Opinion: MSME, backbone or broken link?

MSMEs are the engine of the Indian economy, but their potential is yet to be fully realised

By Vidyasagar Veesamsetty

Micro, Small and Medium Enterprises (MSMEs) are the unsung heroes of India’s economic growth story. These enterprises, ranging from neighbourhood kirana stores to burgeoning tech startups, often family-owned and labour-intensive, form the backbone of the country’s industrial and service sectors. They contribute significantly to GDP, employment generation and exports. However, despite their immense potential, MSMEs in India face a myriad of challenges that hinder their growth and impact.

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MSMEs are the largest employment providers in India, surpassing even the agriculture sector. According to the Ministry of MSME, as of March 2024, there were over 40 crore registered MSMEs, employing over 15 crore people. Their contribution to GDP is substantial, estimated to be around 30% in recent years.

The diversity of the MSME sector is another strength. From manufacturing to services, from traditional crafts to cutting-edge technology, MSMEs operate across a wide spectrum. This diversity ensures resilience and adaptability to economic fluctuations.

Credit Gap

One of the most pressing challenges facing MSMEs is access to finance. Despite initiatives like the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the credit gap for MSMEs remains substantial. A recent report by EY points out that the MSME sector in India lags behind when it comes to formal credit penetration as compared to global averages. To put things in perspective, the credit gap of MSMEs is estimated to be around Rs 40-Rs 45 lakh crore. Only 14% of the MSMEs have access to credit. This lack of access to affordable credit hampers growth and expansion.

The overall financial need in the MSME market is around Rs 162 lakh crore with a 3.8x debt-to-equity ratio. The demand for debt-based finance was pegged at Rs 128 lakh crore, nearly 47% of which was estimated to be unaddressable since many of these businesses are not financially viable or they prefer being funded by non-transparent informal sources that end up charging high rates of interest.

This leaves a debt demand of Rs 68 lakh crore, of which Rs 28 lakh crore is currently fulfilled by formal lenders like private banks. Moreover, the complex and time-consuming process of loan approvals often deter MSMEs from approaching formal lending institutions. The remaining unfulfilled demand of Rs 40 lakh crore then needs to be addressed by fintechs and NBFCs.

Infrastructure bottlenecks, particularly in terms of power supply, transportation and digital connectivity, pose significant hurdles for MSMEs, especially those operating in rural areas.

Another critical issue is the delayed payments from large corporates and government departments. This problem, often referred to as the ‘trade credit’ menace, severely impacts MSMEs’ cash flow and operational efficiency. The Trade Receivables Discounting System (TReDS) has been introduced to address this, but its penetration is still limited.

Other Challenges

The MSME sector is also grappling with issues related to technology adoption and skill development. Many MSMEs lack the resources and awareness to leverage technology effectively, which affects productivity, competitiveness and market reach. The government has launched initiatives like the National Skill Development Mission, but the skill gap remains wide. Moreover, while fresh and less experienced workmen and employees are trained and nurtured at MSMEs, large corporations hijack the talent, luring them with higher packages and other SOPs.

Market access is another hurdle. While initiatives like the Government e-Marketplace (GeM) have provided a platform for government procurement, access to private markets remains challenging. MSMEs often struggle to compete with larger players due to limited resources and brand recognition. A significant challenge is also the complex regulatory environment. MSMEs grapple with a plethora of licences, permits and compliances. Obtaining these clearances is often time-consuming and bureaucratic, discouraging entrepreneurship. Simplifying regulatory procedures is crucial for fostering a conducive business environment.

Furthermore, the MSME sector is highly vulnerable to economic downturns. The Covid-19 pandemic exposed the sector’s fragility, with many MSMEs facing closure due to lockdowns and disruptions in supply chains. Building resilience in the sector is essential to withstand future shocks.

Unlocking Potential

To unlock the full potential of MSMEs, concerted efforts from both the central and State governments are essential.The government can start by improving access to finance. Expanding the reach of credit guarantee schemes, simplifying loan procedures and promoting alternative financing options like crowd-funding can be game-changers.

Secondly, the government should prioritise skill development and technology adoption. Investing in vocational training programmes, promoting digital literacy and providing subsidies for technology adoption can help MSMEs enhance their capabilities. The government can also incentivise large corporates to procure more from MSMEs through policies like mandatory procurement targets.

Simplifying the regulatory environment is another key area of focus to enhance the ease of doing business. The government can streamline procedures, reduce compliance burdens and implement single-window clearance systems. This will save MSMEs time and resources, allowing them to focus on growth. Moreover, the government should create supportive infrastructure. This includes improving logistics, providing affordable industrial land, and enhancing access to electricity and other utilities. A robust infrastructure is essential for MSMEs to operate efficiently.

Market access is another critical challenge. The government can facilitate participation in domestic and international markets through trade fairs, exhibitions and buyer-seller meets. Additionally, promoting e-commerce can help MSMEs reach a wider customer base.

State governments can play a pivotal role by creating a conducive business environment, providing industry-specific support and facilitating access to markets. Setting up industrial parks and clusters, providing skill development training, and offering subsidies on electricity and property taxes can be effective measures.

Moreover, fostering a strong MSME ecosystem requires collaboration among government, industry, and academia. Public-private partnerships can be leveraged to address challenges related to finance, technology, and skill development.

To sum up, MSMEs are the engine of the Indian economy, but their potential is yet to be fully realised. Their growth is essential for inclusive development and job creation. Overcoming the challenges they face requires a multi-pronged approach involving both the central and State governments. By providing adequate support and creating a conducive ecosystem, India can unleash the power of its MSMEs and propel the economy to new heights.

(The author is Chairman and MD, Sagar Asia Pvt Ltd, Hyderabad)