Empowering MSMEs for export success

Through reforms and e-commerce innovation, India must supercharge its MSMEs

Micro, small and medium enterprises (MSMEs) are often called the powerhouse of the Indian economy. By some accounts, they contribute 27 per cent to India’s gross domestic product (GDP) and provide 110 million jobs. However, dig a little deeper, and a different narrative emerges. MSMEs represent a symptom of India’s regulatory glass ceiling, with 85 per cent classified as “dwarfs” — older than 10 years but still smaller than 100 employees, contributing relatively little dynamism to the economy. So, which of the two narratives is correct? As it turns out, both. We have a large number of MSMEs, but they struggle to thrive because of inherent challenges of small scale, and they struggle when attempting to scale because of regulatory hurdles. How can we help them become world-beaters?

We must first understand where the greatest opportunity for MSMEs lies and what prevents them from seizing it. Certain industries are a natural fit for MSMEs — those that are highly labour-intense with low investment requirements, such as wood products, ayurveda, and herbal supplements, toys, handloom textiles, handicrafts, leather products, and jewellery, among others. However, for these industries, India’s domestic market accounts for only about 2 per cent of the global market size. For example, in toys, the Indian market is approximately $1 billion, while the world market is around $300 billion. In readymade garments, the Indian market is about $55 billion, while the global market is worth approximately $1 trillion.

Of course, India cannot address the entire global market, but we have about 20 per cent of the world’s working-age population. To take our rightful place in the world, we must aim for at least a 10 per cent share of the global trade. Today, India’s share in global merchandise exports is around 2 per cent. If we go by the data on the government’s portal, MSME share of Indian exports is 6 per cent, and less than 1 per cent of MSMEs are exporters. No wonder, then, the 110 million working in MSMEs are struggling to thrive as they are unable to capture the global market.

Small scale has historically been a big limitation on their ability to export. For a typical small business, it is nearly impossible to first find customers abroad, then navigate the logistical, financial and compliance complexities of exporting merchandise to those customers, all while managing the standard challenges of running a business. Without economies of scale to provide a cushion, it is nearly impossible to pull it off, and most exporters are, therefore, big firms.

However, the rise of e-commerce platforms means we are no longer living in that world. These platforms can match small businesses with customers, and handle logistics and even compliance, while the MSME focuses on doing what they are good at. This can allow MSMEs to truly compete in the global arena. However, India’s current e-commerce exports stand at a modest $2 billion, a mere 0.5 per cent of our merchandise exports. In comparison, China conducts 8 per cent of its overall exports via e-commerce. To reach the export target of $1 trillion by 2030, MSMEs and e-commerce should, and can, contribute over $100 billion.

Getting there will not be easy, but there are four steps — three reforms and one “implementation” measure — that can help enormously. One, we must allow “exporter” and “product owner” to be separate entities, which today is not possible. This will let aggregators work much more easily with small enterprises, handling many compliances on their behalf, without assuming substantial assets or liabilities.

Two, we must streamline the rules of financial regulation for exports. Existing rules were created during an era when we were concerned about foreign exchange and sought to control every dollar. Today, as a proud and secure country, we have moved towards freeer trade. Let us go further on that journey. These rules and the systems that administer them create an unsustainable burden for MSMEs, forcing expensive compliance burdens on every transaction. They also unfairly disadvantage Indian producers by limiting dynamic pricing for goods already outside India. For example, a carpet stored at a warehouse in the US cannot go on sale below 75 per cent of the declared value if the demand is low or priced higher than 125 per cent if demand is high. 

Three, we must create a “green channel” for e-commerce exports to expedite Customs clearance. China has been implementing this approach since 2014 and has seen significant success in e-commerce exports as a result. Last but not least, we must implement a one-stop trade portal that brings together all information and processes related to exporting, and places it into a single, streamlined workflow. Currently, exporters, and in particular MSMEs, have no credible source of information, and face several interfaces with the government for compliance processes. While a portal has been announced after the G20 meeting to collate information, integrating all compliance processes into the portal is crucial.

These are focused reform recommendations that do not have a significant political economy cost. So as we strive for broader reform, we must unite to push through these measures that benefit our massive MSME ecosystem. The real challenge lies in the need for a shift in mindset — for our government to treat Indian entrepreneurs with trust rather than suspicion. However, if we can achieve this shift, these reforms can be a game-changer for our MSMEs.

The writers are, respectively, governing council member at FED, and co-founder & economic policy expert