The centrality of the development of the SME segment to the overall economic development of any country cannot be
undermined. In India too, the significant contribution of the SME sector in gratifying various socio-economic objectives, such as higher growth of employment, output, promotion of exports and fostering entrepreneurship is well known. The resilience of the Indian economy in the first two years after the crisis can be
attributed as much to the small and medium enterprise as to the government’s fiscal expansion. The twin processes
of globalization and liberalization, combined with rapid advances in information and communication technologies has
opened up a wide range of business opportunities for SMEs. The role of the SME segment has evolved from a traditional manufacturer in the domestic market to that of an international partner. API (Application Programming Interfacing) and software development, mobile application development, web and cloud computing services, gaming and consulting are offered by the Indian IT SMEs. Outsourcing opportunities in the manufacturing sector in India, especially auto components, pharmaceutical, IT and textile industry, has not only given rise to newer businesses but also enabled these sectors to make a global impact.
Yet, the share of SMEs in India’s total exports is only 40%. What is indeed disconcerting here is that even as there are over 6,000 products ranging from traditional to high-tech items being manufactured by the MSME sector, the SME export basket is very small with just five products (engineering goods, garments, leather goods, basic chemicals and marine and processed foods) accounting for a sizeable share of the total exports. Less than 1% of Indian MSMEs export, while 25% of EU SMEs export within the EU and about 13% of EU SMEs are active in markets outside the EU.
The Government is thus making efforts to push the sector forward with a number of plans to foster technology, innovation and quality in SMEs. The most explicit of such initiative has been the creation of the National Manufacturing Competitiveness Council (NMCC), which would, basically, identify and focus on certain clusters and firms in certain promising sub-sectors. A number of SMEs are beginning to witness the advantages of these schemes. 221 clusters have been identified and selected for Lean interventions across the country. Engineering SMEs have been quick to adopt lean manufacturing practices to maximise the use of resources and reduce wastage. Another key government’s key initiative is the “Support for Entrepreneurial Development of SMEs through Incubators” scheme operational since April 2008. The main task of this scheme is promotion of individual innovators so that they could become technology based entrepreneur. As on FY14, 118 Business incubators have been selected for implementing the above scheme and an amount of ` 145.3 mn released so far. Despite these development, the concern remains that education and awareness about these initiatives is dismally low amongst
SMEs overall. Let us take a brief look at some key strategies that would help accelerate the growth trajectory of SMEs and, quintessentially, enhance the vitality and competitiveness of the SME sector:
Strengthening University – Industry – Government linkages
(U-I-G): SMEs face important limitation in doing R&D and are in dire need of technical support from outside. There is a need for building close collaboration between industry-academia government with the aim of taking advantage of new ideas as well as academic and technological research carried out by universities and use it through a suitable policy to build nationally competitive SMEs. Germany’s SME units, called Mittelstand companies, emerged as the key contributor to the economy due to the government initiative of bringing together the companies and education institutions. This policy worked as a win-win situation for both companies who adopted concepts
towards lean manufacturing and also the students enabling them to improve their technical skills from hands-on experience. In Netherlands’ the linkage between industry and academia is strengthened by the “innovation vouchers scheme” whose main objective is to enable SMEs to buy knowledge and strategic consultancy from research institutions through innovation vouchers and thus to stimulate interaction and exchange between the knowledge suppliers and SMEs.
Innovation: SME segment is the ‘seed bed’ of innovation. Even in the Indian context, a significant number of small firms do carry out technological innovations and thereby enhance their competitiveness. To nurture this, such schemes which provide easily accessible technological and financial assistance to inhouse technological innovations at the district level can be added to the existing institutional network. Easy and timely access to business development services such as market intelligence on domestic and export markets, statistical and
economic information, sources of technical support can provide insights on market conditions and consumer preferences,thereby providing support to MSMEs in the designing of innovative products and processes.
Unavailability of Modern Affordable Technology: Technology upgradation and modernization would help SMEs differentiate from peers, optimize cost structures and most importantly compete on a global level with other corporate giants. However, SMEs in India face multiple struggles on account of accessing and using the latest technological advancements. Apart from knowledge, access and funds continue to hamper implementation of technology, absence of an ecosystem that enables technology transfer and interaction with technology providers is a critical reason of limited adoption.
Stress on Cash flows: Another factor limiting the competitiveness of SMEs is the lack of formalized contractual
relations and elongated payment cycles. Delays in settlement of dues adversely affect the recycling of funds and business operations of the SME units that typically operates on razor-thin margins. Timely payments from customers will help SMEs in reducing their working capital requirements, leading to lower interest costs, improved profitability and have a positive impact on the long-term health and sustainability of India’s SME sector. This problem can be institutionally tackled by factoring, which is a type of supplier financing in which firms sell their credit-worthy
accounts receivable at a discount (generally equal to interest plus service fees) and receive immediate cash. Even as banks and financial institutions in India have already launched factoring services in India, factoring as a concept has not quite materialized as a compelling option for India’s SMEs, due to lack of awareness and several other impediments. Recently, the RBI has finalized the guidelines for setting up a trading platform for trade receivables and bills of exchanges of micro and small and medium enterprises (MSME). Once in force, this could be a
big game changer for the receivables of the small and medium industries.
Cluster-based approach for SME growth: Some key benefits of a cluster based approach in developing SMEs include Networking among enterprises, Technology and skill upgradation, lower costs, improve bargaining power, global visibility, easier access to finance.