MSME As An Economic Engine-Srinath Sridharan

India has nearly 1/6th of the global population but around only 3.5% of the global wealth. Like most other economies, the impact of Covid on our GDP has been large and, in some parts, hurtful too. Countless lives and livelihoods have been lost. A logical fallout in the current scenario is the shifting of gears of priorities of the workforce brought on by a wariness of returning to jobs that involve social interaction so long as the virus remains a threat.

In all economies, employment levels contracted compared with the pre-COVID period. India is no exception and estimates about the workforce entrenchment across both manufacturing & services (and both formal & informal), range anywhere between 10-25 %. Moral hazarding and expecting corporates to hold onto employees won’t be sustainable, as companies are for-profit institutions; more so, publicly-listed companies are expected to make profits therefore the road ahead is to give a boost to such sectors that can employ India’s large labour force by either creating fresh demand or by boosting skilling or by aggressively promoting atmanirbhar. While much has been spoken and written about the skilling of our productive labour force and the education reforms, to be a globally competitive economy, skilled workforce is critical. While steps like NEP have been taken up, the sense of urgency around some of these reforms, already undertaken, have to be increased multi-fold.

Despite having to cope with a very difficult Covid-19 outbreak, India has embarked on a path of structural reforms around agriculture, FDI, supply chains, labour laws. Assiduously chasing the target of improving its ranking on Ease of Doing Business, several reforms have been fast tracked with perceptible improvements in the inter se position of India compared with other countries. The point that however begets an answer is that: is this enough? Moreover, can such reforms be fast tracked at the implementing level ?

 China still the factory of the world?
According to data published by the United Nations Statistics Division, China accounted for 28.7% of global manufacturing output in 2019, ahead of the United States which used to be the world’s largest manufacturing sector until China overtook it in 2010. 

China, like the western model and the Korean model, benefited from the conglomerate effect. The positive role of giant conglomerates in economic growth has remained unchanged as they influence manufacturing cost, technological advancement, internationalisation of products and state policies. Taking a cue from this, could this be the decade of the rise of Indian conglomerates? Be it Refining-to-retail conglomerate or salt-to-software conglomerate or airport-to-power-to-green conglomerate?

Post the cocktail of Covid, related issues and so many known geo-political steps taken by China- trust and reputation being perhaps the only two things in the world that travel faster than light-it is possible that its manufacturing muscle starts losing some strength, throwing open the space for other players. Additionally, companies could shift their global supply chain to try and reduce dependence on it. This is assisted by the fact that Chinese wages have been increasing over past few years, due to economic development and rising prosperity. In the low-wage labor intensive manufacturing sector, China is less competitive today, than it was a decade earlier.

For companies thinking of pulling out of China and relocating elsewhere – to begin with, relocating physical production capacity on the basis of geopolitics as opposed to economics might be expensive. And would involve writing off the sunk costs. And within the Asian region, many countries have been pursuing reforms to attract global investors. Indonesia is also pursuing labor market reforms which will enhance its competitiveness. Vietnam and the Philippines are also embarking on major reform initiatives.

A point to consider here that whether with the continued pandemic woes, global economic behavior could shift from “spend” to “save”: would this slow down consumption spending and consequently volumes for global supply chains is a question that only time will answer. Governments around the world could possibly do trade protectionism, that ends up hurting everyone. 

The Fitch Ratings in Feb 2021, showed that China’s MSME as well as SME experienced a plunge in business activity during 2020 due to the pandemic. Indices also revealed that SMEs underperformed larger enterprises, particularly in the retail sector. Hotel, catering, transport and logistics were the worst hit. Manufacturing, retail and real estate showed a speedy recovery from 2Q20, but the indices for all sectors remain well below pre-pandemic levels. Smaller retailers underperformed larger retailers, reversing the trend in 2013-2019. This was most likely due to small retailers being more financially strained and lacking the resources to sustain their operation amid the supply-chain disruption. National retail sales dropped by 3.9% yoy in 2020, lagging larger enterprises’ fall of only 1.9%. Despite the contraction in business activity, financing, liquidity and funding conditions have eased for SMEs since 2Q20, as the government quickly responded with a series of supportive policies, including easier financing, tax exemptions and administrative assistance more so given the fact that the economic activity is heavily reliant on it.

