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India Micro, Small , and Medium Enterprise Report 2014

An Introduction

1.0.Background

India Micro, Small , and Medium Enterprise Report 2014 An Introduction 1.0.Background Small and Medium Enterprises

Small and Medium Enterprises (SMEs) (micro, small and medium enterprises, as it is called in India) are undoubtedly a significant global presence. People need them because they speak the common man’s language. Reporting, which means documenting developments, and bringing to the limelight the least known, is often the researcher’s or scientist’s job. But from the society’s point of view, the scientist’s job, even with the best of justice he has done to his work, just begins there. The societal implication of his exercise comes out only when the result his research is communicated. ’India MSME Report’ series, at the Institute of Small Enterprises and Development, is such an annual scientific exercise, with a clear social orientation. Forming part of a larger Programme of theInstitute, called India MSME Communication Programme, the Report comes out from the Institute’s specialized Knowledge platform, the ISED Small Enterprise Observatory.

Given the spectrum of issues relating to MSMEs in India that demand attention , and given the limitations of a twelve months’ reporting, the India MSME Report 2014 focuses on four broad strategic objectives:

  • 1. An overview of recent changes in the economic and political spectrum, and their implications;

  • 2. Public perceptions and responses relating to the MSME role in such a context;

  • 3. Stake holder interaction and their impact on the MSME constituency;

  • 4. The broad signals emerging from the macro and micro level experience, as also the first- hand

information available to the ISED Small Enterprise Observatory.

2.0.Discussion

The Report discusses the following issues under twelve chapters, running into about 250 pages:

2.1.Global Trends

India’s MSME scene, as in 2014, need to be understood and analyzed against the global trends in enterprise and technology. On lines of the ‘Moore’s Law, there has been some remarkable changes in technology that leads to a major paradigm shift in the global economy. These include, areas such as social smartness, information security, sustainable consumption, the so-called redistributing industrial revolution, the phenomenal explosion of scientific advances, volatility of markets, the global resource gap, the swelling of the ranks of’ ‘unemployable’ labour etc. The global MSME spectrum itself has been undergoing changes, marked by such developments as, enhanced utilization of machines against people, the reduction of the real economy as against a booming financial economy, the growth of the rental economy, the swelling of ‘necessity entrepreneurship’ as against innovators, the race to the’ local economy’, and the enhanced use of SMEs as contra-cyclical tool.Overall, the MSMEs around the world,

have performed a commendable role of social inclusion, and as a guard against massive unemployment, and income inequalities.

2.2.India’s ‘Waiting Period’

While the global reality has obvious consequences and impact on the country- level experiences, in India, the last about two years happened to be a ‘waiting period’ of political and administrative transition. This transitional period was marked by a sharp fall in entrepreneurial confidence on account of:1) the subjective experience of MSME entrepreneurs regarding day-to-day business; and 2) their perception on the government’s role that was broadly passive.

The above MSME experience should be understood against the recent state of the Indian economy. Against the declining trend in exports, investments, and growth, there are major challenges for the MSMEs. ‘Development’, a subject of campaigns for the General Elections, provided space for a discussion on the MSME role, though it did not happen to a significant extent.

Despite the challenges of the economy, as above, the MSME sector in India demonstrated its ‘social responsibility’ by all major macro economic indicators. While savings and capital formation in the corporate sector fell drastically during the last 3 years, the MSME sector actually expanded it, thereby saving the economy from a major crisis.

The Indian economy today is on a revival path, though with serious challenges that linger on. This ‘scissors effect’ of investment offers an opportunity to have an MSME-led growth strategy.The recent policy perspective of the Union Government implies a significant thrust on development of MSMEs in two forms: 1) labour market intervention through an integrated skilling approach; and 2); the” Make in India” strategy on a campaign mode. There is need for a strong labor market policy in order to overcome the labour market rigidities . Will the new approach lead to a major start-up strategy? The answer seems positive, considering the Prime Minister’s policy announcements and the thrusts of the Union Budget 2014,which carries the bare outline of a labour market policy,though it has not yet been scientifically articulated.Much homework need to be done on this.

