Authors Dr Sharad Sarin, Retd Senior Faculty, XLRI, and Mr G M Kapur, Management Consultant, in conversation with Mr Hariharan S Ramamoorthy, Managing Director, Srimukha Group; and Mr S Ravi, Director, Buildcraft Interior Pvt Ltd.,
Dr Sharad Sarin:
Based on our study of several MSMEs over many years, we have categorised them into 5 groups:
- We call the first category the stillborn baby. These are babies that need incubation. Unfortunately, incubators were not available in India many years ago. So many MSMEs died.
- The second category is born-sick baby. These are the biggest drain on our country. The Hindustan Engineering Corporation in Ranchi was established in 1958 by Pandit Jawaharlal Nehru. It was his pet project but till date, they have not been able to revive it. HEC is an example of this category.
- The third category is healthy babies, remaining small. To grow from small to big companies, a lot of effort is needed. There are many transparency and accountability issues. It’s very difficult to manage a team and then a family.
- The fourth category is healthy babies aspiring to become successful. We have many such examples, including companies in Jamshedpur. This is the best of the five.
- Then comes the fifth category, which is also something bad: Healthy babies facing failed aspirations and accidental death. They didn’t want to fail, but something happened. Entrepreneurs may have appealing ideas but if there are no takers in the market, they can’t be developed.
We have many role models to succeed in business. JN Tata, for instance. Till date, Tatas are dedicated to the society. Their sole purpose of business is society. Mr. Narayana Murthy, Azim Premji are also role models who guide us. Mr. Narayan Murthy used to teach computers in IIM Ahmedabad. He got admission in IIT, but his father did not have money to support his education there.
Mr Narayan Murthy carried his team and that is one big reason for the success of Infosys. Their camaraderie was clear from day one and they were clear that they would make money only through honest means. Mr Murthy had just 10,000 rupees in his pocket. Now look at his wealth. Sudha Murthy wrote a postcard to JRD Tata that they were not hiring women mechanical engineers. It is a mystery how that post reached him. Tata questioned his team, and she joined Tata Motors. That is history. These are inspiring stories and case studies.
MSMEs must focus on the growth vector, where they can grow and become better. Sustenance and creating sustainable differential advantages are the keys. Every organization requires direction from time to time and ideas to grow. In this, there are two modes: expansion and diversification. Our view is that, as far as possible, stay in your own business. Don’t try to diversify unless your business has run out of steam, where you have no opportunities. Perhaps expansion would be a better route, but otherwise, avoid diversification, especially mindless diversification.
Mr S Ravi: The term MSME originally meant micro, small, and medium enterprises. There have been significant changes in laws, guiding principles, and accounting practices. Recently, the micro and small have been differentiated from the medium category.
When the MSME Act was introduced, in the Samadhaan scheme, we could go online and file a case if there were outstanding dues. Initially, for six to nine months, we were able to recover our money. However, within a year or so, they modified it such that you could only file a case, only if the outstanding value was one crore or more. I understand that this needs constant review and upgrade, but there are certain aspects, where I think, it fails to serve the purpose of the MSMEs. The value of the rupee has been depreciating over the decades. Therefore, those overseeing it need to adopt different perspectives at different points in time.
Mr Hariharan S Ramamoorthy:
MSMEs are the backbone of our economy. However, is the government truly recognising their importance? I believe there are significant gaps. Almost 90% of MSMEs in the country fall within categories 1, 2, 3, and 5 of the babies listed out by Prof Sarin. Rarely, we have companies in category 4, which is, healthy babies aspiring to become successful.
One reason for this is that conglomerates like the Tatas or Ambanis have extensive backup, background, and support systems. While rare exceptions exist like Mr. Narayan Murthy, who started small and grew, most MSMEs in India require substantial support.
Empower the Micros
Over the past decade, with the current government, considerable efforts have been made. I represent an all-India volunteer organization called Laghu Udyog Bharati, which works extensively with MSMEs. Despite these efforts, can we truly compare an MSME in India with one in Korea or Japan? Recently, a Korean company we engaged with for technical discussions, considered themselves an SME, though they have a turnover of about 950 crores. It speaks of the kind of forward-thinking approach of countries like Korea. While we shouldn’t blindly copy and replicate their strategies, we must adapt and innovate in our own Indian way.
With 95% of MSMEs in the micro sector, 3% in the small, and less than 2% in the medium sector, our focus should be on empowering the micro sector. By strengthening this sector, we can drive significant growth across the country.
The Challenges
However, there are challenges, including stringent laws such as the Basel II norms and NPA norms, which make it difficult for businesses to recover from even minor setbacks. If payment to banks is pending for 90 days, it is treated as NPA. Section 43H mandates MSMEs to make payments to vendors within 15 to 45 days, while the current payment cycle often extends to 90-120 days. These issues require careful consideration.
Despite challenges, there is immense growth potential for MSMEs in the country, especially with initiatives like the China plus one policy. The next decade holds promising opportunities, and we must capitalize on them, aiming for substantial growth and development—If not to become Ambanis, but at least trying to move in their direction.
