FTAs Alone Won’t Help Without Internal Reforms, Competitive Factor Markets: Fisme Secy General

The Federation of Indian Micro and Small & Medium Enterprises (Fisme) was established in 1995 as a body of geographical and sectoral associations of small and medium enterprises (SMEs) spread across districts and States. It focuses primarily on trade and market access issues and reforms, with the twin objectives of establishing an entrepreneurial and competitive environment at home and greater market access for Indian SMEs in India and abroad.

Securing market access for MSMEs in India and abroad and ensuring competitive functioning of factor markets—that is, the markets from which businesses procure their resources be it goods or services. Entrepreneurs purchase, rent, or hire resources from these markets.

Fisme Secretary General Anil Bhardwaj told Bizz Buzz that infrastructure is helping MSMEs, but Quality Control Orders or QCOs have become one of the most misused instruments in trade control

A recent Icrier survey has presented a nice scenario regarding micro, small and medium enterprises (MSMEs). It talks about their “robust performance in recent years.” Do you agree with the survey’s findings?

The MSME sector is composed of 70 per cent services and 30 per cent manufacturing. As MSME services are largely consumed domestically and the Indian economy is growing, most service sector MSMEs have done well. The story for manufacturing MSMEs is mixed. Some sectors have done well, while others have struggled. MSMEs in the B2C segment have also fared well both selling through retail or e-commerce. By and large, I would say, the MSMEs have done well.

In the post-Covid era, what has changed for MSMEs?

One big change is digitization. It has penetrated deep into MSMEs. As many as 70 per cent MSMEs use digital payment systems. Secondly, all the compliances and tax payments use digital platforms from filing to house tax to electricity bills to the goods and services tax (GST). Unless one is really a micro-micro enterprise, it is extremely difficult to operate without being digitally literate.

How has protectionism in recent years hurt the economy in general and MSMEs in particular?

Post-Covid most countries have turned protectionist. The tariff and non-tariff walls have gone up. India followed suit. The twin drivers of the rise in protectionism in India have been: first, a strategy to encourage Make in India supported by policies such as the Production Linked Incentive (PLI) Scheme Subsidy. Second, the fear of dumping by China, as it was said that it had a huge pile of unsold goods, especially metals.

The first strategy has worked for India, especially in sectors such as electronics. India is now the second largest manufacturer and exporter of mobile phones. The China bogey was used by domestic manufacturers of steel and other products to secure unprecedented protection which they used to raise prices. The latter was achieved through all the means available: tariffs, anti-dumping duties, safeguard duties, and most potently through non-tariff measures such as Quality Control Orders (QCOs). The QCOs mandatorily require imports to comply with Indian standards for which a licence is needed.

Within a span of a few years over 700 QCOs have been notified in India. The QCOs have been notified even for those products which are not even manufactured currently but a company might have evinced interest in manufacturing them at a later date. QCOs have become one of the most misused instruments in trade control.

Specifically, protection for the domestic steel industry is hurting MSMEs. What should the government do?

Steel is one of the building blocks of industrialization. It is one of the most important raw materials for downstream engineering and electrical industries like copper, aluminum, or polymers (plastic raw material). Protection allows input manufacturers to increase prices. MSMEs using high-priced raw materials become uncompetitive as their produce continues to face global competition. Therefore, from MSMEs producing auto parts to bicycle parts, from garments of polyester-blended fabric to electrical equipment—all see an erosion of their markets, both domestic and exports. Recently, we sat with representatives of large manufacturers to identify a common ground. So far, nothing concrete has emerged.

India is working on free trade agreements (FTAs) with the US and the EU. The India-UK FTA may also be signed this year. How will these FTAs, if signed, impact MSMEs?

