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Wednesday, August 19, 2009

SME Wishlist

May 16th, 2009 can be termed as a historic day in the political history of India. Where regional parties have been playing a bigger role in every elections starting from 1989, a national party (Congress) has regained lost ground in the Lok Sabha elections. This, coupled with the defeat of the Left Front in West Bengal, shows that people have become impatient of hollow ideology and want governments to focus on development.

As an SME owner who serves other MSMEs in countries like India and the US, I would like to see a Congress government that professes a deep belief in an inclusive growth mantra and implements major reforms in the SME space, especially in the following areas:

Increase collateral-free lending options:

Indian SMEs need faster and easier access to credit, which should be less tedious in terms of paperwork as well as lowered transaction costs of debt financing. This can be done by increasing the role of the Credit Guarantee Fund Trust (CGTMSE) and making its schemes less cumbersome, like sole banking criteria, etc, which usually leads to lower adoption by banks and the borrowers. The recent reforms in the Small Business Administration (SBA) loan regime in the US with regards to guarantee fees and secondary market norms should also be followed in India.

Unique identification number (UIN):

This is one of the major steps that the government needs to take in order to increase credit access as well as kickstart the credit rating market for the SMEs in India. The plethora of identification numbers, like Permanent Account Number (PAN), Tax Identification Number (TIN), and so on, leads to tracking issues that hamper the creation of a centralized database of the SMEs. The lack of a centralized database is the biggest impediment for banks and IT companies like Dell to provide greater and cheaper credit access to SMEs.

Credit rating incentives for SMEs:

SMEs should be encouraged to get credit rated, not just through subsidies, but also incentives like greater credit limits and cheaper credit, which will further help the sector to become organized and export-competitive. This will also help Indian SMEs to market their goods and services easily to the world markets. The example of the SEI-CMM rating methodology has already shown the benefits of a standardized and globally accepted rating system can propel a sector (IT/ITES) to achieve world-class standards in last 20 years.

Implement general sales tax (GST):

This is perhaps the biggest tax reform that the government can implement. One of the biggest challenges for the manufacturing SMEs in India, besides access to credit, is a lack of standardized tax regime across different states and a whole lot of paperwork for these different tax regimes. Countries in South East Asia as well as the US have shown that the GST is the most effective tax structure that increases the competiveness of the SME sector besides improving the tax collection for the government. Since the SMEs are at crossroads and have a historic opportunity to capture a bigger market share internally as well as across the world, I sincerely wish that the government will be able to implement these reforms at the earliest.


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