Transform MSMEs to address the jobs gap - Hindustan Times

Transform MSMEs to address the jobs gap

ByRavi Venkatesan
Jun 20, 2024 09:11 PM IST

Better access to finance can boost growth and unlock the true potential of the sector, a key employment provider

India’s 65 million MSMEs employ around 25% of the country’s workforce. This sector is a vital job creator and crucial to the health of the economy. However, for micro-enterprises to grow to small enterprises and then medium enterprises and beyond, the cost is almost prohibitive. One of the key factors that is crushing the growth prospects of MSMEs is access to finance.

India’s 65 million MSMEs employ around 25% of the country’s workforce. Photographer: Prashanth Vishwanathan/Bloomberg (Bloomberg)
India’s 65 million MSMEs employ around 25% of the country’s workforce. Photographer: Prashanth Vishwanathan/Bloomberg (Bloomberg)

Delayed payments remain a major impediment to the potential and growth of MSMEs. Unfortunately, this issue has become too normalised, driven by lack of concern by large organisations that engage these MSMEs as contracted partners. Delayed payments to MSMEs leave them severely malnourished, as their revenue from contracts gets deferred by months and sometimes even years.

Large corporations routinely rely on MSMEs to supply components, intermediates and services of a pre-defined quality, as it can be cheaper to buy from a third party rather than to invest working capital and build capacity in-house. Credit periods or terms are generally stipulated by the buyer. MSMEs, due to their size and lack of negotiation power, get stuck when it comes to realising payments. The amount of working capital to be invested by MSMEs becomes disproportionate to the size of their operations. This significantly stunts their growth.

Challenges in receiving payments from large corporations hamper the growth potential of MSMEs who do not have the capital they need to further expand their operations. This is not only bad for these small enterprises but also if the MSME sector weakens, it will directly affect the Indian economy.

According to the Global Alliance for Mass Entrepreneurship’s (GAME) Delayed Payments 2.0 report, a massive amount of 10.7 lakh crore in payments was due to MSMEs in 2021. This amounts to 7.8% of India’s GDP. With the growth in the economy since then, this number would have gone up further today.

While the government has been proactively addressing the challenges of delayed payments to MSMEs, there have been steady and consistent measures taken to track, monitor and address this issue. The Samadhaan portal was launched in 2017 to monitor the outstanding dues to MSMEs. State governments have also set up mechanisms to resolve disputes. However, in many cases, MSMEs have to approach the courts for the execution of the decisions of the council.

In 2023, India’s finance ministry added 43B(h) to the Income Tax Act, 1961. Intending to effectively tackle delayed payment issues, this amendment penalises companies that have not cleared dues to MSMEs within a maximum of 45 days from the delivery date of goods and services. “45-day-rule” as it is commonly referred to has seen some resistance from certain sections of MSMEs. They see this legislation as hindering their ability to do business, taking a short-term view that the companies that use them as vendors would be negatively affected.

Organisations such as the Federation of Indian Micro and Small & Medium Enterprises (FISME) have found that the fear that the 45-day rule hampers business is unwarranted. This amendment simply requires that MSMEs receive payments within 15 days without any agreement and within 45 days with agreement. This provision gets triggered on a company’s balance sheet date at the end of the financial year, i.e. March 31st. Only those invoices that are pending payment on that day are covered. Transactions made during the rest of the year are not affected by the amendment. In the case that the company does not make the payment to the MSME in March, they would have to make the Income Tax payment as applicable. Even in that case, once they pay the MSME in the following year, they could claim a refund. This gives both large corporations as well as MSMEs enough leeway to work in a way that is favourable to both parties.

Unfortunately, large corporations see delayed payments to MSMEs as the latter’s cost of doing business. The prospect of future contracts is used as leverage with aggrieved MSMEs, an almost coercive tactic. While legislation is a work in progress, what cannot be legislated is good behaviour by corporations. What is needed is a shift in corporate values where MSMEs are treated fairly. Good governance in large corporations must include prompt payments to vendors and partners.

Realising receivables at the right time can enable MSMEs to thrive, expand their operations and in fact, have a better quality of output, leading to the betterment of the sector as a whole. The ripple effect of prompt payments can lead to a movement of mass entrepreneurship, which in turn will lead to further job-creation and the strengthening of our country’s economy

Ravi Venkatesan is founder, Global Alliance for Mass Entrepreneurship (GAME). The views expressed are personal

Catch every big hit, every wicket with Crickit, a one stop destination for Live Scores, Match Stats, Infographics & much more. Explore now!

See more

Get Current Updates on India News, Elections 2024, Lok sabha election 2024 voting live , Karnataka election 2024 live in Bengaluru , Election 2024 Date along with Latest News and Top Headlines from India and around the world.

Story Saved
Live Score
Saved Articles
My Reads
Sign out
New Delhi 0C
Tuesday, July 16, 2024
Start 14 Days Free Trial Subscribe Now
Follow Us On