2.3. Focal Themes of the Year

As the ‘new economy’ increasingly gets stronger, its effect will get reflected in the way business is done. Therefore, unlike in the past, one need to think of the structure and transition of MSMEs in more concrete terms, with special focus on their sub categories. The sub category called ‘modern small- scale industries’ has been the focal area of most public programmes today. ‘Non-farm’ / micro enterprises’, the second category, the key driver of employment in the country, has witnessed a significant growth during the past few years. It has undergone a major structural shift over time, though the relative share of unorganized manufacturing jobs declined during recent years. But, influenced by the booming construction sector, the growth has been significantly polarized, away from the farm sector. Social enterprises, an upcoming category globally is yet to get due recognition in India. As an emerging economy, India’s share of ‘new economy’ enterprises has been growing. The emerging knowledge- base of goods and services implies major changes in the enterprise scene.

From the point of view of analysis and policy, the key concerns of 2014 are varied: jobless growth, the mixed start-up experience, constraints to growth, need for crisis management strategies, the side- effects of inclusive strategies, issues relating to local economic development and regeneration, addressing the confidence crisis, and informalization of work, are some of these. India needs an integrated MSME policy against the Country’s new policy thrust on making it a manufacturing destination.

  • 2.4. Growth Story is Telling

The Indian economy, more recently, is characterized by jobless growth. Rights-based programmes such as NREGA, instead of enhancing productivity and employment opportunities, have, in fact , stolen away jobs through structural rigidities. An MSME- led development strategy could have contributed, at a time, to reduce the structural rigidities and to overcome economic slowdown. Against this, the start-up experience in the country has been lop-sided. Essentially focused on the ‘new economy’, and concentrated in the metros, the start-up initiatives in the country did not take off. There was no serious national level effort to boost start-up. Besides ,the flow of institutional finance, over the past few years, did not support start-up initiatives significantly.

The experience of MSME growth in India, in recent times, has been confined largely to clusters. However, the growth experience on the cluster mode demonstrates a lop-sided pattern. One can identify three categories of States. They are, the leading States consisting of Gujarat, UP and Tamil Nadu, the Growing States of Kerala, Madhya Pradesh and Karnataka, and the emergent States of Punjab, Bihar, Rajasthan and Maharashtra. Studies by the ISED Small Enterprise Observatory have shown that, the growth of the clusters have been largely because of the ‘ magnets of manufacturing’ logic, rather than by the Cluster Development Programme. This necessitates a fresh look at the Government’s role in enterprise promotion, towards more of the so-called ”governance”.

While the growth constraints of the MSME sector can be explained in terms of both internal structural factors and external factors, the recent developments in the economy have triggered a debate on the definitional limits of the MSMEs. As a response, the Finance Minister announced the Union Government’s intention to redefine the sector. (Also see, ISED White Paper on ‘MSME Definition in India: The Present State and the Imperatives’.)

2.5.Side-effects of Inclusive Strategies

Across the world, countries are on efforts for evolving strategies for crisis management, wherein,

MSMEs figure as a major instrument of job

creation..

ISED had warned, since 2007, the shape of things

to emerge, and of the potential role MSMEs could play in such circumstances. However, the role of MSMEs was largely viewed, at the policy level, as part of an ‘inclusive development’ strategy, rather than as a strong sector that can act as a growth trigger. Besides, the side-effects of the inclusive strategies were largely on MSMEs than on other sectors of the economy.

The ISED Small Enterprise Observatory, based on its field research, reported a serious ’confidence crisis’ in the MSME sector, demanding immediate corrective strategies. It advocated a ‘Local economic Development’ Model that can kick-start start-up initiatives. Besides, informalisation of work is an important recent development in the Indian economy having implications for policy. While MSME start- up was a focal theme of public policy in 1950s and 1960s, it has undergone major changes during recent times. Start-up programs got a new boost in 2014, thanks to the initiatives of the Union Government. While the role of skill development has been widely appreciated in policy circles, the importance of motivational skills was not hitherto properly appreciated. The new policy approach considers motivational skills on par with modular skills. Such an approach is important in a context where, the tastes and aspirations of the people, and especially of the youth, are undergoing rapid changes.

Apart from the differences in approach of governments, do we have a long term policy of sustained enterprise development. Entrepreneurs come into the stream and go. But the society need to show greater interest in their actions and contributions. The country also needs an MSME policy to shape the direction of its growth and to use this vital sector as a powerful instrument of development.

