MSMEs are the backbone of India’s economy

Dr Sanjiv Layek Executive Secretary, WASME, in an exclusive conversation with BusinessWorldDossier Journalist.

Read on for the full interview

Dr Sanjiv Layek Executive Secretary, WASME

1. Could you please help us understand the role of your organization?

WASME is the only international organisation that enjoys consultative/ observer status with many UN agencies such as ECOSOC, UNCTAD, ITC, WIPO, UNIDO, UNESCO, UNICITRAL, UNESCAP and ILO, several intergovernmental and international organizations like WCO, OECD, ICSB, APEC, APCTT, etc. to promote and support SMEs around the world for over 40 years. WASME is a nonprofit organization founded in 1980 that operates across the world, fostering and promoting SMEs. We provide our members with a broad range of highly specialized services and solutions, including support for growth and competitiveness, access to financing, knowledge management through Policy Advocacy, Information Dissemination, Conferences, Seminars, Events, Trainings, Publication, Network linkages etc.

2. How do you go about engaging with msme community?

WASME is committed to supporting SMEs in understanding the need for and leverage on WASME’s extensive knowledge, global exposure and expertise. We are promoting the SDG agenda in all our activities and platforms to enable SMEs to become more competitive, environment friendly socially responsive, culturally sensitive and ethical in their business practices. In doing so, we hope to provide the right support to SMEs so that they can thrive and contribute to sustainable development.

3. G20 and India as the third largest economy…what role do you see msme sector playing in the country’s growth?

Fifty percent of the world’s population currently lives in urban areas, which is projected to increase by 1.5 times to 6 billion. However, cities continue to face mounting challenges in accommodating the needs of this rapidly expanding population. Moreover, the Global South faces the twin challenges of managing the urban sprawl while delivering a good quality of life for its citizens.

As a catalyst for global change, what promises can India’s presidency hold for half the world’s urban population? How can India set an example for city planners of the developing world to ensure the availability of and accessibility to basic amenities and infrastructure? How can India’s G20 presidency contribute to the pressing urban issues?

G20’s Sustainable Development agenda aligns itself with sustainable actions to meet the goals of the 2030 Agenda. Within the G20 ecosystem, a city diplomacy initiative called the “Urban 20” (U20) was launched in December 2017. As one of the formal Engagement Groups under G20, the U20 forum was meant to collectively raise critical urban issues of G20 cities during the G20 negotiations.

India’s theme of G20 2023 holds the promise of interconnectedness to bring in an attitudinal change through deliberation, partnerships, dialogues, cooperation and knowledge-sharing. India can lead the way for global response and action by setting the stage for newer partnerships and agreements to facilitate community empowerment and social justice at both the local and societal levels. By stressing on equity, inclusivity, sustainability and resilience, U20 2023 will be able to honour its commitment to establish better cities.

What are India’s G20 Priorities?

  • Green Development, Climate Finance & LiFE

The opportunity to lead G20 comes at a time of compounding existential threat, with the COVID-19 pandemic having exposed the fragilities of our systems under the cascading impacts of climate change. In this regard, climate change is a key priority for India’s presidential Presidency, with a particular focus towards not only climate finance and technology, but also ensuring just energy transitions for developing nations across the world.

Understanding that the issue of climate change cuts across industry, society, and sectors, India offers the world LiFE (Lifestyle for Environment) -a behaviour-based movement that draws from our nation’s rich, ancient sustainable traditions to nudge consumers, and in-turn markets, to adopt environmentally-conscious practices. This ties closely with India’s G20 theme: ‘Vasudhaiva Kutumbakam’ or ‘One Earth. One Family. One Future.

  • Accelerated, Inclusive & Resilient Growth 

An accelerated, resilient and inclusive growth is a cornerstone for sustainable development. During its G20 Presidency, India aims to focus on areas that have the potential to bring structural transformation. This includes an ambition to accelerate integration of MSMEs in global trade, bring in the spirit of trade for growth, promote labour rights and secure labour welfare, address global skills gap, and build inclusive agricultural value chains and food systems etc.

