The future of MSMEs in India: an exploration

Micro, Small and Medium Enterprises (MSMEs) play a key role when it comes to the global economy. MSMEs create a vast number of job opportunities, drive innovation, and function as an incubator for future multinational corporations.

MSMEs, which contribute to nearly 45% of India’s GDP (gross domestic product), are suffering primarily due to supply and demand issues. Moreover, they are rapidly losing their small reserves and may not be able to survive the crisis created by the COVID-19 pandemic, unless they are provided substantive support immediately.

Challenges faced by MSMEs in the last few years

MSMEs, which are the backbone of the country’s economy and an employment provider to more than 114 million Indians, have gone through extremely challenging times during the past 3-5 years.

The fact remains that they have had to face one setback after another, such as those mentioned below:

• Demonetisation

• Flawed implementation of GST

• Economic slowdown in the real estate and auto sector

• Financial and banking crisis

• COVID-19

Signs of an impending decline are already visible. The sector has already begun to face a huge financial burden of unpaid salaries (which will ultimately result in loss of jobs), unpaid EMIs (which will severely affect the balance sheets of financial institutions), and eventual closure of such operations. Balance sheets that are loss-making do not allow MSMEs to obtain finance from banks or NBFCs (Non-Banking Financial Companies) as per norms by the RBI, thus resulting in an increased pileup of unsold inventory, entry into the arena of dead investments, and massive losses.

What is the future of MSMEs in India?

• Collateral-free automatic loans will provide small businesses with an opportunity to bounce back from the impact of the pandemic.

• The economic stimulus will help various MSMEs in resuming operations by offering access to credit to help in overcoming near term loss of income. This will further enable MSMEs to grow as well as maintain the continuity of business. The long-term focus on enabling MSMEs with state-of-the-art technology also offers a fantastic opportunity for businesses to thrive.

• Most logistics depend on the manufacturing sector. These options announced by the Government of India will enable them to resume business operations, thus also resuming the movement of goods, which, in turn, will benefit the logistics industry, as well.

• The MSME sector has faced a lingering problem in the form of delayed payment. To overcome this, the government announced that the Centre and the Central Public Sector Enterprises would honour every MSME receivable.

• Moreover, E-market linkage will also be provided to all MSMEs as a replacement to exhibitions and trade fairs. This economic stimulus will surely prove to be quite a game-changer for Indian businesses.

• The economic stimulus package is primarily focused on local shops, which are responsible for the generation of 40% of employment opportunities and the driver for more than 90% of retail commerce. This will ensure that the economy is restarted from its very foundations. Moreover, it will help in building a highly locally-driven shockproof system for the future, thus fulfilling the mission of “Atmanirbhar Bharat” or “Self-reliant India.”

• The government’s decision of barring global tenders from successfully procuring up to Rs 200 crores will eventually increase MSME registrations on several e-procurement sites. The Indian government’s e-procurement sites have largely been flooded by large, foreign players who bring an unfair advantage when it comes to pricing and size. MSMEs functioning as ancillary units (such as autos and infrastructure) lose the bids on smaller deals. This move should enhance the competitiveness of Indian MSMEs when it comes to government contracts. It must also see a significant increase in registrations by MSMEs and mid-market businesses on these platforms.

On a Final Note:

While the role played by MSMEs is frequently highlighted in the context of the generation of employment and contribution to economic growth as well as balanced regional development, it is crucial that these enterprises are highly sustainable and have the ability to deliver scale. Though contributing phenomenally to exports, MSMEs of India are still not regarded as formidable forces in international markets. When it comes to the future, the primary challenges lie in building the next generation of MSMEs that can successfully function as a powerhouse of the Indian economy. With fierce competition at the global level and the subsequent demands that have arisen due to globalisation, it is presently imperative for Indian MSMEs to demonstrate prominent levels of competitiveness, successfully position themselves strategically, and eventually leverage their engagement in global value chains or GVCs.