At the outset, allow me first to wish all MSMEs, their founders, employees and other key stakeholders a happy MSME World Day 2020. While dedicating a day in a year, as we do for many different causes, may not seem like much, but the fact that the United Nations decided in 2017 to assign a date for the sole purpose of highlighting the efforts by the MSME sector goes a long way to remind all of us of the invaluable contributions by this sector. So once again, kudos to all involved directly and indirectly with the MSME sector.
Before we speak of what MSMEs need, it’s critical to understand who they are
At our end, at Greyhound Research, on an ongoing basis, we track the MSME sector across 150+ countries and have a view on how each of these countries defines, categorise, fund and promote their MSMEs. Per the latest estimates at Greyhound Research, globally there are about 500 million MSMEs, and five countries contribute nearly 50% to this number. This list of top 5 includes India, Indonesia, Nigeria, the United States and China.
India alone contributes 15% to the total number of MSMEs in the world and has a total of 75 million MSMEs across the country.
Close to the heels is Indonesia, that houses over 60 million MSMEs and shares stark similarities with their Indian counterparts. To put this in perspective, these two countries together are currently home to 27% of the world’s MSMEs.
But there’s another story brewing on the side, and one of additional complexities in doing business. Given the current complexities and near breakdown between the US-China and India-China trade relations, we at Greyhound Research believe additional investments in Indian MSMEs is a given in the coming years. Per our estimates, India alone will house a quarter (25%) of the world’s MSMEs by 2025. To put this in context, currently, MSMEs contribute 29% in the country’s GDP, and the government has declared its intent to focus on the sector with an expectation to increase this contribution to 50 per cent of the GDP. Hence, on this marked occasion of MSME World Day, it’s only fitting we focus on the key issues, expectations and more of the MSME sector in India.
COVID-19 has impacted the MSME sector that was well on its trajectory of growth
Indian MSMEs have grown at a stable pace for the last decade – from 42.7 million in 2010, the number as of date in 2020 stands at 75 million. According to the latest Annual Report issued by the Ministry of Micro, Small and Medium Enterprises, there are over 6,000 products, ranging from traditional to high-tech, which are being manufactured by the MSME sector for domestic as well as international markets.
With the government’s intent to focus heavily on MSMEs hereon, the sector can be expected to employ over 150 million people by 2025 – currently, this number stands at around 110 million. In fact, the change in focus by the government is already resulting in positive changes for the sector. India’s ranking in the World Bank’s Ease Of Doing Business Index has improved 79 places from 142nd in 2014 to 63rd in 2019. This, by any measure, is a record for a major economy.
However, with COVID-19, this growth story has received a telling blow. It’s almost as if the MSME sector has a sword hanging on its head and not many are hopeful of survival. Per the outcomes of a recent study commissioned by All India Manufacturers Organisation (AIMO), 1 in 3 firms of the existing 75 million MSMEs in India expect to shut shop in the face of the current lockdown. Of course, the situation is expected to be much worse if the lockdown were to continue, and if not enough effort is made to bring back the migrant labourers that have returned home to their villages.
The government is very cognizant of this and has tried to address it in the recently announced Atmanirbhar Bharat Package that includes a special focus on MSMEs by way of both regulatory reforms and credit support. The seriousness of the government’s intent can also be measured by their attempt to resolve long-standing issues around the definition of MSMEs.
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Despite the focus, changes and investments, MSMEs continue to operate in a challenging atmosphere
The dearth of easy finance and credit instruments – Ease of credit access and quick finance is the most critical growth driver for any SME. Most Indian SMEs start out with minimal capital, which eventually stalls their growth after a certain point. Easy credit access for SMEs, therefore, becomes a very important factor for national growth as well. The lack of easy credit is stagnating growth of SMEs, which in turn is affecting national growth in terms of GDP, import, export and employment. Unavailability of credit at the right time can affect business growth at many levels; this is why a lot of small businesses often shut shop after not being able to generate margins.
Key MSME issues under finance and credit instruments include:
Complex collateral requirements to obtain loans, cumbersome procedures and delays in fund reimbursement, unstandardised project appraisal system for term loans, high rate of loans from NBFCs, difficulty in obtaining and maintaining PE investments and high cost of transaction for imports and exports.
