An idea on challenges for MSMEs

With about 7 crore working units and a nearly 30% share in India’s nominal GDP, the MSME sector is amongst the most essential and growth-focused sectors contributing to national development.

However, it is plagued by a host of factors like physical infrastructure constraints, presence of an informal structure, low and slow adoption of technology, upskilling of the workforce, lack of access to credit and capital, and delayed payments that sometimes even lead to no payments.

Even though efforts are being made to combat the challenges of MSMEs in India, the existing data indicates that the micro sector provides approximately 97% of the employment in the MSME sector. This implies that these micro-enterprises cannot grow into small and medium enterprises, primarily because of the challenges mentioned above.

What causes the challenges

While discussing the problems mentioned above in detail, it is important to realise the root cause of the challenges of MSMEs in India and what can be done to alleviate their concerns.

• Improper infrastructure: Though readily intuitive in understanding, the infrastructure problem is far more complex. It exists throughout the value chain, impacting every aspect of the MSME business, from sourcing and procurement to receiving payments. Infrastructure can be understood in 2 ways:
  • Macro: This relates to countrywide concerns like the availability of electricity, water, roads and highways, among others. Here, improvements need to be driven by the government’s efforts, central, state or local.
  • Micro: This relates to the choices of individual MSME units. It is primarily about how such units plan to run their businesses. Decisions related to digital enablement, technology adoption and investment into assets that help achieve economies of scale are made here.
• Lack of access to credit and capital: Banks and other financial intermediaries require some financial results or collateral to disburse credit. Financial results are essential to ascertain the credit-worthiness of the MSME business owner. Meanwhile, collateral is required to serve as a means of recovery of debt if the MSME unit cannot pay back the loan. However, most of the MSME units lack such documentation. As a result, unregistered enterprises have been unable to raise funds from the formal credit channels. This is also one of the most significant challenges MSMEs face during Covid-19. However, the Government of India has launched schemes that enable MSMEs to avail of credit without collateral. This has shown little success as it requires a substantial digital presence of the MSME unit, which is a far bigger problem.
• Delayed payments and consequent working capital crunch: MSMEs working majorly in the B2B domain in the construction, metal, mining and engineering sector often receive delayed payments. This leads to a liquidity crunch due to which they are unable to finance their day-to-day operations. This challenge is prevalent in the manufacturing sector, with over 44% of the MSME units facing delayed payments. However, this percentage was a little lower at 27% for the services sector. Despite the enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which penalises delayed payments to the MSME sector, the low bargaining power of these units is a major challenge. They cannot negotiate the terms of payments, let alone fight back in the case of non-payment.
• Negative impact due to Covid-19: Due to a K-shaped recovery that the world witnessed right after a massive blow to businesses worldwide, the impact on the MSME sector has also been mixed. Depending on the MSME units’ industry, they were either: 
  1. Massively negatively impacted
  2. Moderately negatively impacted
  3. Not impacted much
  4. Positively impacted

The apparel, leather and meat processing, and construction businesses have been impacted significantly negatively due to the sudden supply chain disruption. This disabled them from procuring raw materials, processing them (because of the absence of labour), transporting them (due to disruption of logistics), and selling them altogether (because of reduced willingness to spend and fear of consumption of meat). The sectors related to essential activities like the synthesis of chemicals, production of health-related equipment and other utilitarian products witnessed no adverse long term impact to even positive impact in some instances.

• Lack of skilled labour: The paucity of skilled labour is perhaps one of the most significant challenges MSMEs face in India. Due to the hiring of unskilled labour, MSMEs cannot function to their fullest with efficiency. This is also because the upskilling efforts have not been commensurate with the needs of the industry. To combat this, dedicated upskilling efforts like Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY) have been made functional with the combined goal of upskilling 38 million youth by 2022.

Conclusion

The challenges faced by the MSME sector in India are numerous and complex. However, there also exist elaborate solutions to combat these challenges. The governments at central, state and local levels have been working to mitigate the concerns of MSMEs to empower them and enable their transition from micro to small and medium enterprises.

These efforts have also shown a positive impact. The share of the MSME sector in India’s merchandise exports stood at 48 per cent in 2018-19. This indicates that Indian MSMEs are becoming globally competitive, and our output is being accepted internationally.