Enhancing Competitiveness of Manufacturing MSMEs -II
On their part should earn their right to grow by following the best accounting practices. Working capital management basically rests on four important factors:
 
  • Predictability of cycle
  • Material flows
  • Receivables – overdue
  • Independent credit rating agencies’ assessments
 
Some more essentials are set out below:
 
(i) Realistic assessment of morale building assurances: MSMEs would be well advised to cautiously assess morale building assurances during the current slowdown of the economy. MSMEs which accepted such assurances in the backdrop of the global recession of 2008 and built up capacities and kept up production levels, resulting in very high inventories, were devastated. Furthermore, when the demand for a product falls, there could be pressures on small enterprises not to cut output as this would eventually result in labour lay- offs. Units that accepted such persuasion faced disastrous outcomes.
 
(ii) Capacity expansion: Quite often, MSMEs come to the erroneous conclusion that their product would experience an unrealistically high increase in demand. Units which build up capacities on tenuous information invariably end up with serious problems. In a savagely competitive environment, it is these small units that end up in ‘fire sales’ which are available to buyers at attractive prices. There is merit in building up financial resources to avail of such opportunities rather than increasing the capacity of their existing units. It is time to realize that coopetition would bring better synergies among similar producers to meet up with temporary surge in demand.
 
(iii) Interest rate cycles and excessive dependence on bank credit: During the expansionary phase of the credit cycle, banks are only too willing to lend but during the downturn small borrowers are invariably the first casualties in being denied additional credit. As an abundantly prudent measure, MSMEs are well advised to seek bank credit essentially for inventory financing but be very cautious when using bank finance for capital expenditure. Excessive borrowing for capital expenditure generally puts MSMEs into distress during cyclical movements in the economy. It is good to learn to build equity gradually from out of the revenues and avoid excess leverage. They should learn to conform to financial discipline which alone will win them the trust of investors. Strategic partnerships and not overindulging in debt are the best bet in times of stress. It is good news for the MSMEs that the government of India has extended the interest subvention scheme up to March 2021. 
 
(iv) Importance of an Appropriate Exchange Rate: MSMEs account for about 40 percent of exports. It is unfortunate that there is a widely held perception that a strong rupee exchange rate reflects good macroeconomic management. This is clearly erroneous. Large industry is generally import intensive while small industry is export intensive. Hence a strong exchange rate of the rupee (i.e. an overvalued rupee) helps large industry and hurts MSMEs. It is not as if the exchange rate should be excessively undervalued. As a thumb-rule, over the medium/long-term, the nominal exchange rate of the rupee vis-à-vis the major industrial country currencies, should be adjusted downward on the basis of inflation rate differentials between India and the major industrial countries. An overvalued exchange rate makes MSMEs uncompetitive in international markets. MSMEs should not attempt to be forex traders; they should concentrate on their own line of production. 
 
As a staunch optimist and believer in the excellent capabilities of MSMEs in innovation, incubation and future growth, least expensive handholding, mentoring and counselling, the MSMEs as process consulting tools have immense scope to become highly competitive both domestically and globally if certain synergies are built into the system. Telangana Industrial Health Clinic Ltd has adequate capabilities in this exclusive portfolio of handholding, mentoring and counseling as a preventive and stress relieving measure.
 
Supply Chain to Value Chain
 
There is need for building ‘pools’ or aggregators to gain both cost advantage and brand image through co-branding of products.
 
India Mart are trying to do supply chain aggregation. MSME online Bangalore is also trying to evolve an ecosystem where a lot of questions of MSME are getting answered by about 50 consultants and they have started a CEO Club for taking MSME entrepreneurs to the next level by having a monthly meeting. Jeevan is trying to develop a 360o view for developing the ecosystem in Hyderabad on the Hub and Scope model. These are welcome initiatives, no doubt, but they need traction. 
 
Many of the user population should not merely know such initiatives but should also know how best to access them. Second, by aggregators, I mean those that are fully capable of building a common brand for a set of products from the micro and small manufacturing enterprises through building their capacities and capabilities to rise above their existing levels, introduce those practices and technologies that take them closer to the global standards even if sold in the domestic markets and secure good prices at their doorstep within the promised wait-in period. These would mean investment on the part of the aggregator and a price that the aggregator should legitimately get for such services without losing the competitiveness in the market. Ipso facto, it would mean that at the firm level, cost reduction should take place at each link in the value chain. There are different ways of doing it: 
 
  • The industry associations can develop a marketing arm and establish net linkages with e-commerce players; 

 

  • They can help the industry avail the host of incentives waiting to be used from the GoI-MSME schemes; 

 

  • They can establish linkage with the NSIC, the MSME Development Institute(MSME-DI) and such other institutions. 
 
MSMEs should earn their right to grow. This happens only when they are quality conscious where precision, functionality and producing premium products will be their driving forces. Their passion and pride rest on satisfied customers. Intellectual property rights, improved technology processes and getting equity to fund such technologies are all their sustainable future. Employee retention strategies depend not just on higher remuneration but on building trust and social cohesion as also gender equity. 
 
MSMEs should also realize that death is a process of development. They must know when to exit from the enterprise and how. Strategies to clear sovereign dues and realization of overdue creditors on a mission mode pre-exit have a clear role. Ignoring them will be suicidal.
 
*Author of ‘The Story of Indian MSMEs: Despair to Dawn of Hope’ (2019) is an economist and Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., Hyderabad (www.yerramraju1.com
 
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