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How MSMEs will play a key role in the development of Indian manufacturing sector
Articles- Dec 12,24
Setting up a business in India is futuristic, makes a lot of sense, and, for foreign companies, connecting with the Indian MSME and helping it grow is a sure way to success, says R Jayaraman.
Every economy consists of three types of sectors – industry, services and agriculture. In many western countries, agriculture has become irrelevant in terms of contribution to the GDP (for example, it is less than 0.5 per cent in the USA), although remaining very much a sector which supports the inverted pyramid.
The global gross domestic product (GDP) grew from $ 70.5 trillion in 2013 to $ 89.5 trillion in 2022, at an average annual rate of 2.7 percent, the contribution of agriculture value added increased by 2.9 percent on average each year from $ 3.0 trillion in 2013 to $ 3.8 trillion in 2022. However, the percentage contribution has remained steady, around 4.23 per cent. Perhaps this could be the bottom below which level, agriculture may not be able to support the global hunger.
Even at this level, hunger is a problem in parts of the world. India is the highest in terms of contribution of the agricultural sector to the GDP, of all the big economies, at around 18 per cent. The services industry is usually the most monetarily productive. It is not so in terms of creating goods. The percentage contribution to Indian GDP has been around 60 per cent between 2013 and 2023. And so, the contribution due to the manufacturing and industry is about 22 per cent, in the same period, with the percentage varying between 20 and 22 in India.
Micro Small and Medium Enterprises (MSMEs) are often the backbone of the larger industrial sector. In India, the MSME is one such. MSME is the organised, registered group of organisations which supply finished products to other industries, as also directly to the end customer. These enterprises are flexible, speedy in deliveries and concentrate on a few products. Technologically they may not be at the cutting edge, but a select few of them, who are supported by larger companies/ industry bodies like the CII, FICCI and others, have the latest technologies with which they can supply the market accepted current goods. MSME’s are typically spread across the length and breadth of India, and, often found in ‘industrial areas’. There are many such dotting the country. Some of these are shown in the map.
However, significant omissions are those in Himachal Pradesh, near Haridwar, Goa, Jamshedpur and Rajasthan. MSME’s located in these areas are able to take advantage of state and central government incentives as well as ‘always available’ utilities, like power and water. Of late, many transport hubs are also located close-by.
Ever since the first industrial area came up in Ambattur, through the efforts of a former President of India, R. Venkataraman, these have proliferated and have contributed significantly to the industrial growth. Not very assets heavy, these are physically as well as financially small operations. They often specialise in one or two products or services. The manpower is usually less than 100. Over the years, much development has taken place, and we will discuss some of these.
What began as small clusters, with a few units, have now become townships, in many cases, accommodating many diverse industrial units. Employment and trades practised have increased, and many of these units employ ITI trained personnel, thereby bringing in higher level skills needed to manufacture high quality goods. There has been a significant growth in the MSME sector in the last few years (Refer Table 1).
The average employment per MSME has remained more or less constant over the period. The government has ramped up the MSME sector, with Udyam registration portal, followed by other actions to legitimise and support this sector. The latest data on MSMEs, as on 5th December, 2024, is: 557,84,614 numbers of units employed 554 million persons, for an average of 9.9 persons per MSME. Of the MSME, those of interest for foreign companies trying to set up operations in India would be 729,527 Small and 68,819 Medium enterprises. There are 11 million manufacturing units in the MSME. These are perhaps of the greatest interest. Since the number of small and medium enterprises is only about 0.8 million, there are another at least 0.3 million micro units which are in the manufacturing sector. Could be more.
In the last ten years or so, the MSME sector has changed dramatically. These changes are making the industry a lot more modern, responsive, better financed, leading to faster delivery of higher quality products. In view of the overall level of education and awareness, the MSME entrepreneur has updated himself and has shown speedy appreciation of the new opportunities that have opened up due to the ‘ease of business’ improvements. The government has come out with Make in India, Start Up in India, Manufacture in India, with all these movements supported by schemes like PLI, PMGSS, etc., which have assured the entrepreneurs that the conditions have irreversibly changed for the better.
The changes begin with on-line registration of the MSME unit, under the Udyam scheme. This scheme has helped the govt to identify and recognise the units in the sector. In line with the DBT schema, any financial transactions are done via the bank accounts of these units, thus cutting out the middleman. As a result, the transactions are faster, accurate and reach the intended parties directly. Data transfer from the units is also facilitated, and such transfers help the govt to monitor progress and design new schemes for helping these units to increase their business. Since these units are small, individually they may not be able to obtain funds or assistance (for example, C&F for exports, LOI for exports), now they can rely on the govt to provide such assistance on a common basis. The PM’s employment generation scheme, the credit linked capital subsidy scheme, credit guarantee trust fund, raising and accelerating the performance of MSME’s and skill development and training are some of the schemes which have been undertaken by the government to speed up MSME upgrade. Table 2 indicate the contribution of MSMEs to the GDP.
Hence MSME become a key part of the supply chain catering to foreign companies establishing factories in India. Many such companies, like Nokia, Suzuki Motors, Schneider, Alstom, ABB, Bosch, have successfully learnt to deal with MSME. For example, Maruti Suzuki sources a large percentage of its parts form Indian MSME. Many foreign companies establishing in India will have to purchase 100 per cent of their inputs, in many industries, form local sources. MSME can form a substantive part of this. Quality of supplies by MSME is up to global standards, as can be seen from Table 3.
