Problems related to Regulatory Environment-

Problems related to Regulatory Environment-

To promote MSMEs Government provides several initiatives, relaxations and exemptions. To create a domestic market for MSMEs Government made some products reserved especially for the sector and imposed quantitative restrictions to protect them from competition from imports. At the end of the 1990s, however, these very policies have become detrimental to the dynamism of the sector, especially in the rural areas. But the capital investment limits have discouraged economies of scale, and concessions offered to MSMEs have created adverse incentives against re-investment.

Even having several relaxations and exemptions the procedure to start an MSME is yet quite lengthy and full of formalities requiring time and money both. The ‘cost of doing business’ is much higher in India than in other countries due to the plethora of forms and inspections that entrepreneurs have to comply with, some of them arising out of legislations long pending review, such as the Factories Act. According to Doing Business 2007: How to Reform—a co-publication of the World Bank and the IFC (2007) the average time spent in completing entry requirement in India is 35 days and the number of procedures is 11. The streamlining of these procedures requires action by government agencies in the States and in the Centre also.

The establishment of an MSME is the belief in the maxim, "Small is Beautiful". Basically an MSME has to go through the following steps to start its business which are as follows:

After identifying the Business Opportunity to provide a product or service, which can generate sufficient surplus) the proposed MSME has to screen the ideas and then the project has to be conceptualized in all its dimensions of 4Ps:

• 
  Product (Shape, Size and Nature)
  
• 
  Process (Technology to produce the product)
  
• 
  Place (Location of Plant)
  
• 
  Partner (Technological of Financial Collaborator)
  

This requirement of license sometimes adversely affects the MSMEs. Among all the major industries in India, textiles and pharmaceuticals are surely the leaders. There are about 250 large and 8000 Small Scale pharmaceutical units, in India.¹ Following the de-licensing of 2005 of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. According to a survey of the small-scale pharmaceutical companies in 2001–02, as many as 327 units had been closed or had their licenses suspended or may have shifted to some other States and another 370 units were not in a position to comply with the Goods Manufacturing Practice norms. Since these norms have been made mandatory w.e.f. 1.07.2005, these units have been closed.²

Besides this, MSMEs also suffer from the lengthy process of registration. The proposed MSME is required firstly to obtain ‘Provisional Registration Certificate’ for the specified period till its setup which enables it to obtain term loans and working capital from financial institutions, banks under priority sector lending; facilities for accommodation, land and other approvals; NOCs and clearances from regulatory bodies i.e., pollution control board, labour regulations, etc.

After the commencement of commercial production permanent registration is granted after physical inspection of the unit and scrutiny of certain documents like; clearance from the Municipal Corporation and State Pollution Control Board; sanction from the Electricity Board; ownership/tenancy rights of the premises where unit is located; copy of partnership deed/memorandum of articles of association in case of a private limited company; sale bill of product manufactured; sale bill of each end product; purchase bill of each raw material; purchase bill of machinery installed BIS/QC certificate if applicable and an affidavit giving status of the unit, machinery installed, power requirement, etc.

The registration certificate so issued enables the unit to get several concessions like IT exemption and Sales tax exemption as per the State Government policy; incentives and concessions in power tariff, etc.; price and purchase preference for goods produced; availability of raw material depending on existing policy. This registration may be cancelled if the small unit crosses the investment limits; starts manufacturing any new item or items that require an industrial license/other kind of statutory license; or does not satisfy the condition of being owned, controlled or being a subsidiary of any other industrial undertaking. To avail these exemptions and relaxations continuously the MSMEs sometimes do not want to increase their investment above the extent of the limits prescribed. Some states may have a 'SIDO registration scheme' and a 'State registration scheme'.

Table 6.3: Clearances required for permanent registration

Regulatory/ Taxation Clearances	Environment & Pollution Related Clearances	Product Specific Clearances
Registration under Sales Tax Act Registration under Central Excise Act Payment of Income Tax Registration of Partnership deed Calibration of weights & measures Power Connection Employee strength exceeding 10 with power/ 20 without power	For following 17 products: Sugar; Fertilizer (Nitrogen/ Phosphate); Cement; Fermentation & Distillery Aluminium; Petrochemicals; Thermal Power; Oil refinery; Sulphuric Acid; Tanneries; Copper smelter; Zinc smelter; Iron & Steel; Pulp & Paper; Dye & Dye intermediates; Pesticides manufacturing & formulation; Basic Drugs & Pharmaceuticals	Establishing a Printing Press License for Cold Storage Construction Pesticides Drugs and Pharmaceuticals Safety Matches/ Fireworks Household Electrical Appliances Wood Working Industry within 8 km from forest Milk Processing & Milk products manufacturing units

In 2006-07 there were 7453396 manufacturing sector and 18647401 service sector MSMEs out of which only 1035102 (14%) and 517390 (3%) were registered and 6418294 (86%) and 18130011 (97%) were unregistered respectively.¹ Nearly 45% of total registered and 52% of total unregistered MSMEs were in rural areas.

This situation is same in Uttarakhand also. According to the Fourth Census out of 226513 MSMEs in state, 90% are unregistered (16% manufacturing; 84% service units) and only 10% are registered (57% manufacturing; 43% service units). Nearly half of the total MSMEs is in the rural areas.² Due to excessive formalities; huge time and money consumption in completion of formalities; bribery and corruption; and sometimes ignorance and illiteracy of entrepreneurs these unregistered MSMEs are unable to reap the benefits of registration.

Besides this MSMEs suffers from other allied acts also like; Factories Act; Minimum Wages Act; Income Tax Act etc. It has been concluded from the primary data that the provisions under these laws should be different for MSMEs and large units. There should be flexibility in rules framed for the MSMEs to enhance their competitiveness in the marketplace. This applies to all laws of taxation, labour, environment, among others. There is also a strong need to address the labour market constraints, which impede the productivity of MSMEs.

Moreover, there is need to simplify the tax administration and ensure rationalization of tax structure to promote cost effectiveness in MSMEs. There is need for better coordination between Central and State Governments so that the policies formulated by the Centre are effectively implemented at the State level.