Greening MSMEs is Critical to India’s Clean Energy Transition

Micro, Small and Medium Enterprises (MSMEs) contribute to about 30% of India’s GDP and employ an estimated 15.50 crore individuals, as recorded on the Udyam Registration Portal in December 2023. Moreover, they contribute to roughly 45% of India’s total exports. These enterprises drive economic growth by fostering bottom-up innovation, fortifying value chains, harnessing untapped local resources and creating job opportunities. However, despite their significant contributions to economic growth, India’s MSMEs face several challenges. This includes substantial energy consumption responsible for about 110 million tonnes of carbon dioxide (CO2) emissions annually. In addition to challenges in meeting environmental sustainability standards, with energy consumption projected to increase by 50% by 2030, MSMEs also face the added challenge of rising costs, highlighting the need for urgent intervention.

The Shifting MSME Policy Landscape

Their role in economic growth and emission reduction makes MSMEs critical to India’s ongoing energy transition efforts. The focus on making these enterprises more energy efficient is reflected in recent policy changes, special support packages, technological advancements and significant shifts in the business landscape.

The Udyam Assist Platform (UAP) is one such initiative that leverages digitalization to facilitate easy online registration of Informal Micro Enterprises. RAMP, a World Bank-supported central sector scheme, focuses on enhancing institutional and governance frameworks at the central and state levels, the greening of MSMEs through adoption of energy sustainable technologies, and increasing their access to markets. The Ministry of MSME has also launched the MSME Samadhaan Portal to empower micro and small entrepreneurs to directly register their delayed payment cases.

Challenges and Opportunities

Despite the renewed focus, MSMEs remain particularly vulnerable to global uncertainties due to their size. This has been highlighted by events like COVID-19, which led to the shutdown of approximately 13,000 MSME units in India. This underscores the urgent need for strategic support in accessing flexible credit facilities, advanced technologies and sector-specific policies. The sector is also vulnerable to the impacts of climate change and associated financial risks; however, we can proactively equip MSMEs to build resilience and tackle future challenges.

The challenges faced by MSMEs were acknowledged in the G20 New Delhi Leaders’ Declaration in September 2023 under India’s G20 Presidency. The challenges included information asymmetry, limited access to finance for technology upgrades, and insufficient information on renewable energy and resource efficiency, particularly in developing countries. To work toward addressing these challenges, the declaration welcomed the Jaipur Call for Action, an initiative aimed at enhancing access to information for MSMEs. It also focused on building resilient Global Value Chains (GVCs), integrating MSMEs into global trade and improving logistics for trade.

Recognizing the need for a digital transformation, the G20 Finance Ministers and Central Bank Governors endorsed two key initiatives: Regulatory Toolkit for Enhanced Digital Financial Inclusion of MSMEs and the G20 Policy Recommendations for Advancing Financial Inclusion and Productivity Gains Through Digital Public Infrastructure. These recommendations aim to guide regulators in enabling MSMEs' access to digital financial services, which would ultimately enhance productivity and better equip them to handle financial uncertainties.

WRI India has also held focused discussions on the greening of the MSME sector. We explored the multifaceted challenges faced by MSMEs in our conversations with stakeholders. These discussions emphasized the necessity of revamping existing financial mechanisms and introducing new ones that are tailored to integrate sustainability, energy-efficient technologies and provisions for scaling up the adoption of renewable energy. This includes establishing a special line of credit for green energy projects to address funding challenges and encouraging sustainable practices. This was also highlighted in our publication, Analyzing the Policy Landscape for Supporting the Clean Energy Transition in Small and Medium Enterprises in India, which focused on the state and central policy landscape between 2010 and 2020.

Streamlining financial instruments has emerged as a critical component. Leveraging data, such as GST data and technical business information, would enable MSMEs to address the challenge of creditworthiness. Furthermore, integrating MSMEs into India's National Clean Air Program can facilitate the adoption of cleaner and more efficient technologies to help reduce emissions.

Cluster Development Approach

A cluster development approach can enhance productivity, competitiveness and capacity building among MSME clusters. These enterprises typically exhibit similarities in production methods, quality control, energy consumption, pollution control, technology levels, marketing strategies, communication channels, market needs and skill requirements. Addressing collective challenges and leveraging shared resources can help improve overall performance. For instance, installation, operation and maintenance of small boilers require huge investments. Additionally, units are required to install air pollution control devices individually, which requires consent from the concerned State Pollution Control Board (SPCB) or Pollution Control Committee (PCC). This also requires regulators to monitor many small boilers.

Exploring and promoting the installation of community boilers in clusters of small-scale industries can help address these challenges. A community boiler offers several advantages, including the reduction of air pollution by replacing multiple small boilers with a centralized system, less regulatory burden for small-scale industries, and decreased financial and ash handling costs. It provides a continuous supply of steam for industrial use and can generate electricity for in-house needs and potentially for other units as well. With advanced pollution control equipment, it can improve air quality and reduce occupational hazards. The main drawback is the shutdown period; however, this can be mitigated by coordinating the shutdown period to coincide with holidays and/or installing a stand-by boiler.

The 2024 Budget announced special reforms for MSMEs. This includes easier access to loans —the Mudra loan limit under the Tarun category has been increased to ₹ 20 lakh. Additionally, a modern and inclusive approach to credit assessment will be implemented in-house, alongside expanded services from the Small Industries Development Bank of India (SIDBI). The Budget also announced financial support to MSMEs to transition to clean energy and facilitate investment-grade energy audits in 60 clusters, with plans to extend this to 100 in the next phase.

A robust transition framework for MSMEs should integrate environmental, industrial and social policies with strategic financial allocations. Key components should ideally include promoting green manufacturing, adopting energy-efficient technologies, developing infrastructure like common facility centers, and incentivizing innovation and technological upgrades. Enhancing skill development and supporting marginalized groups through social inclusion initiatives is also essential. Adequate funding must be ensured via budget allocations, financial packages and public-private partnerships.

As India charts its course toward a cleaner and more sustainable energy future, the green transformation of MSMEs is not just desirable but essential. It is crucial to embrace the outlined strategies, policies and collaborative approaches to ensure that India’s MSMEs can become more resilient to climate change and other related impacts.