What do MSMEs want? Perspectives from a conversation with NCR’s industrial associations

In response to the COVID-19 pandemic, more than 600 Indian medium, small and micro enterprises (MSMEs) in the textile and garment business are churning out 4.5 lakh personal protective equipment (PPE) kits every day, according to recent reports quoting Union Minister Smriti Irani. Similarly, mask production per day is in excess of two lakh and small enterprises are now aiming at exporting the surplus. Over the past two months, thanks to timely support from the Ministry of Textiles, MSMEs have demonstrated swift response to the market by making required changes in the production process, hiring and training workers during lockdown and successfully distributing their finished products to hospitals and other customers.

In normal times, however, they face multiple hurdles in doing business, as industrial associations of Delhi-National Capital Region (NCR) shared during a virtual roundtable discussion conducted by World Resources Institute, India earlier this month.

1. Regulatory requirements

Despite the state government’s thrust on making paperwork simple for new businesses, it still takes at least two years before a business can fulfill various regulatory requirements – like obtaining no-objection certificates (NOCs) – and begin operations. “By that time, the enthusiasm of the entrepreneur is killed and his entire launch plan goes awry,” said an entrepreneur from Karnal.

2. Land resources

The massive hurdle in NCR, however, is the availability of land. One textile manufacturer from Sonepat expressed his frustration at the Haryana State Industrial and Infrastructure Development Corporation’s practice of auctioning industrial plots to the highest bidder, rather than allotting them on the basis of readiness to set up a plant. People who win the bid are often not interested in manufacturing but have bought the land as investment while those who have a plan ready for expanding their production facilities are left waiting. “If this continues, I have two choices,” he said, “either I relocate out of Haryana, or I stop manufacturing and become a trader.”

3. Access to skilled labor

Another significant impediment is in the realm of access to skilled labor. An example of shortage of skilled labor is in the purchase of defense equipment. To boost the Make in India program, the government has laid down that 30% of defense equipment purchased has to be from domestic manufacturers. But implementation of this policy is difficult because manufacturers of military hardware in India are limited as the requisite skill is not available. The government’s efforts at skilling through Industrial Training Institutes (ITI) have proven woefully inadequate so far, as industry bodies felt that they offered outdated courses that didn’t benefit the students and their employment prospects.

4. Access to financial resources

Meanwhile, another webinar on MSMEs organized by Global Alliance for Mass Entrepreneurship (GAME) revealed that access to finance posed a major problem as well. Banks demand a fully laid out plan on return on investment. This is tricky for entrepreneurs launching a brand-new product who have no precedent to base their answer on . Collaterals are hard to produce especially for women entrepreneurs running micro enterprises, as land and other assets are often not in their name. To become credit-worthy, MSMEs need to show transparency in processes and cross the digital divide. This is particularly difficult for micro enterprises that are at the bottom of the MSME pyramid.

To those who can access the capital, the cost of funds is the next hurdle. “Capital is available to Chinese entrepreneurs at 2-3% and to us at 7-10%. Our cost is already higher by 5%. How can we then compete with Chinese goods?” lamented an industrialist from Noida whose company manufactures equipment for railways.

5. Government’s underutilized schemes

While these are significant hurdles MSMEs face in doing business, ministry officials point out that there are several levers within the entrepreneur’s realm of control to make their businesses work efficiently, which are not being pulled enough. These include being energy efficient, improving productivity, managing working capital effectively, having a lean structure and strong balance sheet.

To help them, the MSME ministry has launched a number of schemes which officials believe are underutilized, especially by entrepreneurs in NCR as compared to those in states like Gujarat, either due to being unaware or not believing that they are useful. Some of these are the champion schemes that aim to help smaller units scale-up operations – the Zero Defect and Zero Effect (ZED) scheme to create production systems which have zero defect products and zero adverse impact on the environment, the Credit Linked Capital Subsidy (CLCS) scheme for technology upgradation in which the government gives 15% subsidy to firms which adopt one of the listed technologies, the Lean Manufacturing scheme to reduce waste in manufacturing and the Design Clinic to provide advice and finances for design development. A portal called Sambandh acts as a virtual marketplace for MSMEs and potential job seekers.

MSMEs have been identified as an engine of economic growth being the second largest employers after agriculture providing 11 crore jobs. According to the MSME Annual report of 2016-17, they contributed 33% of the manufacturing output and 45% of exports. The COVID-19 crisis has shown how they can quickly turn themselves around when ably supported. It would hence be worthwhile for stakeholders – including financiers, policymakers, skill developers and industry bodies – to come together and plug the oft-discussed gaps in the MSME ecosystem.