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1.Introduction
The role of Micro, Small, and Medium Enterprises (MSMEs) in India's economic landscape is integral, not just for driving growth but also for financial inclusion through a diverse ownership profile. In a country where capital is scarce and labor-abundant, MSMEs exhibit lower capital-output and capital-labor ratios compared to large-scale industries, making them vital for achieving growth and employment objectives. Moreover, their contribution to trade and export earnings is substantial, with a collective ambition to reach $1 trillion in exports by 2027.
As we delve into the strategies for enhancing their export competitiveness, it's evident that nurturing MSMEs fuels economic advancement and resonates deeply with the broader ethos of sustainable development.
1.1 Worldwide Trends in the SME Sector
· Japan – SMEs employ 70% of the wage earners and contribute 55% of the value-added.
· China – SMEs contribute to over 68% of the exports – in the last 20 years created more SMEs than the total number of SMEs in Europe and the US combined.
1.2 Challenges associated with MSMEs
2. Current Scenario of MSME Exports
Without boosting exports, especially from MSMEs, the idea of MSMEs powering India is half-hearted. The MSME sector contributes over 40 percent to the total exports, and the target to raise it to 60 percent has been set by the government.
India is slowly losing ground to many competitors like Vietnam and Bangladesh in garments, Sri Lanka, and Kenya in tea, leaving aside competition from China. Most Indian MSME exporters lack the competencies to market specific products.
A problem plaguing the MSME sector is businesses’ inability to showcase their products in overseas markets.
Non-traditional products account for more than 95% of the MSME exports (dominating in the export of sports goods, readymade garments, plastic products, etc.). Since these products are mostly handcrafted and hence eco-friendly, there exists a tremendous potential to expand the quantum of MSME-led exports. Also, MSMEs act as ancillary industries for large scale industries providing them with raw materials, vital components, and backward linkages e.g. large-scale cycle manufacturers of Ludhiana rely heavily on the MSMEs of Malerkotla which produce cycle parts.
Tax deductions for the internationalization of MSMEs should be provided. Like Singapore where any MSME that spends $100 on overseas marketing is provided with a tax deduction of $200; to encourage MSMEs to spend more on overseas marketing.
The last critical step to boost Indian MSMEs is to connect them to the global markets through
trade deals and agreements. Lately, India has made good progress on this front. After refusing to sign up for the Regional Comprehensive Economic Partnership (RCEP), India is in the process of finalizing trade deals with several vital trading partners. It recently signed a Free Trade Agreement (FTA) with the United Arab Emirates, with talks for an FTA with Australia and the United Kingdom at an advanced stage. These deals are likely to open new opportunities for India’s exporters and, specifically, its MSME sector.
To make India a globally competitive economy, there must be a larger focus on exporting to the most demanding markets. A stronger participation of Indian MSMEs in the global markets can accelerate such growth. This will lead to more opportunities for scaling up, speed up innovation and, in turn, enhance productivity.
In addition, most of India’s MSMEs are informal–it becomes difficult for them to access formal financial channels and to connect to the global or national market.
As a part of the newly announced Aatmanirbhar Bharat (“Self-Reliant India”) agenda, several production-linked incentives (PLI) schemes were introduced to boost domestic manufacturing. As India seeks become a part of global supply chains, its approach should not be limited to inviting large global players into India. It also needs Indian players to go international–PLI schemes may help solve a part of the problem.
Critical to solving this puzzle is helping India’s MSMEs become more efficient using technology. The government has launched several schemes and portals to benefit MSMEs: the Udyam registration portal makes the registration process simpler. The RAMP (Raising and Accelerating MSME Performance) scheme improves the productivity of MSMEs. The government has also launched programs to expand and grow digital payments and fintech amongst MSMEs.
3. Case Study of China
India wants to replace China as the manufacturing capital of the world. However, there were significant reasons for the success of the Chinese industrial sector that made it the world’s manufacturing capital. A documented reason for this success is the impact of Chinese e-commerce and, more importantly, the success of Alibaba that took China’s products across the globe.
Before Alibaba came along, Chinese manufacturers were already succeeding due to a long-term industrial push by Chinese leadership. Alibaba transformed villagers across the length and breadth of China into micro-entrepreneurs. Scores of villages leveraged this opportunity and turned into clusters specializing in products and eventually became known as “Taobao village,” named after the famed e-commerce platform by Alibaba. These villages are also suppliers to other large retailers like Amazon and Walmart apart from Alibaba.
