What makes this sector so important for GDP growth?
PwC has analysed nine sectors poised for growth in the present time and interestingly has also chosen the MSME sector to focus on. These nine sectors make up 75% of our pre-pandemic GDP: Consumer and Retail, Healthcare & Pharma, Logistics & Infrastructure, Financial Service, Technology & Education, Government, Power & Mining, Automotive & Industrial products, Agriculture and the MSME Segment. The reason they have chosen to look at the MSME sector is because this sector is the largest employer after the agricultural sector. It constitutes 30% of employment spread across the sectors.
Touted as the sector to significantly contribute to our GDP numbers, this sector first took a beating with demonetization and then again with the introduction of GST. Our fastest growing sector had the rug pulled out from underneath much before we had any Covid-like situation.
The pandemic has done nothing to alleviate the frictions of this sector. For oft repeated reasons, ‘Make in India’ is the buzz word today. What exactly does it mean? Is Make in India for multi nationals like TATA, Reliance, Mahindra & Mahindra, and others of their like or should it filter down to the lowest level? By lowest level, I mean MSMEs. They are really the backbone of our economy but Covid has handed them a Mike Tyson like KO punch.
Upgrading this sector – the need of the hour
For ‘Make in India ”to play out to its logical end, we must upgrade our MSME sector. We must train them in Technology, Marketing, Finance, and have to re-skill the labour. Without labour nothing can be Made in India. For years labour has been protected by archaic labour laws. More modern laws have to be brought in that rewards hard work and enterprise and at the same time keeps with the management’s and labour’s interests in mind.
Under the Ministry of MSME the government has done well to set up clusters where similar and contiguous manufacturing units come together and are able to share resources as their needs are similar. Much like the auto cluster that has come up in Pimpri Chinchwad, Pune with Industry 4.0 in mind. Likewise, across the country, if reports are to be believed, 964 clusters have been considered under the scheme out of which ongoing are 193 and completed are 771. In case of infrastructure projects, 179 projects have been undertaken out of which 135 have been completed.
To be a successful MSME – Show Me the Money!!
One of the key elements for an MSME to be successful is finance. Banks are reluctant to loan money to them as they are deemed risky. Recently, the Government sanctioned a scheme whereby banks could loan up to 20% of an MSMEs facilities with a moratorium period for the loan.
However, grandiose this may sound on paper, there is a catch. This loan of 20% of facilities is ONLY available to an MSME if it has existing loan facilities from the bank. Enterprises that, up until now, have had no need to borrow from banks are not extended this facility. The pandemic situation has stressed these enterprises to now having to avail of a loan. When approaching the bank, the MSME is told that he can ONLY avail of a loan on the usual terms and not under this facility. The only fall out of such a short-sighted measure is that many enterprises who are denied working capital loans on this basis have shut down.
Secondly, many of the MSMEs are taken advantage of by their bigger customers who never pay them in time. This causes a cash crunch. The Government has specified that all companies who owe money to MSMEs money over 30 days must mention this in their balance sheet. Why not go one step further and ensure that all MSMEs should be PAID in 30 days? This will alleviate their financial situation and in turn reduce the stress on the banks
Unlike many large companies which make final products for sale to the end consumer, smaller businesses are more into making intermediate products that go into the making of final products. Hence smaller businesses tend to typically depend more on orders from a few large companies, in comparison to larger businesses that are significantly more diversified. Given this, in any economic crisis they are likely to get hit more
Owings by the Government to the MSME sector stands at Rs.5 lakh crores as said by Union minister Nitin Gadkari.
Getting out of the maze for MSMEs
The PM has said that there is scope for making toys in India. There is a huge worldwide market. Sri Lanka has toy manufacturers who compete in the world market. These are small companies meeting a high specification.
Further, in the domestic market for toys MSMEs are behest with non-cooperation from the Government in extending time for enforcing the BIS licence that MSMEs have to obtain. At the highest level we have encouragement, but at the lower levels the MSMEs are restricted by regulatory and financial issues. Just two days ago the government has extended time for companies to meet BIS till January 2021
Not just toys, nitrile latex examination gloves are a need that is here to stay. This is a product which requires medium size investment & high technology. This can be done by MSMEs. The technology is available in India, but again finance is required as to be competitive in the world markets you need to have economies of scale.
When importing is cheaper than Make in India
There is also the issue of an inverted duty structure. For e.g. Natural Rubber Latex attracts an import duty of 70%. To achieve international quality standards natural rubber latex has to be imported. Why would anyone pay such a steep import duty and then make the product in India when you can import the finished product (for e.g. toys and gloves) at a cost cheaper than what can be manufactured? This needs to be looked into very seriously.
Health too has to be the order of the day. If you are not healthy you cannot work, and you cannot Make in India. Covid-19 has found us wanting in this area.
The point I make here is that without MSMEs we will never be able to make products in India that are competitive in price. To ensure that we can compete with the best in the world, investments in health, training, skilling have to be made along with easier availability of finance and equitable labour laws.