Strengthening India's MSMEs during Pandemic Recovery

Skills training institutes in India do not always have courses relevant for local MSMEs. At the same time, a study by the Ministry of Statistical Office and Programme Implementation reported that only 3.5% men and 2.9% of women received formal skills training while only 9% of the female workforce received vocational training as against 18.8% of the male workforce. The gap is wider in nonformal training, with 15.2% men getting hereditary, on-the-job, or other forms of informal training compared to only 6.1% women.

Indian MSMEs manufacture more than 8,000 products—from handmade, traditional, machine-made items to more recently, automation-technology-made goods. However, they find it difficult to diversify into new product and service lines due to lack of awareness of market trends, lack of technical knowledge, and high investment cost.

Almost 51% of Indian MSMEs are based in rural areas and have limited internet connectivity and computer access. Of those with access to personal computers, less than 6% advertise online. Common constraints to adoption of digital marketing include lack of direct access to consumers and dependence on local traders and distributors to reach markets, inability to access marketing experts, and lack of awareness of digital marketing tools.

The MSMEs find it challenging to utilize the full benefits of government schemes designed for them due to lack of awareness and cumbersome and complicated processes. Increased online processes and shorter timelines, multiple visits to government offices, manual interface in automated systems and numerous compliance processes impede efficient transactions.

The COVID-19 pandemic has highlighted the need for adequate risk mitigation instruments, credit appraisal techniques, and innovative financial products, such as cluster financing. Under a cluster financing model, MSMEs can group together to form a special purpose vehicle, which then borrows from banks under a single transaction and on-lends to its members. This reduces the cost of borrowing for MSMEs and transaction costs for the bank.

Other measures include creating a digital platform to collect credit information and develop credit ratings for MSMEs, promoting the Small Investments Development Bank of India (SIDBI) as a market maker that could offer low-cost credit lines for state government-led MSME schemes, and supporting MSME-focused financial technology firms, including those that developed online marketplaces and peer-to-peer lending platforms.

India’s public vocational education and training systems require greater scale, better quality, and more relevance to prepare young workers for emerging skill demands. Vocational training programs need to provide (i) refresher courses for base level jobs, (ii) upskilling for those seeking advanced training, and (iii) reskilling for workers transitioning across sectors and jobs. These will require increased support for apprenticeship schemes, introduction of online industry-relevant courses that can be done through the e-skilling portal of the National Skill Development Corporation and virtual skill training centers run by industry associations, tailored entrepreneurship training from micro-businesses, and vocational training at the higher secondary level.

To address the gender gap, skills training institutes should provide requisite infrastructure for women, while central and state governments need to prioritize sector-specific training and certification for industries with higher participation of women.

The significant and rapid shifts of consumer preferences during the health crisis have underscored the need to diversify into new products. Measures to help MSMEs learn more about the market and ease into product diversification include (i) promoting use of digital platforms, (ii) encouraging partnerships between leading and nascent clusters, and (iii) introducing short-term training programs that can be offered by state skills development missions, sector skills councils, and industry associations.

Also, the government can incentivize production of personal protective equipment (PPE) for global markets during the pandemic. India has become the second-largest PPE manufacturer in the world (Government of India, Ministry of Textiles 2020) and has manufacturing capacity for alcohol-based sanitizers (Government of India, Ministry of Commerce and Industry 2020).

Government can assist MSMEs to go beyond traditional marketing methods by (i) repurposing its support to include digital marketing, including hiring marketing experts and purchasing digital and social media marketing solutions; (ii) promoting digital trade fairs and exhibitions; (iii) providing financial support for eco-friendly packaging; (iv) creating awareness of and establishing links with online marketplaces, including international business-to-business and business-to-consumer platforms; and (v) decentralizing product testing and quality management to enter export markets.

Accelerated adoption of automation, artificial intelligence, and machine learning can help MSMEs improve the quality, precision, and productivity of their goods and services. Digitalization can be promoted across the value chain, such as offering incentives to private firms to develop tailored digital servicing platforms and products for MSMEs, as provided for under the government’s Digital MSME scheme.

Investment into research and development can be increased to promote sustainable manufacturing technologies in high-priority sectors, and a dedicated public–private development fund may be established. Also, programs can facilitate cluster-level partnerships among MSMEs, large enterprises, and educational and research institutions (KPMG and Confederation of Indian Industry 2015 and Government of India, Ministry of MSME 2019).

To facilitate the access of MSMEs to government programs, processes should be simplified and online governance initiatives for enterprises promoted. A survey of MSMEs and industry associations should be conducted to understand their needs in the post-pandemic market, and schemes need to be designed or converged accordingly. At the same time, one-stop MSME accelerator cells at district level can be created. These units will provide various knowledge and advisory services, such as an employment portal, information on government schemes, technology upgrade, and market entry strategies.