Editorial Articles

Issue no 4, 23 - 29 APRIL 2022


Msme Sector Transformation To Stimulate Economic Growth

Dr Ranjeet Mehta

Micro, Small and Medium Enterprises (MSMEs) are crucial for the economic growth and stability of any country and play a vital role especially for developing countries as they facilitate economic activity and provide employ-ment thus contributing to poverty reduction. In India too, the significance of the 65 million+ MSMEs that create about 120 million jobs and 30% of the country's economic output cannot be underestimated as it forms the backbone of the industrial landscape of the country contributing 49 percent to the exports and 45 percent to the manufacturing sector and are also responsible for around 30 percent of total employment generation.

 The development of this segment is very much essential to meet the national imperatives of financial inclusion and the generation of significant levels of employment across the country. Many developed and developing economies have demonstrated that the MSME segment is the catalyst for maintaining growth and employment generation, which provides stability during economic downturns. As a catalyst for socio-economic transformation of the country, the sector is critical in meeting the national objectives of generating employment and discouraging rural-urban migration.

MSME Landscape in India 

·Over 90% of firms have less than 5 workers. 

·The MSME sector is dominated by small firms that do not grow with age. 

·Global experience suggests that in the absence of distortions, firms grow with age. However, in India the average number of employees in a forty-year-old plant is almost the same as its five-year-old counterpart.

·These skewed patterns of growth impose huge productivity costs.

MSMEs function in a highly competitive space and require an enabling environment to sustain growth. The government is taking a slew of measures to provide adequate support in these areas like the proposal to bring the change in the definition of MSMEs, the introduction of Pradhan Mantri Mudra Yojana (PMMY) for enabling hassle-free credit to MSMEs, enabling emarketplace for MSMEs, two percent Interest Subvention Scheme, introduction of TReDS platform for discounting of bills, conduct of loan melas, restructuring the loans of stressed MSMEs, etc.

The MSME sector strategically has become the most important sector fuelling the economic growth of the country. The sector is slated to gain even greater prominence in the days to come owing to its potential for employment generation. It is also the bedrock from which a large corporate of the future evolves. Hence, it is imperative for all the formal financial institutions to progressively reach out to the large extent of MSMEs untouched by these institutions.

Change in Definition of MSMEs

 Effective from 1st July 2020 - Criteria for classification of micro, small and medium enterprises:-

·A Micro Enterprise- Where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.

·A Small Enterprise- Where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.

·A Medium Enterprise- Where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Industry feels that a change in the definition of MSMEs with an upward revision in their investment limit will help in the seamless expansion of small and medium businesses in the country and help them to access the institutional working capital. A robust MSME sector is key to improving the economic strength and resilience of the country and making it highly self-reliant and globally competitive.

The change in the definition of MSMEs may result in many enterprises which were classified as Small enterprises getting reclassified as Micro, and those classified as Medium enterprises getting reclassified as Small. Further, there may be many enterprises which are not currently classified as MSMEs, which may fall under the MSME classification as per the new definition. Such enterprises will also now benefit from the schemes related to MSMEs. The Ministry of MSME runs various schemes to provide for: (i) flow of credit to MSMEs, (ii) support for technology upgrade and modernization, (iii) entrepreneurship and skill development, and (iv)clusterwise measures to promote capacity-building and empowerment of MSME units.

Although there has been a mixed reaction on the new definition of MSME, but most industries think that the change in the definition of MSME is one of the most significant changes made to the legal regime governing MSMEs since the enactment of the MSME Act as it brings numerous companies within the ambit of the MSME Act and allows them to avail of the benefits of the reforms introduced by the Government for the MSME sector during this pandemic of COVID-19.

Digital Technologies can Transform Indian MSME Sector

We are in the midst of a significant transformation regarding the way we produce thanks to the digitization of manufacturing. Technological obsolescence and sub-optimal scale are two critically distinguishing features of Indian MSMEs, which predominantly consist of micro, informal enterprises. Therefore, policymakers in India have two persistent challenges to the modernization of the MSME sector in the country, namely, first how to accelerate technological upgradation and modernization of more and more MSMEs. Second is - how do we enable more and more MSMEs to expand their scale of production?