2.7.Nonfarm Enterprises

The role of micro enterprises(or the so-called non farm sector) as the largest single sub sector of MSMEs is widely accepted in India. This relatively deprived subsector, from an angle of inclusive growth, need to have effective development strategies. The growth of the nonfarm sector, unlike in other countries, is largely a story of autonomous growth. Therefore, as the largest employment provider, it has a significant potential in any major enterprise development programme. The rural nonfarm sector has undergone major structural changes in the recent part. The Indian experience, unlike in the western model, does not follow a ‘stage theory’ of growth; it is also different from the Chinese model. Besides, its acts both as a rural reservoir and an urban growth pole.

Recent evidences show that, construction is the major growth- trigger of the non farm sector. The experience, as above, has significant policy implications. First, there is need for an inclusive policy of growth. Secondly, there is a significant opportunity of developing ‘social marginality’ as an opportunity. Thirdly, there is need for ensuring flow of credit to the weaker sections as an important trigger for nonfarm sector development . Fourthly, there needs articulating and establishing appropriate linkages for non farm sector development.

The new policy perspective of the Government of India, as outlined by the Union Budget 2014, marks a significant departure from the conventional thinking of nonfarm sector development. It moves away from the ‘rights- based approach’ into a developmental approach focusing on capabilities and entrepreneurship. Taking this perspective forward, it is necessary to consider entrepreneurship as a critical national resource. In a ‘bottom-up approach’ to enterprise development, the role of institutions and organizations should be looked afresh and judged on the basis of demonstrated capabilities.

2.8.Subsectoral Strategy

Around the world, value chains and knowledge-base are emerging as critical aspects of MSME development. Today the traditional, and often rather fundamentalist, approach to MSME development

has become less relevant. Particular MSME sectors need to be analyzed and understood in relation to their position in the value chain. Growth and employment generation are becoming increasingly size- neutral and knowledge based. These aspects need to be factored into an MSME policy .

Policy need to go into the fundamentals of India’s business demography. It demonstrates three broad

categories of sub sectors: Legacy subsectors which, in many cases, survive on monopoly rent; ‘Enclave

subsectors’ having much growth opportunities; greater potential.

and the’ New Economy sub sectors’, with much

Given the current state of MSMEs in India, three sub sectors demonstrate a promising picture:

  • 1. Food processing, having great potential because of its agro- linkages.

  • 2. Textiles, offering great opportunities of innovation with backward linkages and having an inclusive angle.

  • 3. Electronics, having a great potential for value addition through linkages with ITES .

Food processing has much untapped potential, which need to be explored, especially in relation to gender roles and farm linkages. Textiles have a key role in any inclusive growth strategy; but needs restructuring with a clear definition of the role of MSMEs. Electronics have the potential of making India a manufacturing powerhouse.

In India, there are three critical constraints that have adversely affected MSME growth from the supply

side, in recent times: 1) confidence crisis;

2) public policy inertia; and 3) a policy holiday. Such critical

constraints, and their adverse effects on flow of finance to the sector, necessities a fresh development approach. The need arises in relation to both, relevant entrepreneurship and a corresponding situation

of relevant flow of finance. Both need to be inclusive in nature.

2.9.Policy Constraints

Both for policy and practice, there are some critical constraints. The major constraint relates to finance. The global financial crisis affects MSME finance in two ways: 1) a general decline credit availability to the MSMEs; and 2) the Base II norms that constrain the liquidity position of banks, and therefore , the loanable funds of banks.

There are several strategy imperatives relating to institutional finance for MSMEs. An enhanced flow of start-up finance need to be ensured through conventional and modern institutional sources. Secondly, gender financing, despite various programs by banks, remain a neglected area. It needs to be a streaml ined, within the existing work of universal banking. The relevance of small banks needs to be explored. Thirdly, ‘inclusive entrepreneurship’ need to be introduced as a new strategy. Fourthly, CSR, in the context of enterprise creation, need to gain a new focus. Fourthly, the criteria for judging asset quality of MSMEs need a thorough review and restructuring. Fifthly, there need to be a new asset reconstruction strategy, by which, all cases of MSME sickness need to be addressed. Fifthly, opportunities of alternative financing sources for MSMEs need closer examination.

Developing a business case for institutional finance is necessary for the banking industry to respond to

the needs of MSMEs. regard.

New institutional structures and incentive systems can play a major role in this

2.10.Governance Issues

In India, there has been significant debates on governance issues . There is a feeling among MSME circles that government programs do not actually deliver in terms of their basic objectives. Implementation is often perceived to be weak. Hence, there is some obvious rationale for arguing for ’ good governance’, with respect to its two aspects: 1) government-MSME relation; and 2) governance practice within MSMEs and their clusters. They need to be separately treated in a transitional phase. Otherwise, liberalization and the progressive withdrawal of government roles will lead to a collapse of the achievements of the past.

