MSMEs cementing position as the backbone of the country’s economy

There is no denying the fact that the MSME sector in the country serves much of the domestic consumer demand and plays a significant role in moving the country forward as it heads towards becoming the world's third-largest consumer market by 2026. And now business confidence has emerged strongly among MSMEs across all three sectors of manufacturing, trading, and service. This confidence, in turn, is translating into growing demand for credit specifically for business expansion. In fact, more than 89 per cent of the MSMEs have stated that investing in growth initiatives as the reason for seeking business loans.

Trading MSMEs, at 88 per cent,are most optimistic when it comes to business expansion compared to manufacturing at 83 per cent and Services at 78 per cent, going by a recent data analysis on ‘MSME Insights’ by Kinara Capital. Interestingly, immediate plans for business expansionsare the primary reason for MSMEs to seek access to formal credit. The top reasons of Trading MSMEs are to improve unit economics and to offer a wider product variety. More than 84 per cent of Trading MSMEs claimed that boosting their inventory levels was the main reason to seek business loans. Purchasing inventory in bulk leads to quick improvement in their unit economics by which they can provide their customers with a wider variety of products.

They also gain a competitive edge with their ability to fulfill customer orders quickly with available stock. Boosting inventory was followed by product/market expansion and business premises renovation as the main reasons for Trading MSMEs to seek loans.Quite significantly, demand for credit continues to be on an upward trajectory.

In FY24, the credit demand grew by nearly 35 per cent compared to the previous year. While all three MSME sectors exhibited demand, the trading sector is leading with a 45 per cent increase in credit demand, followed by the services sector at 31 per cent and manufacturing sector at 18 per cent.Another interesting trend has been that B2B sub-sectors of trading MSMEs experienced a significant increase in business loans in the last financial year. The key 5 B2B sub-sectors to have flourished were electrical and electronics, houseware goods, industrial products, construction and building materials, and paints and varnishes.

Incidentally, in FY24, houseware goods sub-sector experienced a 150 per cent YoY growth in the number of loans disbursed, followed by the industrial products sector at 138 per cent and paints and varnishes at 120 per cent. Trading sector also saw a 106 per cent growth in construction and building materials, which is indicative of rapidly evolving urban development in Tier 2 and Tier 3 metros as well.Having said all these, one must also remember that it is of utmost importance for Indian MSMEs to adopt digital transformation to unleash their growth potential and play a pivotal role in making India a Viksit Bharat (a developed economy) by 2047. Today, MSMEs are the backbone of India’s economy, currently contributing nearly 30 per cent to the country’s GDP. There are several studies which suggest that MSMEs will boost their GDP contribution to 35-40 per cent by 2027.