Abstract
Micro, small and medium enterprises (MSMEs) are considered a crucial part of the Indian economy. They contribute significantly to the country’s GDP and conduces social growth through inclusive development. The rural parts of India are getting an upliftment with the help of growing MSMEs. The Government of India (GoI) takes several initiatives to support the MSMEs, and one such step was taken in the year 2014. In respect to that, GoI proposed a framework in 2015 that would evaluate the ease of doing business (EoDB) among Indian states. The initiative was taken to create more favourable entrepreneurial ecosystem across all Indian states. This paper tries to analyse the impact of Business Reform Action Plans (BRAPs) on the increase/decrease of MSMEs in the top and emerging states. States ranked as top achievers and achievers in EoDB ranking (2016–2017 and 2017–2018) are considered the top performing states, and fast-moving states are considered emerging states for the analyses. Some states show a positive relation between BRAP scores and MSMEs count, but some have contrary results. BRAP actions of top and emerging states with no point scoring are studied to determine which actions contribute to growing MSMEs. For this, the reports of BRAP published by the Department for Promotion of Industry and Internal Trade were studied. The results revealed four major action plans: commercial dispute resolution enablers, construction permit enablers, labour regulation enablers and availability of land, influencing the increase/decrease of MSMEs in Indian states/union territories (UTs).
Keywords
Introduction
Micro, small and medium enterprises (MSMEs) are the backbone of the Indian economy, with a contribution of 30% in the Indian GDP (2019–2020) (SME Chamber of India, 2020). MSMEs play a crucial role in India’s economic and social development by fostering entrepreneurship and enormous employment opportunities. They also contribute significantly to the overall exports, with a share of 49.8% (Ministry of Micro, Small and Medium Enterprises, 2021). India has a concentrated ministry, the MSMEs, which has taken progressive actions across the years for growth in MSMEs. Indian MSMEs are so vibrant because it helps in inclusive development by providing opportunities to rural and backward areas; and reducing regional imbalance by assuring equitable distribution of national income and wealth (Ministry of Micro, Small and Medium Enterprises, GOI, 2021). Approximately, 51% of MSMEs are established in rural India. (Ministry of Micro, Small and Medium Enterprises, Government of India, 2021). The Micro, Small and Medium Enterprises Development Act in 2006 provided a legal framework by defining MSME. The Ministry of MSME designs various policies and schemes, and monitors their implementation to assist the growth of MSME, helping them scale-up their business. Given MSMEs growth, M/o MSME introduced revisions in the existing MSME bill. The Micro, Small and Medium Enterprises Development (Amendment) Bill came in 2016 addressing the problem MSMEs faced due to lack of adequate and timely credit at a reasonable cost (Ministry of Micro, Small and Medium Enterprises, GOI, 2016). In order to provide easy access to credits, the ministry proposed two significant amendments; scheduled commercial banks shall lend to MSMEs at the rate of 1% plus the rate of fixed deposit of such bank, and MSMEs shall be entitled to collateral-free loans up to 20 million from scheduled commercial banks. The Central Government of India (GoI) has come up with various initiatives that could enhance the support for MSMEs and create a better ecosystem for them. However, the principal responsibility lies with the state governments. The primary role of M/o MSME is to assist the state governments through which states can facilitate the MSMEs by encouraging entrepreneurship and enhancing competitiveness among them. The schemes are framed to facilitate MSMEs with an adequate flow of credit from financial institutes/banks; support for technology up-gradation and modernisation; access to modern management practices; entrepreneurship development and skill up-gradation through appropriate training facilities; support for product development, design intervention and packaging; the welfare of artisans and workers; assistance for better access to domestic and export markets; and cluster-wise measures to promote capacity-building and empowerment of units and their collectives (Ministry of Micro, Small and Medium Enterprises, GOI).
Throughout, central and state governments have collaboratively worked to create an ecosystem for MSMEs, which would lead to ease of doing business (EoDB). One of the government’s recent initiatives is the change in definitions of MSME. The new definition came into effect on 1 July 2020. Tables 1 and Table 2 shows the difference between the previous and new definitions.
