Survival of MSMEs in the digital age

An October 2020 study by McKinsey Consultants in the European Union has found that one-half medium, small and micro industries (MSMEs) believe that they will not be able to survive more than 12 months. The condition in our country is likely to be much worse because our MSMEs have faced the problems of demonetisation and GST earlier.

The simple fact is that the cost of production of MSMEs is more in comparison to large industries and they cannot survive unless given special protection. First reason is that the cost of information is more for them. Let us say a businessperson of Kanpur has to get information about the market for leather goods in Mumbai. The cost of travel by a large businessperson would be, say, double of the MSME businessperson. However, the large businessperson would sell ten times the goods sold by the MSME businessperson. Accordingly, the cost of information would be five times for the small businessperson.

The second reason is that a small businessperson has to manage production, marketing, finance and accounts himself. Large businesses have specialised managers for each of these functions. The MSME business person does not have the level of skill in any of these functions as available with the large businessperson. The lower level of skill translates into higher cost.

For example, a MSME businessperson would not be able to assess the competence of a sales outlet in same depth as the marketing manager of the large business. He may not be able to access the credit reports of the sales outlet. In course of time this lack of skill will translate into losses for the MSME.

The third reason is that MSME face a higher cost of compliance with regulations. A number of studies indicate that the cost of compliance of GST has been more for MSMEs across the world. Large businesses have in-house chartered accountants who can manage such regulations with ease.

The fourth reason of digital technologies such as Artificial Intelligence, robots, 3-D printing, Internet of Things and internet-based platforms like Amazon and Flipkart. The cost of production of large businesses is reducing by the day due to the use of these technologies. They are producing large quantities with lesser number of workers by using robots. Further, they are able to persuade the large platforms to push their goods.

For example, Amazon or Flipkart can push the sales of a particular chocolate manufacturer of Switzerland. MSMEs do not have the clout to persuade the large platforms to push their goods. It is necessary to strengthen the MSMEs against big businesses in view of these inherent disadvantages if we have to ensure their survival and the jobs that they create.

A guidebook for supporting the internationalisation of MSMEs made by the European Commission has suggested that the task of training, research, provision of information and making their clusters could be done better through the MSME associations. The associations are in deep contact with their members and they can what kind of training and research is needed by their members. The same training module or research programme made by academic institutions or government officials may be off the mark.

Similarly, the associations have a better understanding of what goods have a sale potential in which country and they make efforts to obtain that particular information and provide to their members. The associations have a better grasp of the potential of making clusters as well. For example, the association of weavers of Varanasi would have a better understanding as to whether the cluster of weavers should be made around a sales website, testing facility or designing.

The policy of the India Government appears to be moving in the opposite direction, however. The Board for MSMEs had large numbers of representatives of associations in the past. The Government has reduced their representation and instead appointed MLAs and the like who have no grasp of the problems of MSMEs. The funds provided to the MSME associations have also dried up.

The second step especially in the present scenario of Covid is that the Government must consider providing direct financial support to MSMEs. A study by the National Institute of Public Finance and Policy dated April 2020 has noted that MSMEs in Brazil were being provided part salaries of their employees as subsidy. Canada and New Zealand were providing salary support to their MSMEs for three months. It was advocated that Indian MSMEs may be provided income support for some time if they can show that there has been an actual decline in their incomes.

Our government, on the other hand, has been focusing on providing access to credit to MSMEs which is good. However, the utility of a loan arises when there is demand in the market. The MSMEs will use the loans for consumption and sink into the quicksand of debt in absence of demand from the market. Therefore, the Government should consider giving subsidies on wages and income support to the MSMEs.

MSMEs often buy purchase imported raw materials like plastic and sell the finished goods such as dolls made by them. They can do this only if they get cheap plastic and protection from cheap imported dolls. However, the policy of the Government has been exactly in the opposite direction.

Heavy import duties have been imposed on certain raw materials while low import duties have been imposed on certain finished goods. Thus, Anil Bharadwaj, Secretary General of the Federation of Indian Micro, Small and Medium Enterprises has said India's increased import duties on raw materials have made the MSMEs highly uncompetitive.

A 2018 report by the International Trade Centre titled "Business Systems for the Digital Age" has said that in 2017, the market capital valuation of the top ten internet platform companies reached more than USD 3.3 trillion. This is significantly higher than India's GDP of USD 2.6 trillion in that year. These platforms can push the goods of particular producers who may give them higher margins. Ola and Uber drivers have told me that their companies give more bookings to the taxis own by themselves to the disadvantage of single-taxi owners who have attached themselves to these platforms.

Therefore, the Government must consider breaking the large platforms into smaller companies so that competition between them can prevent the dominance of a particular platform. The Competition Commission of India has adequate powers in this direction. The Government must direct the Commission in this regard.

(The author is formerly Professor of

Economics at IIM, Bengaluru)