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MSMEs: Engines of growth for new India

From easing access to credit to leveraging the PLI scheme, MSMEs can tap into a range of policy initiatives

In November 2021 the government announced the Special Credit Linked Capital Subsidy Scheme for the MSMEs (Micro Small and Medium Enterprises) in the services sector. The scheme has a provision of 25 per cent capital subsidy for procurement of service equipment through institutional credit to the SMEs for advancement of their technology.

In July 2020, by redefining the MSMEs, the Finance Minister addressed the ‘fear’ of MSMEs losing their benefits under various schemes if they expanded. 

Accordingly, a firm is classified under MSME — Medium category, if its investment in plant and machinery or equipment does not exceed ?50 crore and its turnover does not exceed ?250 crore. This policy change certainly gave a ‘comfort zone’ for the MSMEs.

It is well established in literature that Indian MSMEs were discouraged from scaling up their operations mainly due to regulatory limits on their assets.

Also, MSMEs face legacy issues such as information asymmetry, non-registration of firms, inadequate and untimely credit, delayed receivables, technological obsolescence, negligible market linkages, absence of exit policy, etc.

As the MSMEs contribute around 30 per cent to India’s GDP, employ about 11 crore people, constitute nearly 40 per cent of total exports, and more than half of them are located in rural India, the government is keen to rev up this sector to achieve inclusive growth thereby attaining self-reliance (Atmanirbhar Bharat).

An analysis of CMIE Prowess database reveals that the Indian MSMEs mainly rely on unsecured loans and take few long-term loans for capex. This is further corroborated by the research finding from a recent study (NIRDPR, 2021) that nine out of 10 MSMEs depend on informal sources (mostly unsecured loans) for their working capital and term loans.

Lack of sufficient asset cover (collateral) discourages them from taking secured loans at lower interest rate and hence they have to rely on unsecured loans at higher interest rates. This dents profitability and economic viability of their businesses.

After a gap of 14 years, the government revised the definition of MSMEs by factoring in inflation and depreciation of the Rupee vis-à-vis other currencies between 2006 and 

2020. In January 2006 the USD/INR was quoted at ?45 and it depreciated to nearly ?71 in January 2020 (58 per cent). This made the MSMEs to operate at a low scale by creating subsidiaries/sister concerns/Export Oriented Units with a view to receiving incentives from the government.

According to the new definition, export revenue is deducted from total sales while estimating the turnover of MSMEs, which is a positive sign not only for the sector but also for exports. Since the old MSME definition had a regressive effect on the firms’ exports, expansion plans and employment generation, the new policy is expected to act as a catalyst for development of ‘new India’.

In order to reap intended benefits of the new policy, the government can focus on the following issues:

  1. Ease of doing business: MSMEs should have better access to efficient factors of production through industry-friendly labour reforms, proper land acquisition policy, free access to capital, vibrant entrepreneurship culture, modern technology, enabling infrastructure, and simplified tax policy.

  2. Export of services: The world is moving towards a clean, green, and lean corporate regime to achieve the triple bottom line — Planet, People, and Profits. Since India has a comparative advantage in services sector, entrepreneurs of MSMEs may be re-oriented in this direction to enhance export of services by capitalising on the revised definition. However, balanced growth of agriculture, manufacturing, and services may be maintained by leveraging demographic dividend.

Leveraging PLI scheme: Recently, the government introduced Productivity Linked Incentive Scheme with a total outlay of ?1.97 lakh crore to boost 13 industry sectors 

with a view to harnessing Make in India, thereby enhancing our manufacturing prowess and export potential. As part of this, the government announced three schemes for automotive industry wherein manufacturing of electric vehicles will be incentivised to reduce carbon footprint, import of fuel, and enhance competitiveness and growth.

  1. Promoting start-ups: According to Nasscom, India has 66 unicorns till date and is still counting. With a market capitalisation of $18 billion, Byju’s has become the largest and most valuable Edu-tech company in the world. Similarly other decacorns namely Paytm, and Flipkart have market capitalisation of over $10 billion mainly due to burgeoning domestic market, massive funding opportunities, and evolving technology. As such, MSMEs with innovative ideas should be nurtured with right incentives and be freed from the bureaucratic maze.

  2. Market linkages: The Covid-19 crisis should be converted into an opportunity by going digital. There should be a virtual platform exhibiting crafts, handlooms and frugal innovations of MSMEs, to reach out to the broader national and international markets thereby enhancing their revenue. As most of the MSMEs don’t have adequate market linkages and branding for their products/services, the government may promote (RURBAN) clusters thereby building synergy and sustainable value chains in the ecosystem.

Emulating best practices: Turkey has introduced ‘TURQUALITY’, a state sponsored scale up programme meant for SMEs to transform themselves into global players. Another such initiative is ‘Growth Driver Programme’ of Business Development Bank of Canada to provide multi-disciplinary support system in terms of enterprise growth and job creation in SMEs. 

  1. Financial literacy and education: MSMEs should be imparted with financial/digital education to make use of digital channels including TReDS platform for speedy realisation of their receivables. Also, MSMEs should be trained to utilise the services of SME stock exchange in order to mobilise risk capital for growth plans.

Policy support in the above areas will make MSMEs as engines of growth for ‘new India’. After all, a resilient and healthy MSME sector is essential for achieving the goal of self-reliant India.

Srikanth is Associate Professor and Director (Finance), DDU-GKY, National Institute of Rural Development and Panchayati Raj, Hyderabad, and Suresh is Associate Professor, ICFAI Business School, Hyderabad. Views expressed are personal