1policy watch

this IssueInsideMessage From the Director General. .......... 1Chandrajit Banerjee, Director General, cii

policy Barometer ......... 4

industry Voices ............ 6

Fact File ...................... 8

cEo Speak ...........................................................................................2

January 2017, Volume 5, Issue 5

PolicyM icro, Small and Medium

Ente rp r i ses (MSMEs) are the backbone of the

indian economy and play a crucial role in furthering growth, innovation and prosperity. they contribute 38 per cent to india’s GDp, account for a 40 per cent share of exports and 37 per cent share of the manufacturing output, bearing testimony to their salient role in the social and economic restructuring of the nation. MSMEs also make a significant contribution towards employment generation, especially in the rural areas, by employing almost 120 million across the country.

the indian Government has been spearheading a series of business reforms which have led to the emergence of india as one of the fastest growing economies and the preferred destination for global investments. the demonetization of high value currency notes by the indian Government is a breakthrough initiative to curb the proliferation of black money. the Government has also recently announced major sops to address the credit paucity for MSMEs by doubling their credit guarantee cover from Rs 1 crore to Rs 2 crore and enhancing their cash credit limit from 20 per cent to 25 per cent. with the launch of the Goods & Services tax (GSt), the indian taxation system is also set to come at par with the global taxation system. the focus of the Government has been on the simplification and digitalization of business processes and regulations through self-attestations and certifications, single window system, online approvals, etc. indian States too have gone beyond the one-size-fits-all

strategy and emerged as equal partners in policy reforms reflecting a paradigm shift in the development modalities.

the Government must be lauded for promoting the sustainable growth of MSMEs through a deluge of initiatives such as the Zero Effect Zero Defect Scheme to promote manufacturing excellence among MSMEs while minimizing the adverse effect on the environment; the National Sc/St hub for building the capacity and enhancing the market linkages of the underprivileged sections of society; bill to amend MSME definitions; the insolvency and Bankruptcy code; labour market reforms, etc. the Ministry has also launched the MSME Databank to create an online repository of MSMEs in india and their various products and services.

in spite of their significance, these enterprises face an assortment of challenges and constraints such as shortage of skilled manpower, technological obsolescence, regulatory issues, etc. SMEs in india are particularly hampered by an inability to obtain financial capital for growth and expansion. Banks, on the other hand, face information asymmetries and lack access to key data points for assessing the credit worthiness of MSMEs resulting in an unreasonable, high-risk perception of these enterprises. this underscores the need to develop a robust digital infrastructure for capturing comprehensive data on the identification, financial information, credit information, etc. on MSME borrowers for an easier assessment of their credit worthiness, which is one of the focal points for cii’s

policy advocacy initiatives for MSME finance. the demonetization of high currency notes will enhance the credit worthiness of MSMEs by encouraging MSMEs to transition to digital payments.

For addressing the financial needs of MSMEs, cii has been successfully operating the cii Finance Facilitation centre which partners with leading banks and other financial institutions to provide credit facilitation, advisory and compliance services for MSMEs. in order to leverage technology to boost the productivity and global competitiveness of MSMEs, cii has recently launched a technology Facilitation centre which is partnering with top technological solution providers for the technological upgradation of MSMEs. cii has also established a centre for competitiveness for SMEs which works towards enhancing the global competitiveness of SMEs through cluster development as well as counselling and mentoring services.

a technologically vibrant and internationally competitive SME sector should be encouraged for sustainable contribution to national income, employment and exports. Based on the response from cii’s members, many of the initiatives undertaken by cii have been able to effect a tangible change in the MSME ecosystem in the country and cii will continue to work synergistically with the Government and actively champion the cause of a robust MSME sector in india through its ongoing and upcoming initiatives. n

Chandrajit BanerjeeDirector Generalconfederation of indian industry

Shreekant Somany, chairman, cii National MSME council and chairman & Managing Director, Somany ceramics limited

Milon K Nag, co-chairman, cii National MSME council and chairman & Managing Director, K K Nag private limited

Focus: Micro, Small and Medium Enterprises

2 policy watch

CEOSpeak

Indian MSMEs are veritably hailed as the backbone of the Indian economy with a significant contribution to the country’s GDP, exports and manufacturing output. These enterprises are a source of healthy competition in the economy, stimulating innovation, economic dynamism, entrepreneurial spirit and diffusion of skills. Catalysts for socio-economic transformation of the country, MSMEs are critical in meeting the national objective of generating employment, reducing poverty, and discouraging rural-urban migration.

