Top 5 Reforms That Will Enhance The Ease Of Doing Business For MSMEs

Micro, Small and Medium Enterprises (MSMEs) are the economic and employment backbone of the developing economies. In India, apart from agriculture, major part of employment generation is done in the MSME sector with more than 90 per cent employment being accounted for by micro enterprises. The sector has been significantly contributing over the decades to the country’s economy as a major partner to the socio-economic development process.

Presently, the MSME sector consisting of 63 million units provides employment to over 113 million persons - the highest next to agriculture. The sector, through more than 6,000 products and services has been contributing 45 per cent of the total manufacturing output and 40 per cent of the country’s exports. MSMEs are also important for fostering and strengthening the Startup ecosystem since they are the catalyst for new ideas to breed. The Startup entrepreneurs can also be the drivers of economic growth with the potential to pull the marginalized people of India out of poverty.

Need for ‘Ease of Doing Business’ for MSMEs (EODB)

India’s ranking has significantly improved in the World Bank’s ‘Ease of Doing Business Index’ in the last decade due to the fact that the government introduced a number of business-oriented reforms in the last few years that have allowed India to climb rapidly in EODB index. Commenting on this achievement, the World Bank had said “India’s impressive progression in the Doing Business rankings over the past few years is a tremendous achievement, especially for an economy that is as large and complex as India’s. Special focus given by the top leadership of the country, and the persistent efforts made to drive the business reforms agenda, not only at the central level but also at the states’ level, helped India make significant improvements.”

The ease of doing business initiatives have favourably impacted the MSME sector in India, but a lot more needs to be done to ramp up the contribution of this sector to the economy. Ease of doing business is predominantly crucial for the MSME sector that can lead India’s economic growth and generate employment for millions across the country. To take the leap forward, the government, along with other institutions in the ecosystem have to work more towards addressing the pressing needs at the grassroots level. For example, MSMEs still continue to grapple with many issues that are preventing them from realising their full potential. India still lags in areas such as enforcing contracts (163rd) and registering property (154th). There are many other constraints and policy concerns with respect to seeking multiple registrations and approvals, higher taxation for proprietary and partnership concerns, multiple statutory compliances, complicated labour laws and inadequate infrastructure etc. All these issues need urgent attention of the Government and other authorities to bring in real ‘Ease of Doing Business’ for the MSME Sector.

Following are the top five issues which need to be addressed by the Government for improving ‘Ease of Doing Business’ for MSMEs:

1. Reducing various approvals, registrations and compliances for MSMEs

Business enterprises including MSMEs have to seek many approvals and registrations for establishing new units and running/ operating their businesses and comply with a large number of regulations and laws related to labour, environment, taxation, factory building and other statutory compliances. Fulfilling all these requirements can be time consuming and expensive especially for smaller/micro enterprises and start-ups having limited resources. Such multiple and complex regulatory requirements can also prevent the potential entrepreneurs to start new businesses. Further the lack of awareness about these regulatory requirements can also put the MSMEs in the risk of non-compliance thereby endangering their continuation due to legal and financial risks.

It is therefore, utmost necessary that the Government should undertake a thorough review of all the regulatory requirements and statutory compliances for MSMEs and start-ups and overhaul the whole system for seeking various approvals/registrations and statutory compliances for new as well as running business enterprises to bring the real ‘Ease of Doing Business’.

2. Easing of Labour Laws

The government efforts for codification of 44 Central labour laws into 4 codes – pertaining to Wages, Industrial Relations, Social security and Welfare and Safety and Working conditions in order to simplifying and ease in filing documents is a major step forward. However, along with protection for workers, reforms in labour laws must lead to opportunities for industry in terms of engagement of workers. MSMEs are presently constrained by a complicated regulatory environment and labour market rigidities which impact the ease of doing business for MSMEs and limits their growth potential. It is desirable that adequate flexibility should be given to the Industry to devise the terms of employment of workers for example in case of Employees’ State Insurance, government could introduce optional ESI or Medical Insurance coverage. Simplification of Employees’ State Insurance, Provident Fund and other labour laws can be implemented for MSMEs for EODB.