Democracy need to have three effective pillars of governance (a) a concrete policy regime; (b) strong institutions ; and (c) effective policy instruments. Meeting the aspirations of entrepreneurs is the primary objective of MSME policy. Today, it needs to be examined in relation to three aspects: (a) skill development; (b) innovation; and (c) financial inclusion. The new official thrust on skill development is of an integrated nature. However, on MSME innovation and financial inclusion, there need to be much more home work.

2.11.Decentralisation

The recent political changes in India have trigged a debate on Center-State relations. A meaningful debate need to spotlight on local economic development, where, MSMEs have a great role to play. The latest available data indicate the role of selected States demonstrating significant visibility in terms of their MSME presence. While the number of business start-ups, and their estimated employment, can be meaningful indicators of visibility, they can be deceptive indicators as well. In this context, the success story of States like Gujarat,need close examination. A national debate on India’s diversity on the MSME front, therefore, becomes imperative. Such a debate needs to be against the country’s national priorities on the MSME front, as outlined by the Prime Minister.

2.12. Key Policy Themes

The emerging scene indicates both the imperative and opportunity for MSMEs to play a significant role in the Indian economy. However, realization of this opportunity demands a strong political will and a concrete policy approach emerging there from.

The major policy imperatives emerging from the Report’s analysis are:1) a focus on start-up;2) thrust on local manufacture;3) a new understanding on skill development ;4) an integrated view of manufacturing and MSME niche; and 5) harnessing ‘social marginality’ as a development tool.

3.0.Learning and Tips for Action

The critical look, as above, should lead us to some concrete action points: need to be based on the following aspects:

1)The macroeconomic understanding of the MSME sector and its role in India is of a piece meal type. What does the national level data tell us? With the coming into force of the MSME Act 2006, a framework was created, within which the performance of the sector can be monitored on the basis of a regular five- yearly Census. However, by practice, the Union Budget and the Economic Survey often make a casual statement on the MSME sector and its programmes. The country does not have effective mechanisms for reporting and advocacy that can help our understanding of the sector and for scientific articulation of the MSME case.

2)The Economic Survey 2014 speaks of a ‘policy paralysis’ at the national level. For the last five years, MSME policies revolved around the Prime Minister’s Task Force, which was prepared 5 years ago. While rapid changes have happened in the economy subsequently, these did not attract the attention of policy makers. MSME policy, so far, essentially means, either perspectives of policy institutions or political statements by Prime Ministers. In a democracy, what is needed is a national Policy Statement, around which strategies need to be moulded, and signals given to the entrepreneurs.

3) Since the policy is ambivalent, programmes and schemes also lost their

focus..

Subsequently, it is

found that the programmes are either repetitive, poorly targeted, less relevant, or that the benefits are

cornered by vested interests.

4)Strategy Approach: Given the programmes and schemes, the strategy approach. Therefore it needs to be properly defined. While a strategy approach specific to MSMEs is crucial for sustained development, in the actual practice, they are often of an ad hoc nature.

5) The role of actors is often confused. While public- private partnership is the dominant rule of programme implementation today, the private sector often remain ill-defined. This is most evident in the case of Cluster Development Programme. While, the main purpose of cluster mode of intervention is to enhance ‘collective efficiency’, studies have shown that, measures for enhancing capability of the collective efficiency platform are often insignificant. In fact, rather than the programme contributing to enhancing collective efficiency, it is the relatively progressive industry associations that have proved to be efficient in cluster management as well. This implies that, the important role of capacity building, expected from Cluster Development Programme, remains unfulfilled.

6)In a democracy, advocacy has a crucial role in enhancing the visibility of a particular subsector, and to establish its presence and relevance in the administrative system. It is also a mechanism that can play a key role in establishing a positive linkage between the parliamentary process and a grass root level economic activity. However, the advocacy role is practically very weak in India; it need to be shaped on scientific lines.

7) The MSME sector is expected to gain its developmental role and relevance through an appropriate labour market policy. While the country does not have a strong labour market policy, in the case of MSMEs, the situation is worse. In a globalizing world, where the opportunities of labor migration are greater, labor market interventions of a rather casual nature, are likely to make anachronistic results (example: NREGA) In such a situation, one policy stands in the way of another one.Though such anachronistic situation has, of late, been understood in policy circles, concrete corrective action is awaited.