Notwithstanding their importance, Indian MSMEs are assailed by a slew of challenges and impediments thwarting their growth and progress as well as dwarfing their contribution to the economy. Any policy designed for the MSME sector must work towards creating an enabling environment to support the enterprises to prosper and grow. An enabling business environment is the most basic pre-condition for Indian MSMEs to flourish. This entails a supportive policy framework for Indian MSMEs as well as business reforms to improve their ease of doing business and reduce their regulatory burden. The CII National MSME Council interacts with several Government officials to engage in rigorous policy advocacy efforts for addressing the concerns of Indian MSMEs through the SME Policy Dialogue series. The series focuses on top policy challenges for SMEs such as ease of doing business, regulatory requirements, public procurement, etc and attempts to create a platform to deliberate on recommendations to remedy them. Further, simplification and rationalization of business regulations and inspections, abolition of the duplication and multiplicity of documentation and reporting requirements for compliances, online portals, single window system, time-bound dispute resolution mechanisms, self-certifications, etc. can be crucial in creating the conditions conducive to the growth of Indian MSMEs.

In addition, the role of technology cannot be over emphasized. Technology has not

technological solutions, lack of financial resources, difficulty in the identification of the best fit technological solution, low connectivity and linkages to technological solution providers, etc. which limit their potential for technological upgradation. CII’s recently launched Technology Facilitation Centre attempts to address the gaping technology divide facing the Indian MSME sector by interconnecting these enterprises with various leading technological solution providers.

Innovation in product and process capability to drive cost competitiveness, excellence in technical and manufacturing capabilities and robust quality and control systems can assist in enhancing the global competitiveness of Indian MSMEs and prepare them for greater participation in global value chains. Besides this, there is a need for more efficient information dissemination within the SME sector as most SMEs in the country lack adequate awareness about the schemes and policies implemented by the Government for their support and development. In addition, easier entry and exit norms, a strong public procurement framework, adequate access to key resources such as financial resources,

infrastructural facilities, utilities, skilled manpower, cluster initiatives, factoring services to tackle delayed payments, labour market reforms, etc. are some of the other imperatives to enhance the competitiveness of Indian MSMEs.

New opportunities are rapidly emerging owing to the reformative drive by the Indian Government through a slew of ease of doing business reforms. The demonetization of high value currency notes has underscored the emphasis of the Indian Government on business integrity through clean and ethical business practices. It is imperative that Indian MSMEs are provided with the requisite support through synergies between various key stakeholders in order to enable them to partake in the rapidly emerging opportunities consequent to India’s impending ascent as a global economic superpower. n

A Robust MSME Sector Needed for Driving the Growth of the Indian Economy

Shreekant Somanychairman, cii National MSME council and

chairman & Managing Director Somany ceramics limited

just provided the wherewithal to make globalization possible in a physical and virtual sense, but it is also the key source of increased productivity associated with innovation and growth. Technology needs to be infused within the MSME sector both through indigenous development as well as external acquisition. Specialized and competitive manufacturing technologies can create significant impact in areas of Lean Manufacturing, Quality Management, Design Expertise, Intellectual Property Rights (IPRs), etc. MSMEs encounter several technological challenges such as lack of awareness about the available

Source: Smart7\shutterstock.com

3policy watch

CEOSpeak

As an owner of a successful family-run SME business, how important do you think SMEs are for the growth of the Indian economy?MSMEs are very important for the growth of the Indian economy. They contribute 37 per cent of the total manufacturing output of the country, 40 per cent of exports and employ over 120 million. More importantly, there is a social dimension that makes MSMEs essential for the nation. Large sector companies increase output mainly through automation and technology whereas MSMEs do so by employing more people. A vibrant MSME sector is thus critical to absorb the 12 million young people entering the workforce each year.

