As per the year 2014, the MSME sector of India has been able to increase its GDP share by 2.6%, which includes 18.7% exports and 10.2% imports. It generated direct employment for 8 million people and contributed a total turnover of US $192 billion (Indian Rupees). While there are many challenges ahead for both the MSME sector as well as their impact on many aspects in India, one of the major issues is lack of visibility with certain sectors like Industrial Investment, leaving many new generation firms without commercial opportunities in this sector.
Industrial investments in the MSME sector as well as their MSMEs have been severely affected by several factors; some of them are ‘external’ while many other challenges are also ‘internal’. It is important to understand the various challenges being faced by the MSMEs, which will impact them and their future. These challenges can be categorized into external and internal factors, where internal factors may be further divided into four sub-categories. The external factors include the overall financial health of India, where the case has shown that despite having a huge potential for growth in exports, their total exports have only risen by 5%. Some other examples of such challenges include global macroeconomic conditions. With the help of this article, we are going to further highlight the various issues being faced by the MSME sector along with their negative impacts.
What is Msme Sector, And What is Its Role in The Real World?
MSMEs are not just any small firms. They offer employment to one-third of 1.2 billion people in the world who work in the informal sector and generate services for other sectors like small and large industries, retail, tourism, transportation, construction, etc. But today, many sub-sectors within MSMEs face challenges in attaining their rightful share of the market, which will undoubtedly have a significant impact on their performance as well as future growth outlook. While there are some major challenges faced by such sub-sectors like Construction, Retail, etc., they still require to be inculcated and incorporated within the MSME ecosystem.
Some of The Major Challenges Faced By The MSME Sector:
Below is a list of some of the major challenges faced by MSMEs that have a significant impact on their growth prospects.
Let’s understand each of these challenges faced by MSMEs in india along with potential solutions that can be implemented:
1. Financial issues:
Challenge Faced:
In the Indian economic landscape, obtaining financial assistance has consistently posed a challenge for smaller enterprises and businesses, proving to be a significant impediment for both businesses and the MSME sector, particularly in the realm of MSME finance. However, the most disturbing fact about it is that only 16% of SMEs get access to timely finance, resulting in small and medium firms being forced to rely on their own resources. It is not just small firms that face this problem, but larger firms do as well because even those bigger players face significant difficulties in accessing cheaper credit from formal banks.
Solutions:
- Streamlined Loan Process: The Indian government should work with banks to simplify loan application processes for MSMEs. This could involve creating a centralized online portal where businesses can submit applications and track their status. By reducing paperwork and bureaucracy, more MSMEs would be able to access formal credit. The portal could also provide educational resources on financial management and loan eligibility, helping businesses prepare stronger applications.
- Alternative Financing Options: Encouraging the growth of alternative financing methods can provide MSMEs with more options. These platforms can be regulated to ensure safety while offering faster and more flexible funding compared to traditional banks. For example, a government-backed P2P lending platform specifically for MSMEs could connect small businesses with individual and institutional investors willing to lend at competitive rates.
- Credit Insurance for MSME Loans: Introduce a government-backed credit insurance scheme that covers a portion of the risk associated with lending to MSMEs. This would encourage banks and other financial institutions to extend credit to small businesses. Such insurance could be made available at a subsidized premium, specially targeting sectors or regions where MSMEs struggle most.
- Micro-Financing through Digital Cooperatives: Credit digital cooperatives that pool resources from multiple MSMEs to establish a common fund, managed via a digital platform. This fund could be used for mutual financial support, group purchasing, or investing in shared infrastructure and technology upgrades. These cooperatives could also receive matching contributions or incentives from the government.
- Financial Literacy and Creditworthiness Programs: Launch nationwide finance and creditworthiness improvement programs targeted at MSMEs. These programs would educate business owners on effective financial management, credit building, and access to alternative financing options. They would also assist in preparing business plans, and financial statements, and maintaining records necessary for loan applications. This could be supported by digital tools or apps to simplify the process.
2. Regulatory issues:
Challenge Faced:
Several regulatory issues have been identified over time, including problems like tax compliance and changes to labor laws which have ended up costing the MSME sector dearly. In an attempt to make this sector more competitive among others, certain labor reforms were attempted some years back. Still, they failed to make any dent in improving things for MSMEs despite making them more competitive than larger firms. As a result, it has become very difficult for MSMEs to comply with these regulations and register for tax compliance, which has resulted in many operating on low capital or even shutting shops.
Solutions:
- Simplified Compliance Framework: India should develop a comprehensive yet simplified compliance framework specifically for MSMEs. This could involve creating a tiered system where smaller businesses face fewer regulatory requirements, gradually increasing as they grow. A user-friendly online platform could guide MSMEs through necessary compliances, offering step-by-step instructions and automated form filling. Regular training sessions and helplines can further support businesses in understanding and meeting their obligations.
