Micro, Small and Medium Enterprises (MSME) are one of the main forces behind India’s economy’s growth story. The MSME sector, which includes the service industry, manufacturing, packaging, infrastructure, food processing, IT, and chemicals, has emerged in the past few decades as the Indian economy’s most dynamic source of growth.
The MSMEs sector has grown faster than the industrial sector in recent years. This industry not only creates a significant number of jobs but also helps to maintain regional harmony by bringing industrialisation to isolated rural and underdeveloped areas. MSMEs may appear to be a minor and unimportant portion of the economy, but they actually employ 40% of all Indians, making up the second-largest workforce after the agricultural sector.
There are around 6.3 crore MSMEs in India, and their domestic and international trade is responsible for over 29% of the country’s GDP, according to MSME Ministry data released on May 16, 2021. Almost 50% of the nation’s exports come from this sector.
Technology takes many different forms, one of which is information technology (IT), which benefits MSMEs. IT has a huge impact on every part of life and is changing how businesses are conducted around the world. ICT has been an important supporter of commercial activity throughout the past couple decades. Most often, it has evolved into a crucial enabler for competitiveness, higher service standards, cheaper processing costs, or even improved Management Information Systems (MIS) support.
On June 27, 2017, UN MSME Day, the Honourable Minister of Small and Medium-Sized Enterprises introduced the Digital MSME initiative. The program’s goal is to advance Information and Communication Technology (ICT) in the MSME industry by having those businesses and manufacturing processes use ICT tools. The programme also intends to enhance digital marketing in the MSME sectors and raise knowledge of e-platforms.
Following the vision of Digital India, the Union MSME ministry introduced an online mechanism on July 1st, 2020 for registering MSMEs named as Udyam Portal. It is required for MSMEs to take advantage of the benefits of programmes for the Ministry of MSME and for Priority Sector Lending from banks. Additionally, it is connected to the databases of the Goods and Services Tax Network and the Central Board of Direct Taxes (CBDT) (GSTN).
Growth in Digital Finance
Despite briefly declining during the pandemic, India came out on top with more than 149 crore installations of financial apps. According to the Ministry of Finance, the volume of digital transactions has grown significantly over the last three fiscal years, by 88% during 2018–19. The number of transactions climbed from 23.26 billion in 2018–19 to 34 billion in 2019–20. The Ministry of Finance’s data indicates that in 2020–21, the number of transactions increased to 43.7 billion.
Over 22 billion transactions were recorded using the Unified Payment Interface (UPI) in 2020–2021, a four-fold increase from the previous three years. Additionally, compared to the previous four years, Aadhaar Enabled Payment System (AePS) interbank transactions increased ninefold in 2020–21.
OBJECTIVES OF DIGITAL MSME SCHEME
The major goal of the programme is to give MSMEs digital empowerment and encourage them to use ICT tools and applications in their business and production processes to increase their competitiveness in domestic and global markets. The program is expected to have the following effects:
- Empower and allow MSMEs to use IT as a communication tool to improve market access and refresh their managerial and technical skills through online content—both static and dynamic.
- Increasing internal productivity by heavily utilising ICT, automating processes, and enhancing capacity for information access, processing, collaboration, and dissemination.
Many MSMEs are anticipated to gain from this scheme in terms of standardising their business operations; decreasing inventory carrying costs; increasing productivity and production quality; regulating costs and timelines; increasing customer happiness; etc. Also, everything has gone digital in this age of the internet, and e-signatures are no exception. In terms of protecting a document, digital signing is superior to paper or ink signing.
For companies of all sizes to remain relevant and competitive in the rapidly changing and expanding business climate of today, digital transformation has become a must. Utilizing technology and becoming digital has many advantages for MSMEs, including cost reduction, higher productivity, increased business agility, improved customer experience, and improved data security.
COMPONENTS OF SCHEME
The following activities are proposed to be carried out as part of the scheme:
Awareness Programme and Training
The goal of awareness campaigns is to inform implementing agencies and MSMEs about the advantages of integrating ICT into their businesses, the specifics of the scheme, how to take advantage of the scheme, and the procedure methodology for taking part in the scheme. For the officials, appropriate domestic and international training programmes may be organised.
Development of an e-Platform and software for MSMEs
A portal for Indian businesses will be created to offer MSMEs a variety of services. The portal will show information about and a list of service providers, as well as information about their services, fees, the costs of comparable apps, features and specifications, service levels, etc.
MSMEs will have access to software/apps in four sectors: Enterprise Resource Planning (ERP), Accounting, Manufacturing Design, and Regulatory Compliance, including GST.
Digital literacy and e-marketing
The goal of e-literacy is to empower MSMEs on the internet. The e-literacy mission will be managed by Enterprise Development Centers (EDCs). Through the India Enterprise portal, e-marketing initiatives may be carried out as the decision makers see fit.
