How can the Government help small businesses?

Encouragement of small business has been a cornerstone of the NDA Government’s stated policy. Who can forget Prime Minister Modi’s first Independence Day speech, when he made that fascinating speech, ending with the rousing cry, “We must be number one in start-ups… Start-up India; Stand up India.”

We have spoken elsewhere about the measures taken towards making this dream a reality, but let us look today at what a Government can do, in general, to make small business successful.

Take care of the hygiene factors

Before any incentives or special schemes can be launched, a government must fulfil its responsibility to businesses at the most basic level by providing the following:

1. Secure property rights, the foundation of the Capitalist economy
2. Rule of law, without which no business can hope to flourish
3. Stable currency, which is essential for any economy.

Streamline business registration process

India stands at 130^th in the world in the ‘Ease of Doing Businss’ index, an indicator of how difficult it still is for entrepreneurs in our country. Indeed, the ranking on independent indices for starting business are lower, and it still takes well over a month to register a limited company in India. Until serious effort is made towards shortening this lead time, small businesses will continue to flounder.

Encourage fundraising options

Raising capital is one of the most important – and most difficult – aspects of getting a business started. An effort from the government towards standardisation of procedures and rules for raising money along with incentives for banks to lend to small businesses would help them to take off. Making it easier to raise funds through IPOs, formalising rules for Venture Capital Funds and angel investors to operate in India would also allow for start-ups from India to raise money in the manner their counterparts in Silicon Valley do.

Reform bankruptcy law

Strange is it may sound, making it easier for a business to fail is a critical part of making business successful. India has a long-drawn out procedure for winding up of business, and the process of declaring bankruptcy carries tremendous social stigma due to this. Compare this to the United States where a businessman who presided over six bankruptcies is still so widely-adored that he became the President of the country! Allowing companies to wind up in a timely manner would free up funds and labour and land to be put to alternative uses, and empirical evidence suggest that it will lead to improved rate of innovation.

Invest in education

Small or large, the quality of the workforce is a critical determinant of the success of a business. An investment in education at the primary and secondary level will ensure that small businesses do not falter for lack of access to skilled labour as well as provide a fertile soil for the rise of entrepreneurial instinct among the people itself.

Simplify tax laws

Last but not least, India must look at simplification of the tax code. Our myriad and complex laws for indirect taxes are being simplified into a single GST but a lot of work remains to be done on local levies as well as income tax. Further, reduction of tax burden on new and small companies without making it too much of an incentive for a company to remain small need to be ensured.

There is no ‘magic wand’ wielded by any government that can suddenly make the economic environment conducive to businesses, and start-ups will always have to face a period of struggle. However, by taking care of these factors, we strongly believe that the task of running a business in India will become just a little easier, and that little is often the difference between success and failure.