Ivory tower economists and the reality of Indian small businesses

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Every year, we are privileged to first speculate, then listen to and finally analyse the annual budget. Before the budget, we also get the Economic Survey, that is supposedly the base upon which the budget is prepared.

For a very long time, the populace used to wait for the budget with bated breath, hoping for tax breaks and policy measures that would bring better days.

Now, realization seems to be creeping in – as long as any draconian policies are not announced, it makes no difference either way.

If anything, the gallows humour, mostly unintended, in these documents/speeches brings a smile of resignation in those who are able to understand.

Take 2019 – the last pre-Covid budget for example.

One of the “Out of the Box” ideas mentioned in the Economic Survey was the new classification of organizations as “Dwarfs”.

Dwarf enterprises have been defined as small organizations that are more than ten years old. The authors of the document, while pointing out the allegedly tiny share of employment generated by these organizations, recommend a sunset clause on the benefits that are supposedly being enjoyed by them. They feel these organizations are refusing to grow as they would then lose out on these benefits, and these benefits would be better utilized by giving them to Startups and larger organizations.

The sheer ignorance of the authors about the reality of running a small business in India cannot be better illustrated. If it wasn’t so insulting to the small businesses and terrifying that such people have been given the responsibility of guiding our economy, it would probably be funny. 

Maybe if one of them went to a bank and asked for a loan under the CGTMSE, they would realise the difference between what exists on paper and reality. 

A look at the possession notice advertisements that appear every single day should give them an idea of the pain felt by the common man in trying to set up and run a business. 

Maybe, the authors need to understand the anguish felt by the small business owner when he is unable to make statutory payments on time because his customers, especially government departments/PSU’s, delay payments for months on end citing a variety of reasons. Oh yes – they will point out that the government has put in place mechanisms to help small businesses in collecting payments, but then here too, there is a huge gulf between policy and reality that they need to understand.

Giving support to Startups is good. But it is also important to understand that a startup, as per definition, is an organization that is able to unlock value through innovation. Another important criteria is the ability to scale up rapidly, thereby bringing returns to investors. 

Classifying every new business as a startup, defeats the very purpose of supporting startups. At the same time, it is of utmost importance that we encourage the youth of the country to embrace entrepreneurship. For this, they need to see for themselves that the government supports all businesses – not just “Startups”.

It would behove the authors of the Economic Survey to set aside their assumption that the so called “Dwarfs” are deliberately staying small and try to understand why they are where they are.

Secondly, it is important for them to understand that a complex economy cannot blindly import policies and practices from developed economies and expect them to deliver the same results. India needs small businesses even more now with the massive changes that will be brought about by automation through Artificial Intelligence and Machine Learning, and we need to urgently take steps to ensure that the existing small businesses survive.

Instead of denying small businesses benefits, they need to look at how they can help them grow. Yes – we need out of the box solutions for this – for example, direct equity investments in small businesses (maybe only those having an Udyog Aadhaar initially) could be given tax breaks. This would be a huge help in raising desperately needed funds, as well as give a better return to the common man, without having to go to the stock exchange. 

Similarly, fixing responsibility for delayed payments and punishing those responsible for the delay would not only ease the working capital requirements of small businesses, but allow business owners to productively utilize the time thus saved.

Another example of an “out of the box” option would be to make the utilization of government funds more efficient through proper prioritization and increasing efficiency. If we are able to eliminate wasteful spending and improve the usage of available funds, we can easily provide a better standard of living to every citizen. But then for this, policy makers would need to get out of their air conditioned offices and live in a rural area for a few months first!

Thanks to our socialistic legacy, our economists still harbour the impression that the business owner is a villian who profits by exploiting the common man and the government has to ensure he is kept in control through legislation and myriad rules and regulations. 

It is high time we understood that the economy is fuelled by businesses and it is in the interest of the nation to help them. Even communist countries like China understood this and that is why they have reached where they are.

The quicker policy makers understand that they need to help businesses  – small and large, become and stay profitable, the easier it will be for India to become a 5 trillion dollar economy.

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