Digitalisation requires vision, strategy, leadership, change management and investment on a continuing basis.
Micro and small manufacturing enterprises (MSMEs), that constitute approximately 98% of the total number of manufacturing enterprises (34%-35% of the Udyam registrations of all the enterprises), are proprietary and partnerships (either family or friends). As defined in 2020 with an amendment of the MSME Development Act (2006), micro manufacturing enterprises are those with an investment of Rs1 crore and turnover of Rs5 crore, while those in the small category are with an investment of Rs10 crore and turnover of Rs50 crore. The relationship between the investment and turnover has been retained at 1:5 ratio.
The costs can be divided in terms of hardware and software. Hardware expenses usually appear one time but with the changes in technology, even hardware becomes obsolete after five years. With banks, non-banking finance companies (NBFCs) and fin-tech moving to mobile platforms for delivery of all their products both acceptance of deposits and dispensing credit, entrepreneurs invest additionally in either tablets or smartphones, in addition to the desktop computers. Insofar as software is concerned, although they are lured into adopting cloud technologies, they weigh their options between the cost of the latter and their own data storage platforms with alternate storage space outside the system location.
Micro manufacturing enterprises with a turnover of below Rs5 crore, presuming that they reach this turnover within three to four years of establishment, require 10% of turnover for digitalisation. Right from day one, they should have a road map of their growth – when and where they would like to move, what markets they would like to cater to, which type of clients they would like to attract and when they would like to scale up to the next level.
As of now, except 0.25% of micro enterprises, others do not have this vision and strategy to scale up. The reasons can be many, including the perverse incentives that encouraged horizontal growth. For a firm with Rs5 crore turnover, spending 10% will be next to a pipe dream. Furthermore, change management is imperative as every technology requires a different approach for its utilisation and the cost-benefit analysis requires that reduction in cost without affecting its human resources (HR) – retention instead of attrition – would be a very tough exercise. HR taking to new technologies requires re-skilling and up-skilling and scaling up remuneration comparable to the market. Unless an enterprise reaches a turnover of Rs100 crore to spend a minimum of Rs50 lakh with agility to spend up to Rs1 crore, digitalisation would make such enterprises non-performing assets (NPAs). The reasons are not far to seek, apart from the above. Where does such investment come to them?
Investment for these MSEs comes 99% from debt. Angel funds or venture capital funds or mutual funds or pension funds—even if the MSEs have all the muscle to attract—would not be able to go near them. Any investor would like to look at the vertical growth of the enterprise and the ability to mobilise equity commensurate with the growth of the firm. This is the principal reason for these enterprises to strategise, innovate and manage the change.
Counselling and mentoring play a very critical role. These should come at a very low cost to them. This will happen only when the Union and state governments invest in skilling, re-skilling, and up-skilling, and meet at least 30% of the cost of technology once in every five years or with every change in technology that the firm ventures to introduce. Debt markets will not be able to service such activities even if they have the will to with their current level of functioning as they do not have the time or resources to engage these enterprises on a continuing basis, providing credit with extension.
(The author is a retired senior banker, economist and risk management specialist)
