Because Small Is Big

THE GOOD NEWS is that in recent times, the MSME sector is getting as much serious policy attention in India’s economic discourse as big business. The bad news is that so far there is more talk than walk, and where walk is concerned, more of the same palliative actions rather than a clear strategy based on a fresh look to build India’s MSME Version 2.0 over the next 10 years. A CRISIL report headline says that they are facing an ‘existential’ crisis. Existential crises don’t get solved from a place of ‘what is and why it is so’ but from a place of ‘what can be and how to make it so’.

While large companies have emerged from 2020 battered but getting to live another day and several have managed to improve operating margins and ride the come-back of demand, MSMEs have mostly not had the resilience to do so. Several are near-dead from working capital asphyxiation and unable to recapture the demand they once had, presumably because they competed on cost and had no differentiation. Even if you offered loans aplenty, many of them are not in a position to qualify for them or digest them.

The obvious question is why struggle so much to try and stop MSMEs from dying? Why oxygenate their entire planet to help the strong and weak breathe instead of allowing the fittest to survive? After all, that’s market capitalism and it is jungle fires (admittedly, not man-made ones) that keep the jungle healthy as a whole.

The answer always comes in the form of how big their contribution to employment is. Ninety-nine per cent of all MSMEs are micro and half are in rural India and half in urban and spread all over, geographically. Add to it the dismal occupation and education profile of India’s young generation and it is clear that without them, India’s ‘let’s pretend’ demographic dividend will be in a far worse place. All evidence from around the world, and our own experience in India, shows that large companies are increasingly using more technology and fewer people to get the job done. If we have some hope of upward mobility and upskilling large numbers of people over the next decade, we need MSMEs to be healthy.

So yes, we need to oxygenate ‘planet micro enterprises’ for their survival and ours. There are many ways to oxygenate this planet. There is an old favourite, tried and tested way of clustering them geographically and oxygenating them through shared services, both government-subsidised and via service providers who are happy to do price-cost of customer acquisition (so many in one place) trade-offs. We need to create many more clusters.

If the objective is to preserve employment, then for all income-tax filing SMEs above Rs 1 crore turnover, audited accounts are available and employee wage costs are available, and some part of those can be defrayed in a manner that makes it as scam-proof as possible. People have dismissed this as ‘you don’t know how jugaadu and corrupt MSMEs are.’ True perhaps, but very unfair to single them out. Big business has scammed us as badly, or worse. We are a corrupt society. But what naysayers need to notice is that in today’s India, with its digital infrastructure and footprint, it is getting harder to jugaad.

Raising the limit of auditing for tax filing is counterproductive and old school. We have to do the opposite. We have nudged more and more MSMEs into the GST and IT returns ambit. Let’s build on these gains and make it easier for them to stay there. ‘Declutter-digitise-simplify’ to make all compliances easier, incentivising more and more MSMEs to come in, today reeling or daunted by costs and complexity of doing so. So if we widen their digital footprint, we have better data and we can oxygenate them better.

Another way to oxygenate them is to find segmented solutions, one size doesn’t fit all. The trouble with mega-label policy is that it doesn’t really work at the micro sector ‘x’ size, ‘x’ type of business level. In fact, this should be the basis for setting up industry associations so that we can be more granular about problems and solution space discovery and dialogue. Too complex? Sadly, our wonderful macro, as has been so often pointed out, is the meta of so many really tiny micros.

If only the glossy reports of consultants which talk about what MSMEs need to do to improve product differentiation, upskilling, improving technology, etcetera, can dedicate as much time to the task of what all it takes to truly create a vibrant ecosystem. Once this happens, differentiation, going up the value chain, etcetera, will automatically happen. Greed and youth are deadly seekers of opportunity. I have often written about the splendid business instincts of the micro entrepreneurs best exemplified as ‘tea with sugar Rs 5, without Rs 8’ or how all small tailors learn the latest fashion real-time with their hitting big stores, or the footwear exporter who says ‘yes, I can make the design’, bags the order and figures out how to make it.

Interestingly, we have a caste system already—startups are not MSMEs in our minds. So no, let’s not waste energy on them—let’s just not fix what ain’t broke. This Government has itchy fingers and meddles a lot.

NOW THE BIG question—how do we enable access to funds? The common complaint for the longest time has been that the MSME books are dodgy. Incentivising good practices through lowering the administration burden and the cost of doing so is the only way. Many are today willing to comply—the upside of being legit is far more interesting today. The changed societal aspirations we have identified as causing voter behaviour shift, the need to change the status quo for a ‘shot at a better life’, also applies to micro owner-driven enterprises with ideas and aspirations. So, it’s back to the elephant in the room—Primary Sector Lending (PSL) hasn’t worked too well and the jury is still out on the Micro Units Development and Refinance Agency (MUDRA), but we are hopeful.

Let’s segment another way. The ones who are part of a vendor/distributor ecosystem are okay. If banks won’t lend to them, fintechs will do so gladly. Then there’s new-age non-banking financial companies (NBFCs) who will build linkages to other businesses of theirs and lend selectively to another set of MSMEs. These are engines that are being built and we need to fuel them by increasing the pool from which they can draw.

It is fashionable to vilify the public sector banking system, but there is so much to learn and keep from there. Private legacy banks are not interested. They still talk of old-world ideas of ‘no collateral’, ‘bad books’, and generally, ‘it’s not my problem to fix the system’. This is called business development. The old India Inc hasn’t been surviving too well. There are enough instances of small, tiny companies becoming significant, the law of speedy compounding which banks get quite well. The lazy idea seems to be to bring efficiency to non-performing assets (NPAs) also. One Rs 4,000 crore NPA is more efficient than 4,000 NPAs worth a crore each!

I reached out to very eminent PSU bankers who had cut their teeth on branch banking in the 1960s and 1970s and moved into senior positions prior to retiring.

One of them recalls how the State Bank of India (SBI) had created a special cadre of staff drawn from within the banking system called development officers, posted in Kolhapur, Sangli, Guntur and so on and, of course, in branches near industrial states with a mandate to develop and guide MSMEs, and even in those days, they did cash flow-based lending. He remembers one such SME branch he was in, as a branch manager—he said it was the Andheri branch where he did Rs 19 crore in advances (1968-1969) profitably.

Development officer jobs were field, not desk, jobs and branches actually did banking, and were not the dumb terminals of today’s centralised banking system. He said they would sit with borrowers and help them with their applications, showing them what financial planning was. He adds ruefully, “Today, CBI would have come and arrested me for collusion.”

A dedicated force for SMEs were the warriors, field officers who were up on their game. Field officers would validate things like upward revision of electricity bills, wage bills, raw material purchase bills or a request for additional credit. The branch manager would review everyday vouchers of all account holders (think how easy that would be in today’s world of AI and algorithms!) and see who is an MSME borrower paying and who is he receiving from.

Today, it’s not fashionable to see banking as a social institution. But there is a new emergent business narrative which says social purpose is as important as shareholder returns. In fact, the two are linked.

Rosabeth Moss Kanter of Harvard University compellingly describes a concept called institutional logic and says companies ‘are more than instruments of making money, they are vehicles for accomplishing societal purpose.’

We need a cultural change to fix this MSME thing. Today, all the tools are there like never before. We need the MSMEs—for exports, employment, global outsourced manufacturing activities.

Let’s look back to the future on several counts. Asian Paints, Nirma, Haldiram, Haldyn Glass were small once. Let’s strategise and execute our way through this and build a vibrant healthy MSME ecosystem. For the first time, many new pieces are available and in shape. It will come together.

GDP growthMSMENirmala SitharamanOpenomics 2021Union Budget 2021