MSMEs: Time to fix what is broken

The strengthening of the MSME segment will only add to the agility of the segment to readjust to the changes in the supply and demand

Updated: Mar 15, 2018 12:59:23 PM UTC
Image: Shutterstock

Amidst the challenging market scenario in India and worldwide, the Micro, Small and Medium Enterprises (MSMEs) sector has been continuously showing consistent efforts of resilience, playing a pivotal role in driving the growth engine of the nation. The Indian government acknowledges the sector as the backbone of the economy, and it is expected that by 2020 India will be the largest job ready market, and have a favorable business ecosystem in the manufacturing sector which, in turn will generate huge employment opportunities.

The sector is seen contributing to around 30 percent the GDP while providing employment to more than 117 million people, which is noteworthy given that a large section of the workforce in the nation lacks vocational skills. The MSME sector also demonstrates the entrepreneurship spirit of India. However, a major roadblock to the growth of the sector has been non-availability of easy finance. But now, given the online presence, several modern fintech players are making it convenient for the sector to receive loans. The coming months is further expected to witness strengthening of current policies and introduction of new initiatives to improve the business environment for MSMEs.

However, it is crucial to juxtapose the performance of India with the other countries to come to a conclusion on the actual effectiveness of the sector and government policies.

The International Trade Centre (ITC) under the United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO) does a systematic assessment of SMEs’ competitiveness across 50 countries. This assessment provides valuable insights on where the SME sector in India stands in terms of competitiveness when compared to other countries.

As per ITC, competitiveness has been scored based on three pillars - capacity to Compete, Change and Connect. The capacity to compete centers on operations and efficiency while the capacity to change depends on the ability of firms to evolve and innovate through investments in human and financial capital. The capacity to connect depends on how they streamline processes and communicate information and knowledge which is crucial for the digital economy and for services.

If you compare India to countries such as Argentina, Brazil Indonesia, Kenya, Malaysia, Mexico, Russia, South Africa, Thailand, Turkey, and Vietnam, on the three pillars of competitiveness, Argentina, Turkey, and China are leading the path. India’s performance is rated lower than average under two pillars -- Compete and Connect. Comparatively, India fares better when it comes to the third pillar i.e. Change.

Measuring SME Competitiveness: Compete, Connect and Change. Source: ITC, UNCTAD, WTO, World Bank, D&B calculation

Another vantage is to view the progress made on solving various issues and challenges in the last decade. Considerable progress has been made on few challenges that had been the major impediments to the growth of MSMEs. One can draw an inference that concerns such as government regulations, bureaucracy, availability and cost of land, and certain labour-related challenges have reduced considerably over this period. Curiously, the top most five concern areas have not been contained to a degree of satisfaction in the last five years.

These challenges are access to finance; availability of infrastructure; availability of skilled labour; power supply and technology-related issues. This is despite the government’s constant push for policies and special schemes to counter these issues. Inference can be drawn that perhaps, there still remains low awareness amongst MSMEs regarding various government schemes.

Changing pattern in issues & challenges: A comparison over the last decade. Source: D&B research

There is an urgent need to prioritise the five concerns areas where we have not made much progress. Perhaps, considering the changing landscape, it would be befitting to relook at the definition of MSME.  Internationally, SMEs are defined by two simple and clear parameters – the number of employees and revenues. In India, SMEs are defined only on the basis of assets: investment in plant and machinery and equipment. A clear definition is imperative for MSMEs to draw the benefits of government schemes/policies, nationally or internationally; especially, when relaxations/rebates are designed for a certain category of firms.

While we acknowledge the contribution of a strong MSME segment to the country’s economy, the negative impact of a weak MSME segment must not be discounted or ignored. It is critical to adopt a policy of ‘arrest and act’ to first monitor the issues that make the sector weak, and take remedial measures before it results in a vicious circle of vulnerability that makes the industry fall prey to credit risk, business continuity or compliance.

The strengthening of the sector will only add to the advantages that the sector provides -- the agility of the MSME segment to readjust to the changes in the supply and demand unlike the big firms as well as the entrepreneurship and innovation that it fosters. A strong MSME sector is empowered to absorb the emerging workforce, especially the migrants from the agriculture sector, providing an answer to one of the biggest issues faced by the government today – the gap between employability and employment. The problems are well known. We know what to fix. What we need is to address them, and execute the strategy fearlessly.

By Manish Sinha, Managing Director, Dun & Bradstreet

NOTE: News18 Rising India Summit will bring together leading statesmen, thinkers, economists and intellectuals from across India and the world to discuss the future that belongs to India. It will be held on March 16 and 17 in New Delhi

(News18 is a part of the Network18 Group, publisher of Forbes India magazine.)

The thoughts and opinions shared here are of the author.

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