MSME Day in India - An Open Letter to the Finance Minister

We sit to pen these lines as industry insiders and advocates who have been deeply inspired by the vision enshrined in the ethos of the recently observed international MSME day. Undeniably the sector is key to an inclusive and sustainable recovery, putting India on a course to emerge as a global economic powerhouse. Nevertheless, may we suggest that at the moment, the country's MSMEs need more than a nudge to live up to their excellent potential.

As you will be aware, the MSME vertical is more than a cornerstone of our economy, contributing upward to 30% in national GDP and 45% of our gross exports, employing over 100 million citizens. Yet, they remain most vulnerable to the economic shock and liquidity crunch, entailing the COVID-19-induced disruptions. Without adequate and immediate sovereign intervention, our collective concern remains that the sector will be unable to weather the storm, setting the hitherto achieved socioeconomic gains into a freefall and posing systemic implications for the supply chains, both within and beyond our borders. 

Studies suggest that out of the MSMEs that were negatively impacted in the wake of the lockdown, around 40% are still struggling to find their feet. Consequently, a primary firm survey in India indicated a decline in average productivity from 75% to merely 13%. Further, it revealed that businesses could retain only 44% of their workforce, with 69% of the leaders reporting an inability to see long-time prospects. Although no data is available on the MSME job losses, we are apprehensive that many of the jobs decimated at the height of the crisis are gone forever! It flies in the face of the fact that the sector's health is critical to absorbing a significant share of the 60 million entrants to our labor market by 2030. 

To save our MSMEs and, by extension, preserve lives and livelihoods across the states, we believe that augmentation of the recently enacted and welcoming support measures is the need of the hour. While much is already being done, it has only emboldened us to beg your audience on the following pleas that may safeguard the viability of the Indian MSMEs, allowing them to pivot to prosperity:

Conducive fiscal measures

The amendments to the GST regime and the complex regulatory requirements have significantly pushed up the cost of doing business for the MSMEs. A simplified form of tax compliance tailored to fit the MSME interests is expected at this hour. Here, experts recommend that for MSMEs to profitably consume various professional services as part of their value delivery process, the current GST rate of 18% should be reconsidered. Also, government intervention is desirable in optimizing the income tax burden on the MSME sector, where most businesses are operating as partnerships, proprietorships, or LLP entities. 

Simplified compliance

At present, the compliance framework is too elaborate, posing a drag on the administration of the MSMEs. While the multistage documentation has been intended to integrate business operations across states, the ground reality is that small businesses often do not possess the complete set of documents or can not afford subject matter expertise on the issues. Here we would like to recall the wisdom of the UK Sinha Expert Committee Report on MSME that recommended making PAN the Unique Enterprise identifier (UEI) for mid-market players in India. Indeed, collapsing documentation requirements into a universally accepted identifier will free MSME administrators from complex paperwork, allowing them to focus on more strategically important issues.   

Adequate access to liquidity

Liquidity and asset quality challenges remain vital contributors in muting the performance of the Indian MSMEs. Here, the collateral-free loan limits under the Credit Guarantee Fund Trust for the MSMEs scheme should be adequately enhanced to let the businesses cope with the disruptions. Also, the government should popularize the Trade Receivable Discounting System (TReDS) for the MSMEs to allow them to secure funding against their invoice value. Further, as Indian MSMEs are increasingly required to compete globally, it is high time to consider optimizing their exposure to the share market, enabling the businesses to access equity capital and compete at scale. 

Technology enablement

Considering the substantial upfront cost of adopting Industry 4.0 technologies and intense competition from corporate peers, the government should develop an ecosystem on mission mode, empowering the MSMEs to address these real-world problems. Expertise in next-gen technologies such as AI/ML, industrial robotics, IoT, blockchain, edge, smart manufacturing, and cybersecurity can be subsidized, incorporating a nurturing role by our premier academic institutions for elevating the MSME outputs. Here, plugging AI into the CHAMPIONS portal is an excellent instance of leading by example! 

Despite the disruptions, India's MSME sector is treading valiantly, with the dual imperatives of building an Atmanirbhar Bharat and securing a better socioeconomic state for its teeming millions. We are convinced that facilitated by the policy lobby, the sector will metamorphose into the robust engine of growth that it is destined to be.