  • Accelerating progress on SDGs

India’s G20 Presidency collides with the crucial midpoint of the 2030 Agenda. As such, India acknowledges the detrimental impact of COVID-19, which changed the current decade of action into a decade of recovery. In line with this perspective, India wants to focus on recommitting G20’s efforts to achieving the targets laid out in the 2030 Agenda for Sustainable Development

  • Technological Transformation & Digital Public Infrastructure

As G20 Presidency, India can foreground its belief in a human-centric approach to technology, and facilitate greater knowledge-sharing in priority areas like digital public infrastructure, financial inclusion, and tech-enabled development in sectors ranging from agriculture to education

  •  Multilateral Institutions for the 21st century

India’s G20 priority will be to continue pressing for reformed multilateralism that creates more accountable,inclusive just, equitable and representative multipolar international system that is fit for addressing the challenges in the 21st century.

  • Women-led development

India hopes to use the G20 forum to highlight inclusive growth and development, with women empowerment and representation being at the core of India’s G20 deliberations. This includes a focus on bringing women to the fore, and in leading positions, in order to boost socio-economic development and achievement of SDGs.

India kick-started its presidency term agenda with a series of cultural initiatives that included various Jan Bhagidari activities, a special University Connect event with 75 educational institutions from across the country, the lighting up of 100 ASI monuments with the G20 logo and colours, and showcasing G20 at the Hombill festival in Nagaland. Sand artist Shri Sudarshan Pattnaik also created sand art of India’s G20 logo on Puri beach in Odisha. Various other events, youth activities, cultural performances, and site excursions showcasing the sights and traditions of respective city-venues, are also planned throughout the year-long calendar.

Micro-, small-, medium-sized enterprises (MSMEs) play a major role in the global economy, particularly in developing countries. MSMEs represent about 90% of total businesses and more than 50% of employment around the world (UNCTAD, 2020).1 Yet the vast majority of MSMEs tend to be less productive and lucrative than large firms, which is generally attributed to MSME-specific barriers related to scaling up and accessing strategic assets. Recent research showed that the productivity gap between SMEs and large companies is 41% in Germany and 60% in Turkey (McKinsey, 2020).

Improving the productivity of MSMEs can lead to more resilient jobs and faster-growing economies: estimations indicate that halving the global productivity gap between SMEs and large companies would amount to about USD 15 trillion in corresponding value-added, or roughly 7% of global GDP (McKinsey, 2020).

GVCs are a well-established vehicle for generating productivity spillovers to local firms (OECD-UNIDO, 2019). Studies show that the participation of firms in GVCs tends to be associated with higher levels of productivity, technological capacity and competitiveness (Lileeva and Trefler, 2010; Caliendo and Rossi-Hansberg, 2012; Wagner, 2012; Cusmano and Koreen, 2020).

If MSMEs become better integrated into GVCs, they should also be in a stronger position to ask for credit, which is needed to participate in international trade (WTO, 2016).2 However, MSMEs have long struggled to access trade finance due to a combination of factors including creditworthiness, collateral requirements, short-term liquidity, political risk and currency risk.

4. Which sectors are most likely to see msmes entering and thriving

Small-scale businesses have been a hallmark of the Indian economy since independence. Over the last five decades, the MSME sector has evolved to show itself as a vibrant and dynamic component of the economy. 

  • Initially, the non-agricultural MSME sector was heterogeneous and consisted of traditional industries. These included khadi, silk, coir, cottage and village industries, Small Scale Service and Business Enterprises (SSSBEs), and Small Scale Industries (SSIs). Today, all these industries are clubbed together under the umbrella term of Small Scale Industries (SSI). 

  • In 2006, the Micro, Small, and Medium Enterprises Development (MSMED) Act was enacted. This statute aimed to incorporate all the diverse industries, the service sector, and medium enterprises. 

  • As a result, the MSME sector in India is classified into two categories: the manufacturing and service industries. Furthermore, the industries are classified as micro, small, and medium based on the investment made toward machinery and equipment.

MSMEs contribute towards exports, entrepreneurial development, upliftment of rural and backward areas, and employment generation. Over 120 million people are employed in the sector around the country, and it contributes around 45% of the nation’s overall exports.

What are the challenges for the MSME sector today?

The sector is expected to shoulder a substantial portion of the country’s vision to turn into a $5-trillion economy. But there are some challenges that lie ahead:

  • Need for digitisation: Owing to problems like the dearth of proper infrastructure, finance, and limited knowledge, the MSME sector has been slow in going digital. Digitising the sector could help in enhancing efficiency and reliability, cutting costs, and keeping up with trends.

  • Importance of business knowledge: With growing competition, it is imperative for MSMEs to have a thorough grasp of the opportunities, challenges, in-depth know-how, trends, and risks of the industry to run a successful business. The right business strategy can help a company scale up. 

