Originally appeared in Maharashtra Economic Development Council (MEDC's) MSME Compendium 2013
Betting on Small
William J. Clinton~
In 2012, when the US Presidential elections were fought, one of the prime areas of concentration both for the Democrats and the Republicans was the small business segment and the proposed thrust for it to excel. When a country with USD 15.7 trillion of GDP invests and commits such serious attention to the SME/ SMB segment it really speaks a lot about the potential and criticality of the sector for the growth of the economy and social development.
Germany is another such developed nation which has a robust SME sector to power its growth. This is one nation which has managed to stay above all the issues surrounding other EU countries. SMEs contribute 57% of Germany’s GDP. According to World Bank data, the percentage contribution of SMEs to GDP in High Income Countries is in the range of 50 – 55% of GDP (UAE, Singapore, Qatar, Austria, Germany, Denmark, France, Norway, US, UK)
We can go on with examples from different countries which are doing remarkable well compared to others solely due to a potent SME sector. World over economies are dependent on the SME sector for employment, resource mobilization and utilization, rural development, inclusive growth, improving manufacturing and service efficiency and promoting consumption. All these factors culminate in improvement of standard of living.
However, India is yet to nurture this powerhouse of growth to the best of its potential and benefit for the nation. There is total inertia on the part of the government towards the sector. Our poverty numbers are despicable and the level of governance is not worthy of any mention. There are some efforts for the MSME sector through various quarters but most of it is lip-service rather than grounded plans with quantifiable targets and steps for execution to realize tangible results. As a nation we are expending too much energy for this sector in a haphazard fashion which renders most of the plans and schemes useless.
When ten people work in isolation and are trying to make progress in opposite directions the resultant is status quo. We have multiple ministries affecting the MSME sector who create and design modalities which are not in harmony with each other. There is inherent lack of synergy which bogs down the sector.
Instead of running in circles (evident based on the progress of the MSME sector in the last decade and a half), we need to introspect. The call of the hour is root cause identification and analysis. We must determine the contributing causes hindering the sector from reaching its fullest potential.
What is holding us back?
Considering that the SME segment is thriving in many countries, it is apparent that in India, somewhere we are going absolutely wrong. Till we do not identify and address those factors, we will not make any headway and all kinds of SME-centric efforts will become futile. This is a sector that can truly alleviate our issues of poverty, joblessness, creating an equitable society and inclusive growth. This sector will actually help us realize the GDP growth that we only see in whitepapers and theoretical projections. However, SME sector in India is riddled with a range of issues.
· Setting up a Business
There are a lot of people with budding business ideas and possessing an entrepreneurial zeal but the rigmarole of setting up a business simply turns half of them off. The sheer complexity of permissions, licenses, compliance even before we start making a single penny of sales hugely demotivates the entrepreneur. There is simply a lack of transparency and simplicity. It seems all our systems are designed for creating obstacles instead of breaking the shackles. Logically, if someone is keen on setting up business, all other allied machinery should be swooping in to provide support to ensure success. After all, does a successful business only benefit the owner/ promoter?
· Inadequate financial support from banks and financial institutions
The government frequently comes up with directives and guidelines but are they really being met when it comes to lending to MSMEs? No! Irrespective of RBI directives, the ground reality is far from what is expected or projected. The government schemes also leave a lot to be desired.
The irony is that the schemes, plans and aids etc. do not consider the needs and wants of the MSME owners rather formulated as desired by the policy makers. If a person needs food to survive, what is the sense in giving him subsidized soft drinks?
· Lackluster Infrastructure
The lesser said about our infrastructure the better. Energy is one of the biggest impediments and we are simply unable to race with the growing demand of power. There is a lack of robust plans to add generation capacity though consumption is steeply shooting up. The roads of Mumbai are even dug up every third day causing traffic snarls. With a huge coastline, how many ports do we have? What about the access route to the existing ports and their ability to manage huge container ships? One Yamuna Expressway or Bandra Sealink in the whole of India is not the definition of a dynamic infrastructure to support trade and commerce. People shy away from setting up businesses in rural India since accessibility itself is an impediment.
· Missing clusters
MSMEs can grow better in a cluster environment where they become part of a larger value chain. World-wide clusters have proven to be extremely effective. China itself has multiple clusters for different types of products. Jewelry, footwear, textiles and garments, chemicals and auto-parts business units are some areas which can enormously benefit in a cluster setting. India lacks such vibrant clusters barring a few examples here and there.
· Weak R&D and miniscule innovation
Machines, pharmaceuticals, IT solutions and products – have we actually come up with some innovation that has taken the world by storm? How many Microsoft, Google, Facebook or Wikipedia have been created by Indians? There is such noise about patent of cancer drugs. How many have been developed in India? We buy proprietary original equipments from their manufacturers located in Europe or USA to run our factories. Why don’t we have such indigenous products?
