SME Industry

Mumbai: With the current wind of demonetization in the country, thought it’ll be good for us to analyze its effect on the SME sector of India. The SME, as we understand is a big chunk of the economy contributing to 8% of the GDP whilst employing more than 80 million people year on year. Before we analyze the impacts of demonetization, we must realize and understand how we reached this stage in simple words. Most SMEs are traditionally-operated family-run businesses. Broadly, there are two kinds of players in the market in this segment.

One, the businesses that were formed because their promoters saw the opportunity early on before anyone else could and went on to become successful businesses quickly. The other are the players who joined the race and could do reasonably good because of the vast underserved market. The traditional mind-set and early success convinced them to not upgrade on the way they do their business and therefore they continued to remain in the SME sector and not scale beyond a point. Whilst all of this was happening, the Indian economy was growing and at a macro level policies were made to keep a check on several aspects and this lead to introduction of various licenses and their approvals and therefore compliances.

Taxes increased in percentage and forms. India is known for its frugal mindset; we are quick at spotting what others cannot and can come up with very innovative solutions to problems. An SME has been a master at this art. He was quick to spot ways to get through with the compliances and taxes and the officials were happy to receive the unaccounted benefits. Soon it was also noted, that the return on investment on taxes paid was meager and there always were alternatives available to a frugal mindset.

This gave rise to the parallel economy of black money. It’s a classic case of poor processes at the government level. Processes are always interlinked and therefore whilst constructing them one has to look at all the sub-processes it will impact. Processes need a monitoring & audit mechanism which is independent and cannot derive benefits from allowing incorrect ways in the system. All of these aspects somehow were missed.

Demonetization, in my opinion is an extremely bold step taken by the honorable Prime Minister of the country, especially when a large portion of the economy is run on cash transactions and the economy is largely how people feel and interpret the situation. My personal views are as follows:

Demonetization is not a surgical strike; it is carpet bombing. It impacts everyone. Replacement not only takes time; it also slows down the spending process as everyone tries to protect the newly acquired currency to secure themselves from the uncertain future. In case of SMEs, most will be unsure of payments coming from customers for some time; this, as liquidity in the form of unaccounted currency has dried up. If customers don’t pay, SMEs will protect what they have and that will mean they purchase less and produce less. Purchasing less will mean further slowdown for the people who provide them with raw material and producing less will mean shortage of supply leading to inflation on what is available.

• Reforms in the form of incentives is what we see will happen soon. I am positive that the government is aware of the first point and will take measures to restart the money wheel rolling in the market again. This could happen in several forms, early announcement of GST and BTT, elimination or drastic reduction of Service Tax and VAT until GST is introduced or something else. Taking steps on taxes will encourage people to spend without having the fear of tax which is currently seen as systematic loot with minimum or no returns.
• Improvement in government procedures and monitoring of the monitor. This will happen as a measure to avoid generation of black money in new currency. Government will redesign processes to acquire licenses and approvals with ease, older redundant requirements will be abandoned. Tax and other compliance officers will need to be monitored to ensure the policing does not give birth to ‘under the table settlement’ culture again.
• Visible use of collected money in banks on development of infrastructure that brings benefits to people quickly. “Quick” is the keyword, we will see money invested in aspects that bring quick results for all classes. The current change has got quick pain with a promise of long term gain but we have to remember that a large section of our society will need quick gains to survive before they can enjoy the long term benefits.
• SMEs will invest in self-development and improvement in terms of technology, infrastructure and training to self-utilize the increased profitability with unaccounted income now becoming the part of the books which are taxable.
• SMEs and businesses now by design will have two options. Pay tax or spend on doing more for scaling up and this will have a spiral effect on the overall improvement in the economy.

There are loads of positive and negative impacts of the current move, no one currently can be sure of the future and this uncertain environment is certainly not good. Outcomes in uncertainty depend on the mindset and currently whilst people are taking it positively, they definitely are starting to realize possible pitfalls too if measures are not taken at the right time. Communication will be the key to ensure stability. And like I mentioned earlier, while personally I am impressed with the bold step taken by the honorable prime minister, I am also concerned about the mammoth task ahead of him to make this a success. Because in my mind the war against black money has not started yet. Demonetization is only a war cry that declares the start of a war.

Hardik Harsora, Co- founder of Effex Business Solutions, a management consulting company, said, “With the the demonetization in our country it is time for our SMEs to experience the advantages of deploying management concepts and process excellence solutions. Robust and thought-through processes lead to arrest of wastages and inefficiencies. Well structured systems help monitor the performance of every activity in the organization. Smart reporting and MIS aids entrepreneurs to take the right decisions at the right time. When all of this happens in synchronization, that is when an SME sees gradual but sure growth. Our methodology called ‘Propel’ is specifically designed for the Indian SME and ensures implementation of these solutions”.