Make in India is the flavour of the month. There has been a rash of pronouncements around this idea and a slick campaign, created by an American advertising agency, that has pushed the Central Department of Industrial Policy and Promotion into headlines. In this hubbub, the economy’s backbone – the small and medium firms – have been reduced to the role of a bit player, and the clunkily named Ministry of Medium Small and Micro Enterprises has been pushed out of the picture.
If the game plan of Make in India is to create jobs and increase the share of manufacturing, it appears misdirected. The campaign will not work unless we fix our policies for micro, small and medium enterprises – i.e., those with plant and machinery less than Rs 10 crore in manufacturing or Rs 5 crore in services. These enterprises are crucial to our economy, accounting for 45% of industrial production and 40% of exports.
World over, small firms and businesses are the backbone of employment in manufacturing and services. Even in South Korea, despite the chokehold of chaebols, small firms provide more than 80% of the country’s jobs. In Japan, they provide 66% of the country’s employment and have long been the workhorses of construction and manufacturing through a tightly-knit system of subcontracting.
In India, micro, small and medium enterprises or MSMEs face a number of regulatory and institutional obstacles that the government has been unable to address despite a plethora of schemes. There has been a lack of urgency – the recommendations of the Prime Minister’s Task Force on MSMEs languish, as do amendments to the MSME Act.
There are five things that need to be done post-haste to strengthen this backbone of our economy.
1. Simplify the regulatory regime
Of the 58 million MSMEs employing more than 106 million workers, only 6% are registered with the Ministry of MSME. Complex and protracted statutory compliances deter them from registering and availing whatever little benefits are provided by the government. Obtaining clearances from multiple authorities is tedious and time consuming (obtaining construction permits, in particular). For example, building a warehouse requires over 25 procedures, takes 186 days and costs 28% of the warehouse value. It is therefore imperative to create a network of private agencies or consultants and accredit them as one-stop shop for obtaining all statutory permits or clearances through a single window. The ministry could facilitate this by subsidising the fees of agencies or consultants.
The same rules and regulations govern the entire spectrum of MSMEs from micro to medium enterprises. This one-size-fits-all approach has to change. Micro firms do not have the ability to comply with cost-intensive and time-consuming formalities. They should be registered on the basis of self-declaration (of land, labour, machinery, etc.) with random checks, a process akin to self-employed individuals filing tax returns with random checks by the Income Tax department.
2. Ensure flow of finance
According to government estimates, only 4% of small businesses have access to institutional finance. It is difficult for MSMEs to access institutional finance from agencies such as the Small Industries Development Bank of India, State Industrial Development Corporations and National Small Industries Corporation because they fail to offer sufficient data and security against loans to comply with the onerous paperwork. Procedures to obtain subsidised loans earmarked for them are daunting, cumbersome and protracted. The erstwhile Planning Commission estimated the gap between supply and demand for credit at 62% and industry experts estimate the demand for loans outstrips supply by more than $80 billion. The Reserve Bank of India should move speedily to raise the cap on microfinance loans. Though the recent budget announced a Mudra (Micro Units Development and Refinance Agency) Bank with a corpus of Rs 20,000 crore, it did not make a budgetary allocation for this corpus. The government must explicitly commit resources to make the Mudra Bank viable.
3. Simplify taxation
The latest Doing Business Report by the World Bank ranked India 156 out of 189 nations in terms of paying taxes (down two places from last year). On average, medium-sized firms made 33 tax payments and spent 243 hours annually filing, preparing and paying taxes. Total taxes paid could be as high as 61.7% of profit. The proposed Goods and Services Tax should be pushed through at the earliest to simplify taxation. Further, the available tax incentives display ambiguity, so the tax code needs to be amended to clearly define Small Scale Industrial Undertakings for availing tax benefits.
4. Make it easy to shut down a business
We need a clear legal framework for winding up a firm – the current system is long-winded and difficult, leading to lock-in of financial and physical capital and a waste of resources. The US Bankruptcy Code, for instance, provides for reorganisation or liquidation of a business (the well-known Chapters 11 and 7). In India, much awaited amendments to the MSME Act, which allow for orderly exit or revival plans, languish while the central government dithers.
5. Enforce contracts
India consistently ranks below 170 among all countries in enforcing contracts. We need fast-track courts to quickly dispose of routine commercial matters like those around negotiable instruments or contracts. Tax and compliance disputes should be resolved quickly in a time-bound manner. Arbitration for old disputes related to tax and compliance should be simplified and fast-tracked. Technology should be leveraged to set up call centres to register complaints and forward them in real time.
