The Small and Medium Business (SME) sector in India has a heavy influence on the economy. It provides employment to millions of people every year and contributes a healthy eight percent to the country’s GDP. When a major economic decision like demonetization is implemented, it is necessary to study the impact it could possibly have on the economics of this sector.
Most SMEs are family-run businesses in India. The SME market can be categorized into two sectors.
- Businesses created by entrepreneurs who smelt the opportunity and moved fast to launch and become successful quickly.
- Businesses that came in late but could become reasonably successful because of the huge potential that remained untapped.
SMEs, with their traditional business mindset and approach, were convinced that they could continue to do business this way and yet enjoy success without having to scale up or make any major investments.
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Why SMEs Have A Different Approach To Business
While the SMEs continued to remain in cocooned isolation and followed their tested specific business methodologies, the mainstream Indian economy was growing steadily and expanding. It became imperative for the government to keep a check on several aspects and this lead to introduction of processes such as multiple licenses, approvals and other mandatory checks which came with an element of complication.
Our thrifty approach to business makes it easy for us to quickly notice what others cannot and helps us come up with out of the box solutions. SMEs are past masters in this and have always managed to find a roundabout way to beat taxes and licenses. The key methodology was to tempt officials with doles of various kinds.
Our Tax System In Not Friendly
The fact that our tax system does not exactly encourage voluntary participation due to poor returns to the honest tax payer was another major reason why evasion became a norm among SMEs. Poor implementation and faulty techniques made it easy for businesses to subvert the system conveniently. A parallel economy which created hordes of unaccounted wealth or black money was the outcome. The government believed that demonetization was the best way of tackling the menace of black money.
It was undoubtedly an extremely courageous step because withdrawing nearly 86 percent of the cash circulating in the economy when cash transactions is the most commonly used method of transacting required some tough thinking and implementation.
An Experiment That Has No Peers
Demonetization can be compared to carpet bombing instead of calling it as a surgical strike on the economy as it has impacted everyone. Replacement of currency can be a long drawn process because everyone tries to acquire more and spend less given the uncertainty factor.
SMEs are hugely impacted by demonetization as liquidity of currency has been severely affected. As cash flow slows down to a trickle, SMEs are safeguarding what they have in hand; waiting for improvement in the currency availability situation. This is leading to limited purchase of merchandize and materials across the whole cycle of procuring and manufacturing.
How To Assuage The Growing Uncertainty
The biggest priority of the government and the Reserve Bank of India must be to ensure that there is free and abundant availability of cash in the financial system. All restrictions on withdrawals from the ATMs and accounts must be removed at the earliest.
The government is also sharply focused on bringing in critical reforms in the financial and trade and commerce sector. The announcement of GST and BTT was a major step in this direction but demonetization can affect the timely implementation of GST.
The government will also have to address the concerns among SMEs and other businesses about the processes associated with licenses and approvals. A single window clearance system is the need of the hour along with other measures that would make it easy for businesses to roll out in the quickest possible time. All other procedures involving multiple applications and complicated procedures must be scrapped.
Tax procedures and filing methods must be simplified and taxing structure made people friendly so that the highest level of compliance is achieved. The culture of settling issues under the table must be ended immediately.
There must be a concerted effort by the government to show visible benefits in terms of infrastructure development by money collected through taxes. People who pay taxes must feel that the money they pay is being put to proper use for the development of the country.
Normalcy Must Be Restored At the Earliest
Demonetization has both positive and negative sides. As it is a move that is unprecedented in terms of scale, it is extremely difficult even for experts to make a quick judgment on its possible outcome. The uncertain environment that has gripped the country from November 8th and continues to do so, even after two months of demonetization does not augur well for the economy.
The government must do everything possible to dispel fears and instill confidence, not only among the common populace but also among the small and medium businesses. This can be achieved through proper and regular communication. Transparency must be maintained and information about the developments associated with demonetization shared with people through all possible mediums and channels.
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