Authors: Dr Neha Arora& Rishika Nayyar*
The COVID-19 crisis is a challenge never witnessed before and many economies are bound to shrink as a result of demand and supply shocks. It is expected that COVID-19 crisis could have a far more devastating impact on the world economy than the global financial crisis of 2008-09.Like any other crisis, the present one has exposed the vulnerabilities of existing structures and practices, forced the change in status-quo and, at the same time, opened new window of opportunities.
The Medium, Small and Micro Enterprises (MSME) sector is the most vibrant and crucial industrial sector for the Indian economy. The sector provides employment to over 130 million people and contributes to nearly 30% of GDP. The MSMEs contribute nearly 45% to manufacturing, forming the backbone of the Indian manufacturing economy. MSMEs have contributed significantly towards domestic employment generation, increased revenues and have boosted international trade. Over the years, MSMEs in India have transitioned from manufacturing low-tech labour-intensive goods to medium-tech capital-intensive products and have also entered the services sector in recent past.
The significant contribution of MSMEs to the Indian economy on one hand, and the hard blow that the sector has received from the present crisis on the other, have called for a renewed and carefully thought-out focus on the situation of MSME units. In this background, the present article highlights the pertinent role that a vibrant and dynamic MSME sector can play in helping India capitalize on the opportunities thrown open by the pandemic and aid the process of economic recovery. It also suggests a three-pointer action plan that focuses on technology adoption, rural cluster development programme and strategic partnership development programme to bolster the MSME sector.
Opportunities for India
Supply chain restructuring: An opportunity to be the next global production hub
The COVID-19 crisis has caused widespread and significant disruptions and exposed vulnerabilities in the global supply chain, especially for countries who were excessively dependent on China for sourcing of raw materials, intermediate and finished goods. Over the past two decades, China has played a dominant role as the ‘factory of the world’ for industries such as electronics, automotives, apparel and plastics. However, escalated trade tensions in 2019 between China and the US, in addition to rising labour cost and declining productivity, dimmed the country’s significance as a global production hub. While the relocation of production facilities was already setting in, the current pandemic fueled this fire. Many countries around the world, including the USA, UK, Japan and South Korea, have been incentivizing their companies to move production facilities out of China with a view to reconfigure their supply chains and reduce reliance on China. This initiative to reduce dependence on China has become a matter of national priority for some countries, like the UK.
The reconfiguration of global supply chains has opened up a window of opportunity for India to present itself as a business-friendly nation and an attractive, alternative investment destination for companies looking to relocate their production facilities. According to the Reshoring Index released by consulting firm Kearney, because of the COVID-19 crisis,“companies will be compelled to go much further in rethinking their sourcing strategies—indeed, their entire supply chain.” It is this compulsion and urgency that India needs to act upon. If exploited at the right time, this opportunity could provide the much needed boost to Indian Government’s flagship program -Make in India- which has now culminated into the aspiration of making in India for the world.
In a bid to attract foreign companies, the Indian government has rolled out various plans such as developing a land pool of 461,589 hectares (twice the size of Luxembourg) to supplement easier availability of land, improve hard infrastructure through huge investment in national infrastructure pipeline project, and soft infrastructure (i.e. institutions) through implementing business reforms. The Government has also handpicked ten sectors – electrical, pharmaceuticals, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles – as spotlight areas for promoting manufacturing suggesting a much focused approach than earlier.
The MSME sector can be used as an catalyst to exploit the opportunity and realize the dream of making India a global production hub in three ways. First, MSMEs act as complimentary entities by providing intermediate goods to large businesses (both domestic and foreign) in India. They also help them achieve economies of scale by facilitating outsourcing of functions, specifically in labour-intensive activities. Second, they also play a pivotal role in promoting resilience to sector-specific shocks and fluctuations in international markets by diversifying the industrial sector. Lastly, MSMEs are the harbinger of entrepreneurship and innovation which are important pillars for lifting the nation’s capacity in shifting towards the manufacture and exports of sophisticated high tech products, and help move up the global value chains. Thus, to build and sustain competitive manufacturing enterprises, both large and small, and realize the vision of Make in India for the world, MSMEs need to be strengthened and supported.
