Micro and Small enterprises, who constitute the bulk of MSMEs in India, have a very little economic cushion to withstand a prolonged period of economic uncertainty or market deterioration. The COVID pandemic is only the latest in a series of shocks this exceptionally important sector has had to bear, with demonetisation, GST, and the credit squeeze post-ILFS, preceding the pandemic. It is a testimony to their resilience and temperament that so many MSMEs have managed to survive this tough period. But spirit alone can only ensure short-term survival; If MSMEs are to thrive, they need a lot more help.
Silver linings, but clouds still loom large
There are enough green shoots to indicate that the economy will come back to pre-COVID levels by this fiscal. Several, macroeconomic indices corroborate this positive outlook, and the third wave is expected to be only a brief setback.
However, a deep dive into sectors, geographies, and especially into the size of business, makes it apparent that the impact of the rebound is not being uniformly experienced. While the top 10-15 per cent of MSMEs can be optimistic, there are lakhs of micro-enterprises (turnover < 1 crore) that remain in acute distress because of factors mentioned earlier.
Creating an enabling, inclusive, nurturing playing field, where even the smallest of MSMEs can flourish, is the biggest help the government can provide now.
Think beyond credit
Most discussions on MSME growth tend to focus on helping them with easier access to finance. While the importance of credit and liquidity for a small business is not in doubt, we often ignore the more structural obstacles that need to be urgently addressed at a policy level – e.g. the ease of doing business, supply chain availability and cost escalations, the impact of climate change etc. In fact, assuming that there will always be something that threatens small business survival, could be a useful starting point for any policy.
Therefore, all eyes will again be on the Finance Minister’s budget speech next week, given that in India we treat the presentation as a statement of policy intent, rather than as only a statement of account.
Here is a wish list:
Make ‘business as usual’ easier
Getting approval to start a business is certainly easier than before, but the real problems lie in the day-to-day running of it. While laws and compliances are getting rationalized, these need to be structurally enforced at the state level. States that are still demanding archaic and unnecessary compliances must be called out publicly and ‘transparency-driven’ competition among states must be encouraged. While some states are making progressive changes, this needs to become consistent and ubiquitous.
GST as carrot, not stick
There is no doubt that the One Nation, One Tax principle embodied in GST has made indirect taxation simpler. However, there is a lot more to be done if we need to get micro and small enterprises to embrace it willingly. Given that data analysis is sophisticated to detect frauds, the policy itself should focus on simplicity rather than an excessive focus on reducing abuse. A case in point - ITC rules especially should be made simpler with buyers depositing the GST amounts and claiming entire ITC rather than depending on suppliers to deposit the same.
Driving consumption
The Indian GDP growth imperative will need more consumption and Direct taxes both for MSME’s and individuals need to be viewed as an important lever to achieve the same.
Affordable credit
The ECLGS scheme was a big relief during the pandemic and should be extended with additional borrowing limits. This scheme has helped many, but we must remember that this was available only to MSMEs with an ongoing lender relationship.
We also need to think of structural initiatives to help the micro and small enterprises to get affordable credit. A re-imagining of micro finance principles to trade associations (formal and informal) along with credit insurance will incentivize lenders to direct affordable credit without requiring state intervention.
While some of these may be outside the scope of a Budget statement, the intent of creating an environment that is comfortable for each stakeholder – buyer or seller, small or large, lender or borrower – should be the guiding force of policy.
The author is Founder and CEO, Vayana Network- Supply chain finance platform. Views are personal.
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