MSMEs: The nuances beyond financial parameters

India has seen a significant increase in employment generation in the micro, small and medium enterprise (MSME) sector, as well as a worthy contribution to gross domestic product (GDP). Government websites also boast the number MSME registrations in Udyam Portal, and in the last update in March 2024, 97.7 percent of registrations were ‘micro’ businesses and 1.5 percent were ‘small’ businesses. These figures are heartening for a country like India, which is plagued by unemployment, especially among the educated youth.

While startups are known for their potentially disruptive innovation and volatility, an MSME entity aims for more centered, stable and incremental growth. This makes it a reliable sector that contributes to economic development, job creation and improving other social factors. For a promising sector like this, government initiatives rightly identify and address the most important factor contributing to the success of its units – adequate and adaptable financing. Numerous efforts are being made to develop schemes that offer collateral-free or cheaper loans to SME units, and this has proven to be immensely useful, especially during turbulences such as the COVID-19 pandemic.

Irrespective of the special attention and favorable financing policies given to this sector at the central and state levels, the failure rate of the units in this sector remains high, especially in the first few years of establishment. In the wake of a proposed revision of the MSME Development Act, 2006, now would be a good time to analyze the non-financial factors that make or break a micro or small business entity, in addition to the special focus on financing, and to legislation according to realistic and current needs.

New units usually lack a concrete business plan and a unique value proposition (UVP), which jeopardizes their chances amid fierce competition. Business owners may be experts in the products or services they offer, but seriously lack business acumen. This manifests itself in the form of poor management and governance of the new unit, even though it has great potential. Almost all government initiatives, whether in the form of policy or through the statutory bodies that implement these policies for the SME sector, are aimed at facilitating financing or inventory. Even when there is access to favorable financing options, a lack of proper financial planning and an over-reliance on outside opinions endanger the longevity of the company.

These types of factors indicate a legislative need to ensure adequate training sessions, which are mandatory to be attended by entrepreneurs who do not have such skills. Compliance with laws and regulations must be tailored to the constraints of a small-scale entrepreneur while ensuring sufficient disclosure and transparency, especially when public funds are involved. The government can develop a well-designed mentoring system to facilitate reliable access and communication between entrepreneurs and industry experts so that crises can be addressed in a timely manner.

Just as important are the digital skills of today’s entrepreneurs. Merely facilitating initiatives like ‘Make in India’ and ‘Digital India’ will not help a small business entity stay afloat in this intrusive or even intrusive digital marketing and advertising era. Consistent and quality training and awareness programs are the basic requirements to enable entrepreneurs to devise strategies for visibility. While amending the existing legislation, which is on the verge of obsolescence, given the changes in the almost twenty years since its entry into force, is a law ahead of its time and adequately covering the nuances of this sector, this is the need of the moment. It is a welcome step to expand the scope of the definition of ‘MSME’ to include more units. However, the impact of the amendment should be more far-reaching.

While the entrepreneur is the heart of an MSME unit and must be a jack-of-all-trades when it comes to running a business, the same quality will benefit the unit as a people-oriented unit compared to a system-driven and relatively less adaptable large enterprise. This will make any change easier and thereby increase the possibility of forming a circular economy if the government can develop well-researched and data-based systems consisting of an interconnected circuit of MSMEs operating in the same geographical location or at based on such factors. This would also require aligning state and national laws for MSMEs for holistic impact.

Given the government initiatives to stimulate entrepreneurship, equal importance should be given to initiatives that ensure that business units can survive in the current economy. The regulators should also take into account the non-financial parameters while promoting MSME units, in addition to the current push for concessional taxes, subsidies and similar benefits. With the new government in place, hope for a new challenge for MSMEs is currently an urgent priority, and every step is welcome in the wake of World MSME Day celebrated on June 27.

Puzhankara Sivakumar is practicing secretary of the company, Kochi; Ranjith Krishnan is former Head of the Academic Program Unit, NISM; Anju Panicker is Director of SEP Learning and Corporate Solutions Private Limited, Kochi

Disclaimer: These are personal views of the writer. They do not necessarily reflect the views of or the Business Standard newspaper

First print: June 21, 2024 | 5:49 PM IST