Indian Economy is dominated by Services. Services sector contributes close to 55%, while agriculture to about 18% and manufacturing to about 15%. Policy makers have expressed the need to move the manufacturing to about 25% of the economy. This is critical to ensure sustained growth of the Indian economy and provide employment to the millions that hit the job market every year. In this context, it is important to examine the role that MSMEs can play in this journey.

The contribution of MSMEs to the Indian economy is undisputed. The over 64 million SMEs is a vibrant sector that contributes to over 30% of India’s GDP and 40% of exports. They employ close to 120 million people which is close to 40% of the country’s workforce.  SMEs buy products from large industries and are also their suppliers. This interdependent supply chain system makes them a critical cog in the Indian manufacturing ambition.

During the immediate post Covid period, China+1 gained currency, but India did not benefit as much as was anticipated except in sectors like electronics, largely driven by the PLI scheme. Now, the world trade system has moved from the WTO driven rules based order to ‘deals’ between the US and individual country, based on reciprocal approach. India is still at the negotiation stage with the US and one waits with bated breath on the outcome.

Among these uncertainties, where does that leave the Indian manufacturing ambition of 25% to GDP? With Robotics and automation making their mark in terms of use cases for manufacturing, large manufacturers are moving towards high capital, low employment strategy to scale manufacturing.

How do we know?

Anecdotal evidence from the  investments and employment potential impact of the investment announced by large companies suggest one person employment per one Cr. investment. In some cases this goes to is 2 person employment per Cr of investment. This is because large companies rely on high technology, sophisticated systems and processes, and high potential talent to drive their businesses. Obviously, they need to employ lesser people for scale. That number is significantly more in MSMEs.

Further, MSMEs employ lesser skilled or unskilled people and those transitioning from agriculture to industry. So, the criticality of MSMEs to manufacturing and employment generation cannot be overstated. In fact, the ambition of 25% manufacturing is predicated upon the contribution of MSMEs. This is also critical to address the huge employment challenge facing the country.

But what are the challenges that need to be addressed to ensure MSMEs play their vital part in this journey?

1. Access to credit – despite all the effort by the governments and RBI, various estimates put the funding gap to about ₹30 lakh crore. This starves the potential MSMEs of a critical resource for scale up. While banks have moved from asset based lending to cashflow based lending based on GST filing, the gap remains. Working capital support through TREDs platform has been a boon. Much still needs to be done as the gap is too large to be plugged by a few initiatives.

2. Access to new markets – Though MSMEs contribute to over 40% of India’s exports, only about 1,75,000 of them engage in exports. Others either stay away from exports or are content to supply to large organisations that export or supply to merchant exporters. This is because the compliance requirements to exports, long and expensive marketing cycle and the cost of export insurance deter them. Many countries have significant non-tariff barriers and navigating them requires capability that MSMEs lack. There is a need for capacity building and policy support to enrol more MSMEs, particularly in manufacturing to export.

3. Access to talent – over the last decade or so, manufacturing is not seen as an attractive career option by youth. More young people prefer service jobs. Those that do choose engineering education veer towards IT or GCC careers or invest in MBA and move to service roles. Core engineering discipline hardly see enrolments and those that do, learn IT skills.  Apart from fresh graduates, there is a serious lack of middle management talent in manufacturing in roles like production, quality, maintenance. Further, the supply of skilled worker through the ITI system has all but dried up. In this context, the proposal of finance ministry to invest in upgradation of 1000 ITIs is timely but far more needs to be done.

The Prime Minister Internship Scheme (PMIS) is another good attempt but the results of the first two pilots have been anything but encouraging. There is need to include MSMEs in the scheme to ensure wide coverage of the scheme. Enrolling MSMEs as part of PMIS would solve two problems. Firstly, MSMEs can train interns as per their requirement. Secondly, considering the talent gap, almost all of them will end up being employed at the place of internship or similar units in the ecosystem. One of the reasons for poor success of PMIS is because candidates were offered internship in large organisations that were typically located in metros. Pivoting this on MSMEs would solve this problem as they are located in nearby locations. 

If India has to succeed in raising the contribution of manufacturing to 25%, the role of MSMEs is critical. Policy makers, industry, financial institutions and trade bodies have their task cut out. Incremental solutions may not address the problem. We need a complete overhaul of our thinking on MSMEs. It is vital for their success, vital for manufacturing and indeed vital for the country.

R. Srinivasan

Director – AIRA Consulting Pvt. Ltd.