Why don’t MSMEs upgrade, and what to do about it?

Indian MSMEs are the lifeline of the country’s industrial landscape. They employ 184 million people—about 62% of India’s non-agrarian workforce—account for 29% of India’s GDP, and 40% of India’s precious forex earnings.

Today, India’s ‘China moment’ is here as the world looks for alternatives, and MSMEs need to take the lead in leveraging this opportunity, where we can become a manufacturing powerhouse, and hopefully, the world’s No. 2 exporter of products.

Just like China, India too will require 20 years of unbridled GDP growth of 9-10% per annum. However, India will not be able to take its rightful position in the world order unless MSMEs come out of the current quagmire. 

The challenges are many, ranging from a lack of capital availability to the absence of a supportive business environment and world-class infrastructure. Many reports address these issues and suggest corrective measures.

On their part, various governments have taken steps to alleviate these problems. There are programmes, such as skill development, strategic financing, technical support groups, data centres, etc., which are aimed at supporting the growth of the MSME sector. However, my take is a bit different. My query is to the MSME founders themselves, and what they do to upgrade their respective businesses. 

Governments will come and governments will go. Policies will change and perhaps slowly evolve for the better. India, however, cannot wait for this slow churn. To empower India, the MSME promoters must empower themselves through a change in their mindset; otherwise, no amount of support or policy progression will be able to generate the kind of growth that we need as a nation. 

Persistent challenges despite government support

The first thing MSME promoters need to do is to have the intent to grow. This might sound counterintuitive since the general feeling is that everyone is aggressive and wants to grow. However, it is not the case.

About 97% of India’s MSMEs employ fewer than six people on average. This kind of enterprise simply will not have the ability to create world-class products in most cases. The growth mindset is discomforting for such micro-enterprises. It takes people out of their comfort zone. But this is the only way to create a greater impact. This applies equally to promoters of small and medium enterprises as well.  

The growth intent is best displayed by the quality of talent one is willing to invest in. Medium enterprises employ about 90 people on average and comprise 0.3% of our MSMEs. These firms can grow more easily since they have a stronger foundation and the necessary resources. They have the ability and means to hire engineering and management talent that can enable them to grow faster.

However, what I find missing in many promoters is the willingness to pay for that talent. Many promoters tend to feel that a high salary given to the professional is coming out of their own pocket. This happens because, in most cases, there is no clear demarcation between the self and the organisation.

Promoters often treat a company like their personal fiefdom. Instead of taking a fixed salary and a performance-linked incentive from their company, they often take whatever amount of money they feel like. In such a case, reinvestment for the enterprises’ growth is low while the promoters personally invest in so-called safe assets, like land, property, and shares.

A mindset change is required, wherein such promoters realise that the biggest asset they are creating is their enterprise itself, and they must nurture it through investment in talent and technology. 

There is also the matter of delegating and letting go. Most MSMEs are family-driven businesses, wherein managerial and board positions are filled by family members rather than outside professionals. This prevents such firms from living up to their full potential despite having something special in their constitution, which is what helped them exist in the first place. 

Clean accounting for credibility and growth

Clean accounting is a hush-hush but very important subject. Two ‘khatas’ are a common occurrence in many MSMEs. This prevents such promoters from getting external funding, resulting in hampering their growth potential. Often, such companies end up wasting a lot of time and effort fighting their cases with the authorities. Honest accounting and transparency are indeed the need of the hour. 

Focus and discipline are required to scale any business. Many MSME promoters think that since their business is now set, their time will be better utilised in share trading or starting up something new. This is a common mistake and demonstrates a lack of confidence in one’s own business. Such businesses stay small and are never able to break through. In fact, such promoters end up losing more money. 

Taking professional help in drafting watertight agreements is critical, since MSMEs tend to involve extended family in the business, often leading to family feuds. Such instances drain life away from any growth prospect that the business might have had. 

Lastly, MSME promoters must walk the talk. They must lead by example when it comes to matters such as honesty, discipline, cleanliness, personal hygiene, grooming, and sustainability. World-class manufacturing requires all these at every level from every worker.

An unclean factory with rags and grease on the floor, workers without proper uniforms, shoes, or basic safety measures, premises without proper amenities, or food facilities will never be able to create a quality mindset, and the products will not be able to compete globally. It is up to the promoters to lead from the front and bring about this change. It is time they invest in themselves and their workers alike. 

Indian entrepreneurs have always worked and survived despite bureaucracy and government. They have always faced daunting challenges and continue to grow their business. Today, there is a conducive environment and a supportive policy framework. MSMEs have a unique opportunity to grow faster and scale up, provided they can address the aforementioned challenges at a personal level.

Ravi Saxena is the Founder and CEO of Wonderchef