· Poor thrust on the manufacturing sector
The dependency of our GDP on service sector is worrisome. China has become an economic goliath on its sheer strength as a manufacturing hub. Today, any product that we pick up from the shops has a Made in China stamp. And that is not the case in India but even in US or Europe. Manufacturing business is tangible and the mode of true value addition through resource utilization. They create opportunities for the service sector not the other way round. Today, India is harping on the potential of its services sector but it will not take much for some other country to eat away into this segment because the resource requirement is minor compared to manufacturing units. And the cost for setting up new ventures is much lower with lesser complexity.
The cost of business operation is growing due to unchecked inflation. The government seems to be waiting for some divine intervention to solve this problem. The pinch of inflation is higher for smaller businesses whose narrow margins are further eroded rendering them economically unviable in many instances.
· Statutory compliance, record-keeping and inspections
Operating a business will surely entail certain amount of compliance, record-keeping and periodic inspections. But the redundancy of data storage, complexity of filing returns and intrusion of inspectors who are more inclined towards corrupt ideas than actually inspecting the facilities are not in the interest of the small businesses or their progress rather causing unnecessary hindrances.
· Rickety MSMED Act 2006
When the MSMED Act 2006; the general opinion was that it is a great step towards the cause of MSMEs. Sadly, the truth is the Act lacks enough teeth and does not seriously help resolve some of the key issues hampering MSMEs, one such being the delayed payment clause.
· Overburdened judicial system, Archaic laws, Corruptible enforcers
A serious set of issues that externally and internally hamper our small businesses is the overburdened judicial system (which makes justice delivery painstakingly slow or sometimes impossible apart from the cost) and its complicated ways aided with 19th century laws applied in 21st century scenario. And to add fuel to the fire is our law enforcers many of whom lack integrity and honesty towards the job. If we gather a handful of entrepreneurs or small business owners at a street corner, they will have atleast ten instances of unnecessary harassment or injustice. Imagine the magnitude of the problem in the whole country.
· Regionalism and factionalism
NREGA has already shown its down-side towards industry. One of the outcomes of our democracy is the number of political parties, their ideologies, regional interests that affect availability of labors and workers. Actually, only the political parties gain and both the industry and the labor force are the losers. Finally, it is the country that loses but somehow the powers that be are unable to see it or have decided not to see.
Today, we need solutions to remove the hurdles. Simultaneously, we also need to identify the contemporary sectors that are conducive for MSMEs including women, young entrepreneurs, residents of rural Indian and those living on the fringes that can be brought into the mainstream. This will result in maximum outcome based on effort.
Obstacles don't have to stop you. If you run into a wall, don't turn around and give up. Figure out how to climb it, go through it, or work around it. ~ Michael Jordan
Promising Sectors for MSME
With the changes occurring around the world, opportunities are cropping up from unlikely quarters. The growth of niches today is probably the most since independence. Though the government has earmarked certain items to be produced by MSMEs only, it does not restrict them from venturing into other areas. There are some sectors more favorable for MSMEs to participate and grow. The following list is based on modern global trends.
This segment has an entire range of options and demand from small to large like day-cares, playschools, books and teaching aids, training programs, schools, colleges and universities. Technology is a game – changer in this business. One can start a good online business in this sector. See the case of Tutorvista.
Diseases are not going to get eradicated that soon. And our life-style and depleting environmental conditions are giving rise to newer issues every day. There is a steady demand for generics and life-style drugs especially in Latin America, Africa and South-East Asian countries.
Healthcare is the segment to watch out for in the 21st century. People are more open to alternate therapies like Yoga, Ayurveda and Unani medicines. The life-style problems and the need to look good is driving people of all age groups towards fitness centers. Long hours in offices, travel time and fast-paced lives are causing various health challenges that require exercise aids and frequent physiotherapy. Smaller cities are warming up to the need for multi-specialty hospitals and better healthcare. Many hospital chains are opening up in a hub-spoke fashion to cater to the B and C class cities. The opportunities are aplenty and a huge latent market waiting to be served.
Auto – parts, electronics, nanotechnology products, medical equipments, smart-phones, computing devices are in great demand and will sustain in future.
· Logistic Management
Globalization has truly boosted the potential of logistics. Be it people or products, something needs to be shipped and delivered just in time across the globe. There is a need for enterprises that help support supply chains of companies to meet their procurement and delivery targets. E-commerce has also given lot of thrust to the logistics business.
· Tourism and Arts and Crafts
Tourism in India has a mystic allure and the westerners love to visit Rajasthan, Uttaranchal, Kerala etc. Other states also have lot of heritage sites which if show-cased properly can be huge tourist attractions. Our arts and crafts have a decent global appeal and demand. We need entrepreneurs to gather these items from rural India and present it to the buyers across the world.
