By Niranjan Banodkar
Micro, Small and Medium-sized enterprises (MSMEs) are critical drivers of economic growth, particularly in emerging markets, where they stimulate job creation and play a crucial role in integrating local economies with global trade networks. Globally, MSMEs are the bedrock of economic prosperity, accounting for 50% of global GDP and 60-70% of total global employment. In India too, the MSME sector plays a crucial role, contributing significantly to employment, production, and exports.
According to the data from the Ministry of Statistics & Programme Implementation, the MSME Gross Value Added (GVA) accounted for 29.2% of India’s GDP in the fiscal year 2021-22 and the share of MSME-related products was more than 45% of India’s exports in the fiscal year 2023-24 (as of September 2023). Additionally, the MSME sector provides employment to over 110 million workers across various industries such as food processing, agriculture, chemicals, electronics, and textiles.
Due to their economic significance, the decarbonisation of MSMEs is an integral component of India’s climate journey. The sector’s substantial environmental footprint, generating 110 million tonnes of CO2 equivalent annually, underscores the urgency for change. As India takes strides to adopt a more sustainable and inclusive economic growth pathway in line with its commitment to achieving net zero carbon emissions by 2070, greater momentum towards the low-carbon transition of the MSME sector will be a key determinant in achieving India’s climate ambitions.
The government has played a key role in enhancing financial inclusion and access to credit for MSMEs by launching a broad spectrum of initiatives such as the Udyam Assist Platform to bring the Informal Micro Enterprises (IMEs) under the formal ambit and credit guarantee mechanisms such as the Credit Guarantee for Micro and Small Enterprises (CGTMSE) scheme. A similar thrust towards helping MSMEs adopt low-carbon technologies and advance on sustainable pathways will be crucial in enabling the sector to fast-track its transition.
Due to their disproportionately higher vulnerability to the impacts of climate change, MSMEs lag in the adoption of best practices for sustainable development. Unlike their larger counterparts, MSMEs typically have fewer strategic ties to their communities and face numerous challenges, such as limited knowledge, lack of capital, ineffective control mechanisms, difficulties in finding qualified staff, and a general lack of awareness about environmental issues. These obstacles make it difficult for MSMEs to comply with environmental standards and implement sustainable practices due to a shortage of resources, technical skills, and experience.
In this article, let me discuss some of the solutions that can be implemented to enable MSMEs to transition towards more sustainable business models.
Government Incentives and Access to Finance
Government policies and incentives can play a crucial role in promoting sustainability among MSMEs. By creating a favourable regulatory environment and providing direct financial support, governments can ensure that MSMEs are not left behind in the sustainability transition. Recognizing this need, the government has taken concrete measures to incentivize green initiatives, such as fostering wider adoption of the MSME-Sustainable (ZED) Certification scheme, that encourages MSMEs to adopt sustainable practices.
Additionally, as MSMEs typically have limited capacity and insufficient expertise to adopt green practices, there is an urgent need for focused capacity development programmes at a large scale. These programmes can focus on upskilling them on best practices to build resilience from climate risks along with educating them on using sustainable practices to enhance their competitiveness in global markets. In addition to the budgetary allocations by the center and state governments, financial incentives such as input tax credits for green energy procurement, loans for green technology and concessions for ESG compliance will further reduce barriers to the sustainable transition of MSMEs.
Alongside direct and in-direct incentives, targeted interventions such as capital infusion through a government-supported green bond programme can be a game-changer for MSMEs. These bonds can finance large-scale renewable energy installations, such as solar panels and wind turbines, as well as infrastructure projects aimed at sustainability.
As MSMEs have a relatively weaker credit profile, one effective approach could be, for a government-led financial institution with a high credit rating and expertise in bond issuance, to issue such bonds and utilize the proceeds to provide loans to eligible MSMEs. Government and financial institutions can further support MSMEs by offering technical support grants and subsidies to offset the initial costs of adopting green technologies. Such financial support will not only incentivize sustainable practices but also ensure that MSMEs can compete in markets increasingly driven by environmental considerations.
Cheaper Financing Solutions for Sustainable Growth
One of the most effective ways to enable MSMEs to adopt sustainable practices is through the provision of cheaper financing solutions. In accessing commercially available finance, MSMEs face barriers such as high collateral requirements, relatively poor credit profiles, small-scale of projects and high transaction costs, which can make financing prohibitive.
To overcome some of these challenges, Indian financial institutions should strive to continue developing innovative products that offer financing at reduced interest rates, specifically designed to fund eligible projects that benefit the environment. These products can cover investments in renewable energy systems, energy-efficient technologies, and eco-friendly production practices. As a result, a meaningful reduction in the cost of capital could help MSMEs transition more smoothly to sustainable operations.
Customised Financing Mechanisms
Beyond cheaper financing, MSMEs can benefit significantly from customised financing solutions tailored to their unique needs. Blended finance instruments, which combine concessional funds from public sources with private investment, can provide the necessary credit enhancement and availability to bridge specific gaps in various sectors. This approach can help MSMEs access the capital needed to adopt sustainable practices, such as energy-efficient manufacturing processes or sustainable supply chain management, while also building their capacity to implement these changes effectively.
A prime example is the government’s Raising and Accelerating MSME Performance Programme (RAMP) which focuses on enhancing governance and improving MSME’s access to markets, technology and sustainable practices. As a part of RAMP, the government has recently introduced two significant schemes: MSME Green Investment and Financing for Transformation (MSME-GIFT) and MSME Scheme for Promotion and Investment in Circular Economy (MSME-SPICE), which offer interest subvention and credit guarantee support for green technology and circular economy projects.
Moreover, the creation of sector-specific financial products can address the distinct challenges faced by MSMEs in different industries. For instance, offering targeted financial products for MSMEs in the agriculture sector to invest in sustainable farming techniques or for manufacturers to improve energy efficiency can lead to greater adoption of environmentally friendly practices.
Advances in India’s Digital Public Infrastructure, fintech innovations and advanced data analytics can also be utilized to design such products, by providing granular insights into the ESG performance of supply chains for environmentally-sensitive sectors.
Promoting Green Procurement Practices
Green procurement practices represent another critical avenue for fostering sustainable growth among MSMEs. Prioritizing the purchase of environmentally friendly goods and services by public and private-sector organizations can create an enabling environment for MSMEs to adopt green technologies and sustainable production practices such as sourcing raw materials sustainably, optimizing logistics to lower emissions, and adopting eco-friendly packaging.
Encouraging companies to engage in green procurement could also open up new business opportunities, particularly in international markets which are increasingly adopting stricter sustainability regulations. Businesses that integrate sustainability into their procurement processes can enhance their competitive edge, attract environmentally conscious consumers, and comply with global regulatory standards.
Furthermore, sensitizing MSMEs to the long-term cost savings associated with green procurement can help them see the economic benefits of sustainable practices and aid in accelerated adoption. To foster green public procurement, the Public Procurement Policy for Micro and Small Enterprises (MSEs) which requires central government institutions to allocate a percentage of their annual procurement to MSEs, could also be adjusted to include incentives for green procurement practices.
As India aims to meet its ambitious climate targets, the integration of sustainable practices among MSMEs will be pivotal. With the right financial instruments, support mechanisms, and incentives in place, MSMEs can become leaders in sustainable growth, driving economic development while minimizing their environmental impact.
Niranjan Banodkar is the Group CFO of YES BANK. Views expressed are personal. Reproducing this content without permission is prohibited.