From crisis to competitive: Transforming Karnataka’s MSMEs

IN PERSPECTIVE

Approximately four million MSMEs are the growth engine of Karnataka’s economy, employing seven million people, or approximately 48% of its non-farm workforce. MSMEs in Karnataka are essential to the distribution and supply chains across major job-creating industries such as textiles, automobiles, and more. The Covid-19 pandemic has severely affected this sector. Surveys suggest that up to 30% of MSME jobs could be lost in Karnataka because of the crisis. Even pre-Covid-19, the sector was plagued by low competitiveness, and most small firms were stuck in a vicious cycle of informality and low productivity. As a result, most remain stunted, with the average MSME employing less than two people.

On the other hand, firms that start formal are two to three times more productive and have a better chance of growing. The difficulty is that the cost of formality and compliance are onerous. For instance, a typical MSME factory in Karnataka has to file 144 returns and intimations, maintain 62 registers, and make 103 payments each year. Labour regulations account for over 50% of these. With these pre-existing problems and a slowing economy, the impact of Covid-19 is an existential threat, particularly to smaller, informal firms.

However, this crisis is also an opportunity to address known issues; with the right support, MSMEs can not only survive but be more resilient and competitive from the crisis. By its very nature, this sector requires the attention of public policy and the organised large private sector. Strong public-private leadership to drive and de-bottleneck implementation of well thought-out and pragmatic recommendations are critical.

Since MSMEs are regulated both by the Union government and state government, both need to act in tandem for optimal outcomes. Keeping this in mind, the Global Alliance for Mass Entrepreneurship (GAME), a ‘not for profit’ platform, convened a task force of policymakers, captains of industry, and researchers to recommend measures for transformation. Their report, “Improving Economic Dynamism and Accelerating MSME Growth”, has succinct recommendations ranging from short-term fiscal relief to medium-term structural reforms for policymakers and industry leaders.

The short-term or “survive” measures focus on financial and regulatory support to keep businesses afloat, restart operations, and retain jobs. The Government of India recently announced a package to help MSMEs maintain liquidity and access credit. The task force’s recommendations focus on the strong execution of announced packages through state governments and local industry bodies, including a clear explanation of scheme details to MSMEs and banks.

On this, GAME, the UNDP and four local industry associations are piloting an ‘MSME support helpline’ to help enterprises, in local language and with local examples to understand the implications of the new MSME definitions, eligibility and relevance of government schemes, and help them access these.

Beyond this, recommendations include monitoring and ensuring that funds are disbursed to small and micro businesses (and not just larger players within MSMEs), setting up funds directed at new-to-credit MSMEs, the inclusion of MSMEs in supply chain financing and bill invoicing (TReDS) initiatives, and mandating quick disbursement of payables from government and private sector players.

The medium-term reforms focus on ease of doing business to ‘revive’ MSMEs. India is ranked 63rd globally on ease of doing business, owing to high burdens and costs of compliance and complex processes, deterring formalisation.
Simplifying six key processes for starting and running businesses, rationalising compliance requirements (from about 58,000 compliances across state, central and sectoral requirements) and digitising processes by streamlining and removing redundancies across registering property, construction permits, etc., constitute the main recommendations.

Criminal liability of compliances is a significant deterrent to formalisation, with nearly 9,000 compliances having penal consequences. Specific measures to decriminalise and evaluate the ease of doing business at a state level, along with objective and measurable criteria and publishing annual scorecards, are an essential part of the medium-term list of actions. To address grievances and unlock information, we suggest strengthening MSME support networks and industry associations (by rationalising a set of about 3,500 industry bodies) led by local NGOs.

Beyond the short and medium terms, for MSMEs to ‘thrive’, create mass-prosperity, seize the shifts in global supply chains, and become “atmanirbhar”, India must create a massive entrepreneurial movement with millions of enterprises, across the country, aggressively pursuing local and global opportunities. This transformation requires local ecosystems in 300+ cities with a careful combination of Seed (education levels, the degree to which young people have ambition, agency, entrepreneurial mindset), Soil (infrastructure, connectivity, access to markets, access to credit/capital) and Climate (ease of doing business, local culture).

Early signs of such a model is visible with ‘Sarthak’, a digital ecosystem deployed by the state government that combines seed (e.g., mentorship and education), soil (e.g., access to finance and markets), and climate (e.g., stories of success and inspiration, MSME awards, etc.), available to all MSMEs across the state.

(Krishnan is a former Secretary to the Government of India, and Chair of the GAME Taskforce on MSMEs; Venkatesan is a former Chairman of Microsoft India and Bank of Baroda and founder of GAME)