Global Recession: Can MSMEs protect the Indian Economy?

While the world was recovering after two years of the pandemic, the global economy started facing several unforeseen challenges. The geopolitical war in Europe has triggered the biggest instability and insecurity since the 1970s, with the world experiencing a sharper-than-expected slowdown and steepest inflation in several decades. 

With the global economic growth disrupted, India’s invincible domestic market and rapid infrastructure development are insulating its economy from recessionary pressures. The ease of doing business, foreign investments in the local economy, and 'make in India' initiative have kept our economy in a favourable position.  

According to The Organization for Economic Co-operation and Development (OECD) Growth, the next year is “strongly dependent” on major Asian economies. India is projected to have the world’s second-highest growth rate after Saudi Arabia—at 6.6% in 2022—followed by 5.7% in 2023.

Focus on the MSME sector has strengthened the Indian economy by helping resist the slowdown. Union Minister for MSME Narayan Rane said that the MSME sector can keep India’s economy safe from the looming global recession. The minister expressed confidence that the MSME sector can also play a big role in increasing Indian exports and boosting the economy.

Role of MSMEs in Indian economy

The MSME sector is the backbone and the primary element of the Indian economy, contributing approximately 30% to the GDP, 45% to manufacturing output, and providing nearly 110 million jobs which are 22%-23% of the total employment, including 51.25% of rural and 48.75% urban areas. 

MSMEs promote innovation by providing an opportunity for untapped creativity and promoting the adoption of the latest technologies. They are the frontrunner in ‘Make in India’ initiative to maintain global standards of quality. Many multinational companies and government agencies are also procuring semi-finished, and auxiliary products from small enterprises. MSMEs produce and manufacture a variety of products for both domestic as well as international markets.

Challenges and their impact on MSMEs

Despite the promising future of the MSME sector, it experiences multiple constraints that are major hindrances for businesses and the MSME sector. 

Inadequate finance: 

This is the biggest challenge before the MSMEs. The sector demands approx Rs 36 lakh crore compared to Rs 16 lakh crore available as formal credit—leaving a credit gap of Rs 20 lakh crore. Most micro-entrepreneurs depend on their family, friends, and local moneylenders for their credit needs.

Obsolete technology: 

These industries often work with outdated technology. Lack of knowledge, funds, innovation, and awareness prevent entrepreneurs from adopting new technologies and tools, resulting in low levels of productivity, especially when compared with larger firms.

Lack of managerial competence: 

Due to a lack of formal training opportunities in small- to mid-income segments, these entrepreneurs have had limited vocational training. As a result, a lack of managerial competence often impacts resource planning, capital management and labour management, book-keeping, as well as analysis and decision-making, hence, restricting the growth process. 

Inadequate market linkages: 

In the absence of adequate market linkages, this sector affects quickly in case of any demand disruption in the supply chain. Because of too many middlemen, MSMEs are unable to organise and reduce the procurement cost from large enterprises or streamline the output supply chain. 

Lack of infrastructure: 

Limited access to infrastructure facilities such as electricity, water, and roads increases operational costs for MSMEs and makes their business uncompetitive. The procurement of raw materials and skilled labour is done within the local territory due to these limitations.

Technological advancements:

Technological upgradation is the demand of time, and big industries are empowered with the best technology solutions to get the maximum productivity and output. The MSME sector is missing out on the latest technology advancements to stay competitive, and this directly impacts its success.

Despite the number of challenges, the government is doing its best to boost the MSME sector to help it overcome its many challenges and prosper. In India, a stimulus package of Rs 3 lakh crore allowed MSMEs to get collateral-free loans from specified lenders. The cost of funding is gradually decreasing, and both public and private sectors are working towards developing better products that can be competitive in terms of quality and price. 

The NBFCs have been a key enabler of financial inclusion for underserved and unbanked segments. These institutions work with the sole aim of making financial services accessible to one and all. The NBFC sector plays a crucial role in developing the core infrastructure. By offering quicker funds and credit, these entities are helping to overcome most of the challenges, enabling the nationwide growth of MSMEs.