MSME policy needs to be more realistic: report

Though the Twelfth Five Year Plan has put forward a ‘strategy triangle’ involving micro, small and medium enterprises (MSME), India needs a more aggressive approach to inclusive development, especially in the context of the global economic crisis, says India MSME Report 2011, brought out by the Kochi-based Institute of Small Enterprises and Development (ISED).

The 200-page report is the outcome of the ISED's year-long research overseen by an international team including Kiran Karnik, member, National knowledge Commission, and T S Papola, member, Prime Minister’s Advisory Group on MSMEs.

The report says that Indian policy makers have illusions regarding the role of macro fundamentals, especially growth rates. "Macro fundamentals by themselves cannot give a true picture of the state of the economy. Accelerated growth rates often creates distributional anomalies. Thus, in the long run, growth itself is likely to be retarded," it says.

In India, the latest findings emerging from the Fourth MSME Census show a mixed picture of the sector. An overall scaling up is visible, both in terms of number of units, and of the average investment size. But the sector also shows a marginal growth in the number of sick units from 13.98 per cent in 2001-02, to14.47 per cent in 2006-07.

The death rate has come down from 39 per cent to 21.6 per cent during the period. But, growth rate of the sector is greater than that of the overall growth of the economy. States like Uttar Pradesh have demonstrated greater birth rate of MSMEs.

The report says innovation is the sine qua non for growth of MSMEs, which have considerably weakened, and calls for key steps. "Credit by itself will not help; what is needed is relevant financial products that address the life cycle of the firm. This means that the banking sector should introduce new and relevant financial products that address the reality of SMEs on the basis of an identified business case," it says.

Rather than stereotypes such as cluster, microfinance, and venture capital, the focus should be on informed interventions. In the states, competition for attracting FDI, by itself, will not help. There should be a new thrust on innovation and local economic development with focus on IPR. Public-private partnership should take a new form, with active involvement of NGOs, and other actors, says the report.

It also calls for making the Twelfth Five Year Plan more realistic. MSME programmes, in many cases, are considered as a stop-gap arrangement. The effectiveness of policy depend upon the different phases of the enterprise development cycle. Both governments and NGOs have a key role to make relevant interventions at these specific stages appropriately, and to ensure meaningful results.

This alternative approach would require a focus on human resources. The financial institutions should shift themselves to an approach of investing in entrepreneurship, rather than on enterprises. This will lead to better targeting of their lending policy.  Women and youth should be ensured the care they deserve, by providing entrepreneurship education, it says.