MSMEs are a crucial part of the Indian economy and have contributed greatly to the socio-economic growth of the country. Over 40% of India’s workforce works in the MSME sector. They are made up of companies in the manufacturing sector as well as the service sector. It not only creates employment opportunities but also contributes to the development of backward and rural areas of the country.
Indian MSMEs have historically followed the traditional route, supplying domestic markets through direct-to-consumer (D2C) sales or as part of the value chain of B2B giants. With the ever-changing demands and tastes of their customers, they are increasingly trying to keep up with the dynamics of the industry by developing innovations and customizations in their services. According to the IBEF, the number of registered MSMEs increased to 2.5 million in 2020 following the implementation of the Udyog Aadhaar Memorandum policy. According to IBEF estimates, there are currently around 6.3 million MSMEs in the country. According to the Ministry of Statistics and PI, the share of gross value added (GVA) of MSMEs in India’s GDP for the year 2019-2020 was 30%.
Indian MSMEs produce over 6,000 products for local and international consumption. According to data from DGCIS, the value of MSME-related products in India was $147,390.08 million during the period 2017-2018. These statistics clearly show the valuable contribution of this sector to India.
The MSME industry is more susceptible to negative impacts on its supply chain, labor supply and market demand for goods and services than large enterprises. This is mainly because MSMEs, compared to large industries, lack adequate resources, including monetary and administrative resources, and are unprepared for such long-term disruptions. According to rough estimates, the COVID-19 pandemic has had an impact of 30-50% on MSME incomes. Many companies in this sector are running out of cash and capital, while many others are on the verge of collapse.
Information and Communication Technology (ICT) can drive gigantic growth in the socio-economic progress of the Indian economy by helping the MSME sector to reinvent and digitalize for better productivity and higher profits .
To a large extent, the question of whether the MSME sector should jump on the digital bandwagon is now an old story. Digitization is not really a choice but rather a necessity, which will bring stability to their business performance and expand their reach. In a survey conducted by MSC in India, Indonesia, Kenya and the Philippines, it is unfortunate that only 38% of respondents revealed that they had either increased the use of digital payments or started using payment methods. digital payment for their deals and transactions.
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The advantages of digitalization are innumerable for MSMEs, which allows them to differentiate themselves from their competitors. E-commerce platforms allow MSMEs to have better access to various transnational markets and can reduce risks within supply chains.
It will help promote profitable trade policies. MSMEs that use the Internet reduce their costs by around 22% to obtain raw materials, manage inventory and increase productivity.
Digitization will also contribute to better customer engagement. MSMEs that govern digitally can effectively regulate their clientele by using social media platforms to ensure higher levels of engagement. The lockdown has given a big boost to e-commerce and online shopping, with 2020 and 2021 seeing more than 75% new customer base on these portals. As shoppers have drastically changed their shopping habits, digitization has become necessary to run a business.
From a financial point of view, this leads to broader and fairer access to funds. As MSMEs improve their digital footprint, they become more visible to banks and financiers. MSMEs can access credit easily, as monetary institutions can use digital data to more accurately assess credit threats.
Digitization would help increase geographic reach and acquire new consumers. With the development of digital platforms, the growing importance of e-commerce and the lowering of barriers to entry, MSMEs can expand their market and resist the limitations of physical location. E-commerce has also enabled MSMEs to cater to rural and remote customers, thereby expanding their customer base. In Africa, 82% of industries fully engaged in cross-border e-commerce are micro and small enterprises. E-commerce also provides easy access to international markets for businesses led and owned by women. And a similar trend is seen in India.
Customer credit management is another functionality facilitated by digitization, as MSMEs can trace customer credit and can also set a credit limit for customers. It can act as a risk mitigation technique and control credit loss and help maintain efficient cash flow in the business.
However, digitization is not an easy path for this sector to take, mainly due to the traditional nature of the activities that this sector is accustomed to. MSMEs need more promising access to e-platforms, better payment and delivery services, simplified customs procedures, a vigorous data privacy system and well-targeted talent building to ensure that they thrive on e-commerce.
The Indian government recently launched the “Digital Saksham Initiative” in partnership with MasterCard to improve the ability of MSMEs to better market their products, through better know-how and virtual payment recognition. The “Digital MSME Scheme” is launched to facilitate Information and Communication Technology (ICT) in the MSME sector by adopting ICT tools and applications in production and industry procedures. Digital MSME Scheme is also intended to raise awareness, strengthen e-developments and platforms, enhance literacy, training and foster digital marketing in the MSME sector.
Digital literacy will play an important role in catalyzing the use of digital technologies and closing skills gaps. The Indian government, along with EdTech start-ups and many other tech companies have come together to help MSMEs grow their business online. But there is still a long way to go and with the third wave affecting most regions, the MSME sector will need to prepare and be digitally agile sooner rather than later.