Challenges faced by MSME

In the vibrant landscape of India’s economy, Micro, Small, and Medium Enterprises (MSMEs) stand as a formidable force, contributing significantly to employment generation, GDP growth, and overall economic resilience. As of recent statistics, the MSME sector in India comprises an astounding 6.33 crore enterprises, with micro enterprises constituting an impressive 99% of this total. These enterprises not only serve as the backbone of the economy but also reflect the entrepreneurial spirit that fuels innovation and prosperity. 

 The importance of MSMEs becomes even more evident when considering their employment impact, with nearly 93.95 lakh individuals finding meaningful livelihoods within this sector in the fiscal year 2022. With a notable contribution of around 27% to the nation’s Gross Domestic Product (GDP), the MSME segment’s influence on India’s economic fabric remains unmistakable. 

 However, beneath this promising facade lie multifaceted challenges that have hindered the sector’s growth and potential. The COVID-19 pandemic, marked by unprecedented lockdowns and disruptions, laid bare the vulnerabilities faced by MSMEs, exposing the gaps in their resilience. The repercussions of the pandemic extended beyond immediate closures, leading to permanent shutdowns for a significant number of enterprises and prolonged disruptions for others. Even as the nation transitions into a post-pandemic era, the MSME sector continues to grapple with a host of challenges that demand innovative solutions. 

 In this exploration, we delve into the intricacies of the challenges faced by India’s MSMEs, ranging from financial constraints and credit score limitations to supply chain disruptions, marketing gaps, and technology-related hurdles. By understanding these obstacles, we can gain insights into the complexities of nurturing and sustaining the growth of this crucial sector. As we navigate the intricate web of MSME challenges, we uncover potential pathways to fortify these enterprises, ensuring their enduring contribution to India’s economic vitality. 

   As per a report, there are more than 6.33 crore MSMEs in India. The micro enterprises account for 6.30 crore or 99% of the total number of MSMEs in India. The small sector consists of 3.3 lakh (0.5%) MSMEs and medium sector is estimated to be 0.05 lakh (0.01%) companies (Source: IBEF Blog). 

 In terms of employment in the MSME sector in India, a government report suggests that in FY22, total 93,94,957 people were employed by MSMEs which are registered on the Udyam portal. 

 The MSME sector’s contribution in GDP stood at around 27% in 2020. In fact, it has revolved around 30% for more than a decade or so. This insightful statistics highlights importance of the MSME sector in India. 

 Although the contribution of MSMEs is enormous, growth of the MSME sector in India has been hampered due to various reasons. The pandemic induced lockdown impacted the sector adversely. 

 Mostly the MSME sector was resilient enough to bear the impact of COVID-19 induced lockdown. However, not all businesses could stay afloat. As per data, nearly 6,000 MSMEs got permanently shut down during financial years 2020-21 and 2021-22. Alternately, for many companies, business activities were disrupted for long time. A report on MSME sector in India suggests that 70% businesses remained disrupted till August 2020 while 40% businesses remained disrupted till February 2021. Thereon, the demand increased gradually. Post pandemic, the MSME sector continues to face multiple challenges. 

 Poor cash flow: 

 Managing cash flow and keeping the money rolling is an important aspect of any business. Many MSMEs do not update books of accounts regularly. This affects the business in multiple ways. If books are kept up to date, the business owner gets a quick overview of pending payments and can follow up with those customers. This ensures regular in-flow of money which can be rolled into the business again. 

 Moreover, considering that most businesses were going through difficult times, there was the additional challenge of not finding enough customers or receiving payments in time. This naturally led to cash crunch leading to working capital challenges for business. The government has introduced low-interest government loan schemes, subsidies, and exemptions, to help MSMEs conquer financial challenges. 

 Low credit score: 

 Many times, loan application of business owners is rejected due to poor credit score. Even if a bank or NBFC approves the loan, rate of interest is too high. The low credit score and the resultant issues are mainly a result of non-maintenance of books of accounts. Therefore, it is important to keep the books of accounts updated and accurate. When all transactions are documented and tax returns are timely filed, business loan approval process becomes easy. 

 In general, it is advisable to maintain a credit score of 680+ to be eligible for all business loan types from banks and NBFCs. 

 Higher cost of raw material: 

 The pandemic caused several disruptions – one being the fluctuation in raw material prices. For MSMEs this emerged as an additional obstacle to growth. 

 As the volume of business was low, the cost of procurement got higher. This resulted in lower profit margin and affected the business adversely. 

 Marketing: 

 MSMEs mostly rely on word of mouth for marketing. Although they understand the importance of marketing activities, they do not have the required skills and resources for undertaking marketing activities. 

 In the era of digitization, ways and means of marketing have changed drastically. Social media has an enormous role to play. However, it needs a fair amount of planning and dedicated resources, which MSMEs usually lack. Hiring a full-time resource may not be a feasible for MSMEs however, though a freelancer can be hired for the role. 

 This will ensure that the website and social media accounts are regularly updated and your digital reach expands. 

 Technology related challenges: 

 MSMEs are often not confident to adopt new technology. This could be due to various reason including lack of dedicated resources to update the technology, lack of funds, lack of knowledge, etc. However, it directly impacts the production and quality of the output. It is essential for business owners to keep themselves updated and analyse the right time to upgrade machinery and technology.