Why collaboration between corporates and small businesses is the key for reviving Indian economy

India has a robust ecosystem of over six crore MSMEs. But the sector has taken a severe hit due to the pandemic and lockdown. Observing months of near-zero revenue, Union Minister for MSME Nitin Gadkari, in May 2020, said the MSME sector was on the verge of collapse.

The most direct way to keep the sector up and running is to give MSMEs more purchase orders.

Lending is another way to infuse liquidity in the sector and save it from collapse.

But loans have to be repaid, and MSMEs need to make sales to sustain cash flows and eventually repay outstanding debts.

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Sourcing from small businesses

For decades, Indian MSMEs have supplied raw materials, components, ancillary products and even finished goods to large corporates and public sector undertakings (PSUs) in industries such as iron and steel, agriculture, paper, textiles, petrochemicals, etc.

These large companies lack the core capabilities to manufacture the components in-house, orfind it expensive to do so since the costs associated with capital assets and labour would become unsustainable.

Supplier reliability is a key factor impacting the purchase decisions of large companies, who look for vendors who can ensure a consistent and regular supply of good quality raw materials or products.

Any interruption in supply of raw materials can prove financially disastrous for a buyer if the supplier’s plant, machinery and human resources sit idle for indeterminate periods of time.

It can be expensive to frequently correct errors and make interventions to ensure quality control.

As corporates build a network of small business vendors, it is often beneficial to minimise the number of suppliers in order to maintain quality standards and meet cost objectives.

Building a supply chain of a minimal number of MSME vendors brings cost benefits to both, the buyers and the sellers.

With a small number of suppliers, large corporations tend to purchase more from each supplier and at more frequent intervals. This results in a reduced purchase price for buyers and a pipeline of regular orders for sellers.

Rapid digitisation among small businesses

The onus falls on the MSMEs - the small-time suppliers - to elevate themselves to meet such demand and boost their efficiency. Many MSMEs adopt modern, digital systems and processes for inventory management, quality management, tracking and logistics, among other functions.

To bring relief to the severely-impacted MSME sector, large corporates and buyers are urged to incorporate Indian MSMEs in their supply chains and procure raw materials and other products from them.

However, when some MSMEs adopt digital systems and elevate their quality standards, potential suppliers who don’t keep up are left behind.

The current situation in India is thus one of increasing polarisation in the MSME sector. In the wake of COVID-19, MSMEs adopting digital solutions are faring far better than those that don’t.

This Darwinian phenomenon involves agile, technology-equipped MSMEs surviving the pandemic and traditional and slow-moving MSMEs dying out in droves.

According to a report by Global Alliance for Mass Entrepreneurship (GAME) released in June 2020, between 20 and 40 percent of MSMEs could permanently shut shop in the wake of the pandemic.

Currently there is a multi-billion dollar opportunity to digitise Indian MSMEs and save the sector.

A 2019 Zinnov report estimated that the total digital opportunity offered by Indian MSMEs will grow from around $30 billion in 2019 to $85 billion in 2024.

The real opportunity could be far bigger in the wake of the pandemic. Tech companies and startups can contribute immensely, as India is one of the largest markets in the world with several unmet technological needs.

The June GAME report proposed that to revive MSMEs, India needs to digitise and streamline processes in order to simplify business, enable a reduction in timelines and ease formalisation.

The big digital opportunity

Larger tech players have the scale and the capital needed to build custom solutions for MSME digitisation.

Product builders need to keep in mind that local MSMEs want easy, plug-and-play solutions. A product with too many complex features can drive potential customers away.

The digital products should also be tailored to the Indian market, and not simply imported from elsewhere. Spending time on the ground to understand the pain points of MSMEs is critical to building a digital solution.

Further, Indian MSMEs are highly cost-conscious. Product builders need to work backwards from the digital solution and find a price point that MSME customers would be willing to meet.

The concept of trials and packs works well for first-time adopters of digital solutions. Easy-to-buy and easy-to-cancel bundles and packs of digital solutions can drive tremendous adoption.

Tech companies also need to understand that many MSMEs prefer the human touch when it comes to customer support. Giving customers a single point of contact to directly call in case of issues can boost the synergy between product builders and buyers.

The current situation in India and the post-pandemic world thus poses the perfect opportunity for big companies to extend support to local businesses. By giving more orders to small businesses and also helping them go digital, large companies can help revive the sector responsible for contributing 37.54 percent of the Indian GDP and 48 percent of the country’s total exports.

Active and sustained collaboration between large companies and MSMEs will also have a major impact on jobs. In India, the MSME sector is the second biggest employer after agriculture. Corporate-MSME collaboration could thus prove to be a decisive element in India’s mission to tackle the unemployment crisis.