Deepti George and Madhu Srinivas
The United Nations General Assembly has designated June 27 as the MSME day to raise public awareness of the contribution of micro, small and medium enterprises to sustainable development and the global economy.
Indeed, MSMEs form an important part of our economy. They contribute about 30 percent of our nation’s output and provide employment to more than 110 million people. But despite their importance, the MSME sector is constrained for growth due to various issues such as lack of access to finance, the informal nature of the sector and severe information asymmetry problems.
The current pandemic has further highlighted their vulnerabilities. To mitigate this, the government has taken several welcome steps to address the adverse effects of the economic crisis on MSMEs. This is also a good time to consider how best to implement certain key long-term measures to address the structural problems affecting the sector. In order to create a shift from a survival mindset to a growth mindset, policy must focus on enabling innovation, managerial and other skill development, and financial sector development to power this growth.
Take the case of access to credit for enterprises wishing to grow. Lenders face significant challenges in appraising businesses due to a lack of proper documentation, and financial and cash flow information. Even beyond lending, if the government decides to target benefits (cash or skilling or training) to the lakhs of tiny or small informal sole proprietorship businesses across the country, it is currently impossible to identify these beneficiaries at scale.
The first step in overcoming this barrier is the creation of a Unique Business Identifier for MSMEs to identify them in a systematic manner. The RBI’s Expert Committee on MSMEs recommends that the PAN be made the Unique Enterprise Identifier (UEI). This UEI should be linked to all regulatory/government mandated information being submitted by the entity.While the PAN helps to identify the type of commercial entity (proprietorship/company/LLP/Trust/Society), the Goods and Service Tax Identification Number (GSTIN) data shall help determine the scale of the enterprise (micro, small and medium). The latter will now become critical since the definition for MSMEs has been changed to include a combination of size of investment in plant and machinery and turnover of the business.
The government departments/ministries handling such information should include the UEI in their database and allow lenders to access this information through Application Program Interfaces (API). For instance, financial information like auditor reports and GST filings and non-financial information like registration details, proprietor and related party information can all begin to be accessed by lenders through APIs such that requisite data privacy and protection measures are in place. This would enable them to underwrite MSMEs using credible and accurate information at much lower costs. Such a unique identifier would also do away with the need for MSMEs to register separately with various bodies such as Udyog Aadhaar, National Small Industries Corporation (NSIC), and GSTN.
For this to happen in a seamless manner, the government could consider the feasibility of establishing an infrastructure backbone between the databases of all Registrars (Registrar of Companies, Registrar of Firms and various Registrars at the State Government level such as Registrar of Cooperative Societies and others), the PAN database of the IT Department as well as the GSTIN database of the GSTN. These linkages will need to be carried out after adequate verification (at database level) to ensure all quoted details belong to the same entity. Usage rights to this infrastructure backbone could be provided to not only ministries at the national and state level, but also enterprise-facing units like District Industries Centers (DIC) and other entities the government may deem appropriate. The purpose would be to allow for identification of enterprises at a local level as well as for the provision of basic services like information rectification or for providing protections under the MSME Act from delayed payment by customers.
The success of the UEI, is in large part, based on MSMEs filing the necessary government/regulatory returns. To help these enterprises with various documentation procedures for GST, IT filing, loan application, PAN and so on, Enterprise Development Centres (EDCs) should be established in the DICs. These EDCs should be funded by a central scheme with operational flexibility being given to the centres to partner with private sector players or the concerned state government, as recommended by the RBI’s Expert Committee on MSMEs.
Many micro and tiny enterprises could choose to remain in the informal sector due to various reasons. The larger question at hand is whether there is adequate incentive for enterprises to choose to formalise in order to grow. With the Government’s focus on ‘Atmanirbhar’ and the role of MSMEs in the implementation of this strategy, we believe there is plenty of opportunity for growth for MSMEs. Solving the identity problem is necessary to enable a shift away from a survival mindset and towards a growth mindset.
Deepti George is Head of Policy and Madhu Srinivas is Policy Research Associate at Dvara Research. Views are personal.
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