- One-Stop Regulatory Shop: Establishing a single point of contact for all MSME-related regulatory matters can significantly reduce complexity. This agency could coordinate between various government departments, simplify communication, and provide clear, concise information on all relevant regulations. They could also offer personalized guidance to MSMEs based on their specific industry and size. It ensures businesses understand and can easily comply with necessary regulations.
- Regulatory Sandbox for MSMEs: Implementing a regulatory sandbox approach allows MSMEs to test innovative products or services in a controlled environment with relaxed regulations. This can aid in identifying unnecessary or burdensome regulations while fostering innovation. This sandbox could be sector-specific, allowing regulators to work closely with MSMEs to develop appropriate rules that balance consumer protection with business growth.
3. Infrastructure:
Challenge Faced:
In India, the infrastructure sector is extremely important because we are often referred to as the ‘world’s back-office because so many works in this sector are carried out overseas. Applications such as eCommerce and BPO have created more jobs in low-wage countries like India.
Solutions:
- Digital Infrastructure Support: The government should prioritize providing high-speed internet and digital services to MSMEs with the growing importance of digital infrastructure. This could involve subsidizing broadband connections, offering free public Wi-Fi in business districts, and creating digital service centers where MSMEs can access advanced technologies like 3D printing or virtual reality tools. Additionally, training programs can help MSMEs leverage this digital infrastructure effectively for their business operations.
- MSME-Focused Industrial Parks: Developing dedicated industrial parks for MSMEs can address multiple infrastructure challenges. These parks could offer reliable power supply, high-speed internet, common effluent treatment plans, and shared logistics facilities. By clustering similar businesses together, these parks can also foster collaboration and knowledge sharing. The government could offer subsidized land or tax breaks to encourage MSMEs to relocate to these purpose-built facilities.
- Public-Private Partnerships for Infrastructure Development: Encouraging public-private partnerships (PPP) can accelerate infrastructure development for MSMEs. Private companies could be invited to invest in and manage critical infrastructure projects like roads, power plants, or digital networks in MSME-heavy areas. In return, they could receive long-term contracts or revenue-sharing agreements. This approach can bring in much-needed capital and expertise while ensuring the infrastructure meets the specific needs of MSMEs.
4. Low productivity:
Challenge Faced:
MSMEs are not necessarily very productive, but they perform certain tasks that emit more value than they produce. Retailers sell consumer goods to end-users at relatively lower prices. In fact, MSMEs may be very productive only when it comes to being cost-efficient and are capable of creating high volume at very low costs. But given that their production is on a small scale with low margins, low productivity can put them at a disadvantage, especially when compared with larger firms.
Solutions:
- Technology Adoption Programs: The Indian government should launch comprehensive technology-adopting programs tailored for MSMEs. These programs could offer subsidies or low-interest loans for purchasing modern machinery and software. Plus, partnerships with tech companies can provide MSMEs with access to cutting-edge tools at discounted rates. Training sessions and regular follow-ups and support can ensure sustained adoption and utilization of new technologies.
- Lean Manufacturing Initiatives: Promoting lean manufacturing principles can significantly improve productivity in MSME manufacturing units. The government could sponsor expert consultants to work with MSMEs, identifying inefficiencies and implementing lean practices. This could involve reorganizing production floors, optimizing inventory management, and streamlining processes.
- Skill Development and Training: Addressing the skills gap is crucial for improving productivity. The government should establish sector-specific skill development centers in MSME clusters. These centers can offer both technical and managerial training. It would ensure workers are equipped with the latest skills and knowledge. Collaborations with industry experts and academic institutions can ensure the training remains relevant and up-to-date. Additionally, creating a national online learning platform specifically for MSME workers can provide flexibility and on-demand skill development opportunities.
5. Lack of innovation:
Challenge Faced:
Indian MSMEs are not very innovative, and the majority of the products that they produce are based on outdated technologies. There is a severe lack of entrepreneurs in this sector, which has prevented it from adopting new technologies and tools which have brought about significant changes in other sectors like eCommerce and call centers, etc. As a result, MSMEs have had to struggle with outdated technology as well as low levels of productivity, especially when compared with larger firms.
Solutions:
- Innovation Incubation Centers: Establishing innovation incubation centers specifically for MSMEs can foster a culture of creativity and problem-solving. These centers can provide access to research facilities, mentorship from industry experts, and networking opportunities with potential investors. Regular innovation challenges are hackathons that can be organized to encourage MSMEs to develop new ideas. The centers could also offer prototyping facilities and support in patent and commercializing innovations. This would reduce the financial and technical barriers that often hinder MSME innovation.
