SME development in India

Unlocking potential: Key strategies for accelerating SME development in India

With approximately 64 million units (Annual report 2022-23, Ministry of MSME - MoMSME), MSMEs are the backbone of India's market economy. According to the MSME Ministry's 2020-21 report, the sector contributes nearly 33% to India's GDP and 45% to its manufacturing output (December 2023 press release – MoMSME). Predominantly situated in rural areas and Tier 2, Tier 3, and smaller cities, MSMEs support balanced national growth. Over 99% of MSMEs are micro-sized, with 85% being Own Account Enterprises (OAEs) that do not employ outside labour. With a workforce of around 110 million people, MSMEs significantly address unemployment. Despite their significant role in economic development, MSMEs encounter obstacles hindering their growth. Targeted interventions in the following key areas can significantly increase their sustainability.

Government-initiated programs like the Micro Units Development and Refinance Agency and the Credit Guarantee Fund Scheme for Micro and Small Enterprises offer low-interest loans and collateral-free credit, enhancing credit availability for MSMEs. However, actually accessing funds is often difficult due to bureaucratic delays. While credit guarantee funds expand the pool of funds, strict lending criteria and collateral requirements hamper their accessibility. Reliance on past credit history over MSMEs' future potential, due to the limited capacity/ priority of financial institutions is another bottleneck. Public investment in databases and trend analysis can inform financial institutions' decisions, boosting confidence in funding MSMEs. Collaborations between large companies and the government in database creation and trend analysis can strengthen ecosystems, benefiting downstream suppliers. Implementing size-specific credit subsidy targets can ensure equitable subsidy distribution among MSMEs. Drawing on successful Self-Help Group (SHG) processes and mutual credit guarantee schemes, India can blend mutual and public guarantees to develop hybrid credit guarantee schemes. Peer monitoring and pressure mechanisms in these models can lower default rates, boosting financial institutions' confidence. A supportive regulatory framework for alternative financing options like crowdfunding and tailored venture capital can diversify MSME financing avenues. Augmenting skilling programs with financial literacy modules can enhance an MSME owner’s ability to secure financing and manage resources efficiently. This will also reduce default rates, further strengthening financial institutions' confidence.

Government-led skill development programs like the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and technology and extension centres train youth in various trades. However, these programs, often misaligned with industry needs, leave MSMEs without the essential human resources for innovation and productivity. Without direct business gains, the interest of unit owners to actually invest in learning remains low. Government and industry require collaboration to develop customized training modules to bridge this gap, ensuring the immediate applicability of skills. Tax incentives for SMEs investing in employee training will provide them with encouragement to look into the same. Partnerships between educational institutions and SMEs can facilitate internships, apprenticeships, and on-the-job training programs, benefitting students and businesses.

Post-COVID-19, India experienced increased leveraging of digital technologies for operational efficiency and market expansion. E-commerce platforms and digital marketing are crucial for the broadening of customer bases. Government initiatives like the notification of consumer protection rules communicate a commitment to strengthen the e-commerce sector. Public platforms such as "GeM” for public procurement and the "Indian Business Portal” to tap overseas markets, alongside private sector efforts, offer MSMEs and artisans from smaller cities opportunities to access global markets. However, uptake among MSMEs, especially micro and OAE units, remains sluggish due to cost, technical skill shortages and regulatory barriers (like the requirement of the Good and Services Tax registration to access e-commerce platforms). A supportive regulatory framework and nurturing of a local service provider ecosystem for digital support services (like photography and digital tool usage), achieved by augmenting existing skilling programmes, is imperative for digital adoption. Artificial Intelligence (AI), particularly generative AI, is transforming the global business landscape, nurturing innovation and enhancing capabilities. AI tools like Generative Adversarial Networks revolutionize marketing, customer engagement, and inventory management, enabling MSMEs to compete globally by affordably predicting trends, innovating designs, and personalizing products. This consequent leveling of the playing field makes MSMEs competitive with larger businesses. To facilitate this transformation, government, and private initiatives should modify incubation programs, providing MSMEs with an innovation ecosystem of resources, mentorship, and networks. Financial incentives and grants can encourage AI adoption and integration. Regulatory sandboxes should be established to facilitate experimentation in live market conditions without stringent regulations, keeping intact ethical considerations. Government-backed venture capital funds or co-investment schemes can attract private investment. Due to its affordability and lower educational and hardware barriers, AI can be accessed with foundational exposure and training in various AI tools. Embedding digital literacy and AI-specific skill modules in existing skill development programmes will increase its accessibility.

In 2022-23, MSME-specified product exports constituted 43.6% of India's total exports (Directorate General of Commercial Intelligence and Statistics). To bolster MSME competitiveness in international markets, the government launched schemes like the Export Promotion Capital Goods and Export Credit Guarantee Corporation, providing export credit insurance. Export promotion councils offer market intelligence and trade facilitation, helping MSMEs seize global opportunities. Indian MSMEs demonstrate significant potential to increase production and compete in and tap into international markets. Excelling in manufacturing, textiles, pharmaceuticals, IT, etc, they leverage a rich cultural heritage and skilled workforce, offering niche products tailored to global demand. As per the MoMSME's 2020-21 report, a significant portion of MSME production in India targets the domestic market. However, with increasing globalization, more MSMEs are exploring export opportunities, supported by technology advancements, improved access to global distribution channels, and government initiatives. Yet, challenges like regulatory compliance, market access barriers, and logistical constraints persist. To support MSMEs in their export endeavors, the following measures can be implemented: 1) Establish Export Promotion Hubs to offer shared infrastructure and access to global markets. 2) Launch comprehensive training and assistance programs on export procedures and compliance, product adaptation, etc. 3) Promote digital platforms' streamlining access to international buyers, enabling online transactions and provide tools for marketing, customer relationship management, etc. to lower entry barriers to global markets. 4) A single-window clearance system to simplify export processes. 5) Make MSMEs aware of international/ national policies like the European Green Deal and incentivize sustainable production to meet evolving international demands.

By focusing on these strategic areas, policymakers and business leaders can create a more conducive environment for the growth and development of MSMEs in India.

Written By: Amit Pande, General Manager, Foundation for MSME Clusters (FMC), New Delhi

Disclaimer: Views expressed above are personal views of the writer