Manufacturing Outlook 2022 For Small Business In India

The three-sector model of economies postulates that in early stages of development, an economy begins with its main focus on the primary sector, which is involved in extraction of raw materials. As the economy develops, its focus shifts to the secondary sector, i.e., manufacturing, followed by the tertiary sector or the service sector.

It is often said of India that its focus shifted from the primary to the tertiary sector while almost skipping the secondary sector. This is evidenced by the fact that manufacturing typically accounts for 16% to 17% of India’s gross domestic product (“GDP”) while the service sector’s contribution has been above 45% since 2010.

Various factors have hindered the growth of manufacturing in India despite the availability of a cheap labour force. These factors include inadequate infrastructure and unavailability of credit, among others.

India has long realised the importance of strengthening its manufacturing. In 2011, the Government of India (GOI) notified the National Manufacturing Policy. The primary aim of the policy is to enhance the share of the manufacturing sector in India’s GDP to 25% by 2022. The current central regime has continued to focus on domestic manufacturing with such policy objectives as “Make in India”. Further, the economic impact of the Covid-19 pandemic has shown the pitfalls of an over-reliance on the service sector, it being the most affected with various services becoming redundant and undesirable in the wake of the pandemic.

All recent indicators and official communications suggest that the GOI is doubling its efforts to strengthen India’s manufacturing, which paves the way for many business opportunities.

MSMEs

As per the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”), Micro, Small and Medium Enterprises (“MSMEs”) are classified as follows:

MSMEs form the backbone of manufacturing in India. There are approximately 6.3 crore MSMEs in India operating both in manufacturing and service sectors. As per the Confederation of Indian Industries, MSMEs contribute approximately 6.11% of the manufacturing GDP. They also contribute vastly to employment and export.

The GOI sees MSMEs as vital in boosting India’s manufacturing capabilities as evidenced by, among other things, the doubling of the budget allocation for MSMEs from Rs. 7,572 crore in FY 2020-21 to Rs. 15,700 crore in FY 2021-22.However, the policy objective of increasing manufacturing’s share in the GDP to 25% and the act of doubling the budgetary allocation of the MSME sector,when taken together point towards a bright future for manufacturing by MSMEs.

Addressing the hurdles for manufacturing MSMEs

Indian manufacturing has suffered for very long from various structural issues which were made worse by the pandemic. We will now discuss some key steps being taken to, one, help the sector recover from the blow of the pandemic, and two, address some structural issues.

Availability of credit

The GOI operates various schemes to make availing credit easier for MSMEs.

The Emergency Credit Line Guarantee Scheme (“ECLGS”) was implemented to tackle the financial exigencies created by Covid-19. Under this Scheme, the National Credit Guarantee Trustee Company (NCGTC) provides 100% guarantee for certain working capital term loans availed by MSMEs. The ECLGS constitutes approximately 64% of the budget allocation for the MSME sector showing that aid of the Covid-hit MSMEs is a top priority.

While ECLGS is available only till the earlier of March 31, 2022 or when its corpus of Rs. 4.5 lakh crore runs out, there exist several other longer-term efforts.

The Credit Guarantee Scheme for Micro and Small Enterprises (“CGSMSE”) seeks to make bank credit available to micro and small enterprises without the hassles of collaterals / third party guarantees. It provides for credit guarantee for loans of up to Rs. 2 crores availed by existing or new micro and small enterprises. The guarantee cover ranges from 85% for micro enterprises (up to Rs. 5 lakh) to 75% for others.

The Credit Linked Capital Subsidy Scheme for Technology Upgrade Scheme (“CLCS-TU Scheme”)facilitates technology up gradation in MSEs by providing an upfront capital subsidy of 15 per cent (on institutional finance of up to Rs. 1 crore availed by them).

Additionally, in February 2021, the Reserve Bank of India (“RBI”) permitted commercial banks to deduct the credit disbursed to “new MSME borrowers” of up to Rs. 25 Lakh from their Net Demand and Time Liabilities (NDTL) for calculation of the Cash Reserve Ratio (CRR). The effect of this being that a commercial bank would be required to keep a lesser deposit with the RBI which would effectively increase the liquid funds available with the commercial bank. This exemption is available for credit disbursed up to December 31, 2021.

