Prime Minister Narendra Modi cherishes a commendable vision to take India to new heights on the socio-economic front. For this to happen, first our country has to catch up with the developed world in the manufacturing and industrial sector. Unfortunately, even after more than two decades of economic liberalization, India has barely managed to scratch its existing potential. The Micro, Small and Medium Enterprises (MSME) sector contributes significantly to manufacturing output and exports of our country. It also provides maximum opportunities for both self-employment and jobs, outside the agriculture sector. The inclusiveness of this sector is underlined by the fact that nearly 50% of the MSMEs are owned by disadvantaged groups of society. As such, if India is to develop faster and achieve new heights, then our government needs to aggressively promote the growth and development of this particular sector.

Overview of the MSME sector

Currently, the MSME sector contributes 8% of the national GDP and accounts for around 40% of the total exports and around 45% of the manufacturing output.  According to the Fourth All India Census of MSMEs, the total number of enterprises in the sector is 36,176,000 of which 1,564,000 are registered enterprises. An overwhelming 72% of India’s 36.17 million MSMEs are engaged in the services sector, whereas the balance 28% are in the manufacturing segment.

MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic progress of our country by providing employment to over 80,524,000 persons. In a country like India where millions of people are unemployed or underemployed, the MSME sector has thus emerged as a major provider of jobs by creating more employment opportunities per unit of capital. Furthermore, MSMEs are the nurseries for entrepreneurship and innovation. They are widely dispersed across the country and produce a diverse range of products to meet the needs of the local markets, the global market and the national and international value chains.

During 2011, the total production of MSMEs amounted to Rs 10,957.6 billion (at 2001-02 prices) and the sector manufactured more than 6,000 products ranging from traditional to high-tech items. Meanwhile, the MSME sector has also played a vital role in fulfilling other socio-economic objectives. It has emerged as a powerful tool for dispersal of economic wealth and power. This sector has also contributed handsomely towards removal of regional disparities and economic backwardness in the rural and less developed segments. As a result, it occupies a strategic position of unique importance in the Indian economy, and also has the potential to lift the country to the bracket of developed nations.

Recognizing the importance of the sector and with the aim of making it a significant player in the global marketplace, our central government has passed the MSME Development Act 2006. The objective of this Act, which came into effect on October 2, 2006, is to facilitate the promotion and development of the sector and also to enhance the competitiveness of the MSMEs as well as to redress all the matters connected therewith and incidental thereto. Meanwhile, under the Public Procurement Bill 2012 approved by the Cabinet on April 1, 2012, all public sector undertakings (PSUs), central government ministries and departments will have to procure at least 20% of products and services required by them from the micro and small enterprises (MSEs). Though the public procurement policy for MSEs has become effective from 1 April 2012, the provision of 20% procurement of products and services will become mandatory only from April 1, 2015. 

 

Challenges faced by the MSME sector

Despite the Union government passing the Public Procurement Bill 2012 mandating that 20% of all government procurement of goods and services should be from MSEs with effect from April 1, 2015, several PSUs and agencies are yet to initiate the process of measuring how they will procure from the sector. Moreover, the transaction costs that the MSEs would have to bear for registration, earnest money deposits, etc are considerably higher than what most small enterprises can bear. Financially, for most of the firms in this sector, cash management and working capital cycles are very tight. So, additional transaction costs will impose a fairly large burden on them. For small firms with limited management capacity, the concerned registration process also tends to be very complex. That is a huge stumbling block. Qualification criteria are set so high as to be intimidating; the perception that MSEs cannot meet quality standards is reinforced when such hard-to-meet criteria are imposed.

Furthermore, PSUs and government agencies have to climb a steep learning curve before implementing the procurement rules from April 1, 2015. To start with, there is no comprehensive database on MSEs. Moreover, there is very little information about the capacity and ability of the MSEs that can be drawn from the available data from registration. Besides this, a massive challenge for MSMEs is finance, and when a significant proportion of all MSMEs are proprietary firms rather than corporate structures, even small changes in cash management and working capital cycles can create unanticipated problems.

Though there are large numbers of startups coming up all over the country, at the field level there is a high death rate or sickness rate of new enterprises. This is specifically because of a lack of healthy entrepreneurship ecosystem in many states across the country. This can be attributed to the failure of the concerned state governments to provide the required policy thrust for startups and also to the absence of backward linkages where large corporates source from local SMEs.

