India “Ease of doing Business” – MSME hopes on NaMo

Amidst the politico-economic concerns arising out of the recent World Bank’s report, on the Ease of Doing Business in India, there is a renewed realisation, that strong steps are required to move ahead to achieve success under Make in India campaign. Within the short span of six months in office, Modi Government realised and simultaneously emphasised the need for expediting the process to create a more friendly business environment in India. Micro, Small and Medium Enterprises Minister Kalraj Mishra, in September this year described the present situation in India vis-à-vis ease of doing business as “laggard” and asserted the need for creating a business ambience where setting up an enterprise in India would be easy.

The latest World Bank report has placed India as low as 142 out of a total of 189 countries in the list. The exhaustive report assesses how conducive are countries based on 10 requirements ranging from starting a business to issues such as taxation and insolvencies.

The present Government has made the promotion of ease of doing business, an integral part of its agenda and is promoting it vigorously. A few important steps have already been taken. Within months of taking over by the Modi Government, the Department of Industrial Policy and Promotion (DIPP) took a slew of measures to improve business-friendly environment in the country. These include having a timeline for clearance of applications, de-licensing the manufacturing of many defence products and introduction of e-Biz project for single window clearance. Earlier, initial validity of Industrial Licence was for a period of two years with a provision of granting two extensions of two years and one year respectively, in an important step, DIPP has extended the validity of Industrial Licence to encourage entrepreneurs. Providing speedy environmental clearances, removing bottlenecks for coal block allocation to improve availability of power etc and many other such steps intend to change the unfriendly business environment, to one that facilitates and welcomes the domestic as well as international investors and entrepreneurs to set up manufacturing in India.

From June, 2013 to May, 2014 period, India hit the nadir in at least two categories; it stood 184th in the ‘Dealing with Construction Permits’ category and 186th in ‘Enforcing Contracts’. However, there is significant improvement in India’s credibility as a nation that promotes ease of doing business, since the last Government. After the new Government took over, India climbed several positions to reach a commendable 7th position when it came to ‘Protecting Minority Investors’. This is on the back of several initiatives taken by the present Government like fast-tracking decision-making, bringing down the level of current regulatory compliances and above all the efforts to reduce the cost of setting business in India.

Presently, entrepreneurs face various impediments in starting as well as promoting the enterprise, especially so in the micro, small and medium enterprises sector. The MSME sector in India stands at crossroads. Considering these facts the Finance Minister Arun Jaitley in his Budget speech had announced setting up of a Task Force for this sector. Being member of this important committee I had the privilege of interacting with many stakeholders on their concerns on various issues.

The case for MSMEs

The removal of above difficulties can catapult the MSME sector also. The largest employment provider after the agricultural sector and currently employing about 40 per cent of India’s workforce, at the forefront of sectors stands disadvantaged due to an unfriendly business environment in India. Presently, the MSME sector is also cash-strapped, mainly due to lack of equity capital in the sector, apart from other factors like the reluctance of banks to finance MSME entrepreneurs.

Prospective Policy Initiatives

Currently, the MSME sector faces major hurdles in the start up of the business, lot of paper works and high degree of liability involved for the entrepreneurs. The stakeholders in the MSME sector in India have voiced the need for bringing down the liability of the entrepreneurs through the promotion of the concept of limited liability in the true sense of the term, backed by necessary policy initiatives. For luring investors in the MSME sector, an important step could comprise bringing down the current level of compliances for an entrepreneur. One of the ways in which both these steps can be implemented could be through the promotion of the concept of ‘One Person Companies’ (OPC). OPCs have the potential to transform the current status on both these issues. If the level of compliance is brought down particularly for this segment, the ease of doing business will automatically go up.

The issue of registration of the MSMEs in India, today, can probably be singled out as the most significant of aspects affecting this sector. Statistics have it that only a meagre 6 per cent of the MSME enterprises are registered. This automatically excludes the rest, a whopping 94 per cent, from the governmental policy benefits and initiatives. The first step for luring investors would be to simplify the process of registration in this sector. A common opinion among the stakeholders of this sector is that registration for MSME enterprises should be based on self-declaration, subject to verification by the authorities later, but for limited approvals only. This will not just cut out a lot of paper-work, but will considerably decrease the apprehension caused amongst the entrepreneurs relating to Inspector Raj.

Besides, the entire registration process should be made online, instead of filling only. The online process should replace the current system involving multiple-bodies in the registration. Stakeholders as well as entrepreneurs are together on the issue of only one body (probably DIC) handling the registration. An increase in registration of the MSMEs will not just bring them in the loop of Government policies undertaken to benefit this sector but will remove the current misunderstanding which often confuses the informal sector as the ‘illegal’ sector. Once in the formal network, the financing of enterprises by banks will also simultaneously get easier. Presently, most of the banks are wary of lending to enterprises in the informal sector, particularly those that function as unregistered units.

The Government will have to formulate and institute a comprehensive Exit and Rehabilitation policy also. Only when an entrepreneur would know that he/she can close down the business and come out safe with minimum liability, would he/she be willing to enter the sector in the first place. The present system lacks any mechanism for insolvencies in the sector.

Improving the ease of doing business index in the MSME sector would also require that the problem of ‘delayed payments’ be resolved. Entrepreneurs suffer huge losses as a result of delayed payments from their clients, which are often big units. Giving the MSEFC more teeth through stringent legal provisions, is a step which many stakeholders feel, will go a long way in deterring the clients to delay payments to these entrepreneurs. As most MSME entrepreneurs are not big investors, they particularly depend on speedy recovery of dues to start their next cycle of investment/production.

Another major problem of the MSME sector in India is labour policy. Many entrepreneurs, despite having the requisite capital hold themselves back because of this policy. Policies to protect labour rights such as strengthening the Industrial Disputes Act is good, but when the level of compliances for a large industrial house and a small enterprises are not differentiated, it only ends up harming labour interests. Skill development of the labour within the industry and before their exit, can be an important measured to induce labour to enter and exit freely from these industries. Yet another issue obstructing this sector is concerned with the issues of taxation. The intricacies involved in the excise and customs often goes beyond the comprehension of the entrepreneurs. To add to these, the officers involved create a fear psychosis amongst the entrepreneurs, often leading to bribery and corruption. Hence, to rid the entrepreneurs in this sector off these complexities, a liaison officer/facilitator should be appointed in each of these Government department to weed out the fear and ignorance of the small units.

Conclusion

All these would require a holistic assessment of the problems of this sector through the involvement of stakeholders and evaluation of policies undertaken by other countries like South Korea and Egypt. There are many such policy initiatives that can be taken in the MSME sector to improve the Ease of Doing Business Index in India. It is only upon such an improvement that India can see a formalisation of the contribution of this sector to the country’s GDP and realise the potential for reaching a commendable 15 per cent from the current 8 per cent. Despite the Government treating this sector as a priority sector, the progress is slow. India’s image of a potential global leader has to be matched by similar domestic policy initiatives. Credit Suisse report today places India in the bracket of countries having high level of inequality in income. Therefore, financial inclusion through large-scale employment generation and balanced regional development on the back of MSME sector should definitely be a priority policy initiative.