Challenges Faced by MSMEs in India
Economies across the globe are working on creating a business climate in their regions, which is favourable for business firms.
The Indian MSME (Micro, Small and Medium Enterprises) sector plays a pivotal role in driving the wheels of the economy in the overall supply and value chain. According to CII, India has 63.4 million units across the country employing more than 120 million workforce. MSMEs contribute 6 % of the manufacturing GDP and 25% of the service sector GDP. They also produce 33% of the manufacturing output and generate 45% of overall exports from India.
The main challenges that the MSME sector has to face are as under: –
- Doing business in India remains a stressful and obstacle-ridden ordeal. This begins with cumbersome registration and regulatory approvals, enforcing contracts, complex labour laws, complicated tax compliances, etc. The regulatory loopholes that cause a delay in getting the license, insurance and certifications, regressive and high duties and taxes also hamper the prospects of MSMEs and competitiveness in a globally connected economy.
- Access to competitive financing: Most businesses are unable to secure timely financing at a reasonable cost of financing from the organized financing institutions and banks due to their high-risk perception though the government has made some steps towards easier credit availability to foster entrepreneurship. Lack of timely working capital financing and high cost of credit hampers the business growth with limited access to resources- whether material or skills and thereby loss of business.
- Access to Technology: MSMEs do not have access to and are not able to afford the modern and evolving technology that is necessary to fulfil the contemporary market demands and remain competitive. Scientific institutions- MSME tie-ups and collaborations are still not robust which deprives the MSME entrepreneurs of lost opportunities and create import substitution. Low financial resources do not encourage in-house R&D efforts that could improve their business prospects.
- Infrastructure constraints: High cost of land, high power and utility costs, poor infrastructure for transportation and high cost of mobility of products are some of the infrastructural constraints that make MSMEs low in productivity and competitiveness.
- Operations issues: Seeking raw materials at competitive rates bogged by high taxes and duties, skilled manpower, and other costs is always a balancing act in managing costs and pricing in a competitive market. Poor productivity, low quality due to inefficient processes, and unskilled manpower lead to loss to competition.
- Cheap imports: The lack of swift government steps in tackling the dumping of cheap imports killing local manufacturing dampens the entrepreneurship spirit resulting in collateral losses like loss of employment and related effects on the economy.
- Inadequate access to Market: MSMEs struggle to access organized markets and also government agencies due to inadequate market connections and tools, and lack of financial resources to create market awareness of their products. The poor design, packaging, and product display also has resulted in a low-quality perception
- International business opportunities: Indian MSMEs have poor visibility in the international market due to a lack of awareness or high costs toward global market linkages. Government efforts through inter-country trade representations needs to be more intensive for B2B trade.
The way forward
The various stakeholders viz the private entrepreneurs, Academia and Economists, Government, etc. have to muster coordinated efforts in resolving the challenges that will result in significantly enhancing the MSME contribution to the country’s economy. The Government has taken several measures for the revival of the MSME sector supporting stressed MSMEs through the Financing machinery and other schemes. The government also invited comments from stakeholders on a draft Environmental and Social Assessment (ESSA) for a World Bank-funded program “Raising and Accelerating MSME Productivity” (RAMP). This is a $500 million operation to support the Government of India in raising the productivity and competitiveness of MSMEs in India. The Global Bharat Movement, an initiative of SAP with NASSCOM, UNDP, and Pratham Infotech Foundation seeks to drive greater efficiencies with global standards, systems, and processes, practices, skilling the workforce and enhancing the business value of MSMEs by providing access to the global marketplace and digitally transforming the business.
Beyond this, the Government has to recognize that MSMEs have to operate in a globally connected economy and accordingly create a conducive atmosphere through its policies that will make them globally competitive and be a significant player in the Indian economy.
Unicorn startups and MSMEs
Lately, there has been a slew of startups that have reached unicorn status. A unicorn is a startup that reaches a valuation of $1 billion. Startups should not be viewed through a narrow lens that only E-Commerce, fintech or IT companies. Can MSMEs from the manufacturing and services industry become a unicorn?
One of the fundamental differences between a startup and an ‘MSME’ is the entrepreneur or the founder. Startups have highly qualified risk-taking individuals, while MSMEs are run by people with limited information on marketing, scaling-up, etc. They also are not too focused on technology; unlike startups that leverage technology to achieve growth. Use of new technologies like data science, automation, and innovation is critical for the growth and success of MSMEs, which unfortunately are ignored, as MSMEs consider themselves as product manufacturer and a part of the supply chain. A change in this mindset is required.