For MSMEs in developing countries, a multilateral agreement at the World Trade Organization is a better option. Failure of the multilateral trade round is pushing FTA frenzy. The bilateral and regional FTAs have not worked for India. The chief reason is that India is a costly place to do business as a result of lack of competition in factor markets, excessive regulation, and an almost dysfunctional judicial system. Without internal reforms and capacitating local manufacturing base, lowering duties does not result in gains. The FTAs with developed countries (EU, UK, USA, etc.) may help MSMEs in products where we compete on cost with countries like Bangladesh and Sri Lanka.

In general, is there any trend in the MSME sector suggesting that smaller firms are gearing up to export their goods and services?

There is a contradictory trend. Exports generally suit larger firms in the MSME segment. But very small firms are also entering into exports through the e-commerce route as India liberalized its e-commerce exports regime.

Prime Minister Narendra Modi and economic ministers emphasize ease of doing business, deregulation, supporting MSMEs, etc. State governments also say similar things. Are these intentions translating into reality, especially for MSMEs?

There is a marked improvement in Central regulations because there is a continued emphasis on reducing cost of compliance and making them transparent using ICT [Information and Communication Technology]. The ground realities vary vastly among states. The importance accorded to businesses in industrialized states like Gujarat and Tamil Nadu remains very high in comparison to states like Bihar, Rajasthan, Orissa, West Bengal, or UP. The lack of a grievance redress mechanism leads to petty corruption, and long and expensive litigations. Manufacturing remains a tough vocation to get into.

The fiscal and revenue deficits have been reined in. Infrastructure building continues unabated. How are these developments helping MSMEs?

The development of hard infrastructure—roads, power connectivity, etc.—is expanding urbanization and fuelling the demands of goods and services in rural India. MSMEs have benefited from them. The housing sector alone contributes to over 60 product categories in the MSME sector from tiles to furniture to electrical gadgets to building hardware. The capital investment in infrastructure is also opening up supply opportunities as there is 25 per cent set-aside in government purchases for MSEs.

How are MSMEs adopting new technologies like AI, machine learning, 3D printing, and internet of things (IoT)? You may also comment on any other issue related to MSMEs.

These technologies have touched a very niche segment of MSMEs so far. Twenty per cent of organized MSMEs are part of supply chains such as the automotive and white goods industries. In these segments adoption is being driven from lead firms and brands.

US President Donald Trump has begun the global trade war. How do you regard reciprocal tariffs? How will they impact MSMEs?

Reciprocal tariffs are a sword hanging over global trade. Indian MSMEs account for nearly half of India’s exports. The US is the most important market for some sectors of India: 28 per cent of India's textile and apparel exports; 47 per cent of pharmaceuticals; 30 per cent of gems and jewellery exports; 27 per cent of auto components; and 14 per cent of electronics.

Reciprocal tariffs can pose serious challenges for MSME exporters. In the short term, the threat of high tariffs will have a dampening effect on buyers. The medium and long-term impact is uncertain, as it will depend on several factors: India's trade agreement with the US; deals made by our competing countries with the US; and the overall state of the global trade war between major trading countries.

In my opinion, electronics, especially phones and pharmaceuticals, are two categories that can benefit. Garments and jewelry segments require sufficient lead time for manufacturing. In the short term, all segments may experience a decline in demand due to disruptions. Large garment buyers are already reducing orders by 20 per cent to 50 per cent for the next six months. The 90-day relief can help global value chains reorganize their supply bases.

The government is consulting with the industry. Fisme recently held in-depth consultations with leading trade negotiators and economists in India. Fisme is sharing inputs with the government. The most likely scenario is that India will want to reach a bilateral trade agreement with the US by September this year. This can open up new opportunities for Indian MSMEs in the US.

Business chambers regularly interact with the government. What is generally Fisme’s focus in its engagement with the government and multilateral organizations?

Fisme is a keen votary of reforms in the regulatory environment and promotional policies to enhance the competitiveness of SMEs vis-à-vis their larger domestic counterparts and foreign firms through research and dialogue. It also executes MSME development projects supported by the government and all major multilateral and bilateral bodies in India such as the UNIDO, the ILO, the UNCTAD, the DFID, and GIZ.