Strategies for enhancing Competitiveness of Manufacturing MSMEs:
Muted
manufacturing with PMI just around 51, a fall from about 54 almost couple of
years back, increasing protectionism of the US, UK with the BREXIT winning a
thumping majority for Boric Johnson and global trade winds heading to recession
have taken the toll of India’s growth story. Industry would face more
challenging times than before due not merely to adverse headwinds on external
trade but the turbulence in the domestic economy. Enhancing competitiveness for
manufacturing firms in the small sector has several challenges and these can
turn into opportunities for growth.
Inefficiency,
increasing fraud rates and faulty Bank Balance sheets of almost all the major
Banks in India compounded the woes of domestic debt markets. No surprise that
the equity suppliers like the VCs and Angel Funds are distancing themselves.
The impact is the most on the vulnerable – MSMEs, particularly in the
manufacturing segment. The thriving or successful even in this current
environment are those SMEs in the Defense, Aerospace, Gems & Jewelry,
pharmaceuticals and a few agro-industries linked to market giants like the ITC.
Nobody can
have a guess of how many MSMEs shut their shops due to the Banks’ unwillingness
to revive despite the RBI and GoI instructions as no ‘exit’ statistics are
captured. The corporate sector exits alone show up in the data because the
Ministry of Corporate Sector statutorily demands it and IBC has become a
barometer for industry and financial institutions’ health.
Banks never
gave data on number of units financed or closed but only number of accounts.
Each unit can have number of accounts: term loans for specified purposes;
working capital – cash credit, overdraft, SME Plus, etc., and unfunded limits
like LCs, Guarantees etc.
Since 98
percent of the MSMEs are either partnerships or proprietary and are linked to
onetime registration on Udyog Aadhar, there is no way the closed shutters get
into the data. Even the industry and trade associations do not get a wind of
the closures as several so-called members are irregular in the payment of
membership subscription annually.
This
scenario leaves the policy maker to public noise and a wild hunch. Every State
is concerned about improving the ecosystem for the MSME sector and more in
conjunction with the Union Government. States do know that a robust MSME sector
is a red carpet for the global investors. However, improving the MSME
competitiveness remains the biggest challenge and it requires a more holistic
approach than now.
Information
asymmetry and adverse selection continue to be the biggest blocks for
institutional interventions, both financial and non-financial. Several MSMEs
complain of a serious setback due to demonetization and GST. The reasons for
such a far cry should be seen in the advantages they got without them: cash
sales not routed through the bank accounts and yet several MSEs thrived until
their debtors ditched them; inventories over-invoiced could get into the
recorded working capital cycle with banks as the banks have been going by what
is shown to them instead of what they should see and count for want of field
visits; there have been many qualified ‘account experts’ to show the convenient
excel spread sheets for securing working capital limits from banks; the small
volumes these enterprises produce and the small size of the firms have also
distanced them from the reach to markets; and there have been very few mentors
and counsellors to advise responsibly either from the financial institutions or
others to advise the units right financial discipline would get them all the
gains they are looking for as also their entry to new markets.
GoI on its
part, unleashed MUDRA, SME99Minute Loans and whipped up the Shamiana Camps that
could give the lever to the FM to announce that the Banks sanctioned 8lakh loans
amounting to Rs.70000cr in just two months, which they could not do for years!!
Future NPAs would show the unknowns and unseen among such crowd. Dy. Governor,
RBI recently sounded the alarm on the growing MUDRA account NPAs.
MSMEs on
their part should earn their right to grow by following best accounting
practices. Working capital management basically rests on four important
factors:
• Predictability of Cycle
• Material flows
• Receivable – overdue
• Independent Credit rating agencies’
assessments.
Some more essentials are set out below:
(i) Realistic Assessment of Morale Building Assurances:
MSMEs would be well advised to cautiously assess morale building assurances during
the current slowdown of the economy. MSMEs which accepted such assurances in
the backdrop of global recession of 2008 and built up capacities and kept up
production levels, resulting in very high inventories, were devastated.
Furthermore, when demand for a product falls, there could be pressures on small
enterprises not to cut output as this would eventually result in labour lay-
offs. Units that accepted such suasion faced disastrous outcomes.
(ii) Capacity Expansion: Quite often, MSMEs come to the
erroneous conclusion that their product would experience an unrealistically
high increase in demand. Units which build up capacities on tenuous information
invariably end up with serious problems. In a savagely competitive environment,
it is these small units that end up in ‘fire sales’ which are available to
buyers at attractive prices. There is merit in building up financial resources
to avail of such opportunities rather than increasing the capacity of their
existing units. It is time to realize that coopetition would bring better
synergies among similar producers to meet up with temporary surge in demand.
