Internationalizing India’s MSME Sector

As a part of Indian President Pranab Mukherjee’s ongoing state visit to Sweden, the two countries are expected to sign a non-binding Memorandum of Understanding on micro, small and medium enterprises (MSME). While the full details of the impending MoU are not known, it is understood that the two countries will pledge cooperation on knowledge sharing and technology adoption and create conducive policies for joint ventures. The proposed agreement is, of course, not the first MSME-related MoU that India has signed with another state. It would the 18^th one, including ones with Mexico, South Korea and Vietnam.

Over the years, the Indian MSME sector has received substantial international support and commitment. In 2012 the Asian Development Bank (ADB) sanctioned a USD 100 million loan for the growth of India’s MSME sector. President Obama during his state visit to India January this year pledged a USD 1 billion loan for the growth of rural MSMEs, to be processed through the US Overseas Private Investment Corporation. The real question – between the plethora of agreements and financial assistance – is how the putative internationalization of the Indian MSME sector can change the on-the-ground picture.

For bilateral agreements – such as the one to be signed in Stockholm – to be effective, there needs to be a common consensus on basic, definitional issues. For example, one way Sweden defines a small business is that it should have not have a turnover exceeding 5 million Euros. (It neither has micro nor medium enterprises since all businesses there are classified as either “small” or “large”.) On the other hand India’s definition of an MSME is one based on fixed investment in equipment. Comparing a Swedish small business to an Indian one is like comparing meatballs with dosa.

Coming to specific issues bilateral exchanges on MSMEs often center around, consider technology adoption. According to the 4^th (and latest) All India Census of MSME, 71 per cent of all enterprises in that sector reported that they did not need any power to run their businesses while only 15 per cent needed electricity. Clearly, technology is not the key issue in creating economies of scale out of Indian MSMEs; infrastructure is.

Of course this is not to argue that bilateral agreements on MSMEs do not have a major role to play in the development of the sector. President Obama’s support for rural Indian MSMEs (accounting for more than half of that sector) has a potential to transform the landscape of rural enterprises. Export finance loans like the one from the ADB has served as a big push, especially for the 8 poorest states of India which it was designed to target. For non-financial bilateral agreements to be truly meaningful, a common ground – which reflects the reality of both parties – must be sought and leveraged.