Source:

https://www.civilsdaily.com/news/op-ed-snap-changing-the-indian-state-from-bully-to-ally/

Model Answer:

The MSME sector in India continues to demonstrate remarkable resilience in the face of trialing global and domestic economic circumstances. The sector has sustained an annual growth rate of over 10% for the past few years. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive economic shocks, even of the gravest nature. But this sector faces a tremendous task of compliance of n numbers of regulations and filling numerous papers.

MSME Sector and it importance:

• The significance of MSMEs is attributable to their caliber for employment generation, low capital and technology requirement.
• They are also important for promotion of industrial development in rural areas, use of traditional or inherited skill, use of local resources, mobilization of resources and exportability of products.
• With 38% contribution to the nation’s GDP and 40% and 45% share of the overall exports and manufacturing output, respectively, it is easy to comprehend the salience of the role they play in social and economic restructuring of India.
• Besides the wide range of services provided by the sector, the sector is engaged in the manufacturing of over 6,000 products ranging from traditional to hi-tech items.

Issues with over regulation in MSME Sector:

• MSMEs have to follow 60,000-plus possible compliances and 3,300-plus possible filings.
• The task for MSME becomes even more difficult because of 5,000-plus regulatory changes annually.
• Post-1947, policymakers started over-regulation of the private sector without focusing on primary education, basic healthcare, sanitation and adult literacy (human capital).
• Eventually, this focus on over regulation of MSMEs and lack of attention on human capital has become the binding constraint for our enterprise growth and poverty reduction.
• Much of India’s over regulatory practices for employers is not driven by economic justifications like consumer protection, market failures, information asymmetry and externalities, but reflects expressivism.
• It mean values rather than facts are used to make policy.
• This has increased compliance load on the MSMEs with frequent policy changes.
• For example, in labour and human resources alone, MSMEs have to file possibly 1900 filings and have to adhere over 27000 compliances annually.
• In finance department, this figure remains around 800 filings and more than 9800 compliances.
• A cost-benefit analysis would suggest that policy makers are hurting the very people they think they are trying to protect – MSMEs and employees by breeding informality and its inevitable companion, a cottage industry of consultants and corruption.

Reforms Needed:

• The progress made in Ease of Doing Business (EODB) rankings is real, but it’s time for another exercise that takes a ground-up look at our current regulatory frameworks.
• India’s next wave of EODB should have three vectors—rationalization (cutting down the number of laws), simplification (cutting down the number of compliances and filings) and digitization (architecting for true paperless, presence-less and cashless).
• Rationalization could start with clustering our 44 labour laws into a single labour code and should include reviewing levels and increasing competition.
• The lowest-hanging fruit is competition for mandatory employer payroll deduction monopolies like provident fund and Employees State Insurance that offer expensive products and treat customers badly.
• Simplification would include replacing our 25-plus different numbers issued by various government arms to every employer with a unique enterprise number – like an Aadhaar for enterprises.
• Finally, we must move away from the current approach to digitization as a website, where you log in with a password and upload files and shift to open architecture-based API frameworks, where multiple players compete in providing services to employers. In this regards, GST Network is a good template.
• In general, there is need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.

The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market. The next avatar of our EODB programme must aim to decisively shift the Indian state from being an MSME over regulator to an MSME ally. The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments. The upside could be about 50 million more formal jobs.