How to fix distorted incentives

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Incentives to help Indian SMEs have unexpected and undesirable consequences. Most small businesses start small and live small throughout their lives. They don’t want to move on.

For small businesses in India, growth distress is drier than birth pain. Most of them often live in the size they were born, as entrepreneurs have often found it difficult to balance their aspirations and need to expand.

Arun Singh, chief economist at Dunn & Bradstreet, says there are 95 micros for every 100 companies, 4 are small and medium and only 1 is big. “Whereas in most developed countries, 50-55 out of 100 institutions are micro and 40 are small and medium firms.

Globally competitive

Small businesses need to understand that competition is not somewhat is a vague concept that is limited to boardrooms. A 2019 report by a confederation of Indian Industry defined competition as “the ability of a firm or nation to offer products and services that meet the quality standards of local and world markets at prices that are viable and provide them with adequate returns on resources employed or consumed in production”. The report says that while MSMEs have been able to show favorable and flexibility, many domestic factors hinder their competitiveness index.

Classification

One of the primary reasons for keeping back the growth of MSMEs is high compliance and regulatory costs. Industry observers claim, most MSMEs do not want to develop. They prefer to be small- sometimes shrink – to avoid being the target of impractical regulatory policy.

Last year, Finance Minister Nirmala Sitharaman revised the definition of MSMEs by raising the investment limit. An additional business criterion was introduced and it also bridged the gap between the manufacturing and services sectors.

‘ Show me the money ‘

Poor access to low-cost capital has been a major issue for small businesses. In a survey by Dunn and Bradstreet, one in three MSMEs claimed that getting finance was one of the top challenges in scaling up their operations. The primary reason was that they had a low or bad credit score, or poor debt history because of dependence on traditional debt. Most MSMEs deal in the cash economy, so the formal credit system will not have enough data about them.

Going Online

One good news for MSMEs is that digitization has changed the way businesses do business, especially after the outbreak of the epidemic. After large companies adopted virtual ways of life, the focus has changed for the digitization of many small businesses. Many institutions like Shopify, Shopmatic, and ANS Commerce have emerged to help SMEs make friends with technology. Even the big companies are looking at it as a strategic step. “A lot of tech-capable large companies have realized the importance of partnership with small businesses. A large company may be able to attract top-notch talent. But this entrepreneurial enthusiasm can’t get a small business operator brings to the table,” says Bansal of Hull.

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