3. Ease in Taxation Laws and Rates

MSME sector needs tax rebates that will help them to become globally competitive and support them in ease of doing business. Exemption from the burdening capital gain tax along with other tax breaks is much required for fostering a healthy and dynamic MSME sector in India. Further, MAT should be abolished or reduced for MSMEs and the Capital gains tax should be brought down to zero to encourage investments in technology to encourage MSMEs to improve their quality and help in import substitution.

The recent cut in corporate tax rates for domestic companies should also be extended to proprietorship, Partnership and LLPs which are more than 90 per cent of MSMEs and it should be reduced to the level of 25 per cent for old and to the level of 15 per cent for new firms. In addition, to provide respite to the industry, it is desirable to rationalize and simplify the GST compliances.

4. Development of Infrastructure for MSMEs

There are approximately 3100 industrial estates across all the states in India. Around 450 of these estates are sector based and the rest are generic. There are also 186 operational Special Economic Zones in India across all the states. The state of infrastructure, including power, water, roads, etc. in such areas is poor and unreliable, leading to very high transaction costs. This has resulted in crowding of MSMEs operations in such areas, which are often in conflict with environmental and urban regulations.

It is high time that the entire concept of designing and setting up of industrial estates is relooked into. The current concept of industrial estates in vogue is traditional and outdated as it does not take into consideration among other factors, the infrastructure needed for the service sector, requirement of common facilities, and pollution control necessities. Further, new industrial estates/zones are not picking up as required by the demand for MSMEs due to various reasons including cost of land, availability of critical infrastructure like power, transport and communication and skilled workers. There is an urgent need for renewal and up-gradation of MSMEs infrastructure located in existing industrial estates.

5. Digitalizing all Contracts, Compliances & Documentation

Digitalization stands out as a formidable tool for fostering poverty alleviation and overall national development, offering unparalleled cost-effectiveness and widespread impact. The integration of Digital Ease of Doing Business tools and technologies holds the key to empowering individuals and MSMEs, facilitating efficient access to government schemes, banking services, and ensuring hassle-free compliance in a ‘Atma-nirbhar’ or self-reliant manner.

An integral aspect of this digital transformation is the use of Digital Signatures, employing hardware dongles or DSC signatures, which has significantly contributed to computerization in the past decade. However, the acceptance of Aadhaar-based eSign, now acknowledged by numerous government and public institutions, holds the potential to revolutionize processes across private, public, government, and judicial sectors. Universal acceptance of this innovative Aadhaar-based eSign could expedite documentation procedures, curbing costly delays that still plague our economy and will also obviate the need for obtaining & carrying physical DSC hardware which involves unnecessary cost for the MSMEs and individuals. For Example-Registrar of Companies, Tax Authorities, Foreign Trade Authorities, Ministry of Corporate Affairs continue to rely exclusively on DSC based digital signatures, which causes great inconvenience in terms of safety besides the costs involved. On the other hand, Aadhaar-based eSign is most authenticated with in-built e-KYC, with assured integrity and complete audit trail and much secure and safer method of affecting digital signatures, without any upfront cost and hassles. Therefore, all government entities and organizations should be directed to accept Aadhaar-based eSign at par with DSC based digital signatures on all documents which will help faster submission of documents and compliances.

With the right support and policies, the Indian MSME sector will provide the much needed thrust to the Indian economy and will be instrumental in making India the global superpower. It is a widely accepted fact that with improvement in ‘Ease of Doing Business’ the MSME sector will help achieve the ‘Make in India’ target which aims to increase the pie of manufacturing sector in India’s GDP from the current 16 per cent to 25 per cent.

(The article is written by Sanjeev Agrawal, President, PHDCCI)

(The opinions presented belong solely to the author)