How MSMEs can help India become a $5-trillion engine
A bridge between the traditional business ecosystem and new-age businesses, India’s MSMEs have been evolving. A thrust from the Centre will stimulate the sector
India has emerged through the coronavirus pandemic as the fastest-growing major economy in the world. Over the last few years, the government has laid the foundation for this growth through its unwavering focus on supporting enterprise and facilitating ease of doing business, recognising its impact on the national Gross Domestic Product (GDP) growth.
In 2016, Prime Minister (PM) Narendra Modi launched the Start-up India initiative for building a start-up culture to transform India into a nation of job creators instead of job seekers. A 19-point agenda was the guiding document for this initiative, including a ₹10,000 crore fund for growing the domestic venture capital industry and a Start-up India Seed Fund. In parallel, programmes and policies were also created to increase the capacity of the manufacturing sector to bring its share of the economy’s output from 17% to 25% by 2025.
This continued focus towards moulding India into becoming a pioneer in technology and innovation and accelerating its contribution to the GDP through various sectors have yielded results. India’s rank in the Global Innovation Index moved up to 40 in 2022 from 46 in 2021. Furthermore, the Union Budget 2022-23 allocated ₹14,217 crore to the ministry of science and technology to facilitate research and development, and establish India as a leader in innovative technological improvement.
In March 2020, Production-Linked Incentive (PLI) schemes were introduced, targeting three industries initially, which has since expanded to multiple sectors to boost India’s manufacturing capabilities and encourage export-oriented production. In addition, the PLI schemes aim to develop local supply chain capacities and incentivise high-tech production investments. As of November 2021, PLI schemes covered 13 sectors, with a total budgeted outlay of ₹1,97,000 crore.
It is now time for the central government to focus on the micro, small and medium enterprises (MSMEs). This sector has been the backbone of the national economic structure for years, contributing 30% to the GDP. It is pivotal to the nation’s employment generation as it is the second largest employer after the agricultural sector, employing millions of unskilled and semi-skilled individuals, besides providing employment opportunities in rural and remote areas. The sector is also among the country’s major exporters, accounting for 49.5% of India’s total exports in 2020-21.
MSMEs have shown their resilience during Covid-19. From 2019-20, the number of Indian MSMEs increased by a compounded annual growth rate of 18.5%, but the sector still has vast, unutilised potential. The three areas where smart intervention can trigger growth are finance, technology and knowledge support.
The biggest issue MSMEs face is the non-availability or difficulty in access to finance. MSME growth has doubled in the past two years, but the credit gap remains at ₹25 lakh crore and overall debt demand at ₹269 lakh crore. In addition, an MSME is burdened with the difficulty of facing trust issues from banks nationwide. Till December 2022, approximately 10% of the SME loans were collateral-free, while the rest 90% were collateral-backed. The demand to present collateral makes it difficult for SMEs to get financial assistance through loan facilities.
According to a State Bank of India report, government-backed schemes have more successfully eliminated the MSME sector’s financial hardships. However, a central mechanism needs to be implemented to ensure that the financial schemes being developed for the MSMEs are efficient in eradicating the hurdle of economic unavailability.
The Open Network for Digital Commerce (ONDC) seeks to encourage small retailers to enter e-commerce, helping create new opportunities, eliminating the risk of digital monopolies and supporting MSMEs and other small traders in buying and selling through a seamless transaction. This platform should further be enhanced in promoting the digitalisation of MSMEs, eventually leading to the integration of MSMEs and e-commerce. This can help scale up MSME businesses, which brings liquidity through digitally availing capital financing and transaction banking solutions.
Indian MSMEs hold the potential to be big players in the global value chain but are restricted due to being insufficiently educated and integrated into the international market landscape. Grassroots-level support from the government to MSMEs is long overdue. A facility, which caters to knowledge sharing about international trade rules and regulations, branding and positioning, digital marketing and intellectual property rights and other criteria, which an MSME needs to be made aware of must be set up.
The sector needs a centralised hub of incubators for budding enterprises to help establish a knowledge network for entrepreneurs who aspire to develop their skills and serve global markets. It also brings about efficiency in the ease of doing business. As a sector that has been a bridge between the traditional business ecosystem and the new-age business ecosystem, MSMEs have been evolving, adapting to the economy’s demands. A significant thrust from the central government will stimulate the MSME sector and help advance India’s target of becoming a $5-trillion economy.
Lloyd Mathias is a business strategist and an angel investor
The views expressed are personal