Business Reform Action Plan and Ease of Doing Business Ranking
Under the Ministry of Commerce and Industry, the Department for Promotion of Industry and Internal Trade (DPIIT) commenced the exercise to create a conducive business environment by streamlining regulatory structures and creating an investor-friendly business climate for the entrepreneurs. The plan was initiated in 2014 by identifying the reforms which need to be undertaken by the states (Department for Promotion of Industry and Internal Trade, 2014). With the support and partnership of the World Bank Group, DPIIT understood the essence of various reforms through 18 workshops. In 2016, DPIIT released the first Business Reform Action Plan (BRAP). A draft of 340 points action plan was structured consulting all states/union territories (UTs) (DPIIT India, 2019). The draft introduced recommendations on 58 regulatory processes spread across ten reform areas (Figure 1). The specialty of these action plans was their coverage of the entire business life cycle and significantly reduced compliance’s burden on the industry (Department for Promotion of Industry and Internal Trade, GOI). However, every year, the action points, recommendations and regulatory processes are revised. According to BRAP 2017–2018, the action points were updated to 372 spread across nine reform areas (Figure 1). The EoDB ranking of Indian states and union territories is done based on BRAP scores. A higher ranking indicates a more conducive environment for starting and operating a business.
BRAP Reform Areas 2016–2017 and 2017–2018.
Methodology Flow Chart.
Aims and Objective
The paper tries to study the impact of the BRAP on Indian MSMEs through the EoDB ranking. The EoDB ranking of a state is determined by the reform actions taken by that state. The paper aims to identify the reform action plans/areas that majorly influence the entrepreneurial ecosystem and MSMEs in that state. For this, we have analysed the BRAP of states ranked under EoDB ranking as top achievers, achievers and fast movers.
Every reform action contributes towards a better entrepreneurial ecosystem. Each state is working on different parameters to enhance its ecosystem. Some states are doing exceptionally well, and others are still working hard to better EoDB in their state. On the other hand, being a top state in EoDB ranking and working extensively on BRAP, we can observe a decrease in the MSMEs count in that state and vice versa. The objective of this research is to determine:
The reasons behind this phenomenon of increase/decrease of MSMEs in respective states. For that reason, action plans of top and emerging states have been studied to find out reforms that enhanced the EoDB along with the count of MSMEs in that state. Such analysis would provide a clearer picture about why some states with good BRAP scores have decreasing MSMEs and other states with lower BRAP scores have increasing trends in MSMEs count.
Methodology
This paper analyses the results of 2016–2017 and 2018–2019. Having the ranking of states for 2018–2019 (refer Annexure C) still, we could not consider results for this year, as the feedback scores have yet to release. Government upgrades the BRAP evaluation criteria annually to enhance the reform actions of states/UTs. Few changes are evident in BRAP reform areas of 2016–2017 and 2017–2018 (Figure 1). A significant addition in the evaluation criteria of BRAP 2017–2018 was the consideration of feedback scores. Earlier, the scores were allotted based on actions taken by states/UTs as per the BRAP framework for that year. In the 2017–2018 evaluation, the scores were allotted based on states/UTs’ performance and taking feedback from entrepreneurs.
Definition of MSME before 1 July 2020.
Revised Definition of MSME with Effect from 1 July 2020.
States Ranking under Ease of Doing Business 2016–2017 and 2017–2018.
The reports of BRAP published by the DPIIT were studied. In every reform area, the government has allotted points (or reform counts) as per the evidence submitted by the state government. No points are allotted for actions where the state has taken no initiative. No points are allotted because of the unavailability of evidence against few actions. The actions with no points, because of no action status, are considered for analyses. Action points deducted because of the non-availability of evidence are not considered as a lack of action (refer Annexure A). For the analyses, we have tried to understand actions at which the state scores no points. On the other hand, we studied the change of MSMEs count from 2016–2017 to 2017–2018 (refer Figure 2) in respective states (top and emerging states) [refer Annexure 2].
Comparative Analyses of MSMEs Among the Top and Emerging States Ranked under Ease of Doing Business
The overall analyses bring us to four major action points that significantly increase or decrease MSMEs count in a particular state. Following are the four major action points: commercial dispute resolution enablers, construction permit enablers, labour regulation enablers and availability of land. Environment registration enablers are another action point, but it is prevalent in a few states.
Labour regulation enablers play a vital role in affecting the MSMEs. The slightest change in this action point has affected the MSMEs significantly. States with increasing MSMEs have a 100% success in labour regulation enablers or have made a significant change compared to the previous year. However, there is much scope for this action point in almost every state with decreasing MSMEs. Andhra Pradesh’s performance has declined in this action plan. The importance of this action point can be understood as the slightest change in Andhra Pradesh performance under this particular action point has led to a 66% fall of MSMEs. Moreover, this is the only action point where Andhra Pradesh performance has declined, whereas, in other action points, it has a 100% success. A similar trend can be observed in Uttar Pradesh and Bihar, with a fall of 70% and 82% in MSMEs, respectively (refer Figures A10, A16 and A19).