Self Reliant India- A shift from excessive dependence to embracing self sufficiency
For the last three decades, Indian economy, like any other open economy, has embraced the benefits of globalisation. Forces of globalisation, including production and trade, based on national comparative advantages have given rise to geographically-spread value chains. In normal situations, the global value chains work as a well-oiled machinery leading manufacturers and nations to be oblivious to the extent of dependency on other nations. A recent article published in Harvard Business Review provides evidence that most of the companies are not as up to speed about the structure of their supply chain. Covid-19 has given a blow to these companies as they struggle to keep a track of which site, parts, products, and suppliers are located in affected areas, leading to a complete halt of production. Automobile industry is a perfect example of this blowout.
Another, and in fact, more appropriate account of globalisation-driven dependence can be seen in the case of India’s Pharmaceutical Industry. Third largest in the world (in terms of volume), Indian pharmaceutical industry imports 90 percent of active pharmaceutical ingredients (APIs) or bulk drugs, with two-thirds of total coming from only one source- China. Despite being alarmed about the overdependence on China as a national security threat in 2014, only half-hearted measures were taken by the policymakers to make industry as self-reliant as it was in the 1990s when it actually exported APIs and was ahead of China. The stricter regulatory requirements on Indian firms manufacturing APIs, coupled with strong state support given by China’s government to their indigenous manufacturers, resulted in widening of the gap between the cost competitiveness of Indian and Chinese companies- a cause of increased dependence.
While several other examples of products other than APIs, such as computers, mobile phones, medical devices, toys can be given here, the one that boldly underlines India’s dependence in the manufacturing sector is the fact that it struggled to be self-sufficient in the production of something as simple as plastic dispensers for hand sanitizers. The current pandemic has given a wake-up call not only to corporations but also to governments across developed and developing economies.
From the agenda of reducing dependence on foreign imports, including those from China for APIs and other supplies, to the initial steps in ramping up the production of essential gear like personal protective equipment (PPE) kits, masks, testing kits, alcohol based sanitizers, dispensers, Indian Government’s vision of making India self reliant is echoed in the five pillars of its Aatma Nirbhar Bharat Abhiyaan- Economy, Infrastructure, System, Demography and Demand. The initiatives (present and planned) under each of the five pillars are aimed at getting the economy back on its feet. Needless to mention, focus on strengthening the manufacturing sector is and has to be the centerpiece of any course of action directed to make India self-reliant.
In realizing the vision of self-reliant India, two things will play a determining role. First is the identification of sectors and/or areas, products, in which the Indian industry is capable of replacing foreign imports and can quickly scale up production, such as textile components and basic medical devices. One sector that is recently identified by the Government is the toy industry. A renewed focus on such sectors implies a renewed focus on MSME units that have the capability to scale up effectively and efficiently. The second and a related requirement is creating a supportive ecosystem, of which MSMEs are not only viewed as an important part (in the capacity of a partner to big businesses) but also, more importantly, as beneficiaries. So, for instance, while toy MSMEs are going to play a direct and quintessential role in reducing India’s unduly excessive reliance on imports as well as making her self reliant, it is unachievable without a supportive ecosystem that protects innovative and creative works, and streamlines the procedure of obtaining quality certification.
Reverse Migration- An opportunity to boost rural entrepreneurship
The covid-19 situation has worsened the situation of unemployment in India. The stalling of economic activity has forced businesses to lay off workers.. According to the Center of Monitoring Indian Economy (CMIE), the rate of unemployment in India has risen to over 23 percent as of April 2020 (25 percent in urban areas and 22 percent in rural) up from 7 percent (10 percent in urban areas and 6 percent in rural) in the beginning of the year (January 2020). Even as lockdown restrictions continue to ease, businesses in both formal and informal sectors, including construction, manufacturing, restaurants, travel and housekeeping are facing severe shortages of workforce due to reverse migration from urban to rural areas. According to an estimate by the Confederation of All India Traders traders’, the capital city has already witnessed an exodus of over 60 to 70 percent of its labor force. A similar situation has been reported from other major states for migrant workers such as Maharashtra, Tamil Nadu, Gujarat, Andhra Pradesh and Kerala. The extent of reverse migration is estimated to be at least 23 million migrants moving back to rural India. The consequences of such an extent of reverse migration are being clearly highlighted and voiced by businesses across urban areas as they grapple with shortages of workforce. However, more concerning aspects of this situation will be faced sooner than we realize as a significant proportion of migrants would be reluctant to return back to cities due to fear of the coronavirus, which is expected to haunt mankind for at least a year, uncertainties and related economic and emotional distress. As migrant workers seek safe haven back in their villages, the already widespread unemployment in rural areas is bound to skyrocket. While some of them would rely on agriculture as a means of livelihood, the sector is not without challenges – low productivity and small size of land holdings – to name a few. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is another alternative but the guaranteed days of work is restricted to just 100 in a financial year and the wages are meager. Perhaps, employment under MGNREGA is generally viewed as a work avenue in the off or lean agriculture season rather than a primary source of employment. Such a scenario, however, is an opportune moment to direct efforts towards rural industrialization through promotion of rural MSMEs. The process of rural industrialization through rural MSMEs will act as a catalyst to spur the generation of employment and income in the rural areas. A plethora of opportunities can be tapped by MSMEs not only in the agriculture and allied sector, but also in food processing, other traditional sectors such as khadi and village industries, handloom, handicraft and coir. In fact, the present crisis offers enormous potential for rural MSMEs to revive India’s artisan traditions and handicrafts which is in line with the Government’s latest “Vocal for Local” initiative. Setting up such units and making them operational might take some time and require coordinated support and policy initiatives by private enterprises as well as the Government at center and state level. However, promoting rural industrialization through MSMEs is the most viable option for sustained employment and income generation in rural areas that are home to 66 percent of India’s total population (as of 2018) to foster balanced regional growth, and keep a check on future migration to urban areas thereby decongesting and alleviating pressure on cities.
