'Digital’ Platform Will Help Scale MSMEs, Build Competitiveness

The contribution of MSMEs has been central to India’s growth. They contribute 29 per cent to the GDP, 45 per cent of the total manufacturing output, accounting for 40% (but declining) of exports. Sixty million units (a third are rural based) employ about 120 million. They boost consumption, drive economic growth, and equally contribute to social mobility.

‘Small not beautiful’ - 98% are micro-units, most destined to remain so

They continue to suffer multi-faceted challenges. 

The regulatory framework is overly complex. The cost of compliance is high. Harassment is rampant. Access to adequate, timely and cost of credit is the weakest link. These are well known and well documented. But there is more.

The productivity of micro firms (less than 10 people) is half that of medium firms (50-250 people) in most cases.  The Crux study across 7000 MSMEs, 450 bankers, enablers, clients, and other stakeholders in 7 industrial clusters highlights several other challenges, less known, below the radar, and less ‘felt’. Yet equally value depreciating.

Only a small fraction has the ability to attract talent, adopt technology, access markets, and apply productive processes. This hurts competitiveness. Limited access to appropriate technology, equally the ability to acquire is detrimental to productivity. The MSMEs pay a high proportion of their revenue on ‘non-core’ activities. The administrative and ‘maneuvering’ cost of an MSME is about twice that of a larger organization. The ‘ease of doing business’ framework hasn’t percolated to the MSMEs. 

Scale & size hinders any meaningful investment in productivity tools, perpetuating over 99% of the MSMEs into the low productivity-subscale vicious competitiveness cycle. 

The Crux study articulates productivity is key to competitiveness. It insights a 30% increase in productivity can propel the ‘small into the ‘medium’ league in 4 years. Similarly, 10% of the micro will leapfrog into the ‘small’ category. This could increase GDP growth rate by a third. 

Formalization. Without a safety net, and the growth ‘fuel’ a real threat. 

India has the largest share of micro-enterprises among MSMEs compared to other large industrial economies. 

The frailty of the Indian economy can be attributed to the missing ‘middle’. The MSMEs have neither the heft nor the competitiveness to add value to the larger corporates. A thriving MSME ecosystem, and the backward-forward symbiotic relationship will make the corporate sector more competitive and enhance value. MSMEs are not mere ‘vendors’. 

The ‘development’ of the MSMEs is in the interest of the larger corporates. It has an even bigger role to play. They shy away. It must invest & partner; mentor and coach on best practices. Joint R&D can be equally symbiotic. 

The cost of MSMEs failing is difficult to fathom, but ripple across the ecosystem. There are lessons plenty for the economic ecosystem.

Not a monolith. Each sector has unique value drivers 

98 per cent of the estimated sixty million will never grow beyond micro-enterprises. Crux study has several lessons. Most MSMEs (even the larger amongst them) have limited aspirations, fewer means. Micro units are tied to low productivity and lower competitiveness. It’s a vicious cycle. Compliance and regulatory ecosystem only add to the challenge. The labor law (trade union law, Factories Act) makes no distinction between fifty thousand people company or a ten. The complex regulatory environment and the cost associated disincentivises growth. This rippling effect hurts the economy.

A good example is the ‘Maharashtra’s New Industrial Belt’, closely ‘linked’ to India's financial, commercial capital, home to IT, pharmaceuticals, textiles, and consumer durable units. It accounts for 5% of India's GDP, and 70% of capital transactions. It boasts of India's largest container port, and yet 95% of the small & medium enterprises have not been able to scale optimally. Only a fraction is globally competitive. 

Sample this. Over three fourth of the units are ‘micro’ in Tirupur India’s largest textile cluster. Over 80% of the units in Narayanganj Bangladesh have more than ten, making their exports more competitiveness. 

The ‘Gurugram-Manesar-Bawal’ belt is the largest automobile ecosystem, accounting for half of 4-wheeler manufacturing, and home to a million MSMEs. And yet only a handful may ever scale enough to enhance competitiveness of the larger firms.

China owes its rise as an industrial powerhouse to the large coastal SEZs, liberalized regulations, tax benefits and duty-free imports. The millions of village enterprises (MSMEs) played an equally pivotal role. The thriving community of small enterprises enhanced the competitiveness of the larger organizations and laid the foundation for a sustainable industrial structure. It took 20 years. 

Similarly, MSMEs are the heart of the German industries’ (and economy) competitiveness.

MSMEs are neither resilient, nor thriving. ‘Start small, will remain small’

MSME policy and institutional framework have failed to identify and address the challenge of competitiveness. Value drivers are determined at three, and interconnected levels i.e., firm, business ecosystem, and economic environment. Our approach has been transactional; offering support, inducing schemes. However, on the ground, support eludes them. 

The study articulates that only the top decile ‘medium’ and top 3 per cent ‘small’ amongst the MSMEs is competitive to create a sustainable growth trajectory. Less than 2 per cent of the MSMEs are able to ‘build’ capital for expansion. Most others stagnate. 

The government needs to make bold policy moves. MSMEs are ‘micro and fragmented’. Ecosystem restricts growth. Capacity   limits economies of scale. The government needs an innovative approach, go beyond, and create and establish a robust, ‘digital platform’ that promotes, incentivizes, fuels collaboration. The platform partners could harness and catalyze the benefits of a united approach to production, marketing, and R&D.

Digital aggregator will help build competitiveness

The platform can gather contextual data. ‘Link’ MSMEs to the relevant stakeholders to serve most needs of the sector. It can access sales and credit-performance data to develop credit scores and share with lenders. The platform could connect MSMEs to both the markets and suppliers. It could secure and ‘guarantee’ for them. It can tie up their logistics needs. It would link them to the auxiliary service providers that could train & coach, audit, provide legal advice and help them gather catalyze, exploit business related and contextual information& knowhow. 

It could be a multiplier.