MSME incentives for MSME Sector and PLI incentives for large scale manufacturing

Change in MSME Definition in May2020
Further revised on 1st June 2020 as below.
MSME definition widened further to include firms with up to Rs 250 cr turnover

The earlier definition was linked to investment in plant and machinery, but the government was pushing for turnover-based classification. However, it was argued that any change in definition to only a turnover-based would mean traders and assemblers who import from China and put together a product, could benefit at the cost of local manufacturers.Hence only turnover cannot be the criteria.With the current amendment investment limit is increased but it is now capped by Turnover limit

Relevance of MSME 

Production Lined Incentives for large scale manufacturing

SME Export Orientation

A nation’s economy cannot grow if its exports do not grow. That’s almost a truism, given that exports contribute to valuable foreign exchange, which gives a country better bargaining power in the world’s markets. Just as important is exports’ role in boosting the economy by creating jobs; demand for Indian goods abroad will result in production going up, which translates into more jobs. Clearly then, it makes sense for a country to encourage exports. But it’s not enough for the government to put in place policies and schemes to promote outward shipments. Government policies cannot create and grow markets -- that’s something exporters have to do. Sure, the government can fight for improved bilateral trade ties, and can fight protectionism, but when it comes to creating demand, exporters have to do their bit.

According to the Ministry of Micro, Small and Medium Enterprises, MSMEs accounted for 40% of India’s exports in 2018. This is a number that can easily go up if a number of systemic and operational issues are resolved. These include poor export distribution channels, unfamiliarity with the legal and policy frameworks of other countries, lack of adequate trade finance, and poor quality of goods. The government has set up export promotion councils that serve to train and raise awareness. It’s up to exporters to use this information to expand their footprint in global markets.

When it comes to the export of services, India is among the undisputed world leaders in the sector. Manufactured goods exports, however, are an entirely different story. ‘Made in India’ products, particularly in quality-conscious markets like Europe or North America, are often instinctively not associated with high quality, and are rarely priced low enough to make “poor quality” worthwhile to buyers. Indian exporters have also had to deal with the Chinese behemoth, which churns out vast quantities of cheap, mass-produced goods. The country’s have largely tried to compete with this, but have not been able to slow the rampage of the Chinese export goods juggernaut.

The general cry in India is that MSMEs cannot afford to take on the might of China’s state-led investments. Our contention is that MSMEs cannot afford to ignore this. Of course small exporters do not have the financial wherewithal to fight this, but they can play to their strengths and create a dedicated market for their goods. Below, we look at five ways in which MSMEs can create and grow their export markets without taking on competition from mass-produced cheap goods from competing exporters:

  1. Invest in innovation: Value-added products command a far greater price than plain vanilla goods. This has to be among the most obvious statements ever made, but it’s surprising to see how few companies follow through on it. Even small companies can -- and should -- invest in research and development, or at least outsource this aspect. We are also not talking of just big-bang disruption, although that’s good too. Innovation can take place in myriad sections of the trade pipeline -- from manufacturing and packaging, to even distribution. The focus has to be on staying efficient and creating value, which can make Indian exporters more lucrative to more international markets.
  1. Set quality standards: Indian goods have an unfortunate reputation for shoddy quality, and this often leads to prices being beaten down. MSMEs particularly cannot afford to have shipments rejected on quality grounds (and the hordes of ‘export reject’ shops in India show the extent of this rejection). While quality controls are essential, what is needed even more is knowledge of the export market’s needs, requirements, and regulations on quality. What works in one market may be rejected in another. For instance, the European Union and the United States have different quality standards. It is up to the exporter to understand these differences and meet specific standards for each market.
  1. Building a brand: This is one aspect which MSMEs are only now recognizing. For a long time, critics of Indian exports have demanded to know what memorable brands -- if any -- have come out of India. It is only recently that companies have started investing in promoting their brands. This effort has definitely received a boost from attempts to promote the ‘Made in India’ tag in a positive light. From being associated with mass-produced shoddy goods, the tag is now being associated more with premium, often hand-crafted and artisanal, goods. Of course, a lot more needs to be done, and exporters need to understand the need to invest as much in brand promotion as in quality control if they are to catch the eye of markets.
  1. Improving logistics: This seems like a no-brainer, but it is something companies often ignore. Goods, particularly perishables, lose a lot of value if they are not transported properly. Whether it is food products or pharmaceuticals, the process of getting it from the factory gate to foreign markets has to be improved substantially, and then the quality maintained. Companies need to consider investment in cold-chains, warehousing, and the like. After all, simply producing a product serves no purpose if it cannot be taken to the market.
  1. Supply chain: When we talk of exports, we often forget that production depends on domestic suppliers. Large export-oriented companies have a supply chain that feeds in to their production. Smaller companies, however, often deal with recalcitrant suppliers and face production difficulties as a result. Exporters need to have a reliable supply chain in order to ensure that production is not disrupted and they can meet order demands from markets consistently.

This is of course not an exhaustive list of steps. Indian MSMEs have miles to go to expand their export markets and solidify their overseas presence. Meanwhile, there are other issues that still need to be tackled as well -- access to trade finance and capital, for one. Banks, particularly in the post-Nirav Modi and post-Mehul Choksi environment, are shunning smaller companies for fear of loans remaining unpaid. When they do offer capital, it is usually against a demand for collateral that an MSME may not have, or can ill afford. While the government is only just beginning to accept that alternative lending sources can help, fintech startups are already stepping in to fill the gap and offer credit. Giving this new batch of lenders adequate support needs to be a key policy move going forward as well.

There is also the burning issue of countries turning protectionist to save their own markets. This hurts exporters in a big way. It is up to the government to work around such protectionist measures and ensure that Indian exporters are not hurt in the process.

As we have already mentioned, export promotion bodies are doing their bit in making exporters aware of the changing export regulations in other countries. It is now time for exporters, startups, and government to work together to improve the country’s exports.

Article by  Pushkar Mukewar