The heart of India’s businesses lies with Small and Medium Enterprises (SMEs). Demonetization is a great reform for the long run but one that’s had a short-term blow for day-to-day functioning of small companies. One can argue whether these were operating in the right way or the wrong way, but they are for now strapped for functioning monies. This has disrupted operations, shuttered down factory sheds, and sent into disarray seasonal cycles of different businesses.

On the other hand, it’s opened them up to the notion that survival of business will be by the books, paying ‘cost of convenience’ i.e. the Indian jugaad for bribes and touts will drastically slide. SMEs hope that the Prime Minister’s effort will mean an internal shakeup of the inspector raj fostered by governments themselves. There are genuine challenges for demonetization to become one of the best moves for India’s SMEs.

I was speaking to a wedding and greeting card manufacturer in Delhi’s Chawri bazaar who says they have had no petty cash to pay printing labour, who are in dire need to make ends meet. He raised two key issues: One, many customers have called off already-completed orders because they have no ability to pay. Presumably in this business, many customers also showed keenness to spend in cash.

Two, many card manufacturers block large deals ahead of the season (upcoming ones being New Year and Valentine’s Day) from China, where they have paid advances but have fewer means to get those orders completed. Worse, once these shipments arrive in India, the bulk buyers who function in cash will no longer be around to buy them, causing a multi-seasonal loss, threatening business survival.

In Punjab, there are businesses that are into production of pumps, sports gear and other such products, some of which may even be exported. The main issue, as an industrialist points out, is with labour. “They are labour migrants who travel across India hunting for jobs and often don’t have ID cards or banking history,” he explains.

In the small industries, 80 to 90 per cent work culture is based on cash. They have been forced to keep shutters down to first manage the larger problem of how to declare and then to digitise themselves and turn fully bankable.

Another manufacturer of motors in Ludhiana believed the Central government has clearly done a lot of spadework in helping people open accounts, but the impact has been mixed. Employees have been forced to open bank accounts and have Aadhar cards, but the labour is far from this process yet.

The manufacturer believes the government has not taken into account the need for systemic reform. “By demonetization, you may have sucked out the money. I don’t sell product to my dealer without a bill, but we all know dealers do a lot of adjustments because they are multibrand sellers. That will affect sales and production of companies. My sales are down to 20 per cent of what they used to be. I am hoping this will be a temporary phase as the taxation in pumps is as it is quite low and many are already doing business in white.”

There has to be reform across departments from the bottom up. He explains this with an example. “You want your building maps cleared, you want a pump installed, you need a license, or a birth certificate, you find yourself in front of people, whether touts or officials, who want cash. This is what middle class has long called the ‘cost of convenience’.” He asserts the government needs to bring this reform to its officials. “Until inspector raj is sorted, how will we sort it out? Inspectors come to your factory and observe we are doing business in ‘white’ but the inspector comes and says if you want my sign off then you will need to pay me cash.” These are clearly real problems. Can they be wished away?

It’s interesting to note that part of the fall out of the problem is our work culture. In India for years, the business environment has been marred with the need to transact in cash. For businesses, transactions would be hidden in a rampant ‘bill discounting’ ethic. Add to this ‘clearances’ that are done only when someone produces cash under the table.

SMEs have been a core link of the economy. Perhaps the income tax net needs to cast wider and get more people from hawkers, touts, unorganized sector and others—those who have waded taxes into the loop? With this move and the Goods and Services Tax put together, things should be good for those who have so far done business by the books.

Those who have been undercutting businesses with lower pricing via cash transactions will be eliminated or sorted out and that will improve the competitive environment of the sector itself. Companies will have better grasp on operational planning. However for India, where SMEs account for 40 per cent of the business growth, there is both fear and hope that real contribution could be much higher.

Going forward, in the transition period—when India will see the company landscape shake up a bit and leave us with financially prudent and honest companies—there will be big hiccups.

Gulping the inconvenience for now will only help the country by allowing real SME potential show up if the means of execution supported by system improved and the onset of digital banking helps us.

(The author is award-winning business journalist, entrepreneur and founder SheThePeople TV)

Source: DNA

Image Courtesy: Lhsfna