The loud forecasts of prime minister Modi that India is all set to become a major 21st century superpower are likely to prove illusionary unless the country beefs up — sorry, politically incorrect — improves its manufacturing sector. Currently, manufacturing contributes a mere 15 percent of annual GDP with services contributing over 55 percent and agriculture a mere 16 percent. And the reason why industrial manufacturing is in the doldrums is because the country’s micro, small and medium enterprises (MSMEs) are caught between a rock and hard place. On the one hand their credit needs are being ignored by banks, and on the other, instead of being nurtured by large customer companies, they are bullied by them.
The plain truth is that Indian industry cannot prosper unless MSMEs prosper. For a start, the country’s 63 million MSMEs account for 40 percent of India’s industrial output and employ 40 percent of India’s 493 million workforce. Therefore their health and well-being is critical not only to keep the wheels of industry turning, but also to keep people off the street by generating employment. Yet banks, including public sector banks which are awash with liquidity, are averse to lend to them — too many small accounts to service and a tardy legal system which makes loans recovery very difficult.
Moreover, government and large well-established companies are slack about making payments for goods and services supplied by MSMEs. The average number of days of payments outstanding to supplier MSMEs is 75-90 days, with some of the biggest companies in India routinely delaying outstanding payments for months on end. In his excellent under-sold book India’s China Challenge (2020) Ananth Krishnan, the Beijing-based correspondent of The Hindu, attributes the rise of China into the world’s manufacturing powerhouse to the rise and prosperity of its many million town and village enterprises (TVEs). The average interest on easily availed accessible credit is 8 percent and as supply chain enterprises of the People’s Republic large world-beating corporations, they are assured of prompt payment and utmost respect.
There’s a moral in this story for government and industry leaders making announcements about India’s inevitable great leap forward into a $30 trillion (from the current $3.7 trillion) economy by 2047.