Over and above all these, the MSME sector has also been reeling under various other disadvantages that have been historically affecting small enterprises in India — such as lack of capital and credit facilities, infrastructure deficit, higher fixed costs compared to the large-scale sector and lack of access to global markets.

Boosting the growth of MSME sector

History shows that MSMEs of countries like Japan, Korea, etc managed to emerge as global players only because of the persistent and effective support they received from their respective governments. Though the Union and state governments in our country have been striving to support the MSME entrepreneurs by making things simpler for them, still there are certain issues related to policy and government support that need immediate attention. Moreover, facilitation from government is required to minimize transaction costs for technology upgradation, market penetration, modernization of infrastructure, etc. Taking into account the diverse issues and challenges currently inhibiting the growth of the MSME sector, given below are some recommendations categorized under six different focus areas, which if implemented properly will facilitate the rapid growth and development of the Indian MSME sector.

1. Finance, including CreditCredit is a crucial input for promoting growth of the MSMEs, particularly the MSE sector, in view of its limited access to alternative sources of finance. Currently, entrepreneurs have to face lot of trouble when they try to get loans from banks. So, first and foremost, granting of loans to entrepreneurs in the MSME sector should be simplified and made hassle-free with the aim of increasing required fund flow to the sector and for ensuring that every entrepreneur gets timely loans without having to go through avoidable, time-consuming and complicated procedures and formalities.

   The complex terms and conditions for availing of loans also pose a stumbling block. A survey of 540 MSME units reveals that 71% of the entrepreneurs were not even aware of the credit guarantee schemes launched by the central and state governments. Those who were aware could not take advantage as banks, which administer such schemes, are themselves not equipped to guide the customers — either the staff are not trained or they lack information.

   Collecting account receivables is also an area of major concern. When PSUs delay settlement of outstanding dues to corporates, the latter in turn delay the same to SME firms and a never-ending loop comes into play. Zero tolerance in case of defaults and use of commercial bills with minimum proportion of dues under the bill system and fixed date of payments can be a corrective measure to resolve this issue. Next, while on one hand MSME firms face the scarcity of collateral during early stages, unnecessary borrowing for capital needs is a worry too as interest is to be borne all throughout; on the other, bank credit on inventory has to be assured as this would also eradicate the issue of collateral. A hidden aspect of MSME borrowing is a move towards non-bank sources such as commercial paper, which increases the burden of interest rates, thus taking away the competitive edge of the borrowing firm. Hence, our government should formulate strict rules and legislations to resolve these issues.

   Furthermore, our government and the Reserve Bank of India (RBI) should strictly implement guidelines for year-on-year growth of MSE credit. Moreover, the reach of the MSEs to the banking network has to be substantially enhanced through setting up of branches near clusters. In fact, a cluster-centric approach is the best bet for addressing the credit needs of the MSME sector, because of reasons of operational convenience and trust building. To address the risk perception of banks, particularly for lending to MSEs, the credit guarantee schemes need to be further strengthened with enhanced budgetary support.

   Lack of equity support for the MSME sector inhibits their growth. In order to fill equity gap, access to finance needs to be enlarged through alternative sources of capital such as private equity, venture capital and angel funds. The Securities and Exchange Board of India (SEBI) should also come up with specific measures to encourage SMEs to raise funds on the already existing dedicated platforms for SMEs and start-ups on BSE and NSE, which allows small companies to get listed without an IPO.

2. TechnologyThe low technology generally used by the MSME sector has been a major cause for poor competitiveness of the sector. So the Union and state governments should set up a multi-tier support system by collaborating with industry associations, industry clusters and private R&D institutions for inducing technology-based competitiveness in the sector. This support system should be given the required encouragement to enable it to develop appropriate technologies for various manufacturing processes, which in turn will lead to substantial reduction in cost of manufacturing by improving labour productivity, reducing material wastage and minimizing energy consumption.

   Steps should also be taken to support innovative ideas in a bid to develop them into marketable products, facilitate linkages of MSME clusters/ Mini Clusters to public and private R&D institutions, and finally subsidize the cost of technology available in the international market. Government should formulate liberal policies and assistance programs to nurture innovative ideas of academic institutions and techno-preneurs.