Why should foreign companies establish MSME supply chains
Clearly, there is a case for sourcing from MSME. Cummins is one company which has been Indianizing its operations since the early 2000’s. With plants in Jamshedpur, Pune and other places, the company found that manufacturing in India could be done cost effectively. However, they needed to identify a group of vendors who could serve the quality and quantity needs. To do this, the company went about studying the industrial areas where the MSME were located, and, over time, created a cluster of vendors for specific requirements for the manufacture of large automobile engines. The same methodology has been adopted by others, like, Maruti, Bosch, which have all settled down to stable relationships with MSME, quite apart from other suppliers.
The ideal mix would be heavier and more numerous parts, needing heavy capital machinery for manufacture, could be sourced from large companies, which have facilities like forging machines (Bharat Forge), large lathes and facing machines (for machining parts like girth gears for cement plants, turbines, parts for electric arc furnaces). The foundry industry is India is found both in the MSME and large companies (Mukand Iron and Steel). Some of these, like Mukand, are able make special castings weighing over 100 tonnes. Other names include Texmaco, MM Castings, which can manufacture large steel castings for railways, earth moving, jaw crushers, gyratory crushers, etc. The smaller parts could be sourced from the MSME. With a small portion of imports. The Indian government insists that localization of supply chain must be done in stages speedily. 100 per cent localization is desirable in many cases, but not all. So, one of the prime drivers for MSME is the ‘localization of supply chain’ clause for doing business in India.
The second reason would be the cost. Given that the quality of MSME has been tested and found suitable in many areas, cost is a consideration which can be quite attractive. Companies like Mahindra have established Total Quality Institutes in-house, where they train ‘quality specialists’, many of who go on to play a key role in developing and maintaining vendor quality. Vendors are now more amenable to allowing such ‘sensei’ (in the Toyota terminology), who will act as a facilitator to develop win-win situations for both the buyer and seller, instead of the usual zero-sum game, where, usually, the vendor is bullied into submission. Thus, it is not merely that the current cost is low, but will continue to be ‘under negotiated control’ of both the buyer and seller, which arrangement is now possible in India, thanks to the role played by CII and other industry associations to build in the TQM and business excellence culture in many of the MSME clusters.
The third reason for linking with the MSME is the ease of receipt of deliveries, continuously and on time. Owing to the phenomenal growth in the infra sector in India, in roads, railways, power, telecom, electronic payments systems, DBT, Jan Dhan, most of the country is now connected with modern business systems, to transact and offer value to customers, both, in India and abroad. The variety is wide and can meet with any demand for modern usage by customers worldwide. India today manufactures anything from a pin to a nuclear reactor, to a nuclear submarine, to a missile to a rocket which can take the country to the moon. With the PLI scheme, in the next few years, electronics chips will be manufactured in abundance in the country, along with many other new innovations. India is already the fifth largest recipient of patents in the world (refer Table 4).
With some 30 IITs and a similar number of IIMs, the Indian higher education system has received a huge fillip. With the proliferation of online education, more and more Indians are gaining training and skills to make a dent in the newly developing fields, like, IOT, AI, Big Data, Social Media Marketing, and so on. There is an upsurge in the ITI’s type of training too. Thus, the infra needed for speedy transport, a literate population to operate the newly emerging technology gadgets and software systems, the electronic payments systems backing, India is now poised as a powerhouse of value-added products. There are many B Schools now offering MBAs to family managed business persons, increasing their knowledge base, and enabling them to use business savvy methods to run their family heirlooms efficiently, and build for the future.
One significant development which deserves a special mention is the PMGSS – The Prime Minister Gati Shakti Scheme. This scheme, formulated and operated under the watchful eyes of the PMO, has made the development of ‘Integrated Infra’ a reality. The software and the systems developed newly enable all the concerned ministries to communicate with each other electronically in real time, and ensure that the development schemes are neither duplicated, nor wasted. The thoroughness with which the schemes under the PMGSS are now being executed bode well for the country. With this scheme, truck shelters, cargo depots for railways, online booking, speedy transport under the tried and tested GST regime, larger trucks, buses, etc. are all doing the rounds of the country, carrying passengers and goods to all corners. The newly laid road highways are state of the art, and are enabling the 3PL’s and 4PL’s companies to do profitable business. New transport hubs and depots are getting built, with large capacities and modern facilities, such as, rest rooms, toilets, cloak rooms, facilities to fill up petrol/diesel/ charge EV’s. These new ways of doing business in the Indian industry will surely reduce the transportation cost from about 10 to 12 per cent to 8 to 9 per cent of the total cost of goods.
Finally, India is now poised to become the third biggest economy, in a few years. Every day, one is hearing of new things coming up, such as, testing of new missiles and rockets, new submarines, launch of new ships. Vande Bharat is now here to stay and is being upgraded on a daily basis. The ‘Kavach’ system is under testing in different conditions, and is likely to be offered to other railways, just like how ISRO is carrying satellites for space odysseys. Hence, setting up a business in India is futuristic, makes a lot of sense, and, for foreign companies, connecting with the Indian MSME and helping it grow is a sure way to success.
About the author:
R Jayaraman is the Head, Capstone Projects, at Bhavan's S P Jain Institute of Management & Research (SPJIMR). He has worked in several capacities, including Tata Steel, for over 30 years. He has authored over 60 papers in academic and techno economic journals in India and abroad. Jayaraman is a qualified and trained Malcolm Baldrige and EFQM Business Model Lead Assessor.
MSMEs
Indian manufacturing sector
R Jayaraman
PLI scheme
Suzuki Motors
Schneider
MSME supply chains
Bharat Forge
Prime Minister Gati Shakti Scheme
IITs
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