Address challenges to achieve inclusive growth

On this International MSME Day (June 27), the Government of India must look at more effective capacity-building measures working in unison with the states to reaffirm the role of the micro, small and medium-sized enterprise (MSME) sector as the champion of the masses.

In a world dominated by colossal corporate giants, India’s MSMEs have an important role to play in fostering inclusive development and bridging income disparities. It is the presence and prosperity of the MSME sector that is proof that there is a level playing field for all kinds and sizes of participants in economy building.

The sector has over 40 million registered units as of March, of which 94 per cent are micro units having turnover of less than Rs 5 crore. The numbers prove that the MSMEs are an important medium to bring about true inclusion, whether it be financial or in terms of employment and growth opportunities. To harness the true potential of the MSMEs and ensure their survival in the face of competition and global economic forces, it is necessary to identify and address the pain points afflicting them.

The MSME units are often on a path of resistance when it comes to technology adoption, upskilling, and research. This arises from a lack of funds, dearth of information, and hesitation to embrace change. Thanks to digital lending platforms, priority sector lending policies, government schemes for collateral-free guaranteed credit, soft loans, and subsidy schemes, the demand for and supply of credit to the MSMEs has been increasing.

According to SIDBI’s MSME Pulse report in February, for the quarter ended September 2023 the demand for MSME credit upped 29 per cent year-on-year and the volume of credit supplied increased by 20 per cent. However, loans of above Rs 10 crore have declined in terms of value.

More fund inflow is needed to make the MSMEs competitive. Faster technological adoption enables their bigger counterparts to move to leaner manufacturing techniques minimising waste and optimising resource utilisation, resulting in lower costs and more competitive prices. The MSMEs need to play catch up with them to retain their market share.

Further, the MSMEs may be under pressure to adopt more sustainable practices due to the sustainable sourcing requirements of their customers. All these may require purchasing new machinery or modifying the existing ones, switching to different raw materials, modifying their tools and production systems to adapt to the newer technology, maybe even changes to the factory layout, and hiring skilled labour — all of which entail significant investments.

In this context, an effective way to bridge the funding gap is fund-raising through SME initial public offers (IPOs) because equity capital does not require servicing like loans, making it a viable option to fund technology upgrades. The SME listing also enhances brand visibility and trust. The number of SME IPOs is increasing, and that is a healthy sign. However, more awareness about the benefits of SME IPOs is needed, particularly among young entrepreneurs in rural areas.

Despite several measures to ensure prompt payment to the MSMEs, delayed customer payments continue to choke working capital and endanger long-term survival. This may be inevitable as the bargaining power of MSMEs with their bigger customers is inherently low. However, with more robust financial management, it is possible to thwart business failures.

In the absence of professionally qualified financial management personnel, the MSME owners must equip themselves with the ability to analyse accounting records and keep tabs on the financial reality of the business in terms of working capital, debt-servicing capacity, profitability, and growth. Financial skills may be imparted through capacity-building programmes in association with professional institutes.  

One of the important factors making the MSME units shy in seeking institutional credit or launching SME IPOs is the lack of formalisation of business functions.

As an MSME unit grows, informal business practices should gradually be supplemented with formal ones. Within the available means, it is possible to streamline the business by adopting a well-defined organisation structure, articulating business policies, establishing clear communication channels, decision-making hierarchies, standard operating procedures, implementing internal controls and risk management measures.

Further, discipline in the accounting function is necessary to make available reliable  information for decision-making, dissemination to lenders, and smooth legal and tax compliance.

Equity is light on the MSME pocket, but SME IPOs are perceived as resulting in an increased compliance burden. The role of merchant bankers ends with the IPO process leaving the MSMEs to fend for themselves post-listing.

The promoter-managers must acquaint themselves with the broad aspects of the various compliance requirements right from the inception of the business. This is required especially in terms of income tax and GST compliance, permissions and reporting required under industrial laws, environmental laws, food safety laws, corporate laws, as may be applicable, and most importantly, the consequences of non-compliance.

Streamlining of business comes in handy here because the business is already equipped to handle the additional compliance requirements. Simple measures like noting down the various deadlines in spreadsheets, or setting alerts in calendar applications, and following up with the employee or professional concerned can be a lifesaver for the MSMEs. 

For the MSMEs, augmenting operational skills, digital marketing skills, and financial management skills is necessary. While there are skill development programmes under the MSME training institutes, more awareness measures to drive home their importance are needed. Digital skills, in particular, for building an effective online presence is an essential component of marketing strategy, and a trust-enhancing measure.

The need of the hour is more awareness. Popularising government schemes through advertisements, skits, and interviews in the local language in mainstream media and social media will be more effective, and accessible. Establishing formal online and offline peer-to-peer and mentoring platforms will also help build awareness and address the practical problems of the MSMEs more effectively.

When the MSMEs grow, the nation becomes more self-reliant because the reliance is on indigenous human capital and resources. Micro businesses can indeed drive a macro change.

(Usha Ganapathy Subramanian is a Chennai-based practising company secretary, and Ranjith Krishnan is a Thane-based sustainability consultant)