Editorials, GS-3, Indian Economy, Uncategorized

Why India needs vibrant small enterprises

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According to experts, small enterprises are the best bet right now to create the millions of jobs that India needs to create every year if it is to maintain social stability. However, the life of a small entrepreneur is a tough one in India.

Why?

  • He faces the worst of the inspector raj that makes India such a tough place to do business.
  • He has to battle credit constraints that hurt his ability to grow his business.
  • Whatever bank finance he can access comes at far higher interest costs than what large enterprises can negotiate.
  • He works with very long receivables cycles that make a mess of working capital management.
  • He has little access to trained labour, technical progress and management support.

Other problems faced by small enterprises:

Other common problems faced by small enterprises in the country are related to availability of technology, infrastructure and managerial competence, and limitations posed by labour laws, taxation policy, market uncertainty and imperfect competition.

What are small enterprises?

Small enterprises include both private limited companies that report their annual accounts to the Ministry of Corporate Affairs as well as the larger pool of unincorporated enterprises.

Significance of small enterprises:

New data released by the Reserve Bank of India recently provides a good glimpse into how small enterprises are the champions of the Indian growth story right now.

  • Small enterprises account for less than a tenth of GDP but nearly 45% of industrial output and 40% of exports.
  • They employ an estimated 60 million people because small enterprises generally have lower capital intensity.
  • Output by these enterprises has been growing faster than the underlying nominal gross domestic product. This is in contrast to the more sluggish growth in the 5,788 listed companies whose financial performance dominates public discourse.

So far, what has been done to encourage small enterprises in the country?

India had tried to encourage small companies after the 1970s with the help of two barriers of protection.

  • First, the ridiculously high levels of import tariffs for the entire economy.
  • Second, reserving the production of certain goods for small companies.

However, these two policies created inefficient small firms that were neither capable of scaling up nor facing global competition after the 1991 reforms.

What needs to be done now?

The challenge now is to create a policy environment that will encourage the growth of more small companies that can hold their own in a competitive market.

  • The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
  • In general, there is need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
  • More importantly, there is need for skill formation and continuous upgrade both for labour and entrepreneurs.
  • While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
  • Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.

Conclusion:

Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for these small enterprises. Many of these enterprises are dependent on self-finance. Profit margins are extremely thin due to stiff competition and the small size of firms. The government drive for financial inclusion could benefit such entities. The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing line of credit to firms which are under financial stress. However, it remains to be seen whether new institutions such as MUDRA Bank can open the credit markets for small enterprises.

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