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The Micro, Small, and Medium Enterprises (MSME) sector is considered to be the backbone of the Indian economy. With resilience and agility, this segment has faced various challenges in last couple of years. This article throws light on current scenario of the MSME sector and various challenges faced by the sector.
Current scenario of the MSME sector in India in 2023
As per a report, there are more than 6.33 crore MSMEs in India. The micro enterprises account for 6.30 crore or 99% of the total number of MSMEs in India. The small sector consists of 3.3 lakh (0.5%) MSMEs and medium sector is estimated to be 0.05 lakh (0.01%) companies (Source: IBEF Blog).
In terms of employment in the MSME sector in India, a government report suggests that in FY22, total 93,94,957 people were employed by MSMEs which are registered on the Udyam portal.
The MSME sector’s contribution in GDP stood at around 27% in 2020. In fact, it has revolved around 30% for more than a decade or so. This insightful statistics highlights importance of the MSME sector in India.
|Classification of MSMEs in India on the basis of annual turnover
|Up to ₹5 crore
|Up to ₹50 crore
|Up to ₹250 crore
A latest report released by Blinc Invest, suggests that credit gap in the MSME sector stands at ₹25 trillion. On the other hand, debt demand in the MSME segment remains at ₹69.3 trillion, growing at the rate of 11.5% CAGR.
Although the contribution of MSMEs is enormous, growth of the MSME sector in India has been hampered due to various reasons. The pandemic induced lockdown impacted the sector adversely.
Impact of COVID-19 on MSME sector in India
Mostly the MSME sector was resilient enough to bear the impact of COVID-19 induced lockdown. However, not all businesses could stay afloat. As per data, nearly 6,000 MSMEs got permanently shut down during financial years 2020-21 and 2021-22. Alternately, for many companies, business activities were disrupted for long time. A report on MSME sector in India suggests that 70% businesses remained disrupted till August 2020 while 40% businesses remained disrupted till February 2021. Thereon, the demand increased gradually. Post pandemic, the MSME sector continues to face multiple challenges.
5 Top challenges faced by the MSME sector in India
1. Poor cash flow:
Managing cash flow and keeping the money rolling is an important aspect of any business. Many MSMEs do not update books of accounts regularly. This affects the business in multiple ways. If books are kept up to date, the business owner gets a quick overview of pending payments and can follow up with those customers. This ensures regular in-flow of money which can be rolled into the business again.
Moreover, considering that most businesses were going through difficult times, there was the additional challenge of not finding enough customers or receiving payments in time. This naturally led to cash crunch leading to working capital challenges for business. The government accordingly has introduced low-interest government loan schemes, subsidies, and exemptions, to help MSMEs conquer financial challenges.
2. Low credit score:
Many times, loan application of business owners is rejected due to poor credit score. Even if a bank or NBFC approves the loan, rate of interest is too high. The low credit score and further repercussions are mainly a result of non-maintenance of books of accounts. Therefore, it is important to keep your books of accounts updated and accurate. When all transactions are documented and tax returns are timely filed, business loan approval process becomes easy.
In general, it is advisable to maintain a credit score of 680+ to be eligible for all business loan types from banks and NBFCs.
3. Higher cost of raw material:
The pandemic caused several disruptions – one being the fluctuation in raw material prices. For MSMEs this emerged as an additional obstacle to growth.
As the volume of business was low, the cost of procurement got higher. This resulted in lower profit margin and affected the business adversely.
We encourage MSMEs to try using Tata nexarc Procurement – our online platform for raw material procurement. You can compare rates, identify requirements, and procure raw material at reasonable rates.
4. Ineffective marketing:
Many a times MSMEs rely on word of mouth for marketing. Although they understand the importance of marketing activities, they do not have the required skills and resources for undertaking marketing activities.
In the era of digitization, ways and means of marketing have changed drastically. Social media has an enormous role to play. However, it needs a fair amount of planning and dedicated resources, which MSMEs usually lack. Hiring a full-time resource may not be a feasible for MSMEs however, though a freelancer can be hired for the role.
This will ensure that your website and social media accounts are regularly updated and your digital reach expands.
5. Technology related challenges:
MSMEs are often not confident to adopt new technology. This could be due to various reason including lack of dedicated resources to update the technology, lack of funds, lack of knowledge, etc. However, it directly impacts the production and quality of the output. It is essential for business owners to keep themselves updated and analyse the right time to upgrade machinery and technology.
For instance, today, the government announces all its tenders online through its eProcurement platform. The online tender application process is straightforward, fair, transparent, and gives every eligible bidder to be able to apply for tenders and compete. Without the technological skillset and understanding, MSMEs not only miss out on growth opportunities for their business, but also on building credibility for their business.
Besides challenges listed above there are many other hurdles that an MSME owner faces that include labour relates challenges, disrupted supply chain, rising cost of raw materials, cybercrime, and so on.
To sum up
In order to revive the MSME sector and provide relief to the MSME sector, the government of India is instrumental in launching various schemes and subsidies. Often, business owners are ignorant or unaware of these schemes. To unleash full growth potential, MSME owners should work towards meticulous financial planning, hiring right resources, upgrading technologies and availing applicable government schemes.
Moreover, Tata nexarc acts as one stop platform to help MSMEs in various ways – assisting with business loans, raw material at reasonable rates, affordable logistics and access to relevant tenders.