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VIEW: Why India’s MSMEs have failed in driving growth

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MSMEs in India suffer from three main problems—technology, capital and talent.

VIEW: Why India’s MSMEs have failed in driving growth
Authored by: Manish Bhatnagar
What is common to Ludhiana’s hosiery and Varanasi’s sarees? They are recognised as the best examples of India’s MSME success by consumers around the world. But why is it that most of the MSMEs in India have failed to measure up to their potential?
India’s approximately 50 million micro small and medium enterprises (MSMEs) employ about 120 million people. A quick calculation to arrive at the number of employees per firm should already give us an indicator of the structural problem in this sector. What makes this problem worse is that this beleaguered sector contributes to about 30 percent of the country’s GDP. Therefore any unresolved problems in this sector would have a tremendous negative impact on India’s growth ambitions.
Apart from their role in driving growth, MSMEs are crucial to the idea of an inclusive India. They help in the industrialisation of rural and backward areas, touch the lives of the poorest in our country, reduce regional imbalances and assure equitable distribution of income. So it becomes imperative from even a social narrative to ensure they are unshackled.
MSMEs have been time and again emphasised by Prime Minister Modi as the bedrock of India’s mission for self-sufficiency or Atmanirbhar Bharat. While everyone understands how important they are, it is now time to unpack the structural problems in this sector. MSMEs in India suffer from three main problems—technology, capital and talent. None of these are newly identified problems. But unless these are understood, addressed and then resolved, we will continue to throw good money after bad ideas and then keep wondering why India’s supposed engine of growth is not just not delivering its social and economic potential, but at times fails to even wake itself up from its overnight sleep.
Inflexibility of obsolete technology
The sector remains deeply reliant on obsolete and inflexible technology which hampers its production efficiency and time to market. Outdated production systems, inefficient equipment and lack of good manufacturing practices remain the norm at most MSMEs. Digital manufacturing, which is fast becoming mainstream across many industries remains mostly unheard of in this sector. Extending technology to beyond the factory, many MSMEs remain excluded even now from the digital economy which cuts them from a vast majority of digital-savvy customers.
While digital payments and invoicing are gradually picking up to help them connect better with their customers, this sector needs immediate intervention on their shop floors and production systems to make them efficient and agile. We need more MSMEs to adopt the latest manufacturing technologies including CNC machines, 3D manufacturing or additive manufacturing, laser or ultrasonic machining, robotics and process automation.
Digital solutions such as mixed reality applications, connected technologies and digital simulations on the shop floor are not just easy to implement, but also easy to source cheaply and abundantly in India. MSMEs do not need complicated Industry 4.0 solutions that even large manufacturing companies are struggling to implement, but they need low-cost, efficient and locally available solutions to up their game quickly.
Lack of adequate and timely access to finance
Most MSMEs rely on friends and family for their capital requirements. With limited equity by the owners, financiers see them as high risk for any future lending. Due to their informal nature, MSMEs are also unable to deliver on formal credit or risk assessments, thus often leaving them out of formal bank credit or venture capital financing. Additionally, most small businesses have very low barriers to entry, placing them in the crosshairs of a very competitive environment which puts pressure on their revenue and margins. This combination of low margins and inadequate capital does not allow them to invest in manufacturing, purchase raw materials on time, access new technologies or acquire new skills.
To provide capital assistance for driving their growth, MSMEs need the banks to change their lending practices to move away from asset-based lending to focus on individual credit scores or future potential etc. While private banking systems may still be wary of undertaking such risks, the government needs to nudge the state-owned banks to be more accepting of MSME ground realities and thus tweak their lending requirements accordingly. While the recent Covid crisis has exacerbated the NPA crisis for all businesses including MSMEs, in general MSMEs have an NPA rate of less than half of the larger borrowers, so the risk is well worth the rewards of growth here.
Fixing the talent constraint
MSMEs are the second largest employer in the country after agriculture. And much like the latter, friends and family constitute much of the workforce in these enterprises. Apart from the obvious reluctance of professional managers to join such enterprises, there is also the lack of good HR practices at lower levels at many of the MSMEs. They pay less attention to human resource management and more attention to day-to-day business operations. This is then the classic hamster treadmill where new talent is either not able to or does not want to jump on the belt to help drive it better and faster.
MSMEs need to be as vigilant, if not more than any of their larger peers as regards their HR practices. It is myopic and short-term to think talent is less important than working capital, customer relationships or manufacturing operations. But this responsibility goes beyond the MSMEs themselves, it needs a complete overhaul of our skilling institutions to create welders, fitters, technicians, electricians and crane operators who not only have the right skills that MSMEs actually need but also have practical training experience that allows them to start on the first day at the job instead of having to be retrained by the MSMEs who do not have the luxury to do so.
 Conclusion
To timely address these issues, a comprehensive and collaborative strategy is required through the multi-stakeholder partnership of government and industry. This needs to be coupled with the simplification of the regulatory process. Efforts also need to be made to develop self-sufficient clusters of manufacturing competence, which are empowered to provide single window clearances to entrepreneurs and investors. This not only solves the issue of regulatory hurdles but also ensures timely and inclusive business by the MSMEs.
Apart from these specifics problems, it also needs to be ensured that the scale of reforms under the government’s ease of doing business also reaches the MSME sector in all its inclusivity. Reforms are in process already in this aspect, but more effort is required. This is especially true for verticals such as land and labour. The MSME sector holds a tremendous promise to make India the first choice of investors, to power a billion entrepreneurs and to be a leading exporter across many sectors.
The sector holds the answer to critical questions such as unemployment, self-sufficiency, local economic development, fiscal deficit, financial sector development, amongst others.  Thus, a collaborative front will help in filling the short-term gaps towards the road to realizing the true potential of MSMEs. This road does look like a long one, but not an impossible one.
—Manish Bhatnagar is Managing Director, SKF India. The views expressed are personal
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