GLOBAL VALUE CHAINS EXPANDING BOUNDARIES OF INDIAN MSMEs

MSMEs are a significant driver of the growth of the Indian economy, which is why they receive consideration of the policy makers. The 73rd Round of NSS survey on Unincorporated Non-Agricultural Enterprises in Manufacturing, Trade and Other Services Sectors (Excluding Constructions) quantifies the total number of establishments to be 633.92 lakh enterprises of which only 4,000 were large enterprises. Almost 95.58 percent of these organizations are recorded as micro enterprises, the rest being small and large. With almost 51 percent of the MSMEs based in rural areas, the sector contributes towards the economic empowerment and social inclusion of the marginalized through the generation of employment. The significance of the sector is evident from the government’s numerous initiatives to boost its growth, the most recent one being the 12-point initiative launched by the Honorable Prime Minister for overhauling the entire MSME ecosystem towards making it more robust, competitive, and resilient in the national as well as the global scenarios.

The sector’s contribution to the national GDP is eight percent. It contributes about 6.11 percent of the manufacturing GDP, 24.63 percent of the services, and 33.4 percent of India’s manufacturing output. It’s contribution to exports stand at 40 percent.

The budgetary allocation to MSME for the year 2018-19 was Rs. 3,790 crores for credit support, capital, and interest subsidy and innovations. Through providing rebates in the interest rates, collateral free loans, incentivizing exports, and introducing mechanisms for better accountability and transparency, the government is promoting the growth of MSMEs.

EXPORTS FROM INDIA

India contributed to 1.68% of the total global exports in 2017.1 India exports a diverse range of commodities over large geographical expanses. Merchandise Exports during 2017-18 were estimated to a total of US $ 302.84 Billion registering a growth of 9.78 per cent in dollar terms vis-à-vis 2016-17.

CONTRIBUTION OF INDIAN MSMEs IN THE PRODUCTION OF TOP EXPORTED ITEMS

The list of top 10 exported items and the commodities showcasing maximum growth for every country underpins the importance of MSMEs in the manufacturing and contribution in exports of almost every product in the manufacturing sector. Approximately 98.5 percent of the industries fall under the category of MSMEs in India. While some of these enterprises are directly engaged in exports, majority of the MSMEs are engaged indirectly in the export ecosystem through manufacturing intermediate goods for larger industries engaged in exports to international partners. As per the IIP, there are approximately 21 sectors and over 7,500 commodities produced by the MSMEs. The MSMEs contribute in the production and in the ancillary activities of almost every commodity produced in the country.

For instance, the Gems and Jewelry sector contributing about 6%- 7 %3 of the nation’s GDP, is also among the largest exporter of gems and jewelry in the world.

It accounts for 95% of the diamond exports and is the fourth largest exporter of gold jewellery. The industry comprises of gold, variety of diamond and platinum and varieties of precious and semi- precious stones. The Gems and Jewelry industry like every other MSME sector is highly scattered and unorganized. The gold processing industry has over 15000 players across the country, of which only about 80 players have a turnover of over US$ 4.15 million (Rs.200 million).

GLOBAL VALUE CHAIN

The liberalization policies of the 1990s opened India’s doors to global competition with reduced protectionism. For exports, challenges of reaching prescribed standards at competitive prices which requires optimum production techniques were felt. MSMEs which constitute a huge chunk of the industrial framework were challenged given their limited scope of investment in capacity building and infrastructure development to be able to meet the requirements of the international markets.

THE GLOBAL MARKET

The definition of trade and market today has changed both metaphorically and geographically. The concept of complete manufacturing of a product at a single place has given way to a diverse array of sourcing of raw materials, processing, and development of the final product. We are moving towards a market which is not determined by borders but by the ability to produce goods and services of a required standard. This expanded platform, the ‘Global Market’, has been widening and provides the scope to engage experts from across the globe to produce the best quality products.

The Government of India has been responding the challenges by providing a conducive ecosystem where the Indian industries can compete internationally. India has been proactively adapting to the global changes and has been promoting bilateral, regional, and global partnerships to promote trade. MSMEs account for almost 98 percent of the industries in India which makes it imperative to devise strategies for development and linking them to the global market. The Government of India has taken multiple steps and launched landmark program like Make in India, Digital India to project our country’s strength in manufacturing and services. MSMEs engagement in the global value chain offers them an opportunity to grow through exposure to a large customer base and access to technologies which would promote quality matching international standards. Nevertheless, it brings along the challenges of meeting the standards of the supplying country. Every country has its own requirements of standards of commodities exported to their country, hence unifying with the GVC would mean that the Indian SMEs must be adequately equipped to meet these requirements.

IMPORTANCE OF GVC

GVCs allow SMEs to specialise in specific segments of production, rather than having to master all processes required to produce finished goods and thus integrate into segments of global production chains. In turn this pave the pathway towards economic development through productivity growth, exporting more sophisticated products, and a less concentrated export basket (Kowalski et al., 2015). This integration can occur on the ‘output’ side, through direct cross-border exports and also indirectly, through upstream supplies to larger firms, which provides a vehicle to overcome trade related costs and challenges. But SMEs can also benefit on the ‘input’ side, through access to cheaper inputs and capital goods as well as through better sourcing or use of foreign technologies, products or knowhow (Lopez-Gonzalez, 2017). Apart from directly benefitting in terms of growth and increased revenue of the firms, the MSMEs also benefit from the learning and awareness on innovation and new updated technology, which often comes as a spillover of working with international vendors. Participation in the GVCs provides the MSMEs with increased avenues of learning and understanding of the international best practices and replicate them in their production environment. This indirectly aids in capacity building of the enterprises while also contributing to the production process.

HOW CAN MSMEs INTEGRATE INTO THE GLOBAL MARKET?

MSMEs can integrate their functions into the global market either through directly engaging with the global players or being a part of the supply chain by producing for the bigger firms which are linked to the global vendors. The global networks can be perceived more like a multi-tiered structure where multiple vendors take part in the production process for a larger enterprise which in turn manufactures for the international vendor. Direct participation in GVCs takes place when SMEs export intermediate goods and services for further processing. Evidence from South East Asian countries shows that selling inputs is particularly important: manufacturing SMEs in these countries have a higher tendency than larger firms to export goods and services that are sold directly into GVCs. (Lopez-Gonzalez, 2017). The SMEs also benefit from the GVCs by indirectly forming a part of the export channel through producing and supplying intermediary goods. While the data for contribution to the export figures through direct engagement with the global vendors might be small, their contribution remains much higher when calculated through the indirect contribution by supplying to larger manufacturers for export.

THE WAY FORWARD

The dynamism of the global trade platform requires every country to keep adapting the changing trends to sustain in the global market. India since it’s opening up of the economy has constantly strived to keep up in the global race through constantly revisiting its trade policies. However, the need of the hour is to engage its MSMEs which constitute almost 95% of the Indian economy. The acknowledgement of the importance of MSMEs is manifested in the numerous initiatives taken by the Indian government to provide an enabling environment to integrate into the GVCs. Through landmark policies like Make in India and other supporting policies, India has announced its arrival in the global market. Various Schemes and Programmes to enhance the standards and quality of production has been launched to facilitate the MSMEs to join the global production groups. While most of our MSMEs are indirectly connected to the GVCs through producing intermediate goods for larger companies, more endeavour needs to be made to enable them to become a direct beneficiary of the global opportunities. More opportunities to the MSMEs in the global trade would require a more robust integration of the regional market to the global market.