India needs an ecosystem that’s conducive to MSME expansion

We must adapt our policy settings to favour new opportunities for small businesses if they’re to play a big role in job creation

Sustainable employment opportunities for Indian job-seekers now lie largely in the sector of micro-enterprises. With 65% of India’s population below the age of 35, job generation by micro, small and medium enterprises (MSMEs) therefore assumes a high level of importance. The challenge goes beyond skilling. The country must equip MSMEs to use modern marketing tools, especially of e-commerce, which could be key for their expansion and sustainable growth.

India has approximately 63 million MSMEs, more than 99% of them tiny businesses. Only a fraction of them are registered. The number of registered MSMEs grew 18.5% year-on-year from 2.1 million units in 2018-19 to 2.5 million in 2019-20, by government records. According to data shared by India’s MSME minister in the Rajya Sabha, the list of registered MSMEs is dominated by micro enterprises, which number 2.2 million in 2019-20, up from 1.8 million the year before, while small and medium enterprises (SMEs) went up from about 241,000 to approximately 295,000. Mid-sized businesses only increased from 9,403 units to 10,981 units during this period. The first need is to continue to track MSMEs, so that we have a repository of information on these businesses, by geographical area and the products they sell. The aggregation of similar businesses will enable us to target skilling and handholding initiatives closely and also expose them to new market opportunities.

Efforts need to focus on quality manufacturing, with the use of automation to enhance operations, and the exploration of new markets through e-commerce. This would require a holistic approach of hand-holding existing manufacturers in the sector, equipping both managers and their workforces with appropriate skills, and educating them on new technologies and standardization norms, even as we expose them to new market avenues and instil confidence in them that the country’s ecosystem would assist them in their expansion plans. New MSMEs, especially, should be encouraged to start off with this advantage.

In this context, the principal challenge is to ensure that Indian policies and their execution have the clear objective of boosting these small production units and evolving an ecosystem that acts more as a facilitator than anything, with a light compliance regime and a sustainably credible framework for these units to plan and invest in expansion over longer time periods.

Realism is critical. India’s current goal of skilling 402 million people is way too large, unnecessary and unattainable. A functional industry interface that allows for apprenticeships in MSMEs with stipend costs borne by the government will help train the country’s youth for productive tasks. About 70 million individuals of working age (15-59 years) are expected to enter the country’s labour force by 2023. Using the same estimation model, India’s total workforce will then have about 404.2 million people. This will include 59 million individuals in the age group of 15-30 years, according to our analysis of data from the Periodic Labour Force Survey (PLFS) 2017-2018.

Strategies for re-skilling and increasing the skills of the current workforce, as well as for the formal recognition of informally-acquired skills, have been worked out by the National Skill Development Corporation. Skilling plans in accordance with sector-wise requirements will enable us to create appropriate job opportunities not just in India but also across the globe, as various developed economies need skilled manpower in a swathe of industries that cover manufacturing, software and healthcare. For the formal sector, the key is to forge collaborations with industry, and for the non-formal sector, schemes like the Pradhan Mantri Kaushal VikasYojana will need to deliver results. Given the prevailing trends, industrial units and emerging e-commerce platforms are best equipped to provide the right kind of skilling.

The traditional concept of apprenticeship, which involves part-time work and is a widely accepted skilling practice, especially in weaving, handicraft and manufacturing units, does not find mention in India’s wage-protection rule-books. This oversight can be fixed via coverage by either the wage code or social security code rules, or perhaps the Shops and Establishments Act rules, as deemed appropriate. At this juncture of the development of our digital economy, it should be lawful for employers to engage part-time workers, ideally for up to six hours a day. Wages could go by the minimum applicable for eight hours of similar work, with 15% extra, or an eight-hour equivalent of the prevailing daily wage rate for permanent workers doing similar work with a 15% mark-up, whichever is higher.

Apart from trained manpower and a compliance burden, what holds India’s MSME sector back is a policy framework that effectively acts as a disincentive for them to adopt emerging market platforms like e-commerce. Production units need to make use of these, but the country’s rules lack cogency in the context of a significant shift in consumer behaviour towards online buying, and that too at a time when world trade is increasingly moving to the internet. Indian policies need to be revisited so that discrepancies are removed and we encourage small units to take advantage of e-com platforms. The deterrents range from goods and services tax provisions to investment rules, which I shall elaborate in a subsequent article. MSMEs need to be empowered to perform, and there’s little time to lose.