Scale-up India: Enabling MSMEs to build up for India's economic revival

The COVID-19 crisis has further pushed an already sputtering Indian economy towards colossal challenges.

Faced with distressed businesses, loss of jobs, economic contraction, and financial exclusion of millions of people, the Indian economy needs to give a major impetus to its MSME sector to be able to pull itself out of this financial morass. In fact, scaling up of micro and small businesses holds the key to India’s economic revival.

Highly skewed MSME distribution: The missing middle

It is instructive to note that the MSME sector is dominated by micro-enterprises. According to the 2019 MSME ministry’s annual report, India had 6.33 crore MSMEs, of which a staggering 99.4 percent are micro-enterprises, while 0.52 percent are small enterprises.

This phenomenon, that implies an overwhelming skew away from medium-sized entities, has often been termed as the case of the ‘missing middle.’

The developed countries have a more balanced distribution of micro-businesses and small and medium enterprises. India needs to emulate this and upgrade the disproportionately high number of micro-businesses into small businesses and medium-sized entities.

Scaling up these crores of micro-businesses into small and lakhs of small businesses into medium entities would translate into a several-fold increase in productivity, output, and above-all, employment, unleashing a multiplier effect on the economy.

Notably, a joint report by SIDBI and CIBIL has termed micro-enterprises with borrowings of less than Rs 1 crore as “our best bet to help the economy recover from the COVID-19 crisis.”

How these micro and small businesses can be scaled up?

It is widely understood that businesses need a series of favourable factors to be able to scale up and grow.

These include their potential or capacity, access to markets and resources, ability to increase productivity, a helpful regulatory environment, access to skilled labour, as well as access to the latest technology and processes. The government’s policy framework must also work towards enabling the above factors.

Credit and grievance redressal

Scaling up requires access to timely credit. However, accessing credit or finance has been the biggest bugbear for most small enterprises with a whopping majority remaining outside the formal credit system.

Exceedingly high-interest rates and the requirement for disproportionately high collateral to loan value have been the typical deflators. So, both the interest rates and the collateral criteria must be rationalised to reflect a more realistic credit market.

It has been noticed that the NPAs for small businesses have been modest as compared to the medium and large corporate segments. In fact, the NPAs and leverage ratios of micro-enterprises have been the lowest in the commercial segment.

In the current context, not only there should be an additional sanction of working capital for micro and small businesses, the duration for classification of their assets as NPAs must also be extended.

Unfortunately, even when the government announces credit schemes as done recently to deal with the COVID-19 crisis, the gap between loan sanctions and loan disbursements remains glaring. This gap needs to be bridged by ensuring faster disbursal of loans.

Further, micro-enterprises and small businesses should be integrated with digital finance lending platforms for the former to be assessed for their creditworthiness and offered unsecured loan products. Digital platforms would also give them access to other sources such as mobile money, peer-to-peer lending, crowdfunding, etc.

Delayed payments have been another bane for micro and small businesses. The government set up the Samadhaan portal in 2017 to help redress grievances of MSMEs particularly in the context of delayed payments. However, the grievance redressal mechanisms remain slow, resulting in loss of valuable time for these enterprises. This mechanism must be sped up and made more effective.

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Business skill training

Micro and small businesses need critical business skills to be able to plan and prepare for their business scenarios. They should be able to foresee how their current sales and profits based on current customer base could allow them to scale up and plan accordingly based on different customer volume scenarios.

Unfortunately, many small and micro businesses are unaware of their potential and how to go about the task of scaling up. Many family-run micro-enterprises continue to function with three to four people as the owners are unaware of the management skills needed to scale up, hire employees, and delegate themselves to the task of management and business development.

Large-scale training in business management, development, and entrepreneurship is the need of the hour. The government must collaborate with private players and academic institutions to conduct such training. Here, the digital medium must also be thought of as a recourse too.

Digital transition training

Micro and small enterprises have traditionally been slow to adopt digital technologies. However, given the inevitable shift to digitisation, micro and small businesses now have no option but to take the leap. The need for digital transition training and access to digital tools is more pronounced than ever before.

Governments at different levels must initiate training and launch hand-holding solutions to help such small businesses transition smoothly to the digital environment. Relatedly, their access to technology itself must be facilitated through subsidies and assistance while building a larger public infrastructure base.

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Improving infrastructure and productivity

Reliable supply of power coupled with adequate transportation, logistics, and communication infrastructure imparts stability in terms of procurement of supplies and delivery to customers. A favourable working environment automatically translates into business growth and scaling up of a micro and small business.

It also enables MSMEs to effectively integrate with the global value chain and further contribute to the country’s economic growth.

Improved access to markets and skilled labour

Access (or lack of it) to markets remains a scaling-up challenge for micro and small enterprises. Establishing manufacturing clusters near lucrative markets and enabling the transition of small enterprises to digital selling are critical policy elements needed to improve market access for them.

While a procurement policy mandating government departments and PSUs to procure at least 25 percent of purchases from SMEs is already in place, some entry barriers prevent its benefits from reaching all small and micro-enterprises. Such obstacles need to be addressed.

At the same time, skill training programmes need to be launched on a major scale, particularly in small towns and villages, to enable a steady supply of skilled labour for all enterprises looking to scale up and increase productivity.