What are the top 5 challenges that are impeding Indian MSMEs from leveraging the emerging opportunities in the aftermath of the pro-business reforms by the Indian Government?Despite the Government’s efforts to improve the ease of doing business, there are still too many regulations that an MSME needs to comply with. Other impediments are pervasive corruption, poor infrastructure, finance related issues such as inadequacy of funding, high interest costs and unrealistic collateral requirements and inflexible labour laws.

What are some of the most important enablers which can create an enabling policy framework for Indian MSMEs to thrive? The most important enabler for Indian MSMEs to thrive is ease of doing business. A lot of emphasis is placed on the ease of starting a business but not enough on the ease of running an existing business. This requires a complete overhauling of the mindset where ensnaring a business in a web of unnecessary paperwork is mistaken for the administrative skill of an official.

What is the extent of preparedness of Indian MSMEs for taking up

customers, suppliers, bankers, lawyers, consultants and the community at large.

How do you think demonetization has impacted the Indian MSME sector given that around 90 per cent of all Indian MSMEs are currently informal and 55 per cent of these enterprises are located in the under-banked rural parts of the country? What are some of your suggestions for MSMEs to smoothly transition to digital payments?

There is no doubt that, in the short run, Industry in general and the MSME sector in particular have been very adversely affected by demonetisation. However, if this drive against black money and the introduction of GST forces people to move from the informal economy to the formal economy, it will be hugely beneficial to the nation. Today, not paying one’s taxes is considered socially acceptable in many sections of society. That attitude must change.

As the Co-Chairman of the CII National MSME Council, please enumerate some of the focal areas for the CII National MSME Council for the development of Indian MSMEs?

The CII National MSME Council works to enhance the global competitiveness of Indian MSMEs by conducting discussions and policy awareness through initiatives such as the SME Policy Dialogue series for addressing areas in which MSMEs face particular challenges and conferences like the SME Global Summit which promote global MSME partnerships. Through our CII Finance Facilitation Centre, we address the financial difficulties for MSMEs. We have also launched the CII Technology Facilitation Centre this year to address the hurdles faced by MSMEs in accessing the latest technologies. n

SME Perspectives, Challenges and Key Growth Enablers

Milon K Nagco-chairman, cii National MSME council and

chairman & Managing Director K K Nag private limited

various global technological solutions and trends in the aftermath of Digital India?MSMEs by and large employ less qualified people and have less technology infrastructure than larger companies and thus have lower preparedness to absorb new technological solutions and trends. As their scale of operation is smaller, they have a lower capacity to invest. Technology providers need to provide customized solutions for the MSME sector to reduce cost.

How impor tan t i s qua l i t y upgradation for SMEs to gain global competitiveness in the wake of paucity of funds?Quality upgradation for MSMEs is of utmost importance to improve their global competitiveness. Improving the quality of processes can go a long way in reducing costs and increasing customer satisfaction and loyalty.

Based on your experience, how important is it for MSMEs to develop strong personal relationships with their stakeholders given that a large number of MSMEs across the globe are family-run enterprises?It is extremely important for MSMEs to build strong interpersonal relationships with various stakeholders. In our company, we strongly believe in maintaining solid long term relationships with our own members,

4 policy watch

Policy Barometer

Key CII Recommendations for MSMEs

Area Issue s Recommendations

Legal / Regulatory Framework

Lack of enabling regulatory framework and SME Policies

A revised framework must be implemented for MSME definitions based on •the three criterias of turnover, capital investment and employment

Ease of Doing Business

Start-ups and Micro enterprises should be allowed a special dispensation from •various compliances related to taxation, labour laws, etc. for an initial period of 3 years i.e. the start-up phase, to remove hurdles in their growth

MSMEs should be allowed to provide self-certifications and conduct self-•attestations to avoid visits by inspectors

The submission of all reports and documents for filing of returns, approvals, •licences, etc. must be made online through single window system and online portals

