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MSME Sector: Decoding Rural India’s Growth Led By QR Codes


MSME Sector: Decoding Rural India’s Growth Led By QR Codes

As India recovers from the deadly Covid-19 pandemic, the talks about micro, small and medium enterprises (MSMEs) have rapidly increased. Every other platform is seen talking about the hurdles faced by this sector, however, a concrete outcome of these discussions is yet to touch the ground because the industry is still struggling to find a base to move forward. 

Urban India is somehow equipped with resources, not immune to crisis though, but it is rural India which bears the brunt of major events like demonetisation and the Covid-19 pandemic. 

In early 2022, MSME Minister Narayan Rane in Lok Sabha cited a survey report and said that during FY21, 67 per cent of MSMEs were temporarily shut for up to three months due to Covid. More than 50 per cent of the respondent units witnessed a decrease of over 25 per cent in their revenues in 2020-21.

The five most critical problems faced by MSMEs were identified as liquidity (55 per cent units), fresh orders (17 per cent units), labour (nine per cent units), logistics (12 per cent units) and availability of raw material (eight per cent units), as per the data. 

However, one thing that worked for small businesses, especially in rural India was the stunning penetration of digital connectivity during the Covid period. Presently, the majority of businesses in the rural belt use digital payments led by QR codes. 

Following demonetisation and the pandemic, there has been a significant surge in digital payments within the rural economy. This shift in behaviour has led to various stakeholders, including agri tech platforms, urban farm-to-fork and direct-to-consumer (D2C) companies, actively participating in the value chain. 

“With technological advancement, India’s rural areas have seen positive changes. One example is MSMEs’ widespread use of QR codes, which can now transact seamlessly, reach a broader audience and grow their business. QR codes have brought transparency, promoted digital payments and saved transaction costs. Most importantly, it has connected rural areas to the rest of the world. The future of India’s rural economy is much brighter with the widespread implementation of QR codes. They can help MSMEs to reach a broader customer base,” said Sanjay Shah, Chief Operating Officer, Wadhwani Foundation, India/South East Asia. 

As per the data (industry sources), month-on-month growth of merchant onboarding has increased from eight per cent to 23 per cent in the last 12 months and the rural merchant retention rate is at 66 per cent. The average number of transactions has increased from less than one to 5 in rural areas. 

“MSMEs, which are essentially micro-entrepreneurs running their businesses, often lack an institutional persona in most cases. However, the situation is changing as banks, including the public sector, private and regional are increasingly embracing digital technology, especially with the adoption of the UPI. QR Codes enabled through UPI, combined with the JAM Trinity (Jan Dhan, Aadhaar, and Mobile), are leading the way in digital inclusion for rural MSMEs. This development is not a myth but a reality,” said Ramprashanth Ganesan, Chief Strategy Officer, IppoPay. 

Talking about digital payments, the State Bank of India (SBI) in a report said that the total digital payments percentage to nominal GDP has increased to 767 per cent in FY23 from 668 per cent in FY16.  The retail digital payments (excluding RTGS) as a percentage of GDP has reached 242 per cent in FY23 from 129 per cent in FY16. 

Among all, Unified Payments Interface (UPI) has emerged as the most popular and preferred payment mode in India pioneering person-to-person (P2P) as well as person-to-merchant (P2M) transactions in India accounting for about 73 per cent of the total digital payments. 

The volume of UPI transactions has increased multifold from 1.8 crore in FY17 to 8,375 crore in FY23. The value of UPI transactions has also increased handsomely, from just Rs 6,947 crore to Rs 139 lakh crore during the same period, a jump of 2004 times.         

The SBI report said that rural and semi-urban areas are now accounting for 60 per cent of the share in UPI value/volume, dismantling the popular perception that metro/urban areas are hotbeds of digital payment adoption and innovations. The top 15 states accounted for about 90 per cent of the share in value/volume. 

Even according to a survey by NeoGrowth, an MSME-focused digital lender, about 70 per cent of MSMEs believe more than half of their retail sales will be via UPI. The study titled ‘Decoding digital payments: a retailer perspective’ stated that close to 80 per cent of retailers use digital payments for customer payments due to convenience. 

“As 1.4 billion people of this country move towards a cashless society, QR codes have become omnipresent across Bharat and have proven to be a powerful tool for driving economic development in India, particularly for MSMEs. With this technology, businesses are now able to expand their reach and improve their sales. As QR codes continue to gain traction, they are expected to further spur the growth and development in rural areas,” said Sanjeev Kumar, Co-founder, Executive Director and CEO, Spice Money. 