- Collaborative Research Programs: Encouraging collaboration between MSMEs, large corporations, and academic institutions can drive innovation. The government could create a platform to facilitate this partnership, offering funding for joint research projects. This approach allows MSMEs to access advanced research capabilities and expertise while benefiting from the practical industry knowledge of larger firms. Tax incentives could be offered to larger companies that engage in meaningful research collaborations with MSMEs. This would create a win-win situation for all parties involved.
- Innovation Voucher Scheme: Implementing an innovation voucher scheme can provide MSMEs with the financial means to pursue innovative projects. These vouchers could be used to purchase services from research institutions, hire consultants, or access specialized equipment. The application process should be simple and straightforward, with quick turnaround times to encourage participation.
6. Technical changes:
Challenge Faced:
There has been no dearth of technical changes over time, and most industries have undergone some form of change in order to remain competitive. As a result, Indian MSMEs have had to deal with some very important changes which have affected their growth potential. At first, there was a change in the ownership right of land, which has made the sector more prone to mismanagement and, with it, a fall in productivity.
Solutions:
- Technology Upgradation Fund: Creating a dedicated technology upgrade fund for MSMEs can help businesses adapt to technical changes. This fund could offer low-interest loans or grants for purchasing new equipment, and software, or for training employees on new technologies. The application process should be streamlined, with clear guidelines on eligible technologies and expected outcomes. Regular technology audits could be conducted to help MSMEs identify areas for improvement and guide their upgrade plans.
- Technology Extension Services: Establishing a network of technology extension centers across India can provide on-ground support for MSMEs adapting to technical changes. These centers could offer services like technology demonstrations, hands-on training, and troubleshooting support. Mobile units could reach MSMEs in remote areas. This would ensure widespread access to these services. The centers could also facilitate knowledge sharing between MSMEs, creating a community of practice around technology adoption.
- Industry 4.0 Readiness Program: Launching an Industry 4.0 Readiness Program can prepare MSMEs for the future of manufacturing or other sectors. This program could offer comprehensive assessments of a business’s current technological capabilities like IoT, AI, and robotics. Workshops and training sessions can help MSME owners and managers understand the potential and practical benefits of these technologies.
7. Competition:
Challenge Faced:
Due to various factors, such as the rise of eCommerce and the advent of globalization, bigger firms have forced MSMEs out of their markets. However, this is not new because MSMEs were facing competition from year one, but they could fight it off successfully compared to professional firms. In fact, MSMEs continue to face competition in many areas, including agricultural machinery, garments, and tourism.
Solutions:
- Market Intelligence Support: Developing a comprehensive market intelligence system for MSMEs can help them better understand and respond to competition. This could involve creating a centralized database with information on market trends, consumer preferences, and competitor strategies across various sectors. Regular reports and analyses could be made available to MSMEs, helping them make informed decisions.
- Export Promotion Initiatives: Enhancing export capabilities can help MSMEs compete on a global scale. The government could establish dedicated export promotion cells for MSMEs. They could offer services like market research, logistics support, and compliance assistance. Training programs on international trade practices, quality standards, and cross-cultural business etiquette can prepare MSMEs for global markets. Plus, creating a simplified export procedure specifically for MSMEs can reduce bureaucratic hurdles. This can encourage more businesses to explore international markets.
- Cluster Development Approach: Promoting the development of MSME clusters can enhance competitiveness through economies of scale and shared resources. The government could identify potential clusters based on geographical concentrations of similar businesses and provide infrastructure and policy support to strengthen these clusters. Common Facility Centers within clusters can offer shared access to expensive machinery or testing facilities, reducing individual investment needs.
8. Skills:
Challenge Faced:
When it comes to skills, Indian MSMEs are far behind their counterparts in other countries because they depend heavily on the help of informal workers, who are not paid well and lack the technical skills which can help enhance productivity. As a result, smaller firms are forced to take up jobs that require low levels of skill and expertise, which further affects their growth prospects in the long term.
Solutions:
- Digital Skills Focus: Recognizing the growing importance of digital skills can lead to the creation of a digital literacy program for MSME workers. This could involve basic components such as computer skills, digital marketing workshops, and courses on using specific sector-specific software and tools. Mobile training units could be deployed to reach MSMEs in remote areas. Partnerships with tech companies can provide access to online learning platforms and certifications at discounted rates.
- Apprenticeship Promotion Scheme: Expanding and streamlining the apprenticeship program for MSMEs can create a pipeline of skilled workers. The government could offer financial incentives to MSMEs for taking on apprenticeships, such as tax breaks or partial wage subsidies. An online platform could simplify the process of registering for apprenticeships and tracking progress. This scheme could also include provisions for upskilling existing workers through short-term apprenticeships in larger firms or advanced training centers.
