An MSME overhaul can help India become an economic super power

Pankaj Sharma, CEO, Religare Finvest

Since the economic reforms of 1990-91, India has gradually moved up in the world economies’ leader board. Recently, it pipped the UK to become the fifth largest economy, globally. While big conglomerates and large businesses have hogged the limelight, micro, small and medium enterprises (MSMEs) have also contributed to India’s economic growth.
At over 60 million, India has one of the largest number of MSMEs in the world. The number increased at a CAGR of 18.5% in 2020 over 2019. An estimated 110 million people earn their livelihood by working in these MSMEs. India’s MSME sector contributes ~30% of the nation’s GDP, up from 17% in 2013-14. In FY21, MSMEs procured loans of Rs. 9.5 trillion, which was a 40% increase over the FY20 figures.

Despite the impressive growth statistics, observers claim that it is way below the sector’s potential. The industry needs to undergo a major restructuring exercise to unlock its true potential and spread industrial and business growth throughout the country.

The past and the present

Most of India’s MSMEs are family-run or single-owner entities. At times, the owners lack the drive and/or vision, resulting in stagnation and reduced productivity over time. Most of such MSMEs are content to remain small and stay in their comfort zone. Again, staying small helps them escape regulatory scrutiny and spares them taxation-related hassles.

Those that choose to grow have to contend with a different set of problems, largely concerning financing. High interest rates coupled with the need to extend longer periods of credit to their customers leaves them with little room to manoeuvre. While most big corporates who procure material from the MSMEs enjoy an interest-free repayment period of 120 days, the MSMEs do not get this luxury of time to repay their interest-loaded bank loans.

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In addition, individual sectors face their own challenges. Real estate, for example, has slowed down in the past few years after a period of robust growth. Similarly, exports are also on a decline owing to contraction in demand from Developed countries. Further, geopolitical issues in West Asia are queering the pitch for the MSMEs.

Also, since these companies are not market leaders in their segments, they are unable to drive a favourable bargain, pricewise either from buyer’s or seller’s side. With reduced margins, they struggle to maintain quality. Further, supply chain inefficiencies, global and local competition, lack of skilled manpower and limited access to latest technology severely constrain those with limited financial and business strength.

The challenges ensure that most MSMEs are fighting for survival and cannot afford to chart a growth path. A concerted and joint effort is needed from all quarters to help the sector realise its true potential.

The good news

The government has introduced many schemes to encourage the micro and small industries. Rightly, the push has been towards providing these MSMEs with easy access to finance. Through schemes such as Micro Units Development Refinance Agency Bank (MUDRA) and Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS), the Central government is boosting the credit availability for the MSMEs.

Also, schemes under flagship initiatives such as Make in India and Atmanirbhar Bharat promise technological and equipment-related assistance to the MSMEs. The start-up sector seems to have warmed up to these initiatives and is taking advantage of the improved facilities.

The road ahead

India’s banking sector now needs to take cognizance of the Central Government’s push for providing MSMEs with better access to funds. At the moment, the biggest handicap faced by the banks is information asymmetry which constrains the ability of banks to have distinct underwriting standards for the MSMEs. Their current underwriting standards, based on standard risk parameters, make it difficult for these enterprises to become creditworthy. While shadow banking system has been able to provide the much needed credit to MSMEs to an extent same cannot be said to be true for the banks. Regulatory space provided by way of Co-Lending has the potential to spur credit growth in this segment provided various operational issues of Co-Lending can be addressed.

Currently, the regulations remove advantages and benefits available to Small and Micro enterprises as soon as they cross the threshold to become a Medium enterprise. Suddenly, the entity finds itself competing with bigger corporations having deeper pockets, greater access to credit and superior technological acumen. Survival becomes tough leading them to question their growth aspirations.

Along with the external ecosystem, the MSME universe has to internally embrace a growth mind set. MSMEs have been traditionally labour-intensive, especially in the manufacturing sector. Going forward, entities will have to focus on automation and digitalisation. The sector has to be more outward-looking than inward. Rather than wanting to remain small and disorganised, businesses have to put their weight behind making it an organised sector.

Also Read | How Prioritizing Financial Education is a Must to Uplift the MSME Sector

The opportunities are immense. The traditionally robust MSME markets such as South Korea, Taiwan, Singapore, etc., have saturated. MSME entities there may feel the need to explore other markets for growth. With a fast-growing middle-class and increasing internet penetration, India promises a mature market. These companies may be keen for local partnerships. While they may bring the technology and the knowledge, they will look to their Indian partners for ground support.

The atmosphere is rife with challenges but also full of opportunities. If all the stakeholders – MSMEs, financial institutions, Governments, etc., come together, the sector can see tremendous growth, and play a big role in making India an economic superpower and reach its goal of attaining the status of High Income Country in its 100th year of Independence. If we shake off the dust, we can start creating the future here and now.

Views expressed in this article are the personal opinion of Pankaj Sharma, CEO, Religare Finvest.

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