A myth that sustainability for MSMEs cannot coexist with economic profitability: Pradeep Mehta, CUTS

Economic Times, February 25, 2020

The drive to ensure that MSMEs adopt more environmentally friendly production methods need to be deepened and capital for such technology up-gradations should be more readily available, says Pradeep S Mehta, Secretary General, Consumer Unity & Trust Society (CUTS International). In an interview with ET Digital, Mehta talks about the idea of sustainable manufacturing, how government-industry partnership can make a big difference and why we should look at Germany for inspiration. Edited excepts:

Economic Times (ET): The idea of sustainability has economic, social and environmental considerations. Do you think this is too much to ask from our cash-starved MSMEs?
Pradeep S Mehta (PM):
It is a myth that environmental sustainability cannot coexist with profitability and economic sustainability of MSMEs. In fact, it is a better business model to internalise sustainability. However, to enable MSMEs to turn their business model sustainable without losing on profitability, we need to keep working on technology and market innovations. In parallel, we need to identify emerging sectors where the potential for setting up new MSMEs is already high. Waste management, decentralised renewable energy or energy efficient constructions are such examples.

MSMEs are parts of larger value chains; the onus of cost of compliance is on the whole value chain rather than on individual firms or a segment of the value chain.

The drive to ensure that MSMEs adopt more environmentally friendly production methods need to be deepened and capital for such technology up-gradations should be more readily available. Other players in the whole value chain need to facilitate the process.

However, we feel that at this juncture such up-gradations should not be forced upon, but should be convinced upon so that MSMEs adopt them readily. Maybe the government should fix a time-line within which MSMEs need to upgrade to more environmentally friendly production methods. Some rewards – in the form of tax benefits or loans on easier terms or a combination of both – can be brought in to incentivise the process of upgradation. MSMEs need to understand the imperativeness of sustainable production to remain competitive.

ET: What may be stopping Indian MSME turn more sustainable? Is the cost the biggest hindrance here?
We do not feel the cost of compliance is stopping MSMEs to turn more sustainable. We would like to blame shoddy governance for the continued, and somewhat deep rooted, social culture of neglecting practices that contributes to sustainability. MSMEs or entrepreneurs are part of the same society, where despite several laws and regulations, they tend to take sustainability concepts lightly, which further gets buttressed by lax and corrupt practices of law enforcers.

Be that as it may, certain rules and regulations may also require review and be made less restrictive, yet achieving the same objectives.

We can take clues from Germany, where MSMEs are the prime economic actors for some time now, and they comply with all the sustainability rules, which are of much higher standards from those being sought in India. MSMEs in South-East Asia, reportedly, have shown immense improvement in the near past.

ET: How can the government can create the financial elbow room for MSME players to turn more sustainable?
Limited access to finance is the biggest challenge for Indian MSMEs like in many other developing countries. Nonetheless, turning sustainable also offers us the opportunity to be integrated into the global production and trade system, and consequently, attract international investment. Government through various policy incentives need to ensure the steady inflow of investment. Additionally, the government must ensure that the value-added or return as an output of the new model is evenly distributed across the complex network of various links and chains of the producers.

In addition to creating financial elbow, the government along with business association needs to convince MSMEs of the benefits of adopting production processes that contribute to sustainability. First let the demand for upgradation come from MSME players themselves, which in turn would pave the way for the financial elbow room.

At the same time, consumers also need to be sensitized so that they begin demanding more and more products that are made through environmentally sustainable processes. While companies use innovative advertising, packaging, and labelling in promoting their sustainable products, the government needs to be vigilant to ensure transparency of information is maintained and environmental claims are examined. A national environment based ecolabelling such as Ecomark, which is lying almost dormant with the Ministry of Environment, Forest and Climate Change (MoEFCC), can be duly revived and used as a benchmark for industries and their products. This will also create confidence among consumers concerning the interface of quality and environment friendliness of the product.

ET: Is the Indian regulatory and compliance ecosystem more of a drag/or an enabler when it comes to promoting sustainable manufacturing across MSMEs? What further would you like to see the government doing?
Though the Indian regulatory system may require a review as far as its optimality is concerned, we feel that the attitude of enforcers of rules is a big drag and need to change substantially. We understand that some changes in such an attitude or mindset have come around at the Central level in the near past, but those at the State level are still far from satisfactory. There is a persisting lack of understanding concerning the interconnectedness of challenges, resulting in fragmented approaches.

Government contribution towards building a sustainable MSME ecosystem can largely be divided into two – hard and soft. Hard contributions are those in the form of building quality infrastructure (roads, electricity etc.) and soft contributions are in the form of governance, including compliance issues. On the latter, the government can create enabling conditions for MSMEs for developing new sustainable business models and solutions through the careful mix of regulations and economic instruments. This needs to be accompanied by the development of new technologies or modification of existing ones, capacity building of stakeholders and last but not least, more adaptive approaches.

This can be done by adopting a somewhat de-regulating mindset. Maybe, to begin with, the government can designate few deregulated zones on a pilot basis and study the behaviour of MSMEs vis-à-vis adherence of sustainable production processes. Like the ‘sandbox’ approach adopted for tech firms, based on the study in the deregulated zone government can device least-restrictive optimal regulation for MSMEs to achieve desired objectives.

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