Most of the MSMEs in India are nurseries for innovation and entrepreneurship that supply to domestic and overseas high-end industries including nuclear, aerospace and defence sectors and are concentrated in ten states of India—West Bengal and UP top with 40 per cent each followed by Maharashtra, Bihar, Karnataka and so on.

There are more than 63 million units employing 111 million contributing to 40 per cent of total exports and upwards of 20 per cent contribution to GDP. This is quite low in comparison to many countries in Europe, Singapore or Taiwan where it ranges between 35 to 88 per cent.

Despite the MSMEs being the lifeline of millions of Indians, India’s policy environment has never been conducive to their growth. Ironic as it may sound, yet India has failed to reflect this in its policies towards promoting, encouraging or safeguarding their interests. Whether it is the credit flow, Credit Guarantee Fund Trust For Micro And Small Enterprises (CGTMSE) or the 12-Point agenda unveiled during 2018 or ease of compliances, the hurdles exist at all stages. 

Existing regulatory environment or the number of laws, MSMEs have to comply with including the ease of registration, financial environment and support—are dimensions that get checked when one looks at the 12-Point charter. “But when it comes to the policy and execution, there remains a gap. All these prevent building an entrepreneurship culture in the country,” said Dilip Chenoy, Secretary General, FICCI. Credit, market access, labour laws and GST compliances, add to the woes of MSMEs. “Rules are framed and are on paper, stringent against SMEs,” added Raghunandan Jagdish, CEO, Nandan GSE—SME from Mumbai manufacturing specialised handling systems defence and aerospace industries.

The 59-minute loan scheme is available at 2 per cent interest subvention to GST registered and GST paying companies. On the other hand, the GST is payable by companies with R40 lakh turnover and above – up from R20 lakh earlier. This means companies below R40 lakh turnover do not get benefit of this scheme technically. “In regulation, while a lot is being done at the central level, at the state level, ceilings are being carried out for use of spaces in residential areas. While there is lot of focus on creating MSME and industrial parks, the location, approach and infrastructure remains a challenge,” continued Chenoy.

“Why can’t we replicate the China model wherein small enterprises pay as low as 3 per cent interest rate, roads and infrastructure is ready to use and land is available on lease for 30 years. No money gets blocks and small enterprises have an environment to grow,” asked Jagdish. Scalability of businesses in India is restricted because of restricted access to capital, which prevents small enterprises from accessing global markets and let go of business opportunity.

There are regulatory constraints for businesses. India tax to GDP ratio is 17 per cent and this is largely because both regulation and government policies do not let the MSME potential to be unleashed. There is increasingly a need to democratise access of SMEs to financial institutions.

Banks find it difficult to fund enterprises operating from residential areas. On top of that, cost of doing business becomes prohibitive that relates to electricity, power, sewage and owning generators. There is a new regulation in Rajasthan, which has mandated all generators to switch from fossil fuel to PNG. Add to this is the social security cost, which is close to 30 per cent. “When the government introduced Ayushman Bharat scheme, the ESI scheme should have been abolished,” said Anil Bhardwaj, Secretary General, FISME. He further said, “In absence of requisite capital, the enterprises, despite having talent and expertise are not able to invest in plant and machinery, therefore continue to produce inferior quality products and suffer.”

There is need to create competition in the banking sector vis-à-vis MSMEs. Banking and financial institutions should chase the borrowers and not vice versa. “We are not going after large corporates, we have SMEs at the core of our strategy. We are always looking for good borrowers, who do not become defaulters. As a banker, I have to ensure that the public money returns to the system. Given the history of many SMEs, which avail several subsidies, loans under various schemes under state and central government, different kinds of papers are mortgaged as collateral. We have to ensure that loan offered is secure,” commented Alok Kumar, Regional Head, Union Bank of India.

Evaluation of SMEs should be based not only on documents but also on the innovation and the energy in the company infused by its promoters. “The bankers should also look at credentials of the promoters rather than asking for project report without any guarantee of success. This adds to our cost,” said Priyanka Mokshmar, CMD, Vaayu India, Indore based manufacturers of India’s First Patented Hybrid Cooling Machines. Regulation is strict and the compliances are stricter. “As a banker, I am all there to help but yes, compliance should be easy,” added Kumar.

The MSMEs do not spend on marketing and advertising as such spend becomes difficult to justify in project reports and annual balance sheets. “We would like to advertise but there is no opportunity available. The government should determine special rates for MSMEs and also create a pool of CAs for us to choose from to keep our costs low. This will give us visibility and allow us to compete with bigger players in the market,” said Mokshmar.

Given the current economic environment, the payment cycles for most business have become long. While the GST is to be paid upfront, the payments take as long as 180 days to come. Alok Kumar said that Union Bank would be happy to take the returns and finance up to 90 per cent. “I openly offer that if you bring these papers to me, we will finance it,” he added.

For various reasons, many SMEs create multiple entities within the family. Because of this the compliance burden goes up, and as a group its strength is not visible. This restricts private equity and bankers to help them. It also restricts their access to markets. “We find some SMEs have done well but it does not show on the books. I am sure bankers will have same feeling. If it is not showing on record, it becomes difficult for us as merchant bankers to make a good case. If you keep your records clean, it will build your credit history and help in the long run to raise funds,” commented Vijay Bhutada, Partner Pantomath Advisors LLP. This is one reason that explains why the number of SMEs listed across exchanges in India remains as low as 437.

Apprenticeship can play a large part in the task of up-skilling India’s workforce, offering the opportunity to share costs among different parties (employers, individuals and the government) and to involve governments, employers and workers in partnerships. Currently India has only about 300,000 apprentices compared with a labour force of nearly 500 million people. This proportion of less than 0.01 per cent of the workforce compares unfavourably with many countries, such as US with a participation rate of 0.3 per cent of the workforce, Germany and Australia, which both have around 3.7 per cent of their workforces participating in apprenticeships.

“Challenge is that students prefer to go to a large company even though a good opportunity is available with a small enterprise. Moreover, under the current law, companies employing less than six people; cannot go for apprenticeship,” said Chenoy. The Direct Benefit Transfer (DBT) for apprentices in MSME sector for skill development is a great idea but has its own challenges. “The biggest being, identity of the real beneficiary and ensuring that he has not taken up more than one apprenticeship at the same time. Rather, minimum one year apprenticeship should be made compulsory on students before he or she register and applies for a job. This will encourage candidates looking for apprenticeship rather than companies looking for apprentices.”

It is also suggested that minimum employee requirement for PF be changed and linked to minimum turnover. This could be made part of minimum wages and let the employee has the liberty to choose ways to invest. Schemes at the national level and state government level need to converge or merged to have one nation one regulation—to include NSIC, SIDBI, MSME Ministry, Labour Ministry and so on. Another suggestion is to make housing and subsidised food and other areas exempt under GST, part of employee contract. This will put more money in the hands of employees and reduce the tax burden on the enterprises.