Continual radio, print, and electronic media campaigns, the creation and publishing of a knowledge book on ICT/Cloud computing relevant to the MSME sector, as well as documentaries and short videos on the advantages of ICT adoption for the MSME sector, etc will be initiated as a part of its publicity and branding.
Digital Empowerment through Enterprise Development Centre (EDC)
The EDCs might participate in a range of e-marketing and digital literacy-related tasks. EDCs could serve as hubs for sharing knowledge and raising awareness among MSMEs, student fraternities, etc.
Assistance for IT infrastructure to various Implementing Agencies (IA) up to Rs.10 lakhs per IA
Impact Assessment and Survey, including Data Analytics
With the agreement of O/o DC (MSME) involving expert agencies, NMIU/IAs may carry out any survey addressing need assessment, impact of activities, and other related activities as they see suitable.
IMPLEMENTATION OF THE SCHEME
The scheme was proposed to be implemented by the financial year 2019-20.
- In order to facilitate, execute, and monitor the scheme involving Implementing Agencies (IAs) in accordance with specified procedures, a National Monitoring and Implementation Unit (NMIU) shall be formed
- The planning, screening, and identification of interventions and projects, as well as other tasks required to guarantee the scheme’s successful execution, will be handled by a Project Monitoring and Advisory Committee (PMAC) established at the O/o Development Commissioner (MSME). All proposals made in accordance with the plan will be received by the LAs and sent to PMAC via NMIU.
- PMAC will be in charge of formulating policies for the agency in charge of monitoring the implementation of the plan. It will have the authority to make all crucial choices regarding the plan and to consent to small changes for operational convenience. Meetings of the PMAC will be held as needed.
Eligibility Criteria: All MSMEs that are registered under the MSME Act of 2006, as amended, as well as MSMEs that are covered by executive orders issued by the Office of the DC (MSME), in accordance with the MSME Act, from time to time, are eligible.
PERFORMANCE & IMPACT
The introduction of digital technology over the past several years has completely altered the corporate environment across various economic sectors. Digital technology has been adopted more slowly by medium, small, and micro-enterprise companies, though.
There are over 6 crore MSME businesses in our nation, and historically, these businesses were subject to an informal credit system because they lacked access to a formal credit system. Many of these MSME enterprises have advanced toward adoption of a digital lending system in response to the government’s recent innovative measures, such as Digital India and GST (Goods and Services Tax), which will guarantee their access to simple and affordable financing. However, significant other economic factors, like the drop in mobile data and phone costs, have also aided in spurring MSMEs to adopt digital lending practices.
Only industries that have a significant impact on large populations, underprivileged groups, and industries with high employment rates, such as agriculture and micro and small businesses, are included in priority sector loans. The banks have a responsibility to provide sufficient and timely credit to support the expansion of these sectors. According to the following standards, bank loans to micro, small, and medium-sized businesses in the manufacturing and service sectors are eligible to be categorised under the priority sector:
- Manufacturing Enterprises: The Micro, Small, and Medium Enterprises (MSME) that produce items for any of the industries listed in the first schedule of the Industries (Development and Regulation) Act, 1951, as well as other industries as the government may from time to time notify. The definition of manufacturing businesses is based on their investment in machinery and plant.
- Service Enterprises: All bank loans made to MSMEs that are involved in the provision or rendering of services as specified in terms of the investment in equipment under the MSMED Act of 2006 are eligible for credit without a cap under the priority sector.
- Khadi and Village Industries Sector (KVI): All loans to KVI sector units are eligible to be classified under the sub-target of 7.5% set forth for Micro Enterprise under priority sector.
- Other Finance to MSMEs: Loans to organisations that support the decentralised sector by supplying materials to and marketing the products of artisans, small-town, and cottage enterprises. Loans given to cooperatives run by producers in the decentralised sector, such as small-town and artisanal businesses. Credit that is still owed on general credit cards (such as the Weaver’s Card, Laghu Udyami Card, Swarojgar Card, and other cards that are available and meet people’s credit needs outside of agriculture). The MSME units will continue to benefit from the priority sector financing status for up to three years after they leave the relevant MSME category, in order to guarantee that MSMEs do not stay small and medium-sized just to maintain their eligibility for priority sector status.
- Overdrafts under PMJDY: According to updated regulations published by the Department of Financial Services, Ministry of Finance, on September 24, 2018, the Pradhan Mantri Jan-Dhan Yojana (PMJDY) account holder’s overdraft limit has been increased to $10,000, the age restriction of 18 to 60 years has been changed to 18 to 65 years, and there are no restrictions on overdrafts up to $2,000 in amount. These overdrafts will count toward meeting the goal for financing to micro businesses.
By 2023, 85% of MSMEs will have more access to formal credit systems than predicted. However, the adoption of digitisation by MSMEs across other business aspects, such as sales, payments, logistics, ads, etc., is still in its infancy and needs to expand, since just 6% of MSMEs, according to a survey by RedSeer Consulting, had done so at the end of 2018.
