Micro, small and medium enterprises (MSMEs) are at the heart of industrial activity in India. There are more than 3.6 crore MSMEs, which account for 45% of industrial production, 30.5% of services sector and employ close to 80 million people. With the rapid technological shift in means of production and that of internet and mobility in all spheres of economic activity, reorienting the MSME landscape towards cutting-edge innovation and skills is a foremost structural challenge. A dynamic global market coupled with domestic policy focus can unleash opportunities for MSMEs to go global.
However, even as 40% of exports are handled by MSMEs, they are yet to take off in the global arena in terms of technological investments or expansion plans. Make-in-India may just provide the platform for this. As the incubation space heats up and government supports innovative ideas, MSMEs can also turn ‘Mittelstand’ or ‘medium-sized’ as called in Germany, where the MSME sector has emerged as one of the strongest sectors, notwithstanding the global meltdown. Mittelstand also keeps the local employment scenario in Germany active and brings in social equilibrium.
Despite being a highly regulated and high wage country, the strength of SME sector of Germany lies in its three-pronged strategy: (1) Targeting niche markets for its products; (2) Integrated research facilities feeding to the MSME sector; and (3) Fraunhofer’s model of classic government-industry partnership which jointly imparts training and research.
In case of India, the policy continues to linger around regulatory regime and subsidy frameworks, which fail to provide an enabling framework for MSMEs to grow. An existing business having a turnover of Rs 5 crore, which in the global context would be considered a ‘micro business’, does not have an enabling framework to grow to Rs 50 crore, or a Rs 50 crore turnover company does not have an enabling framework to grow to Rs 500 crore. Given global inflation and valuation for money, the definition of limits demands a refurbishment.
A subsidy framework may be provided for small entities with less than Rs 5 crore of turnover, but globally $100 million (Rs 600 crore) annual turnover is recognised as a barrier after which a company is considered to be a serious player in the market. Till then, it is still considered to be a small player. The Rs 600 crore to Rs 3,000 crore ($500 million) is the space for ‘small’ and ‘medium’ companies, globally. If we want this sector to ‘go global’, our policy-makers have to ‘think global’.
The genesis of making Indian MSMEs global lies in providing them with a level-playing field to innovate, incubate and penetrate vis-a-vis the global arena. The sector is one of the most agile ones. As claimed, MSME tool rooms have provided at least 10 components that were used in the Mangalyaan (Mars Orbiter Mission). There is more such expertise in precision engineering waiting to be explored.
As we look forward to Make-in-India reinventing the glory of manufacturing, the policy framework derived for MSMEs should cover criteria such as enabling framework, supporting framework, and subsidy framework for very small businesses. Enabling framework is of utmost importance as the government will just need to build the bridges with its existing projects like Digital India, Skill India and Start-up India. Strong inter-linkages of the MSME sector within this framework will provide the impetus to entrepreneurs to do things differently as well as provide enough trust to the credit delivery system for long-term support.
The government does have the Credit Linked Capital Subsidy Scheme that assists in technology upgrade and the National Manufacturing Competitiveness Programme which endeavours to equip these enterprises with technology-based tools in the areas of quality, productivity, design development, energy-efficiency and marketing. There is also a serious gap between market-led research, entrepreneurship ideas, export market expectations and governing rules of financial institutions. To ensure better flow of credit to MSMEs, the ministry has introduced a Policy Package for Stepping up Credit to Small and Medium Enterprises, under which it operates schemes like Credit Guarantee Fund Scheme and Performance and Credit Rating Scheme.
On the lines of India Aspiration Fund, a specific fund dedicated to the MSME sector can be envisaged with the support of nodal financial agencies. A policy framework can be developed for a seed fund which can contribute to 25% of the venture and special purpose private equity funds ranging from R100-500 crore. Some ways through which the initiatives in the areas of doing business in India, skills and digitisation can be leveraged for the MSME sector are:
Developing specific-sector policies like in the case of biotech, IT and textiles, along with dedicated HR skills for that sector, with the lead from local education institutes to build competitive edge;
Leveraging Digital India to widen the growth base and access to resources to overcome location disadvantages. This is also necessary to address increasing overcrowding in existing corridors and overcoming real estate challenges;
Incorporating aspects of transport infrastructure in the doing business agenda. The top states in MSME industrial growth—Maharashtra, Tamil Nadu, Gujarat and Karnataka—also lead in terms of transport infrastructure. Improving the network and quality of roads in other states is imperative to lower logistics costs and aid MSME growth;
RBI’s initiative of improving banking in the countryside through small banks and conversion of MFIs into banks has a direct impact on improving access to capital for MSMEs. The government policy should focus on opening new avenues of finance and improving existing channels of credit;
The government should also introduce employment-linked tax rebates to entrepreneurs in addition to capital-based incentives;
Labour reform initiatives taken by states like Rajasthan and Gujarat need to be replicated across major states to enable growth of labour-intensive industries like textiles and garments manufacturing.
All stakeholders, including regulators spread across ministries at the Centre, state industry majors, the financial sector and trade associations, will need to come together and create a forward looking framework and ecosystem for the MSME sector to thrive.
The author is MD & CEO, YES Bank, and chairman YES Institute