Ease of doing MSME business

India has been consistently getting its Ease of Doing Business priorities wrong. When we think of the World Bank’s signature rankings we view it in terms of persuading mega-foreign corporations to part with their hard-earned investment dollars. It is always good for a government to set its sights high. But it also needs to set its sights realistically. Prime Minister Narendra Modi and his economics boffins, whether foreign-trained or domesticated, may do better to look down from the Olympian concern for big business and focus attention on micro, medium and small enterprises, collectively known as the MSME sector. 

Ease of doing business for this sector has always been appalling. And if the operating environment is generally poor for a sector that accounts for about a third of GDP and the bulk of employment, it is unlikely to be enormously different for large corporations in spite of their stronger institutional capabilities and clout. That probably explains why India languishes behind most comparable economies on these annual rankings, to the routine dismay of everyone concerned.  

The MSME sector is an unwieldy beast –  the various qualifying cut-offs for manufacturing and services encompasses units with investment is as low as Rs 25 lakh and as high as Rs 10 crore – and it operates in a universe that is mostly outside the formal economy and the ambit of data collection. Importantly, it is the sector that it is most vulnerable to local-level corruption — the labour and factory inspector have become caricature villains in popular Indian culture. Not surprisingly, entrepreneurs in this sector are prone to participate in subverting systems as an instinctive survival mechanism. The proliferation of illegal abattoirs in Uttar Pradesh, which a newly elected chief minister sought to close in a conspicuous display of muscular saffron virtue, is a fine example of the vicious circle of regulatory cholesterol promoting unhealthy business practices. 

It is instructive that, from as far back as the eighties, hapless representatives of this group have consistently lobbied not for the soft bank loans that successive dispensations have offered but a better operating environment. In pre-liberalisation days, it was all about getting basics such as an electricity and phone connections. Since the nineties it’s still been about infrastructure, but also about multiple regulatory hurdles, market access, and tax compliance rules. 

Over the past year, however, things have gotten immeasurably worse for this sector — and because their activities are captured imperfectly in national statistics it is hard to understand the depths of their crisis. We can only guess their plight from the broad vital stats of slowing growth and rising unemployment (and even these dismal numbers may mask the real picture, some economists aver).  

Demonetisation was a straight hit, especially for micro-enterprises that operate on a daily cash basis. Those who could afford it, paid a steep 30 per cent premium to the money mules, who miraculously emerged on the scene on November 8 evening, to launder cash hordes. With local markets dislocated for lack of cash, small units abruptly shut shop and sullen jobless youths were seen streaming back to the villages. 

The goods and services tax (GST), with its imprudently condensed deadline, brought the double whammy. Sans any beta-testing, the shortcomings became evident within a month — and in less than two, Bihar’s trouble-shooting finance minister, Sushil Kumar Modi, was brought in to head a committee to sort out the glitches. IT snafus and flawed structure are only two nightmares for clueless businessmen and their foxed CAs. The MSME sector’s sufferings are worsened because the bulk of them are outside the cut-off for this single-market tax. 

It’s Hobson’s choice. Inclusion means high costs and fiendish complexities. Exclusion means that MSME goods and services, especially those at the micro and small level, are unlikely to find a market because larger buyers cannot avail of an offset. Small oversights, such as taxing branded food products but not unbranded ones – the many pointless complexities introduced by the tax authorities – will discourage brand-building at this lowest level of the business value chain. As things stand, the food equivalent of Nirma is a distant possibility. MSME exporters are suddenly finding themselves saddled with costs owing to an oversight in GST planning.    

Much of this angst was well in evidence at Business Standard’s round table on the GST on September 6, when traders and businessmen put their questions to a dispensation that was visibly disinclined to be sympathetic. If, however, senior ministers are trying to find ways to stoke the economy, they need look no further than easing the burdens on the MSME sector. What is more, with most states under ruling party governments or coalitions, the opportunity to encourage them to winnow out local constraints to business could never be better.

The problems of India’s MSMEs represent in miniature the problems of business in general. This regime has praiseworthy aim of bootstrapping India up the Doing Business rankings from 130 to 90. For big ideas, it need look no further than its smallest and humblest businessman.

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