Trade, import, and export for MSMEs: The Covid pandemic has altered countries and multinational companies’ vision for engaging in global trade characterized by the emerging and alternative economies that promise quality manufacturing. Crossing the $400 billion exports in the financial year 2021-22 helped India earn a decent spotlight as a growing manufacturing and export hub in the world as well as a strong contender to be among the top global value chains (GVCs). Here, India’s 6.3 crore MSMEs, which account for nearly half of the country’s exports, would be among the key components. However, it won’t be a smooth ride for the country and its vast MSME base to develop or strengthen its presence in GVCs. So, what are the challenges here? Experts at Financial Express Online’s SME Exports Summit 2022 on Friday deciphered.
With respect to MSMEs, India’s export basket has predominantly contained goods that have lacked sophistication in terms of technology used in comparison to affluent countries that produce medium to high-technology products, said MH Bala Subrahmanya, Professor (HAG), Department of Management Studies, Indian Institute of Science, Bangalore. As the economy progresses, it diversifies from agriculture to manufacturing and the trade basket evolves from products from natural resources to low-technology ones and further to medium and high technology but India has moved away from manufacturing towards services. In such a shift, there is no virtually no or negligible move from natural resources to high technology manufactured goods, according to Subrahmanya.
“So, unless we strengthen our MSME sector to move towards medium and high technology product category, there is no easy way for India to penetrate the GVCs in a big way,” he added at the panel discussion on developing GVCs from India.
Moreover, the majority of MSMEs have been in food and beverages, wood and wooden products, textiles, etc., under the consumer goods segment where technology sophistication is largely absent in comparison to the intermediate goods sector such as auto components and fabrication units which are more sophisticated, Subrahmanya noted as he called for replicating the technology-driven model of businesses in Bangalore to MSME clusters across India. “This kind of support system should be created in all MSME clusters in India to encourage science and technology networks, industry-institute partnerships, and linkages with MNCs. This would have some impact on promoting technology sophistication of MSMEs.”
The volume is also a problem. According to Subrahmanya, there are hardly 1.5 lakh MSMEs exporting from India – a fraction of 6.3 crore MSMEs in India. So a significant chunk of MSMEs are needed to be integrated into global markets and then into GVCs, he said.
Market Access and Ecosystem Support
Developing GVCs have been about enabling exports which means improving manufacturing in general. However, there have been ecosystem issues around lack of right information, capital, accessing foreign markets, etc., for MSMEs. Mohammad Athar, Partner and Leader Industrial Development at PwC India said MSMEs in India have stayed away from using industrial estates and parks across different states because they don’t have enough capital to build their own unit there while the cost of compliance has also been too high for them.
“To solve this challenge, MSME Ministry is thinking of coming out with smaller MSME parks. This means if there could be ready-to-use facilities where MSMEs could rent out space and be part of a larger manufacturing ecosystem without developing that ecosystem by themselves, it will really help them improve manufacturing. This is needed across major manufacturing clusters for government to develop MSMEs ecosystem and let the global integration happen,” Athar said during the panel discussion.
Another step taken by state governments to help SMEs do business in international markets is ‘acceleration services’ coming up, according to Athar. “This should also start enabling the capacity. In a nutshell, the opportunity is quite real and many companies are already integrated with GVCs. To enable further integration and help MSMEs be more productive, alignment on trade cost, regulations, and export ecosystem will be at the heart of it,” said Athar.
The mindset of being a small business with limited management bandwidth and multiple problems is another challenge that limits MSMEs from exploring their full potential in being part of GVCs. Rama Shankar Pandey, who leads Germany’s automotive lighting company Hella’s India business said MSMEs need to get out of this mindset of just being commodity suppliers.
“Just because you are small doesn’t mean you cannot differentiate yourself and move up the technology ladder. Scope matters but one organisation cannot have the full scope of supplies, products and services. This is where the role of MSMEs is critical. For example, in the last few years, our growth has been fueled by ‘Uberising’ manufacturing. We go up the value chain, invest in research and development (R&D) and design and development (D&D) to attract the best talent and channelise our access to customers and relation with OEMs to the talent. When it comes to manufacturing, we promote our MSME ecosystem to take over. The moment they do that, they become part of the value chain and get the confidence to look up,” explained Pandey.
Building Right Temperament
The panel also included India’s first diamond-certified MSME Gilard Electronics in Punjab and India’s automotive sector under the government’s Zero Defect, Zero Effect (ZED) scheme that promotes sustainable manufacturing. Launched in 1961, exports account for only 5-7 per cent business of automotive switches manufacturer Gilard which counts Honda and Mahindra & Mahindra among its over 100 customers.
“While our exports are low, we have been helping Indian companies avoid imports through import substitution and contribute towards India’s balance of trade. Moreover, post-Covid, I think the world is suddenly looking at India to buy different products. Even local companies in India are approaching us to develop products as they don’t want to depend on China,” said Sanjiv Singh, Managing Director, Gilard Electronics.
However, to succeed in exports, Singh said MSMEs need the right temperament. For example, Singh added currently not many MSMEs use any system for documenting what they are doing, they don’t create any business plan or make targetted attempts to understand their strengths and weaknesses, and the direction they want to go. This coupled with overall process management, managing logistics etc., are also very important, he said.