How do MSMEs Contribute to the Indian Economy?

For the Indian economy with a population of 1.3 billion and the highest demographic dividend, the MSME sector is undeniably a crucial job provider. The spine of the Indian economy, the MSMEs contribution to GDP stands at a gigantic 8%. While the MSMEs and cottage industries contribute substantially towards India’s socio-economical improvement, the challenges faced by MSMEs in India are hampering their aggrandizement.

According to the RBI, the MSME sector with 51 million enterprises was providing jobs to over 117 million people during 2015-16. The Indian MSME sector supplies a wide domain of products for both domestic and global markets. These numbers answer why MSMEs are important for the Indian economy. Yet, the path to success for Indian MSMEs as major obstacles.  

Read Also:https://smeventure.com/what-are-the-key-takeaways-for-msmes-from-budget-2022-23/

What are the Challenges faced by MSMEs in India?

In 2020, the pandemic hit the world and almost all economies came to a standstill. For Indian MSMEs as well, the pandemic was such a major blow that the sector has still not recovered from its impact. However, no matter how harsh the situation may be, there is always a silver lining. The pandemic highlighted some deep prevailing issues with the Indian MSME sector. Some of these key challenges faced by MSMEs in India are:

1. Poor Ease of Doing Business Environment for Entrepreneurs

In India, one need to have 45 documents to start a restaurant, but only 19 to get an arms license. Well, the example itself explains the scenario for entrepreneurs. A poor business environment for startups is one of the major challenges faced by MSMEs in India. This is majorly due to numerous regulations, complex procedures, and bureaucratic red-tapism. These factors in turn throttle the aspirations of those who plan to start an enterprise. But, it isn’t all doom and gloom as India has steadily climbed up its rank in the World Bank’s Ease of Doing Business Index. While in 2012, we stood at the 131st mark, India ranked at 63rd in the 2021 EODB Index.

But still, there exists a dire need to simplify contract enforcement, permits, tax payments, property registration, and insolvency resolution.  

2. Indian MSMEs are lagging on the technological front

One major reason why rival firms outperform Indian MSMEs is the lack of advanced technology. As Indian MSMEs fail to exploit the technological benefits; a lower consumer demand has become as customers switch to better options. So, the need to introduce new-age technology and implement technology transfer across the sector is the need of the hour. Moreover, India needs more focus and financial investment in research and development.  

Besides, enhanced collaboration between the scientific community and MSME clusters is imperative to establish a technological sound and digital MSMEs base. MSMEs and the digital economy should go hand in hand to ensure the synchronization between the two. By introducing automation, MSMEs can also engage in exporting new products further leading to cost competitiveness. Needless to say, technology adoption is a must for Indian MSMEs to thrive lest global competition will render them outdated. 

3. Scant Infrastructural Facilities

A good infrastructure base is a prerequisite for the success of any business. But Indian MSMEs are grappling with extremely insufficient infrastructure. By eliminating the infrastructural gaps in domains such as electricity connection, regular supply, and capital goods availability; the output and resilience of Indian MSMEs can be strengthened.

4. Financial backwardness remains a major deterrent

The financial backwardness in Indian MSMEs is a three-fold issue that encompasses: lack of financial knowledge, liquidity crunch, and a high cost of credit.  

Financial literacy among the Indian MSME sector is still quite low. The knowledge of finances and market trends is extremely necessary for entrepreneurs to bring good output and expand their operations. Moreover, to tide over the crisis waves, entrepreneurs need to have an in-depth understanding of various MSME loan schemes and economic know-how.

Secondly, MSMEs (especially in remote areas) struggle with perennial liquidity crunches due to various reasons, such as:

1. Lack of knowledge about available loans and schemes
2. Low penetration of banking sector in rural and remote areas
3. Regulatory loopholes and delay in loans

Due to lack of access to finance at the time of need, most MSMEs resort to moneylenders. Debt trap is one of the biggest problems of MSMEs in India. Moreover; lack of timely finance also hampers timely purchase of raw material, acquisition of skilled manpower, and access to advanced technological tools. The crunch was much evident during the pandemic when MSMEs faced the worst hit due to lack of adequate financial solutions and rising NPAs.

Thirdly, a high cost of credit is the major spoilsport hindering the MSME sector from performing at its full potential. Poor credit availability coupled with unreasonably high credit costs throttles Indian MSMEs aspirations to innovate, acquire and expand their operations. In addition, the trust deficit between banks and MSMEs add to their miseries. As the small enterprises do not have a property to substantiate the strict collateral requirements, banks refrain from extending loans to the sector. The MSMEs now turn to unsecure money lending channels which are essentially the debt-trap pits.

5. Working Capital Shortage

As lockdown restrictions ease up, MSMEs now stare at a grave shortage of financial and human capital.

The enormous labour shortage especially due to the migration crisis is a major problem of MSMEs. It has been obstructing the recovery of the MSME sector post-pandemic. In addition, lack of skilled and trained manpower is another issue that needs to be addressed by providing on-work training and encouraging skill acquisition. The complexities related to poor industrial linkages and labour laws are added issues to the miseries of the MSME sector.

6. Outdated Practices and Knowledge Base

To keep up with the market trends, businesses need to be up-to-date with upcoming managerial, marketing, sales, and entrepreneurial skills. However, a lot needs to be done in this sphere to bring MSMEs in line with modern practices. The potential of our MSME sector remains untapped in this domain due to:

1. Lack of education and awareness of market trends
2. Poor knowledge of marketing strategies
3. Absence of market analysis and target audience identification skills
4. Little or no professional perception of distribution, branding, production, and packaging
5. Limited professional exposure to product development and promotion practices

Indian MSMEs need to be re-equipped with relevant marketing techniques to take their customer game to the next level.

Government’s Aspirations for Indian MSMEs

The Government recognizes that MSMEs are the key to an inclusive and sustainable recovery. This is why there have been concerted attempts to resolve the issues faced by MSMEs. The Indian Government aims to enhance the MSMEs contribution to 50% in terms of Gross Value Added. Moreover, a target to augment exports from MSMEs from 49% to 60% has also been set. At first glance, the targets may seem like building castles in the air, especially due to the pool of challenges faced by MSMEs in India. However, a step in the right direction can be made by implementing effective solutions to eliminate problems of MSMEs.

Firstly, the small industry owners need to be aware of the available schemes and plans. Digital India and Make in India are two flagship missions which if synchronized, can fulfill the digital MSMEs dream. Moreover, financial awareness to enable access of MSMEs to digital payment infrastructure needs to be the focus. Secondly, emergency credit guarantee loan schemes and incentives for MSMEs in India can be a great head-start. This will cause financial strengthening of the small industry sector. The sector generally lacks updated information on the latest technological developments at the global level. So, the Government should come up with more skill development and IT centres especially in remote areas. 

While the Indian Government is doing its part by promoting domestic products via Make in India and Atmanirbhar Bharat, MSME sector needs to enthusiastically develop upon their customer service and product quality to outperform the competition. A holistic focus plan to create more opportunities for MSMEs in India will require a complete overhaul on various fronts.

Written By,

Prasad P. Patkar