Medical tourism is a huge factor for India and people are flocking from around the world for serious procedures like bypass to fashionable things like liposuction and facelift. We need to look for the honey pot.
· Food Processing
Instant food market is booming. A decade ago it was probably Maggi that we knew. Now we have all kinds of spices, semi – cooked food, samosas and parathas. The options are endless. Knorr soups are now being challenged by Ching’s secret soups which require much lesser time and effort to make and have. The young working class and students in hostels are the major drivers of this packaged food segment. We are opening our palate to international foods and health concerns are driving us towards organic food, farm fresh etc. Indians travelling abroad or staying in foreign countries are big customers of processed Indian foods.
· Information Technology
The Indian MSME story is incomplete without the amazing opportunities in the Information Technology sector. Cloud solutions are gaining prominence. Big data analytics for banks and pharmaceuticals is in demand. E-commerce business is coming off age and everyone is into Flipkart and Jabong. A very potent business sub-segment is cropping up in the form of Digital Marketing, Apps for smart phones and Gaming devices as well as solutions. Companies are trying to reduce their total cost of ownership by migrating towards server farms or the SaaS model applications. And last but not the least facilities management is always in demand.
· Green Technology
Though we are still a developing country but we can see a rise in awareness and adoption of green technology. Expensive energy costs are leading to use of energy efficient LED lamps and constructing green buildings that are less energy hungry and more economical, ergonomic and happy. E-waste management market is maturing.
· Renewable Energy
The cost of energy generated from non-renewable sources will continue to escalate as scarcity grows. Simultaneously, availability of good quality power will become a challenge. There will be a steady demand for alternate sources of power atleast in housing / residential complexes for basic lighting and ventilation. Small generation units and products will be in demand.
There are opportunities lying to be exploited in various corners. How we identify and turn them into booming business venture depends on the ingenuity of entrepreneurs and the “surrounding business environment.” A major role will be played by the government in providing the necessary framework to help MSMEs outperform.
What the government needs today is a clear-cut roadmap to steer the nation towards sustained growth and meaningful development by the end of this decade. Many smaller countries are rapidly growing thus, making them a desirable business destination. They are not stunted by the geographic size of their country or limited population. The difference between us and them is – they have a well-thought of plan and the resolve to execute it to the best of their ability and beyond. They are aware of where they stand, definite about where they want to be and relentless in doing what needs to be done to meet the goal.
We can blame globalization, privatization, capitalism, cliques, vested interests, weather, mindset, culture, “the system”, poor education, poverty etc. for the problems grappling this sector but the honest fact is that we are not trying to the best of our ability; we lack commitment, sincerity and conviction.
The solutions are right in front of us. We simply need the will to do!
Following are some of the pointers to start with.
· Expand the definition of MSME in India by making it more inclusive with multiple segments and not just bold three categories clubbing all and sundry into one of them.
· Involve large number of actual industry players in policy formation to remove the system barriers and thus promote entrepreneurship, business, trade and commerce.
· The age old practice has been to let enterprises setup their factories in remote areas and then slowly build the infrastructure. We need a paradigm shift. Build the infrastructure and invite people to invest. Unlike the chicken and egg story, roads should come before industries. Period!
· Ease the compliance system and taxation, reduce data retention or atleast allow electronic storage, simplify return filing and its periodicity, streamline inspection procedure with increased awareness to the enterprises about their rights and that of the inspectors. Government should bring innovation to its compliance process and make it investor friendly and not draconian.
· Develop vertical and horizontal clusters across the country
· Our judicial system should be provided facilities and framework for faster, sharper and stronger legal teeth and might to handle defaulters thus protecting MSMEs
· Reward enterprises that are employing more people which will promote further employment and not burden with complex labor compliance which scares away owners.
· Creation of a huge credit flow system with accountability; government should join hands with international banks and institutions like UN, ADB, and WB etc. for MSME specific financing.
· There should be specific promotion of women entrepreneurs especially to aid them in rural areas or smaller towns and cities where there are huge untapped opportunities.
· Government should provide structured support and policies for businesses to grow in size instead of opting to remain stunted and circumvent legal and procedural hassles.
· The laws should provide honest and logical exit strategies because some businesses will get stuck in the cross winds.
· Industry – academia interaction and collaboration for skill development, employment focused curriculum, stronger vocational training avenues
Taking up the upliftment of the sector should be seen as an opportunity rather than obligation. We need to understand the growth potential and developmental reach of small businesses in a geographically vast country like India with world’s second largest population with no abatement to the rapid increase. Consider growth of MSME sector in the best interest of the country, its sovereignty and future.
“You have within you, right now, everything you need to deal with whatever the world can throw at you.” ― Brian Tracy