MSMEs: The nuances beyond financial parameters

India has seen a significant increase in employment generation by the micro, small, and medium enterprise (MSME) sector, as well as a worthy contribution to its gross domestic product (GDP). Government websites also boast of the number of MSME registrations in the Udyam Portal, and in the latest update as of March 2024, 97.7 per cent of the registrations were ‘micro’ enterprises and 1.5 per cent represented ‘small’ enterprises. These numbers are pleasing to a country like India, which has been plagued by unemployment, especially among its educated youth.

While start-ups are known for their potentially disruptive innovation as well as volatility, an MSME unit targets a more centred, stable, and incremental growth. This makes it a dependable sector for contributing to economic development as well as the creation of employment opportunities and the betterment of other social factors. For a promising sector such as this, government initiatives rightly identify and tackle the major contributing factor to the success of its units – adequate and adaptable finance. Numerous efforts are taken to develop schemes that offer collateral-free or less expensive loans to MSME units, and this has proven immensely beneficial, especially during turbulence such as the COVID-19 pandemic.

Regardless of the special attention and favourable financing policies given to this sector at central and state levels, the failure rate of the units in this sector remains high, especially within the first few years of inception. In the wake of a proposed overhaul of the MSME Development Act, 2006, now would be a good time to analyse the non-financial factors that make or break a micro or small business unit, in addition to the special attention to financing, and update the legislation as per realistic and current needs.

New units most commonly lack a concrete business plan and a unique value proposition (UVP), which compromises their chances amidst tough competition. Business owners might be experts in the products or services they propose to serve but critically lack business acumen. This reflects in the form of poor management and administration of the new unit, even though it may have high potential. Almost all government initiatives, whether in the form of policies or through the statutory bodies administering these policies to the MSME sector, are in the direction of facilitating funding or inventory. Even with access to favourable funding options, lack of proper financial planning and over-dependence on external opinions compromise the longevity of the business.

Factors like these signify a legislative need to ensure adequate training sessions, which must be compulsorily attended by entrepreneurs who lack such skills. Legal and regulatory compliances should be aligned with the limitations of a small-scale entrepreneur while at the same time ensuring sufficient disclosures and transparency, especially if public funds are involved. A well-devised mentoring system can be developed by the government for facilitating reliable access and communication between entrepreneurs and industry experts to handle crises in a timely manner.

Equally 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 unit to stay afloat in this penetrative, or even intrusive, digital marketing and advertisement era. Consistent and qualitative training and awareness programmes are the basic requirements in empowering entrepreneurs to devise strategies for visibility. While amending the existing legislation that is on the verge of obsolescence considering the changes in the nearly two decades since it was enacted, a law that is ahead of its time and adequately covers the nuances of this sector is the need of the hour. Widening the scope of the definition of ‘MSME’ to include more units in its purview is a welcome move. However, the impact of the amendment should be more far-reaching.

While the entrepreneur is at the heart of an MSME unit and has to be a ‘jack of all trades’ when it comes to handling an enterprise, the same feature will benefit the unit as a human-centred one compared to a system-driven and comparatively less adaptable large enterprise. This will make any change easier, thereby facilitating the possibility of forming a circular economy if the government can develop well-researched and data-based systems comprising an interconnected circuit of MSMEs operating in the same geographical location or based on such factors. This would also call for aligning the state and national laws for MSMEs for a holistic impact.

Considering the government initiatives towards encouraging entrepreneurship, equal importance should also be given to initiatives that ensure that business units can sustain in the current economy. The regulators need to factor in the non-financial parameters as well while promoting MSME units, in addition to the current thrust on concessional tax, subsidies, and similar benefits. With the new government, the hope for a new gambit for MSMEs is a pressing priority at the moment, and any move is welcome in the wake of World MSME Day to be celebrated on June 27.

Puzhankara Sivakumar is practicing Company Secretary, Kochi; Ranjith Krishnan is Former Head, Academic Programme Unit, NISM; Anju Panicker is Director, SEP Learning and Corporate Solutions Private Limited, Kochi

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