Sparking Innovation: Telangana's Ambitious Steps for MSME Growth

- Paras Jasrai

The Micro, Small, and Medium Enterprises (MSME) sector plays a critical role in driving economic development across Indian states by providing employment opportunities and enhancing overall industrial output. The government of Telangana (GoTG) recently released a policy document on MSMEs to foster innovation and inclusivity (encompassing various social groups and women) and positions itself as a forward-thinking framework. We uncover the policy in this edition. 

First, we all know how complex and complicated policy documents can be, despite the good intentions of outlining them as solutions in a specific area. Or how oversimplified they can be. All of this makes it difficult for investors and other stakeholders to get hold of the government's proposed solutions, which do not eventually result in the desired result as envisaged initially. However, the MSME policy 2024 by GoTG¹ strikes the right balance by discussing the challenges faced by the MSME sector in the state and by outlining the solutions succinctly, in just 36 pages. 

The policy identifies six areas namely access to land, finance, raw materials, markets, the flexibility of labor markets, and adoption of technology for the MSME sector. The document then proposes solutions to address challenges in each of these areas which could unlock the potential of MSMEs in the state. 

Addressing Land Accessibility and Affordability

The first and perhaps the most important solution of the MSME policy is regarding improving access to land and its affordability. The state’s nodal industrial agency allots land at rates that are nearly five times that of Maharashtra and Gujarat, indicating the difficulty faced by MSMEs in land affordability. In addition, Hyderabad’s zonal restrictions around the outer and regional ring roads (ORR and RRR)  restrict the accessibility of land for industrial and commercial use. To address these challenges, the policy aims to build one industrial park in each of the state’s districts and 10 industrial parks around the ORR and RRR, with 20% of plots reserved for MSMEs.

However, while Telangana’s measures to increase industrial parks are commendable, comparable states like Gujarat and Maharashtra have taken a more aggressive approach toward land reforms, making land acquisition easier and more cost-effective for MSMEs. Telangana could further explore mechanisms such as land pooling or shared infrastructure projects to ease the burden of high land prices. Along with the establishment of industrial parks, adequate and consistent power and water supply, to them, also have to be ensured. These industrial parks also need to have faster connectivity to ports, to ensure easier exports.

Labour Availability and Skill Development

Labour is another critical area. While Telangana boasts an impressive workforce proficient in technical skills, the policy acknowledges the need to upskill workers in critical thinking and shop floor skills (such as inventory management, production planning, scheduling, etc.), crucial for the scaling of MSMEs. The Skilling University proposal is a step in the right direction by providing them with courses relevant to the MSME sector about advanced manufacturing, digital skills, etc. However, it could be further strengthened by public-private partnerships with industries to ensure that the skills imparted are market-relevant and industry-specific.

In comparison, states like Karnataka and Tamil Nadu have advanced skilling programs with industry-academia collaborations, where industries directly design curriculum modules. Telangana can take a cue from this by involving sector-specific industries (e.g., biotech, IT, Pharma, manufacturing) in developing targeted training programs for MSMEs. In addition, if industries belonging to a specific sector are pooled in the same location, it would make hiring, training, and retaining talent easier.

Also, the policy is completely silent on labor laws which is surprising as higher unit labour costs are a major impediment to MSME growth.

Raw Material Accessibility and Export Integration

The availability of high-quality raw materials is a well-recognized challenge in Telangana. MSMEs in the state face delays in raw material delivery and lack adequate testing facilities, which hampers their ability to be a part of export value chains. The policy rightly proposes to develop common testing facilities and improve the warehousing ecosystem. However, states like Tamil Nadu and Rajasthan have pioneered in setting up raw material banks for MSMEs, ensuring the timely availability of materials at subsidized rates. Telangana could further enhance its policy by adopting similar measures, particularly in industries that rely heavily on raw materials like textiles and pharmaceuticals. 

Financial Access and the Need for a State-Specific Credit Guarantee Scheme

Easy access to finance is essential for the growth of MSMEs. While the Telangana policy focuses on enhancing accessibility to traditional (such as banks, and other financial incentives) and alternative (revenue-based access to credit based on future revenues) sources of finance, it stops short of introducing a state-specific credit guarantee scheme. The credit guarantee scheme at the national level already supports MSMEs with collateral-free loans, but Telangana could take it further by introducing a credit guarantee scheme offering 100% coverage for micro-enterprises, especially in rural areas.

This scheme could provide additional interest subsidies, fast-track claims, and sector-specific guarantees for industries like biotech, renewable energy, and green businesses. Moreover, states like Gujarat and Tamil Nadu already offer targeted financing for specific industries, and Telangana can improve financial inclusion by incorporating fintechs and alternative lenders in its scheme.

Technology Adoption and Market Access

The Telangana policy takes a positive step toward enhancing technology adoption in MSMEs by proposing the creation of a dedicated fund for technology transfer and promoting the digitalization of MSMEs. The bulk buying of software products to provide at subsidized rates for MSMEs is an innovative measure that will certainly help small enterprises improve efficiency.

However, Maharashtra and Karnataka have gone a step further by offering financial grants for patent registration and supporting R&D initiatives for MSMEs. Telangana’s incentives for patent registration and R&D are noteworthy, but stronger financial support could encourage MSMEs to invest in innovation more actively.

On the market access front, the policy includes measures like import duty reimbursements on samples for prototyping and continuing cost-sharing for quality certification, which are excellent initiatives. Additionally, the development of an enterprise development center platform to outline export compliances is a forward-thinking initiative.

Sustainability and Green Business Incentives

While Telangana promotes the adoption of green technologies in MSMEs, the policy lacks concrete financial incentives for sustainability practices. States like Karnataka and Maharashtra provide specific financial support for businesses adopting circular economy models, such as waste recycling or renewable energy solutions. Telangana can enhance its policy by introducing green certifications or offering financial grants to MSMEs adopting sustainable manufacturing practices. 

Implementation and Governance

The implementation framework of Telangana’s MSME Policy 2024 is robust, with an MSME wing under the Commissioner of Industries and a clear outline of responsibilities for various departments. The inclusion of a steering committee to monitor implementation is a good move. The policy provides for a monitoring framework by tabling annual performance review reports to the legislative assembly. However, independent audits and public access to performance reports would add another layer of accountability, ensuring that the policy’s impact is regularly assessed and adjusted if necessary. 

States like Tamil Nadu have adopted third-party evaluations of their MSME schemes, which could serve as a model for Telangana to ensure greater transparency and effective implementation.

Conclusion

Overall, the Telangana MSME Policy 2024 strikes a solid balance by addressing the core challenges faced by MSMEs in the areas of land access, finance, raw materials, technology adoption, and market integration. While there are several innovative measures, particularly around digitalization and industrial parks, the policy could benefit from more concrete financial support for sustainability practices and expanded financing options through a state-specific credit guarantee scheme. Additionally, measures must also be taken to encourage the industries to scale up and eventually become large industries by implementing sensible labour laws which were passed by the Union government in 2020. With thoughtful implementation and a robust governance structure, Telangana’s MSME policy could become a key driver of the state’s economic growth.

References:

A Model Comprehensive MSME Policy for Indian States

1. https://www.telangana.gov.in/wp-content/uploads/2024/09/Telangana-MSME-Policy-2024-English.pdf