Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. Not only do the 6.3 crore MSMEs in India contribute one-third to the GDP of the country, but they also provide employment to a large segment of the population, particularly the non-formal sector.

Also, in a country like India, which is more a services hub than a manufacturing one, MSMEs have always ensured some competitive intensity between domestic products and imported ones. With the current emphasis on Atmanirbhar, these MSMEs have become even more significant to our economic and financial strategy. The fact that MSMEs contribute 55 per cent and 60 per cent to the GDP of Germany and China respectively is a clear indication that we still have a long way to go in our MSME journey.

As small businesses downed shutters during the lockdown phase across the country, sales plummeted to zero, even when costs did not, hitting the sector particularly hard. Most MSMEs in India typically rely on NBFCs and MFIs for their financing needs, given the lack of access to the banking sector. With the NBFC sector enduring a liquidity crunch since September 2018, MSMEs were hard-pressed for money as it is. The pandemic further compounded their problems. While a black swan event like Covid could not have been predicted in advance, it does bring into question, what could have been done to prevent such a situation in the first place.

The credit conundrum

A concerning gap in India has been the credit supply shortage to MSMEs. The formal credit available to this sector is ₹16 trillion. The viable credit gap is ₹20 trillion against a total demand of ₹36 trillion!

The main reason for this gap is the lack of formalisation amongst MSMEs. Even today, out of the 6.3 crore MSMEs only about 1.1 crore are registered with Goods and Services Tax regime. The number of income tax filers are even less. As a result, Indian MSMEs’ credit requirement has been largely unmet due to limited availability and access to data and legacy underwriting methods.

The silver lining

There are two critical forces that will together give rise to niches, new models and propel the credit growth in the MSME sector:

* Formalisation — Registration, documentation and certification of entities have been increasing rapidly. From just 22 lakh registered MSMEs in 2015, we are now at 88 lakh, a trend which is accelerating with enabling government procedures and the focus on Ease of Doing Business

* Data Democratisation — The increasing formalisation as well the as the rapid uptake of the India Payments stack has ensured that we have access to a variety of non-conventional, alternate sources of data for underwriting. New underwriting models, based on such alternate data points are being tested and improved upon every day, providing the opportunity to bring an even larger fold of MSMEs into the formal credit bracket.

With India’s bond markets starting to take shape, promotion of SME bond issuances can provide a fillip to debt capital markets participation of MSMEs. While such issuances will provide lower interest rates for MSMEs than other financial intermediaries charge, they will also be a viable high-yield instrument for informed and educated investors operating in the bond market.

Even as we work towards using the new data and information highway to better understand MSMEs, it is paramount that the government creates an independent body which can advise and provide consultancy to MSMEs and enable them to win in this new, digital world.

Secondly, labour laws, as they stand today, are not very conducive to MSME growth. They must strike the right balance between providing a growth-oriented framework for MSMEs to run in and providing sufficient protection for the rights of workers.

Lastly, while Ease of Doing Business has been a focus area, the reporting, approval and compliance requirements for small businesses continue to border on the higher side. If we truly want to create a country where MSMEs can influence our economic destiny, it is imperative that they are provided a hassle-free regulatory framework which works for them rather than against them.

Looking ahead

MSMEs are the backbone of a resilient national economy. Prioritising their development is critical to the future of the country. The government has come out with a variety of enabling mechanisms over the last few years.

We need more such measures, especially in the current environment. The next decade will be the metamorphosis of India from an emerging power to an established economic powerhouse and MSMEs will be an important cog in the wheel on this journey.

The writer is Chairman, Edelweiss Group

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