MSMEs: Structural issues go beyond the standard challenges

Published on Oct 02, 2020 11:25 AM IST

First, the sheer number of enterprises; second, the challenge of linkages; third, the setting up of unregistered OAEs often happens as a livelihood of “last resort” or is inherited due to lack of options rather than entrepreneurial vision; and fourth, OAEs mostly survive with surplus family labour, lack business records, linkages with market, knowledge and technology.

Labourers works in a utensil manufacturing factory, Jammu(ANI)
Labourers works in a utensil manufacturing factory, Jammu(ANI)
ByTamal Sarkar

The government has introduced several innovative monetary measures to promote Micro, Small and Medium Enterprises (MSMEs). While the current challenges are mostly related to finance, market and raw material, and have got aggravated due to the pandemic, other issues pertaining to MSMEs have been there for years.

A deep dive suggests at least four structural issues which go beyond the standard challenges. The first is the sheer number – around 20 million manufacturing enterprises which is higher than the population of 75% of most countries. The second is the challenge of linkages, as only around 15% of MSMEs are registered. The estimated 17 million unregistered MSMEs are mostly Own Account Enterprises (OAEs) – operating mostly as household units and pose a regulatory challenge for formal institutions to support them. Third, the setting up of unregistered OAEs often happens as a livelihood of “last resort” or is inherited due to lack of options rather than entrepreneurial vision. Fourth, the OAEs mostly survive with surplus family labour, lack business records, linkages with market, knowledge and technology. These make them poor candidates for growth, Covid or no Covid.

Such structural issues may be handled through a dual strategy – one for the estimated three million artisanal OAEs and the other for estimated 14 million non-artisanal OAEs and other unregistered micro-enterprises.

While artisanal OAEs face some of these growth challenges, joint enterprises of owners of household enterprises are often successes. India has seen several schemes, mostly with an emphasis on the creation of common infrastructure. However, equal importance may be given in creating a formal joint market or business promotion organisations of artisanal enterprises which can allow informal units to manufacture and formal joint enterprises to manage the forward and backward linkages. India needs at least 5,000 such joint enterprises with appropriate technical support that will propel them to grow and make the artisanal OAEs to grow along with them. Covid has added a fresh agenda of e-marketing, where heavy investment is needed.

It is estimated that non-artisanal OAEs (based on overall OAE composition), are mostly manufacturers of textiles and apparel (44%), food products (11%), furniture and wood products (10%) and metal and non-metal products (6%). Here, there is need for creation and consolidation of four types of stakeholders: One, locally available and affordable or “barefoot” service providers in the areas of energy savings, bank linkage, technical support; two, strengthening of existing and creation of new industry associations, wherever they are absent, at cluster/district level; three, provide linkage with buyers who can implant knowledge among the OAEs through a business (learning by doing) model and; four, provide linkages with knowledge nodes.

Much of this can be achieved with the support of district and cluster-level associations. A majority of these associations, at present, are only occasional policy promoters/challengers and are otherwise dormant. But they are the most trusted ally of the MSMEs and they are our best option. One needs to build their capacities to train and create barefoot service providers at the local level and also become service providers themselves. There is an existing repository of 2,000 plus such associations and there may be 5,000 of them. One can also incentivise bigger MSMEs through tax benefits for outsourcing as this is also a very effective route for learning and making the entire ecosystem competitive. The district industry centres can be empowered as the knowledge provider by creating a panel of experts for the most important clusters in that region.

However the places which are industrialised are not the real poverty hotspots. Poverty hotspots often see an exodus of labour and the same labour with business knowledge from the clusters in the metros, post- Covid, has in many cases, returned to its origin. This reverse migration will work both ways. While the urban clusters will go for mechanisation and will need support for technology upgradation, poverty hotspots need to be identified for industrialisation and “creation of clusters” based on the comparative advantages of skill influx through reverse migration and thereby fulfilling the vision of “vocal for local”.

Tamal Sarkar is executive director, Foundation for MSME Clusters, New Delhi

The views expressed are personal

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