Small enterprises are the unsung heroes of the economy
June 27 is international MSME day declared by the United Nations via a resolution passed in the General Assembly in 2017. Every year on this day, there are events highlighting the importance of micro, small and medium enterprises in the economies and society. The UN celebrates MSME’s because they are crucial in meeting the Sustainable Development Goals (SDG’s) that are to be achieved by 2030. The seventeen SDG goals were adopted in 2015 with a fifteen year time horizon to achieve them. The first goal is to end poverty. The MSME will help achieve goals number 1, 4, 5, 8, 9, 10. These goals are about generating employment and economic growth, reducing income, wealth and gender inequality, fostering education, innovation and skilling. The importance of the MSME to any economy cannot be overemphasised. Indeed they are the unsung heroes of a thriving economy. The UN says that globally these enterprises account for a whopping 90 percent of all business entities, 60 to 70 percent of employment, and 50 percent of GDP.
In India too, even if you focus only on the manufacturing sector, the MSMEs provide more than half the employment, output and exports. But they get less than 20 percent of bank credit. Hence, they have to depend on friends and family, or moneylenders and informal credit for carrying on their businesses. Often if they are B2B enterprises, i.e. suppliers to large companies, then they are at the mercy of their sole customer who is like a “maayi baap”. Being a vendor dependent on one large customer is not as bizarre as it sounds. The Indian railways have a million vendors for whom the railway is a sole customer. Think of the small vendors who supply sheets and blankets, or provide catering services, or just nuts and bolts.
In India, even if you focus only on the manufacturing sector, the MSMEs provide more than half the employment, output and exports. But they get less than 20 percent of bank credit
This is the case with other large companies. Indeed for large companies and governments, vendor development is a big achievement. India’s booming auto and auto components sector have thousands of small vendors, who have a critical, symbiotic relationship with large auto companies. But in a downturn all the small guys get singed, since payments get delayed. There is nothing that the small guy can do. If the small supplier decides to go to court for payment dispute he risks earning ire, being blacklisted and losing the customer. Indian law has empowered small vendors to seek timely payments. The 2006 MSME law makes it illegal to delay payments beyond 45 days. But how many large companies have paid a penalty? Probably zero. The Insolvency and Bankruptcy Code (IBC) law made it possible for small businesses to sue large customers, for payment default, for as low as a default of 1 lakh rupees.
If the payment delay problem was solved, it would release one lakh crore rupees of profit into the system, energising the MSME sector
That threshold was increased to 1 crore rupees during Covid, because the government did not want MSMEs to create a nuisance with small payment defaults. But despite this legal empowerment the MSME suppliers simply cannot pursue these measures, since the same customer that they sue, is also the one on whom they depend for their livelihood. The aggregate delayed payment problem is quite huge, estimated to be 10 trillion (or 10 lakh crore) rupees. Imagine the interest burden alone, which at 10 percent interest rates, could be close to 1 lakh crore. If the payment delay problem was solved, it would release one lakh crore rupees of profit into the system, energising the MSME sector. The Reserve Bank of India too has introduced measures to help the payment delay problem through online trading of “trade receivables”. This is basically bill discounting, but done online and anonymously. It has not taken off despite a strong push from RBI.
The Prime Minister is urged to start a campaign called “Naitik Dabaav” or “Ethical Pressure” on large companies to take care of the small, micro and tiny suppliers
Ultimately the problem of delayed payments to MSMEs is a moral one. Industry chambers should ask all their members (typically large companies) to take a pledge that they will not delay payment to small vendors beyond 45 days. This can be a national movement, and the Prime Minister is urged to start a campaign called “Naitik Dabaav” or “Ethical Pressure” on large companies to take care of the small, micro and tiny suppliers.
The birth of 10 million jobs requires the birth of at least half a million new enterprises every year
If India has to generate 10 to 15 million new jobs every year for the next decade, these will not come from large companies, or the government, armed forces, post office or railways. They will mainly come from small enterprises which employ between two to two dozen employees. Hence the birth of 10 million jobs requires the birth of at least half a million new enterprises every year. This calls for another national slogan: 10 million new jobs means half a million new enterprises. The latter needs not only ease of doing business, but also ease of starting and ease of closing down a business. The paperwork and inspector raj is still a big deterrent to starting new business in any part of India. New businesses still need permits and regulatory clearances or registrations from a city and State government machinery. There is a great deal of uncertainty on how long the process could take. And not to forget the corruption angle. The MSMEs also suffer from financial and tech illiteracy, which further handicaps registering new businesses. An entrepreneur of a small business will find that he is spending more time in government offices, filling out forms and figuring out GST compliance than in developing his core business or marketing. This makes it very difficult to start and sustain micro businesses.
The MSMEs also suffer from financial and tech illiteracy, which further handicaps registering new businesses
India has an estimated 64 million enterprises of which 99 percent are small, micro or nano. The main policy support they need is access to working capital (and not be burdened with locked capital in delayed payments), ease of starting, running and closing their business, access to affordable tech and digital tools, and financial literacy (how to maintain a balance sheet and income statement without tears).
Indian agriculture with almost 140 million small land parcels is also an ocean of small entrepreneurs, whom we call small and marginal farmers. Let us acknowledge and celebrate the role of the small businesses in our economy. Let us also recognise that growing inequality, i.e. large corporations becoming highly profitable while MSMEs perish is harmful to the economy and for meeting SDG goals. Inclusive growth implies healthy growth of MSMEs
(Dr. Ajit Ranade is a noted economist)