Three top things that MSMEs want from Narayan Rane: Ease of doing business, finance, and timely payments

The impact of the COVID-19 crisis is also being felt across the MSMEs sector, which is reeling under the economic crisis triggered by the pandemic. While grappling with these various issues, the MSMEs want the new MSMEs minister to address three key issues for the quick revival of this sector.

Three top things that MSMEs want from Narayan Rane- Ease of doing business, finance and timely payments

Ex MSMEs union minister Nitin Gadkari has achieved a lot in his three-year stint in the Micro, Small and Medium Enterprises (MSMEs) ministry. Whether it’s raising the MSMEs contribution to the GDP; lifting the ban on the entry of corporates and private players in the MSMEs sector; or reinstating the status of retailers and traders as MSMEs, he had already set a high standard for his successor as he passed the baton to the current MSMEs minister, Narayan Rane.

Post the mega reshuffle in the cabinet, former Maharashtra Chief Minister and Rajya Sabha MP Narayan Rane has been appointed as the new minister for MSMEs. He has been serving the public in elected offices across different capacities for over 35 years now. Before that, he had served in the Income Tax Department from 1971 to 1984. Along with him, five-time Lok Sabha MP, Bhanu Pratap Singh Verma also took charge as minister of state in the ministry. As an MP, he was a member of the Committee on the Welfare of Scheduled Castes and Scheduled Tribes.

Now the Indian MSMEs sector and its people are eagerly watching how Rane, and his team perform in their new capacity.

Currently, India has approximately 6.3 crore MSMEs.

As of May 2021, the Udyam Registration portal registered 30,00,822 MSMEs, which replaced the former process of filing for Udyog Aadhaar Memorandum (UAM). Registered micro-enterprises stood at ~ 28 lakh (93 per cent), followed by small enterprises at 1.78 lakh (6 per cent) and midsized enterprises at 24,657 (1 per cent). The Indian MSMEs sector contributes about 29 per cent towards the GDP through its national and international trade.  

Inside article1-Three top things that MSMEs want from Narayan Rane

However, Narayan Rane takes charge of the MSMEs ministry at a crucial time as the sector has been among the most affected business segments amid the COVID pandemic. At the same time, this sector has also been one of the priorities for the core focus group of the government as is evidenced by its financial support announcements made in the past one year, which include a separate resolution framework for MSMEs.

According to the experts and stakeholders SME Futures spoke to, the MSMEs industry is dealing with a slew of challenges. Currently, the MSMEs after having already gone through numerous difficulties because of the COVID-19 pandemic, are yet again being confronted by numerous challenges because of insufficient liquidity, supply criss-crosses, lack of work, and the non-instalment of contributions. Money starved MSMEs are expecting incentives and alleviation measures from the Government of India to further develop their manufacturing capacities, increase trade and generate business openings and opportunities.

However, certain key viewpoints concerning the MSMEs sector need prompt consideration. Which if addressed immediately with a host of salutary measures, can drastically improve the precarious situation of the small and medium-sized businesses.

These are—Ease of capital, ease of doing business and amending delayed payments.

Easy finance is the way to go

Micro, small and medium Enterprises (MSMEs) are important participants in the growth of the Indian economy and are imperative for driving development, innovation, and employment. Most importantly, they are at the core of the $5 trillion economy goal of India.

But access to finance is still a critical barrier to growth for MSMEs. Despite a plethora of policies and schemes from the government and RBI, this sector is struggling to get timely and adequate finance. This problem persists from the perspective of both entrepreneurs and bankers. On top of that, the pandemic has only exacerbated the financial woes for these businesses. Many have been forced to shut down their operations permanently or temporarily, however, the number of such enterprises is something that the government does not have any specific data on.

Moving forward to 2021, MSMEs see finance and funding or getting loans as a top challenge. According to a LocalCircles poll at the beginning of the year, 28 per cent respondents out of about 3000 MSMEs, listed raising funds or obtaining loans as their top concern.

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“Things are not in a good state. The government must provide as much relief as it can,” says Kulmani Gupta, Chairman at the Indian Industries Association, Noida Chapter. Speaking about the capital crunch, he says that MSMEs are going through a rough patch, and they are really looking forward to the help that the government must provide to them to revive their deteriorating condition due to the recent lockdowns.

“There is a requirement for a positive environment at the moment. We are all stressed due to the financial burden and the shortage of labour and workers as they have migrated back. We also want to get back to normalcy at the earliest. But industry challenges and now the fear of the third wave are not letting us cope up with our businesses. The sector really needs some relief,” he asserts.

“Finance inclusion or getting capital from banks or other forums is the number one concern,” says another stakeholder, Arunachalam Karthikeyan, founder and a member of the board of directors of the Alliance of Indian MSMEs, a non-profit organisation and a consultancy firm for MSMEs.

