MSMEs Embracing Digitalization, Sustainability Report Profit: FICCI

To enhance their competitiveness, MSMEs in India have been increasingly adopting technology and digital solutions, such as the use of e-commerce platforms, digital marketing, cloud computing, and automation tools, The Federation of Indian Chambers of Commerce & Industry (FICCI) said in its report.

The report, based on a nationwide survey of more than 600 enterprises across 14 cities, revealed that MSMEs have been utilizing digital technology across different business functions, with 60 per cent of enterprises using digital tools for human resources, 51 per cent for sales and marketing, and 48 per cent for finance. The accounting software (such as Tally/ Vyapar/ Busy, etc.) and business applications like ERP and CRM were reported to be the most used digital tools by MSMEs. Significantly, about 37 per cent of enterprises surveyed were also using cloud-based business applications such as IaaS, PaaS, SaaS, etc.

According to the report, most of the firms by incorporating digital technology into their business functions have experienced improved productivity and reductions in operational costs. Nearly 35 per cent of respondents reported a reduction in their annual operational costs by 11-20 per cent as a result of digitalization. Another 30 per cent of respondents indicated that their annual operational costs had decreased by more than 20 per cent.

The survey also found MSMEs leveraging e-commerce platforms and online marketplaces to reach a larger customer base in order to expand their market presence. These platforms provide opportunities for MSMEs to showcase and sell their products nationally and globally.

A significant 71 per cent of surveyed enterprises had their own sales platforms such as a website to display or sell products. Amongst the enterprises that reported selling through online channels, 24 per cent reported that 50 per cent to 75 per cent of their overall sales came through online platforms like e-commerce platforms or their own website. Another 39 per cent respondents reported that one fourth to half of their sales were through such online platforms.

Challenges Faced By MSMEs

The study highlighted several significant challenges encountered by micro, small, and medium enterprises when it comes to incorporating technology into their business operations, particularly when trying to establish a presence on e-commerce platforms. Approximately 40 per cent of the surveyed individuals cited a lack of skilled resources and technological expertise to effectively integrate and operate these technologies.

Although there is a government initiative called ‘Digital MSME’ within the Champions Scheme aimed at encouraging digital adoption among MSMEs, it is evident that there is a pressing need to enhance awareness about this scheme and its potential benefits for MSMEs throughout the country.

MSMEs in India also have the opportunity to leverage the Digital Public Infrastructure (DPI) to enhance their access to financial resources and markets. For instance, platforms like the GeM (2016) for public procurement and the TReDS (2014) for receivables financing have played pivotal roles in the growth of MSMEs in India. However, the survey findings indicate that while some MSMEs are aware of these platforms, there is still room for improvement in raising awareness and encouraging their wider adoption among MSMEs.

Adoption Of Sustainable Practices

In recent years, there has been a growing emphasis on adoption of sustainable practices by micro, small, and medium enterprises in India. By adopting sustainable practices, businesses can mitigate their ecological footprint, optimize resource utilization, and minimize waste generation.

As per the report, businesses have recognized the importance of integrating Environmental, Social, and Governance (ESG) practices into their operations, not only to meet regulatory requirements but also to improve their competitiveness and reputation. The survey found that about 72 per cent of respondents were generally aware of sustainability and ESG practices. Interestingly, the importance of buyer support in implementing sustainability and ESG practices was instrumental as 64 per cent of enterprises received guidance and support from their buyers.

Over the past two years, a significant number of surveyed businesses have taken proactive steps towards embracing sustainability. About 41 per cent enterprises initiated actions to reduce or eliminate paper usage, signaling a growing recognition of the importance of waste reduction and resource conservation. Additionally, 41 per cent of them focused on conserving water, while 39 per cent invested in environment-friendly projects.

The participating firms have also expressed their intention to prioritize sustainable practices in the coming two years with 36 per cent MSMEs committing to adopt renewable energy sources, and 35 per cent aiming to invest in green initiatives. The enterprises have also reported benefits and cost savings by transitioning to green and sustainable practices including adoption of water conservation practices.

Transition Challenges

While adopting sustainable practices, 42 per cent respondents found time constraint as a key challenge, followed by 41 per cent citing limited funding and lack of incentives for implementation of such practices.

In order to overcome these challenges, enterprises may invest in sustainability training and education, define clear goals and metrics for sustainability efforts, and establish partnerships and collaborations with other stakeholders in the industry, the report said.

Key Suggestions

The survey suggested an adjustment in the categorization criteria for MSMEs as non-performing assets (NPAs), extending the current 90-day limit to 180 days. Citing the reason, the respondents said that the operational cycle of many MSMEs often exceeds the 90-day period. The cycle includes the time between procuring raw materials, making sales, and the subsequent 30 to 90 days required to collect bills and receivables.

Prolonged operational cycles have become standard practice, making it challenging for MSMEs to meet their debt payments and interest obligations on time. Consequently, a significant number of MSMEs default, leading to the irregular classification of their dues as NPAs. A 180-day classification period will safeguard many MSMEs from financial distress or closure, thus preserving economic activity and employment opportunities, the report suggested.

Need For Improved Government Policies

Micro, small, and medium enterprises have emphasized the need for enhanced government policies and support systems to tackle the challenges faced by businesses. This includes the call for increased transparency, enhanced effectiveness in current mechanisms and channels for resolving payment-related concerns, and the implementation of financial assistance measures that effectively cater to the requirements of businesses affected by delays and defaults.

MSMEs have also stressed the importance of taking into account the enduring effects of financial challenges on creditworthiness, including adverse impacts on credit scores and the enduring complications in securing future loans.

For the TReDS platform, respondents suggested automatic publishing of GST registered MSMEs’ invoices, allowing participation of state government agencies in TReDs, and making the Customer Care Helpline of TReDS more robust. In case of GeM, the suggestions offered include reduction in charges and ensuring timely payment to MSMEs.

In conclusion, the suggestions highlighted in the study are critical for improving growth and development of businesses in India. Regular monitoring and evaluation of government schemes is needed for MSMEs to ensure effective implementation.