In the current economic climate, unlocking growth in micro, small and midsize enterprises is critical for the survival of businesses. Globalization has introduced many new regulations and policies that have a direct impact on the way companies do business. In addition, as India becomes more regulated, businesses are challenged with trying to comply with them. Simplifying business processes and systems is essential to unlocking growth in MSMEs.
The future of work is highly dependent on the performance of micro, small and mid-sized enterprises, which are crucial for economic growth and employment creation. They also drive innovation in markets. In contrast, large companies can invest in better working conditions and training, while MSMEs are more likely to struggle to compete in productivity. This gap can result in a low-income generation, higher levels of informality, and poor growth performance. By 2030, there will be a global workforce of 600 million people.
In India, micro, small and mid-sized enterprises (MSMEs) represent a substantial part of the economy. They provide jobs for over 90% of people and contribute to national GDP and employment. Yet, despite their importance, MSMEs face several obstacles that limit their growth. These barriers can be overcome by bridging the credit gap, improving value chains, and increasing digitization. This article provides a practical guide to unlocking growth in MSMEs in the Indian landscape.
Government Should Offer Industry-Specific Support
While governments and NGOs are working to support MSMEs, they must understand the specific needs of the various sub-segments to tailor support to their specific needs. While some government-led initiatives have been successful, others have failed to reach the desired results. By carefully analyzing the costs and benefits of initiatives, governments and NGOs can identify the most effective solutions. This can be beneficial to both MSMEs and their country.
Making Finance & Resources Accessible
Micro, small and medium-sized enterprises face numerous constraints, including a lack of access to finance. While access to finance is a critical constraint, it is also the second-most cited barrier to growth in micro, small and medium-sized enterprises. This lack of financing hampers the growth of micro, small and medium-sized enterprises in emerging markets and developing countries. To help small-scale businesses flourish, governments must focus on making the most of their available resources.
Welcoming Technology & Innovations with the Help of Stakeholders
For these reasons, unlocking growth in MSMEs requires a concerted effort and support from many stakeholders. In many cases, MSMEs face significant challenges while adopting new technology. The lack of expertise and resources are just a few of the barriers to embracing new ideas. However, when supported by the right resources and expertise, these MSMEs can thrive and expand during tough times. Furthermore, studies have shown that MSMEs that incorporate innovation are more likely to survive and flourish in tough times.
Bridging the Credit Gap with the Help of Fintechs, NBFCs & Banks
It has been identified that enterprises have credit constraints and assumptions about how much money they would like to borrow. The resulting gap in credit supply is larger than the credit available to MSMEs, making it difficult to identify the best way to bridge it.
In such a scenario, fintech platforms can help bridge the credit gap by providing access to affordable, digital credit. The key is to create a platform with reliable digital data sets, low-cost KYC, and a broader range of sources of capital. Such platforms can provide a critical support system for the growth of MSMEs, making credit more accessible. However, they must not only have a digital platform to provide access to credit but must also provide the necessary tools to facilitate lending and access.
One such solution involves a symbiotic partnership between digital NBFCs and banks. This partnership would address the credit needs of MSMEs in the unserved and underserved sectors. Another option would be to form co-lending models between traditional banks and registered NBFCs. In such a case, traditional banks would provide capital to MSMEs and participate in their growth.
Increasing Digital Literacy & Infrastructure Along with Contactless Methods
Digital solutions can help MSMEs in the short run by providing them with a cost-efficient way of handling transactions, delivering goods, and facilitating financial services. Such a pandemic has changed the way MSMEs do business, and online activity is set to skyrocket. In order to increase the productivity of MSMEs, the government must develop the right digital infrastructure and support them financially. The Digital Saksham Initiative launched by the Government of India in collaboration with MasterCard aims to empower these companies with digital tools and resources.
In order to promote digitalization, governments should provide the right infrastructure for B2B transactions and utilize digital tools to improve public services. Large tech companies such as Facebook should also support digitalization efforts and work to improve MSMEs’ access to digital tools. Moreover, governments should support the entrepreneurship ecosystem of MSMEs by providing funding and promoting skills development. However, the government should also see into how they can support the growth of MSMEs through funding and digital literacy.
Another important aspect of digitalization for MSMEs is a more flexible way to engage with customers. Instead of relying on traditional “social” and “in-person” settings, businesses must now consider incorporating innovative “contactless” delivery methods. Ultimately, digitalization can support MSMEs by improving their productivity, reducing their costs, and increasing their competitiveness.
Promoting Access to International Markets Through Global Value Chains
While it is often assumed that MSMEs are not fast-growing firms, they can boost ecosystem resilience by improving value chains. By providing regulatory backing and enabling sustainable practices, government agencies can support the growth of MSMEs. MSMEs are often subject to unfavorable conditions, which make them vulnerable to financial shocks. However, by empowering them with the necessary resources and the right incentives, they can be more resilient than their larger counterparts.
Besides providing access to international markets, promoting the internationalization of SMEs will enhance their productivity and competitiveness, which are essential for inclusive economic growth. Given their prominence in many countries, this is essential. Global value chains (GVCs) are networks of firms that connect countries around the world through international trade. MSMEs can take up specific tasks in GVCs and participate in the entire production system. They can be a significant source of employment and growth in a country.
While it is clear that MSMEs offer great opportunities and are capable of building complete supply chains, the challenge is how to scale them and become globally competitive. The Government is working to level the playing field for Indian MSMEs by facilitating access to advanced technology and enhancing their ability to add value to their products. Moreover, the coronavirus shock has left the world economy in a state of turmoil, which presents an excellent opportunity for strengthening India’s manufacturing prowess and positioning itself as an important hub in global value chains.