- Sector-Specific Skill Development Centers: Establishing sector-specific skill development centers in MSME hubs can address the skills gap efficiently. These centers should offer both short-term courses for quick skill upgrades and longer-term programs for comprehensive training. Practical, hands-on training using the latest equipment and technologies can aid individuals working in this sector.
9. Lack of professionalism:
Challenge Faced:
A majority of Indian MSMEs lack professionalism despite being vital for larger industries’ growth. As a result, they are highly prone to corruption and abuse of power, which has a huge impact on the productivity of their businesses.
Solutions:
- Management Development Programs: Launching comprehensive management development programs can help in eliminating the disadvantages of MSME workers. These programs should cover topics like strategic planning, financial management, HR practices, and business ethics. They could be offered in flexible formats, including weekend workshops and online modules, to accommodate busy schedules. Completing these programs could be linked to benefits like preferential access to government schemes or recognition awards.
- Corporate Governance Guidelines for MSMEs: Develop simplified corporate governance guidelines specifically for MSMEs can promote professionals and ethical business practices. These guidelines should be practical and easy to implement. It should cover board composition, financial reporting, and stakeholder management. Training programs and easy-to-use toolkits can help MSMEs adopt these guidelines.
- Professional Services Support Scheme: Creating a scheme to subsidize professional services for MSMEs can encourage the adoption of professional practices. A panel of pre-approved service providers could be established to ensure quality. Workshops on how to effectively work with professional service providers can help MSMEs maximize the benefits. Regular audits can ensure the scheme is being used effectively and not misused.
10. Lack of standardized policies:
There are very few MSME policies in India. As a result, there is no consistency when it comes to MSME development as well as entrepreneurship promotion programs. However, positive progress has been made in Delhi over the years, but this needs to be done on a national level so that Indian firms can become more competitive across the world for global companies and investors.
What is the Overall Impact of Such Challenges Faced By The MSME Sector?
Due to the low productivity, corruption, and poor working conditions, MSMEs have been struggling to ensure growth. This has resulted in the sector having a very low level of profitability and growth, which is not acceptable for the overall economy. If a healthy MSME sector is present in India, it will create a significant number of jobs that will clearly benefit the country and its people. However, by implementing the potential solutions, the major challenges faced by small scale industries can be successfully mitigated.
Conclusion
MSMEs face a number of challenges, but the government is doing its best to ensure that the MSME sector remains competitive. The cost of funding is gradually decreasing, and both public and private sectors are working towards developing better products that can be competitive in terms of quality and price. Perhaps, if we get rid of corruption and focus more on quality, then MSMEs will be able to beat bigger firms.
Lendingkart provides tailored financial solutions as well as aids MSMEs with tips and helpful resources so that they can start or continue their entrepreneurship journey with ease.
Frequently Asked Questions
What is the definition of MSME?
MSME is an abbreviation for & Micro, Small & Medium Enterprises, and these firms are categorized by their annual sales. Unlike large firms, small businesses have annual sales of less than Rs. 100 crore. They require less funding because of their size and they also employ less people in comparison to larger firms.
What are the challenges of MSME financing in India?
Challenges in Indian MSME financing include limited access to credit, high interest rates, inadequate collateral, complex documentation, and regulatory hurdles, that hinder the growth of small and medium enterprises.
Which are the issues facing MSMEs?
A majority of Indian MSMEs face major issues like operating from underground locations, having to deal with scams, poor working conditions, lack of skills, and low productivity. Moreover, most MSMEs are not productive and do not create much value whereas they merely perform regular tasks which they may have bought or borrowed from other firms.
How can we overcome the challenges of MSME?
To tackle MSME challenges, leveraging financial institutions is crucial. They provide funding and expertise for managing cash flow, addressing a major hurdle. This empowers MSMEs to sustain operations, foster employment generation, and promote economic growth.
What is the solution to this?
The government has set up several programs that aim at boosting MSMEs. With the help of government schemes, they have been able to increase their output. However, most programs are not set up on a national scale and there is no consistency between different states which results in low growth for the sector as a whole.
How can we improve the situation?
Governments across India are focusing on several measures to boost MSMEs and improve their productivity. They have also introduced various policies which aim at reducing costs such as providing land and utility subsidies to MSMEs and also improving access to finance for smaller firms.
What is the difference between MSMEs and other businesses?
The main difference between MSMEs and larger firms is the number of people that they employ. Larger firms tend to be more productive in terms of value-added whereas MSMEs usually focus more on low-value activities which are common for daily lives.
What is the percentage of small businesses operating in India?
The number of small businesses operating in India has been increasing over the years. Perhaps due to their improved ability to set up new firms, there has been a rise in the demand for products from smaller firms.
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