Addressing Operational Challenges For MSMEs: From Survival To Sustained Expansion

The MSME sector in India is incredibly resilient. It stands as a beacon of hope, not only for the Indian economy but globally as well. 
 
Picture this: small workshops bustling with activity, vibrant markets where artisans ply their trade and larger enterprises flourishing in every nook and cranny of the city. 
 
This is not imaginary, but a part of our daily lives. 
 
Despite this, the sector grapples with persistent challenges such as working capital constraints, export growth and a need for cutting-edge infrastructure and innovation support. Take the COVID-19 pandemic. Reports and studies from the time paint a sobering picture: Data suggests that four out of ten businesses in the sector had to change their business model to survive, while more than 14 per cent of the MSMEs exited business altogether. 
 
This raises a very important question: Why are these small businesses, the lifeblood of the economy, often the hardest hit in times of crisis and how can the sector chart a course towards sustained expansion? 
 
Policies driving market access 
 
We have come a long way from the era of licensing to starting a business with the click of a mouse. In recent times, the sector has seen rapid change with favourable policies from the government. 
 
Policies and initiatives such as MSME Market Development Assistance (MDA), the Marketing Intelligence Services Lease under the NSIC scheme and schemes relating to export credit insurance such as the Small Exporters Policy (SEP) and the Open Network for Digital Commerce (ONDC), among others, have increased the market for MSMEs, opening new avenues of revenue. Moreover, India has also improved its position as per the World Bank’s Ease of Doing Business rankings. 
 
However, the work is far from done. A recent survey by the Indian Council for Research on International Economic Relations (ICRIER) states that the biggest challenge that MSMEs face today is the inability to access markets and retain customers. Low business diversification, digitization and infrastructure, limited e-payments, a lack of a supportive legal framework and a lack of quality data restrict the growth of small enterprises. 
 
Policies and initiatives revolving around the formalisation of small businesses, reskilling and upskilling of workers, the integration of digital tools and technology, economic diversification and increasing access to new and innovative financing can create a fertile environment. Trade agreements, tariff reductions and export incentives can also significantly enhance MSMEs' ability to penetrate global markets, unleashing their potential on a broader scale. 
 
Building bridges to success through stakeholder collaboration 
 
Let’s go back to the marketplace that we pictured in the beginning. Imagine a similar marketplace, but for ideas, resources and expertise. There is immense potential that Indian MSMEs can unlock through strategic collaboration with industry peers. 
 
The mindset of working in silos is rapidly shifting towards a collaborative approach where companies think of it as a bridge connecting them to a world of opportunities such as market access, tech infusion, resource optimisation, enhanced innovation and risk mitigation, among others. According to reports, 34% of the businesses in India will be looking at collaboration opportunities by 2025. 
 
For this to happen, diverse stakeholders, from employees to employers, suppliers to retailers, community leaders to policymakers and new-age start-ups to established corporations, must come together. By leveraging their respective expertise and resources, these stakeholders can create an ecosystem that nurtures enterprise development. Collaborative efforts, ranging from offering technical support and mentorship to opening doors to markets and capital, can enable MSMEs to overcome obstacles and grasp growth prospects. 
 
Technology and the rise of digital commerce here can also play a vital role in enabling the collaboration ecosystem. We can already see this happening across sectors and services. For example, a small business owner in a Tier 3 city in India can now collaborate with Amazon to sell his or her goods, or a small restaurant can collaborate with Swiggy and Zomato to increase revenue. 
 
The democratisation of technology will continue. However, we see that MSMEs still need help to adopt the technology and turn it into an essential part of their business growth. This is where technology startups and ecosystems in India can be great assets to MSMEs in expanding, scaling and growing their businesses. We have many technology startups on the lookout for innovative ways to solve problems and interesting use cases, which could lead to low-cost innovations for MSMEs. 
 
Access to finance for global competitiveness  

Access to finance remains a persistent hurdle for MSMEs, often limiting their growth ambitions. As per reports, 85 per cent of MSMEs lack access to formal credit and the assessed debt demand of MSMEs is Rs 69.31 lakh crores, of which only 16 per cent is formally financed. 
This is due to limited collateral, a lack of credit history and stringent lending criteria. This limits their ability to invest in technology, innovate, and upgrade infrastructure, thereby hindering their competitiveness and growth potential. Data suggests that the overall finance demand by MSMEs is Rs 69.31 lakh crore, with 70 percent of the credit requirement attributed to filling the working capital gap. 
 
It is essential to adopt measures that promote convenient credit access. This can be achieved by simplifying loan application procedures, offering loans by considering alternative sources of collateral, and providing financial education programs. Enhancing financial inclusivity by offering various options to meet the working capital requirements of micro, small, and medium enterprises (MSMEs) is crucial. Implementing policies that strengthen lending based on cash flow, encouraging corporate buyers to support their MSME partners, and integrating TReDS portals with the GST e-invoice portal are potential solutions to alleviate the challenge of credit access in the MSME ecosystem. 
 
Embracing innovative financing mechanisms like venture capital, angel investment networks, and crowdfunding platforms provides alternative funding avenues, enhancing MSMEs' ability to compete globally. By facilitating access to finance, these initiatives empower MSMEs to invest in technology, expand operations and seize international opportunities, ultimately driving their competitiveness on a global scale.

Ketul Acharya

Guest Author