Three pillars of action to support, strengthen and scale MSMEs
It is unarguable that MSMEs are going to play an increasingly important role in enabling India to exploit the opportunities thrown open by the pandemic at both national and international level, and to put her on the path of economic recovery. However, it cannot also be refuted that MSMEs are the worst hit by the pandemic, with many of them struggling to survive, and would probably die down by the time things normalize – partly owing to the absence of any direct support for them in the Government’s 20 trillion stimulus package. For units that will survive the pandemic, a coordinated action plan consisting of support from Government (centre and state), industry associations, as well as strategic agility of units themselves, would be pertinent. Therefore, we suggest three action plans that could help reap the potential of MSMEs by making them more productive, efficient, and competitive.
- Technology Adoption
- Rural Cluster Development Programme
- Strategic Partnership Development Programme
Technology Adoption
As the world embraces the fourth industrial revolution, automation and digitization of business processes has become an absolute necessity for businesses’ survival and growth. According to a recent survey by SME body- India SME Forum -only 7% of MSMEs surveyed (1,29,537 MSME respondents) reported the adoption of technology beyond the use of digital tools to communicate with key stakeholders such as customers, employees, and suppliers. The adoption of technology could play a non-trivial role in overcoming numerous challenges and issues that plague the productivity, competitiveness and profitability of MSME units in India. The potential benefits from adoption are expected to be realized across the value chain and/or network – from procurement of resources, to automation and use of robotics in manufacturing processes, customer engagement, supply chain management, sales force management, integration of business processes etc.
An action plan to increase the rate of technology adoption amongst MSMEs must keep into consideration two important factors- perceived usefulness and perceived ease of use (Davis, 1989)[1]. The intention to use (adopt in this case) the new technology depends on the users’ attitude towards it which is influenced by, in addition to the external forces, the belief that the use of it would result in the improvement of performance and is free from effort. A Government initiative along with industry body CII, in the form of CII TechSaksham, is a step that underlines the belief about usefulness of technology in improving MSMEs performance (profitability and global competitiveness) and, in turn, their contribution to the Indian Economy. The three-year long comprehensive project is also aimed at addressing the issues revolving around the “perceived ease of use”. The “perceived ease of use” is reported to be a major blockade in MSMEs attempt at technology adoption.
A staggering 70 percent of MSMEs that were surveyed by India SME forum cited lack of knowledge, guidance, skilled manpower, and cost of investment, as impediments to technology adoption. While initiatives like CII TechSaksham can provide a platform to overcome the knowledge barriers, real beneficiaries would be those MSMEs that move swiftly in formulating an effective strategic plan for technology adoption that furthers three As necessary for promoting the “perceived ease of use”- awareness, agility, and adaptability. It is essential to give strategic priority to technology adoption and carry out the implementation in a phased manner. For units facing cost issues and manpower crunch, a viable and cost effective solution is to avail of technology as a service. These services provided by third parties include “Software as a Service (SaaS)”, “Infrastructure as a Service (IaaS)” and “Platform as a Service”, and can go a long way in overcoming the challenges associated with technology adoption by MSMEs.
