THE CONTEXT: On this International MSME Day, the Government of India must collaborate closely with state governments to implement more effective capacity-building measures. This will reaffirm the critical role of the micro, small, and medium-sized enterprise (MSME) sector as a champion of inclusive development and economic growth. The MSME sector, with over 40 million registered units, is a testament to the potential for equitable economic participation and prosperity.
THE ISSUES:
- Access to Finance: Despite various government schemes and digital lending platforms, MSMEs still face significant challenges in accessing adequate and timely finance. The demand for MSME credit has increased, but loans above Rs 10 crore have declined in value, indicating a need for more fund inflow to make MSMEs competitive.
- Technology Adoption and Upskilling: MSMEs often resist adopting new technologies and upskilling due to a lack of funds and information and hesitate to embrace change. This resistance hampers their ability to compete with larger counterparts who use leaner manufacturing techniques and advanced technologies to minimize waste and optimize resource utilization.
- Sustainable Practices: MSMEs are under pressure to adopt sustainable practices due to their customers’ sustainable sourcing requirements. This transition requires significant investments in new machinery, raw materials, production systems, and skilled labor, which many MSMEs find challenging to afford.
- Delayed Payments: Delayed customer payments continue to choke the working capital of MSMEs, endangering their long-term survival. The bargaining power of MSMEs with larger customers is inherently low, making it difficult to ensure prompt payments despite several measures in place.
- Formalization of Business Functions: Many MSMEs operate with informal business practices, which hinders their ability to seek institutional credit or launch SME IPOs. Formalizing business functions, such as adopting a well-defined organizational structure, establishing clear communication channels, and implementing internal controls, is necessary for growth and compliance.
- Awareness and Capacity Building: There is a need for more awareness about government schemes and the benefits of SME IPOs, particularly among young entrepreneurs in rural areas. Capacity-building programs with professional institutes can help MSME owners equip themselves with financial management and other essential operational skills.
THE WAY FORWARD:
- Digital Lending and AI-Driven Credit Assessments: Adopting digital lending platforms and AI-driven credit assessments can significantly improve access to finance for MSMEs. These technologies streamline the loan application process, reduce the need for collateral, and provide quicker access to funds. For instance, the Emergency Credit Line Guarantee Scheme (ECLGS) has successfully provided timely credit to MSMEs post-pandemic. Expanding such digital financial infrastructure can bridge the credit gap and support MSME growth.
- Awareness and Simplification of IPO Processes: Raising awareness about the benefits of SME IPOs and simplifying the listing process can encourage more MSMEs to go public. Equity capital from IPOs does not require servicing like loans, making it a viable option for funding technology upgrades and expansion. The government can collaborate with financial institutions to provide workshops and resources to educate MSMEs about the IPO process and its benefits.
- Subsidies and Training Programs for Technology Upgrades: Subsidies for purchasing new machinery and training programs for digital skills can help MSMEs adopt new technologies. The government’s Digital India initiative can be expanded to include specific programs for MSMEs, focusing on digital marketing, e-commerce, and cloud computing. Germany’s Mittelstand (SMEs) benefit from government programs that provide financial support for technology adoption and innovation.
- Capacity-Building Programs in Financial Management: Implementing capacity-building programs with professional institutes can equip MSME owners with essential financial management skills. These programs should cover working capital management, debt servicing, profitability analysis, and tax and industrial laws compliance. Japan offers comprehensive support programs for SMEs, including financial management training, consultancy services, and assistance with regulatory compliance.
- Incentives for Sustainable Practices: Incentivizing MSMEs to adopt sustainable practices, such as tax breaks, grants, and subsidies for green technologies, can encourage environmental responsibility. Programs like the Raising and Accelerating MSME Productivity (RAMP) scheme can be expanded to include support for green initiatives. The European Union’s Green Deal contains specific provisions for SMEs, offering financial support and resources to help them transition to sustainable business practices.
THE CONCLUSION:
The MSME sector is pivotal for India’s economic self-reliance and inclusive growth. The sector can thrive by addressing the challenges of technology adoption, financial management, and formalization and raising awareness about government schemes and SME IPOs. A concerted effort from both the government and the private sector is essential to harness the full potential of MSMEs, driving India towards a more equitable and prosperous future.
UPSC PAST YEAR QUESTION:
Q. Faster economic growth requires an increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. 2023
MAINS PRACTICE QUESTION:
Q. Examine the hurdles Indian MSMEs encounter and assess the government’s efforts in mitigating these obstacles.
SOURCE:
https://www.deccanherald.com/opinion/address-challenges-to-achieve-inclusive-growth-3082386
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