Limiting regulatory policies – Despite the investments and positive changes made by the government, India’s overall scores remain relatively low in the World Bank’s Ease of Doing business Index. For a nation that currently houses 15% of the world’s MSMEs and with that number expected to grow to 25% by 2025, a lot more needs to be done. It’s common knowledge that Indian SMEs are weighed down by complicated regulatory policies which make starting and running a business difficult. Owing to this prohibitive business climate, many innovative entrepreneurs are not able to enter the markets or sustain a business. Again, while much has changed and the government has implemented many reforms alongside using technology, additional focus on easing of regulatory policies can help attract more foreign investments and make India even a better destination for investments. This is particularly important in today’s date when India is trying to position itself as a favourable destination for manufacturing and be considered as a solid alternative to countries like China that are facing backlash from countries like US and Japan.
Key MSME issues under regulatory policies include:
Absence/weak implementation of common regulatory bodies, confusing and time-consuming financial regulations, among others.
Unavailability of modern, affordable technology – In an increasingly complex and competitive economic landscape, the need to align people, processes and technology is stronger than ever. The latest technology can help enterprises reduce cost and time taken to innovate and offer sophisticated products and services. This helps SMEs differentiate from peers, optimize cost structures and most importantly compete on a global level with other corporate giants. However, SMEs in India face multiple struggles on account of accessing and using the latest technological advancements. While knowledge, access and funds continue to hamper implementation of technology, absence of an ecosystem that enables technology transfer and interaction with experts is a critical reason for limited adoption. This challenge is most peculiar for smaller enterprises and those headquartered in Tier-3 towns that have minimal knowledge compared to their counterparts from Tier-1 towns.
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Lack of basic infrastructure facilities – Adequate and modern infrastructure powers the steady growth of a nation’s economy. The absence of proper infrastructure can cause serious problems to an enterprise’s daily business operations of manufacturing, consumption, and distribution of goods and services. The lack of proper infrastructure affects businesses at every level and ends up being a deterrent to healthy growth. Separately, there is a pressing need to encourage and set up cluster-based infrastructure as it directly impacts competitiveness in markets.
Key MSME issues under infrastructure facilities include:
Lack of reliable electricity and water infrastructure, inadequate cluster infrastructure reducing competitiveness, insufficient methods of industrial waste management, lack of facilities like Tool rooms, and increase in the price of coal and gas.
Absence of exclusive marketing platforms and distribution networks – With consumer habits changing rapidly and increased competition from both local and global brands, market dynamics and customer loyalties are in a state of flux. While offering best-in-class products and services, enterprises also need to improve the quality of customer interaction at each opportunity. Enhancing customer engagement is not a matter of choice anymore and to succeed, SMEs need market intelligence, tools and well-trained workforces to respond to these external pressures. Not surprisingly, smaller enterprises and those headquartered in Tier-3 towns quote lack of awareness of technology solutions to cater to the marketing needs more often than their bigger counterparts.
Key MSME issues under marketing platforms and distribution networks include:
Lack of awareness about monetary support schemes, inability to compete with large competitors due to access of networks, insufficient number of trade fairs and buyer-seller meets, lack of awareness about technology for marketing, limited experience in new-age marketing tools and techniques.
Inflexible labour laws and availability of affordable skilled labour – Indian MSMEs employ 110 million of the country’s workforce, making them the employment powerhouse of the country. However, India today faces the big challenge of outdated labour laws that are still in use. This leaves many MSMEs struggling with problems of culture and scale and not being able to meet their workforce demands. A labour law reform overhaul is required to absorb the 200 million individuals that will enter the workforce in the next 2 decades. For MSMEs, retaining talent is the biggest challenge due to the lack of ability to pay well and inadequate employer branding. While a national standard minimum wage policy is expected, Tier- 3 cities often opine that minimum wage policies should be subject to the per capita income of the region. Another common sentiment of MSMEs is that they face extremely low productivity numbers from their workforce.
Key MSME issues under-skilled labour include:
Inability to retain talent due to lack of ability to pay top salaries and benefits, lack of productivity of labourers, a single minimum wage across the country, and lack of skilled workforce at affordable rates.
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The need of the hour is a stronger partnership between the Government and MSMEs
MSMEs are the undisputed powerhouse of India but the section above details areas where there is still a lot that needs to be done for their welfare. MSMEs today are burdened by challenges of not just generating capital but also technology obsolescence, inadequate human capital and lack of information. The need of the hour is to solve these long-pending issues and create reforms and means that allow these MSMEs to march towards the aim of them contributing almost 50% to the country’s GDP by 2025. Here are a few areas that we at Greyhound Research believe need additional focus:
There is a pressing need to develop infrastructure facilities as MSMEs are handicapped due to the lack of it. Enterprises are struggling with problems of power and electricity as there are not many large scale power grids to support their business operations. Cluster Infrastructure development is one solution that most enterprises look forward to, therefore, it is important that more initiatives are launched to encourage cluster financing by the government or through PPP models.
