Accelerating digital adoption among Indian MSMEs

The policies of the government of India are in the right direction to transition India’s chiefly agricultural economy to an industrial one that is based on the manufacturing of goods and dissemination of services. Yet, growth in manufacturing seems to have hit multiple speedbumps along the way, especially in terms of its potential to generate employment in the country.

As per a Centre for Economic Data & Analysis – Centre for Monitoring Indian Economy (CEDA-CMIE) bulletin released last year, the agriculture industry employs more people today than it did five years ago. On the other hand, manufacturing which accounts for nearly 17% of India’s gross domestic product (GDP) has seen a sharp decline in employment rates in the same period – from 51 million employed Indians in 2016-17 to 27.3 million in 2020-21. 1 There are many deeply rooted factors to explain this anomaly. First, more than 60% of India’s population still lives in rural areas. Examining the state of the manufacturing sector can also shed some light on the subject.

Informal micro enterprises are responsible for 80% of employment in manufacturing but contribute only 20% towards output.2 The lack of productivity can be traced to a largely unskilled workforce, the hiring of temporary workers, and minimal application of technology in their operations. The sector was severely impacted during the global pandemic and saw large numbers of the workforce leave to return to their villages.

The recent Union Budget’s continued commitment to support the micro and small to medium enterprises (MSME) sector, with a focus on prioritizing entrepreneurship and formalizing the economy will hopefully give it the necessary impetus to bounce back and grow. But other issues plaguing the sector need to be addressed.

Adopt digital to improve output

The manufacturing sector needs to accelerate its digitalization journey to improve efficiency, productivity, and skills. The finance minister was clearest in her budget speech this year when she stated the need to adopt digital technologies to make Indian manufacturing globally competitive.

There are varying levels of digitization a company goes through. First is the use of basic digital tools, second is creating an online presence, and finally is the use of digitalization as a core business model. At this level that we call smart manufacturing, it is a pivotal way to enable faster decision-making, foster new collaborations, and increase productivity. Manufacturers have the flexibility to address issues quickly and efficiently, while reducing downtime and risks to their workers, assets, and reputation.

Stages of MSME Digitization in India3 

Levels of Digitization  Digital Tools/Processes 
Use of basic digital tools  Microsoft Office, email, WhatsApp, personal computers, mobile phones 
Growing an online presence  Website, social media, e-commerce sites, tablets 
Use of advanced digital tools, or digitalization as part of the core business model  Enterprise resource planning (ERP), customer relationship management (CRM), analytics, big data, automation, pure online business, scanners, bank card readers, central servers, imaging devices 

To understand the level of digital technology penetration in the MSME sector, CRISIL conducted a survey in November 2020, which showed 47% of micro enterprises and 53% of SMEs have adopted digital sales platforms in India. The adoption has increased dramatically post-pandemic from about a level of 29% pre-pandemic. This is an encouraging trend and a silver lining that the pandemic has spurred.

The adoption of digital technology or improvement of existing digital processes among MSMEs is often constrained by the access to sufficient capital. In recognition of this, the Emergency Credit Line Guarantee Scheme (ECLGS) and Raising and Accelerating MSME Performance (RAMP) program, which were announced in the recent budget, will provide a much-needed boost for MSMEs.

Beyond just capital, increasing adoption of digital technology requires a systemic change with respect to better risk management and skills enhancement. A study conducted by the enterprise arm of Quick Heal Technologies revealed that the Indian manufacturing industry was most vulnerable to cybersecurity risks, accounting for close to 30% of all cyber threats detected between January and March 2019. 4 This can have an adverse effect on small manufacturing companies trying to go digital. A secure digital ecosystem is necessary to propel MSMEs forward. While government policies and initiatives play a defining and important role, educating MSMEs about risks is crucial. Initiatives like the cybersecurity meet by the US Consulate General Kolkata last year, 5 where MSMEs learnt what they can do to prevent digital threats, can help greatly.

Another deterrent MSMEs in India face is the lack of awareness of the benefits of technology and a corresponding lack of skills to understand and participate in the digital economy. MSMEs need to have access to digital skilling tutorials for their workers – this will help to train manpower in-house who can then manage a smooth and streamlined digital transition for the organization.

With 5G technology rollouts on the horizon6, there is a clear opportunity to showcase the benefits of digitalization in the manufacturing sector – 5G will make it easier for manufacturing companies to connect in real time with their suppliers and customers and modernize legacy processes.

Additionally, 5G will give smart manufacturing and Industry 4.0 processes the much-needed fillip. However, the true test will be when the advantages trickle down to the smallest of enterprises. Only then will we be able ensure the competitiveness of India’s manufacturing sector and secure our vision of ‘AatmaNirbhar Bharat.’

Authored by:
Dilip Sawhney, Managing Director, Rockwell Automation India

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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