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Modi 2.0 - What do the Small Businesses expect?

According to the 2018 year end review by Ministry of Micro, Small and Medium Enterprises (MSME) there are 63 million MSME units in India that produce over 8000 products. It is also the country’s largest employer, providing jobs to almost 111 million people from the working population.

The MSME sector contributes approximately 30% of the GDP, 48% of total exports, and around 45% of the manufacturing industry output.

Given these statistics, it is not a surprise that MSMEs are seen as the growth drivers of the Indian economy. However, these growth drivers will be able to deliver only if they are able to perform in a business friendly environment.

Historically, MSMEs have been operating in a challenging ecosystem that makes it difficult for them to scale. During 2014-19, NDA government did take various measures to provide support to small businesses and start-ups through various initiatives like PMMY, 1 crore loan in 59 minutes, improvement in the ease in doing business ranking, Skill India, Make in India, Start Up India programs. However, many systemic challenges remain to be addressed.

Further, demonetisation in 2016 and GST implementation in 2018 ended up being speed-breakers for growth of small businesses. What MSMEs are expecting from Modi 2.0 Modi led NDA Government has over time earned a reputation for being pro-market and growth, gaining support from the business community. Now in its second term, the MSME sector will expect some definitive solutions from the government to help them grow and compete with their global counterparts. According to the trade and industry experts, some of the areas in which MSME sector needs encouragement are: 1. Ease in accessing finances: One of the biggest concerns of the MSME sector is getting timely funding from banks or financial institutions to support their daily operations or expansion plans. RBI’s Mint Street Memo (Aug, 2018) “How have MSME Sector Credit and Exports Fared?” highlights the difficulties faced by the sector in obtaining loans. According to the data shared, MSME sector’s finance requirement is around $370 billion whereas credit supply to them is $139 billion. This gap in supply and demand of funds is indicative of the financial challenges MSMEs face.

To help MSMEs in overcoming their fund requirements, the government launched schemes such as loan in 59 minutes where MSMEs can avail up to 1 crore loan from public sector banks. Out of 1.31 lakh applications received during the first 50 days of the scheme’s launch, 1.12 lakh were approved and only 40,669 applications were sanctioned the loan. CGTMSE scheme which was launched in 2000, continued to get government support, as per 2016 data, 22,59,044 guarantees for an amount of Rs.1,06,927.55 crore have been approved by CGTMSE.

While there is no dearth of schemes and initiatives to support the finance requirements of the MSME sector, they still struggle to get funding due to lack of awareness and inability to provide collateral required by banks. Banks require a collateral from MSMEs as they are unable to evaluate and monitor them closely. This points to inadequacies in the credit information infrastructure in the country.

The other problem that MSMEs face is delayed payments from their buyers. This puts an additional strain on their working capital. SAMADHAAN portal was launched to help MSMEs find a quick resolution to delayed payments, however, as per data collected by TimePay, more than 70% of complaints on the portal remain unresolved.

In our view, the core of the MSME finance problem relates to delayed payments from customers - be it large corporates, PSU/Government agencies and even other MSMEs. Government needs to tackle this by implementing the MSME payment law and SAMADHAAN initiative more aggressively. Government also needs to encourage NBFC and Fintechs that are servicing needs of MSMEs who are left out of the traditional sources of Finance. 2. Ease of doing business: In the 2018 Ease of doing business report, India has emerged as one of the top improvers. It moved up 23 places in 2018 to be ranked 77. While this is a significant achievement, there’s still a lot more to be done to make India a business-friendly nation. For example, simplifying the process to start a new business (ranked 137) and enforcing contracts (ranked 163) can be further improved. Getting credit has been ranked 22, but as we can see from the previous point, MSME sector continues to face issues in availing finance.

