For years, the Micro, Small & Medium Enterprises (MSME) sector has functioned as a pillar of strength for the national economy as well as a bulwark against both domestic and global economic shocks. The sector accounts for 8% of the national GDP, facilitated by over 40% share of the country?s industrial output, exports and employment. There is high expectation that the new Government being formed at the Centre with Narendra Modi as the Prime Minister will provide the necessary impetus for the MSME sector to accelerate its growth and achieve a 15% share of national GDP by 2020.

The MSME sector?s growth path is riddled with challenges. The very definition of MSMEs needs to be revisited. The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, classified Indian manufacturing and services enterprises on the basis of investments in plant and machinery. Since then, the cost of plant and machinery has increased manifold in India, owing to spiralling inflation and the weakening rupee, but the parameters to define MSMEs were not adjusted accordingly. An early intervention in the matter will be a great relief for the entire sector.

In 2011, the Centre introduced the milestone Public Procurement Policy MSE-2012 mandating central and state ministries, departments and public enterprises to organise vendor development programmes and make a minimum 20% procurement from the MSEs. However, it comes to light that the majority of these bodies have not implemented the policy.

The new government would do well to ensure total implementation of this policy.

A large number of MSMEs are embattled with the issue of delayed payments but are unable to exert pressure on the large enterprises that are their main buyers. Given the criticality of the issue, the new government could take a multi-pronged approach by implementing the clauses pertaining to delayed payments provided in the MSMED Act, 2006, and by incentivising timely payments with tax breaks, reinforcing factoring institutions, automating payments, and imposing penalties on the defaulting organisations. Measures like mandatory disclosures on amounts due to MSMEs in the annual report of companies, introduction of the XBRL system of reporting, and fast-track issuance of Form-C will also go a long way towards addressing this issue.

In recent years, institutional credit flow to the MSME sector has steadily increased year-on-year. Yet, a significant number of MSMEs do not enjoy easy access to timely credit. While it is imperative that the RBI guidelines to banks on credit flow to MSMEs are adhered to, the cost of credit provided to this sector should also be brought down to equal or below that extended to large enterprises, say at around 10%. At the same time, it would be prudent for the government to promote dedicated SME equity funds with funding to support closure of the first few funds. Tax breaks to retail investments in these funds similar to what is available for investments in infrastructure

bonds would help address the financing issue.

In the immediate run, two other areas that merit the government?s attention are: tax incentives to MSMEs; and skills development initiatives for the sector. The industry view is that tax break to the order of 50% of income tax liability will greatly augment the growth prospects of manufacturing MSMEs. A friendly tax regime for rental and leasing of capital goods to SMEs with exemption from service tax will be of the essence to these enterprises. On the skills development front, the government could leverage the knowledge and resources of national and regional industry bodies to support skill upgradation programmes for MSMEs operating in remote areas.

Entrepreneurship development is the key to MSME growth, and to achieve this, the government could facilitate investments by extending certain incentives like tax breaks to early-stage investor classes like angel investors, seed and early-stage venture capital investors, impact investors, among others. It would also be in the fitness of things to create STPI-like structures for early stage MSME businesses supported with single-window approvals.

Importantly, in recent months, the Inter-Ministerial Committees on

?Accelerating Growth of MSMEs in Manufacturing? and ?Boosting Exports from MSME Sector? had submitted key recommendations to the government, which now needs to be acted upon.

As regards MSME manufacturing growth, industry is of the firm belief that the existing MSME Cluster Development Programme needs to be scaled up and Common Facilities Centres (CFC) should be set up in the clusters to deliver tooling solutions and technology support to the enterprises. At the same time, the new government should look to make available readymade work places for MSMEs to start their business/ventures at affordable rates in industrial parks and clusters at a reasonable rate.

MSMEs need support not just at the start-up stage but also for dealing with intractable issues like bankruptcy. There is a clear need for an Expert Advisory Group that can lay down requisite procedures and push for amendments to the existing laws to facilitate restructuring or closure of distressed MSME units.

In the longer run, the sector would benefit immensely from government interventions to reform the archaic labour laws that are linked with The Factories Act, 1948, The Industrial Disputes Act, 1947, Contract (Regulations and Abolition) Act, 1970, etc, and develop a single labour code. It is equally important that

the inspections of MSME units are rationalised.

The Indian MSME sector is poised for rapid growth and integration with major global value chains. Timely policy intervention and due support will go a long way toward making Indian MSMEs globally competitive.

Chandrajit Banerjee

The author is director general, CII