Digitalisation, credit growth, government policies to drive MSME growth, say experts

  • The government’s Open Network for Digital Commerce (ONDC) initiative, which seeks to democratise e-commerce, is seen aiding increased digital adoption by MSMEs.
  • As per RedSeer, India MSME digital services market is set to grow 6x in the next five years.
  • The MSME ministry plans to boost MSME contribution to the GDP to 50% by 2025.

Digitalisation is playing a crucial role in accelerating growth in the Indian micro, small and medium enterprises (MSME) sector. And the government’s Open Network for Digital Commerce (ONDC) initiative, which seeks to democratise e-commerce, is likely to spur increased digital adoption by MSMEs, says a report by Elara Securities.

The report also shared a survey finding (published in June 2021) conducted by Bluehost, a web hosting solutions provider, that said Indian MSMEs are rapidly adopting digital payments over cash – 72% of payments were through the digital mode compared while cash transactions accounted for 28%.

Not only are new small businesses embracing digitalisation, more and more existing MSMEs are going digital too. This is, however, far short of that achieved in countries like the US and China.

The percentage of Indian MSMEs that turned online grew from 32% in FY16 to 55% in FY20, as per data from RedSeer.

“To compare, in the US, 54% of small businesses used emails in 2017 and in China, 89% of the MSMEs were already digitally connected by 2015. This indicates significant growth headroom in terms of digital connections in India alone,” said a report by Elara Securities, adding that currently only 4% of MSMEs are truly digitally engaged, the report said.

As per RedSeer, India’ MSME digital services market is set to grow six times in the next five years, taking the market opportunity from $1.5 billion to $9 billion by FY25, at a CAGR of 43%. About 73% of the growth is estimated to come from a surge in the number of digital businesses and 27% from higher average spend on digital services.

ONDC to build digital backbone for MSMEs
Covid forced many MSMEs to embrace digital. Now, there is a larger incentive for small businesses to go digital thanks to the government’s Open Network for Digital Commerce (ONDC) initiative. It provides opportunities for small businesses to grow via e-commerce, by connecting them with network partners – taking products digital.

“ONDC is expected to expand the user base for all digital/e-commerce apps/platforms in a way similar to UPI, which revolutionised the payment industry and increased the overall usage of online payments,” said the Elara Securities report.

The platform will make it easy for small businesses to take their service portfolio online and become digitally relevant to their customers.

“With such growth headroom, ONDC may bring in more and more MSMEs into e-commerce’s fold and accelerate the shift from offline to online,” Elara said.

There were 80.16 lakh registered MSMEs as on March 31, 2022 – contributing close to 26% to India’s gross domestic product (GDP). The sector generates about 12 crore jobs across industries/regions and is a major wealth creator at the grassroot level, as per the report.

The MSME ministry plans to boost its contribution to the GDP to 50% by 2025. It also aims to double the number of MSMEs in the next five years with a focus on high-growth industries.

“The sector holds immense potential in supporting India’s ambitious vision of a $40 trillion economy by 2047,” says a recent report by industry body Assocham.

Improving credit growth
Apart from the digital push, the government has been putting in all efforts to aid the sector’s quick growth through nuanced policy support.

“Rural demand traction, improving MSME credit growth and manufacturing revival and supportive government/RBI policies are enabling a prolific seedbed for MSMEs,” said the report by Elara Securities.

To give the sector a further boost, industry body Assocham recommended that banks can fund MSME working capital requirements against GST filings.

“Banks could fund working capital requirements against GST filings, which are more reliable quantitatively, as compared to collateralized loans. This would not only enable MSMEs easy access to funds but also spur formalisation through GST registrations,” Assocham said.

The industry body also added that the government could come up with a structure similar to real estate investment trusts (REITs) and infrastructure investment trusts (InVITs) to lend specifically to MSMEs via pooling funds.

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Donovan Larsen

Donovan is a columnist and associate editor at the Dark News. He has written on everything from the politics to diversity issues in the workplace.

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