There is no parallel to this phenomenon in India, which traditionally has had many clusters specializing in products for centuries that aren’t well-known globally, barring a few exceptions. Instead, its e-commerce market is dominated by Amazon and Walmart-owned Flipkart.
Policymakers realize this potential and have come up with concepts of “one district, one product” aimed at cluster-led industrial development and developing districts as export hubs. These schemes need to be implemented on a war footing if India is serious about displacing China as the world’s manufacturing capital. Traditional industries must be trained in e-commerce, and e-commerce companies need to be provided incentives and infrastructure to bolster e-commerce exports from the country—Indigenous B2B platforms with business models need to be supported to scale up.
4. Government Initiatives
Government of India has taken several measures to enhance the exports by Micro, Small and Medium Enterprises -
These include efforts made under Make in India Programme, Promotion of Ease of Doing Business, improved availability of credit through MUDRA, Stand up India. Further, Ministry of MSME has established 52 Export Facilitation Centers (EFCs) across the country with an aim to provide requisite mentoring support to MSEs in exporting their products and services to the foreign market; and 102 Enterprise Development Centers (EDCs) have been setup with the aim to build a network of entrepreneurial leaders by providing professional mentoring to existing as well as aspiring MSMEs with special focus on rural enterprises on continuous basis.
These EDCs act as a “One-stop-shop” and provide services under components including Awareness, Incubation, Enterprise Facilitation.
In addition to these, Ministry is also implementing International Cooperation Scheme for enhancing the marketability of products and services in the MSME sector by facilitating visit /participation of MSMEs in international exhibitions /trade fairs/buyer-seller meet.Cluster Development Programme is being implemented by Office of Development Commissioner(MSME) for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) to increase demand of domestic products in global markets.
5. Recommendations for Improvement
ACCESS TO FINANCE | Initiatives like collateral-free loans, export credit facilities, and easier access to working capital can support their export aspirations. |
CAPACITY BUILDING AND SKILL DEVELOPMENT | Training programs and workshops in areas such as international trade practices, quality standards, marketing, and technology adoption
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TECHNOLOGY ADOPTION | Adoption of modern technology and digital platforms to improve production processes, quality standards, and market reach. This includes e-commerce platforms for global visibility and efficient supply chain management system |
QUALITY ASSURANCE AND CERTIFICATION | Compliance with standards like ISO, CE, etc., enhances credibility and acceptance in global markets. |
MARKET DIVERSIFICATION | Government support in identifying potential markets and providing market intelligence can aid MSMEs in expanding their export destinations |
TRADE FACILITATION | Streamlining customs processes, documentation, and logistics can significantly ease the path for MSMEs to engage in international trade |
CLUSTER DEVELOPMENT | Promote the formation of industry clusters where MSMEs can collaborate, share resources, and benefit from economies of scale. Clusters often facilitate joint marketing efforts and knowledge sharing |
INCENTIVE AND SUPPORT | Offer export-oriented incentives, tax breaks, and subsidies to encourage MSMEs to venture into global markets. Support schemes for participation in international trade fairs and exhibitions can also be beneficial. |
GOVERNMENT SUPPORT AND INTERVENTION | These could include export promotion policies, dedicated export zones, and schemes for market development. |
6. Conclusion
As we navigate the evolving landscape of international trade, it's imperative to recognize the pivotal role MSMEs play. Through sustained efforts and a commitment to nurturing their capabilities, MSMEs can emerge as significant contributors to India's export landscape, fostering a resilient and dynamic economy that thrives on global competitiveness.The Government of India has envisioned the Indian economy to US$ 5 trillion by 2027. MSMEs will play a crucial role in the achievement of this goal. Further, the government aims to enhance MSME’s share in exports and its contribution to GDP. MSMEs are the backbone of the Indian economy but there is a need to remove the hurdles on its path to success.
Meet The Thought Leader
Vamsi is a mentor at GGI, and has a diverse background that includes being a former McKinsey employee and a graduate of IIT Madras. He possesses a broad skill set encompassing strategy and operations, gained from his various roles and industry exposure.
Meet The Authors (GGI Fellows)
Graduate from Lady Sri Ram College for Women in political science and history. I am currently pursuing a masters in development studies and looking to build a career in public policy.
If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.