India harbours tenacious entrepreneurs. Over 46 million micro, small and medium enterprises (MSMEs), employing over 106 million, account for 45 per cent of India’s industrial output and over 40 per cent of its exports. Occupying a vast diversity of geographies, they employ India’s entrepreneurial talent while flourishing in sectors with little or too much regulation. And yet, most are perpetually on the verge of closure, haunted by power cuts, unsupportive government policies and rising commodity prices. India’s industrial policy, despite much positive rhetoric, focuses primarily on large enterprises.
Financing remains troublesome. According to the Reserve Bank of India, small and medium-sized enterprises’ non productive assets in 48 listed banks stood at Rs 55,000 crore, with practically no buyers for units put up for auction. While the Credit Guarantee Fund was meant to facilitate credit flow without collateral, banks continue to insist on collateral for loans below Rs 1 crore. This creates obstacles for MSMEs, who have no financial security, preventing expansion. Delays in payments (30-60 days) by big corporations affect their working capital cycle, while their debt-to-equity ratios hover around 4:1. Despite significant rhetoric otherwise, the playing field is still treacherous.
Key stakeholders (research and development institutes, trade associations, equity investors, banks) could be linked with MSMEs through physical and digital marketplaces. Incubation centers could be developed in local universities to provide mentoring and technology support, along with R&D facilities.
A shared integrated cold chain, similar to Singapore’s government-funded Senoko food hub, could be built for the agri-processing sector. Flatted factory complexes and dormitories might be set up around large cities for MSMEs on public-private participation mode. As recommended by the Prime Minister’s Task Force on MSMEs (2010), industrial estates could be notified as separate local bodies and entrusted with municipal functions and taxation, along with infrastructure maintenance.
India’s procurement policy is neutral towards MSMEs, mandating just 20 per cent of all annual Central government ministry/department/public sector undertaking procurements from SMEs. This needs to be more pronounced at the Central and state level. The public procurement policy could be utilised to enlarge markets for MSMEs, with incentives for vendor development utilised to provide support for capital expenditure and technology absorption. MSMEs should be encouraged to convert to limited liability partnerships by keeping registration and transaction costs low and introducing a graded corporate tax structure for LLPs. Bankruptcy declaration or a sector exit could be made easier as well.
Tax policy needs to be refined as well. Micro enterprises should be offered a tax holiday for the first 10 years from both direct and indirect taxes. Foreign companies wanting to set up shop in India in collaboration with MSMEs should be offered five-year tax holidays in those specific sectors. Most MSMEs face a significant credit gap, with the National Commission on Enterprises estimating 73 per cent for micro enterprises (average credit offtake Rs 1.2 lakh) and 62 per cent for MSMEs (average credit off take Rs 7.2 lakh).
Small enterprises should be allowed to have up to 200 investors, with Rs 50-100 crore non-regulated crowd funding. High-net-worth individuals investing in MSMEs could be offered a 10 per cent tax rebate on investments. A framework should be developed to utilise the MSME Development Fund (Rs 10,000 crore) and the MSME Technology Upgradation Fund (Rs 200 crore) along with business facilitation centres that help link all stakeholders (equity funds, banks, financial institutions, MSMEs) at a regional and district level.
Banks can be incentivised for investing in innovative firms through appropriate capital adequacy norms, rationalised interest rates and margin requirements and effective monitoring mechanism through the Credit Guarantee Fund Trust for Micro and Small Enterprises. Banks should be mandated to increase SME lending on a 20 per cent year-over-year basis. Any shortfall (against the 60 per cent lending target to micro enterprises of total lending to MSMEs) should be put into a corpus fund with the Small Industries Development Bank of India, facilitating additional credit flow. All commercial banks should be pushed for a 15 per cent year-over-year growth target in micro enterprise accounts. During periods of sectoral down-turn, restructuring of MSME loans should be simplified with higher NPA norms.
The MSME policy should be geared towards increasing their contribution to 15 per cent by 2020, covering 50 per cent of overall employment and increasing their share across key public and private industry sectors. This will help fulfil domestic demand, grow exports and attract the holy grail of indigenisation. MSMEs can be our catalyst for growth.
The writer is a BJP Lok Sabha MP and a national general secretary of the party
