Strengthening SMEs Capabilities for Global Competitiveness

Small and Medium Enterprises (SMEs) are important agents of development throughout the world. Promoting a country’s SME sector to play a crucial role in maintaining high employment and income generation and to feature in the global competitive scenario has become imperative and very critical to achieving sustainable growth.

In India, a robust SME sector is very crucial to the economic development of our nation. In a developing country like India, the SMEs sector has been described as an engine of growth.

We are passing through a very crucial phase of development and global competitiveness. Only a few decades ago, the India SMEs sector’s priorities were different as the key issues were its growth and development. Then the economic environment had not opened up. Then came a time when the globalization of economies happened and suddenly the industry found its self facing competition from across the borders.

The SME sector needs to be carefully nurtured and supported. Especially in India, the SMEs are the best vehicle for inclusive growth in the country. Besides generating employment, the sector also acts as feeder line for the MNCs and the large corporate of tomorrow.

Today, globalization is bringing new opportunities for the SMEs sector in India. The entrepreneurs in the SME space are required to seize these opportunities. For this, the SME entrepreneurs have to be supported to make them stand in the global competitive arena. They have to have a relook review their business strategies.

Gandhiji once said, the poor of the world cannot be helped by mass production; it can be achieved only through production by the masses. Here the role of small entrepreneurs becomes of paramount importance.

If a large number of producers have to work for wider markets, the entrepreneurs that produce should necessarily be small. In the changing global environment SMEs sector in India has to be competitive. Global competitiveness is a prerequisite for maintaining high levels of income, employment and sustainable growth.

‘Innovate of Perish’ is new slogan today. We are witnessing change everywhere. To meet the modern day demands and challenges, we have to embrace change. It happens so fast that what is good today may not hold good tomorrow. So entrepreneurs have to innovate and develop strategies which acknowledge change. The SME entrepreneurs have to apply the discipline of innovation to identify and develop new business tenets.

The current economic situation has to integrate with socio-economic conditions and technological breakthroughs on a justifiable scale.

To answer the needs of the present global environment, SMEs have to move up the ladder of technology and skills to achieve greater competitiveness. And for becoming more competitive, the SMEs have continuously enhance their capabilities in various success factors that define growth and progress.

In the context of India, the success factors may vary from Credit flow to technology, from skill development to environment issues and managing knowledge.

Competition often bring pressures on the entrepreneurs to reduce costs that is only possible when you organize for better finance management, corporate governance, skill management etc.

In an emerging economy like India, fostering a dynamic MSMEs sector is an important development goal of the government as the sector is the key driver in creating jobs and GDP growth.

As per the Government data, there are over 26 million enterprises in this sector accounting for 45 per cent of manufactured output and 8 per cent of the GDP. MSMEs contributes close to 40 per cent of all exports from the country and employes nearly 60 million people, which is next only to the agricultural sector.

It is firmly believed that the next level of growth in the economy will have to come from the MSMEs sector. It is this sector which promises to propel India’s growth rate from around 5.5 per cent at present to a sustainable 9 plus per cent in the medium-to long-term, which is considered as India’s desirable growth rate.

In fact, economists are of the view that for a healthy Indian economy, we need a vibrant MSMEs sector. And a vibrant MSMEs sector is only possible when the sector is made more competitive to stand high up on the global economic map.

In India, the sector primarily depend on bank finance and access to timely and adequate finance remains a priority.

In is unfortunate that commercial banks are reluctant to make available easy credits to the MSMEe sector for a variety of reasons. Banks regard MSMEs as ‘high-risk’ borrowers for various reasons such as lack of capital and assets, absence of corporate governance, non-compliance attitude, lack of transparency and naturally low recovery rate. The credit worthiness of the entrepreneurs becomes questionable.

The government must come forward to encourage lending to the sector. That is is only possible if the government removes some impediments like

  • Compliance should be made easy
  • Single window clearance
  • Removal of Inspector Raj
  • Easing of credit rates and provide level-playing field

Reserve Bank of India must come forward to formulate a working policy framework for better channelization of funds to the sector and draw a pragmatic road map for financing the MSMEs sector by:

  • Encouraging and weighing low-cost credit ratings
  • Bringing about transparency in the working of the commercial banks especially pertaining to MSMEs.
  • Making the banks accountable and answerable to receiving and rejecting applications from the SMEs entrepreneurs.
  • To allow encourage SIDBI for direct lending to MSMEs.
  • To spread awareness in banks and entrepreneurs towards credit guarantee scheme
  • Derive a dedicated package to encourage start-ups and not weigh them in the same balance.
  • Uniformity in providing banking services in all parts of the country.
  • Making use of Information and communication tools where physical banking services are not possible or viable.
  • Chalking out a programme to spread financial literacy on a national level.
  • Setting up special cells at their branches
  • Review the working of rural banks and do away with the role of middlemen.