Admittedly, the growth in credit extended to MSMEs has been uneven. Micro and small enterprises only recorded a year-on-year (“YoY”) growth of 1.1% in gross bank credit in August 2021, while medium enterprises recorded 54.6% growth. Even with the medium enterprises, the rate of YoY growth in August was less than June and July.However, recently, banks like HDFC and Kotak Mahindra have taken initiatives to offer support to the MSME sector.

Growth Incentives

Several measures have been taken to incentivise growth in the MSME sector. In May 2020, as a part of the Atmanirbhar Bharat Scheme, the definition of MSMEs was revised to the definition provided above. The investment limit was raised and the turnover criteria was added. For micro manufacturing enterprises, the investment limit was increased from Rs. 25 Lakh to Rs. 1 crore; for small enterprises, from Rs. 5 crore to Rs. 10 crore; and for medium enterprises, from Rs. 10 crore to Rs. 20 crore. The investment limits were increased to encourage MSMEs to grow by allowing them to retain their concessions and benefits despite increase in their scale of operations.

The Public Procurement Policy for Micro and Small Enterprises Order, 2018 came into effect on April 1, 2019 (“Procurement Order”). It requires the Central Ministry /Department/PSUs to set an annual target for 25% procurement from the MSE Sector. The implementation of the Procurement Order has picked up pace this year. Several ministries have already exceeded the target of 25% with many poised to exceed the same for FY 22. Import duties on several key raw materials for MSMEs have also been reduced to help bring down the costs associated with manufacturing, making MSMEs more competitive.

Infrastructure

The budget allocation for the Infrastructure Development Programme for MSMEs increased from Rs. 896.56 crores in FY 21 to Rs. 1107 crore in FY 22. A key focus area for the Infrastructure Development Programme is the Cluster Development Programme under which a cluster, i.e., a group of enterprises located within a contiguous area and producing same or similar products or services, is identified and development actions are undertaken in such a cluster. The logic of the scheme being that operating in clusters is more beneficial for micro and small manufacturers than operating in silos. Expenditure of Rs. 961.49 crores has been undertaken on the Cluster Development Programme since its inception in 2014. The budget for FY 22 allotted a further Rs. 507 crores to the programme.

Future Challenges and Opportunities

We can see from the above that the priorities for the Indian economy for the medium term have been clearly defined. India wants a robust manufacturing sector to fuel the story of its growth and India sees MSMEs as a key industry for achieving this goal.

While the efforts and the policies of the government go a long way, the path ahead is still fraught with challenges.

Covid-19 Wave

The MSME sector accounts for nearly 50% of India’s exports. As such, its economic well-being relies on foreign demand. With resurgent waves of Covid-19 across Europe, the health of the export sector is suspect.

The pandemic also created and exacerbated what is being termed the “Global Supply Chain Crisis”. It has affected the ability of countries to both export goods and import them causing shortages of goods, higher prices, and delay in supply.

Both these factors highlight the importance of a strong domestic market to enable India’s manufacturing to survive and capitalise on the opportunities which will come about as things improve.

Climate Crisis

Climate change related catastrophe has become very common in the last decade. As the global temperature reaches closer to the inflection point of 1.5 degrees Celsius, the pressure on governments and industries to adopt climate friendly practises, including “net zero”, is increasing.

Adoption of many climate-friendly practises imposes heavy cost burdens on developing countries and the smaller businesses which exist therein. However, businesses will have to adapt to be more environmentally friendly to survive as the global policy regime comes to terms with the scale of the problem humanity faces.

Conclusion

The Covid-19 pandemic has caused major changes in national and international economic relations and geopolitics. It has also created a need for economies to evaluate which activity is important. At the same time, the rise of the manufacturing sector in India has been long due and there exists a concerted policy effort to enable India’s MSMEs to achieve their potential. As 2021 comes to an end, the puzzle pieces are in place for a bright 2022 for India’s manufacturing and its MSMEs.