There must be greater flexibility in the deadlines for submissions of forms, •filing of returns, etc. especially for SMEs

An effective time bound dispute resolution mechanism must be implemented •with clearly stated course of action

Access to Timely and Affordable Finance

Lack of access to timely and adequate credit

Dedicated MSME equity funds need to be made available to finance rapid •growth of MSMEs both in the public as well as in the private space

The current limits under the Credit Guarantee Trust for Micro and Small •Enterprises (CGTMSE) scheme should be enhanced from the present Rs. 4,000 crore to Rs. 28,000 crore annually over the next 5 years

High risk perception and lack of information on credit worthiness

A digital infrastructure must be developed to make comprehensive data •available to financial institutions on the identification, financial information, credit information, etc. on MSME borrowers for an easier assessment of credit worthiness

High incidence of Non-Performing Assets (NPAs)

The classification of NPAs should be 120 days instead of the present 90 •days with a special dispensation for extra 30 days for MSMEs

Debt restructuring norms must be issued by the Reserve Bank of India for •the restructuring on SME debts

High cost of creditCost of money (interest on borrowing) should be limited to a maximum limit •of base rate + 2.5 per cent

Delayed Payments

There is a need for provisioning of factoring without recourse for tackling •delayed payments through a factoring vehicle

Implementation of Trade Receivables Discounting System (TReDS) for facilitating •financing of trade receivables of MSMEs from corporate and other buyers, including Government departments and Public Sector Undertakings (PSUs) through multiple financiers

5policy watch

Policy Barometer

Area Issue s Recommendations

InfrastructureInadequate infrastructure facilities

25 per cent of the land available at all Industrial Corridors must be allocated •to MSMEs at lenient rate slabs and acquiring models

Land bank should be created at State level to facilitate smooth allocation •of land to start-ups and micro enterprises

Vacant and disused premises in industrial estates must be allocated to new •or existing enterprises by State Governments

Incubation cells and hubs within clusters can be developed in collaboration •with academia/regional institutions to provide MSMEs with mentoring and technology support, and shared Research & Development facilities

Public Procurement Policy for Micro and Small Enterprises (MSEs)

Weak Institutional Framework

A robust monitoring mechanism should be implemented to monitor and •ensure an effective implementation of the Policy

State level Public Procurement Policies must be launched for expanding the •coverage of public procurement from MSEs

Lack of Vendor Development

All Ministries/Departments/CPSUs should be mandated to organize VDPs and •buyer-seller meets between MSME suppliers and the procuring agencies of the Government

TechnologyNon-availability of affordable technology

Government should implement cloud technology among the MSME clusters which •can help MSMEs in sharing knowledge and developing competitiveness

Support should be provided to MSMEs to use different Information and •Communication Technology (ICT) platforms like Enterprise Resource Planning (ERP) through enhanced depreciation on Information Technology (IT) products

Market linkages

Lack of adequate market linkages for business development and expansion

There is a need for effective implementation of various market development •schemes available including Market Development Assistance (MDA), trade fair participation, business meets and visits to foreign countries, etc.

6 policy watch

Industry Voices

a sound and stable regulatory environment, supported by good governance, transparency, predictability, and economic openness is crucial for a positive business and investment climate in any country. the state of a country’s business and investment climate is a key factor in its ability to develop SMEs. the recent initiative by the indian Government to increase online submissions and information has a major potential to improve ease of doing business for SMEs, while simultaneously promoting transparency in governance. Digitization of regulatory processes will make it possible for the indian Government to better monitor and track various regulatory checks and compliances and reduce the burden to conduct multiple routine inspection visits and audits.

Ashok Saigal chair, Sub-Group on Ease of Doing Business, cii National MSME council and Managing Director, Frontier technologies pvt ltd

with women constituting nearly 48 per cent of india’s entire population, their labour force participation rate is abysmally low. Sectors such as nursing, teaching, professional services, agro and cottage industries are traditionally women centric. the need of the hour is to enhance the participation of women across sectors. initiatives such as crèches near industrial townships, incentive to companies employing women, especially in manufacturing and other predominately male-centric industries, incentive to families educating girl children, etc. can boost the labour force participation of women. More than anything, an attitudinal shift is required to instil greater confidence amongst women to step outside the traditional roles and engage in revenue generating employment opportunities. Enhanced gender parity can be attained in the labour market through gender sensitization and mainstreaming which will ensure a more equitable distribution of the large scale employment opportunities generated by the indian MSME sector. there is a need to create a systematic framework to connect qualified women with productive employment opportunities across industries.

