September 24, 2019

MSME and the Five Trillion Dollar economy

How to create a three dimensional framework consisting of a rugged digital marketplace, corporatised vendors and trained managers that will catapult the Indian economy into the big league.

image credit clrskills

Handicraft Fairs -- or HastaShilpa Melas -- are a regular feature in Kolkata, where artisans from the rural areas come, show and sell their products. The Micro Small Medium Enterprises (MSME) Department of the West Bengal Government has, through the Biswa Bangla initiative, set up a number of permanent, fairly upscale retail outlets to help these people sell their products. Some of these outlets are probably profitable, as is the one in Kolkata Airport, but a majority of them, in district towns and elsewhere, suffer from a lack of footfalls or well heeled buyers. Frankly, this is old wine in new bottles. We have had in the past, Khadi & Gramodyog initiatives under various names in different states, as in Manjusha (West Bengal), Poompuhar (Tamil Nadu), Kairali (Kerala), Lepakshi ( Andhra / Telengana), Pragjyotika (Assam) and so on. While the quality and demand for such products is quite high -- the author has seen Bishnupur dokra, that sells for Rs 150 in Bankura, being sold at Rs 1200 in Mumbai and for $150 in the US -- the bureaucratic machinery that manages these marketing operations are too incompetent and arthritic. So these government organisations are not really able to exploit the market and help the artisan earn a respectable income that takes them out of their low-income-group status.

While the logistics of delivering products across large distances is perhaps the single biggest challenge, there are many others, including product selection, new and original designs, branding, marketing and promotions. These are alien challenges for our bureaucrats who are used to a command and control environment but are routine matters for anyone who has been in the retail business. What we really need is a way to introduce these retail specific skills, or competencies,  into the handicraft / MSME business but here we run into a new problem -- that of scale. MSME operations are far too small to be able to afford the kind of people or the technology infrastructure to get their product across to the customer. The noise in the market is far too  high for a marketing message from the hinterland to reach the local state capital, let alone the big national and international markets and then convert into viable sales transactions. Then there are problems of delivery, collection and in some cases refunds. What we need is scale and for that the only solution is consolidation. But even that is easier said than done.
The Digital Marketplace

Mr Gadkari and the MSME Ministry of the Government of India has recently proposed the creation of a national eCommerce portal or  a digital marketplace where MSME units can sell their products online. This is definitely a worthwhile idea and could be a first step on the route to consolidation. But in the absence of any further details, it is difficult to determine whether the Ministry has really thought through the myriad issues that are critical for the success of an online venture..

The author, who was an internet evangelist in his professional career as a technology consultant, has first hand experience of what it means to set up some of the earliest eCommerce initiatives in India -- and then see them fail in front of his eyes! Not all the (1999-2001 era) high technology that was available with a leading multinational technology company could help clients create a truly viable eCommerce operation in India. It took another ten years and people like the Bansals who eventually managed to copy the Amazon model and create a stable platform that is still running today. Since then, there have been many others but while these may have managed to scale up at a national level, they are still nowhere when it comes to the likes of global giants like Amazon and Alibaba. But in all such successful cases, it is not just technology -- which is necessary but not sufficient -- that is the deciding factor. There are many other issues.

So what are the other issues? and how should one address them? Let us identify the issues but without the arrogance of claiming to have instant solutions, let us instead, work towards identifying those who have actually solved these problems and get them to participate in a possible solution..

Let us admit upfront that government employees are not the best people to operate an eCommerce business. Running such a portal is essentially a trading or entrepreneurial activity that is best done by someone who has it in his, or her, blood! Such people do not work for the safety and security of a sarkari job but would be found owning or heading some of the biggest retailers in the country today. Can such a person be poached and appointed as the head of the sarkari eCommerce enterprise? Not really, because even if such a person comes in, he or she would be quickly stifled by the bureaucratic red tape and will either sink into sarkari sloth or, what is more likely, resign and run back to the private sector.

The Retail Partner

Instead, the government must partner with a global major like Amazon, Walmart -- it may be too dangerous to allow Alibaba into such a strategic initiative -- and float a special purpose vehicle (SPV). This SPV would build, operate and run a full fledged digital marketplace in the country. This task is far from simple. Companies like Flipkart have invested a huge amount of time and money to acquire and operationalise the expertise to not just sell products but to sign-up vendors, build the delivery and return infrastructure, capture and report product and vendor ratings, ensure secure yet inexpensive ways to collect payment, arrange for refunds, handle customer complaints on poor products and shoddy delivery, and finally promote the platform as well as individual products through aggressive discounts, special deals and events. Without all of this and more, no digital marketplace can succeed and yet building all this up from scratch will take far too long. Hence the government needs a partner who has already done this and will not be learning from scratch and reinventing the wheel.

Choosing such a partner may not be very easy or non-controversial and so a transparent process is very important.  Government could also explore the possibility of partnering with multiple companies  and create separate SPVs that  could be allocated different geographies. Such territorial partition could be on the basis of either sourcing or distribution. We could either have the marketplace sourcing from different parts of the country but selling everywhere, or -- and this would mainly be for exports -- we could have each marketplace sourcing everywhere but delivering only in specific regions outside India.  Once operations have stabilised such geographical restrictions may be removed so that  these companies can compete with each other or even merge to create larger companies that can stand up to global competition.

