Integrating MSMEs Into Global Value Chains : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

Key Phrases: MSMEs, Global Value Chains, Export Preparedness Index, Working capital, Delayed payments, MSME Samadhaan, Guarantee Emergency Credit Line, Emergency Credit Line Guarantee, Scheme, TReDS, Pradhan Mantri Mudra Yojana.

Why in News?

A bigger push towards digitalisation will give the crucial MSMEs sector greater access to formal sources of credit.

Context:

Micro, Small and Medium Enterprises (MSMEs) play a fundamental role in India’s economic growth. The sector encompasses over 63 million enterprises and provides a livelihood to over 111 million workers.
With the manufacturing sector’s contribution to GDP hovering around the 15 per cent mark over the past two decades, MSMEs are seen as a way of re-energising the sector that will push its contribution to 25 per cent of GDP.
The potential of MSMEs is well recognised by industry bodies, academics, and policymakers. In a recently concluded MSME conclave, Secretary, Ministry of MSME, highlighted MSMEs’ potential in building a complete supply chain, enhancing their global competitiveness.
Along similar lines, the Economic Survey also underlines the significant benefits that can be reaped by participation in GVCs (Global Value Chains) for Indian manufacturing by creating four million jobs by 2025 and contributing one-fourth in value-added terms towards the $5 trillion economy.

Impediments to Integration Of MSMEs With GVCs:

GVCs enable firms to participate in international markets more flexibly, as they might contribute only a small component of an overall supply chain rather than a product in its entirety.
In this regard, manufacturing MSMEs can use lower costs and flexibility to their advantage. Innovation is yet another component of competitiveness, and MSMEs can test advanced technologies in a pilot mode.
MSMEs’ integration into GVCs, however, depends crucially on access to finance, as rightly recognised by the government. For example, NITI Aayog’s Export Preparedness Index (2021), released in March, covers access to finance as an important sub-pillar of export preparedness, in which the coastal States have performed better than others.
Working capital: Nevertheless, despite its importance and potential, the MSME sector is often plagued by a lack of working capital, affecting its day-to-day operations and even survival during the Covid period. Given that 95 per cent of the MSMEs in India are in the informal sector, access to formal finance remains a significant constraint, with studies highlighting that MSMEs as a whole receive less than 6 per cent of bank credit.
Delayed payments: Yet another area of significant concern is delayed payments. The number of applications filed by MSMEs on the delayed payment monitoring system MSME Samadhaan has crossed ₹26,000 crore.
The large extent of informality and the alarming rise in delayed payments coupled with the slowdown imposed by the three waves of Covid-19 are threatening the competitiveness and even survival of small firms. Without improved access to finance, the goal of integrating MSMEs into supply chains will remain a challenge.
In this regard, the Union Budget has rightly extended the ECLGS till March 2023 and increased its cover from ₹50,000 crore to ₹5 lakh crore to help MSMEs. Nevertheless, the issue of delayed payments remains a major hurdle for MSMEs which needs to be tackled urgently.

Government Policies For the Growth of MSMEs:

In November 2021, the Indian government launched the Special Credit Linked Capital Subsidy Scheme (SCLCSS) for the services sector. This scheme will help enterprises in the services sector meet various technology requirements.
In Union Budget 2021, the government announced funds worth US$ 1.36 billion for ‘Guarantee Emergency Credit Line’ (GECL) facility to eligible MSME borrowers, giving a major boost to the sector.
The Emergency Credit Line Guarantee Scheme (ECLGS) was announced as part of the Aatma Nirbhar Bharat Package with the objective to help MSMEs and business enterprises to meet their operational liabilities and resume businesses in view of the distress caused by the COVID-19 crisis.
The Portal psbloansin59minutes was launched in 2018 to facilitate in-principle approval of loans of up to Rs 1 crore (enhanced subsequently to Rs. 5 crore) to MSMEs without human intervention.
RBI operationalized TReDS to solve the problem of delayed payments to MSMEs. TReDS is an electronic platform where receivables of MSMEs drawn against buyers (large corporates, PSUs, Government Departments, etc.) are financed through multiple financiers at competitive rates through an auction mechanism.
Pradhan Mantri Mudra Yojana (PMMY) scheme was launched in 2015 to provide access to institutional finance to unfunded Micro/Small business units with collateral free loans up to Rs 10 lakh for manufacturing, processing, trading, services and activities allied to agriculture.

Is Digitalisation A Solution?

Although the onset of the pandemic clearly hampered economic activity and left the already distressed MSME sector struggling for survival, it has also pushed it towards greater digitalisation, which offers a promising way forward. Many aspects of B2B (business to business) and B2C (business to consumer) interactions are moving to the digital sphere.
A recent MSME digital readiness survey of 250 Indian MSMEs by PayPal highlights that 29 per cent of these firms witnessed an increase in online customers and 32 per cent experienced better payment solutions.
The survey highlights that 98 per cent of surveyed MSMEs were keen on investing further towards digital payment solutions. The adoption of digitalisation by MSMEs certainly needs to be supported more and leveraged in providing innovative financial solutions.
For instance, Fintech lender Indifil has forged a partnership with Google Pay to provide instant credit to small businesses. Such measures are essential to help MSMEs manage their liquidity mismatch and overcome their working capital needs, otherwise hampered by collateral needs and delayed payments.
The digital payment ecosystem holds immense potential for MSMEs by helping them expand their online customer base and enabling faster flow of funds.
Hence, it becomes essential to provide training and generate more awareness among MSMEs about digitalisation of banking systems and their operational dynamics to make the digital transformation smoother.
A strong impetus towards greater digitalisation in finance is the need of the hour. Doing so will reduce the dependence of MSMEs on informal sources of finance and reduce their operation cost given the latter’s high lending rates.

Way Forward:

The opportunities that lie ahead for the MSME sector are immense. But the post-pandemic landscape has clearly given them a direction to move towards, and with the right support, this transition is achievable.
The government should take the special care by addressing the importance of Micro Firms in terms of providing more and more Micro Firms Registration advantages by implementing better regulations and enable financial institutions to lend more credit at less interest rate for sustainability of this sector.

Source: The Hindu BL

Mains Question:

Q. Discuss the impediments faced by MSMEs in way to integration with Global Value Chains. Suggest measures to tackle these impediments. Comment.