SMEs make up the ?spine? of the nation. They employ 60 million people and account for 45% of the manufacturing output and 40% of exports. Unlike large enterprises, SMEs have the inherent capability to use resources efficiently and satisfy local needs. Their size gives them agility, innovation-orientation and an ability to adapt to changes.
Such advantages have helped many units to rise above the constraints posed by a difficult external and operational environment. Over the years, many SMEs have emerged out of the shadows to become big names in corporate India. One such example is Bharti Airtel, which started as a small manufacturer of telephone instruments and then took advantage of emerging opportunities to become one of the biggest players in the Indian telecom sector. The Hero group has begun as a small business of manufacturing bicycle components in Ludhiana in the 1950s. A company that manufactured 60 bicycles a day then has now become a diversifed group manufacturing 17,000 cycles a day. Lijjat Papads, which started as a small cooperative of seven women in Girgaum (Mumbai) on a terrace in 1959 to produce four packets of papads with a borrowed sum of Rs 80, is today a Rs 325-crore turnover enterprise with 66 branches.
For all such success stories, the fact remains that most SMEs are small and vulnerable. This is also borne out by the fourth census of micro, small & medium enterprises (MSMEs), which states that almost all those covered are either proprietorship or partnership enterprises and 95% units are not even registered, which means they are not covered by any formal data collection exercise like the annual survey of industries.
There is a need to empower such units by providing them the wherewithal to compete in the tough global marketplace.
The question now is: what should be done to help SMEs face the challenge of competition?
If SMEs are to emerge as growth engines of the economy, they should be provided with a conducive and enabling investment climate for the orderly conduct of business. This would imply provision of adequate and timely credit at cost-effective rates, supportive infrastructure, facilitation of technology transfer, training in skill development, marketing support and reduced rigours of legislation and over-governance.
Let us take credit availability. The SME sector faces a huge shortage of credit. This acts as a dampener in meeting their needs for working capital, purchasing machinery, equipment & raw materials, funding technology upgradation and providing finance for marketing. The best of SMEs get credit at interest rates that are at least 175-200 basis points higher compared to bluechip companies. Smaller units are the most distressed. It is important that SMEs be provided credit cheaper, faster and with least documentation.
Besides, banks should set aside at least 15% of the 40% priority sector lending for SMEs. In the US, around 57% is earmarked for SMEs. Further, there is a need to encourage SMEs to explore alternative sources of finance such as venture capital investment, angel funds and other innovative sources of finance.
Secondly, urgent technological upgradation is needed for SMEs to enhance their cost competitiveness and product quality. As suppliers to large industries, SMEs have to attain technological standards demanded of them by large units. Hence, partnership between SMEs and government agencies/R&D institutions as well as the creation of technology incubation centres by the government from which units can source technology at cost-effective rates can help in modernising SMEs.
At the policy level, the government can provide for industry-specific interest rate subsidy schemes for SMEs along the lines of TUFs for textile industry. The government should also consider setting up more tool rooms and training centres, and ITIs should be geared up for training workforce to industry requirements.
Empowering SMEs would also mean giving them the freedom of entry and exit. In our country, it takes a long time to register or dissolve a company. Compare this situation with a country like Taiwan, which has the reputation of a hugely successful SME sector. The policy of free entry and exit has promoted efficiency among SMEs in Taiwan. This model should be considered for our country as well.
Another area where the government can help is by changing the criteria for classifying an enterprise as micro, small or medium. The investment limit in plant and machinery for a medium enterprise should be raised to at least Rs 50 crore from Rs 10 crore now. Similar enhancements should be made for the micro and small sectors. Alternatively, the criteria can be employee- and turnover-based in line with international practices. Micro could be classified as a unit having a turnover of Rs 10 crore and employment of 100 workers, while small could have a turnover of Rs 50 crore with 300 employees. Medium could be classified as a company with a turnover of Rs 150 crore with an employee strength of 500.
SMEs should be incentivised to work towards capacity-building. Policies should be so aligned to help units to grow from micro to medium scale and then to large scale. It is in this context that the corporatisation of SMEs assumes significance. For this, greater awareness should be created about the Limited Liability Partnership Act, which has paved the way for SME corporatisation.
Small enterprises need to complement each other and collectively function as big entities to derive scale economies through shared production and become a part of the global supply chain. It is for this reason that SMEs function more efficiently in clusters. In fact, technological innovations percolate faster and resources are utilised optimally within such a set-up.
SMEs also need to make concerted efforts to improve product quality, packaging, product standardisation and certification. Greater use of information technology and e-commerce would help SMEs make the best use of emerging opportunities.
SMEs are India?s future. This is where real growth will come from?not marginal but explosive growth that is both inclusive and widespread. For this to happen, we need to empower the SMEs. This would mean adhering to 4 Is, which are required in combination and not in isolation?inspiration, inquisitiveness, innovation and insistence.
Inspiration makes an entrepreneur. A successful entrepreneur is inquisitive and is keen to leverage the knowledge acquired for business development. Most enterprises are built on innovation and the most important of it all is insistence, ie. the perseverance to convert challenges into opportunities and opportunities into new benchmarks of success.
The writer is a senior economist at PHD CCI