Create a special fund to make MSMEs smarter

Micro, small, and medium enterprises (MSMEs) play a prominent role in the $2.7 trillion Indian economy. This sector comprising over 63 million enterprises provides livelihood to approximately 111 million workers and accounts for almost 48% of total exports. Despite being the bedrock of the Indian economy, the MSME sector faces significant challenges to its growth. Moreover, the government’s goal of becoming a $5 trillion economy and economic slump created by the COVID-19 pandemic makes the revival of the ailing sector even more prominent than ever before. However, with the global recession amidst us, reviving the disrupted forces of demand and supply becomes a long-term issue. Hence, reforms for the MSME sector should also focus on structural changes that could bolster the industry on an upwards trajectory of growth. In this regard, the adoption of Industry 4.0 could be the way ahead (The Fourth Industrial Revolution is broadly defined as the ongoing transition from traditional manufacturing and industrial practices combined with the latest smart technology).

Over the past 250 years, various waves of the industrial revolution have shaped the production process and the employment structure around the globe. The first industrial revolution witnessed the use of steam-driven machines, while the second wave experienced mass production powered by electricity. The third wave of the Industrial revolution brought computers and automation to the production mix. Currently, the fourth wave aims to foster new modes of innovation and adapt digital production strategies giving birth to the notion of smart manufacturing, which connects disjointed fragmentss of the production process under an umbrella of an IT-backed network. Further, the Cyber-Physical Production Systems (CPPS) leads to self-organization and self-control by monitoring, controlling, and coordinating production systems via a computing mechanism. Thus, forming a nexus between the digital and the physical world via the Internet of Things (IoT). Hence, the underlying aim of adopting to Industry 4.0 as it is commonly referred to, is to maintain its comparative advantage and remain competitive in the long term. This is achieved via intricate customer relations, smart manufacturing, CPPS, intelligent automation concepts, and advanced business and organizational models for improved production and logistical processes.

It is well known that MSMEs play a pivotal role in the supply chain as suppliers of intermediates to large firms. However, rigidity in terms of their adaptability and limited innovative capability limits the gains for MSMEs in supply chains. Consequently, the lack of adaptability and innovative ability allows the larger firms to switch between these small firms as they fall prey to competitive pressure in the market. In this regard, Industry 4.0 provides multiple avenues for MSMEs to enhance their operations. First, Industry 4.0 enables better resource planning by providing accurate insights over inventory, which is driven by big data. This reduces the risk of over-ordering and therefore saving cash flow for the firm. For MSMEs, which are often credit constrained, improvements in resource planning would help them survive and reduce friction in their operations. In addition, systematic management of resources and material boosts customer confidence in the company and its operation. Second, the use of digital systems leads to automation of time-consuming tasks allowing the greater focus of personnel on core functions of the enterprise. An indispensable requirement for a firm to remain a sustained supplier in the supply chain is to meet the stringent quality requirements. Enterprises are often required to prove the source of their components and material procurement for evaluating the said standards. In this regard, a digital system would boost the enterprises operation and credibility by keeping track and trace of materials procured while meeting the quality requirements automatically. Third, the integration of scheduling and planning systems helps examine the impact of scheduled changes and enables the answer of normative questions on its operations. Moreover, the digital solution also allows for a more intricate interaction with the customers establishing a strong rapport with its clients. Hence, integration of Industry 4.0 framework will enable MSMEs to become more adaptive and innovative both on a product and manufacturing process front.

The successful implementation of Industry 4.0 is driven by smart manufacturing, which is reliant on IT infrastructure. In this regard, economies around the globe are undertaking initiatives to integrate the Industry 4.0 and investment in digital infrastructure. The notion of Industry 4.0 originated in Germany in 2011 and it’s no surprise that the German government launched “Industrie 4.0” initiative with the objective of driving digital manufacturing forward. Similarly, the “Made in China 2025” draws upon similar principles with the added objective of producing 70% of the materials domestically. In order to promote technological advancements and adoption by the MSMEs, the Malaysian government provides loans and grants to the eligible enterprises worth RM 700 million in assistance for improvement in digital infrastructure (the SME Digitalisation Matching Grant, the SME Technology Transformation Fund, and the Smart Automation Grant). In addition, the “MED-MTDC Industry 4.0 SME Accelerator Programme” launched by the Malaysian government aims to make SMEs adhere to global Industry 4.0 standards.

India is also taking steps in building the environment necessary to reap the benefits of the industry 4.0. Similar to the initiatives of other economies, Indian government launched the “Make in India” initiative and a “National Policy for Advanced Manufacturing.” According to KPMG-AIMA, Industry 4.0 would be instrumental in boosting the manufacturing contribution to 25% of GDP by 2022. Besides, an ongoing research of the authors also highlights that digitilization is pivotal in fostering Global Value Chain (GVC) integration. Hence, India’s proficiency in the IT sector coupled with the rapid rise of the Internet of Things (IoT) and e-commerce platform would enable MSMEs to provide tailor-made services to its customers. Additionally, ‘The 100 Smart Cities Mission’ of the government provides an opportunity for MSMEs to integrate Industry 4.0 and become a key player in the development of this mission. In this context, the Centre of Excellence (CoE) for Internet of Things (CoE-IoT) would provide a platform to support SMEs by hosting an IoT incubation infrastructure catering to hardware design tools including 3D printing, application sensors, wireless development kits to boost the innovative drive of SMEs and start-ups which otherwise is highly constrained. Through Improved analytics and commercial enterprise intelligence, Industry 4.0 fosters the growth of MSMEs, generating new employment opportunities and revenue. Besides, the attempt to become self-reliant calls for a greater emphasis towards digitization and integration of the MSME sector. In this regard, the existing policy aimed at infrastructure development should focus on making these developments more accessible to MSMEs. One such future policy stance could be the creation of a special fund. This fund could be specifically designated for MSMEs trying to integrate industry 4.0 in its operation. Since adoption of digital infrastructure includes heavy cost, such policy would alleviate the financial difficulties faced by MSMEs. Therefore, it is important that the future policy must aim at harnessing the potential of such integration which in turn could push the country on the $5 trillion trajectory. Hence, it is without doubt that integration of Industry 4.0 could be a game-changer for the Indian MSME sector.

About The Author

Ketan Reddy and Subash S

The authors are with the Department of Humanities and Social Sciences, Indian Institute of Technology Madras. Views are personal.