It is time the government helped small firms flourish. Ignoring them is a disservice to Make in India and hobbles economic growth.
The authors are with the Centre for Civil Society, a Delhi-based think tank advancing social change through public policy.
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If the game plan of Make in India is to create jobs and increase the share of manufacturing, it appears misdirected. The campaign will not work unless we fix our policies for micro, small and medium enterprises – i.e., those with plant and machinery less than Rs 10 crore in manufacturing or Rs 5 crore in services. These enterprises are crucial to our economy, accounting for 45% of industrial production and 40% of exports.
World over, small firms and businesses are the backbone of employment in manufacturing and services. Even in South Korea, despite the chokehold of chaebols, small firms provide more than 80% of the country’s jobs. In Japan, they provide 66% of the country’s employment and have long been the workhorses of construction and manufacturing through a tightly-knit system of subcontracting.
In India, micro, small and medium enterprises or MSMEs face a number of regulatory and institutional obstacles that the government has been unable to address despite a plethora of schemes. There has been a lack of urgency – the recommendations of the Prime Minister’s Task Force on MSMEs languish, as do amendments to the MSME Act.
There are five things that need to be done post-haste to strengthen this backbone of our economy.
1. Simplify the regulatory regime
Of the 58 million MSMEs employing more than 106 million workers, only 6% are registered with the Ministry of MSME. Complex and protracted statutory compliances deter them from registering and availing whatever little benefits are provided by the government. Obtaining clearances from multiple authorities is tedious and time consuming (obtaining construction permits, in particular). For example, building a warehouse requires over 25 procedures, takes 186 days and costs 28% of the warehouse value. It is therefore imperative to create a network of private agencies or consultants and accredit them as one-stop shop for obtaining all statutory permits or clearances through a single window. The ministry could facilitate this by subsidising the fees of agencies or consultants.
The same rules and regulations govern the entire spectrum of MSMEs from micro to medium enterprises. This one-size-fits-all approach has to change. Micro firms do not have the ability to comply with cost-intensive and time-consuming formalities. They should be registered on the basis of self-declaration (of land, labour, machinery, etc.) with random checks, a process akin to self-employed individuals filing tax returns with random checks by the Income Tax department.
2. Ensure flow of finance
According to government estimates, only 4% of small businesses have access to institutional finance. It is difficult for MSMEs to access institutional finance from agencies such as the Small Industries Development Bank of India, State Industrial Development Corporations and National Small Industries Corporation because they fail to offer sufficient data and security against loans to comply with the onerous paperwork. Procedures to obtain subsidised loans earmarked for them are daunting, cumbersome and protracted. The erstwhile Planning Commission estimated the gap between supply and demand for credit at 62% and industry experts estimate the demand for loans outstrips supply by more than $80 billion. The Reserve Bank of India should move speedily to raise the cap on microfinance loans. Though the recent budget announced a Mudra (Micro Units Development and Refinance Agency) Bank with a corpus of Rs 20,000 crore, it did not make a budgetary allocation for this corpus. The government must explicitly commit resources to make the Mudra Bank viable.
3. Simplify taxation
The latest Doing Business Report by the World Bank ranked India 156 out of 189 nations in terms of paying taxes (down two places from last year). On average, medium-sized firms made 33 tax payments and spent 243 hours annually filing, preparing and paying taxes. Total taxes paid could be as high as 61.7% of profit. The proposed Goods and Services Tax should be pushed through at the earliest to simplify taxation. Further, the available tax incentives display ambiguity, so the tax code needs to be amended to clearly define Small Scale Industrial Undertakings for availing tax benefits.
4. Make it easy to shut down a business
We need a clear legal framework for winding up a firm – the current system is long-winded and difficult, leading to lock-in of financial and physical capital and a waste of resources. The US Bankruptcy Code, for instance, provides for reorganisation or liquidation of a business (the well-known Chapters 11 and 7). In India, much awaited amendments to the MSME Act, which allow for orderly exit or revival plans, languish while the central government dithers.
5. Enforce contracts
India consistently ranks below 170 among all countries in enforcing contracts. We need fast-track courts to quickly dispose of routine commercial matters like those around negotiable instruments or contracts. Tax and compliance disputes should be resolved quickly in a time-bound manner. Arbitration for old disputes related to tax and compliance should be simplified and fast-tracked. Technology should be leveraged to set up call centres to register complaints and forward them in real time.
It is time the government helped small firms flourish. Ignoring them is a disservice to Make in India and hobbles economic growth.
The authors are with the Centre for Civil Society, a Delhi-based think tank advancing social change through public policy.