(iii) Interest Rate Cycles and Excessive Dependence on Bank
Credit: During the expansionary phase of the credit cycle, banks are only too
willing to lend but during the downturn small borrowers are invariably the
first casualties in being denied additional credit. As an abundantly prudent
measure, MSMEs are well advised to seek bank credit essentially for inventory
financing but be very cautious when using bank finance for capital expenditure.
Excessive borrowing for capital expenditure generally puts MSMEs in to distress
during cyclical movements in the economy. It is good to learn to build equity
gradually from out of the revenues and avoid excess leverage. They should learn
to conform to financial discipline when alone they will win the trust of
investors. Strategic partnerships are best bet in times of stress and not
overindulging in debt. It is good news for the MSMEs that Government of India
has extended the Interest Subvention Scheme up to March 2021.
(iv) Importance of an Appropriate Exchange Rate: MSMEs
account for about 40 per cent of exports. It is unfortunate that there is a
widely held perception that a strong rupee exchange rate reflects good
macroeconomic management. This is clearly erroneous. Large industry is
generally import intensive while small industry is export intensive. Hence a
strong exchange rate of the rupee (i.e. an overvalued rupee) helps large
industry and hurts MSMEs. It is not as if the exchange rate should be
excessively undervalued. As a rule of thumb, over the medium/long-term, the
nominal exchange rate of the rupee vis-à-vis the major industrial country
currencies, should be adjusted downward based on the inflation rate
differentials between India and the major industrial countries. An overvalued
exchange rate makes MSMEs uncompetitive in international markets. MSMEs should
not attempt to be forex traders; they should concentrate on their own line of
production.
As a staunch
optimist and believer in the excellent capabilities of MSMEs in innovation,
incubation and future growth, least expensive handholding, mentoring and counselling
as process consulting tools have immense scope to become highly competitive
both domestically and globally if certain synergies are built into the system.
Telangana Industrial Health Clinic Ltd has adequate capabilities in this
exclusive portfolio of handholding, mentoring and counseling as a preventive
and stress relieving measure.
Supply Chain to Value Chain:
There is need for building ‘pools’ or aggregators to gain
both cost advantage and brand image through co-branding of products.
India Mart are trying to do supply chain aggregation. MSME
online Bangalore is also trying to evolve an ecosystem where a lot of
questions of MSME are getting answered by about 50 consultants and they have
started CEO Club for taking MSME entrepreneurs to next level by having a
monthly meeting. Jeevan is trying to develop a 360' view for developing
the ecosystem in Hyderabad on Hub and Scope model. These are welcome
initiatives, no doubt. They need traction.
Many of the user population should not merely know such
initiatives but should also know how best to access them. Second, by
aggregators, I mean those that are fully capable of building a common brand for
a set of products from the micro and small manufacturing enterprises through
building also their capacities and capabilities to rise above their existing
levels, introduce those practices and technologies that make them closer
to the global standards even if sold in domestic markets and secure price at
their doorstep within the promised wait-in period. These would mean
investment on the part of aggregator and a price that the aggregator
should legitimately get for such services without losing the competitiveness in
the market. Ipso facto, it would mean that at the firm level, cost
reduction should take place at each link in the value chain. There are
different ways of doing it.
The Industry Associations can develop a Marketing Arm and
establish net linkages with e-commerce players; 2. they can help the industry
avail the host of incentives waiting to be used from the GoI-MSME schemes; 3.
they can establish linkage with NSIC, MSME-DI and such other
institutions.
MSMEs should earn their right to grow. This happens only
when they are quality conscious where precision, functionality and producing
premium products will be their driving forces. Their passion and pride rest on
satisfied customer. Intellectual property rights, improved technology processes
and getting equity to fund such technologies are all their sustainable future.
Employee retention strategies depend not just on higher remuneration but on
building trust and social cohesion as also gender equity.
MSMEs should also realize that death is a process of
development. They must know when to exit from the enterprise and how.
Strategies to clear sovereign dues and realization of overdue creditors on a
mission mode pre-exit have a clear role. Ignoring them will be suicidal.
*Author of ‘The Story of Indian MSMEs: Despair to Dawn of
Hope’ (2019) is an economist and Adviser, Government of Telangana, Telangana
Industrial Health Clinic Ltd., Hyderabad (www.yerramraju1.com)
