Micro, small and medium enterprises (MSMEs) play a crucial role in the socio-economic growth story of India accounting for more than 40 percent of the manufacturing output and over 45 percent of the total export of India as of 2017-18, as per annual report of Ministry of MSME. This sector is also the key to equitable and inclusive growth across local economies. Yet, their potential of acting as engine for growth and livelihood generation remains untapped. Inadequate access to technology, technical and business skills, markets and finance have been highlighted as some of the key constraints for the MSMEs in the manufacturing sector.
Contribution of manufacturing to India’s GDP is stagnant at about 16 percent which is far behind some of the neighbouring and comparable economies such as Thailand (36 percent), China (32 percent), the Philippines (30 percent) and Indonesia (18.1 percent). The National Manufacturing Policy, 2011 (amended in 2016) sets a target of increasing this contribution to 25 percent and creating 100 million jobs over a decade or so. Therefore supporting MSMEs is a critical success factor.
Today we are in the midst of the fourth wave of technological advancement -- Industry 4.0 -- which is characterised by new technologies that integrate the physical and digital worlds. Paired with tools such as predictive algorithms, simulation and automation, this generates new insights, enables more effective decisions and is fundamentally changing how organisations operate. This digital revolution is already impacting the business model for MSMEs.
According to the World Bank’s World Development Report 2019, 60 percent of India’s jobs are endangered by automation. This impact is highest on MSMEs as they employ majority of the un-skilled and semi-skilled workforce. In addition to this, disruptive technologies are changing market demands at a much faster pace now leading to increased risk of obsolescence before payback period. Despite these challenges, MSMEs cannot operate oblivious to these technologies as they integrate more and more to global value chain. Therefore, there is a need for providing the right set of support and enabling framework to ensure sustainability and growth of MSMEs.
Historically, major industrial disruptions have led to short term re-alignment with regards to employment and businesses. In the long term though, economy has emerged stronger as workforce reskills and businesses become more sustainable. Improved productivity releases capital to be deployed for investments thereby creating more jobs. Workforce rendered redundant typically reskills in higher value-adding traits increasing their contribution to the economy. A globally aligned MSME vendor base is one of the key attractions for FDI in manufacturing sector in turn leading to increased market for MSMEs.
Germany is one of the leading nations in adopting a systematic approach towards assisting its MSMEs in adapting to changing scenario and in some case anchoring the change. Average growth rate of some of the sectors such as electronics increased from -6.18 percent to 6.9 percent over 2011-13 and 2016-17 respectively. Automobile sector doubled its growth rate over the same period. These successes are the result of a series of initiatives by the government, industry associations and academia. One such initiative, There is an imminent need for India also to work on an integrated framework to enable the massive MSME sector embark on a journey towards adopting latest suite of technologies. The framework needs to have following key elements:
Plattform Industrie 4.0 was launched in 2013 as a single-stop shop for businesses providing access to successful case studies and examples, service providers, testing and prototyping facilities and events raising awareness. Increasing awareness about new technology and mitigation measures for the associated risks. A focused network of industry, academia and government organisations working towards industry-led research. Tailored training programmes which cater not only to the youth entering the workforce but also to those getting impacted due to adoption of new technology. Entrepreneurship development in the form of policy interventions, incubation support, easy access to finance and advisory support services.
Industry 4.0 while posing challenges for MSMEs also provides a lot of new opportunities. India, with a strong base of technical manpower can be the focal point of frugal innovation. Providing solutions for low-cost automation, simulation, IoT and data analytics can create new opportunities for MSMEs. Rapid embracing of these exponential technologies has the potential to transform Indian manufacturing sector with dual impact -- increase in the organised sector and creation of new jobs. What is required is an integrated approach where all the three key stakeholders, the government, industry and academia work together.
Amar Shankar is Partner – Economic Development, Advisory, at EY.