Are MSMEs Working as Startups for Rural and Semi Urban India?

While credit accessibility seems to be the focal point for MSMEs, start-ups are vying for a bigger share in the economy.

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By Mohit Sahney


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In the recent times, the two terms – start-ups and Micro, Small & Medium Enterprises (MSMEs) - have been heard quite frequently. Infact, both of these kinds of businesses are trying to overcome the present challenges,which if addressed can bring revolution as far as economic growth,employment generation & inclusive development in smaller markets are concerned.

While credit accessibility seems to be the focal point for MSMEs, start-ups are vying for a bigger share in the economy. Often considered as a cool or fun place to work, majority of start-ups are based out of urban locations – any one of the top 10-15 metropolitan cities. As a consequence, a startup has an easier access to media attention, the country's bourgeoning digital infrastructure, and of course, funding for business.

On the other hand, the MSME sectors are still struggling to get adequate funding. Located usually in tier 2 and 3 cities and towns, the sector is often snubbed or underserved by the banking and financial institutions. In the absence of massive funding, fancy consumer-centric apps or digital media campaigns, the MSME sector is hardly ever part of media headlines whereas if supported well this can remove stigma of unemployment & migration of popultaion from our semi urban & rural segments.

However, as we shift our attention and try to look outside the urban landscapes, reality has a different story to tell. The resilience shown by the micro, small and medium enterprises, along with certain favourable announcements and policies by the government, the MSMEs are steadily turning the tide in their favour.

Often perceived as the beacon of hope for the indigenous, MSMEs are breaking the upper ceiling and are increasingly assuming the prominence of a startup. Let us further discuss certain facts and arguments favouring the same:

Contribution to GDP

With a number of Indian start-ups entering the unicorn club, these entrepreneurial ventures are now considered to be the driving force of Indian economy. However, MSME sector spread across the uneven and remote terrain of India has been a consistent provider to the nation's GDP.

Contributing nearly 8% of the country's GDP, MSME sector further claims 45% of the entire manufacturing output &is responsible for 40% of the exports.

As far as the manufacturing is concerned, the MSME sector produces as many as 6,000 different types of products. Furthermore, over the years, the MSME sector has begun to produce more complicated and sophisticated products, instead of simple consumer goods.

Creating Employment Opportunities

Another reason for a startup to be considered as the champion for Indian economy is the fact that they are creating so many jobs in the nation. Battling unemployment has been one of the causes of concern for the Indian government. However, the contributions of the MSME sector in job creation also deserve a mention.

Micro, Small and Medium Enterprises provide the largest share of employment, second only to agriculture. As per the existing statistics, MSMEs are estimated to be employing around 6 croreindividuals.

Besides, while startups are focused at automation and replacing manual labour via Artificial Intelligence and leaner growth models, the MSME sector continues to be labour-intensive, with 4x expected labour intensity.

With an unmet financial gap of INR 3 trillion, arising from over 55 million micro enterprises spread across the country, we are looking ahead at a big opportunity. India's future depends on the productivity & success of its massive youth population, most of which are employed with the MSME sector.

The Way Ahead for Indian MSMEs

Empowered by the Make in India initiative and a favourable Union Budget 2017, the MSME sector can be considered as the nurseries for entrepreneurship & innovation. However, we have only just begun exploring the true potential of MSMEs.

In a recent joint study by KPMG and Google, it was reported that as many as 68% Indian SMEs are completely working offline. Moreover, even those with a digital presence are unable to extract the maximum potential of the same, with only 2% of the SMEs engaged in actively selling and building their business online.

Perhaps it is time for the MSMEs to take a cue from their urban counterparts, the start-ups, and register a digital presence. In addition to opening floodgates of opportunities for online selling, market outreach and customer acquisition, the digital channels also enable MSMEs to easily access financial services and resource materials, significant for their growth and expansion.

The biggest fillip to this sector could be making credit available to MSME as it will take care of most of issues we have in our country like unemployment & migration of population.Since banks are unable to reach out to them in efficient way, Non Banking Financial Companies (NBFCs) are the right answer for this. However there is a catch in this situation, since cost of funds for NBFCs are higher hence credit cost to these MSMEs are high hence government should make credit available to these NBFCs at much lower cost so that credit can be reached to MSME at affordable cost. Mudra Bank can play a vital role here, however they also restrict their lending to bigger players only. Moreover, government can announce interest subsidy akin to affordable housing to MSMEs as well.

Mohit Sahney

Managing Director & CEO, Finova Capital

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