Formalisation, need of the hour

India going up in World Bank’s ‘Ease of doing Business’ rankings should come as blessing to the medium, small and micro enterprises (MSME) sector — which is the backbone of India’s economy and is considered the ‘cradle’ of Prime Minister Narendra Modi’s ‘Make in India’ initiative. But, despite a slew of measures by the government to facilitate the growth of the sector, the challenges ahead are many.

The 40 million-strong MSME sector, which is the largest provider of jobs in the country, employing about a 100 million people directly and indirectly, contributes about 8 per cent to the country’s GDP, and 45 per cent to the country’s total manufacturing output.

However, being largely unorganised and cash-dependent, the sector was worst hit by the sudden demonetisation in November last year, followed by the implementation of the Goods and Services Tax (GST) from July this year, as most of these firms work on small margins.

While one big positive of GST in the long-term is that it will lead to formalisation of the economy and greater tax compliance, the task is humungous.

According to an estimate, 90 per cent of the MSME sector falls in the unorganised sector, which is not tech-savvy, making it difficult for schemes and programmes, which are digitally inclined, to reach out to these firms, about 51 per cent of which are located in rural or semi-rural areas.

The biggest challenge is that informalisation in the sector has been on the rise.

According to the 73rd Round of a survey by the National Sample Survey Organisation, the number of unincorporated non-agricultural enterprises (those not registered under the Companies Act, 1956), excluding construction, grew by 27 per cent to 6.34 crore in 2015-16, compared with 5 crore in 2010-11.

As a result, government initiatives, such as Make in India, Skill India, Digital India and Start-Up India, which have generated significant global interest in the Indian economy, along with various incentives for the sector, may find it difficult to reach the vast number of unregistered enterprises.

According to a paper by the Confederation of Indian Industry (CII), even organised MSME sector growth has been hampered as “technological obsolescence and financing problems have been associated with the sector since long.”

Another area of concern that continues to dog the sector is the rising number of closures, at close to 5 lakh, as per the MSME Ministry’s written reply to Parliament.

Also, the sector, which accounts for 45 per cent of non-performing assets or bad loans in the banking system, needs some hand-holding for easier credit flow.

According to Reserve Bank of India data, the micro and small, and medium sector enterprises saw year-on-year growth of 0.8 per cent and de-growth of -8.3 per cent, respectively. As on mid-August this year, the total credit to the MSME sector stood at ₹456,000 crore.

Hopefully, the expected formalisation of the sector with greater documentation and compliance following GST will see it grow to its full potential, with banks doing their bit to fuel this biggest engine of growth in India.