Increasing ambitions

MSMEs must be encouraged to tap export opportunities

The micro, small, and medium enterprise (MSME) sector has the potential to emerge as a growth engine by increasing exports and contributing to the economic development of the country. However, its share in India’s export basket has been declining consistently — it dropped  from 49.77 per cent in FY20 to 42.67 per cent in FY23. A recent report by the NITI Aayog in this regard has proposed a series of measures to boost exports from MSMEs. Encouraging MSMEs to venture into international markets can help diversify their revenue streams and also augment their competitiveness, apart from fostering innovation and generating employment. The report identifies several sectors into which MSMEs can foray and establish their presence globally. These include handicrafts, handloom textiles, ayurveda and herbal supplements, leather goods, imitation jewellery, and wooden products, as they use traditional techniques of manufacturing and craftsmanship and also possess heritage value.

Globally, these sectors have a significant market, exceeding $340 billion. Although India is endowed with labour, its competitors such as Vietnam, China, and Bangladesh have cornered a disproportionate share of low-skilled goods exports. In this respect, unlocking MSMEs can boost India’s export share in low-skill commodities. India’s share in global exports of such products is just about 5 per cent. Interestingly, what has worked in India’s favour lately is the success of e-commerce marketplaces, both at home and abroad. Digital platforms have helped facilitate seamless exports as well as provided wider access to markets. As of 2021, around 100,000 Indian exporters were utilising these platforms, generating cumulative export revenue of over $5 billion. Yet, regulatory hurdles exist for MSMEs selling their goods on digital platforms. For instance, duty remission and export-incentive processes in the country primarily recognise the cargo mode of shipping while exporting. This makes it difficult for e-commerce exporters using the courier mode to claim export promotion incentives. Additionally, samples imported for conducting market research or e-commerce rejects, which are returned, or unsold goods from online sales are subjected to import duties when re-imported. Such barriers eventually erode the profitability of MSME firms. Hence, broad strategies to promote MSME exports must be put in place in tandem with incentives that allow e-commerce platforms to function without any regulatory obstacles.

Problems, however, do not end here. Around 99 per cent of the MSME units qualify as microenterprises and lack economies of scale. The current policy landscape in India perpetuates this problem by incentivising MSMEs to remain tiny. The Industrial Disputes Act (IDA), 1947, and many other labour laws are a case in point. Although labour laws have been streamlined by Parliament, they have not come into effect. Other than this, extensive paperwork requirements for exporting, difficulties in accessing credit, and limited awareness of target markets constrain MSMEs in their export pursuits. Removing these bottlenecks would be the key to enhancing the export performance of the MSME sector. The report also calls for a one-stop integrated trade portal with an artificial intelligence-based interface for disseminating information to MSMEs. Export credit guarantee can be promoted to improve working capital availability, while a distinction between exporter on record and seller on record can be created for reduction in invoice value to boost e-commerce exports. In general, improving access to finance and reducing information asymmetries can go a long way in boosting exports from MSMEs.