It was always coming! Indian GDP growth has slumped to 5.7 percent in FY18, hitting a three-year low. The situation is so alarming that the union government, for the first time in three years, has compromised its fiscal consolidation target and made investment spending to minimise the snowballing effect of the economic downturn. There is a muted, curious silence — did we get it all wrong?
The services sector has its own challenges — slowing global demand, competition from other low-cost destinations, and the slow level of skilling in India have all contributed in equal measure and don’t scream of an immediate revival. Farmers continue to strike outside the Rashtrapati Bhavan, and India’s dependence on God’s magnanimity in agriculture is not changing anytime soon. The manufacturing sector, though, is at a different tipping point.
Can the SMEs be an answer?
Demonetisation and GST hit the manufacturing sector hard. Manufacturers cut production and dealers, manufacturers offered discounts on their products just to clear out the stocks. But surely the ‘Makers in India’ will learn and cope with the double strike. The question that confronts us is this — can manufacturing contribute more? Can they get us to the promised “Achhe Din”? Some signs look promising.
Manufacturing in India is the world of SMEs. Asking whether manufacturing can revive India is like asking whether the SME can revive India. SMEs form 95 percent of the total industrial units in the country. They employ more than 46 crore of us, a bulk of which is in manufacturing. The SME ‘Maker in India’ makes 8,000 quality products sold all over the globe, more than ever before. The sector seems to be growing at early double digits also. Some global threats also seem to be dwindling.
Some early signs…
The ecosystem has also started to realise it. Banks and NBFCs are developing new ways to fund them. New-age companies in several fields are looking at creating models in procurement, finance, logistics, and marketing that are beneficial to the SME manufacturer. The government has introduced more tax rebates in this year’s Budget in addition to the already prevalent soft loans. And then there is GST. The introduction of GST, though detrimental in the short term, has made the SMEs in manufacturing dream big. They have always had the capacity (both in people employment and hard assets deployed); they were just not fully utilised though. Unreal state boundaries had introduced indirect taxation and increased working capital requirements, which the SME (already reeling under heavy working capital pressure) could hitherto never afford. GST, though, has created a level playing field across these two dimensions that the SME is bound to prosper in, particularly in manufacturing. Now, the SME ‘Maker in India’ is talking, finally, about making more.
Most of these measures above are focused on enhancing the demand and streamlining operations of the SME. The critical need gap that needs immediate attention for a SME manufacturer, though, is the access to finance, particularly working capital. A manufacturing SME has three issues when it comes to working capital — it has high receivables as its anchor customer dictates terms; planning inventory is tough at low volumes and hence results in high inventory across channels; and the supplier does not provide great credit terms to an SME. Thus, SMEs have high working capital needs and since institutional finance does not reach them cost-effectively, SMEs have lent from the channels at high costs. This access to working capital finance has to be sorted for the SMEs to sky rocket, especially given the opportunity at hand. See China: SMEs are ~60 percent of GDP, India’s stays at ~45 percent. That’s an enormous white space.
Fintech at the core of it?
It’s here that new-age companies are stepping in. The advent of WhatsApp and penetration of smartphones had brought SMEs closer to the digital revolution sweeping India. The new-age fintech companies are, admittedly, building on this trend.
The first wave of fintech, both in lending and services, developed fast and nominal paperwork-oriented systems for efficient processing and disbursal of loans to SMEs. They continue to heavily leverage technology in customer interactions, extracting data through online integrations (e.g. Aadhaar), and deploying rule-based screening engines for higher efficiencies and faster decision making.
The second wave of fintech, that erupted post demonetisation, was of mobile wallet-based platforms. It promptly bridged the supply-and-demand gap by making financial transactions possible. This considerably reduced the developing stress on businesses, especially SMEs, lots of whom were traditionally dependent on cash-based transactions.
Many fintech companies have invested significantly in data sciences to build proprietary scoring approaches and databases, which enable them to generate a credit report that is more credible, contemporary, and relevant for the SME. This alternate data set could range from current cash flows, anchor transactions, and social networks to behavioural and community feedback and offers a comprehensive view with high predictability and accuracy. Several fintech startups have leveraged technology to build scalable solutions to connect SMEs to potential lenders for tailored requirements. In addition to connecting, these marketplaces provide several value-added services like primary underwriting, risk assessment, rule-based matching and seamless payment-settlement engine to enable a win-win for SMEs and the lenders. Thus, fintech startups are mushrooming across the entire gamut of financial inclusion for SMEs — acquisition, processing, underwriting, lending, or credit rating. This wave, experts believe, is the third wave and the one that will have a lasting impact. And this is just a start for the SME Maker in India, if you’ve been watching the global trends of fintech innovations.
From the mystic times till today, “inconspicuous” Indians have collectively reached the unreachable across fields — festivals like Janmashtami (the human pyramid), independence movement (civilians freeing the country through non-violence), and the Indian cricket team of today (drawn from sleepy tier- 2 towns). Its time for the ‘small, medium’ enterprises to do that, the unreachable being India’s double-digit growth rate.
I say, this one too, is coming! SMEs bring us hope, and “remember, hope is a good thing, maybe the best of things” (ref: Andy to Red, The Shawshank Redemption, 1994)”. At this hour, we need it as a country!
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)