Micro, Small and Medium Enterprises (MSME) sector as one of the progressive sector of the Indian economy. According to an ET report, about one-third account of the country's GDP is contributed by more than 48 million MSMEs in the country who, acknowledged as backbone of Indian economy, are expected to contribute significantly towards growth of the economy. The sector will improve India's financial inclusion and mitigate the urban-rural divide.
According to Confederation of Indian Industry, with around 51.1 million units throughout the geographical expanse of the country, MSMEs contribute around 7% of the manufacturing GDP and 31% of the GDP from service activities as well as 37% of India's manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 46% of the overall exports from India. Government should therefore furnish this segment with more ways to propel further.
Here are some guidelines how the government can encourage the MSMEs to grow and flourish.
Policy Framing Considerations
The government must introduce new initiatives not only for new businesses in the manufacturing sector but also for the existing ones.
The government should also device policies, which will enable SMEs and MSMEs to effectively participate and avail benefits in ambitious government initiatives such as GST Bill, Demonetization, Digital India, Make in India and others.
Problems to be Addressed
Delay in payments has been a perennial problem for MSMEs. This is hurting even more following demonetization. Receivables from big clients, that is both from Centre and State governments and their agencies; as well as public sector units and large private corporate entities. According to a report published in September 2015 by Knowledge and News Network – a venture between FISME and GIZ (the German Agency for International Cooperation) – a study of the balance sheets of the top 2,700 non-MSME companies in India showed that “the biggest of Indian companies are holding on ₹10,000 crore due to micro & small enterprises against supplies made by them.”
To address this issue, there is a need to establish the mechanism of e-platforms on which supply bills could be offered for discounting by MSMEs to banks and other financing institutions like NBFCs and factoring companies.
These platforms should facilitate the banks and financing institutions and other interested parties to offer their competitive discounting rates for the MSMEs and MSMEs should be able to opt for the best financing sources. Further, MSMEs supplying to various corporate and other buyers should be able to get their bills realized on due dates as per agreed terms or within a maximum of 45 days.
Strengthen MSMEs digitally
There should be efforts to upgrade the MSMEs digitally. Technically sound MSMEs should be given recognition. Also, develop specialized co-working plug and play spaces.
The finance offered by banks to Non-Banking Finance Companies (NBFC) for on-lending to MSMEs was classified under the priority sector category until 2011. It was stopped abruptly in 2011. This should be revived again to improve the financial inclusion within MSME sector Deploy mobile ATMs in industrial areas or announce additional ATM establishments in the industrial areas.
Performance incentive for SMEs through a rebate on direct tax and deductions in indirect taxes through based upon criterions such as their credit rating, technological up-gradation etc., should be introduced, states the report.
Involve SMEs in the Smart City Project- Government must urge the state to involve SMEs to participate in Smart City Project. This will bring about an upliftment in lifestyle and business environment of the state.
Diversification of MSMEs
Government should help MSMEs to go for Diversification of business model. According to a business standard report, Diversification of business model by geographical reach, product range, and customer base — carries a lot of weight in credit risk assessments. So a well-diversified MSME will have a credit-quality edge over peers with concentrated businesses. CRISIL’s analysis of the financials of over 1,000 MSMEs for fiscal 2016 reveals that 51 per cent of the well-diversified ones have above-average credit ratings.
Such MSMEs are more attractive to lenders, having almost twice the leverage over their peers. While higher leverage means more borrowings and interest cost, MSMEs with diversification on the above-stated three parameters still have similar profit margins compared to their peers who harbor concentration risks. MSMEs with well-diversified risks record compound annual growth rate of 18 per cent, compared with 15 per cent for their peers with concentration.