Rescuing MSMEs from their death bed

Lakshmana Venkat Kuchi *

Graded and cautious opening up of the country, after over two months of intense and widespread second covid-19 wave across the country has left a trail of destruction of the economy, is sure a welcome development. But caution has to be the watchword as any oversight and irresponsible behaviour could be even more dangerous what with the medical think tank in Maharashtra warning of a third wave in the very near future.

What the first and second waves of the pandemic have meant is untold misery to the masses, in terms of loss of lives, a threat to the livelihood as the economy has contracted with an overall negative growth that has in turn led to a severe loss of jobs and livelihood, and recorded unemployment in the country at its highest levels.

At times like these, what we have seen is that the organised manufacturing and big industry is able to lobby for itself in the corridors of power, and chances of its success are arguably better than the MSMEs that are finding themselves in a tighter spot than ever before.

Big industry, represented by one of the most powerful of chambers, the Confederation of Indian Industry, has sought a Rs 3 lakh crore economic stimulus package to kickstart industrial activity that was adversely affected on account of various demand and supply-side factors. Now CII wants the new stimulus package to revive demand, the drastic fall of which is the key factor in the contraction of growth in the economy that has set off a chain reaction causing the downward spiral and indicators pointing in the wrong direction.

Now, even the CII is advocating direct cash transfers to vulnerable people as was suggested by a plethora of domestic and foreign economists, higher allocations for rural affairs, short term rate cuts in GST and effecting lower excise duties on petroleum products. “Employment generation must be at the core of Government policy to deal with the shock caused by the second wave of Covid-19,” the CII said in an assessment report.

The CII suggestions are in line with the thinking of macroeconomists who argue that the Indian economy was afflicted with demand-side problem, even before the pandemic hit, and needed specific responses to address that shrinking of demand caused by few unpredictable shocks.

What the CII left unsaid, but hinted obliquely, is the urgent need for supporting the Micro, Small, and Medium Enterprises (MSME) sector, the engine of India’s growth and a big employment generator. Ready working capital requirement is only of the basic problem faced by MSMEs as they struggle for their survival – as Covid-19 accentuated the crisis this sector had begun to face over the past two years.

If we take MSME in Tamil Nadu, the manufacturing hub of the country and one of the top MSME location, the need for urgent intervention is felt given the manner in which at least 40 percent of the units are forced to shut shop. Estimates from trade bodies active in western Tamil Nadu, home to a plethora of MSMEs in various sectors show that if left unattended, the majority of MSMEs will face certain death.

MSMEs, a major contributor to the socio-economic development of the country and its immense contribution to Gross Domestic Product (GDP) as well as exports, is today in bad shape. India had 6.3 crore MSMEs, manufacturing more than 6000 varieties of products.

The contribution of manufacturing MSMEs in the country’s total manufacturing GVO (Gross Value of Output) at current prices has also been as high as 30%. It contributes about 40% to the exports in the country and contributes about 29% towards the GDP.

Tamil Nadu has the third-largest number of MSMEs in the country (49.48 lakh– consist of 49.27 lakh of micro industries and 0.21 lakh of small industries) and accounts for 18% of all MSMEs and has the highest number of non-farm units.

Like elsewhere in the country, MSMEs in Tamil Nadu too face intense pressure and constraints in sustaining competitiveness. It also suffering greatly due to structural and systemic issues which have been exacerbated by the impact of the pandemic-associated lockdowns.

More important, non-pandemic constraints such as high cost of credit, low access to new technology, poor adaptability to changing trends, lack of access to international markets, lack of skilled manpower, inadequate infrastructure facilities, including power, water, roads, etc., and regulatory issues related to taxation (State, Central), labour laws, environmental issues, etc. are also linked with its growth process.

What Covid-19 second wave has done is to halt each and every sphere of economic activity. MSMEs, still recovering from poor 2020-21 turnover, were not able to manage sudden lockdowns. The majority of the MSME units had to close down their units.

This is why, a focused MSME revival strategy needs to be worked out ASAP, as many MSMEs are at the risk of stagnating or even dying out, squeezed as they are from both ends. Conversations with two well-known industrialists from Tamil Nadu – Ganapathi Ramachandran, Chairperson of the IIT Madras Entrepreneurs Forum and Executive Committee of FICCI and Dr. S Raghavan, former Secretary-General of South Indian Chamber of Commerce and Industry (SICCI) – are very illuminating as they reveal a distinct and workable plan to rescue the MSMEs from their death bed.

The solutions, according to them, lie in the relative success of innovation-based MSMEs that use technology and business model variations to create additional markets and fuel growth trajectories. Greater competition, rapid technological advances, more demanding market requirements, and constant changes in consumer demands require MSMEs to be creative and innovative to face the challenges of the global market.

The programme for reviving the MSMEs, including those in Tamil Nadu could focus on helping them "innovate their way to success". They must be made capable to confront increasing competition from developed and emerging economies. They must also be able to plug into the new market opportunities provided by these countries. Focus on the global markets reinforces growth, enhances competitiveness, and supports the long-term sustainability of these enterprises.

There are innovative MSMEs, who have not only adapted but thrived in this emerging environment by harnessing technology, adopting modern professional management practices and proactively pursuing opportunities with new products and state-of-the-art practices.

Some examples of these are to be found in the automotive sector in the Sriperumbudur industrial area as well as in places like Tirupur and Coimbatore. These successful units provide a path and template that can be adapted to and emulated by the struggling units. The thriving start-up and entrepreneurial ecosystem that is driven by technological innovation and availability of risk capital and skilled talent is the strength of India today.

This must be nurtured and encouraged for the overall benefit of the country and economy. An initiative like this can learn from existing successes and develop a framework for transforming traditional MSMEs and make them leaner, meaner, and fitter to compete with the best in the world.