Rural Cluster Development Programme
India has a rich history of rural entrepreneurship and, to support the growth and build-capacity of Rural MSMEs, the Government should focus on developing industrial clusters specifically designed for MSMEs in and/or around rural areas. By virtue of its support to industrial activity in rural areas, rural industrial clusters can promote employment generation, which is the need of the hour now since the coronavirus pandemic has resulted in reverse migration of labourers (not just labourers, other blue collar workers as well). According to a recent report, livelihoods of a large percentage of around 40 million internal workers has been severely affected by Covid-19.
In order to combat the impact of Covid-19 pandemic on livelihoods of millions of migrant workers, a model similar to Special Economic Zones (SEZ) could be replicated in rural areas and districts to enhance the industrial capacity of MSMEs by providing them credit, technical know-how and market support. Additionally, following a cluster development approach towards industrialization efforts in rural areas can help tackle several challenges faced by MSMEs in terms of production, quality control, testing and marketing. For instance, in Indonesia, the government has adopted MSME clustering approach as an important aspect of Rural economy development as the success rate for development of manufacturing SMEs lies in strong inter-firms linkages in clusters and competent external networks and not direct government support. Thus, this could be an ideal time to give support and shape to these rural clusters and come with a workable action plan to encourage formation of clusters in villages.
Strategic Vendor Development Programme
The need for building strategic vendor development programmes stems from the complementarities that multinational corporations (MNCs) and MSMEs can derive from each other. MSMEs constitute an important part of the supply chain as providers of low value-added products, intermediates and components to be used in final production. It is in the interest of foreign MNCs to invest in the upgradation of the capabilities of their supply chain partners in order to ensure the quality of the final product. In order to facilitate that, MNCs often impart training on modern production techniques to the employees of MSMEs and engage in transfer of technological and managerial know-how.
Looking ahead, MSMEs must consolidate and extend relationships with MNCs to leverage their existing capabilities such as superior knowledge, technical know-how and established processes. One way to achieve such competencies is through formation of Vendor Development Programme wherein MNCs can provide training and guidance to MSMEs on how to meet quality standards, reduce costs, deliver on time and thus become reliable vendors for them. A successful example of such a vendor development programme is the Ethiopian flower cut industry. Strategic relationships between local vendors (flower growers) and Dutch foreign investors (Dutch Development cooperation) played an important role in the development and growth of the sector.
However, Indian MSMEs face challenges and obstacles in developing strategic tie-ups with large MNCs for at least two reasons. First, there are many Government-regulated performance parameters such as mandatory sharing of critical technologies and stringent rules for local content requirements that discourage foreign MNCs from entering into contractual relationships. Second, the absence of domestic intermediaries that could act as links between foreign MNCs and local MSMEs hinder the capabilities of the former to select the right vendor or partner and exploit the complementarities.
In order to overcome these constraints, there is a need to reduce regulatory bottlenecks and establish organizations that act as intermediaries (brokers) or connecting links between foreign MNCs and local MSMEs. The presence of such intermediaries will play a vital role in overcoming the information voids that characterize emerging markets like India, reduce the cost, effort and time involved in searching for the right vendor and/or partner (in the form of MSMEs) and facilitate the formation of mutually beneficial relationships. The formation of linkages or strategic tie-ups with multinationals from developed countries would go a long way in uplifting the competitiveness and capabilities of Indian MSMEs to serve both domestic and global markets.
Conclusion
To make the best of the opportunities arising from the biggest challenge of this century, Indian economy needs a thriving MSME sector. The substantial contribution that the sector has made to the economy has got it to be acknowledged as the “backbone”. It is also true that this backbone has been hit severely by the COVID19 pandemic and as the economy tries to stand up on its feet, strengthening of the backbone assumes an imperative task ahead for the Indian government.
The article has listed out the three essential pillars of an action plan that involves coordinated efforts from industry associations, policymakers and the MSME units themselves. While infusion of liquidity could help the distressed MSMEs recoup the losses in the short term, in order to really hit the ground running and help the economy realize its potential, strategies and policy actions with a long term vision in mind need to be enacted urgently. The focus has to be widened from the survival in the short-run to building up a productive and competent MSME sector for the future.
*Dr.Rishika Nayyar is an Assistant Professor (International Business) at FORE School of Management.
[1] Davis, F.D. (1989), “Perceived Usefulness, Perceived Ease of Use, and User Acceptance of Information Technology”, MIS Quarterly, 13(3), 319-340. doi: https://www.jstor.org/stable/249008
