The Indian MSME sector comprises 63.4 Mn companies and employs over 111 Mn people, and is the largest industrial sector in India after agriculture. However, MSMEs that operate largely in the brick-and-mortar model with little to no technology or digitisation, have been struggling to cash in on emerging opportunities in the digital era.
Over the last five years, the Narendra Modi-led government has announced dozens of schemes and programmes focussing on MSMEs. The Ministry of MSME has implemented a number of schemes such as Credit Guarantee Fund Scheme, Scheme for Raw Material Assistance, National Manufacturing Competitiveness Programme (NMCP), Management Development Training Programmes (MDPs) for enhancing managerial skills, MSME Data Bank, and online registration through Udyog Aadhar Memorandum.
But MSMEs were also badly hit by demonetisation and GST initiatives, which meant the above-mentioned initiatives have not exactly worked as the Modi government in the first term had expected them to.
As the internet and allied digital technologies are fast penetrating Tier 2, Tier 3 and Tier 4 cities, how MSMEs are responding to the change? How can leveraging tech solutions make a positive impact on the Indian MSME sector? And what are the major challenges that MSMEs face from the point of view of scaling their business and reaching new customers?
To understand and sketch a picture of the state of Indian MSMEs, this International MSME Day (June 27), Inc42 and Dell organised the ‘invite-only’ roundtable discussion ‘The Dialogue’ in Bengaluru.
Attended by startup founders such as Shubhendu Panigrahi, founder and CEO of Skillenza, Indeed Director-International strategy & operations Vir Kashyap, Kinara Capital CFO Aishwarya Ravi, IDOS founder Srikanth Cheruku, Neelam Trivedi, founder and CEO of FundsTiger and 30 more invitee-attendees, The Dialogue was co-chaired by Pratibha Sastry, founder and CEO of the programme PS: This Matters and Vaibhav Vardhan, cofounder and CEO of Inc42.
The Dialogue: Understanding Why MSMEs Matters
The agriculture and MSME sectors have been the backbone of the Indian economy since even before independence. However, post-independence, while the agricultural sector’s contribution to India’s GDP is down from 52% to 17.1% in 2018-2019, MSMEs continue to rise and currently account for 10% of the GDP. It has remained one of the most vibrant and dynamic sectors of the Indian economy.
According to the National Sample Survey (NSS) 73rd round, conducted by National Sample Survey Office, Ministry of Statistics & Programme Implementation during 2015-16, there are currently 63.4 Mn MSMEs which contribute around 6.11% to the manufacturing GDP and 24.63% to the services GDP as well as 33.4% of India’s gross national manufacturing output.
While MSMEs contribute significantly to the economic and social development of the country generating the largest employment opportunities at relatively low capital cost, the sector also provides a support system for large and very large scale companies. For instance machine tools SMEs played a huge role in the growth of auto giants such as Daimler in shifting their base to Chennai and Gujarat.
Under the Interim Budget 2019 in February, the government made a slew of announcements for MSMEs:
- An all-time high allocation of INR 7,011.29 Cr for MSMEs
- The Prime Minister Employment Generation Programme (PMEGP) got an all-time high allocation of INR 2,327 crore. This reiterates the focus on the creation of sustainable employment in the non-farm micro-enterprise sector.
- For ensuring seamless credit guarantee to MSMEs, INR 597 crore has been provided under the Credit Support Programme.
- To provide funding for the 2% interest rebate on incremental loan up to INR 1 Crore for GST-registered MSME units, INR 350 crore was provided under ‘Interest Subvention Scheme for Incremental Credit to MSMEs’.
- Under previous announcements made in November 2018, 20 large and 100 small Technology Centres are going to be set up with a support of INR 6000 Cr, which the Interim Budget made allocations for.
- Mission Solar Charkha has been launched in the current financial year, for which INR 143 crore has been allocated under the BE 2019-20. The scheme envisages setting up production clusters, each employing 2000 youth in the rural area, at least 50% of which would be women.
While it will be interesting to see whether the new finance minister Nirmala Sitharaman approves these allocations or not, even as MSME minister Gadkari wants MSMEs to increase their contribution to India’s GDP to 50% in the next five years. MSMEs needs to be at the centre of all reforms. Be it, going digital, access to credit and funding, access to market and other essential parameters are concerned.
The question that the discussion kept coming back to was are MSMEs ready to adapt to the market changes?
MSMEs Adopting Digital Tools
MSMEs in India have thrived in the offline market. Many MSMEs see going online as time-consuming and an unnecessary burden to their resources. Aishwarya Ravi, CFO, Kinara Capital calls MSMEs digital strugglers. “We finance MSMEs. The biggest problem for us has been the collection of their data. If you want to lend them money, you need to have their data. None of the data is digitised or available online. We have to send our staff to get each and every information which has been a huge task.”
So, how do they manage to stay away from digitisation in the GST era? Is awareness still a big hurdle in the time of internet? Asked Vardhan.
Trivedi said that thanks to Reliance Jio, there’s a huge change in their lives and businesses as well. Rural or urban MSME proprietors are increasingly using WhatsApp for business purposes. “Things are changing with the advent of industrialisation 4.0, Reliance Jio, Paytm and digital India. MSMEs are no forced to move towards a whitish greyer side of the spectrum,” said Trivedi.
