A massive scope exists for share of service-sector MSME to grow
At the same time, manufacturing entities could significantly better their efficiencies and improve productivity levels to be globally competitive
Traditionally, the registered micro, small and medium enterprises (MSMEs) have mostly been concentrated in the manufacturing sector. As per the Ministry of MSME annual report for the period of 2015-16, these manufacturing set-ups constituted over 67 percent of the registered MSMEs in the country, followed by the repair & maintenance centric organizations comprising another 16 percent. MSMEs from the services sectors accounted for just about 17 percent of the total.
Clearly, the mix doesn’t look quite good when seen from the perspective of India’s overall economy, where the industry sector accounts for just about 26 percent of the national GDP while the services comprise 57 percent. The representation of services businesses in the MSME segment is abysmally poor and there is a scope for massive improvement there.
At the same time, there is much scope to increase the efficiency and productivity of the manufacturing MSMEs. The annual report does mention the need to raise their share of GDP contribution to 25 percent by 2022 on the back of programs like Make in India.
While the Make in India program has provided the much-needed impetus on the policy front, translating that vision into ground-level actions requires concerted and sustained efforts by all the stakeholders—including the government, industry bodies and the large enterprises.
A lack of exposure to new opportunity areas as well as to new technologies has thwarted, at least partly, growth of SMEs into areas such as rural healthcare, clean energy, agro industries and wastewater treatment, among others. A lack of attention from various successive governments in nurturing and framing a plan to foster growth of SMEs in these emerging areas has led to a continued skew in favor of manufacturing businesses, which are often manpower-intensive.
SMEs continue to be dependent on scale or clustering for growth and be impacted by issues such as land acquisition costs, taxation and infrastructure or logistical costs.
What impedes growth?
Scale is key to SMEs, especially in the manufacturing and agriculture sectors. India’s antiquated labor laws and regulatory frameworks in effect discourage entrepreneurs from scaling up, thus effectively preventing them from greater successes in ultra-competitive global markets.
The proportion of SME credit in total net bank credit during 2011 was more or less at the same levels of 14 per cent as in 2000, despite widening the coverage of the SME sector, according to a study from the Bank of Baroda Staff College in Ahmedabad. It also notes that real growth in finance to the SME sector has not matched its significant contributions to the economy by way of providing employment and boosting the manufacturing sector as well as total exports.
While the government has, ever since the mixed economy days, encouraged the development of manufacturing and agro business industry clusters, it is yet to bring suppliers, specialized services and financing into close proximity, creating an environment of both intense competition and cooperation that allows manufacturers to shorten development cycles and upgrade their efficiency or improve product quality over time. This has affected the growth of the SME sector and needs to be addressed proactively at the policy level.
Poor power availability has been a key issue where it is not uncommon for SME machinery in rural areas to lie idle for over 10 hours a day, with wasted capacity adding to the cost. While power for farmers is subsidized, the electricity costs for SMEs tend to be too high. To add to the woes, the Goods and Services Tax (GST) Bill has been long-awaited.
While Indian SMEs don’t inherently lack the potential to become globally competitive, the power, infrastructure and taxation issues need to be addressed on a priority basis. The country has ample entrepreneurial energy, but these issues tend to seep up that energy prematurely.
So what do the stakeholders, including the government, need to do in order to build a favorable growth environment for the MSMEs? Here are some of the key issues that need to be addressed:
Speeding up the process: Starting a new SME or augmenting the facilities at existing SMEs has been very costly in time and money. Service tax benefits have helped the sector only in patches. The paperwork to get an enterprise on the rails is still monumental and so is corruption at local levels. Shipping across states is almost always delayed, the absence of GST being a prime reason. Unless most Indian laws, especially ones dealing with factories and labor, are suitably modified, issues like corruption, delays and inefficiencies will stay entrenched in the system.
Liquidity easing and legislation: SMEs often face tight liquidity situations. Some level of interest subvention for exports and tax breaks for investments in lease and capital goods must be demanded by SME industry bodies and associations. One suggestion has been to formulate a mechanism for small firms to convert their trade receivables into liquid funds and improve their finances.
The definition of SMEs is very narrow. The government has to broaden it as provided under Section 7 of the Micro, Small & Medium Enterprises Development Act, 2006 by, say, doubling the present threshold investment in plant and machinery.
Until now, there was no focused budgetary planning for SMEs. There have been suggestions to include loans to all SMEs under priority sector lending, especially for the food and agro processing units, to reduce cost to credit. Capital gains tax exemption could also be introduced for outperformers among them. To improve ease of doing business, SME-specific guidelines will also need to be implemented to deal with stressed assets.
Consolidate and streamline: A healthy political attitude and will combined with practicality can help rejuvenate the SME sphere. Entrepreneurs specializing in certain fields like agriculture and manufacturing could be clubbed together to develop a single largescale unit instead of numerous lossmaking small-scale industries. This can lead to greater participation and concentration of largescale production units, besides prune government subsidy outgoes to larger numbers of small lossmaking units.
State-level reforms: State Industrial Development Corporations that set up industrial estates and allot industrial plots to SME entrepreneurs, often do not give them the freedom to set up and run their units. Officials have often displayed undue anxiety about periodic upticks in plot prices, but rarely about SME priorities, according to SMEs operating in these estates. This must change.
Growth through tech empowerment: SMEs often shy away from use of technology for various reasons, lack of capital and expertise topping them. These can be addressed by the Ministry of Micro, Small and Medium Enterprises through simplified norms and incentives to invest in cutting-edge technology ventures for alternate sources of capital like private equity, venture capital, angel funding and focused investment funds.
SMEs often face lack of resources and do not follow the best industry practices. Shared resource pooling for tools, testing and marketing will help small firms reduce their business overheads. MSME tool rooms will be a key ingredient in aiding their back-end processes.
Globally, more tie-ups with overseas MSME clusters and industrial establishments will help increase SME presence in industrial fairs to improve their export potential. Industry-academia collaborations through PPPs to promote cost-effective technology upgradation, skills development programs and incubation of SME units with intellectual property potential must be key measures to instill confidence in new entrepreneurs.
Ironing out wrinkles
The Reserve Bank of India (RBI)’s initiative to allow banks to restructure micro, small and medium enterprise (MSME) loans with a limit of Rs 25 crore will help cut losses for the entrepreneurs, but will add to the burden of banks. Forming an MSME committee for restructuring comprising bankers, government representatives and outside experts is a good way ahead, though cutting NPA losses in the long run will still be a challenge for most banks and could ultimately come back to haunt the MSME sector. More prudence is therefore required.
However, the government’s introduction of excise duty on jewelry products for the first time in several decades may need rethinking at a time when reforms should be erring on the positive side. In India, jewelry is largely produced by the SMEs and they are not equipped to follow the rigid compliance of excise norms. The imposition of excise could severely impact jewelry production in India, thus resulting in loss of employment to often uneducated but highly skilled jewelry workers.
While two-third of our manufacturing GDP comes from SMEs, over 70 percent of employment is vested in the unorganized or informal sectors, most of it being privately owned. SMEs contribute almost 45 percent of our manufacturing exports. Policies that address issues and needs such as labor, credit, exit routes and incentives could significantly benefit the SMEs, as already demonstrated through a few new schemes. Notably, the recent Budget promises to provide a significant boost to the SMEs, as media reports have noted. It is estimated that MSMEs could potentially receive incremental business worth around Rs 2 trillion due to fresh allocations in the Budget for the ongoing fiscal.