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MSME NEEDS BIG PUSH, BUT NOT AT STATE ENTERPRISES’ COST

By Nantoo Banerjee

 

It is very heartening that the government has, for the first time, equipped itself with a clear and comprehensive policy to ensure the growth and competitiveness of India’s less-cared micro, small and medium enterprises (MSMEs) sector. MSMEs are regarded as backbone of development even in highly industrialized countries, including Germany, Japan, France, the US and China. They are incubators of ideas and homes of many good innovations. They operate like spokes that hold and support the wheels of industry and development. The Narendra Modi government’s very special focus to the creation of a global centre of MSMEs in India is in sync with its ‘Make-in-India’ policy that aims to convert the country into a global manufacturing and could mean a defining moment for Indian enterprises. But, to be strong and effective, the MSME baby should be allowed to grow without crutches. Forced quota-purchase of MSME products by a particular sector of industry may weaken the quality and price focus of MSME products, which is extremely essential to enhance their competitive strength to survive locally as well as globally and grow.

 

The previous Congress-led UPA government’s dictat on the less privileged state sector enterprises (PSEs) forcing them to procure 20 per cent of their inputs from MSMEs by 2015-16 looks more like an easy and insensitive bureaucratic idea to push the cause of MSMEs by providing an assured market of their products irrespective of their quality and price competiveness and purchase requirement of a PSE. Imagine, a government or its bureaucrats forcing procurement decisions of such high profile state corporations such as Nuclear Power Corporation, Hindustan Aeronautics, Bharat Heavy Electricals, Air-India, Indian Oil Corporation or Bharat Earth Movers that could spell disaster for these high-tech, high-capital, high-value-equipment intensive corporations in terms of their operations and deliverability. Air-India’s aircraft procurement or IOC’s crude oil purchase bills are too large to be realistically linked with 20 per cent local procurement stipulations. IOC’s annual oil purchase bill, for instance, is around Rs. 600,000 crore. Most of these companies maintain their individual robust local procurement manual and vendor development programme in place.

 

The world over, most large manufacturing companies owe their smooth operations to semi-captive or captive SMEs supplying products as per designs, quality specifications, price range and delivery schedule. For instance, when an automobile manufacturer – be it General Motors, Toyota, Daimler Benz, BMW, Maruti-Suzuki or even home-grown Tata Motors – sets up a full-scale production unit, it is tailed by at least 50 reliable medium-sized makers and suppliers of ancillaries and parts to form a cluster. Almost 75 per cent of Maruti’s annual procurement comes from local suppliers. Vendor development, which necessitates skill development and technological assistance whenever necessary, is essential for the efficient operation as well as survival of large enterprises. Companies such as BHEL, L&T, Tata Motors, Maruti, NTPC, IOC, HPCL, RIL, Haldia Petro, SAIL, NALCO, etc. are also into promotion of small and medium sector downstream projects in their own operational interest. All companies maintain vendors’ lists, including small service providers such as electricians, plumbers, carpenters. They all are located in the periphery of the operation centres of large corporations.

 

In fact, several central public sector enterprises  (CPSEs) meet – and, some even exceed — the government stipulation of sourcing 20 per cent of their individual annual procurement of materials and services from micro, small and medium enterprises (MSMEs). To be fully effective from 2015-16, the 20 per cent MSME product and service procurement requirement contains a four per cent component from SC/ST suppliers making the otherwise well-intentioned advisory more of a political agenda than one with good commercial intent. And, this could particularly worrisome for Indian CPSEs, the management of which enjoy little autonomy in business policy making that runs counter to political objectives and intentions of their departmental masters. The government, instead of local procurement quota fixation for commercial enterprises, would do well to help MSMEs with fund, access to new technologies and skilled manpower, to become a force to reckon with, nationally and worldwide. Medium-scale enterprises from countries such as Germany and Japan have bigger global presence than their giant MNCs. In China, as many as 6,000 German medium-scale enterprises have operational facilities, far outnumbering the German MNCs there.

 

At macro-level, Indian MSMEs are not doing badly. Especially, when it comes to exports, this sector accounts for almost 40 per cent of the country’s export income. The export basket contains a highly diversified products from engineering, auto parts, bright steel, jewellery, processed foods, dyes and chemicals, drugs, apparels to shoes and carpets. The sector accounts for 45 per cent of manufacturing output and eight per cent of the GDP. It provides direct employment to some 60 million people. But, this is only one part of the story. At micro level, most of the country’s 26 million MSMEs are fund, technology and skill starved. Many are not even registered, operate irregularly and unreliable when it comes to product quality, availability, delivery schedule and pricing. These are the areas the present government needs to step in to induce them to become compliant to essential rules for enterprises to be successful in business. They need to be equipped with modern tools of business and IT-savvy. They must be made to appreciate the spirit of competition and dress up their enterprises to be worthy of it. The government has several institutes to help and guide small entrepreneurs. Tonnes of tax-payers money are routinely spent on these institutes, year after year. Unfortunately, they are not doing their job honestly and sincerely. Not many maintain even up-to-date web portals to list MSMEs in their areas of function and their capabilities.

 

The government has no business to formulate the procurement policy of a commercial enterprise under the current globalized market context and WTO regime that limits a member country’s tax protection ability. Quality, price, reliability and easy availability are key to any planned industrial purchase decision. External fiddling with such decisions could only bring a disastrous impact on both the procurer and supplier. Finance, technology and skill development are what India’s new generation MSMEs need to be strong and globally competitive and not blind purchase guarantee. The public sector represents only 229 operating enterprises, nearly a third being in the medium sector themselves struggling for survival. About 80 companies are loss making. The state sector should be allowed the freedom to find sources of inputs. (IPA Service)

 

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