PLA Needed for MSME
Another concerning trend is the decline in manufacturing within MSMEs. Over the past 10 to 15 years, the percentage of manufacturing companies among MSMEs has decreased by more than 30 to 40%. This is alarming, as it may lead to increased reliance on imports from countries like China or Korea. Relying solely on trading rather than manufacturing domestically is not sustainable in the long run. There is a pressing need for government support for the manufacturing sector.
For instance, while the government has been providing incentives through schemes like the PLA scheme, these benefits are primarily directed towards large corporations and not MSMEs. It’s crucial for the government to extend such schemes to MSMEs as well, as it would provide a significant boost to productivity in this sector.
We have suggested to the government for the introduction of a new category called ‘shishu,’ for companies with a turnover of 40 lakhs per annum. 90% of MSMEs fall within this category. Additionally, we have proposed the implementation of ‘Small Factories Act.’ Under this act, companies with fewer than 40 employees should be exempted from ESI and PF obligations, although insurance coverage should still be mandatory. Imposing all draconian laws on small companies is impractical and burdensome. Our laws must suit our current business models. It’s essential to tailor regulations to the needs and capabilities of small businesses to promote growth and sustainability.
Dr Sarin: If we analyse the growth trajectory of Maruti around 1983, we can observe that they cultivated a robust network of sub-suppliers. Such extensive networking will be imperative on a large scale for the growth of MSMEs. Additionally, we are of the firm belief that certain laws are stifling the growth of MSMEs. What we truly need is an enabling environment that fosters growth and innovation.
Mr Hariharan: Our organization Laghu Udyog Bharati welcomed Section 43H and advocated for its implementation. There’s unanimous agreement on this because micro and small industries are severely affected by delays in payments from medium and large corporates. However, the issue lies not with the act itself but with its implementation. Immediate compliance is simply not feasible.
We’ve had discussions with the Honourable Finance Minister, proposing a phased implementation approach. We suggested starting with big corporates and government bodies, then moving to medium enterprises, followed by small ones. Micro-enterprises should be given a grace period, perhaps one year. The government has taken our suggestions seriously.
What we lack in our country today is effective implementation, rather than innovative ideas. Additionally, there’s a significant gap in how micro-enterprises respond to government policies. For instance, initiatives like the ONDC and GeM Portal, designed to be game-changers, are primarily for micro and small industries. Regrettably, not many MSMEs, especially from South India, are utilizing these platforms. This highlights a gap between the North and the South. When the government is making substantial efforts, MSMEs need to step up and take advantage of these opportunities.
Presently, the Ready Made Garment (RMG) segment is being dominated by Bangladesh, causing severe impact for our MSME members in Tirupur. Many of them are experiencing a complete loss of business due to competition from Bangladesh.
Prof. G M Kapur: Prof. Sarin and I pondered on ways to prevent the failure of MSMEs. Hence, we conducted a study on failed industries. It’s crucial for every entrepreneur to not fear failure. You’ve likely heard of Kanwal Rekhi, the founder of The Indus Entrepreneurs (TiE), who prefers to support failed entrepreneurs. According to him, they have valuable experience in running an enterprise and learning from past mistakes. So, don’t fear failure.
Today, micro-industries are benefiting from microfinance, enabling their survival. Previously, banks were reluctant to cater to this category. I recall State Bank of India’s differential interest rate scheme (DIR), offering a 4% rate for microfinance around 50 years ago. However, the government wasn’t actively promoting it then. Additionally, borrowers were less committed to repaying loans. Contrastingly, today’s microfinance recipients are running more efficient businesses, although on a smaller scale, and promptly repay loans.
The Prime Minister once remarked that a business can include even one that makes pakoras. Many viewed his statement facetiously. But the fact is, a company named Wow Momos in Calcutta started from a small shop and they are a 2300 crore company.
Undoubtedly, challenges abound, and no business journey is without hurdles. There are always governmental issues. However, I believe today’s government is more industry-friendly and receptive, rather than merely paying lip service. It’s essential to acknowledge the steps taken by the government to address these challenges.
Talent acquisition, retention, and development within MSMEs pose significant challenges. However, if you have growth plans and are willing to share the benefits with employees, you can attract and retain talent effectively. This is my perspective.
Dr. Sarin: Two driving forces in the world of MSMEs are technology and globalization. Technology, in all its forms, is immensely relevant. Regardless of size, all MSMEs need to excel in both technology and management. I recall Asian Paints, which was among the earliest adopters of technology in India back in 1947. Their early adoption has contributed significantly to their unrivalled position in the market today. The key lesson here is not to shy away from implementing technology.
Mr Ravi: What would you rate as the critical factors for the success of MSMEs?
Mr Hariharan: To thrive as an MSME, having some level of uniqueness in your product is essential. Engaging in a cost war is unsustainable in the long run. Adaptability is another crucial aspect. In the automotive industry, there was initially resistance to the idea of transitioning from internal combustion engines to electric vehicles (EVs). However, EVs now represent a significant opportunity. While we might have earned 50 or 70 rupees per part with IC engines, the potential with EVs could be 300 or 400 rupees. But are we adequately prepared for this shift? MSMEs need to be technology-oriented to seize such opportunities.
