The Export Conundrum for MSMEs. Understanding the Impact of Low Factor Productivity and Strategies to Boost Export Competitiveness
In the grand tapestry of the Indian economy, micro, small, and medium enterprises (MSMEs) have emerged as indispensable threads, weaving innovation, employment, and economic growth into the fabric of our nation.
These enterprises, numbering a staggering 6.3 crore and employing over 111 million individuals, stand as the second-largest employment generator after agriculture, contributing 30% to the country’s GDP and accounting for 45% of total industrial production.
Yet, in their quest to make their mark on the global stage, MSMEs find themselves entangled in a web of challenges that inhibit their ability to seize export opportunities.
Unravelling Complexity: Lower Factor Productivity
At the heart of these challenges lies lower factor productivity, a multifaceted issue that encompasses low return on capital, suboptimal resource utilisation, and dwindling labour productivity. To understand the implications and chart a course for progress, it is essential to dissect these interconnected components.
Low Return on Capital – For many MSMEs, the struggle begins with a meagre return on their capital. Access to capital has always been a limiting factor; this coupled with limited financial returns diminishes the resources available for expansion and innovation, creating a cycle of stagnation. This low return on capital translates into a reduced ability to invest in critical areas such as technology, employee skill development and well-being and infrastructure needed to build export competitiveness.
Resource under-utilisation—Another significant challenge that plagues MSMEs is the utilisation of resources. It manifests in the form of unused capacity, unexplored market opportunities, and idle assets. These untapped resources represent a reservoir of potential that, if harnessed effectively, could improve overall productivity.
Labour Productivity –Labour stands as a critical component that needs priority attention. Unfortunately, many MSMEs struggle with low labour productivity, often due to a lack of skilled resources, insufficient training, a low-focus on human resources development, antiquated people processes, a disengaged workforce, outdated machines, and/or sub-optimal workplace conditions.
Low Technology Adoption and Limited Modernisation – Compounding these challenges is the troubling deficiency in technology adoption and the inability to modernise operations. In an era where innovation and digital transformation are driving global competitiveness, many MSMEs struggle to keep pace, restricting their ability to meet the ever-evolving demands and expectations of international markets.
High Costs and Limited Ease of Operations – High costs and complexities in building export capacity, adhering to global standards, and obtaining certifications hinder resource productivity, profit margins, and optimism. High capital expenses and rising costs reduce the competitiveness of MSMEs on the global stage. Their smaller size limits their ability to achieve economies of scale and cost reduction.
These challenges paint a bleak picture for Indian MSMEs, despite the crucial role they must play in achieving the ambitious $ 5 trillion economy goal.
The Apparel Industry: A Case in Point
Unravelling the Impact on Apparel
The apparel industry in India is a significant contributor to the country’s economy.
About 2% of India’s GDP, or 7% of industry output in value terms, comes from the domestic garment and textile sector. It is also one of the largest employers in the country.
The Indian apparel market is experiencing significant growth, with an estimated revenue of US$96.47 billion in 2023 and an expected annual growth rate of 3.34% (CAGR 2023-2027).
With abundant raw materials and cost-effective labour, the industry still lags behind countries like Singapore, China, South Korea, and Hong Kong in global apparel and clothing exports.
Countries are chasing textile and apparel exports for numerous benefits – boost local, state and federal economies, enhance domestic competitiveness, diversification, and gain global market share; India has similar desires, but export results are not commensurate with the efforts of the industry and incentive of the government.
Exports of textiles and apparel were down 1.9% and 17.37% respectively in July this year compared with the same period last year. Cumulative export of textiles and apparel for the April-July 2023 period slid 13.74% year-over-year
Navigating Rupee Depreciation and Apparel Industry Challenges
Amidst a depreciating rupee, India’s apparel industry faces challenges as it deals with higher costs for imported fabrics, leading to reduced competitiveness, lower profits, and production cuts. Global apparel brands are also taking advantage of falling cotton prices and a weaker rupee in negotiations with Indian exporters.
Overcoming Obstacles for MSME in the Apparel Sector
Addressing factor productivity and other challenges requires a multi-pronged strategy and grassroots-level intervention.
To tackle the factor productivity challenge head-on, MSMEs must prioritise the infusion of technology, mechanisation, and automation into their operations. Modernization is the cornerstone of this approach, with cutting-edge machinery and streamlined processes at its core. By adopting advanced technologies, such as computer-aided design (CAD) systems and automated production lines, and investing in supply chain optimisation, MSMEs can significantly boost efficiency, reduce operational costs, enhance quality, increase comparative advantage, and overall improve their marketability.
Innovation stands as another pillar for industry growth – specifically, process innovation can yield significant results. Collaboration with industry peers, fashion designers, global garment brands, cost-engineering, investments in research and development, and embracing digital technologies can enable Indian apparel exporters to compete globally.
The Imperative of Diversification
Diversifying export markets is key to mitigating vulnerability to economic shocks. Government support and industry partnerships must facilitate this diversification, providing market intelligence, fostering trade missions, and negotiating advantageous trade agreements with emerging markets.
Building Trust in International Markets
Building strong relationships with international buyers and retailers is paramount. A commitment to exceptional customer service, adherence to international quality standards, and timely order delivery can cultivate trust and lasting partnerships with overseas clients.
Improving Workforce Productivity
Finally, investing in workforce training and skill development, improving working conditions, employee health and well-being and employee experience is vital in this labour-intensive industry for improving productivity. Government initiatives and industry collaborations can play a pivotal role in upskilling the workforce, enhancing productivity, and elevating product quality for improved export outcomes.
By embracing these imperatives, India’s MSMEs can transform themselves into global contenders, contributing even more significantly to the nation’s economic and social fabric.
AUTHOR – JUBIN MISHRA
The author, Jubin Mishra holds an extensive understanding of the business requirements of India’s small, medium, and family-owned businesses. His strategies and insights are helping middle-market companies embrace digital, navigate through emerging regulatory compliance, create sustainable growth paths, and unlock value. As a partner at Blue Helion, Jubin acts as an advisor, mentor, and member of the CXO and Founder’s core teams and also helps define and operationalize the transformation agenda. Here, he leverages his extensive experience of the business operating models of MSMEs to help combat low-factor productivity challenges. He is specifically focused on improving labour productivity, with a view to improving organisational performance and profitability.