The process of defining the ownership structure for such SPVs and the choice of retail partners should be done with due care and with the blessings of the CLB, the CBI, the CAG, and even the Supreme Court perhaps so that we do not end up with a CoalGate situation. But once this process is complete, the government must take a complete hands-off approach and allow retail and logistics professionals from the partner company to operate the business as a PSU with a  government stake lying between 26% and 49%

Other government agencies like India Post, Railways or the UPI payments infrastructure can be also be linked to the marketplace but not at the cost of efficiency. Use of  government owned infrastructure should be a decision of the management and not an imposition by sarkari bureaucrats.
The MBA-Lite

Other than the actual operation of the digital marketplace, the government must also play a very important role in educating the vendors, that is the artisans, on how to use the marketplace effectively. Most of the MSME vendors who deal with handicraft items are in reality individual artisans or, at best, family enterprises who know very little about how to deal with modern internet platforms and international commercial agencies. While many of them may have bank accounts, thanks to the Jan Dhan initiative, the use of credit cards or other forms of digital payments may prove to be a huge challenge .. and then there will be issues like GST and eWayBills

But if they have to step out of the backwaters of their native village and integrate with the global economy through this digital marketplace, then these village artisans must learn how  modern businesses work. This includes but is not limited to the basics of accounting, finance, operations, logistics, sales, marketing, brand building, business law and even IT systems. Without this knowledge, the poor artisan will continue to be  poor and the benefits of the marketplace will accrue to the baniya middleman who will exploit the artisan and take a lion’s share of the profits.

To train the artisans, the MSME Ministry would need to arrange for short term management programs, an MBA-lite if you will, that can be delivered in the local language at locations close to where the artisans live. These could be either free or at very subsidized rates with the ministry bearing the bulk of the cost of developing the courses, translating them into different languages, printing text books and paying the teachers. Or even better, the MSME ministry could tie up with local B-Schools who already have the expertise in these areas and pay them to prepare and deliver short, simple courses against a common minimum syllabus.
Employee Owned Vendors

In fact, we need to go beyond the MBA-lite training program and put together a comprehensive vendor development, or rather vendor maturity, mechanism. This can be done by encouraging the formation of either cooperatives or, what is even better,  private limited companies. But these companies should be owned by the artisans and craftsmen and in turn employ the owners themselves to produce the artifacts. This structure of employee ownership will reduce the possibility of exploitation of employees and also of the mischief created by unscrupulous trade unions run by political operators. However, one significant challenge in this approach would be the ability of a group of artisans to manage the complexities of running a company that operates under the Companies Act. There are numerous compliance related issues and a rural artisan may find it impossible to cope with all requirements.

This is where the government can really think out of the box and create a cadre of trained management professionals. These need not be the traditional engineer-MBAs who inhabit the corridors of corporates and who would not be interested in the salary levels that these companies can initially offer. What we need instead are people who would have the basic, MBA-lite, management skills and  would also be familiar with the digital world. They should not only be able to manage a small company but also use the digital marketplace that the MSME Ministry has planned for. Once trained, these people would be placed in the artisan-owned  private limited companies and the salary for the first three years could be reimbursed by the government. In fact the government could appoint them on contract for three years and depute them as manager-CEOs of these small, artisan-owned companies for the duration of the contract. If the company does well and the owners are happy with his or her performance, the manager-CEO will continue with the company on mutually acceptable terms after the government contract is over. Otherwise the company looks for a new manager-CEO and this person would be on his own but with three years of valuable experience.  Finally, in the unlikely event of the company being unable to find its feet in three years, there must be a quick and painless way to liquidate the company and return the net asset value to the owner-employees. The government’s obligation would be limited to paying the salaries of these manager-CEOs for three years plus the costs associated with incorporating and, if necessary, liquidating the company.

The MSME sector created nearly 15 million jobs per annum in the last five years but in terms of value added, its contribution to the manufacturing GDP is only about 6 - 7%.  To increase this share and to make MSMEs into engines of economic growth, we need an enabling environment. Creating an ecosystem of employee owned and professionally managed companies would ensure that the MSME digital marketplace has a steady supply of professionally made products to sell both within the country and beyond its borders. Not only will this increase GDP and exports but will help India make the transition from being an informal economy to one that is incorporated and managed in a professional manner. This will encourage the flow of institutional credit, both from banks and at some point of time, from the stock market.

The economic potential that is latent in MSMEs can only be unlocked if we can create this three dimensional framework consisting of a rugged digital marketplace, corporatised vendors and trained managers. Once this framework is in place, artisans in the rural areas would be able to integrate their activities with the national and global economy. With access to credit, information, knowledge, ideas, processes, products, competition and markets they would be able to scale up and transform, not just in quantity and quality but also in the nature products that they manufacture and sell. Creating a powerful powerful distribution channel in partnership with a global eCommerce brand and feeding this channel with goods that are produced by thousands of professionally managed and employee-owned companies could be the way to realise the Make-in-India dream. This in turn could pave the way to the five trillion dollar economy that the country is aiming for.

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