Dr Alka Kaul chair, Sub-Group on women Empowerment, cii National MSME council and Director, horizon industrial products pvt ltd

Make in india is a potent initiative by the indian Government to provide a boost to the manufacturing sector and harness the latent abilities of the MSME sector. Several progressive MSMEs, having deployed state of the art manufacturing facilities and adopted modern manufacturing excellence practices, were hitherto unable to fully exploit the domestic market for want of demand. Make in india not only holds promises for the manufacturing sector to cater to increasing domestic demand but also provides an opportunity for trans-national organizations to use indian manufacturing base to manufacture world class goods. Since the inception of Make in india, many global companies have been taking a keen interest to locate manufacturing in india and are working to forge alliances with indian MSMEs to cater to their global supply chain. Flexibility to adopt globally acclaimed manufacturing practices and a penchant for knowledge based manufacturing and latent enterprising spirit demonstrate the inherent capability of indian MSMEs to leverage this initiative. the key enablers for the growth of these enterprises include lower interest rates on long term debt for capex and working capital, reduced paperwork and regulatory requirements, flexibility in labour laws, higher incentives to exporters, and availability of skilled manpower, among others.

Vipin Mullick chair, Sub-Group on Manufacturing, cii National MSME council and Managing Director, inspros Engineers pvt ltd

7policy watch

Industry Voices

access to finance is one of the biggest challenges for indian MSMEs. with almost 26 schemes available for MSMEs, only a handful, such as the cGtMSE and clcSS address this issue and even these fail to sufficiently remedy the issue due to limited implementation and endorsement by financial institutions.

the trade Receivables Discounting System proposed by the Government for MSME bill discounting must be implemented at the earliest for increased working capital access for MSMEs. additionally, there is a need to transition to the globally adhered practice of project-based financing for working capital access for MSMEs. there is also a need to enact legislation to launch State level Facilitation committees with significant authority and autonomy to act against delayed payments. the excessively stringent lending criteria and the redundant paper work required by financial institutions is another hurdle towards access to finance of MSMEs. there is a need to develop innovative financing products for MSMEs such as lease financing or hire purchase of machinery, buyers’ credit towards technology upgradation, innovation-based R&D financing, periodical technology upgradation funding, channel financing, etc. we need to move away from physical asset-based collaterals to goodwill-based and project-based financing by institutions. Rating agencies also need to take into consideration the business potential of MSME projects while evaluating them..

Ashish Agarwal chair, Sub-Group on credit and Finance, cii National MSME council and Executive Director, ori plast limited

a complicated business environment is one of the most critical challenges faced by indian businesses in general and MSMEs in particular. the compliance environment for MSMEs – barring a few exceptions – is as complex as for large enterprises. owing their limited means and infrastructure, MSMEs struggle to keep track of the varied requirements of law with regards to labour, environment, corporate, operational and financial compliances, etc. in my opinion, MSMEs should invest in a software-based solution, which can provide them atleast the critical compliances in a database and help them achieve their compliance related goals without having to spend too much time or money. the Government should view the world of SMEs with a completely different lens and have a different set of laws and compliances which will fulfil the statutory goals of the Government without unduly burdening the MSMEs.