As at the end of March 2012, as reported by the State Level Bankers’ Committees of various States/ Union Territories, banking outlets have been opened in 74199 villages across the various States in the country. This comprises of 2493 branches, 69374 business correspondents and 2332 other modes like rural ATMs, mobile vans, etc. The process for ensuring coverage of villages with population below 2000 is underway.

In the present environment, the role of service sector is not forcefully recognized even while the sector plays a key role in the development of the SMEs sector. Worldwide service sector is considered an important component in the growth of the SMEs sector.

In India, small entrepreneurs especially the new ones have little access to Venture or Equity capital. A sound equity capital base is most essential to encourage new ventures and making them more receptive to embrace entrepreneurship.

Lack of equity capital poses a serious challenge to development of knowledge-based enterprises mostly promoted by the first-generation entrepreneurs.

We have ushered into the age of information and knowledge. And India is considered a high knowledge region and market. The generation which is fast coming up to hold the citadels of industry will call the shots in the near future. The big question is ‘have we braced up or is India ready in answering the aspirations of this fast up-coming army of knowledge-laced Indians’? Sadly, we have yet to recognize the big potential of the knowledge industry which has to take the center-stage in not too distance future.

The knowledge based enterprises often have no or little cash flows and with no collateral either find it difficult to access debt capital or bank financing. Therefore Venture/ Risk capital is often a more appropriate financing instrument for high-growth-potential and start-up SMEs.

Without the knowledge enterprises, the ability of MSMEs to go in for innovations and adopting newer technologies runs the risk of being stunted. Access alternative sources of capital like angel funds/risk capital needs to be enhanced considerably to encourage and develop entrepreneurship.

Another important issue that has become a challenge for the SMEs sector in India is absence of strong factoring services. Timely payment by the large enterprises to the SMEs is a serious issue facing the sector. The unlimited delay in settling bills has an adverse effect on the working of SMEs. SMEs entrepreneurs with looming uncertainty are unable to plan, pay up their installments in time and their whole business operations go awry.

A recent study of 5000 Indian SMEs by CRISIL shows that high quantum of receivables is an endemic problem across industry sectors and geographies in the SME space. Smaller SMEs, perhaps due to their lower bargaining power, are in a more disadvantageous position with weaker receivables positions. The study estimates that SMEs can enhance profits by at least 15 percent if they receive payments on time from their large corporate customers.

Although some financial institutions in India have launched factoring banks need to come forward to offer such services for the MSMEs. To provide a legislative framework for factoring services, the Parliament has recently passed the Factoring Regulation Bill that would address delays in payment and liquidity problems of micro and small enterprises.

On their part, the entrepreneurs in the SMEs space must also streamline the way business is done by way of:

  • Incorporating latest technology in production
  • Streamlining their marketing and management functions.
  • Reduce operational expenses by adopting lean practices
  • Attend awareness sessions and acquiring knowledge and information offered by seminars, trade workshops etc.
  • Adopt new ICT and IT tools by taking to cloud computing.
  • Review the HR issues as these are fundamental to improving the competitiveness.
  • Look for skilled manpower and management talent.

The SMEs sector must adhere to the rules of corporate governance and should have a vision for longer goals rather than short-time.

Today transparency in business has become a buzz word. Transparency is all about being, honest, open and accountable. It must be realised transparency is a great responsibility. Always remember that stakeholders are watching you and making their evaluations. Their decisions are always based upon what you say and how you do. Your truthfulness matters a lot. You are never invisible and so are your actions.

Today in times of competitiveness, you have to move to the next level of growth. Being stagnant may lead to slow death. New marketing strategies have to be thought of. And for all this you need funds. To have access to credit, you have to have a transparency in your management and in your governance. Today everyone is talking about corporate governance and advocating clean management practices. There are various advantages of being transparent. It builds up your self-confidence and you live free of any guilt. You wear a sense of pride and trust so necessary to run business. You employees develop a great respect for you and it in turn drives them to work with renewed fervour. All this ultimately results in the working of your business.

Then the journey to growth is easy and manageable. You build up a notable credibility for your enterprise. And you enjoy respect in the trade and industry. Remember, transparency is your signatures.

The MSME sector is vital for the nation’s economic progress and hence, needs to be carefully nurtured and supported. MSMEs are the best vehicle for inclusive growth in the country, to create local demand and consumption.

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