Boost MSME sector to achieve the $5 trillion goal

Strengthening our MSME sector against future shocks calls for a slew of measures, beginning with an aggressive push to formalisation


As India enters its 75th year of Independence, COVID-19 has hit our trajectory towards the $5 trillion goal. India’s small businesses, in particular, are reeling under the impact of uncertainty and broken supply chains. This article will focus on the critical policy measures needed to strengthen the Micro, Small and Medium Enterprise (MSME) sector against future shocks.

The pandemic has highlighted the weaknesses in India’s small businesses. Yet, of the 63.3 million MSMEs in India, only about 10 million have benefited from support schemes such as the Emergency Credit Line Guarantee Scheme, interest rate subvention, etc. Five out of every six MSMEs are not benefitting from such schemes, mainly because they are informal. To boost formalisation, the UDYAM registrations need an aggressive push through a bottom-up national drive, as done for Aadhaar and the Pradan Mantri Jan-Dhan Yojana (PMJDY).

‘Liquidity’ comes up as one of the top three challenges in every conversation with MSMEs. A significant reason for the clogged liquidity is delayed payments by public sector undertakings (PSUs) and larger firms. The state facilitation councils must be strengthened with more teeth to act against the defaulters. Another key and non-confrontational solution is supporting and promoting the uptake of the TReDS platform, which has demonstrated a market-based solution to the delayed payments problem.

Linked to the challenge of liquidity is the lack of availability of credit. The MSME credit gap has been estimated at a whopping Rs. 20-25 trillion. The two primary reasons for this credit gap are the inability of smaller firms to mortgage assets to back their loan demands, and the inability of financial institutions to assess the credit risk of these smaller firms at affordable costs.

New age FinTechs are proving to be promising channels to bridge this gap using technology with innovative data analytics and models for assessing creditworthiness. While banks and Non-Banking Financial Companies (NBFCs) should work with fintech through data sharing, there should be adequate support from the Reserve Bank of India (RBI) with appropriate regulations for customer protection.

Digital technologies can catapult the MSMEs on the growth turnpike on the dimensions of business development (e-commerce), productivity (cloud-based affordable, pay-as-you-go technology solutions), credit (FinTechs) and delayed payments (TReDS). To drive these digitisation efforts by creating an enabling environment, the MSME ministry must appoint a dedicated Joint Secretary to look after all public digital initiatives and facilitate all private initiatives that propel MSMEs.

One of the biggest hurdles MSMEs face is that of excessive compliances. Governments — central, state and local — should proactively undertake a journey of reducing the burden of compliances for MSMEs, with support from the industry associations and RegTechs. They must periodically publish dashboards of the progress of critical milestones.

MSMEs have a prominent role in enhancing exports as they contribute almost half of India’s exports. India’s Foreign Trade Policy 2021-26 expected soon will, of course, include specific export promotion measures, but this is the time to raise the implementation-to-intent ratio of policy with an emphasis on MSMEs for capacity building with the help of industry associations, and export promotions through Indian trade commissions in target countries.

To gain the global competitiveness edge, MSMEs must raise productivity through a skilled workforce. So far, government initiatives have revolved around the supply-side through setting up skill institutions or financially supporting them. A change of approach is needed to include demand-driven initiatives like skill vouchers, which can be used for formal training in specific skills from an institute of the employee’s choice.

Pilots in Maharashtra and other states have shown encouraging results. Given the new digital framework of Aadhaar and UPI, it is possible to launch ‘Digital Skill Vouchers’ and ‘Individual Training Accounts’ that capture an individual’s training needs and track progress over time.

Productivity also gets a boost from clusters; however, cluster development and support have been hit by the pandemic over the past year. Government funding must now be front-loaded, with a particular focus on districts with few or no clusters. The aspirational districts listed by the Niti Aayog could be a good beginning.

Finally, at every stage of designing policy, the governments must put a gender lens on their schemes. To take just one example, industrial zones must have dedicated enclaves for women entrepreneurs, including help desks to assist with government support schemes. Multiple enclaves like these need to be set up across India simultaneously to see a visible change.

By taking these recommendations to the implementation stage, the engine of MSMEs that contributes one-third of India’s GDP can be fired up, and the national aspirations of a $5-trillion economy will not remain a pipe-dream.