India's Micro & Small Entrepreneurs: A Distressed Lot. They Self-exploit
The benefits of formalisation for MSMEs are undeniable as it is an access to credit, government contracts, and legal protection
India's entrepreneurial spirit is evident in its vast network of over 72 million enterprises. Behind the impressive number of micro-entrepreneurs lies a stark and grim reality: economic desperation and self-exploitation. This surge in micro-enterprises also reflects a systemic failure to create sufficient quality jobs.
The dearth of formal sector jobs often forces many individuals into entrepreneurship, not as a preferred or a strategic choice but as a distressed one. They are forced into self-employment as a means of survival. These entrepreneurs often work long hours under precarious conditions, earning barely enough to subsist.
While micro, small and medium enterprises (MSMEs) in countries like the United States and China play a pivotal role in driving economic growth, Indian MSMEs particularly the small and micro entrepreneurs, struggle to achieve their full potential.
*The Burden of Being Small. A Huge Cost
Entrepreneurs, face significant social and economic costs when they remain small. These costs, coupled with vulnerability to shocks, hinder MSME productivity, which is often only a third of its potential. This leaves them susceptible to exploitation and financial hardship.
India's entrepreneurial landscape faces significant challenges and is marred by a hostile business environment. The complex bureaucratic maze is unsurmountable, excessive regulations and a culture of red tape stifle innovation and growth. As businesses expand, they encounter a barrage of compliance requirements, audits, and potential corruption, discouraging most from scaling up.
The benefits of formalisation for MSMEs are undeniable as it is an access to credit, government contracts, and legal protection. Yet, the costs, including compliance burdens and taxes, often outweigh these advantages. To encourage formalisation, the government should introduce phased registration, with simplified procedures for micro-enterprises, gradually increasing compliance as businesses grow
Only one in a thousand move up. The reasons are manifold.
Our entrepreneur landscape is complex, the ecosystem is weak. Access to capital, a perennial challenge for entrepreneurs, is particularly acute in India. The banking system is often elusive to small businesses, forcing them to rely on informal and expensive sources of financing. While incubators, accelerators, and mentorship programmes exist, they often lack the resources and capacity to provide substantial support. Cluster-based development offers potential, but requires a holistic approach to address the specific challenges faced by MSMEs in different sectors.
The formalisation process is fraught with challenges. While essential for accessing financial support and legal protections, the associated burdens often deter small businesses from entering the formal economy. This can trap them in a cycle of informality, limiting their growth potential and ultimately leading to their demise.
*India's Missing Middle: A Drag on Economic Growth
Despite the numerical strength of the MSME sector, its overall economic impact remains relatively small due to a preponderance of micro-enterprises.
A robust MSME sector is essential for job creation, and economic growth. However, India's MSMEs are largely micro-enterprises struggling to scale. The absence of a substantial number of enterprises with the capacity to employ 200-500 people hinders the nation's competitiveness on the global stage. These mid-sized enterprises play a crucial role in bridging the gap between small-scale operations and large corporations. They serve as suppliers to larger firms, enhancing their competitiveness and fostering a robust industrial ecosystem. The absence of this critical segment weakens the supply chain, reduces innovation. They are more likely to invest in research and development, driving technological advancements.
The absence of this critical segment weakens the supply chain, stifles innovation, and limits the potential for exports. It undermines the productivity and competitiveness of the larger firms and hurts the entire economic ecosystem. This ‘missing middle’ is a critical barrier to India's aspirations of becoming a global economic powerhouse.
*Formalisation, Technology, and Policy for MSMEs
The benefits of formalisation for MSMEs are undeniable as it is an access to credit, government contracts, and legal protection. Yet, the costs, including compliance burdens and taxes, often outweigh these advantages. To encourage formalisation, the government should introduce phased registration, with simplified procedures for micro-enterprises, gradually increasing compliance as businesses grow. Offering income tax rebates and subsidies can further incentivise formalisation. Technology can transform the MSME landscape by streamlining government processes, expanding access to credit, and enhancing market reach through ecommerce.
Policy reforms, including simplified taxes and flexible labour laws, are essential to creating a supportive environment. Improving access to credit through guarantee schemes and fostering entrepreneurship through skill development and mentorship are also critical. A holistic approach that addresses skilled labour, infrastructure, and markets is necessary for sustainable MSME growth.
*Beyond Reforms. Addressing operational and process challenges
India's strides in improving its business environment, as reflected in the Ease of Doing Business ranking, often contrast with the realities faced by MSMEs. While well-intentioned policies are crucial, the Crux study highlights the pivotal role of state and local governments in fostering micro entrepreneurship. These businesses encounter significant procedural and operational challenges that can hinder their growth. State and local governments are better equipped to address these issues directly, implementing policies that reduce regulatory burdens, streamline processes, and provide targeted support services. Initiatives like business incubators and accelerators, favourable tax incentives, and infrastructure improvements can significantly boost micro entrepreneurship and contribute to India's economic growth.
India needs both a visionary and a plumber
Improving the ‘plumbing’ – the actual process of starting, running and growing a business – is as critical as policy reforms. This involves streamlining bureaucratic procedures, reducing compliance burdens, and ensuring efficient delivery of government services. Often, it is the state-level bottlenecks that hinder the growth of MSMEs.
We need to move beyond headline-grabbing reforms and focus on the nitty-gritty of implementation. India must prioritise addressing procedural challenges and creating a supportive ecosystem to truly unleash the potential of its MSMEs and contribute significantly to economic growth and job creation.