8) While the global value chains have an emerging role, it is necessary to have a sub sectoral approach to development, so that the MSMEs can utilise the backward and forward linkages. This demands the presence of significant domain expertise at the level of policy design and shaping of strategies, including financing strategies. A sub sectoral approach, rather than MSME fundamentalism, that can produce effective results.

9) Public Policy of Finance: In India, the executive and banking system are under two different administrative controls. The banking system, though under the regulatory framework of the RBI, can follow independent policies. The other regulatory angle come from the Ministry of Finance, which in turn, exercise some regulatory tools through the Department of Banking. Despite these regulatory angles public policy on finance to MSME remain a rather grey area. Similar problems are mediated mainly through two types of measures: First, the Central Bank plays a proactive role in ensuring the flow of credit to the MSME sector through appropriate directions, moral suation, and through development of appropriate knowledge systems. Secondly, both the government and the Central Bank have joined together to evolve consultative mechanisms.

While, in India, despite several regulations for ensuring the flow of credit to the MSME sector, the field level feedback indicates that, this has never got translated into a proactive approach from the banker’s side. Banks still do not consider having a business case with MSME finance.This calls for radical institutional changes.

10) Tapping the MSME Growth Opportunities: Making use of the potential of MSMEs is crucial to India’s development policy. However, translated into strategies, they often do not work properly. The constraints related to: 1. policy; 2. funding; and 3. linkages.

The country did not have a strong start-up policy for the last sixty years, though a beginning has been made by the Union Budget 2014. Besides, start up funding continues to be a difficult area. Venture capital Funds and other Start-up Funds can play a major role. But an appropriate environment need to be created. Though there are opportunities of intervention through windows such as CSR funds, such linkages are not often properly tapped or tailored to the context.

11) While the MSME Act 2006 was brought in as a major step forward in ensuring an environment of competition, the benefits of the legislation have not yet trickled down. The Competition Policy of the country is yet to properly understand and accommodate the MSME sector. The experience of countries like South Africa and Indonesia, provide some lessons for India.

12): . Government-Governance Relationship The new thrust of the Union Government is on governance While the results are yet to be seen, it gives promises to MSMEs is relation to a due space for articulation of their case. There is much need for specifying and redefining this relationship, and for restructuring the role of the government.

13) Knowledge Systems: The experience of the European Union and North America demonstrates the significant role of knowledge systems that support both public policy and entrepreneurial activity. While in India, even while major programmes like the National Manufacturing Competitiveness Programme was introduced, the role of a knowledge system that can support them, was largely side- tracked. A major campaign like, ‘Make in India’, demands effective knowledge systems for its success.

14) Business Confidence: Business confidence is essential for orderly growth of private sector development. However, this can happen only if public policy plays a proactive approach to boost entrepreneurial confidence. Like that of Europe, it should start from a ‘Think SME First’ policy, which can give the correct signals to all the relevant stake holders.

15)Asset Reconstruction: Conserving the entrepreneurial resources of the country has, not so far , gained the importance it deserves .it is necessary to have an effective integrated asset reconstruction strategy for the country as a whole, in order to arrest the chronic waste of entrepreneurial resources through industrial sickness.

4.0. Points for Immediate Action

In order to meet

the national policies and priorities on the MSME front, India needs a nine- point

approach and strategies thereon:

1)

an integrated MSME Policy;

2)

Effective MSME governance system, with the help of a sound data system;

3)

Declaration of entrepreneurship as a national resource, and launch of a National MSME

4)

Health Service. Enterprise Security as a policy approach;

5)

‘Think SME First’ as a campaign(for delivery of public services and public procurement).

6)

Mission mode intervention for harnessing the MSME potential of States.

7)

Creation of a National MSME Fund as a Centre-State initiative

8)

Introduction of an MSME Unique Identification System and regular data base

9)

Innovations in financial architecture, with special focus on a concept of ‘Finance Parks’.

5.0.Conclusion

In every democracy, the developmental outcomes are decided by people’s aspirations, to begin with. These aspirations need to be articulated through effective platforms. Institutions are the outcome of these platforms and their initiatives. People’s mandate legitimizes the actions of institutions. Unless

public policy, evolved through a democratic process, gives the signals, one cannot expect India to realize its aspirations on the MSME front.