Rethinking digital solutions for the Indian MSME sector

If there is one sector that has faced the highest degree of disruption in recent years, it is the Micro, Small and Medium Enterprises (MSMEs). The last few years have posed an existential crisis for many small enterprises around the world. Yet, they continue to create jobs as well as support urban and rural economies. The scope and scale of the contribution of these enterprises to a country’s economy and its people can be understood from a World Bank estimate, which suggests that SMEs represent about 90% of businesses and more than 50% of employment worldwide. Further, they are likely to play a pivotal role in addressing the need for creating 600 million new jobs by 2030 to absorb the growing workforce. In India, these enterprises contribute to over 30% of Gross Domestic Product (GDP) and employ over 110 million people. Over the years, the central and state governments have proactively worked to secure and strengthen MSMEs. They were quick to come to the aid of the sector as it grappled with the twin challenges of cash flow crunch and demand downturn during the COVID period. From introducing a revised criteria for classification of MSMEs, providing collateral-free loans, to infusing equity into the sector, the government checked all boxes. This was one of the reasons why the Indian economy could bounce back in record time.

Moving to 2023, in an increasingly digital economy, the MSME sector will have to ride on the digitisation wave to scale and stay competitive. So, what will it take for the sector to digitise operations, including their forward and backward linkages?

Strategy supporting business growth
By now, it has become clear that digitisation can bring unprecedented benefits to traditional businesses. However, before pushing for MSMEs’ digital adoption, it’s important to understand why an enterprise goes digital. To accurately answer that question for an entire sector, one must look beneath the surface to evaluate behaviours, capabilities, and enablers that influence digital adoption.

A study commissioned by Mastercard during the COVID period in 2020 suggested that the use of digital tools for business management and marketing is uncommon across all segments, even at higher levels of digital maturity. In fact, digitally mature segments were highly likely to keep a physical record of their sales and transactions. The findings made it amply clear that a well-thought-out strategy, where digitisation is viewed as a reliable and indispensable growth driver, is the need of the hour.

Relevant and reliable solutions to enhance ROI
While there is no dearth of digital tools, platforms, and solutions for MSMEs, often, they don’t find takers or do not yield the desired outcomes. That’s because these offerings fail the key return on investment (ROI) criteria. A majority of micro and small units in Tier II and III cities in India do not have the resources to invest in modern technology that enhances business returns. The government has already addressed a large part of this problem by building a robust digital public infrastructure, and the onus is now on fintechs and other technology providers to leverage that infrastructure and build solutions that are affordable and highly valuable for users. Custom solutions for small businesses
Firstly, digital tools and solutions have to be tailored to very specific business needs and be convenient to use. For example, a small factory owner struggling to access cost-effective cash flow financing from the bank may not be enticed by a cutting-edge digital platform unless it helps in speeding up the process of securing credit. Similarly, a high-tech bookkeeping tool may not appeal to a small grocery store owner who has never used a Point-of-Sale (PoS) machine.

Secondly, a key requirement for digital offerings is the element of reliability. The mainstreaming of digital tools in the vast MSME sector is only possible if these tools are secure and dependable. Take, for instance, the case of digital payment solutions. For a society that has traditionally been heavily cash-reliant, embracing digital requires a massive shift in mindsets and attitudes. However, the resounding success of India’s digital payment solutions shows that people and enterprises are willing to make that shift if the alternative presented to them is reliable.

Finally, the digital tools designed for MSMEs have to be effective in addressing the complex issue of supply chain and distribution management. Traditional supply chains are replete with ad-hoc processes, where raw materials are often sourced through numerous vendors and fragmented players. That’s why small and medium enterprises need specific solutions that can streamline this process and help them improve efficiency. On the distribution side, there is a need for solutions that help MSMEs gain access to new customer segments through tech, such as cloud-based applications and data analytics, which allow them to gain key insights into market trends and consumer journeys. This can power quick decision-making and lead to higher sales and revenues for the entire sector.

Global effort to empower MSMEs
Some of the issues raised in this article will take prominence at various G20 and B20 meetings involving government functionaries and business leaders, who will deliberate on ways to fuel growth by empowering MSMEs. With India holding the G20 Presidency, the stage is set for the country to present a model of global partnerships that have tasks cut out for every stakeholder; the government creates infrastructure, the tech industry uses it to build solutions, and social organisations take those solutions to the grassroots and train enterprises in using them.

At Mastercard, we have partnered with various industry bodies, such as the Confederation of All India Traders (CAIT) and the Confederation of Indian Industry (CII), to train over 2.5 million small merchants across the country in adopting digital payment solutions. In line with the government’s various digitisation initiatives, such as the Udyam portal, Government e-Marketplace (GeM), as well as Trade Receivables Discounting System (TReDS), we will continue to explore and adopt new ways to digitally empower the MSME sector.

At a time when the global economy battles with multiple crises and impending uncertainties, a collective and comprehensive effort to strengthen the MSME sector can power economies and empower societies, thereby taking us closer to achieving the goal of sustainable development for everyone, everywhere.

– By Vikas Varma, Chief Operating Officer, South Asia at Mastercard