“We have to provide capital to small and medium businesses for their revival. But the issue is that even though there are numerous schemes, ease of financing is lacking. Many MSMEs are not able to get this support on time,” he says.

According to a report by the International Financial Corporation (IFC), the Indian MSMEs sector is currently looking at a credit deficit of $240 billion. However, the growth of MSMEs in India is facing several hurdles due to the lack of access to low-cost formal credit from traditional sources such as banks. Due to poor demand, market uncertainties, and the high-risk profile of the sector, banks are cautious about lending to these businesses.

Considering these facts and the sluggish recovery of these businesses, the industry stakeholders opine that MSMEs are currently in a difficult position in terms of finance. The six-month moratorium period aided them briefly, but their operations have not yet recovered enough from the slump to enable them to repay their prior loans.

Thus, most businesses have major expectations from the new MSMEs ministry team, who they are hoping will look out for them and provide them with relief on the financial front by taking the required steps and measures.

Speaking to us, social media services provider, Neha Agarwal, founder of Digi Acai says, “The former MSMEs minister had undertaken several initiatives to provide solutions to issues in our sector during the last year, in particular a loan guarantee scheme for MSMEs, etc. We would expect to have some more favourable policies while reducing the financial complexities for small companies.”

AIMs Karthikeyan further suggests that the MSMEs ministry should consider giving entrepreneurs interest free loans. “Businesses don’t have credit, and they are not able to run their operations or even procure materials. At the same time, there is a demand slump. Which is why the need of the hour is to provide strong hand holding on the working capital front. I suggest that the government should provide interest free financing at least for a year, so that the MSMEs can recover fast,” he says.

Weighing in with his thoughts, Gupta of IIA says that they are playing safe as to what their next move should be due to apprehensions regarding the oncoming third wave. So, considering the financial challenges of this scenario, the government must come up with something for them, to enable them to work freely and to continue to contribute to the nation’s GDP. “As a manufacturing sector stakeholder, I am looking forward to some type of financial assistance required for manufacturing, as we manufacture 87 per cent of the products of the entire nation. Industries and businesses are in dire need of capital and therefore, I urge the MSMEs ministry to relax the norms on getting a loan for MSMEs,” he avers.

Small businesses need ease of doing business

Ease of doing business remains a challenge for the small and medium businesses till date.

Most businesses in their initial phases, face difficulties due to the plethora of regulations and approvals required. Even though India’s rank in the ease of doing business index has risen significantly, there are still many flaws in the system that are keeping businesses from expanding or flourishing. Many times, entrepreneurs are demotivated due to the complexities and difficulties inherent in obtaining an MSMEs loan, enforcing contracts, and dealing with licences, permits and compliances.

For example, under the Companies Act, the Registrars of Companies (ROC) charges Rs 2,000 to Rs 10,000 for registering a firm, depending on the authorised capital, number of promoters, location, and so on. At times, this sum can be prohibitively expensive for a lot of people.

Another example of a complication is obtaining the GST registrations when starting a business that requires an NoC from the premises owner. However, how can the entrepreneur provide the same if he or she is starting the business from the same premises?

In fact, the time it takes businesses in India to enforce a contract is still 1,445 days, longer than it was 15 years ago (1,420 days). And although India has reduced the time to register a new business from 127 days 15 years ago to 30 days today, entrepreneurs still need to go through 12 procedures to start a business, which is more than the five-procedure average in OECD countries.

Similarly, there are a plethora of steps with which small business owners have found it difficult to comply, which take up 80 per cent of the time of an entrepreneur and are costly to handle.

On this, Karthikeyan says, “Starting a proprietorship or even a partnership firm can be easily done in India. However, if you think about starting a private ltd company, then there is an ample amount of statutory compliances that you must go through. Which creates huge pressure on them. The government should make it easier for them, for example, allow KYC filing once in five years instead of filing it every year. Or give some leverage for the first five years to the entrepreneur in the starting phase.”

Other suggestions from stakeholders include making GST and taxation more understandable and their compliance easier. As it becomes costly for businesses to deal with them in the process of filing them.

Agarwal says, “Reminiscent of the amendments to the GST regime and the large-scale compliance requirements under the GST laws which raised expenses for MSMEs, a simplified form for tax compliance for MSMEs would be expected from our new MSMEs minister, Narayan Rane. Experts are of the view that MSMEs should be allowed to profit from professional services for their company’s growth. MSMEs minister, Rane should consider trimming down the GST rates on most professional services in the areas given to the MSMEs sector.”

She also expects measures to decrease the income tax rates for MSMEs.

“Most MSMEs take on their businesses like partnerships, proprietorship entities, and limited liability partnership structures and they are paying income tax at high rates. When a new business is set up, and there are a lot of different taxes coming on their heads, of course, they won’t be able to imagine that their business will grow,” she points out.

Manufacturing industries are also in favour of more measures that should be taken to uncomplicate the procedures and increase the ease of doing business.

