Covid-19: Path Ahead For MSMEs In India One of the key drivers for growth of the MSME will be degree of import substitution they can offer, driven by their capability of supply, capability of demand, capacity, cost competitiveness and customer perception

By Ashim Sharma

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Micro, small and medium enterprises (MSME) is a strong foundation to India's economic success, contributing to more than 6 per cent of manufacturing gross domestic product (GDP), 24 per cent of GDP from service activities (total close to 29 per cent of India's GDP) and 33 per cent of India's manufacturing output, while generating employment for more than 100 million people. MSMEs also contribute to more than 49 per cent of India's exports. The United Nation's Industrial Development Organization (UNIDO) has defined multiple manufacturing clusters across the country to facilitate conducive environment for development of MSMEs as they continue to operate across 9 different sections such as animal husbandry/horticulture, ores/minerals, chemical and rubber/plastic, among others.

One of the key drivers for growth of the MSME will be degree of import substitution they can offer, driven by their capability of supply, capability of demand, capacity, cost competitiveness and customer perception. The recent announcements made by the government of India can also cater to demand creation for domestically manufactured products and promote import substitution. However, in order to make that happen, the manufacturing sector in India needs to shoulder the dual responsibility of accommodating shift of labor from agriculture and cater to the added labor force.

The manufacturing ecosystem is constantly evolving under influence of several megatrends, starting from consumer behavior to technological shift and now with the advent of COVID-19, business as usual will be replaced by the "new normal', where social distancing and safety norms, along with disrupted supply chain due to supply chokes and shortage of skilled workforce may become a permanent challenge. MSMEs operating in a shop floor environment, especially in manufacturing or similar process-driven industries would need additional investment in operating conditions (such as PPEs, protective cells in assembly lines, low-cost automation in material handling) to streamline operations in the post-COVID era, in order to reduce the risk of infection.

In addition, during the COVID-19 era, most of the MSMEs are in a serious financial crisis, due to drying up of demand and non-receipt of payments which has led to a working capital crunch. While the government has already announced multiple financial packages in tranches as a part of the INR 20 lakh crore stimulus, the benefits accrued as a result of the financial schemes should get clear in due course. However, in addition, a few solutions such as provision of direct wage support to MSME blue-collar workforce as well as deferring payment of utility, rent payment, etc., can reduce the working capital requirement.

Eventually, the financial support is a temporary measure to tide over the next few months and MSMEs will require a major consumption demand boost, at least for domestic market which would need measures in six key areas:

Capability of supply: Can Indian MSMEs in the product group make equally good products in terms of finish, durability, etc.?

Capability of demand: Can Indian MSMEs in the product group quickly adapt to the changing trends?

Capacity: Do Indian MSMEs in the product group have enough capacity or raw material to produce?

Cost competitiveness: Are products manufactured cost competitive with respect to imported products?

Customer perception: Do the products have any negative connotation attached to them compared to the imported products?

Value chain integration: Are various elements of the value chain i.e. raw materials, sub components, etc. available?

Assessment along these factors and suitable measures to close the gaps will ensure different MSMEs are able to cater to the domestic and export demands.

Ashim Sharma

Partner & Group Head – Business Performance Improvement (Auto, Engineering & Logistics), Nomura Research Institute Consulting & Solutions

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