A German model for our MSMEs?

S Adikesavan | Updated on January 16, 2018 Published on December 29, 2016

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India’s definitions of small and medium units should be employment-based rather than investment-oriented

Job-creating growth is likely to be a priority of the Modi government — especially in the context of the contraction expected in the wake of demonetisation — when it presents the Budget on February 1. The Budget presents a unique opportunity for redefining our entire approach towards medium, small and micro enterprises (MSMEs).

Commentators like S Gurumurthy have drawn attention to the jobless growth of the last ten years as against the job-led rise in GDP during 1999-2004.

While the figures have been contested, there cannot be any theoretical disagreement with the need for economic growth to create jobs.

Entrepreneurial spirit

That a million people are getting added to the list of job-seekers every month is widely known. Also, it is acknowledged that the Government or the public sector cannot be the source of employment for all these job aspirants.

We have to essentially depend on the inherent entrepreneurial spirit of our people to create jobs for themselves and create conditions that will help them set up units.

There can be no better solution than the spawning of MSME units on a large scale, in mission mode, in 2017 and beyond, for achieving this objective. There are examples from the developed world that could offer us good lessons on how to make this possible.

One of the fundamental differences in approach has been our obsession with investments in plant and machinery for the definition of MSME units under the relevant Act of 2006. As part of the welter of changes that are expected of Budget 2017, a few policy amendments need to be made quickly to alter our entire approach towards MSMEs.

Tweak the approach

Two major countries/regions from the developed world follow the number of employees as the basis for the categorisation of firms as MSMEs. Almost the entire European Union and the Americas, including the US, base their categorisation of firms for this sector only on the basis of the number of people employed and their turnover. In fact, the US Trade Commission defines SMEs only on the basis of people employed.

Probably, the origins of our irrational obsession with investment norms can be traced to the ‘fear’ of capital as a means of control of businesses and the need to ‘ration’ it so that economic agents with undue advantage over this factor of production do not control businesses.

This thinking is antediluvian and ought to be junked.

As Arundhati Bhattacharya, the chairman of the country’s largest lender, the State Bank of India, recently remarked at a seminar, it is the immense entrepreneurial spirit of the ordinary Indian in running small businesses and services that has helped mitigate the problem of unemployment in this country. Mostly, these small, micro and medium units have thrived despite norms such as the investment limits and not because of them.

At the present juncture, when the need to create jobs is the most important task of governance, the Centre would be well advised to radically redefine the norms for categorisation of the MSME sector, by only taking the number of employees into account. This will be transparent and straightforward.

Simpler definition

Insiders know how obtuse the norms for investment in plant and machinery are. For instance, in the case of a hotel, the cost of lifts and similar equipment, are to be excluded from the investment in plant and machinery and similarly the land and building.

It is difficult to fathom the reason for this definition apart from it being a relic of the licence raj mindset.

We could think of employment numbers like 25,100 and 500 for categorisation of units into micro, small and medium units (only an example), with attendant benefits of ‘priority’ sector classification for banks funding them. This will be a simple and straightforward definition and much less susceptible to issues of interpretation.

Given the Indian proclivity for ‘beating the system’, there may be attempts at cooking of books here but that is part of the larger battle against corrupt practices and unaccounted/black trails in our economy which the Prime Minister is seized of.

Concomitantly, there is need to abolish licensing of all kinds including municipal/local authorities licences for businesses that employ, say, five in rural and semi-urban centres and 10 in urban centres, totally.

Taxes, whether currently applicable or under the proposed Goods and Services Tax structure, will take care of the revenue flows to government coffers for development expenses/social welfare measures.

The German way

Germany, one of the few growth engines of the world today, is a shining example of the difference that such a great thrust for MSMEs can make.

In an e-mailed response, the German Federal Ministry for Economic Affairs and Energy stated that it has accepted the definition of SMEs as businesses with an annual turnover of less than €50 million and with fewer than 500 employees.

In a European context, an SME has been defined by the European Commission as being a company with fewer than 250 employees and an annual turnover of less than €50 million (or total assets of less than €43 million).

Due to their success, German SMEs — known collectively as the German Mittelstand — are also attracting a lot of attention from abroad. Classic SMEs account for 99 per cent of German firms providing for 60 per cent of all jobs in Germany.

Dismantling the norm relating to investments in plant and machinery and aligning it with the best practices in other developed markets, especially the shining example of the German Mittelstand, will further the cause of Make in India and more importantly, focus attention where it is needed most for our economy — job creation.

The writer is chief general manager with SBT. The views are personal

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Published on December 29, 2016
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