‘Rationalising, digitising, decriminalising regulations key to ease of doing business for MSMEs’
By Sandeep Agrawal
Technology for MSMEs: India’s Micro, Small, and Medium Enterprises (MSME) sector employs more than 110 million people and covers over 63 million MSMEs. The micro segment alone accounts for 99 per cent of the total enterprises and 97 per cent of the total employment. MSMEs are a critical pillar of economic growth for remote and backwater areas, with 51 per cent of the enterprises belonging to rural areas. The significance of these establishments cannot be understated, and as such, it is imperative to understand the challenges and obstacles they face.
With over 99 per cent of MSMEs being micro-enterprises, it is not surprising that most MSME owners belong to rural and education-deprived backgrounds. They remain unaware of government schemes, benefits, and policies that can help them financially. Financial difficulties are commonplace for MSMEs, with entrepreneurs making bad financial decisions and having little or no assets to avail of credit services. Furthermore, informal workers employed by MSMEs often lack technical skills which hurts productivity. Technology has also become a barrier to entry into the digital economy for these enterprises, and they struggle to compete against technologically sound businesses. In addition to these challenges, the fear of being entangled in the web of regulatory compliances, infringements of which can result in imprisonment, also deter these enterprises from scaling up.
A total of 1,536 acts and rules, 69,233 compliances, and 6,618 filings govern the business ecosystem in India. While the framework ensures that the bad actors are held accountable, it has also resulted in excessive regulation, creating a massive informal economy. For every 60 informal enterprises, there is just one formal enterprise. MSMEs have grown wary of the complex ecosystem of regulations wherein just to become a part of the formal sector or scale up, they need to complete over 400 compliance obligations. Furthermore, regular regulatory updates are published across 2,233 government websites, making the regulatory ecosystem highly fluid and dynamic. This overregulation has bred economic dwarfs that choose to fly under the regulatory radar even if it restricts their access to institutional capital and superior talent and compromises their resilience in the face of economic vulnerabilities.
The complexity of regulatory compliance stems in part from the ongoing nature of compliances and the overwhelming number of regulations. For instance, a business with a single manufacturing unit must continuously adhere to approximately 50 display requirements. These include the display of registrations, legislative summaries, standing orders, employee-related social security rules, safety signboards, labels on hazardous substances, and equipment identification marks, among others. Additionally, it is necessary to maintain several up-to-date registers, including wage registers, muster rolls, leave and attendance registers, temperature registers, and refuse disposal records, among at least 40 other distinct registers in various formats.
MSMEs must also wade through the dangerous waters of the 21st-century licence raj. On average, an MSME has to obtain at least 30 different licences, registrations and approvals from various authorities. These include EPF and ESI registrations, land registrations, trade licences, environment clearances, factory licences, permanent power, water and sewerage connections from municipal corporations, and vehicle registrations among others. At the same time, MSMEs have to deal with a diverse range of compliances divided into seven broad categories – labour, industry-specific, commercial, environment, health and safety, finance and taxation, secretarial and general. For an MSME with limited resources to fully comply with every applicable compliance is an immense challenge.
Every discussion about the challenges MSMEs face inadvertently concludes with the need and the importance of technology in enabling these enterprises to overcome these obstacles. From tech-based financial solutions to tech-based operational solutions, MSMEs can now leverage technology to aid their businesses. These digital solutions can help entrepreneurs to more effectively and efficiently monitor the financial health of their business and keep up with the regulatory requirements of their industry.
Enlisting digital technology can help MSMEs stay on top of their compliance requirements and avoid lapses, delays, and defaults. Regulatory technology solutions give business owners better visibility and control over compliance functions. Compliance technology has replaced traditional manual compliance processes with unique features, including customised checklists, real-time regulatory updates, automated alerts and reminders, and periodic analytics. Entrepreneurs can now track and manage their compliance requirements and any changes brought about by regulatory updates. MSMEs are shifting from ad-hoc, manual, paper-based, and people-dependent compliance to paperless, presence-less, and cashless compliance processes. It has reduced the cost of compliance for enterprises and the instances of poor compliance, consequently reducing their exposure to fines and penalties.
We are presently in the “Amrit Kaal”, wherein the peaking demographic dividend has put us squarely at a juncture where we are entering a phase of rapid economic growth. The country is on track to breach the $10 trillion GDP mark by the end of the decade, supported by the explosive growth in the digital economy, which is set to cross $1 trillion in the next few years. As a country, we have embarked on a journey of becoming the factory of the world. The three-pronged approach of rationalising, digitising, and decriminalising regulatory obligations will be the key to improving the ease of doing business for MSMEs and creating a business-conducive environment. Only by enabling, empowering, and enhancing the capabilities of these enterprises will the country be able to unlock its potential and enter an era of economic prosperity.
Sandeep Agrawal is the Director and Co-founder of Teamlease Regtech. Views expressed are the author’s own.