The world is facing greater disruption and an increasing innovation pace and actually caught up in a very revolutionary period. The days of simple product innovation are dwindling. Currently the technology, talent, and new innovation ecosystems are emerging - building greater complexities into our final innovation offerings. Intelligent automation and technology are fueling this new industrial revolution. And this unprecedented, exponential pace of change is increasingly reliant on collaborative platforms to realize more radical innovations.

Organizations everywhere are facing mounting pressure to transform - to shift from product centric business models to new models focused on creating and capturing different sources of new value propositions. As a result, innovation is becoming more complex. We are looking increasingly to our engineers, designers, and scientists to unlock these new knowledge flows that bring us whole new areas of technology-based innovation. Product innovation is continually giving way to new concepts that have technology built into them. Our innovation has become increasingly complex, connected, and contextual.

Industry value chains are being radically redesigned to accommodate connected worlds being more reliant on everything being digital. As we continue to design manufacturing to be fully connected-up, we can adjust faster, scale differently, and deliver quantities to varying cycles of demand, closer to the need of the day and more appealing to the customers. Our innovation scope changes with these new dynamics.

We need to appreciate new digital business models and their impact. We are increasingly reliant on digital engineering and science. There is scope to have radically different product development and processes to manage. These are multiplying by this rate of industrial change. The traditional supply chain has a very different potential when factories and operations become highly connected.

The new business models will emerge from the way they can be operated to be responsive in the supply networks. All this requires digital management. As we connect more, the customer experiences can hugely benefit. We can target, sell, and market on greater connecting knowledge platforms. We can understand channel choice and provide more tailored pre- and post-sales support to manage the entire lifecycle as we continue to build the connected ecosystems. Further, blockchain technology is not only disrupting banking and finance, but it also has the potential to impact many industries and community as a whole. For instance, this technology can enable a car to respond as per the need by installing a digital wallet based on blockchain technology. This wallet works by logging all transactions made involving the vehicle, including maintenance, modifications, charging or filling up gas. It makes it possible to predetermine the total cost of ownership and calculate return on investment for the car on a very detailed level.

We have noticed during Covid19 pandemic how exhibitions are getting displayed on virtual spaces. How physical conferences are converting into digital webinars? The goal for all manufacturers will be to get digital as soon as possible at the lowest cost. In defining the operating model for digitization they will factor in lessons learnt from the crisis and try to build a more resilient and agile business. I believe one of the major weaknesses is a lack of real-time visibility across the business. Visibility that is essential to support critical business decisions. For example- What is the demand for products and where can we manufacture them? What is our current raw material, work-in-progress and finished goods inventory levels? What is our manufacturing capacity, both in terms of human resources and asset availability?

The impact of the Covid-19 pandemic has demonstrated the value of IT and digital transformation across industries and businesses and they must utilize this time to speed up the transition. It has been demonstrated in the enhanced corporate ability of long-distance collaborative work, wide recognition of the value of digital transformation and information technology among all employees, and the ability to market online and business development.

To conclude, one of the easiest and cost effective methods of reaching out markets internationally for MSMEs is internet. Time is now when internet can be one of the tools that MSMEs can easily adopt and can capitalize on Digital India and leverage the internet to market themselves and build an identity-and lead the digital transformation for India. Digital should be able to democratize globalization-MSMEs with vision should now reach customers all over the world. The online space can open up a whole new avenue of doing business which was just not available earlier. This in turn will lead to a growth of entrepreneurs as well as giving MSMEs an importance in our economy-something that simply is the need of hour. A survey conducted in 2020 by Endurance International Group, an IT services company, revealed that 30% MSMEs have launched their business websites or tied up with ecommerce platforms and more than 50% MSMEs have adopted video conferencing tools to ensure business continuity since the pandemic-induced disruptions. According to the Cisco India SMB Digital Maturity Study 2020, digital adoption will enable SMEs to add US$ 158-216 billion to India's GDP by 2024.

Finally, Digital platforms and technologies can bring drastic changes and scale up MSMEs. The Ministry of MSMEs provides many learning programs and schemes to help MSMEs adapt to the ever-evolving digital technologies. Ministry of MSME is working hard towards lowering the digital gap by conducting informative workshops to help these conventional companies spread their business and cope up with technology disruption. Conventional businesses are now warming up to the concept of new digital technologies as they understand that without the use of technology they cannot scale up and become globally competitive.

(The author is a senior industry advisor with over 30 years experience in leadership roles across sectors. Email ID: ranjeetmehta@gmail.com)

Views expressed are personal.