Four challenges that keep MSME sector from growing in India

This sector suffers from a mindset problem, which can be overcome when all stakeholders realise that a large part of the Indian economy runs on MSMEs

The unemployment rate in India has doubled between July 2017 and April 2018, while the number of jobs also fell to 406 million from 406.7 million a year ago

India’s economic growth has accelerated to 7.7 per cent in the three months ended March 2018, the fastest pace in the last seven years. However, the unemployment rate in India has doubled between July 2017 and April 2018, while the number of jobs also fell to 406 million from 406.7 million a year ago, data from the Centre for Monitoring Indian Economy shows. How can we tackle this situation? One way to do so is by focusing on creating micro-entrepreneurs.

The services sector contributes more to India’s economy (58 per cent) than agriculture (16 per cent) and industry (26 per cent) combined. Not only do the service MSMEs contribute to overall economic growth (MSMEs account for 37 per cent of India’s GDP), they also have a multiplier effect on the local economies. Even the Government of India believes that the road to sustained job creation and economic growth are the micro, small and medium businesses.

So, what stops India from achieving more in this sector, given that there has been a huge growth and interest in entrepreneurship in the country? Let us take a look at some of the factors impinging on their growth:

Excessive regulation

While India has made substantial progress through sustained business reforms and moved to the Top 100 in the World Bank’s Ease of Doing Business global rankings, it still lags in areas such as starting a business, enforcing contracts and dealing with construction permits. In fact, the time taken to enforce a contract is longer today, at 1,445 days, than it was 15 years ago (1,420 days). While the time taken to register a new business has come down to 30 days from 127 days, local entrepreneurs still need to go through 12 procedures to start a business in Mumbai, the country’s financial hub. Globally, it takes five procedures on an average.

Lack of working capital sources

Secondly, service MSMEs need a lot of working capital. An enterprise belonging to the services sector is deemed micro if its investment does not exceed Rs 10 lakh. However, since most service MSMEs do not have hard assets, they do not qualify for sizeable credit lines to invest for growth. Hence, many units are funded by family, friends, relatives, money lenders or informal institutions, who do not maintain proper accounts, deal in cash and employ casual workers. Businesses cannot grow fast without adequate capital, and MSMEs need the right financial backing at the right time. Not only do they need finance for day-to-day operations, but also to buy fixed assets, like land, building, plant, machinery, etc. MSMEs have also being hit hard by the twin impact of demonetisation and the goods and services tax.

Lack of regular work

A lack of sustainable work means that MSMEs are not able to cover their fixed costs and earn an income. While the government reduced the corporate tax from 30 per cent to 25 per cent for units with a turnover of Rs 250 crore, a majority of MSMEs are essentially one-man-, one-woman-led operations, such as beauticians, plumbers, electricians, etc.

Little access to credible data

The MSMED Act in India does not make it obligatory for a micro-enterprise to register and thus there is no official, accurate database of all such businesses. The registered MSMEs form a very minuscule part of the overall business and hence the various government schemes for MSMEs cannot have the desired impact. Government regulations are complicated and not standardised across states. The high taxation rate makes competition with big brands a strenuous affair, especially during the formative years, and it is very difficult to get quality people as well. Banks tend to keep conservative working capital funding limits because of a lack of transparency and asymmetry of information in financial statements by these enterprises.

There are some green shoots though. The Small Industries Development Bank of India (SIDBI) has partnered with a private sector bank to cater to the working capital needs of its MSME clients. This year, the Reserve Bank of India classified all working capital limits to MSME units as priority sector lending. With the emergence and growth of a new-class of financiers, such as fintech companies, peer-to-peer lending and new-age digital non-banking financial companies, the MSME financing ecosystem is growing to address a key issue affecting the industry.

With new technologies on the anvil and deeper penetration of the internet, the time is ripe for MSMEs to ride the wave. It is important that we change our mindset towards this sector as they can grow the employee base and have a positive multiplier effect on the ecosystem. LabourNet itself plans to create one lakh micro-entrepreneurs over the next five years. Globally, micro-entrepreneurship is being recognised as one of the prominent ways of poverty alleviation and income generation. It encourages the use of minimal resources, provides employment locally and leads in self-sufficiency. We can make this work only if we address the above-mentioned challenges and steer India towards greater prosperity.

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