“India should focus on driving itself forward to make up for the shortfall for a superior and sustainable future,”

says manufacturing industry expert Rajesh Chopra, MD at Rise Electronics.

According to him, the five-year goal of the economy to reach $1 trillion dollars must be met through a progression of strategy drives to increase item accessibility, keep up with creation costs, spur interest and generate more occupations through the ease of doing business. “A serious manufacturing ecosystem would require reduced authorization bottlenecks and interest in better technological developments. Accessibility to adaptable financing and talented laborers to further develop productivity and diminish costs is the way to foster genuine development in the area,” he says.

Also, regarding the issues in the electronics manufacturing segment, Akhilesh Chopra, Sales Director at Bluei, says that measures ought to be taken to decrease the annual assessment rates for MSMEs on the lines of the assembling area. “Truth be told, most MSMEs carry on their organisations as ownership elements, associations and restricted obligation organisation designs, and they are paying annual expenses at high rates. Recognising the forthright expenses related to embracing IT alongside hardened competition from their peers, in its financial plan and monetary changes, the public authority should zero in on providing mechanical arrangements that empower MSMEs to foster moderate items and address their main problems,” he suggests.

The government should boost the speculation environment and long-term clarity about strategies is truly necessary. Initiatives are likewise expected to foster more interest in the businesses, as it would prompt the formation of extra positions, he adds. “We need to pull together on exports if the government is planning to increase the production index and manufacturing to reach up to 25 per cent of the GDP in the following five-eight years from the current 17 per cent,” he asserts.

Delayed payments are hampering the growth of MSMEs

In these stressful times, another unresolved issue that the MSMEs are grappling with is of the delayed payments from their buyers. The number of cases filed in the MSE Facilitation Councils (MSEFCs) by MSMEs against the central ministry, its departments, Central Public Sector Enterprises (CPSE), and state governments have doubled over the past 12 months.

According to the available data about the MSMEs Samadhaan system, 13,091 delayed-payment cases were filed against these departments and the ministry as of April 27, 2020. Since the launch of the delayed payment monitoring system, MSMEs Samadhaan in 2017, this number has jumped by 96 per cent to 25,705 applications as of April 13, 2021.

On the other hand, several reports estimate that the total outstanding payments which are stuck, could be at least Rs 15 lakh crores.

Research by Global Alliance for Mass Entrepreneurship (GAME) states that the average payment period for MSMEs ranges from three to six months. In fact, with the smaller firms, the delay gets longer, which in turn has a further debilitating effect on them.

As per the analysis, 77 per cent of the micro, 69 per cent of the small and 65 per cent of the medium enterprises had their payments delayed beyond 45 days.

“More than 50-60 per cent of MSMEs are suffering from delayed payments and we need drastic steps to resolve this issue,” says Karthikeyan.

According to him, PSUs have taken lots of deposits from MSMEs to take them on as authorised vendors and to procure materials. “I believe, there is ample room for improvement in the provisions to become an authorised vendor and the amount on deposits can be reduced significantly. Moreover, despite the MSMED Act 2006, which ensures payment under 45 days, it is not being complied with. For example, BHEL takes many months to repay their security to the MSMEs. I have seen cases where it has taken a great amount of time. I urge the new MSMEs minister to do something about it. He should issue some directives regarding this, as he has earlier managed the heavy industries portfolio,” he says.

Experts opine that delayed payments not only negatively impact the MSMEs, but this vicious cycle can hurt the nation’s economy as well. According to the GAME analysis, reducing the payment cycle of registered micro and small enterprises to 45 days, may unlock the interest on working capital loans equivalent to ~0.42 per cent of the GDP.

MSMEs are indispensable

According to Chief Economic Advisor Krishnamurthy Subramanian, India’s economy is expected to grow by 6.5 to 7 per cent starting in FY23, thanks to supportive government reforms and the rapid rollout of the vaccination drive. However, this expansion will not be complete without the contribution of the Indian MSMEs, which adds up to approximately 29 to 30 per cent of the country’s GDP.

Domestic businesses require a strong financial stimulus with concessional working capital loans to ensure that adequate liquidity is maintained in business operations. They want ease of doing business so that they can concentrate more on operations, and they are also seeking assurance on timely payments from the government and other sectors.

Thus, the performance and welfare of these enterprises is majorly dependent on the existence and implementation of a functional national policy for MSMEs. Therefore, they should be given an enabling environment to flourish, and if the adequate measures are taken to build up the MSMEs sector, a better economic system will automatically emerge, as the health of the MSMEs sector is an indicator of the overall economic health of the nation.

This is what the industries, experts and stakeholders have in mind too, and they are eagerly looking forward to the rapid and evolutionary growth of the MSMEs sector, engendered in great measure due to the relevant initiatives and reforms undertaken by the ministry and the government.