For more than 110 million people in India involved in the MSME sector, the last 12 months have been a true nightmare. The epidemic-driven disruption in demand, credit availability, and labor supply has been a pincer movement that has shattered the financial health of many MSMEs. Surveys estimate that 82% of MSMEs were affected by the first wave of negative epidemics, and 25-40% of them could close shop. The second wave will probably make these numbers worse.
But the problems of MSMEs in India predetermine the epidemic. Systemic constraints and red tape, lack of affordable credit, inefficient supply chains, and weak access to markets have stymied the sector for decades. The current crisis has shone a much-needed spotlight on these issues. And, therefore, we believe that it is appropriate for MSMEs in India to reconsider solutions to change the business environment and come up with some concrete proposals.
1. Think again of MSME credit: Perhaps the biggest challenge for the MSME sector is the limited availability of formal credit. The World Bank had estimated that there were debt differences of Rs 16.6 lakh crore. The epidemic has aggravated the situation as it has been taught to avoid risk and has caused the flight of credit away from micro-enterprises which is considered risky.
2. Lock the loop on MSME digitization: From grocery stores taking orders on WhatsApp for digital payments to their fruit seller, the epidemic is turning into a turning point in the digitization journey of MSMEs. However, many important government touchpoints for MSMEs including compliance filings, government schemes, and applications for bank loan processing remain largely manual and cumbersome.
This is the moment when governments should enable digital platforms from end to end so that compliance and access to government schemes can be smoothly achieved. While several such efforts have been made, these need to be ‘loop closed’, i.e., digital platforms need to share information and go beyond application approval, so that the work can be completed smoothly. This ‘plumbing’ requires more cross-government cooperation as it involves many departments.
3. Taking a system lens to improve the ease of doing (small) business: For a small entrepreneur, working at the best of times regularly requires overcoming regulatory hurdles. Aventis research suggests that a typical MSME has to file more than 750 compliances every year. Inspector Raj’s ghost is done every day. Reforms need to be overdone, but dealing with these pieces will not make a dent as the challenges faced by MSMEs are specifically interlinked.
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