Millennium Post

Removing obstacles

The MSME sector will prove instrumental in the Indian economy achieving the USD 5 trillion mark but not before shortfalls in its current structure are addressed

Micro Small and Medium Enterprises or MSMEs are the flavour of the season. Promoting inclusive growth by providing employment opportunities in rural areas especially to people belonging to weaker sections, including women, they are the new engines of India's growth story.

Contributing currently about 29 per cent to India's GDP, the vision is to increase this contribution to about 50 per cent. Collectively employing over 120 million people, second only to the mammoth agriculture sector, it contributes conservatively speaking, 45 per cent of India's overall exports. A net gain is also a reduction of regional imbalances and more equitable distribution of national income and wealth.

MSMEs by design have high flexibility and strong ties to customers and suppliers. The focus on customer needs and detailed knowledge and experience passed down in special areas are many times difficult to replicate. Low overheads often aid lower fluctuations in their business cycle. With a very positive climate in the thinking on MSMEs where policy, polity and production seem to have come together in a fitting measure, all seems to be well in this rapidly upcoming 63 million sector, primed to help move the economy towards the 5 trillion USD mark.

Some chinks below the surface, however, need attention and merit early correction. The MSME sector operates primarily on a cash basis and has less access to formal sources of credit. The financial stress of operation, which has been curtailed due to the lockdown and the continuing overhead expenses, however small, has created a burden on many of these companies who are struggling on the brink of shutting down or have already shut down. With the overall slowdown in the economy and the prospects of tepid growth in future demand, this sector will be hard hit. Not to become a 'me too' sector asking for complete Government support and the Government, in turn, nudging the unwilling banking sector to provide credit in a scenario of a high risk of default, the options available are seemingly limited. An enhanced working capital limit and guarantee on loans to small businesses seems to be the way ahead.

The biggest need of working capital — MSME bank loans — is contested by the banks, processes are lengthy and loan queues are long. The MSMEs can't get loans and hence don't grow and because they don't grow they don't get loans. The 'chicken and egg' situation cannot be better seen on display than here, even as ironically large lending to big corporations continues despite their risks of becoming insolvent. The credit gap for MSME as estimated by IFC and Intellecap stands at Rs 16.7 lakh crore. Loan approvals, logistics support, technology access and market access work against the MSME growth ambition. Unlike large companies, they do not have the support of a strong network of people, resources and marketing channels most which become easily accessible with scale.

MSMEs are often seen competing with large corporations and this should be avoided through policy measures. Certain products and categories should be prioritised for MSMEs along with predefined quality standards. What affects the MSMEs further is that they don't have the experience of learning from management education to have an appropriate appreciation of the grammar of business. Theirs is a hit and trial growth.

The MSME future depends significantly on big corporations buying from them. They thus link up with big businesses through disadvantaged negotiations of prices and payment terms, forcing them to borrow more and more. Add to that scenario, the difficulties of delayed income tax and GST refunds which further prevent growth. Thus, in the payment hierarchy where MSMEs are last and have little bargaining power, they are forced to continue the relationship which is contingent on them remaining small.

Equally the MSMEs are unable to apply pressure to reduce dues as they are made to feel that their future business is at stake. Due to the lack of skilled and professional manpower, they are unable to create the required pressure. Their access to grievance redressal is, either not available or has very low-resolution levels. Many don't know how to leverage the redressal system. They fear that seeking such a remedy would jeopardise their future business as ultimately they have all to fall back on the same business houses for repeat business and the same service providers for their required services. Clearing of all pending dues owed by public sector units especially the service providers as telecom and power companies remains a bottleneck. For the MSME sector, having its nose above water is as good as it gets.

Creation of a favourable ecosystem for the MSME would thus remain contingent on regulators assisting in the clearance of MSME bills of large organisations. Pay or be dealt with swiftly or pay up the interest which the MSMEs are paying for no fault of theirs should be enforced. The need to invest in a mechanism to build resilience and strengthen the longevity muscle of the MSMEs would help break barriers and capture global markets.

Views expressed are personal

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