  • Problems related to funding: Many MSMEs may not have all the financial documentation in place or enough access to digitisation in order to take advantage of government schemes. There is also a challenge with collateral as the perceived risk of funding MSMEs is higher. Cash flow and working capital issues are challenging, especially in instances where payments are delayed. While protections exist under the MSMED Act, such as penalties for delayed payments, the fear of losing long-term business means that these protections are rarely ever invoked.

5. According to you, which states are best suited for msme growth and why

Telengana: is among the top five states in the country for providing relief to the micro, small and medium enterprises ,sector from becoming Non-Performing Assets (NPA) as a result of the Covid-19-induced economic slowdown. Various schemes were availed by nearly 4.9% of the units in the state. The central government has released loans under Emergency Credit Line Guarantee Scheme (ECLGS). Amongst states, Gujarat with 12.4% has been the biggest beneficiary, followed by Maharashtra (11.4), (10.3), Uttar Pradesh (8.0), Telangana (5.9), West Bengal (5.9), Andhra Pradesh (5. 3), (5.0), (5.0) and Kerala (4.4). According to a recent report from the State Bank of India (SBI), in financial year 2021, the central government has disbursed loans worth 9.5 lakh crore to the MSME sector,

Telangana is among the top five states in terms of private company ownership among MSMEs. The micro and small enterprises’ loans in banks share around 80% of the total MSME loan portfolio. The trading sector has benefitted the most, followed by food processing, textiles and commercial real estate. The top ten sectors accounted for 75% of the outstanding amount saved for becoming NPAs. Hyderabad is the major growth engine and hub of MSME. Telangana is estimated to have 2.6 million MSMEs, with 56% of them located in rural areas and 44% in urban parts. Since the formation of the state, 63.388 million registered MSME units have begun operations, with an investment of 11,487 crore.

6. Your message to the msme community

MSMEs are the backbone of India’s economy. However, for India to grow exponentially we need these MSMEs to mature into large firms in the decade to come. Advanced economies tend to have a larger share of employment in large firms than other countries. Such firms are usually more productive and have better market linkages. They can lower production costs while making high-quality investments and reaching the markets they need to succeed. They are more likely to innovate, more likely to export, and more likely to adopt international standards of quality. They typically pay higher wages and provide more secure employment than small firms.

The upward movement of mid-size firms will not be easy, but this transition is necessary for the overall growth of the economy. As production is reorganized from medium-scale firms to larger firms, resources are better used, firms take advantage of economies of scale and scope, and they invest in innovation, standards, and human capital. Scale is ultimately associated with productivity, which is a driving force of growth.

The following steps are needed to unlock the MSME sector in India and help the mid-size firms take the leap to large scale firms:

Support of MSME firms through Industrial policies (Ease of Doing Business)

Ease of doing business is predominantly crucial for the MSME sector that can lead India’s economic growth, and this can be done by state and central level policies in the form of incentives, regulatory clearances, and labor laws. The government could continue to work toward the ease of doing business in India by streamlining regulations and processes and by issuing clear directives on future regulatory requirements. MSME firms often benefit heavily from industrial policies aimed at supporting scale per se or supporting the buildup of specific sectors and activities. These policies rebalance economic growth toward manufacturing with the aim of reaping productivity improvements and entry into global value chains. A central feature of large firms—economies of scale and scope—are particularly important in manufacturing.

Promotion of Foreign direct investment (FDI)

India has one of the most liberalized FDI policy worldwide, wherein 100% FDI under automatic route is permitted in many sectors. The FDI policy equally applies to the MSME sector. Liberalized FDI Policy should be pursued to ensure that along with attracting investment, modern and cutting-edge technology is brought in the country to improve overall productivity and competitiveness of the MSME sector. 

FDI can attract multinational enterprises which help in accelerating job creation, increase in tax revenue, and aggregate productivity. Almost all economies have policies and investment strategies aimed in part at recruiting large multinational enterprises to operate in their country. These strategies can result in significant increases in the share of large firms in a short period of time.

Development of MSME clusters

A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous area and producing same/similar products/services. We should have policies to promote MSME clusters in sectors such as automobiles, food processing, textiles, and pharma. Keeping this in mind, the Government has adopted the Cluster Development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of MSMEs and their collectives in the country. Collectively these clusters can act as a large firm and utilize the advantage of scale and scope to increase productivity and employment in their clusters.

