Will SMEs get the GDP Growth Rate Back on Track?
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It was always coming! As the Indian GDP growth slumped to 5.7% in Q1 FY18, hitting a three-year low, there is a 'muted, curious' silence: Did we get it all wrong?
The services sector has its own challenges -- slowing global demand, competition from other low cost destinations and the slow level of skilling in India have all contributed to, in equal measure, and don't speak of an immediate revival.
The farmers continue to strike outside the Rashtrapati Bhavan and India's dependence on God's magnanimity in agriculture is not changing anytime soon. The manufacturing sector, though, is in a different tipping point.
Manufacturing Synonymous with SMEs
Demonetization and GST have hit the manufacturing sector hard. Manufacturers cut production and dealers, offered discounts on their products, just to clear out the stocks. But surely the "Makers in India" will learn and cope with the double strike and the phenomenon is temporal. The question that confronts us is that can manufacturing contribute more? Can they get us to the promised "Achhe Din"? Some signs look promising.
Manufacturing in India is the world of SMEs. Asking whether manufacturing can revive India is like asking whether the SME can revive India. The SMEs form 95% of the total industrial units in the country. They employ more than 46 crore of us, a bulk of which is in manufacturing. The SME "Maker in India" makes >8,000 quality products sold all through the globe, more than ever before. The sector seems to be growing at early double digits also. Some global threats also seem to be dwindling.
SMEs Lapping up All the Attention
The ecosystem has also started to realize it. The banks and NBFCs are developing new ways to fund them. New-age companies in several fields are looking at creating models in procurement, finance, logistics and marketing that are beneficial to the SME manufacturer. The government has introduced more tax rebates in this year's budget, in addition to the already prevalent soft loans. And then, there is GST.The introduction of GST, though detrimental in the short term, has made the SMEs in manufacturing dream big. They have always had the capacity (both in people employment and hard assets deployed); they were not fully utilized though. Unreal state boundaries had introduced indirect taxation and increased working capital requirements, which the SME (already reeling under heavy working capital pressure) could hitherto never afford. GST, though, has created a level playing field across these two dimensions, that the SME is bound to prosper in, particularly in manufacturing. Now, the SME "Maker in India" is talking, finally, about Making more.
Measures to Streamline SME Operations
Most of these measures above are focused on enhancing the demand and streamlining operations of the SME. The critical need gap that needs immediate attention for a SME manufacturer, though, is the access to finance, particularly working capital.
A manufacturing SME has three issues when it comes to working capital - 1) It has high receivables as its anchor customer dictates terms, 2) Planning inventory is tough at low volumes and hence results in high inventory across channels and, 3) the supplier does not provide great credit terms to a SME. Thus, SME's working capital needs are high and since institutional finance does not reach it cost effectively, SMEs have lent from the channels at high costs. This access to working capital finance has to be sorted for the SMEs to sky rocket, especially given the opportunity at hand. See China: SMEs are ~60% of GDP, India's stays at ~45%. That's an enormous white space.
What's Pushing SMEs Closer to Digital Revolution
It's here that the new-age companies are stepping in. The advent of whatsapp and penetration of smart phones had brought the SMEs closer to the digital revolution sweeping India. The new-age fin tech companies are, admittedly, building on this trend.
The first wave of fintech, both in lending and services, developed fast and nominal paperwork oriented systems for efficient processing and disbursal of loans to SMEs. They continue to heavily leverage technology in customer interactions, extracting data through online integrations (e.g. Aadhar), and deploying rule based screening engines for higher efficiencies and faster decision making.
Many fintech companies have invested significantly in data sciences to build proprietary scoring approaches and databases, which enable them to generate a credit report that is more credible, contemporary and relevant for the SME. This alternate data set could range from current cash flows, anchor transactions, social networks, behavioral and community feedback and offers a comprehensive view with high predictability and accuracy.
How Fintech Startups are Helping out SMEs
Several fintech start-ups have leveraged technology to build scalable solutions to connect SMEs to potential lenders for tailored requirements. In addition to connecting, these marketplaces provide several value added services like primary underwriting, risk assessment, rule based matching and seamless payment-settlement engine to enable a win-win for SMEs and the lenders. Thus, fintech start-ups are mushrooming across the entire gamut of financial inclusion for SMEs - acquisition, processing, underwriting, lending or credit rating. And this is just a start for the SME "Maker in India", if you've been watching the global trends of fintech innovations.You saw the human pyramids reaching the unreachable during Janmashtami. The SMEs of India (much like the human pyramids), today, are positioned to do that, the dahihandi being the elusive double digit growth rate. I say, this one too, is coming!