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This article is more than 2 month old.

How MSMEs will drive the economic revival?

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Creating a resilient MSME sector necessitates extensive structural and regulatory reforms, beginning with proper enterprise identification and holding all stakeholders accountable.

How MSMEs will drive the economic revival?
The MSME sector is considered as a backbone of the Indian economy and rightly so! Currently, it contributes over 30 percent to Gross Domestic Product (GDP) and 48 percent to the total exports. This sector contributes significantly to the country's economic and social development by encouraging entrepreneurship and creating large employment opportunities at a lower capital cost, second only to agriculture. There are around 6.3 crore MSMEs in India. The sector presently employs approximately 110 million people across the country. This sector is inextricably linked to the rural economy, with more than half of all MSMEs operating in rural India.
However, despite recent rapid growth, the MSME sector was in trouble even before the pandemic hit, due to a perceived lack of creditworthiness. In terms of the MSME loans, while the overall enquiry volumes registered growth on YoY basis, the balances saw degrowth of 2.3 percent as of Sep-20 pointing towards a risk aversion. Sustained recovery and revival of this sector are dependent on addressing the issue of rampant informality, as the vast majority of these businesses, particularly in the large micro-segment, are not registered with the government. As per a World Bank study, only 50 percent of MSME’s have access to formal credit indicating a huge gap that is waiting to be bridged. Creating a resilient MSME sector necessitates extensive structural and regulatory reforms, beginning with proper enterprise identification and holding all stakeholders accountable.
The good news is that the government has simplified the registration process for micro, small, and medium-sized enterprises (MSMEs), and they will now only need to provide their PAN and Aadhaar numbers to register. In the first 10 months since its launch, the new portal has seen 30 lakh registrations, of which 28 lakh were micro-units. The erstwhile UAM portal registered 1.02 crore units in its 5 years of operations whereas the new portal has already clocked 30 lakh registrations.
Another important change that can bring about a revolution in the MSMEs sector is digitisation. The government of India is working hard to promote a cashless economy and to make seamless digital payments available to all Indian citizens in a convenient manner. The government of India has made digital payment promotion a top priority to bring every segment of our country into the formal fold of digital payment services. The vision is to make seamless digital payments available to all Indian citizens in a way that is convenient, easy, affordable, quick, and secure. The growth in electronic payment systems including National Electronic Fund Transfer (NEFT), mobile banking, and development of payment acceptance infrastructure is likely to boost digital payment transactions from Rs 2,153 lakh crore in FY20 to Rs 7,092 lakh crore in FY25, according to the India Trend Book Report 2021 by the Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young.
MSMEs have to prioritise technology adoption in order to streamline their operations and processes to prepare for business uncertainties. For a long time, the majority of small businesses in the country were unable to advance technologically due to issues such as poor understanding and awareness, a lack of capital to invest, a lack of skilled labour to operate it, and so on, until demonetisation and recent COVID-related challenges occurred. Boost in digitisation in SMBs can help to add $158-216 billion to India’s GDP by 2024.
Another important factor that can provide impetus to the sector is skill development. The Technology Centres set up by the ministry of MSME play a crucial role in providing practical skill development training to more than 2 lakh unemployed youth and industry workforce per year. In the year 2019-20, 18 Technology Centres set up across the country have provided training to 2,73,437 trainees, supported 43,563 units and earned revenue of Rs350.96 crore.
What is the way forward for the sector?
Given the breadth of the challenges, it is critical that the government strengthens its reforms and implements some game-changing measures for the sector. The government should work providing ease of doing business, balancing competition for local businesses and start-ups, broadening the network of beneficiaries, and increasing transparency.
In terms of capital access, pending or delayed payments to MSMEs should be expedited. The government took measures to address this. Under Atma Nirbhar Bharat, a special provision was launched to track delayed payment by CPSEs. Over 26,000 crore of dues cleared by CPSE since the launch of the Atma Nirbhar Bharat Scheme. However, going forward government can further address this problem by ensuring payments to MSMEs via TReDS are closely monitored at the central level. The government is already encouraging MSMEs to use the TReDS platform, as it allows them to discount invoices and obtain short-term credit from banks to temporarily address their delayed payment issue. To relieve liquidity pressure on their working capital, MSMEs should be encouraged to go digital and raise all invoices on the TReDS platform.
The sector will benefit if a thoughtful approach is taken and changes are implemented to make credit and capital more easily accessible to MSMEs. As a result, the lending ecosystem must be simplified and strengthened by leveraging digital technologies for a more seamless lending process and assessing potential borrowers' credit risk. NBFCs and digital lenders possess the right degree of operational agility and technological capabilities to reach out to underserved MSMEs. This fact has been well identified by the government, as visible from multiple initiatives taken to channel NBFCs’ abilities towards credit facilitation. These efforts can be streamlined further to empower NBFCs in MSME financing in the most effective manner. This will ensure their speedy recovery and catalyze the eventual growth.
MSMEs sector has to revive for the Indian economy to revive completely. Once these challenges are tackled the sector will get back on track it will consequently result in the revival of the Indian economy.
Shachindra Nath is executive chairman and managing director of U GRO Capital. Views expressed are personal.
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