By Prof. Vidhu Shekhar

The importance of MSMEs cannot be overestimated. They are a critical part of India’s economy, contributing around 30% of India’s GDP, 36% of India’s manufacturing output, and 50% of India’s exports. They also employ over 110 million people, making them the second-largest employer in India after agriculture.

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But that is not all. If we take the example of China, the MSMEs of yesteryears have become today’s giants. Consider BYD, established in 1995 as a battery manufacturer and expanded into the automotive industry in the early 2000s. It has become a global giant employing over 7 lakh people and building innovative EVs and battery technology—some say it is ahead of Tesla.

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Similarly, BOE Technology, which produced small displays for electronic devices in the late 90s, has grown to become one of the world’s largest manufacturers of LCD, OLED, and mini-LED displays. In essence, if groomed well, today’s MSMEs can become tomorrow’s giants, creating a system of innovation and employment.

To the government’s credit, it has taken several steps to support the MSME ecosystem in India. This includes the Credit Guarantee Fund Trust to facilitate easier access to credit, Credit Linked Capital Subsidy Scheme to incentivise technology upgradation, and the Micro & Small Enterprises Cluster Development Programme for infrastructure development. The most recent steps for enforcing timely payment to MSME vendors by firms will also go a long way in easing the business environment for MSMEs.

Yet, the problem of structural dwarfism of Indian MSMEs—wherein they are not able to scale up beyond their current size—has yet to be fully solved. What can the government do more? We discuss a couple of specific interventions that can be very effective.

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A zero-interest rate environment?

A possible long-lasting and far-reaching policy could be to provide a zero-interest rate environment for MSMEs in India. When, until recently, the world over, and many countries still have zero-interest rate policies, Indian MSMEs competing against them in the domestic and export markets at a higher interest rate environment is like fighting with one leg tied.

This is especially true when competing with China. One of the inside stories of how China promoted its MSMEs was through negative interest-rate loans available to them via a combination of central bank policy and direct budgetary support from the Chinese government.

These MSMEs could then undercut prices in the export market, even supplying at operational losses, as the margins could be made in negative interest rates. Once grown, the economies of scale automatically meant that they need not work at an operational loss.

A zero or possibly a negative rate environment, achieved by combining RBI macroprudential policies and central government budgetary support, can do wonders for Indian MSMEs. This can directly attack the structural dwarfism problem by addressing returns generated as also capital access to these firms. The resulting scale-up could be really fast.

Technological and managerial upgradation via skill development

While the government already has various schemes for technology upgradation for MSMEs, the missing link is that there is no systematic upgradation of managerial and technical talent for MSMEs. Capital is critical, but if the ideation of how and what to do is not extensive, capital alone cannot suffice.

In this, Indian MSMEs have no support. Our institutes of national importance have failed in one major step of nation-building—becoming a training hub for domestic MSMEs. If their faculty and research talents will not help the domestic industrial landscape, who will? It is also true that MSMEs cannot afford the costs of interventions that such eminent institutes may require. In this overall scheme of things, the government can play a crucial role.

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Along the lines of the Atal Incubation Mission, we can perhaps have a mission focused on MSME technical and managerial training. Prominent private and public institutions should be given the responsibility to provide training on cutting-edge technology and managerial innovations—be it fintech, modern sales and marketing, ESG, or newer specialised technologies. The government can provide full budgetary support for such training directly to these prominent institutes.

This will thus give an income source for these institutes, adding to their research surplus. At the same time, the country’s MSMEs will receive the best possible view of modern tech and management. Targeted interventions can also be carried out via the same approach.

In conclusion, the government can perhaps think of two-pronged ways of further intervention for the betterment of MSMEs in India. Providing a zero or negative interest rate environment for MSMEs to pick up scale and get out of the trap of structural dwarfism. And a parallel targeted approach to skill upgradation via budgetary support and co-opting premier institutes in the country. The combined budgetary support for capital, technological upgradation, and skill development to envisage and engage productively in such upgrades, can go a long way in developing a world-class MSME ecosystem.

Vidhu Shekhar is an Assistant Professor, Finance and Economics at Bhavan’s SPJIMR, Mumbai. Views expressed are personal. Reproducing this content without permission is prohibited.

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