Despite the MSME Development Act 2006, and the Atma Nirbhar Bharat Abhiyan package announced in the pandemic, the manufacturing micro and small enterprises (MSEs) continue to suffer in the areas of credit, supply chains and technologies. Mid-corporates or the medium enterprises, constituting just 2% of the total MSMEs (micro, small and medium enterprises), get better attention than the MSEs under the law. If, after 15 years years, a law meant for them has not provided answers to their problems, it is better we seek a proper amendment to the law itself.
Credit Access Needs Correction
Access to credit continues to be difficult for the MSEs because lenders consider them high-risk and expensive supervised-credit. It is good to look at a 2004 report of a working group of Reserve Bank of India (RBI) on flow of credit to SSI (small-scale industries) sector that suggested adoption of the “4-C approach: Customer focus, Cost control, Cross-sell and Contain risk. In the context of increasing pressure on banks to lend responsibly and adequately as also in time, banks would do well to extend credit in clusters and industrial estates or industrial parks and in special economic zones (SEZs), that would reduce information asymmetry, provide better inter-firm comparison, and render cost-effective monitoring of the credit.”
The moratorium for term loans should be a minimum of 18 months and a maximum of 24 months or at least six months after commencing commercial production. Public sector banks (PSBs) in India open working capital accounts ahead of the units’ commencing commercial production. They debit quarterly interest on term loan to the working capital account instead of capitalising interest in the project cost, making the account irregular or non-performing assets (NPAs) even before those enterprises become productive.
Banks should be, therefore, mandated to operate the working capital only after the trial production starts and not before. Cash-flow-based lending for working capital, as recommended by the UK Sinha Committee in 2019, would be the best option for banks and this requires that banks should move their technologies and appraisals in this direction.
Why Separate Law?
Enactment of a separate law with a bias to manufacturing would help realise the broader goal of financial inclusion as part of national strategy, promote innovation in manufacturing and help employment generation. Focus on agro-industries and agri-businesses that would provide value addition at the farmgate level to the farmer and the resultant impetus to the MSEs in rural and semi-urban areas; separate Budget allocation for the MSE sector would be possible if they have a focused law.
Incentives can be redirected to MSEs that have a focus on local employment generation. Emphasis on skilling, re-skilling and upskilling in the manufacturing sector would generate employment of welders, mechanics, architects, carpenters etc. The proposed law that has employment as one of the criteria to define them would prevent labour from migrating to urban and metro areas.
The doctrine of proportionality in legal dispensation is imperative in this land of diversity both in demographics and geography.
District industrial centres (DICs), as delivery channels, need redirection, restructuring and resources. They should give a welcoming ambience for the investors, irrespective of the size and nature. They should have e-library access to update their knowledge in technologies and regulations. The DICs that have vacant space after leaving for green shoots should be enabled to monetise the asset. Newly set up DICs should be in specific production zones and their layout must be investor-friendly. Make labour participate from inception in the industrial parks and estates—creches, schools, playgrounds, retail complexes and housing—to ensure their optimum use.
Most MSEs cannot build their own brand image as it is expensive and eats into the cost of the product. Several MSEs do not also know how to price the product and, therefore, pricing of a product to enhance competitiveness should be part of structured training programmes. Several manufacturing micro enterprises tend to cut costs at the expense of regulatory compliance – labour laws. If the medium and large enterprises are enabled to invest a portion of their corporate social responsibility (CSR) compliance costs in micro and small—the MSE sector has the potential to be globally competitive.
Growth with equity would help the bottom of the pyramid in industry secure the intended benefits and become competitive.
This proposed law can seek disclosures that are essential for the sector overriding all the other enactments covering environment, minimum wages, insurance, and social protection. The 28 labour-related laws were brought under the Labour Code last year.
The other laws, financial (4), infrastructure (7), business structure (3) and five other central laws, apart from around seventy product control orders impact the functioning of MSEs.
MSME Development Act 2006 gave exemptions for only 12 of them to reduce the inspection burden. There were sixty-four (2004) inspections that were brought down to 12 in a few states – Andhra Pradesh (AP), Telangana, Tamil Nadu (TN), Kerala, Karnataka, Maharashtra, Gujarat, Haryana, and Punjab, Uttar Pradesh (UP) and the National Capital Region (NCR-New Delhi).
A single law and not so many should regulate the MSEs as above and facilitate collateral-free lending and revival and restructuring of every functioning manufacturing MSE within the regulatory oversight of the state governments.
Each state should enact an industrial facilitation act in the first six months after the new MSE law becomes effective and this law should have regulatory impact assessment as a key chapter with the proviso that the minister concerned, both at the Union government and state, should present the status report relating to the impact of the Act on its subjects.
Next-generation growth policies should target the MSEs and find ways to increase their productivity. “The reality is that a few firms will grow to become national champions. But by offering a range of public services – help with technology, business plans, regulations, training for specific skills- governments can unlock the growth potential of the more entrepreneurial among them. The provision of such services can be conditioned by the government monitoring and soft-employment targets” (Dani Rodrik 2020).
One implication is that growth policy and social policy will overlap enabling poverty reduction and enhanced economic security and make inclusive growth a reality.
(Dr B Yerram Raju is an economist and risk management specialist and author of The Story of Indian MSMEs – Despair to Dawn of Hope. The views are personal.)