Indian MSMEs are plagued due to lack of information. Many of the MSMEs remain uninformed of the schemes started out by the government. This augments the overall challenges SMEs face today as they are unable to reap the benefits of these special schemes. A great way to overcome this is to use technology to reach out directly and repeatedly to MSME owners and other stakeholders to help promote awareness and understanding.
Indian MSMEs require solid ICT (Information and Communications Technology) networks to compete with larger enterprises and global counterparts. Most MSMEs continue to struggle with problems of technology obsolescence and weak communication networks. This is a serious deterrent in the growth of Indian MSMEs as it has a direct effect on their productivity. A great way to solve this problem is to further the partnership between the Government and players like IBM, Microsoft, Google and other brands and have the latter launch specialised programs that enable Indian MSMEs. Of course, additional funds for promoting local companies to innovate and launch specialized products will also go a long way.
Additional reforms that will facilitate easier and quicker methods of obtaining credit and timely payments. Capital generation remains the core problem for all MSMEs, and thus schemes that will provide collateral-free credit and reasonable interest rates remain top of everyone’s expectation list. Especially during the current times of COVID-19, MSME owners will need extended help on accounts like taxation, compliance and other aspects to ensure survival. The issue of timely payments has been a rather long-standing one and continues to be one of the biggest reasons why MSMEs have to shut shop.
Further relaxation in regulatory policies of the government as it would facilitate ease of doing business. The majority of enterprises feel that India is seeing a new wave of entrepreneurs and to promote them it is essential that the government establish a new program that allows these start-ups to access funds locally rather than looking at funds from other countries. This must include the currently proposed overhaul in the labour laws both from the employer and workers perspective.
As MSMEs battle COVID-19, they must invest in a technology-centric future
COVID-19 pandemic is a rude reminder of the fragility in our systems of doing business. It’s also a game-changer for governments and organisations if they take the right lessons from this world event and invest in the right people and technology assets to transform for a better future.
While the pandemic has ushered in a brand new set of challenges for organisations who are having to adopt a variety of measures to not only stay afloat but come out stronger, it’s also an opportunity for those who use technology to open new doors. This is substantiated by a recent study, Global CEO Priorities 2020, by Greyhound Research which confirms that over 77% MSME organisations (sample of 1800) believe that technology will be a key differentiating factor hereon. To put it succinctly, all that has been spoken about technology over the past 5-6 years, has been implemented (or has been planned for) in the past 5-6 months.
The much-awaited hockey stick moment for technology is here, and virtually every business is now having to think technology-first to ensure fitment in the new operating conditions that may well become an industry-standard hereon.
As MSMEs acclimatise to the current operating conditions and make suitable changes to their strategy, products and services, they must invest in technology and assets that allow them to revive (and thrive) in the coming times. Most importantly, the need of the hour is to keep these investments and strategy fluid to allow the room to improvise.
We at Greyhound Research have been working closely with leaders of both large and small enterprises using our COVID-19 Organisational Response Matrix that explains how organisations globally (and in India) are responding to the pandemic in five key stages. Of these, the first three stages qualify under a technology-enabled approach, i.e. the attempts that the organisation makes to do more with its existing offline assets, processes and offerings by leveraging technology. A classic example of this is traditional manufacturers, retailers and distributors using technology to also sell on eCommerce platforms. However, the next two stages qualify under a technology-first approach, i.e. the effort taken by the organisation to invest in offerings and processes that are primarily built around technology and not necessarily exist offline. An example of this is an EdTech firm using the web and mobile technology as its primary (and maybe only) mechanism to reach out to its customers. Important to note here that these are two very different approaches, and the ultimate goal for any company should be to operate using a technology-first approach.
While most organisations will chart a path of their own, each of them will broadly fit in the matrix shared above. As we have observed from the examples above, while the first and the most obvious response is to ensure the safety of employees, customers and partners, that alone will not help the company stay relevant and afloat. It’s critical for MSMEs to both adapt to the evolving market conditions and also invest in new technology and processes that will enable growth in the coming times.
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