Indian MSMEs need SROs

A SRO can help set and monitor quality and production standards while safeguarding the consumer’s interest

We think that at this stage, the government should take a more relaxed approach to SMEs to get back to business rather than tightening the norms now.
We think that at this stage, the government should take a more relaxed approach to SMEs to get back to business rather than tightening the norms now.

By Srinath Sridharan
India has 6.33 crore MSMEs that employ 40% of the country’s non-farm workforce, contributing nearly 25% of services output and 33% of manufacturing output. The lower-end of the sector has single-person operators like grocers, commercial vehicle-owners, village craftsmen and such. Almost 99% of the MSME firms in India are in the ‘micro’ segment.Prior to Independence, the landscape was different, with composite groups of village and small industries, such as beekeeping, ivory-carving, locks, iron-safes, textile works, leather goods, processing of food, forest industries, dairy farming, toy-making, perfumery and other miscellaneous groups. It is this historical experience of “traditional trade guilds” that still works well for India.

Post Independence, these trade guilds expanded and now provide employment to over 11 crore Indians and contribute over 29% to the GDP. The micro segment with 6.30 crore entities (accounting for 99.4% of the MSME pool), the small segment with 3.31 lakh (0.52%) and the medium segment with 0.05 lakh (0.01%) make up the estimated strength of the sector; 3.24 crore (51%) are based in the rural area and 3.09 crore in the urban areas.A quick comparison: China developed its (M)SMEs very strategically, for growth and employment generation.

As a result, these contribute to over 60% of its GDP and account for 80% of the jobs in the country. China used the strategy of “SME clustering” which used the “one village, one product” and “one town, one industry” concept of development, with full policy impetus, including SME financing and skills development, to access global markets.In India, as the MSME sector expanded, small industry associations started playing an important role in bringing together the fragmented and geographically-spread business units into a common thematic fold.

They have been functioning for the cause of the sector, despite not having the ability to raise large sums of funding that the other larger industrial associations have been able to. Currently, as industry associations, they do not have any official standing; this hinders them from self-regulating the space, its behaviour and norms. However, as the inclusive development of MSME is imperative, it is crucial now for select MSME associations to be designated as Self Regulatory Organisations (SROs). SROs are non-governmental organisations that set and enforce rules and standards relating to the conduct of entities in their respective segments.

An SRO’s  primary objectives would include protecting the customer and promoting ethics, equality, and professionalism. SROs typically collaborate with all stakeholders in framing rules and regulations. It is an entity with the power to develop and enforce stand-alone industry & professional regulations and standards on its own. It works with sectoral regulators if any, and the government policies. With adequate thought given to this idea, an SRO can be formed by an industry or professional group to oversee activities within that industry or profession. 

SROs would help the MSME sector come together strongly to set higher quality parameters and monitor the industry performance, improve reliability and productivity parameters, bring in consumer oriented, value-added product design of global standards, make innovation a driving force and, most important, build capacity through peer-enabled-learning, constant training, mentorship, etc.

This, in turn, would help Indian MSMEs upgrade their export-competitiveness, which is the very basis for increased trade volumes and improved business margins.SROs can take the lead in shaping their sector and pitch ideas to the government for development-oriented policies. These SROs could also be tasked with actually tracking efficiency and productivity of policies that impact the sector.

These SROs could work with the line ministries in understanding various FTAs that India signs and translating those into executable output ideas for industry players. Having SROs in place would bring in higher governance standards and, consequently, trust in the industry players. It would also create a process of resolving industry value chain disputes in a time-bound, transparent and fair way.

Hopefully, with the digitisation acceleration that we have in the country, we will soon have better and granular data on MSMEs. Detailed, structured data can help lenders look at the MSME sector for better financing. Last year, the official definition of MSME/SME changed, and we are in the midst of a FY in which many companies are in transition, in terms of how they will end up getting defined!

Having MSME SROs would also bolster the confidence of the lending institutions on giving better access to credit to MSMEs and enable the former to be policy-participants in improving the acknowledgment (of stakeholders), branding, competencies, digital-interventions, e-marketplace, finance, governance framework and human capital development.

This can bolster MSMEs’ contribution to our GDP, as well as generate entrepreneurship and employment opportunities across India, instead of creating only few dense and choked cities.To translate the atmanirbharta values, we need to empower and trust our local entrepreneurs. With SROs, MSMEs will have power that would rightfully come with accountability. With this, it is indeed possible to make our MSME the ‘Main-Stay Major Economy’!

Corporate advisor and independent markets commentatorTwitter: @ssmumbai 

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