MSMEs are a vital component of the Indian economy and have made significant contributions to the socio-economic development of the nation. The MSME sector employs more than 40 percent of the labor force in India. They include businesses from both the manufacturing and service sectors. In addition to creating job possibilities, it aids in the advancement of the nation's rural and underdeveloped regions.
Indian MSMEs have historically followed the traditional path, catering to domestic markets via direct-to-consumer (D2C) or as a component of the value chain of B2B giants. With the ever-changing demands and tastes of their clients, they are increasingly attempting to cope with industry dynamics by developing innovations and customizations in their services.
According to IBEF, as of March 2022, 48.92 million loans had been approved under the Pradhan Mantri MUDRA Yojana (PMMY) plan, and $39.90 billion had been distributed in total. According to another IBEF estimate, in the Union Budget of 2022-23 MSMEs sector was allocated an Emergency Credit Line Guarantee Scheme (ECLGS) of Rs 50,000 crore ($6.55 billion). This only highlights how important the Indian government views the contribution of MSMEs in the drive to attain the $5 trillion economy threshold.
More than 6,000 goods are produced by Indian MSMEs for domestic and international markets. According to a report Indian MSMEs were recognized abroad and their products and services were competitive on a global scale. 33 percent of manufacturing output is made up of this industry. Rural regions are where about 50 percent of all MSMEs operate and where 45 percent of all jobs are found. The micro-segment accounts for around 97 percent of all employment in the MSME sector.
The MSME industry is more susceptible to negative impacts on its supply chain, labor supply, and market demand for goods and services than more prominent firms. This is primarily because MSMEs in comparison with large industries, do not have adequate resources, particularly monetary and administrative, and are not prepared for such long-term disturbances. Many MSMEs were struggling in 2020-21 due to the burden of loan repayments because of the cessation of demand from consumers. Early on in the pandemic, we identified that MSMEs needed extra support since this was a genuine business disruption.
Information and Communication Technology (ICT) can cause gigantic growth in the socio-economic advancement of the Indian economy by helping the MSME sector to re-invent and digitalize for better productivity and higher profits.
To a large extent, the question of whether the MSME sector needs to jump onto the digitalization bandwagon is an old story now. Digitalization is not a choice but rather a necessity, which will bring about stability to their business performance and broaden their reach. In a survey conducted by MSC in India, Indonesia, Kenya, and the Philippines, it is unfortunate that only 38 percent of respondents have revealed that they either increased the use of digital payments or started using digital methods of payment for their deals and transactions.
The advantages of digitalization are umpteen for the MSME which allows them to differentiate themselves from their competitors. E-commerce platforms allow MSMEs to attain greater access to diverse transnational markets and can diminish the risks within supply chains.
It will help promote cost-effective business policies. MSMEs that use the Internet reduce their costs by about 22 percent to get raw materials, manage inventory and gain increased productivity.
Digitalization will help in better customer engagement too, MSMEs that administer digitally can regulate their customer base effectively by using social media platforms to ensure greater engagement levels. The lockdown during the pandemic gave a big boost to e-commerce and online shopping with the years 2020 and 2021 witnessing more than 75 percent new customer base to these portals. As buyers have radically changed their buying patterns, digitization has become necessary to run a business.
From a finance point of view, it leads to bigger and fairer access to funds. As MSMEs improve their digital footprint, they become more noticeable to banks and financiers. MSMEs can effortlessly access credit as monetary institutions can employ digital data to assess credit threats more precisely.
Digitalization would help increase geographical reach and help acquire new consumers. With the development of digital platforms, the surging prominence of e-commerce, and the lesser obstacles to entry, MSMEs can widen their market and resist the limitations of physical location. E-commerce has also made it possible for MSMEs to attend to rural and remote customers, enlarging their customer base. In Africa, 82 percent of the industries engaged entirely in transnational e-commerce are micro and small enterprises. E-commerce also extends easy access to the international markets for women-run and owned ventures. And a similar trend is being witnessed in India.
Customer credit management is another feature that gets eased with digitalization as MSMEs can trace customer credit and can also set a limit of credit for customers. It can act as a risk mitigation technique and keep a check on credit loss and help maintain an efficient cash flow in the business.
However, digitization is not an easy road to take for this sector primarily because of the traditional nature of the business that this sector is used to. MSMEs require more promising access to e-platforms, better payment and delivery services, simplified customs procedures, a vigorous data privacy system, and well-targeted talent building to ensure that they prosper from e-commerce.
The Government of India has newly launched the ‘Digital Saksham Initiative’ in partnership with MasterCard to enhance the ability of MSMEs to market their products greater, through better know-how and virtual payment acknowledgment. The ‘Digital MSME Scheme’ is launched for facilitating Information and Communication Technology (ICT) in MSME Sector by adopting ICT tools and applications in the production and industry procedures. Digital MSME Scheme is also intended for creating awareness, bolstering developments and e-platforms, building literacy, training, and nurturing digital marketing in the MSME sector.
Digital literacy is something that will play a big role in catalyzing the use of digital technologies and catering to skill gaps. The government in India, along with EdTech start-ups, and many other tech companies have come together to help out MSMEs in developing their business online. But the road ahead is still a long one and with the third wave affecting most regions, the MSME sector will have to brace itself and be digitally agile at the earliest possible.