Indranil Chaudhary co-chair, Sub-Group on Ease of Doing Business, cii National MSME council and chief Executive officer, lexplosion Solutions pvt ltd

indian MSMEs contribute around 40 per cent of the overall exports from the country. During the last couple of years, the indian Government, through its administrative wing - central Board of Excise & customs - have taken many policy initiatives to enhance MSME exports such as the authorised Economic operator Scheme, customs Single window interface for Facilitating trade (SwiFt), Digital Signature, 24X7 customs clearance at many Seaports and airports, provision for deferred duty payments, etc. however, some major policy initiatives that can significantly propel MSME exports are bringing down the borrowing cost, improved port infrastructure, timely disbursal of export incentives to MSME exporters, development of globally acceptable indian Standards, accreditation of indian Standards with Globally Recognized Standards, accreditation of indian certification agencies and test laboratories with global regulatory bodies, etc. MSMEs too can adopt several best practises to enhance their global competitiveness. these include globally recognized hR practices, investment in innovation, emphasis on quality standards, on-time delivery, efficient supply chain management, efficient compliance management and updated business documentation, etc.

K Nandakumar chair, Sub-Group on trade & Export promotion, cii National MSME council and

chairman & Managing Director, chemtrols industries limited

8 policy watch

Factfile

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Total Working Enterprises and Employment

Annual Growth Rate of the MSME Sector

Source: MSME annual Report 2015-16, Ministry of MSME

Policy Watch: MSME FactFile

Source: MSME Annual Report 2015-16, Ministry of MSME Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

7.5 7.5 7.4 7.3 7.0

28.6 28.6 29.3 30.7 30.5

2008-09 2009-10 2010-11 2011-12 2012-13

Manufacturing Services

MSME Contribution to GDP (%)

Rural55%

Urban45%

Geographical Distribution of MSMEs in India (%)

11.8%10.5%

11.8%

18.5%

14.3%12.4%

17.2%18.7%

0.0%

5.0%

10.0%

15.0%

20.0%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Annual Growth Rate of the MSME Sector (%)

36.2 37.7 39.4 41.1 42.9 44.8 44.8 48.8 51.1

80.5 84.2 88.1 92.2 96.5 101.2 106.1 111.4117.1

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Total Working Enterprises Employment

Total Working Units and Employment

In m

illio

ns

Source: MSME annual Report 2015-16, Ministry of MSME

Policy Watch: MSME FactFile

Source: MSME Annual Report 2015-16, Ministry of MSME Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

7.5 7.5 7.4 7.3 7.0

28.6 28.6 29.3 30.7 30.5

2008-09 2009-10 2010-11 2011-12 2012-13

Manufacturing Services

MSME Contribution to GDP (%)

Rural55%

Urban45%

Geographical Distribution of MSMEs in India (%)

11.8%10.5%

11.8%

18.5%

14.3%12.4%

17.2%18.7%

0.0%

5.0%

10.0%

15.0%

20.0%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Annual Growth Rate of the MSME Sector (%)

36.2 37.7 39.4 41.1 42.9 44.8 44.8 48.8 51.1

80.5 84.2 88.1 92.2 96.5 101.2 106.1 111.4117.1

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Total Working Enterprises Employment

Total Working Units and Employment

In m

illio

ns

Geographical Distribution of MSMEs in India Nature of Activity of MSMEs in India

Policy Watch: MSME FactFile

Source: MSME Annual Report 2015-16, Ministry of MSME Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

Source: MSME Annual Report 2015-16, Ministry of MSME

7.5 7.5 7.4 7.3 7.0

28.6 28.6 29.3 30.7 30.5

2008-09 2009-10 2010-11 2011-12 2012-13

Manufacturing Services

MSME Contribution to GDP (%)

Rural55%

Urban45%

Geographical Distribution of MSMEs in India (%)

11.8%10.5%

11.8%

18.5%

14.3%12.4%

17.2%18.7%

0.0%

5.0%

10.0%

15.0%

20.0%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Annual Growth Rate of the MSME Sector (%)

36.2 37.7 39.4 41.1 42.9 44.8 44.8 48.8 51.1

80.5 84.2 88.1 92.2 96.5 101.2 106.1 111.4117.1

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Total Working Enterprises Employment

Total Working Units and Employment

In m

illio

ns

Source: MSME annual Report 2015-16, Ministry of MSME Source: MSME annual Report 2015-16, Ministry of MSME

68%

32%

Manufacturing Services

Manufacturing ServicesManufacturing Services