This points to the fact that we must build the road to recovery for the MSME industry on much more than just financial stimulus. It is the right time to take a hard look at what needs to be done to make this sector more productive and competitive on a global scale. According to World Bank reports, the MSME sector in Asia, Africa and Middle East together contributes over 35% of global economic activity and its contribution to employment is a staggering 60% plus. The value of B2B transactions done by this sector through formal channels is greater than $3 trillion. These figures highlight the potential of this sector and the opportunities it represents in strengthening the regional economy.
Resolve structural issues to make up-scaling lucrative
Most Indian MSMEs, however, are still grappling with a lack of competitiveness, especially when compared to global counterparts. The issue is structural – our MSMEs are not becoming larger and scale, with 99% of the estimated 60 million in India continuing to be micro-enterprises through their life cycle, with limited means and aspirations. Sub-scale units are tied to low productivity, and so the vicious circle continues.
What is needed to help our MSMEs scale and move up the value chain? Industrial policy and the regulatory framework are clearly important focus areas. One factor that has prevented micro units from growing into medium industries has been our policy legacy of restrictive asset-based definitions. This has recently been relaxed, however, and it is a positive move in the right direction.
Compliance is another area to consider. At present, our regulations do not distinguish between enterprises on their scale, except for the tiny ones, in terms of compliance needs. Trade union laws apply to units with more than just six employees, and the Factories Act applies to units with over 10 employees. When small enterprises have the same complex regulatory requirements as large ones, with all the attendant costs of compliance, it acts as a disincentive for micro units to grow. Entering the formal economy proves too costly for them, and they often prefer to stay small, which is finally an economic loss for the country. It is perhaps time to consider designing a more flexible regulatory framework.
Develop new trading partnerships in the region
A lot is being discussed about the intention of global organizations to move deeply integrated supply chains out of China and relocate to India. India views this as an opportunity, but a lot of work needs to be done on the ground to be able to reap the benefits of any such moves. To edge away from India’s huge dependence on imports from China, sector-specific strategies will have to be formulated and alternate trading partners developed in the region. Our existing trade deals with Malaysia, Singapore, Thailand and Philippines should now be re-visited and strengthened. Building up the India-European Union (EU) trade bloc is another option that should be seriously explored. Likewise, trade partnerships with Australia and UK – which have been under active discussion for some time, need to be given priority and closed as early as possible.
Address skill deficit in manufacturing
India must make herself a more attractive destination for a larger amount of FDI to flow in. The reason why the Services sector has till date attracted more FDI than the Manufacturing sector is because the availability of skilled labour in the former is far better than the latter. India needs to address this skill deficit in Manufacturing on a wartime footing to benefit from the current sentiments driving the decisions around global trade. Infrastructure remains another area in which huge strides need to be made urgently. Our outdated ports, for one, need significant overhauling and redesigning.
Forge partnerships with big players to expand the market
There is a strong need to develop localized services and local networks across the country to enable the Government to expand economic hubs beyond tier 1 cities. MSMEs have an opportunity to actively shape this through forging partnerships with big players–including foreign entities–who are looking at exploring the vast Indian market or setting up low-cost manufacturing bases and place a premium on the hyperlocal data and specific knowledge of micro markets that MSMEs possess. Such partnerships could present a significant opportunity for MSMEs to scale fast and move up the value chain within a brief span of time.
(The writer is Venture Lead, SOLV & Member, SC Ventures)