Can MSMEs perk up India's economic growth?

As per Christine Lagarde, MD, International Monetary Fund, India’s GDP will go beyond 7 per cent in the current fiscal. Moreover, the recent Economic Survey forecasted India’s growth to top 8.5 per cent in the next fiscal. However, the rise in fuel prices and uneven rainfall may trigger inflationary pressure on the economy in the near future. Being the backbone of the economy, the MSME sector can play a major role achieving these projected growth rates in the next financial. Thus, it is vital for the government to focus on MSMEs to enhance their contribution.

India’s inflation is likely to fall between 5 and 5.5 per cent in fiscal 2015-16. Recently, the wholesale inflation fell to (–) 2.06 per cent in February 2015 as compared to same period last fiscal on account of fall in prices of food articles, manufactured items and fuel products. Data shows that prices of food articles in February fell 0.80 per cent; fuel prices fell 4.4 per cent and manufactured product prices also declined 0.30 per cent as compared to February 2014. If inflation falls further, this will push India’s economic growth to double digits.

The country’s GDP growth slowed down just after the 2008 global economic slowdown. After a long wait, India’s GDP growth is showing some signs of recovery now. The economy grew 7.5 per cent in October-December from a year earlier, beating China’s 7.3 per cent economic growth recently. To achieve 8 per cent GDP growth rate, India needs to increase investment in major pending projects, launch new projects, boost manufacturing growth, curtail costs and inflation, etc. Among all this, the most important will be to focus on the growth of MSMEs.

MSMEs’ Role

How will the MSME sector help in boosting India’s GDP growth to reach 8 per cent in the next financial year? Around 3.61 crore MSMEs, contributing 37.5 per cent to the country’s GDP, have a critical role to play in boosting industrial growth and ensuring the success of the Make in India programme. The good part is the sector currently employs close to 40 per cent of India’s workforce, contributes 45 per cent to India’s manufacturing output and 42 per cent to India’s total exports.

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Ajay Sahai, Director General, Federation of Indian Exporters Organisation (FIEO), says, “It is rather disappointing that despite having a very large number of MSME units, their contribution to the industrial production is still very low. The percentage share of MSMEs in exports is stagnant over the last few decades.”

He further says, “We need to address basic problems of MSMEs through a concrete strategy. Inadequate availability of credit, high cost of credit, lack of technology and lack of marketing support are some challenges of the MSME sector, which once addressed will enhance the potential that the sector contains.”

The government believes that the MSME sector should contribute robustly to push India’s GDP growth, and it can only happen by boosting India’s manufacturing activity and exports. Surprisingly, India’s exports have witnessed double-digit decline over the last two consecutive months. Expressing concern, Dr Arbind Prasad, Director General, FICCI, says, “Even though trade deficit has shrunk, double-digit decline in exports for last two consecutive months is a cause of worry. It indicates that we will not be able to achieve this year’s export target.”

To increase MSMEs’ contribution to India’s GDP growth, there is a need to boost investment in the manufacturing sector. “The investment proposed in the infrastructure and industry will give a fillip to the growth of the country. The service sector is already doing well, and the steps taken to ease doing business will help all sectors of economy,” says Sahai.

Chandrakant Salunkhe, Founder & President, SME Chamber of India, and CMD, Macro Group of Companies, says, “No new manufacturing units are being setting up nowadays. The government should do proper handholding of manufacturing MSMEs. Adequate funding is also required for boosting the growth of the MSME sector and focus on reviving the sick units. Moreover, the government procurement from the MSME sector should also increase. This will definitely help in boosting the contribution of MSME sector to India’s GDP growth.”

“The budget has talked about setting up of manufacturing facility in CMLV (Cambodia, Myanmar, Laos, Vietnam) countries. This will not only help India to enter the regional value chain, but also make Indian manufacturers to take advantage of parts manufacturing in India and CMLV countries. Indian manufacturer can take advantage of the Free Trade Agreements that these countries have particularly with China to increase exports to China,” further says Sahai.

Union Budget’s Implications

The recent announcement made by Finance Minister Arun Jaitley in the Union Budget 2015-16 has laid down the road map for taking India to double-digit growth. Considering the MSME sector the backbone of the Indian economy, special support in the budget will help the sector. To tackle the problem of long receivables realisation cycle of MSMEs, an electronic trade receivables discounting system (TReDS) has been established.

The related move of setting up of the Micro Units Development Refinance Agency (MUDRA) bank will help meet the funding requirements of micro enterprises in the informal sector and provide a boost to entrepreneurship.

Thomas Rookmaaker, Director, Fitch’s Asia-Pacific Sovereigns Group, says, “A gradual implementation of many small reforms is likely to have a significant impact on growth. At the same time, many persistent obstacles to higher growth remain in place, including labour market rigidities and infrastructure bottlenecks. The budget aims to remove these bottlenecks.”

Tilak Raj Manaktala, President, Delhi Exporters’ Association, says, “Costs have gone up with the increase of service tax to 14 per cent, which is further likely to be 16 per cent with Swachh Bharat/Ganga Cess. The small exporters, in particular, are worst hit because service tax paid at the various stages does not get refund. The refund procedures are so cumbersome and time consuming that the recovery cost is more than the refund in most cases.”

Since the new Foreign Trade Policy is expected, many of the issues of the exports sector will be addressed, and this will definitely help MSME exporters.

How Can MSMEs Benefit?

RBI has recently reduced the key rates in January 2015, followed by another reduction in March. However, the lending rates in the country are still quite high for an entrepreneur, particularly in the MSME segment. Industry expects further cut in the key rates if consumer price inflation remains around 5 per cent.

Harsh Pati Singhania, Director, JK Organisation, and Vice Chairman, and MD, JK Paper Ltd, says, “There should be translation of this (March) cut along with the previous cut announced in January, and banks should take tangible actions to reduce their lending rates. This will improve the credit flow at reasonable rates of interest and accelerate the growth process in industry as well in the economy.”

Moreover, currently China lowered its 2015 economic growth target to approximately 7 per cent, which means China’s economic growth is slowing down. China is concentrating on domestic demand to spur its growth rather than on exports now. Moreover, high cost of wages, high social compliance cost, appreciating currency, strict adherence to environment laws, less labour availability due to single child norms are forcing China to move to medium and high technology sector.

“China has left traditional sectors, such as hand-knotted carpets, spinning and certain segments of handicraft, textile and leather. This gives India a big space to occupy. The Make in India campaign combined with Skill India campaign can empower the country to take full advantage of the current scenario,” concludes Sahai.