How 'Green Finance' can strengthen the MSME sector

India’s Micro, Small and Medium Enterprises (MSMEs), like in most developing countries, are the cornerstone of economic development, with their leading role in providing large-scale employment and strengthening the complex supply chain of goods and services. Approximately 6.5 crore MSMEs in India contribute close to 30% of the GDP of the world’s 5th largest economy, employing around 11 crore people and with a share in its exports of nearly 40%.Given the sheer size and impact of the sector, active participation of MSMEs is critical to India achieving an inclusive, low-carbon economic transition, especially at a time when the Indian economy has unequivocally aligned itself to the global sustainable development agenda, led by the UN Sustainable Development Goals and the Paris Agreement.

Supporting MSMEs transition into the green economy

Simply put, green financing is any investment, such as a bank loan, made towards ‘green’ sectors such as renewable energy or ‘green’ activities, such as purchasing environment-friendly goods and services. There is a clear green transition visible across sectors globally as well as in India, with significant public and private investments flowing into it.

For example, the power sector in the country is transitioning from thermal power to renewables, with ambitious targets taken at the country level, policy actions being taken at the National & State levels and increasing credit inflow from the Indian Financial Institutions. MSMEs in the fossil fuel-based power sector value chain would need to shift their capabilities as well as their capacities to be able to transition successfully, which will require capital as well as access to market opportunities. Green financing can support such a transition.

At the same time, there is also an opportunity and pressing need to help MSMEs recognise how the green transition itself, such as through the adoption of greener technologies, can also strengthen their financial performance, lower operational risks and improve operational efficiency. While technology adoption is not readily associated as a focus for green financing, there is no denying that inadequate adoption of technology remains one of the top challenges for Indian MSMEs. Green financing can be a viable channel to enable MSMEs to invest in new technologies and innovations.

Private green capital can also play a role in augmenting the government’s efforts to incentivise the sector to upgrade their obsolete equipment and adopt advanced technologies and solutions, such as the special Credit Linked Capital Subsidy Scheme for MSMEs in the services sector, which provides for 25% subsidy for procurement of technologically advanced service equipment through institutional credit.

          The above figure highlights the Landscape of Green Finance in India

Green financing can also support closing the considerable skill deficit in the MSME sector. In many cases, there is a considerable gap between the requirements of the industry and the skilling its workforce receives.This skill gap further weighs down due to the lack of awareness among entrepreneurs towards modern, digital solutions. While many government-led and private-led skill development and capacity-building programs exist, notable among them being the Pradhan Mantri Kaushal Vikas Yojana, there remains considerable scope for green financing to help fill the gap.There has been significant growth in the availability of green financing globally and there is a deep interest among international green investors in the India growth story, which presents a significant opportunity for Indian MSMEs. India’s regulators and financial institutions must work towards enabling MSMEs to tap green capital from both domestic and global sources.

The possibilities for green financing to support Indian MSMEs’ sustainable transition are endless, but it will only be through the co-ordinated efforts of governments, financial institutions and the MSMEs themselves that we will be able to tap this opportunity to its fullest.

Source : https://www.thehindubusinessline.com/incoming