The rural economy is not only about agriculture: 

When examining the rural economy, it is often associated with the agriculture sector however, it is more business-led than agriculture-led. While the agriculture and allied sectors contribute approximately 17 to 18 per cent to India’s total GDP, the non-agricultural sectors, particularly MSMEs involved in manufacturing, construction, and services, contribute around 28 to 29 per cent.

With a population of 68 per cent, India’s rural economy currently contributes about 46 per cent to India’s GDP with 33 per cent of savings and 64 per cent of total expenditure. 

IppoPay’s Ganesan said that the health of rural MSMEs, similar to that of Indian agriculture, is closely intertwined with the monsoon seasons. Fortunately, India has experienced four consecutive years of normal to above-average monsoons, and it is projected to have another year of normal monsoons in 2023. 

“This is crucial because rural consumption is closely tied to agricultural production. Other indicators, such as rural FMCG consumption volumes (which have shown a lower decline rate in Q4FY23 compared to previous quarters) and tractor sales, point towards an overall economic recovery in rural areas,” Ganesan added. 

Struggle continues: 

In the recent past, due to demonetisation, GST implementation, pandemic, many MSMEs were shut and several faced the challenges such as meeting the expenses of salaries and which led to lay off, issues like financial liquidity, debt repayment. 

An estimated 5.9 per cent of the gross value added (GVA) in the Indian economy— Rs 10.7 lakh crore is locked up in delayed payments from buyers to Micro, Small and Medium Enterprise (MSME) suppliers, as per a report.

A report by Global Alliance for Mass Entrepreneurship (GAME) with Dun and Bradstreet and Omidyar Network India highlighted that payment delays to MSME suppliers have remained endemic and an intractable problem in India for more than 15 years.

The report stated, “The issue is not new or the result of the pandemic. The proportion of MSME sales stuck as delayed account receivables have been consistent and steady for years prior to the pandemic.”

Although the economic lockdowns during this period did intensify the problem, the numbers in the preceding five years were no less alarming, it mentioned.

Experts pitched for the constant handholding of the sector and support where MSMEs could be exempted from some statutory compliances and declarations, high interest and increasing cost of raw material. 

Talking about rural MSMEs, Aggarwal mentioned, “They need support in building entrepreneurship, increasing employment, enhancing financial literacy and education. For MSMEs to grow in rural India, there has to be prosperity and a sense of positivity in rural India. They need to be the torchbearers for rural entrepreneurship.”

Shah mentioned that in India, there is an option for small businesses to make safe and secure transactions. Awareness of tech solutions which are available along with a variety of incentives from the government and various cluster organisations. Furthermore, digital payment wallets allow MSMEs to operate cashless, making low-value transactions convenient. 

Financial and digital literacy for rural MSMEs: 

Earlier, financial inclusion was as important to policymakers as it is current time. However, India is striving to become a USD five trillion economy for which it needs to boost the rural economy which faces a lack of banking infrastructure, combined with widespread financial illiteracy and formal financial services which is a huge challenge for merchants in rural India. 

“NBFCs, banks are doing their bit to enhance financial inclusion and services like banking, lending, insurance services are being offered to unserved, unbanked population. Digital infrastructure has a major scope of development in rural areas and work needs to be done around smartphone access and knowledge to use financial applications and education on usage, avoiding frauds, building trust in digitisation,” said Sameer Aggarwal, Founder and CEO, RevFin. 

Experts said that MSMEs and financial organisations need to be in constant touch with customers to explain and explore opportunities where they can use the digital platforms across their lifestyle and for this, they can have their field agents or on-ground educators, NGOs focus on increasing financial literacy amongst men, women and youth of rural India. 

“While digital financial infrastructure (DFI) has expanded access to financial services in rural areas, it alone cannot guarantee financial inclusion. The lack of digital literacy, high mobile data charges, and limited access to financial services and banking are still major roadblocks. Enhancing the inclusivity of DFIs in rural areas requires a multi-faceted approach beyond technology. It requires interventions that translate into education and training that can bridge the digital divide and strive towards true, equitable financial inclusion in rural India,” added Shah. 

To achieve Prime Minister Narendra Modi’s ambitious goal to make India a USD 5 trillion economy, it is imperative to address some of the challenges faced by rural MSMEs including the need for financial literacy training, access to credit and technology. 

According to the International Finance Corporation (IFC), India has 55.8 million MSMEs that employ close to 124 million people and about 60 per cent of these are located in rural areas. 

In December 2022, a survey by Development Intelligence Unit and Development Alternatives revealed that about 44 per cent of young adults living in rural India wanted to start their own businesses. Hence, with the right support, rural SMEs can play a major role in the economic development of India, creating jobs, boosting incomes and reducing poverty. 

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