While one participant said that the upcoming generation of MSMEs is catching up fast, Gaurav Anand, founder and CEO of Namaste Credit gave an account of the varied spectrum. “Metro users have already seen a wide range of tech-enabled applications however, the Tier 2 and Tier 3 users have suddenly been exposed to this digital era. Therefore, while they have started using WhatsApp, the intent to utilise the digital tool for Businesses is still not there and that glass ceiling is yet to be broken.”
Ruqiya Irum, cofounder and CMO of Vyapar App which has successfully been downloaded over 1Mn times, averred, “Since we started in 2016, we feel that the entire concept of getting on Facebook and WhatsApp has immensely helped us reach out to the MSMEs.”
How MSMEs Access Credit in India
As for the question — how MSMEs file taxes, buy loans — posed by Sastry, nearly all participants agreed with entrepreneur Sridhar Raj’s assessment that regardless of their technical understandings, startups end up showing low awareness with the sheer motivation of tax avoidance.
Santosh Kumar, enabler at Saiesh Info Solutions shared his experience, “Awareness varies with area. For instance, if it’s a Bengaluru-based MSME, they are quite aware of GST and all; however, for rural MSMEs, it is the opposite. They don’t even want to understand. We had taken an office in Bellary on rent. So, when we said TDS needs to be deducted, however, they refused and said, either pay the agreed amount or vacate. Lots of transaction in these areas happen in cash and cash only. So, technology adoption is one thing. People intentionally don’t use banking system. Either you want to do business in cash or you don’t do business in those areas. There are lots of such regions in India.”
According to the government’s MSME annual report, about 20% of the MSMEs are based out of rural areas. For MSMEs, the business remains the key focus area, filing GST returns remains a secondary business. Ravi who has catered to over 24K startups shared an interesting data point regarding access to credit. She said, “Interestingly 50% of them have taken loans as personal loan and not loans under business category.” Even if they are taking loans to boost the business, they don’t want to associate loan-related risk factors with their businesses.
The old-habit of Indian MSME to avoid taxes blocks their access to credit as well. Trivedi said, “On paper, many of the MSME proprietors intentionally don’t show healthy balance account which is essential for lending; however, when you go to his house, look at their lifestyle — kids going private school, house, cars — you might consider these as an added credit which they usually don’t show. So, you have to draw the actual cash inflow and outflow from the informal accounts. At times, they even intentionally show losses while filing their taxes to avoid the latter. However, what they don’t understand is the adverse effect of it on their credit. Banks simply stops giving loan for the next three years, if your balance sheet shows loss even once.”
For the access to credit, the government had launched a new scheme in November 2018, namely the “Financial Support to MSMEs in ZED Certification Scheme”.
The objective of the scheme for promotion of Zero Defect and Zero Effect (ZED) manufacturing amongst micro, small and medium enterprises (MSMEs) and ZED Assessment for their certification are:
- Develop an ecosystem for ZED Manufacturing in MSMEs in India
- Promote adaptation of quality tools/systems and energy-efficient manufacturing
- Enable MSMEs for manufacturing of quality products
- Encourage MSMEs to constantly upgrade their quality standards in products and processes
- Drive manufacturing with adoption of ZED production processes and without impacting the environment
- Support ‘Make in India’ projects
- Develop professionals in the area of ZED manufacturing and certification
Using 50 parameters for ZED rating and 25 for defence rating, 22,222 MSMEs will be rated & certified under ZED Maturity Assessment Model, while 5K MSMEs will be rated & certified under the ZED Defence Model, and 7368 MSMEs will be supported for gap analysis, handholding and consultancy for improving their rating. The total cost of the project is INR 491 Cr.
How MSMEs Access Market, Communicate
Another big challenge is the language factor, As Irum said, “We have to keep English very simplistic in a way that they could understand. For instance, we don’t use inventory but item; we don’t call clients customers but party.”
Anand and many other participants including Irum agreed that while English remains an aspirational language for MSMEs, the business language remain vernacular. “Enabling digital tools in vernacular language has made it easier to reach out to them. Hands down, it works very well,” said Anand.
Kuldip Purohit, cofounder of a bike rental startup Royal Brothers said, “We, once, did a couple of Youtube videos to promote our brand. We made videos in Hindi, English and Bangla. The English video did amazingly well and most of the views were from North India. While Hindi video failed to catch the eyeballs, Bangla video eyeballs mostly came from Bangladesh. This does confirm the postulate that English is an aspirational language for Indians.”
However, using Indian regional languages helps communicate more effectively and brings more business value, agreed many of the participants.
On market access, Raj added, “Word of mouth plays a bigger role for MSMEs.”
Seconding the same, Irum said, “If your app has worked for somebody and they have heard it. They will vouch for you without any hesitation. This applies for the pricing as well.”
Can MSMEs Break The Internet?
MSMEs often run on a thin margin. They look at digital tools and apps with some suspicion in and have doubts about whether these are apps are worth their time and resources or not.
The entire ball game is about simplification and keeping MSME profit in mind, in regards to the attributed time, resource and money. However, “looking at the current scenario, there is going to remain some human touch and communication in the MSMEs way of business,” concluded Srikanth.
In November 2018, PM Modi had said that there are five key aspects for facilitating the MSMEs include access to credit, access to markets, technology upgradation, ease of doing business, and a sense of security for employees. While Modi made 12 big announcements at the time, the implementation of these outreach programmes was expected to be better than what it is.
Nevertheless, the MSME spirit is strengthened, if the discussions and points raised at The Dialogue by Inc42 and Dell are anything to go by.