Taking a leaf from China (M&)SME

Here, it is important to learn something from the Chinese case study, lessons that can be used in India perhaps, especially those related to its SME strength. The number of Chinese SMEs is over 38 million. The country led the pack in Supply chain reforms. It has been pushing for structural reforms that could derisk its dependence on “infrastructure & realty” based investments. The reforms of the hukou system initiated in 2014, were targeted to boost labor and housing markets; increasing & speeding-up of investments in advanced technology to reduce dependence on the West, creation of mega-urban units, and “new-age-infrastructure” spending on likes of ultra-high voltage grids and connectivity, using 4th IR tools. In a nutshell, China has used SMEs very strategically for growth & employment generation purpose. As a result, these contribute to over 60% of the GDP and account for 80% of jobs in China.

In the mid-2000s, China started to improve the operating environment of SMEs. The Chinese SMEs Promotion Law 2003, pegged the status of SMEs higher in the national economic order and the responsibility of the corresponding government departments. With this, governmental support to SMEs increased and created an environment where these enterprises could compete aggressively globally, including with help of financial & tax incentives.

MSME India – a strategic weapon

India has 63 million MSMEs which employ 40% of India’s non-farm workforce, contributing to nearly 25% of India’s services output and 33% of its manufacturing output. What works in India’s advantage is that it has had historical experience of traditional trade guilds. Prior to Indian independence, Small Scale industries (SSI) was a composite group of village and small industries which consisted of varieties of industries like beekeeping, ivory carving, locks, iron safes, textile works, leather goods, processing of food, forest industries, dairy farming, toy making, perfumery and other miscellaneous groups. This has expanded post-independence, providing employment to over 11 crore Indians and contributing to over 29% to the GDP.

Here, benchmarking to the China story became a goal, a sort of target we set for ourselves.

Mooting a “PACE” program

Currently, around 40% of India’s imports are high value-added products like electronic items and medical instruments. The rest are either low-technological, labour-oriented or inelastic products like active pharmaceutical ingredients (APIs), fertilisers, che
micals or toys. Times have changed; globally consumers seek quality and cost-centric products. Therefore, if China supplies such components & products cheaper and quicker than what say India can manufacture, what’s the incentive for international buyers to change their buying behaviour?

For Indian MSME to be a larger economic driver, we need a “PACE” program :

  • Polity & Policy interventions
  • Advisory access 
  • Credit access
  • Export competitiveness

Indian MSMEs need policy & polity handholding in accessing global markets. Exports levels need to be upped from the existing levels. For that, we have to orient the sector in “export competitiveness” for which, our investments in developing physical infrastructure across India has to be fast tracked multi-fold. We need to simplify compliance regulations as well as fast track labour reforms that currently slow down our (M)SMEs. Policy initiatives can be a catalyst for growth or be used as a “affirmative-action” cover; we cannot afford the latter. Perhaps one way is to offer advisory inputs around which potential promoters can build businesses and to tap into global markets. 

Access to cheaper, timely and speedier credit is one such way, apart from potential areas of business which impedes growth of the sector. Research shows that in 2019 the average number of days it took for enterprises to receive cash for the credit sale was 176, 112 and 81 days for micro, small and medium enterprises, respectively. The TREDS program makes a beginning in easing delayed payments. Further, despite all the policy initiatives, banks and other lending institutions have just scratched the surface for MSME / SME lending. The government has undertaken several initiatives to give collateral free loans, speed-up the process of sanctioning credit and quicker clearance of MSME dues. What can give a further push is increasing digital-lending initiatives where banks & fintechs partner to improve credit access to the MSME / SME ecosystem.

A boost to the sector can therefore come from handholding, advisory services and persistent engagement with the fintech partners to provide access to credit and improve quality with clear identification of the manufacturing sectors that are low-hanging fruits. SME as well might be our GDP growth driver. The question is how soon can we make MSME – “Main Stream, Major Economy” conversation ? The answer is in our political urgency towards economic-agenda.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.