Anchoring trust within MSMEs: Making significant contribution to resolving business challenges

Financial Express, March 20, 2024 

By Pradeep S Mehta & Mehak Sharma

The challenges of running a business persist regardless of its scale, affecting big businesses and small or medium-sized enterprises alike. Issues like corruption and bureaucratic delays disrupt the daily lives of individuals as well. While big businesses are able to deal with such hurdles because they have the resources, small businesses find it more difficult to cope with them due to their limited resources and even connections. Added to dealing with difficult bureaucratic processes, they get further handicapped due to lack of finance. Small businesses are at the core of the economy as they provide a larger number of jobs as well as cheaper services. The administration must do everything to enable them to succeed for the benefit of the society and the economy.

Micro, small and medium enterprises (MSMEs) are a substantial segment of the job-creating sector, accounting for approximately 30% of the GDP and are positioned to serve as a vital catalyst for economic advancement in the coming 25 years. Prime Minister Narendra Modi, while addressing the ‘Udyami Bharat’ programme recently, also affirmed that “the MSME sector has played a monumental role in shaping the AatmaNirbhar Bharat programme in the past eight years. If any industry wants to grow or expand, then the government is not only supporting it but is also making necessary changes in the policies.”

In the vast expanse of India’s entrepreneurial landscape, around 63 million MSMEs dot the economic canvas. Yet, amidst this sea of businesses, a mere half a million have social security systems in place for their workers’ welfare. However, a mere 8,000 among them are listed companies, not that other forms are less important. Such is the surprising tapestry of Indian commerce, where the few shine amidst the multitude, crafting a narrative of both abundance and exclusivity.

Overwhelming compliance burden
One important reason for this sad state is the continued existence of an onerous inspector raj which exploits the situation by misuse of discretionary powers vested in the bureaucracy. This leads to customary delays and rent extraction, which adversely impact the seamless conduct of business operations and reduces the trust deficit.

Adding insult to injury, accountability mechanisms are ineffective and, in many cases, the relevant civil servant or judge who has been caught red-handed indulging in rent seeking and exploitation gets away without any punishment, thus emboldening others. The worst sufferers are the businesses.

In any event, there is a necessity to shrink the compliance burden by undertaking an exhaustive analysis of these obligations. In their book ‘Jailed for Doing Business,’ Gautam Chikarmane and Rishi Agarwal underscore that a cumulative total of 69,233 compliances are imposed on businesses. Numerous industry-specific laws with over 100 imprisonment clauses significantly impede the overall business environment. This ‘regulatory cholesterol’ in business operations is so high that it stifles the growth of small businesses, preventing them from evolving into significant players. When businesses aspire to expand, the escalating compliance burdens act as obstacles, impeding their growth trajectory.

The government’s proclivity for prolonged legal battles and access to ample resources exacerbates its inclination for litigation, unlike businesses. A National Litigation Policy is essential to prevent unnecessary delays. Restraining the state’s litigation propensity is crucial, fostering collaborative dispute resolution and enhancing legal system efficiency.

Lack of access to finance
A recent study has revealed the detrimental impact of corruption on access to finance, a phenomenon observed across 79 developing countries. In several instances, it has been observed that bank managers solicit bribes during the loan sanctioning and/or disbursement process. The lack of access to finance for MSMEs creates information asymmetry between borrowers and lenders, which can lead to increased credit demands and, in the worst cases, bankruptcy. Micro enterprises which form a significant portion of MSMEs (around 630.5 lakhs) struggle to sustain their operations due to lack of funds and limited access to finance.

The government needs targeted and thorough reforms to support MSMEs, but its risk aversion often delays implementation of focused initiatives. Micro and small businesses in unauthorised areas face unreasonable fines, perpetuating a clandestine inspector raj, where officials wield excessive power without accountability. To address this, curbing inspectors’ authority and ensuring officials act with accountability and proportionality in enforcement is crucial.

However, simply making running a business conducive isn’t enough; an exit strategy is also vital for reclaiming invested funds. Business exits vary, often involving selling the owner’s stake. Reforms for business exits are crucial, especially for small enterprises as it is much easier for large enterprises.

Minimising opportunities for informal and discretionary interactions between government officials, judges, and businesses; compelling adherence to the rule of law; automating business payments; and imposing restrictions on government litigation can significantly contribute to bridging the trust deficit and enhancing the ease of running business in India.

Implementing the aforementioned reforms and effectively navigating through directed policy changes, particularly those tailored to the unique needs of MSMEs, will make a significant contribution to resolving business challenges and fostering significant transformations in the business environment.

(The authors work for CUTS International, a global public policy research and advocacy group.)

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