We all believe that it is the SME sector that has the most potential to revitalize our country’s declining manufacturing sector and also it can contribute to our GDP and help considerably in eradicating poverty and unemployment issues. Now that the Modi government is coming out with schemes to foster growth in this sector and a separate ministry has been formed to monitor the micro, small and medium enterprises(MSMEs), we can hope that the interests of SMEs will be heard and implemented.
Why SMEs should be given attention?
Micro, Small and Medium Enterprises (MSME) contribute nearly 8 percent of the country’s GDP, 45 percent of the manufacturing output and 40 percent of the exports of our country. They provide the largest share of employment after agriculture.Historical data indicates that the share of SMEs in GDP, manufacturing output and exports has been slowly declining over the years. The government came out with a Manufacturing Policy nearly two years ago in 2011, however, many of the measures proposed in that policy will have a long gestation period and hence we need some effective shortterm ways to help the SME sector proliferate aggressively.
What are the major issues being faced by Indian SMEs?
SMEs have to face numerous challenges not just at their inception,but also, after starting up when entrepreneurs should focus all attention on running the business, they instead have to give their time and effort to other challenges that are put up on them by the unfriendly ecosystem.
- With the fall of majority of startup MSEs, banks are awry of lending to the sector.
- Technology is the heart of businesses today and SMEs in India still lag behind when it comes to the adoption of technology, and this often proves to be a bottleneck in the path of catching up with their global peers. The main reasons for this are affordability,accessibility and lack of knowledge
- Lack of funds to support R&D and innovation
- Inadequate market linkages & network
- Institutional rigidities,complex tax structure, absence of skill development measures in the field of entrepreneurship
- Lack of proper infrastructure in place
- Non-alignment of government policies with SMEs’ interests
- Lack of marketing skills and capabilities
What should be the focus of Ministry of MSMEs in the short term?
To support funding, banks, not only micro-financing banks but major banks should be encouraged to fund SMEs with minimal hesitation,particularly when the funds are to be used for technology adoption, innovation & R&D usage. Additionally,institutional measures must be taken to attract early stage venture capital from private and overseas investors.
To increase awareness and accessibility of latest technology, entrepreneurship development programs should be run widely in the country, which should educate budding entrepreneurs with the inevitability of technology adoption.
To reduce the burden of institutions on SMEs, revision of existing institutions,policies and financial policies is mandatory. Also, alignment of government policies with the interests of SMEs to the best extent possible must be done. For example, revising policies so as to reduce the cotton exports so that textile mills can access raw-materials easily.
What should be the focus of Ministry of MSMEs in the long-term?
To increase the market linkages between buyers and suppliers and other stakeholders, state-owned digital information centers should be setup in every region. Additionally, digitization of all such information & making it publicly accessible will increase transparency and will enable market network to proliferate.
Proper infrastructure, transportation facilities, etc. must be ensured so that SMEs as well as other large scale industries as well get the benefits of it. Common understanding among policy makers, administrators as well as implementers and controllers in different departments at different levels (Central, state or local) is required so as to encourage SMEs throughout their lifecycle.
Setting up of mechanisms and strategies so as to bring in more foreign exchange in different subsectors of manufacturing for SMEs can be a major source of funding
Role of associations and social capital in accelerating growth of SMEs
Governments at all levels must encourage and aid in setting up common associations or bodies for different departments/sectors for carrying out different activities such as R&D, market network expansion, marketing, skills development, information sharing, etc.
At local level, similar micro enterprises can come together and work together so as to gain the benefits of the strength of togetherness and a better bargaining power, amplified skills and capabilities, diversified risks and expanded resources.
Role of large scale industries
Encourage well-performing large scale industries to come to the rescueof falling SMEs by helping them financially or in whichever way they can. The government should form policies which will recognize these efforts of LSIs by giving them tax exemptions or by recognizing their efforts as CSR activities.
What are the other potential sectors other than manufacturing where SMEs must be encouraged?
In the tourism industry, local residents and entrepreneurs must be encouraged to come together and share their resources and skills to run & promote local food restaurants, places of stay,dance & art forms and other activities.This will not only help in the development of the locals but will also help in preserving & promoting various attractions of our country that are currently not frequently visited by visitors due to under-developed food and stay facilities.
In the education sector as well, able individuals should be encouraged to come together in order to run small scale skill development centers, etc. The government must also provide training and funds for helping in smooth functioning of such organizations.With the setting of a dedicated ministry, we now hope that slowly but steadily, SMEs will get favourable support from the government and they will in turn contribute to our GDP,thereby reducing unemployment and poverty.
Neeta Verma
IIM Kozhikode
References –
1. Annual Report, 2013-14, Ministry of MSMEs, Government of India.
2. http://msme.gov.in/
3. Study on Innovative Interventions required in Manufacturing Sectors to make them Globally Competitive, Department
of Scientific and Industrial Research, Ministry of Science & Technology
[Available at – http://dsir.csir.res.in/webdsir/#files/reports/isr1/isr1_c.htm]