Commercial dispute resolution enablers have a significant impact on MSMEs. States with an increase in MSMEs have achieved a 100% success in commercial dispute resolution enablers, or there is a significant shift in the state’s initiatives towards commercial dispute resolution enablers. On the other hand, the status of commercial dispute resolution enablers is not as favourable in states with decreasing MSMEs. Chhattisgarh, Madhya Pradesh, Haryana, Rajasthan and Karnataka have worked on all the recommendations under this action point. Uttarakhand, Himachal Pradesh and Assam showcase a significant change in their initiatives in this action point. However, states like Maharashtra, Odisha, Tamil Nadu and Bihar have much scope for improvement. In fact, Maharashtra’s performance in this action point decreased in 2017–2018 compared with 2016–2017.
Another important finding is that labour regulation enablers and commercial dispute resolution enablers together have the most significant impact. This can be observed in Uttar Pradesh and Bihar. Both the states have a maximum decrease in MSMEs and have much scope for improvement in the mentioned two action plans.
Construction permit enablers are another action point that impacts the MSMEs in states. States with increased MSMEs have a 100% success in implementing this action point with all recommendations fulfilled. There is much scope in the three states; however, there is a significant change in their performance compared to last year. At the same time, there is significant scope of improvement in states with decreasing MSMEs. States like Maharashtra, Odisha, Uttar Pradesh, Tamil Nadu and Bihar have high scope for improvement.
All the states that show an increase in MSMEs have worked rigorously on the availability of land. This makes the availability of land a critical factor that can impact MSMEs. However, in some states with decreased MSMEs, we see improvement in the availability of land, but other factors such as labour regulation enablers, commercial dispute enablers and construction permit enablers have impacted the growth of MSMEs. Environment registration enablers also impact the MSME growth; however, the effect is not as prevalent as other action plans. Its impact is observant in only three states: Assam, Maharashtra and West Bengal.
Discussion
EoDB impacts the MSMEs in a big way. The government has been taking crucial steps with the help of customised initiatives and schemes for MSMEs. Central government policies and initiatives help create a better ecosystem for MSMEs. From time to time, changes in government policies are well framed, considering the dynamic environment and current requirements. One of the significant steps in the recent past is the change in the definition of MSME. Keeping in mind the EoDB for MSMEs and encouraging growth in their scalability, the change has bought.
After the MSME Act 2006, the government came up with supports like; MSME Samadhaan, MSME Sambandh, MSME Sampark, MSME Champions, Udyan Registration, Grievance Monitoring System and many others across the years, which have gradually helped the MSMEs of India in doing business with more ease. GoI has taken a significant step by upgrading the ease of doing at the federal level. The initiative was taken to enhance the overall EoDB for all the entrepreneurs. However, this has also impacted the MSMEs in a big way. The collaboration of central supports for MSMEs and state EoDB has contributed to the growth of MSMEs.
By analysing the impact of EoDB ranking on the MSMEs of respective states, we could point out some crucial parameters that are very important for the MSMEs. According to our analyses, four major action points were observed in states that led to an increase or decrease of MSMEs in the respective states. The two very crucial action points are labour regulation enablers and commercial dispute resolution enablers. The other two action points are construction permit enablers and availability of land. These were the common factors whose increase/decrease has led to the increase/decrease of MSMEs in particular states.
Policy Recommendations
EoDB supports the betterment of MSMEs across India. This initiative has encouraged all the states to make their state a better ecosystem for every entrepreneur. As the backbone of the Indian economy, MSMEs are in dire need of such initiatives. However, the following recommendations can improve the support system for MSMEs in India.
Annexure A
Chhattisgarh.
Madhya Pradesh.
Haryana.
Rajasthan.
Uttarakhand.
Punjab.
Karnataka.
Himachal Pradesh.
Assam.
Andhra Pradesh.
Telangana.
Gujarat.
Jharkhand.
Maharashtra.
Odisha.
Uttar Pradesh.
West Bengal.
Tamil Nadu.
Bihar.
Annexure B. Change in the MSMEs Count.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.
