Indian small and medium enterprises employ over 40 percent of the total workforce in the country, but they only contribute to 17 percent of GDP. In fact after agriculture, SMEs are the second to fostering employment opportunities. Yet in January-February 2013, SMEs saw a decline of 51 percent in investments by private equity investments. The fact remains that SMEs are the unsung backbone of the Indian economy, which is why the finance minister should address various issues affecting MSME performance in the current recessionary economic climate.
According to a survey conducted by Firstbiz and its knowledge partner the Greyhound Knowledge Group across s 540 small and medium businesses in India, lack of skilled labour and inflexible labour laws are the sixth most important concern of SMEs. While 70 percent have cited outdated labour laws as one of the problems faced by the sector, a whopping 93 percent expect labour law reforms from Jailtley’s maiden Budget.
Expectations from the newly elected government are running high after it kickstarted labour reforms with Rajasthan recently clearing amendments to three central labour laws – Industrial Disputes Act, Contract Labour Act and the Factories Act— in order to boost labour-intensive manufacturing sector in the country. And if BJP-ruled states are able to attract foreign direct investment by reforming labour laws, then other states are likely to follow suit, which will provide a major boost to the SME sector too since labour laws provisions such as standardized wages, social security, and job safety ensure that the workforce is protected and delivers its best.
The table below highlights some of the key issues that organizations face because of inflexible labour laws
The survey shows that availability of skills and labour is felt the most by organizations in Tier-III cities.
“While both small and mid-market organizations report unavailability of skills and labour in a similar manner (both rate this challenge at 70%), organizations in Tier-3 towns face this issue in a peculiar manner. When compared to other cities, organizations in Nasik (82%), Kanpur (77%) and Indore (75%) have rated this as most critical,” said the survey titled ‘SME Perceptions on Union Budget 2014-2015.
Majority (94%) feel that retaining talent is the biggest challenge due to non ability to pay & inadequate employer branding. Also SMEs are bound to find it tough to compete with large companies for the right talent. Due to low operating margins SMEs are often unable to retain the right skilled talent.
Tier 3 cities felt minimum wage policies should be subject to the per capita of the region instead of national standard minimum wage policy.
The challenge that fared lowest was unavailability of skilled workers at affordable costs, 77% organizations felt this was a challenge. Trade unions and limited abilities to pay were some of the major factors causing low productivity. Perhaps affordable technology overhaul can reduce labour effort and in turn increase productivity.
While government-led initiatives and schemes for competency and skill development to ensure SMEs don’t have under-skilled workers was a unanimous demand by all the organisations interviewed in the survey, 98% respondents also mentioned that the minimum wage policies should be made flexible with respect to per capita of the region and not be same for the entire country.
SMEs are also expecting the upcoming budget to encourage labour intensive manufacturing by giving entrepreneurs incentives as well the some new laws that will protect low-skilled labourers which would foster inflow of people into the SME sector.
Even the MSME Ministry has also been seeking a single-window clearance mechanism along with setting specific timeframes for grant of loans, easier labour laws and simplification of processes as a part of roadmap to revitalise the sector.
You can download the entire report here.
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