   Government assistance may vary depending upon the level of technology and the transaction cost involved and may be kept at an attractive level. To facilitate absorption of globally competitive manufacturing technologies that are available in the international market for various industries, government may subsidize the industry. Meanwhile, the extent of support may be decided based on the type of industry and the level of technology being adopted.

3. Infrastructure Development

For MSMEs, land and infrastructure constraints are major problem areas, especially in bigger cities and metros. As production processes of majority of MSEs can be accomplished in flattened factories, such complexes may be encouraged by providing financial support under the Integrated Infrastructure Development Scheme of the central government. Likewise, accommodation problem of industrial workers may be addressed by establishing dormitories on a sustainable basis.

Maintenance of industrial estates (mainly maintenance of roads, drainage, sewage, power distribution and captive power generation, water supply, dormitories for workers, common effluent treatment plants, common facilities, securities, etc) are very important for the successful functioning of enterprises in industrial areas. Industrial estates are generally developed by the state industrial development bodies (for example, GIDC in Gujarat, HSIDC in Haryana, and RIICO in Rajasthan). It may be appropriate to handover maintenance of industrial estates to industry associations, local bodies, state government agencies or Special Purpose Vehicles (SPVs) on self-sustaining basis.

In advanced countries, hi-tech and innovative enterprises start in modular industrial estates. To encourage such ventures, Modular Industrial Estates having Raw Material Bank, Technology Resource Centre, Design Centre, Business Centre, Tool Room, Testing Centre, Incubation Centre, Training Centre, Mini Trade Fair Centre, etc should be set up near Centres of Excellence like IITs. Furthermore, our country currently has no specialized testing facilities for certain high-end products, such as leather items. Therefore, the exporting MSME units have to avail these facilities from overseas testing labs. As such, there is a need for creation of such testing facilities at suitable locations adjacent to clusters of such industrial units.     

4. Marketing Support

Marketing is the most important tool in business development that leads a product from creation to customer through different channels. Marketing is a dynamic activity that calls for constant updating of marketing intelligence and new tools of marketing. It includes a whole gamut of activities such as packaging, labeling, trade mark, bar coding, brand building, advertising, domestic and international exhibitions, buyer-seller meet, e-marketing and customer service to name a few. Generally, MSMEs don’t have the financial muscle or wherewithal to make their presence felt in the market. It is here that our government can pitch in and help them.

While marketing of products of MSMEs mostly depend upon the market forces and individual efforts of the concerned enterprises, government and its various departments and organizations can play the role of a facilitator to help the MSME sector in these endeavours. Ministry of MSME and its attached organizations have been assisting the sector through certain schemes and programs. However, emerging marketing-related challenges call for scaling up of these programs and introduction of certain innovative policies for the sector.

There are multiplicity of market development assistance programs to support MSMEs for participation in domestic and international trade fairs, bar coding, packaging and standardization within the Ministry. There is an urgent need for rationalization and consolidation of such programs under various broad heads. There is also a need for up-scaling of such programs with higher financial allocations.

Lately, Indian MSMEs have acquired global competitiveness in sectors like auto components, leather goods, garments, engineering items, gems and jewellery, etc. In the services sector, education, healthcare, grooming and beauty therapies have enormous export potential. Direct export from enterprises in these segments should be accelerated by enabling services like B2B meetings, events, seminars, dissemination of information about new markets and products, offshore warehousing, product promotion, etc. As individual enterprises do not have sufficient resources to take up such initiatives, our government should set up Business and Facilitation Centers with the aim of providing necessary help through cluster and consortia-based initiatives through the PPP model.

5. Skill Development & Training

Lack of skilled manpower and information as well as lack of reach to modern technology are key issues affecting the growth of the MSME sector. Compared to many other countries, India enjoys an advantage because it has a huge population in the productive age group. If this comparative advantage can be augmented with adequate skill development, India can become a global supplier of quality manpower. In this context, it is very encouraging to know that the Narendra Modi-government is planning to launch a new Skill Development Program by March 2015, which will bridge the gap between educational institutions and the labour market. The proposed scheme is expected to move beyond the target of skilling 500 million youth by 2020 that was set under the National Policy on Skill Development 2009 formulated by the UPA government.

