What’s stopping Indian MSMEs from growing exponentially?

In 2018, the Government of India set up a working group to develop a roadmap to achieve a $5 trillion economy by 2025. The report suggested policy measures across different sectors, with Micro, Small, and Medium Enterprises (MSMEs) coming in for special attention. While India has missed the target because of COVID-19 and other factors, a recent Finance Ministry statement has said that the target can be achieved in the next three years.

The MSME sector is particularly important because its growth is ‘job-rich’ compared to other sectors like services or larger manufacturing units. Within India's economic fabric, MSMEs are the largest non-agriculture employers, contributing to 30% of India’s GDP, and providing over 11 crore jobs.

Even in the face of adversity, such as the COVID-19 pandemic, MSMEs have displayed remarkable tenacity, showcasing their innate ability to innovate and adapt, fuelling economic prosperity and fostering opportunities for marginalised communities, women, and rural entrepreneurs.

In fact, the Confederation of Indian Industry (CII) estimates that the MSME sector will contribute 50% more to India’s GDP over the next few years. To realise these growth projections, it is crucial to understand and solve for the diverse needs and challenges of MSMEs.

Access to capital becomes a pre-requisite because it allows MSMEs to purchase productivity-enhancing machinery, buy more raw material, hire more employees, and grow their revenue through marketing, among other things. However, the Indian MSME market currently experiences a significant credit gap of about $530 billion, with traditional banking systems often imposing strict requirements and lengthy procedures that shut the door for the smaller firms.

However, with the dawn of the fintech era, alternative financing solutions have been offering a lifeline by providing flexible access to funds without extensive collateral or the need to dilute equity. Market estimates suggest that the digital lending market in India could become a $1.3 trillion opportunity by 2030. These solutions, tailored to align with the cash flow realities of MSMEs, are witnessing a surge in adoption, addressing the pressing need for working capital and fuelling growth in the sector.

Furthermore, sustainability has become a major driver of innovation within MSMEs. As environmental concerns take centre stage globally, businesses are increasingly adopting green practices to reduce their carbon footprint. This includes the development of eco-friendly products, waste management solutions, and energy-efficient processes. For instance, MSMEs in the textile industry are adopting natural dyes and sustainable materials, catering to the growing demand for eco-friendly products. Sustainable business practices not only reduce operational costs but also attract environmentally conscious consumers, thereby driving growth, as highlighted in a report by NITI Aayog.

Additionally, the Indian government's focused efforts have resulted in MSMEs contributing to approximately 50% of the country's total exports in the last fiscal year, with projections indicating that ecommerce exports could help India reach a staggering $350 billion by the end of the decade. This surge underscores the importance of policies like the Production Linked Incentive (PLI) scheme, which helps balance imports and exports fairly and allows MSMEs to access international markets. Additionally, simplifying compliance processes, especially for payment reconciliation, has made it easier for new and small exporters to navigate challenges.

Complementing these efforts, government initiatives such as Open Network for Digital Commerce (ONDC) play a huge role in democratising ecommerce too. With standardised operations like cataloguing, inventory management, and order fulfilment, digital infrastructure is immensely enhanced, thereby levelling the playing field and enabling MSMEs to compete with larger firms.

Collaboration and networking also play a crucial role in fostering innovation among MSMEs. Incubators and accelerators provide a supportive ecosystem for startups, offering mentorship, resources, and access to funding. Government initiatives like the Startup India scheme have been instrumental in promoting innovation and entrepreneurship, with over 1,20,000 startups recognised as of March, 2024. These collaborative efforts facilitate knowledge sharing and foster a culture of continuous improvement and innovation.

It is important to acknowledge the challenges that remain. Access to affordable technology, skilled labour, and global markets are areas that require deeper and longer-term attention. However, the innovative spirit of MSMEs, coupled with supportive policies and ecosystems, provides a solid foundation for overcoming these hurdles.

By enhancing access to credit, leveraging digital platforms, adopting sustainable practices, and fostering collaboration, MSMEs can navigate the complex economic waters and chart a course toward sustained success.

(Subhashish Bhadra is the Head of Corporate Development at Klub, a revenue-based financing platform)