The MSME sector is considered the backbone of the Indian economy and rightly so! Currently, it contributes over 30 percent of gross domestic product (GDP) and 48 percent of total exports. This sector contributes significantly to the economic and social development of the country by encouraging entrepreneurship and creating great employment opportunities at a lower investment cost, just behind agriculture. There are around 6.3 million MSMEs in India. The sector currently employs around 110 million people across the country. This sector is inextricably linked to the rural economy, with more than half of all MSMEs operating in rural India.
However, despite recent rapid growth, the MSME sector was struggling even before the pandemic hit, due to a perceived lack of creditworthiness. Regarding loans to MSMEs, while overall survey volumes grew year-on-year, balances registered a decrease of 2.3% as of September 20, indicating risk aversion. The sustainable recovery and revival of this sector depends on solving the problem of pervasive informality, as the vast majority of these businesses, especially in the large micro-segment, are not registered with the government. According to a World Bank study, only 50 percent of MSMEs have access to formal credit, indicating a huge gap waiting to be closed. Creating a resilient MSME sector requires significant structural and regulatory reforms, starting with the proper identification of companies and the empowerment of all stakeholders.
The good news is that the government has simplified the registration process for micro, small and medium enterprises (MSMEs) and they will now only need to provide their PAN and Aadhaar numbers to register. In the first 10 months since its launch, the new portal recorded 30 lakhs of registrations, of which 28 lakhs were micro-units. The old UAM portal has registered 1.02 crore of units in its 5 years of operation, while the new portal has already registered 30 lakh registrations.
Another important change that can lead to a revolution in the MSME sector is digitization. The Indian government is working to promote a cashless economy and make transparent digital payments accessible to all Indian citizens in a convenient way. The Indian government has made the promotion of digital payment a top priority to bring every segment of our country into the formal fold of digital payment services. The vision is to make transparent digital payments accessible to all Indian citizens in a convenient, easy, affordable, fast and secure way. The growth of electronic payment systems, including national electronic funds transfer (NEFT), mobile banking services and the development of payment acceptance infrastructure, is likely to increase digital payment transactions from 2,153 lakh crore in FY20 at Rs 7,092 lakh crore in FY25, according to India Trend Book Report 2021 by the Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young.
MSMEs need to prioritize technology adoption to streamline their operations and processes to prepare for business uncertainties. For a long time, the majority of small businesses in the country have not been able to progress technologically due to problems such as poor understanding and awareness, lack of capital to invest, lack of skilled workforce to operate it. , etc. and recent challenges related to COVID have occurred. Accelerating digitization in SMEs can help add $ 158-216 billion to India’s GDP by 2024.
Another important factor that can give a boost to the sector is skills development. The technology centers set up by the Ministry of MSMEs play a crucial role in the practical skills development training of more than 2 lakh of unemployed youth and industrial workforce per year. During the year 2019-2020, 18 technology centers set up across the country provided training to 2,73437 trainees, supported 43,563 units and generated revenues of 350.96 crore rupees.
What is the way forward for the sector?
Given the scale of the challenges, it is essential that the government strengthen its reforms and implement game-changing measures for the sector. The government should strive to make doing business easier, balance competition for local businesses and start-ups, expand the network of beneficiaries and increase transparency.
In terms of access to capital, pending or delayed payments to MSMEs should be accelerated. The government has taken steps to address it. Under Atma Nirbhar Bharat, a special provision was made to track late payments by CPSEs. Over 26,000 crore in contributions cleared by CPSE since the launch of the Atma Nirbhar Bharat program. However, in the future, the government may address this issue further by ensuring that payments to MSMEs through TReDS are closely monitored at the central level. The government is already encouraging MSMEs to use the TReDS platform, as it allows them to discount bills and obtain short-term loans from banks to temporarily resolve their late payment problem. To relieve the liquidity pressure on their working capital, MSMEs should be encouraged to go digital and increase all bills on the TReDS platform.
The sector will benefit if a thoughtful approach is taken and changes are implemented to make credit and capital more readily available to MSMEs. As a result, the lending ecosystem needs to be simplified and strengthened by leveraging digital technologies for a more transparent lending process and by assessing the credit risk of potential borrowers. NBFCs and digital lenders have the right degree of operational agility and technological capabilities to reach underserved MSMEs. This fact has been well identified by the government, as shown by the multiple initiatives taken to channel the capacities of NBFCs towards credit facilitation. These efforts can be streamlined further to empower NBFCs in funding MSMEs in the most efficient way. This will ensure their speedy recovery and catalyze eventual growth.
The MSME sector needs to revive for the Indian economy to fully recover. Once these challenges are met, the sector will get back on track, resulting in the revival of the Indian economy.
Shachindra Nath is Executive Chairman and Managing Director of U GRO Capital. The opinions expressed are personal.