Why exclusive emphasis on manufacturing firms in MSME sector is imperative to transform Indian economy

Ease of Doing Business for MSMEs: The promulgation of the MSMED Act 2006 was historic in India, as it clubbed manufacturing and service enterprises, on the one hand, and medium-sized enterprises, on the other, together for promotion, similar to the globally observed practice. Though the definition of manufacturing MSMEs (MMSMEs) differed from that of the service MSMEs (SMSMEs), a single policy-led institutional infrastructure – from national to state and district levels – deals with the MSME sector as a whole since then. However, the problems and prospects of the MMSMEs are distinctly different from that of the SMSMEs.

More importantly, the potential for growth through manufacturing is much more than that of services. This is due to the following: First of all, the most significant advantage of manufacturing is the possibility of scale economies (either through a single firm growth or through a network of similar firms) which drive down production costs. Secondly, the scope for carrying out technological innovations and introducing new products/services by firms are distinctly prevalent in manufacturing, thereby enabling them to grow in size. Thirdly, manufacturing sector-led innovation enables the emergence of tech start-ups, thereby facilitating employment generation and income creation leading to industry growth.

Fourthly, the manufacturing sector has the ability to export its products, and thus expand its market base beyond the country’s borders, and contribute to the foreign exchange reserves of the economy. Fifthly, the manufacturing sector has stronger inter-sector linkages more than agriculture and services, and therefore, the former can boost the growth of the latter more than vice versa. Therefore, the manufacturing sector, in general, is considered the “engine of growth”. MMSMEs deserve due attention in this regard.

Given the above, it is imperative to “fuel” this “engine of growth” appropriately to benefit the nation. Given their potential, the MMSMEs need to be encouraged and facilitated to: (i) network, (ii) innovate, and (iii) internationalize.

Networks can emerge either vertically (with customers and suppliers, often, large firms) or horizontally [with similar other MMSMEs, MSME promotion agencies or Higher Education Institutions (particularly engineering institutions)] or both. Such networks, as observed by empirical researchers, help them to get ‘better access’ to markets (domestic and/or international), inputs, finance, technical assistance or technology, and at times, training of human resources. Together, they prompt or encourage MMSMEs to undertake Technological Innovations (TI), among others.

Innovations (especially, TI), either incremental (in the form of improved products/processes as required by MMSMEs’ customers) or radical (in the form of new products/processes) help to achieve a reduction in costs, improvements in quality, and penetration of new markets. As an outcome, innovated products account for an increasingly larger share of total sales and sales growth, leading to firm growth with more employment, investment, and revenue. There is ample empirical evidence to show that innovative MMSMEs often enter the international market through exports. Thus, innovation facilitates internationalization.

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Internationalization bestows on MMSMEs multiple benefits. An innovative firm once succeeds in penetrating the threshold barriers to internationalization through its innovation, learns much more: the value of high-quality packaging, adhering to time schedules, professionalism in management, periodic training of its labour, exposure to sophisticated technology, and further needs for innovation, among others. These learning transform an “intermittent exporter” into a “continuous exporter” and a “consistent exporter” into a “more intensive exporter”. The resultant outcome will be firm growth leading to more employment, more revenue, and more foreign exchange earnings.

While the potential to develop “networks” and “carry out innovations” does exist in Indian MMSMEs, the extent of networks prevalent and innovations carried out in the MMSME sector is not adequately recorded. However, official data on industrial subcontracting (which represents one form of networks of MMSMEs) and the National Knowledge Commission conducted a sample survey-based study indicated that both networks and innovations are marginally prevalent in the Indian MMSME sector. Given this, it is imperative to promote networks and innovations of MMSMEs, as both would encourage the internationalization of MMSMEs through exports. This will together give a boost to the “Make in India” programme, by enhancing the overall contribution of manufacturing to Indian GDP.

MMSMEs are overwhelmingly concentrated in district headquarters in almost all the states, among others. District headquarters are likely to comprise “a threshold level of the ecosystem” in the form of a District Industries Centre (DIC), engineering institutions, banks, particularly Small Finance Banks, and minimum basic physical infrastructure. Some district headquarters would have even public/private sector large firms. Therefore, they offer scope for promoting networks and innovations of MMSMEs.

Given that a majority of MMSMEs work in “silos”, a pro-active initiative needs to emerge from the DIC network by bringing MMSMEs and engineering institutions together through student and faculty-led projects, in the fields of mechanical, electrical, electronics, civil, instrumentation, and computer engineering. MSME promotion agencies, such as Micro Small and Medium Enterprise Development Institutes wherever prevalent, and banks can join the initiative appropriately. Even if it benefits 10 per cent of the 196.65 MMSMEs (pre-Covid-19 pandemic population) for networking and undertaking innovations towards internationalization in the subsequent five years, it would be an excellent upward turn happening for the benefit of the Indian economy at large. Thereafter, incremental increases in networked, innovative, and internationalized SMEs would play a decisive role in the development transformation of the Indian economy.

M H Bala Subrahmanya is the Professor, Department of Management Studies at Indian Institute of Science Bangalore. Views expressed are the author’s own.