India seemed to be marching towards an SME revolution; the sector is widely regarded as the industrial backbone of India.
Initiatives like ‘Make in India’ and ‘Aatmanirbhar Bharat’ are fuelling the aspirations of making India a global manufacturing hub. Many believe that by harnessing their capability of delivering the right products at the right quality parameters, at the right price, and at the right time, Indian companies can replace their rivals from other Asian countries.
In fact, World Bank estimates put the contribution of SMEs to about 80 percent of the entire Indian industrial ecosystem. SMEs are well poised to be the catalysts of economic growth in India and help the country become a $5 trillion economy, even though most of them are considered to be in the informal sector.
Yet, this informality can cause the goal to remain a pipe dream if challenges, including the lack of access to credit, skilled workforce, and input issues, are not addressed.
The inability to utilise installed capacity to the fullest runs the risk of stagnation. This article will walk you through the current scenarios and arm you with a bird’s eye view of the SME industry.
First, some numbers to tell you why the challenges cannot be overlooked any longer.
As per the widely accepted definition, any enterprise that falls in the estimated revenue bracket of $20 million to $250 million comes under the SME category.
India has about 50 million SMEs, employing 110 million people and adding half a trillion in gross contributions to the GDP. This makes it the second-largest SME concentration in the world after China.
Verticals such as social, mobile, analytics, and cloud (SMAC) are growing at a double-digit rate, pushing the revolution. The SMAC segment was projected to see faster adoption and double the overall SME contribution in the national economy.
Growth and revenue generation in SMEs surpassed large corporates. It was pegged to be growing at a rate between 6 and 7 percent annually. SMEs contribute about 45 percent of the total manufacturing output in India.
A lack of funding and sustainable credit options that the SMEs need for the growth and skill development of their workforce has been a major challenge faced by SMEs.
While these challenges existed pre-pandemic, the segment dealt creatively with them. The onset of COVID-19 has, unfortunately, resulted in body blows to the Indian SMEs — both from the procurement and sales perspectives.
A disruption like the pandemic not only hurt the supply side of the business but also led to a financial crunch and decline in product demand for most of the SMEs.
Many companies were left with no more than a month or two of operating cash. They also had to lay off a large number of their employees to survive the period.
While the COVID-19 pandemic will not be eradicated soon, the phrase ‘new normal’ is going to be more than a cliché.
The Indian SME sector is perceived as unorganised partly since most of the workers employed by SMEs are not professionally registered and recognised. This keeps the workers out of numerous governmental benefit schemes, including the Employees’ Provident Fund Organisation (EPFO).
When the work stopped during lockdowns, a large section of this workforce — which had come from rural areas and small towns — migrated to native places, with a significant number refusing to return to work after lockdowns were lifted.
Consequently, even when the businesses reopened, a large number of companies had to deal with labour shortages, with some still understaffed.
In fact, most workers are not qualified as per industry standards. This not only prevents their career growth but also stops SMEs from upskilling and providing higher value-added services.
Providing health insurance and accommodation aid can also help boost employee security and loyalty.
Raw materials shortage
Similar to the labour shortage, the industries were also hit by a lack of raw materials and technology as transportation was disrupted by the lockdown.
Not only within India but international trade also plummeted, leaving supply chains high and dry. Imports such as active pharmaceutical ingredients and semiconductor chips from East Asia were affected.
Even basic raw materials, including steel for making wires (much of the steel products industry is in the SME sector) and industrial oxygen (diverted for medical use), ran into short supply.
Building robust supply chains and reducing import dependence will be part of building long-term resilience.
Collapse in demand
Lockdowns crimped opportunities for people to shop, and lay-offs sapped their capacity. As families shifted spending lower down Maslow’s hierarchy, sales plummeted in everything — from consumer durables to housing to clothing.
While online shopping accompanied by the gig economy saw an uptick, it accompanied the closure of many small retailers. Connecting SMEs to the digital supply chain is a challenge waiting to be addressed through innovative solutions.
The lack of workers and collapse in demand has impacted capacity utilisation. In the wake of the second wave of the pandemic, most of the SMEs are operating at 50 percent or less of their installed capacities.
A similar redundancy is witnessed in all aspects of SME related operations, including transportation.
The good news is that Indian SMEs have in-built resilience that helps them show greater confidence in overcoming pandemic waves. As the world recovers from the worst economic effects of the pandemic, the majority of Indian SMEs are looking at the years ahead as an ideal opportunity to consolidate their market positions.
The Government of India also acknowledged the critical financial fallout and announced numerous measures to back the SME sector.
For instance, Rs 3 lakh crore collateral-free business loans were provisioned for companies, including MSMEs.
Two lakh NPAs or stressed SMEs were to be offered Rs 20,000 crore as subordinate debt. Further, an MSME Fund of Funds worth Rs 50,000 crore was announced which was to be used for equity infusion under various schemes. Investment limits for MSMEs have been raised, and e-markets will now be promoted to replace the on-ground exhibitions and trade fairs.
These are all appreciable steps, but they also need to be backed by several other important ecosystem services, including the creation of social security, health insurance, and cash transfer schemes for the workers, and easy sustainable finance for the companies.
Similarly, digital delivery channels like e-markets should be further optimised for more efficient outcomes.
As we have seen across business verticals, the Indian SMEs staggered a little due to the pandemic hit. However, they are well-poised to surge ahead and make India truly Aatmanirbhar.
We only need to back them financially through government stimulus and funding, and also through the ‘Vocal for Local’ initiative, which would help them generate greater revenues.
Together, we can do it!