Pre-Budget expectations to drive economic growth through fintechs and MSMEs


The 2021 budget must consider issuing specific directives and policies focused on leveraging technological innovations from Indian Fintechs to integrate MSME into the digital economy with the larger goal of increasing MSME and digital economy contribution to the GDP.

The initial impact of the pandemic was severe for businesses in almost all sectors. Gradually some sectors have adapted and weathered the consequences better, while others have benefitted from the situation. The MSME segment that transcends all sectors has experienced the highest impact due to lack of digitization. The fintech space in general and payments, in particular, have benefitted the most after the initial shock.

MSME being the backbone of the Indian economy, the Ministry of MSME aims to increase the sector’s contribution to the GDP to 50% from the current 30%. While there are no official reports, the MSME contribution in 2020 would have most likely been lower than 30% due to a sharp decline in their businesses. The challenges that MSMEs typically face — inadequate cash flows, supply chain and customer relations, fulfillment, and financial management — intensified for a lack of technology adoption. MSMEs direly need governmental support to crawl back to business as usual, let alone contribute more to the India GDP in the upcoming fiscal year. MSMEs that had leveraged technology have provenly fared better using digital channels to conduct business.

Similarly, the Ministry of Electronics and Information Technology (MEITY) has also set a 5-year goal of increasing the digital economy contribution to the GDP from the current 8% to 20%. The objectives of these two departments are inter-dependent and complementary. All the key stakeholders — MSME, MEITY, Ministry of MSME, and Fintechs — essential to achieve the objectives will benefit from effective public-private and intergovernmental agency partnerships and collaboration.

To achieve the goal of increasing MSME contribution, the government must encourage them to leverage technology while ensuring that it’s a win-win for MSMEs and the government. Any financial or non-financial support the government offers to MSMEs must be subject to demonstration of a clear shift to digital commerce. By doing so, MSMEs can be better equipped to manage business disruptions and stay competitive; the government can benefit from higher tax revenues from integrating MSMEs into the digital economy.

The Indian fintech startup ecosystem has played a pivotal role in empowering individuals and businesses via digital payments, lending, insurance, and personal financial management products and services. Between 2015 and 2020, nearly 1500 indigenous fintech startups were founded compared to 2000+ in the US. These startups have been instrumental in developing innovative mobile-based technological solutions that are simple to use, secure, safe, affordable, and scalable. The Startup India campaign announced in 2015 by the Hon’ble PM Shri. Narendra Modi has given a strong fillip to the startup ecosystem. The recently announced Startup India Seed fund of INR 1,000 Crore, though small for an economy of India’s size, is a step in the right direction in setting up new startups and promote their growth.

The 2021 budget must consider issuing specific directives and policies focused on leveraging technological innovations from Indian Fintechs to integrate MSME into the digital economy with the larger goal of increasing MSME and digital economy contribution to the GDP.

Technological Innovation is paramount for economic growth. Digital commerce is one such example that increases consumption leading to economic growth. Despite being among the top 5 economies globally, India lags other nations on the digital economy front. On the positive side, the pandemic has shown the importance of technology to MSMEs, and Fintechs have developed readily usable innovative solutions targeted at 60+ million MSMEs in India. MSMEs that previously did not have the will or the skill for digital commerce are beginning to show willingness after the near extinction of their businesses. However, they still need the skills, tools, and some financial support to embrace digital commerce.

The recent regulatory approval of some of the technological advances bodes well for accelerating the digitization of MSMEs. The legitimization of the Video-Based Customer Identification Process allows for onboarding customers faster and at a much lower cost digitally than physical verification. Mobile- and app-based card acceptance solutions and RBI raising the limits for customer authentication of contactless payment transactions from INR 2,000 to INR 5,000 in tandem will simplify and lower the cost of digital payments acceptance for MSMEs. Similarly, the significant progress in ratification of digital ID and the ability to transact with the ID and payment rails will bring the costs down and create incentives for individuals and businesses in rural areas.

The fallout of the pandemic has created a perfect storm for the digitization of MSMEs. The government should take advantage of the innovations and MSME receptiveness to digital commerce to revitalize the economy and build resilience to similar unforeseen events in the future



Views expressed above are the author’s own.



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