Improving the Business Climate for Indian MSMEs

The business and investment climate is a key factor that determines a country’s ability to attract investments. A positive and healthy business and investment climate is determined by a multitude of factors such as a sound and stable political, economic, legal and regulatory environment, supported by good governance, transparency, predictability and economic openness. This is particularly crucial for the development of the Micro, Small and Medium Enterprises (MSMEs).

The MSME sector in India plays a pivotal role in the overall development and economic growth of the country. MSMEs contribute around 38% of the national GDP, with manufacturing enterprises contributing around 7% and service enterprises contributing the remaining 30%. MSMEs are predominant across sectors of retail, apparel manufacturing, food products, and beverages as well as hotels & restaurants. The MSMEs are also well spread out with over half based in rural areas and therefore play an important role in promoting sustainable and inclusive development.

Ease of Doing Business and Indian MSMEs

Setting up and operating a new business requires numerous operations A simple, well designed and transparent regulatory framework is essential for carrying out business transactions in a quick and effective way.

According to the World Bank, a good investment climate is an essential pillar to stimulate economic growth of a country, which in turn generates opportunities for more productive jobs and higher incomes. The key to building a good investment climate is to remove regulatory bottlenecks by introducing better laws and transparent procedures.

In recent years, India has made tremendous strides in its overall business climate and improved its doing business rankings. Ease of doing business is particularly important for MSMEs, which in turn would spur economic growth and generate employment for millions across the country.

CII Recommendations for Improving Ease of Doing Business for MSMEs

The Confederation of Indian Industry (CII) places the development of Indian MSMEs at its core and deploys various advisory, consultancy, business facilitation and specialized services for enhancing the competitiveness of these enterprises. Some suggestions which could bring about further improvement in the business environment for MSMEs are mentioned below.

Digitization of Processes: All processes related to business regulation and compliances need to be digitized with the help of information technology. Online documentation, including submission and applications of supporting documents, must be made mandatory and physical copies must be done away with in a time bound manner.

Online one-stop-shop: An online one-stop-shop portal with all relevant information relating to business regulations and procedures can be developed using suitable Information and Communication Technology (ICT) platforms and must be mandatorily updated at regular intervals in the event of changes in procedures and regulations.

Single Window Clearance: A single window clearance must be established for a wide range of processes. Thereafter, a common minimum standard must be adopted for each of the states and across government departments. State governments could be free to innovate once the common minimum standard is adopted countrywide.

Standardization of Compliance Procedures: There are wide variations in government-business transactions in different locations of the country including lack of predictability and standardization in terms of timelines and different processes adopted by state governments. Standardization of compliance procedures across locations will facilitate businesses to a great extent and will be a big step in ease of doing business.

Adoption of Regulatory Impact Analysis: Regulatory Impact Analysis (RIA) has been globally acknowledged as an effective approach to critically assess the need and relevance of existing as well as new regulations, developed through a consultative process on the basis of set criteria for a country. It is recommended that RIA be adopted in India for improving the quality of business regulatory governance and a sound business environment in India.

Rationalization of Stamp Duty: Rationalization and benchmarking of stamp duty must be done annually across states as well as internationally. Additionally, e-stamping must be introduced to reduce paper and handling charges.

Empanelment of third party service providers: States may consider constituting certified third party service providers for carrying out inspection procedures on behalf of the departments with the objective of reducing procedural delays.

Public Private Partnership Model for enhancing availability of lands: For dealing with the issue of scarcity of land, the State governments must formulate a Public Private Partnership Model to utilize the existing land banks and enhance the availability of land for MSMEs.

Prudential Debt Restructuring and Rescheduling: The RBI routinely releases prudential debt restructuring and rescheduling guidelines for the large scale enterprises. Similar exercise must be carried out for the MSMEs for improving their credit flow and debt restructuring must be ensured for smooth flow of business operations.

Effective Dispute Resolution Mechanism: An effective time bound dispute resolution mechanism in case of defaults would speed up processes of setting disputes and disagreements without straining the company’s resources.

Apart from the above mentioned recommendations, other suggestions such as integration of inspection requirements under various laws, rationalization of compliance procedures across departments, simpler documentation requirements for MSMEs, and relevant adoption of global and best level practises could go a long way to improve the efficiency and ease of doing business for the MSMEs.

Progress on such reforms is essential for a sustained 8-10% GDP growth in the future. Stakeholder participation and their support is crucial for implementation of such reforms and for improving the business environment. A coordinated, comprehensive holistic strategy along with technological innovation would simplify business procedures and boost the growth of the MSME sector, thereby enhancing the overall development of the country.

 

 

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