MSME reforms set the stage for big manufacturing boom

The long neglected MSME sector has received a leg up from the recent spate of reforms announced by the Modi government. These can encourage MNCs that are looking at India to consider moving many of their feeder industries to this country – generating growth and employment and giving a fillip to consumption.

Micro, medium and small enterprises (MSMEs) form the bedrock of any economy, though it is the big boys in the Fortune 500 club and those immediately below them that steal all the limelight.

In India, for example, this sector accounts for 30 per cent of the country’s GDP, 50 per cent of exports and almost 40 per cent of employment. But despite the crucial role it plays in shoring up the economy and keeping its wheels in motion, MSMEs have been struggling – and the Covid-19 pandemic has only exacerbated the already precarious situation.

The challenges

The sector faces a number of challenges. The chief among them are:

• Inadequate access to finance

• Limited access to the latest technology and management techniques

• Low productivity

• Insufficient marketing support

• High compliance costs

• Non-availability of affordable skilled labour

Reforms to encourage growth

Recent reforms initiated by the Narendra Modi government have sought to address some of these issues. For example, earlier, MSMEs in India were encouraged to stay small. They were actually given various incentives and tax benefits for this. And investment limits were set artificially low to enforce this.

Therefore, in order to take advantage of this, many businesses set up more than one company so that each firm could stay within the specified limit specified.

Such perverse legislation and rules discouraged the global suppliers of multinationals from setting up shop in India. Result: The country was denied access to critical technologies, processes and employment.

Realistic reclassification

The Modi government has sought to address this issue by setting new, more realistic norms on classifying various segments of the industrial chain. According to these new norms, now in force, the investment limit for micro industries has been raised five time to $140,000 and a turnover of $700,000; for small industries, the investment limit has gone up by a similar ratio to $1.4 million and a turnover of $7 million; and for medium industries, the investment limit has been increased by a similar proportion to $7 million and a turnover of $33 million.

Then, differential classification, under which the services sector had lower thresholds, have been done away with and they have been brought at par with manufacturing companies.

This one change addresses several of the challenges referred to above. Increase in scale will facilitate better access to finance, technology, marketing support and improve productivity, all of which have a direct bearing on profitability.

MSMEs can attract FDI

It is also expected to expedite the flow of foreign direct investment and new technologies into this sector – both of which India badly needs in order to become part of the global value chain as part of the Prime Minister’s Atmanirbhar Bharat initiative.

This is particularly important at a time when the government has unveiled production-linked insurance schemes for smartphones, electronics, chemicals, pharmaceuticals, telecom and networking equipment, etc., to encourage foreign multinationals to set up factories in India.

Already, Apple, through its contract manufacturers Foxconn, Wistron and Pegatron, Samsung and some Indian smartphone brands have bought into the scheme and are setting up or expanding their facilities in India.

Creating new eco-systems

But these will remain assembly operations unless India can encourage them to move their entire manufacturing eco-systems, which include suppliers of critical components and services by MSMEs to this country.

This will not only expedite the transfer of knowledge and technology to this sector, which is currently starved of both, but also help it generate jobs for many of the millions of young aspirants who enter the Indian work force every year.

That is what makes a relatively small tweak in classification norms such an important landmark in the government’s goal of achieving self-reliance. This could prove to be among the most important measures taken to transform India into a global manufacturing hub.

Another major problem faced by MSMEs is delayed payments from their principals. The expert committee chaired by former Sebi Chairman U.K. Sinha submitted its report on this subject in July 2019. The government has accepted many of its recommendations and this should further ease the credit crunch faced by this sector.

It must be borne in mind that the reforms already initiated are not the panacea for all the ills plaguing the sector. But they are an acceptance that the government of the day acknowledges their contribution to the economy and accepts that they need support to grow – and transform the Indian industrial landscape.