To coordinate the entire process of conducting skill development programs, the central government should set up a virtual SME University, which will standardize the training curricula as well as certify the trainers and the trainees on completion of the program. Eventually, the university can also become a repository of the details of the persons who have been trained under various programs of the Ministry as well as other Ministries and discharge the function of a virtual Employment Exchange. To enhance workers’ skills and proficiency, our government should also set up 100 Tool Rooms or Technology Development Centers (TDCs), including Central Footwear Technology Institutes (CFTIs), which will provide specialized training to the existing and prospective workers in the manufacturing sector. Such institutes should be set up in industrial clusters and districts, with state-of-the-art machines in a bid to impart training to make the participants readily employable in high growth sectors like auto components, engineering, readymade garments, leather products, etc. To make such programs self-sustainable, they should be taken to the self-financing levels, which will also make them qualitative. To ensure high success rate of such programs, they should be made practice-oriented by involving industry associations in the training, which will also help in identification of the skill gap, development of appropriate training curricula as well as handholding of trainees via internship and apprenticeship arrangements.

Our government, in collaboration with specialized agencies, should arrange to impart regular training to MSME entrepreneurs on risk management strategies, delivery channels, product development related issues, financial management and such other key business parameters so that they are well-equipped to profitably manage their ventures and make them successful.

6. Institutional Structure

The institutional and legal framework for promotion and development of the MSME sector in our country is spread both at the national and state level. While the state governments have the primary responsibility for the development of MSMEs, the central government supplements their efforts through a range of initiatives. Here it is worth noting that the employment-intensive MSME sector has suffered tremendously due to a plethora of laws, rules and regulations that kept on accumulating during the control regime of the licence-permit raj. Ensuring compliance with so many rules and regulations of that era has considerably stifled the growth of the MSME sector. To unshackle the growth of the sector, our government should immediately address the following issues that obstruct the growth of the MSME sector.

1. Environmental issues
2. Labour issues
3. Amendment of MSMED Act
4. Exit policy
5. Restructuring of the DICs and MSME-DIsTo elaborate further on the environmental issues, the relevant policies should be made uniform all over India, while extending appropriate relaxation of controls for MSMEs. On labour issues, the immediate need is to consolidate the plethora of labour laws into one industry-friendly law. The MSMED Act 2006 was enacted to promote the growth of the MSME sector. However, there is an urgent need to strengthen various provisions of the Act along with the enactment of appropriate rules under various sections, which will help redress diverse issues and challenges such as inadequate physical infrastructure, complex regulatory environment and inadequate availability of skilled manpower that have constrained the growth of the MSME sector.

   Furthermore, while amending the MSMED Act, an appropriate provision enabling easy rehabilitation or exit of nonviable SMEs should also be incorporated. In fact, it would be better if our government brings in a single comprehensive MSME law (to replace the MSMED Act 2006) that would include the Labour Law, Factories Act, Land Acquisition Act, 25% land allocation in all industrial corridors, and an Exit Policy (on the lines of Chapter 11 in the US). This new MSME policy should also enable simplified procedures for clearances such as online applications and easy procurement procedures. Raising competitiveness and productivity in the MSME sector should also be a critical focus area of the new MSME law. To achieve the same, funds as well as technology may have to be brought in from abroad for the MSME units, for which relevant provisions should be appropriately incorporated.

   It has been noted that banks while extending loans to MSMEs struggle with limited data on the credit history of the borrowing firms. To resolve this issue, our government should set up a Credit Bureau at the all-India level with its regional offices in all the states. Currently, the District Industries Centers (DICs) under the state government and the MSME Development Institutes (MSME-DIs) under the Ministry of MSME, provide the requisite facilitation to new and existing entrepreneurs for developing their enterprises. The state and central governments should formulate an appropriate restructuring plan for them in order to attune them to the contemporary entrepreneurship scene and likely future developments so that they can play a more helpful role and also discharge their functions more effectively.

If all the above recommendations are implemented in right earnest, then over the next few years the MSME sector will certainly emerge as a highly vibrant and dynamic sector of the Indian economy. This in turn, will open up huge employment opportunities at comparatively lower capital cost and also help in the industrialization of rural and backward areas, thereby reducing regional imbalances as well as assuring more equitable distribution of national income and wealth.