India is in the midst of recovering from the economic slowdown that was primarily caused by the pandemic. There were other factors involved as well but COVID-19 was the reason behind the sudden and significant decline of the Indian economy in the first quarter of FY 2020-21. However, the condition is steadily improving since then but there is still a long way to go for the economy to get back on track. The government will have to bring out more progressive reforms to not only limit the economic impact of COVID-19 but also get the Indian SMEs that have suffered the most back on their feet.
Getting rid of the regulatory cholesterol that is stopping SMEs in India from operating smoothly should be on the top of priority list of the government authorities. It is very important to understand that around three-fourth of the Indian employment comes from the informal sector, which most of the SMEs and MSMEs are a part of. When there are too many regulations governing different aspects of doing business, it becomes difficult for small and medium enterprises to grow. Deregulation needs to happen and it needs to happen very quickly because the Indian SMEs are in a very difficult situation right now, majorly due to the economic impact of the pandemic.
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Also the government needs to ease regulations concerning business and legal frameworks and overreaching tax amongst other areas to enable small businesses to make business decisions and form policies that are favourable for them. For the Indian small businesses to benefit from the economies of scale, they should be relieved of the burdens that come from unnecessarily tough regulations and compliance.
The government needs to understand the importance of small businesses and their contribution to the Indian economy, and introduce measures for ease of doing business. When SMEs reach a point where they can easily do business without compromising on compliance, they can then think about scaling their operations. Ease and compliance as a combination are necessary for small businesses to achieve before they even consider using economies of scale to their advantage.
For decades, lack of proper funding has been cited as the biggest factor that has been stopping Indian SMEs from progressing. However, there is more to this than meets the eye. Regulations have been as much a hindrance, if not more, for the Indian small businesses.
An in-depth study of both the factors mentioned above reveals a very big connection between the two. The Indian business regulatory system is too complex for small businesses to get hold of. This is the reason many small businesses remain in the informal sector throughout their entire lifetime. And improper funding comes from that. There are not too many established lenders that offer funding to business in the informal sector. So these small businesses are not able to scale to a larger size and experience the benefits offered by economies of scale concept.
So it is important for the Indian government to understand small businesses’ need to scale. Deregulation and creation of economic policies that facilitate this need amongst other things will do wonders to India’s recovery from the economic slowdown.
Reference: “Helping Indian SMEs to achieve scale – Behind Infra Lines” | IANS | 27 September 2020
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