The absence of hand holding at every step, essential for business success, is proving to be a bane for MSME start-ups

Micro, Small and Medium Enterprises (MSMEs) play a critical role in the economic growth in India. Apart from being the second largest contributor in the employment generation in the country, they play a key role in gross domestic product (GDP) growth and foreign exchange earnings. India UnInc ( A term used by Prof R Vaidyanathan), in spite of being the backbone of the economy, continues to suffer from several issues, which hinders its growth. While financing remains a big constraint, with most of the MSMEs left to themselves to mobilise funds for business needs, the biggest problem that MSMEs face today is the lack of hand holding mechanism for a start up business in India.

Starting a business is a big challenge in India. Most of the people associate the challenge of starting a business to the availability of capital. While funding is a pre-requisite to run a business, the matter does not end here. There are three critical steps that a small business unit will have to take. The first is a set of approvals required to start the business, followed by production of goods and services and the last stage is marketing or selling of goods. Most of the small start-up businesses have no clue about this three-stage process apart from managing the challenge of managing funds.

Let us look at the first step. A business unit needs a set of approvals before it starts functioning. The approval ranges from obtaining a no-pollution certificate for registration with tax authorities to obtaining a no-objection certificate from the fire department, wherever applicable. For instance, not many entrepreneurs know that if they start a business involving household electrical appliances, an approval from Bureau of Indian Standards (BIS) would be required. Even a non-polluting unit would need to file an application with relevant pollution department and obtain an acknowledgment.

A small business unit, in order to avail benefits of various schemes offered by the government needs to be registered with the District Industries Center (DIC). This registration is obtained by submitting a Entrepreneurs Memorandum (EM-1 & EM-2). Since many MSMEs may not understand the significance of this, they may miss out on the benefits provided by the government. Typically EM-I registration is required for for industrial land, credit and pollution clearance. EM-2 is required for eligibility for marketing support, raw material, assistance under industrial / MSME policies such as VAT reimbursement, capital investment subsidy and interest subsidy. Unfortunately, most of the MSMEs remain unregistered in India and fail to become eligible for these benefits.

After a business unit has been set up and is ready for production or providing services, the problem for MSMEs is not over. There can be cost overruns causing businesses to run out of money and fail. There is a complete absence of understanding on lean manufacturing for MSMEs. MSMEs have limited bargaining powers and along with cost escalation, the viability of the business becomes questionable. One simple example of cost escalation could be management of heating, ventilation and air conditioning, which can add to its power supply bills.

The biggest support is required at the time of sales. Lack of awareness about the right market place, where goods can be offered for sale is one of the biggest challenges that MSMEs face. In spite of the government coming out with plans such as purchase preference policy, MSMEs find it difficult to sell their products. There is an online portal which National Small Industries Corp (NSIC) is providing to sell products but such schemes are not very effective. MSMEs often fail to realise the significance of branding their products and at best end up becoming a supplier of raw material for large corporations.

The most significant point in the entire cycle of MSMEs business is its growth from micro to small to medium and to large entities. In this growth path, the first stage is very critical. This phase of successful launch of business can take it further to take off stage. Till the stage of take off, capital is as critical as hand holding for MSMEs.

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)