The package of 3 lakh crore for MSMEs, which is about 15 per cent of the economic revival package of about 21 lakh crore, sounds great. It may give some financial relief to them, but lack of robust policies to support them would render this package largely ineffective, especially at a time when they are at a grinding halt after having faced a steep fall in the last decade. MSMEs surged rapidly during 2000-2010 but declined sharply during 2010-2020. Even during their decline they contributed significantly to economic growth in terms of output, exports, and employment. Their total share in GDP during decline was still 33.44 per cent, however, employment declined substantially.

MSMEs in India have been major drivers of economic development, innovation, and employment, despite neglect and apathy of the government which is obvious from the data. Situation did not improve much except change in its definition several times. First, they were collectively known as small-scale industries in terms of the number of employees under the IDR Act 1951. No reliable data was available and therefore the data relating to the number of employees, investment in plant etc was considered a proxy. The ambiguity in criteria in their classification remained until 2006, when a fresh legislation was enacted in a bid to remove them. The Act was amended in 2018 to include microenterprises in MSMEs. The level of annual turnover was raised (from Rs 10 crore for manufacturing and Rs 5 crore for service enterprises) to Rs 100 crore again when revival package was announced in May 2020 to include larger enterprises.

It was intended to give more benefit to the larger companies which were hitherto not within the definition of MSMEs. It goes without saying that the real benefit of the MSME package will not go to the larger number of SMEs which have been already facing great hardship since demonetization of November 2016, and hurried implemented GST regime next year. Many of them were shut down and many were functioning at one-fourth of their capacity even before the COVID-19 outbreak. Lockdown from March 25 has enforced all of them to a grinding halt.

Before the planners come up with robust policies to change the situation in right direction, they need to take note of the two distinct pictures of SMEs – first, of the SMEs dependent on larger firms, and secondly of those which are independent. The first group of SMEs is better equipped to overcome the trade barriers due to their association with larger firms, while the independent SMEs have no such advantage and are badly suffering. This calls for the creation of a level playing field, for both the group of SMEs and the larger firms. They also need essential support from the government for restructuring production at least through subcontracting to facilitate economic, industrial, functional, human, and technical upgrading.

While analyzing the problem faced by SMEs, the very first thing that occur in mind is the value chain (VC), a set of activities required to bring a product or service from conception, through the different phases of production, delivery to consumers, and final disposal after use. Many of the SMEs in India are dependent upon a global value chain (GVC). During the COVID-19 outbreak, and its becoming a pandemic, the VC and GVC, has completely been disrupted due to lockdown measures. Unless these chains are restored, SMEs have no chance to survive. However, this depends on many domestic and external factors that the government needs to deal with. Restoration of the disrupted demand and supply chain, both domestic and external, will need another set of robust policies.

GVCs are coordinated by large multinational enterprises (MNEs) which are popularly known as “lead firms”. They perform core activities in the value chain. Upgrading involves innovation to generate higher value added by improving processes, product, and functions, which creates inter-organizational capacity to meet buyers’ demands. Multinational companies capture higher value added and they perform better than non-GVC players. SMEs, therefore, experience greater stability due to better business diffusion and upgrading prospect and gain from GVC participation through upgrading and may develop their own brand to become a lead firm. Innovative firms gain more from upgrading in GVCs by increasing productivity, employment growth, and sustainable business, which depends on institutions and government policy. It must be noted that India firms are facing high barriers to functional upgrading.

Another problem with SMEs is that they have less knowledge-based capital and accumulated technology to enable them to adopt emerging technologies than large MNEs and weaker managerial skills, which act as a barrier to their effective participation in GVCs. Indian SMEs have certain disadvantage in terms of their geographic location, quality of physical infrastructure, and their operational efficiencies along with their limited access or lack of preferential access to major industrialized markets.

It is important because, industrial policies globally are focused on GVC integration and upgrading. For SMEs to move up, they will require to fit into existing corporate strategies and establish close links with lead firms. Policy makers in India need to know how to upgrade SMEs’ position in GVCs. Coordinated actions of government, businesses, and international organizations are required to support public and private investments to gain from SMEs’ participation in GVCs.

A recent study of the ADBI has also recommended that the government should extend necessary support to SMEs for the development of new alliances and comprehensive networks of upstream and downstream partners through information flow, access to the latest technology, learning opportunities, and acquisition of knowledge for high value added. The complexity of the task to revive the SMEs calls for even more than this suggestion. Government must rise to the occasion with real supportive policies as these SMEs, if rejuvenated, will be playing the prime role in protecting and generating jobs. (IPA Service)