Apart from these parameters, to make it easier for local businesses, work needs to be done on resolving insolvency, which lost 5 places to be ranked at 108 and paying taxes which dropped two places to be ranked at 121. 3. Relief from GST: The changeover from VAT to GST helped bring the nation under one tax regime, but it created difficulties for the MSME sector. India dropped two places in terms of “paying taxes “ in the ease of doing business report. Some issues that the MSMEs are facing in GST regime are:

a. High cost of compliance: The filing compliances and software required to comply with the GST requirements has added an additional cost burden on the sector. This was addressed by the GSTN on 28th May 2019. It will provide access to free accounting and billing software to firms with an annual turnover of up to Rs 1.5 crore. This move will benefit around 80 lakh MSME units. A further simplification of the process would go a long way in improving business compliance for the MSMEs.

b. Increase in the turnover threshold for filing GST: The current turnover threshold of INR 20 lakhs implies that many micro and small businesses have to pay GST and go through complex compliance. If the minimum slab is increased to INR 75 lakhs, it would benefit almost 60 lakh MSMEs.

c. Too many slabs: Currently there are 5 main slabs - 0%, 5%, 12%, 18%, 28%. This has complicated tax calculation for businesses dealing in multiple products. A reduction in the number of slabs and removal of more items from the 28% slab is another major point on the MSME wishlist.

d. Services sector: Services sector is a big contributor to GST and is growing in importance. In past, services tax was only a central levy and compliance was easier. With GST coming in, number of compliances for services MSMEs have increased manifold. For example, if a service firm has branches in different states, it needs to have a GST number and filing for each state. There needs to be a simplified way for small & medium services businesses in GST on par with previous service tax regime. 4.MSME friendly policies: State Governments have the prime responsibility for creating a conducive environment for MSMEs in their respective states. They can take a proactive role in making it easier (and cheaper!) to setup and run businesses.

For example, the Rajasthan Government has made starting a new business in the state easy by eliminating the approvals and clearances process to start a new business. They now only have to file a declaration of intent and can start their business once they get a certificate of acknowledgement. This kind of business friendly policy if replicated in other states will help boost the economy and create jobs for the local youth.

India’s own annual ease of doing business index which ranks states on their implementation of plans launched under the Business Reforms Action Plan (Make in India) is a good initiative. It can be leveraged to encourage competition among the states to make them pro business. And, now that the centre and state governments are led by the same party, the central government has a unique opportunity to streamline business policies in all states. 5. Foreign Trade Policies: According to experts, the trade war between China and the US will open up an export market for India in agriculture, garments, machinery and automobiles. Out of these, garments and agriculture, as also auto/machinery components present huge opportunity for the MSME sector.

However, this opportunity can only be leveraged if the MSME units are equipped to supply quality products at competitive prices. To exploit such opportunities, industry/MSME associations need to work collaboratively with Government and facilitate access to market, technology and resources for MSMEs.

There is another side to this story though. While the trade war has opened up new markets for the Indian MSME sector, goods imported from China continue to displace Indian manufacturing in our price conscious domestic market. India needs to revisit its import trade policy with China to create an environment conducive for local industries. A case in point is the the RCEP trade deal currently in discussion with 15 other countries in Asia and Asia-Pacific. Trade experts are of the opinion that this agreement may benefit China at the cost of Indian businesses. It should be carefully negotiated to ensure that MSMEs in India are not adversely affected. 6. Access to infrastructure and utilities: The other factor restricting MSMEs from gaining their full potential is poor quality of infrastructure and limited access to utilities. Inadequate transportation - road and rail connectivity, irregular water supply, low electricity supply, and limited internet access is preventing MSMEs from reaching a wider market. This is especially critical for the MSMEs in the tier II, III towns, and in rural areas. What can we expect? All eyes are on the new Finance Minister, Nirmala Sitharaman. Given her past experience as Minister of Commerce and Industry, MSMEs can look forward to a progressive budget that addresses their issues, especially relating to access to finance.

Some solutions to the financial challenges are also expected from expert committee formed by RBI in January 2019. The committee is expected to submit its report this month end. This committee is created to study the impact of the policies and regulations on the MSME sector and recommend solutions. It will also study how MSME work globally and suggest best practices for the Indian counterparts.

Another person MSMEs should be keenly watching is Nitin Gadkari. He has been charged with two important Ministries - Road Transport & Highways, Shipping and Micro Small, Medium Enterprises. Roads/logistics/construction sectors are high-employment generation sectors with strong MSME involvement. Under a common Minister, one can hope for a fillip to the sector. If the Minister can get infrastructure and construction activity, and get cash flows moving again in these segments, it would be a big positive for MSMEs.

Most importantly, a stable NDA government at the centre combined with various state governments means the country can expect macro-economic stability and positive policy direction that aids business growth. Narendra Modi has set a target of USD 5 trillion economy for India by 2024, and we hope the Government puts MSMEs at the centre of this goal.

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