Use of Technology

Technology is increasingly seen as a business enabler and a vital tool for bringing in process efficiencies and a higher degree of standardization. In order for MSMEs to develop a competitive advantage to operate in the global market, a strong focus on implementing new-age technology, developing indigenous technology as well as technology collaboration with global partners is likely to play a crucial role. Technology plays a pivotal role for MSME to scale up their operations and become part of global value chains.

Access to Capital 

The ability of MSMEs to spur growth and foster job creation is limited by their ability to find adequate finance. A 2018 study on the MSME finance gap in India by the International Finance Corporation (IFC) estimates the overall demand for both debt and equity finance by MSMEs at $1.4 tn, which comprises $1.1 tn of debt demand and $283 bn of equity demand.

With appropriate policy interventions and support to the MSME sector, Government can provide the required support to the mid-size firms to compete on a global scale and grow in the process. Access to institutional capital should not be a hurdle for a mid-size firm to grow in a large-scale firm.

Schemes such as Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE), Credit Linked Capital Subsidy for Technology Upgradation (CLCSS), Micro & Small Enterprises Cluster Development (MSE-CDP), Scheme of Fund for Regeneration of Traditional Industries (SFURTI), and Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship (ASPIRE) provide institutional finance and have been specifically targeted towards MSME sector.

Growth Imperative

To capture frontier manufacturing opportunities in the coming decade, India needs to triple its number of large-scale firms, with more than 1,000 midsize companies scaling up from the current state. Addressing a ‘missing middle’ of midsize firms can enable the emergence of 1,000 more large firms by 2030. Improving access to capital and easing other barriers to business would help the best-performing firms of all sizes climb the ladder of scale and global competitiveness. 

Government has also put its focus on ensuring the growth of domestic firms in India. The government launched the ‘AatmaNirbhar Bharat’ scheme which has witnessed a significant push towards enhancing domestic industries through a slew of measures like incentives, subsidies, and funding support. The underlying goal is to strengthen the manufacturing and export capacities of domestic firms and industries so as to put them at the heart of global supply chains. If India has to become a $5 tn economy, then it has to ensure that the MSME sector gets the maximum attention in the growth story of India. The recently launched Production Linked Incentive (PLI) scheme is meant to ensure that India has global champions in each sector. The scheme will also support the mid-size firms to grow and compete with global firms. This not only helps the MSMEs to grow but also helps the nation to become a manufacturing hub of the world. The PLI scheme will also lead to investments in innovation, research and development, and upgradation of technologies developed and deployed by the MSME sector.

India is at an inflection point and has an opportunity to raise its manufacturing prowess to cater to its domestic demand and also to global markets. Both central and state governments along with businesses have the power and the tools to catapult India into a high-growth manufacturing-based economy. An ambitious vision backed by a concrete action plan is needed to fulfill the demand for sustainable economic growth, gainful employment opportunities, and higher productivity. 

DR. SANJIV LAYEK, PhD, MBA, M.Phil. , B.Sc. (H)

Currently working as Executive Secretary at World Association for Small and Medium Enterprises (WASME – an International Organisation NABET certified by QCI, Govt. of India, having members in 112 countries with United Nation’s consultative / observer status, headquartered at Noida DelhiNCR, India looking after global operation. Around 25 years of rich experience in strategy, research, consultancy, projects. Contributed 18 research papers and actively associated with 15 ministries of Govt. of India, Govt. of Bangladesh, Mauritius, Nepal, Bhutan, Cameroon, Harvard Business Review (HBR) and Research Gate. Serving as Board / Committee members of Symbiosis University, Noida, India, NDIM, New Delhi, MentorX and IEF. Recognised and awarded by UNESCO, Paris, France, Ministry of MSME, Ministry of Industry and Commerce, Govt. of India, S.P. Jain Global Management School, Dubai, UAE, Tata Consultancy Services (TCS), Delhi University, Times Group, Economic Times, Financial Express, Marwah Studio, Parle Sales and Services Ltd, Yenepoya University, Mangalore, Symbiosis University, Bennett University, Greater Noida, India. MentorX, Tefla’s, Mumbai, Aajtak (India Today), NTPC, India. Author of a book titled “MSME – Crash or Opportunity in Covid 19” published by LAP Publishing, Europe. Contributing articles and write up / comment in leading newspapers like Economic
Times, Financial Express, Business Today, WASME Monthly Newsletter and Make in India Magazine etc. regularly. Editor of WASME Monthly Newsletter, fortnightly WASME ebulletin. Organised many International and National Conferences, Seminars, Workshops, Webinars, FDP, MDP.

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