With 63 million MSMEs in the country, the sector contributes over 30% to the GDP and has the potential to grow further. At an Assocham event in Mumbai last year, Union Minister for MSME Narayan Rane had stated how MSMEs’ contribution to the economy was crucial to India’s growth path. “The ambitious target of a $5-trillion economy with a 25% contribution from the manufacturing sector will require the MSME sector to play a pivotal role,” he said.
With Budget 2023 around the corner, there is an opportunity to ensure manufacturing gets a boost for small and medium enterprises.
For small businesses in India, growth pangs are more draining than birth pains. In fact, most of them often remain in the size they were born, as entrepreneurs have often found it difficult to balance their aspirations and expansion needs.
Chief Economist of Dun and Bradstreet Arun Singh says for every 100 companies, 95 are micro, 4 are small and medium and only 1 is large. “Whereas, in most of the developed countries, 50-55 entities out of 100 are micro and 40 are small and medium firms.”
One of the primary reasons holding back MSMEs’ growth is the high compliance and regulatory costs. In fact, industry observers claim, most MSMEs don’t want to grow. They like to stay smaller — sometimes even shrink — to avoid being the target of impractical regulatory policy.
If India is to become a $5-trillion economy, says Partner-Consulting at Deloitte India Shridhar Kamath, MSMEs will need to evolve to the next level and become bigger companies. “It is essential that we enable the medium players to grow into large ones and smaller ones to become medium companies. Unless we have that pipeline and evolution happening steadily, we will just grow into a vacuum. We will be able to only go a certain distance and will then stagnate,” he says.
A number of factors are required to make this growth possible, a big one being easing these companies’ access to credit. Industry players agree that an emergency line of credit is available for small and medium enterprises. “It is necessary to see if that can be expanded and extended in whatever form possible to help smaller players set up their businesses more efficiently. Besides this, the intent should be to encourage such players to upgrade technology by making sure there is easy access. This will help manufacturing organisations to perform far better,” says Kamath.
MSME players say that a good approach will be to classify the various companies according to their size and make relevant schemes based on that.
A way to make such grouping effective is to classify companies based on their employee strength, says Jayanth Mutha, Director of Bengaluru-based agri-electricals company Himlite Products. “Take the case of many small MSMEs that have only a couple of employees. Payment protection for such companies will be crucial so that they continue to survive.” He points out that several MSMEs that can be taken to the next level don’t necessarily have sufficient investment capacities. “The aim should be to handhold them in investment and give them industrial land on rent. A lot of MSMEs can benefit from such a step. They need to be encouraged to move to the next level of growth.”
Mutha cautions that such measures need to be taken urgently if businesses have to stay afloat. “Manufacturing for MSMEs is at a dead end today. In the existing form, they are going towards extinction. They either have to rely on government dole outs or look at a path of growth on their own that takes them up to a medium or survival scale of existence. The government needs to understand that this is the reality and make policies for both the scenarios,” he says.
Others are of the view that while PLI schemes are helping the sector, more reforms can be done to help enterprises stay ahead of the curve. Mahavir Pratap Sharma, Past Chairman, Carpet export Promotion Council (CEPC), says the income tax provisions should be improved. “If the income tax bracket for individuals gets better, it will help the MSME sector too, as most SME sector entrepreneurs are proprietorship or partnership firms and they save on taxes and eventually become more compliant. Interest rates on term loans or CC limits for MSMEs are currently in the range of 14-15%, which is very high. It adds to the cost of doing business,” he says.
Elaborating further, he claims that banks do not take as much collateral from large corporations as they do from SMEs. It is better if collateral can be related to interest rate. “The higher the safeguard by way of collateral, the lower the rate as the banks will have lower risks — this will be a brilliant move for micro and small units, which not only have plant, machinery and stock hypothecated on a loan to the bank, but also end up giving collateral,” Sharma adds.
There are more than 63 million MSMEs, which employ around 110 people and form a key pillar of the Indian economy. However, 99% of the companies remain micro in their life cycle. This sector is plagued with low productivity, lack of efficiency and limited means, which lead to poor competitiveness in the global sphere.
