How to leapfrog MSME growth in India

A few months ago, it was reported that the MSME Ministry had set a target to enhance the sector’s contribution to the GDP up to 50 percent by 2025. The Indian GDP in 2019-20 was $2.9 trillion (₹1,45,693 billion), of which the contribution of the MSME sector was about 30 percent.

It is likely to reach around $4.1 trillion (around ₹1,93,130 billion) by 2025-26 as per the latest estimates from the IMF, which implies that the MSME sector shall target to contribute about ₹96,565 billion to the GDP. By achieving this ambitious goal, India can become a global example of catapulting the MSME sector. However, this will require pragmatic interventions and a multi-pronged approach.

The pandemic has gravely impacted the MSME segment, and the government has taken up several measures to support the micro, small and medium enterprises.

However, the bigger challenge that must be addressed is how to leapfrog a micro-enterprise to small, small to medium and medium to large, thus accomplishing the ‘Our Small Hands to Make you LARGE’ slogan on the Udyam portal.

One of the first steps that the government can adopt is to use the technology and analyse the data of the Udyam portal to understand the trends in the MSME space.

It can utilise the available information to get key insights like identifying the sectors where turnover to investment ratio is high, positive or negative with respect to average turnover per organisation, sectors with downward trends in terms of the average number of employees or average exports or turnover, etc.

This kind of analysis can be seconded by a root cause analysis exercise which can bring forth specific policy measures that the government needs to take to provide impetus to a positive trend and/or arrest a downward trend.

Almost 59 lakh MSMEs are registered on the Udyam portal, with more than 94 percent of them being microenterprises and only 0.5 percent being medium enterprises. Further, around 70 percent of these MSMEs come from just eight states, which is disproportionate. This asymmetry reflects uneven implementation measures and information dissemination.

The absence of appropriate opportunities and incentives has led to a lack of trust, and unfavourable perception among MSMEs and has translated into patchy development in certain areas/segments.

Therefore, the second step required is to increase the outreach and awareness to MSMEs for them to avail the required benefit offered under various government schemes. Videos explaining different aspects of government schemes, in simple terms, can be created in English/regional language and published on government websites, social media, etc.

Additionally, associations of MSMEs, skill training providers, and NGOs can be onboarded to do the outreach activities and create awareness using the created content. Any agency registering as MSME with the Udyam portal can be provided with a welcome kit that contains videos and handouts related to government policies/schemes.

Targeted outreach campaigns for MSMEs in small towns and cities, rural and remote areas needs to be carried out to create awareness and onboard them on Udyam, state procurement portals, government e-Marketplace (GeM) etc.

It is also important to carry out the handholding of MSMEs for which revolving MSE support centres can be established, especially in MSME clusters, to provide pro bono accounting, legal, and other technical support.

It is equally essential to create a robust and efficient grievance redressal mechanism to foster trust among MSMEs.

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The third and most important aspect for the government is to build demand for the goods and services provided by the MSMEs. Central government has already mandated that every Union ministry/department/PSUs shall set an annual target for 25 percent procurement from MSME sector, which creates a good market for MSMEs. However, the percolation of this policy in all the states is yet to happen.

A well-defined procurement policy for MSMEs in each state, clearly mandating an annual procurement target, can create additional demand for small scale enterprises.

Further, specific measures like exemption in tender fee/Earnest Money Deposit (EMD)/performance security, price preference, splitting of contracts into smaller lots, timely payments, etc, can stimulate the MSME growth. Each state can also develop a dashboard to track the procurement status done from MSMEs.

The government should also analyse the measures that it needs to take that can help the organisations at the cusp to vault to the next level. It should identify the hindrances like compliance burden, tax implications, etc, which discourage or prevent an organisation from moving from one level to another and appropriately address them with policy modifications.

It is essential to understand that in order to build an economy where MSMEs have a larger role to play, the government will have to shed its universal outlook and adopt a more dissected sectoral approach.