As of present, the process of digitisation is being hampered by low levels of awareness, a lack of talented people resources, adoption costs, etc. In addition to this, a lack of knowledge about the advantages that can be gained from using technology, a lack of guiding forces for institutionalising technology into the business, and resistance to upfront investment-oriented costs, and other factors have all contributed to the low adoption of digitalization among MSMEs.
Global data reveals that just 20% of digital transformation initiatives are currently successful. When it comes to the digitization of their enterprises, SMEs have unique challenges.
- Digital knowledge gap and digital execution: The adoption of new procedures and formalities would be one of the problems with implementing a new system. It may be challenging to make the change because the knowledge needed to operate in this system will be completely different and more technical in nature.
- Barrier to set-up costs: The expense of building up these resources is the most fundamental problem with integrating technology into any firm. While technology can benefit MSMEs in a variety of ways, including by enhancing productivity, expanding market reach, and lowering costs, most MSMEs are still far from experiencing these advantages of digitalisation.
- Complexity in integration: Although it is obvious that this digital infrastructure plan emphasises the importance and advantages of adopting technology, such as knowing how consumers behave and what the market is like, it will not be as simple to put into effect. There is also the question of whether entrepreneurs will find it worthwhile to integrate this somewhat more complicated system given the widespread perception that any time spent going to the bank and dealing with the complexity and Inefficiencies in the banking process could result in a potential loss of sales and business.
- Cyber security and data privacy, digital fraud: Particularly when introducing a more digitally advanced environment, rising areas of concern like data privacy and digital security will need to be addressed from scratch.
- Persistent digital divide and infrastructure related issues: While the usage of digital technology is growing quickly in the retail sector, the survey reveals that there is still a low level of adoption for supply-side process management.
MSMEs in India can be considered as a tool for fostering equitable development as well as an economic growth engine. The sector has grown significantly throughout this time. It can overtake the agricultural industry and become the largest employer in the nation if the proper policies are put in place. The working environment has changed from a fairly traditional type of structure to one that is more transparent and efficient in many industries as a result of the government’s drive to digitise the economy.
The pandemic has accelerated the pace of digital transformation to the point where more and more Indian MSMEs are looking to migrate to the cloud, and the nation must develop novel ways to assist them in doing so more quickly.
However, the MSME sector nearly crashed-landed in 2020 as a result of COVID-19 and its aftermath, with a significant decline in revenue. Due to a severe lack of liquidity and declining demand, the industry was severely affected in terms of maintaining company continuity.
- Fiscal Policy Support from RBI: The amount issued to new MSME borrowers may now be subtracted by banks from their net demand and time obligations, according to a recent notice from the Reserve Bank of India. This indicates that banks are excluded from maintaining a cash reserve ratio for loans made to first-time MSME customers between January 1 and October 31, 2021. In order to encourage incremental lending and accelerate the revival of stressed sectors, the RBI has now permitted Non-Banking Financial Companies (NBFCs) to access bank funding through Targeted Long Term Repo Operations (TLTRO). Under the programme, NBFCs would be permitted to offer financially ailing MSMEs a lending lifeline.
- Budgetary and Policy Support: The government provided Rs 15,700 crore for the industry in the Union Budget 2021–2022, which provided assistance to the MSMEs that were severely short of capital. One Person Companies (OPCs) will be encouraged to be included in the budget, which will support the MSME ecosystem.
The spread of digital technology would broaden its geographical reach and attract new customers. Due to the advancement of digital platforms, the rising importance of e-commerce, and the lower barriers to entry, MSMEs are able to expand their market and overcome geographic constraints. Additionally, e-commerce has expanded MSMEs’ consumer base by enabling them to serve customers in remote and rural areas.
From a financial perspective, it results in broader and more equitable access to capital. MSMEs increase their visibility to banks and financiers as they enhance their digital footprint. MSMEs can easily acquire financing since financial institutions can use digital data to better accurately assess credit threats.
- Annual Report 2021-2022, Ministry of Micro, Small & Medium Enterprises
- Mishra, P. (2019). Study on Impact of Digital Transformation on MSME Growth Prospects in India (1st ed., Vol. 6, IJRAR- International Journal of Research and Analytical Reviews).
- Schemes for MSMEs Report 2022-2023, Ministry of Micro, Small & Medium Enterprises
- National Manufacturing Competitiveness Programme (NMCP). (2022). Retrieved August 22, 2022
- Buteau, S. (2021, December 10). Roadmap for digital technology to Foster India’s MSME ecosystem-opportunities and challenges – CSI transactions on ICT. Retrieved August 22, 2022
- Ministry of Micro, Small & Medium Enterprises. (n.d.). Retrieved August 22, 2022
About the Contributor
Aanchal Karnani, Research Intern at IMPRI and Third year student at Symbiosis School of Economics, Pune
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