This article, first published in February, 2022, is part of a series in which OECD experts and thought leaders — from around the world and all parts of society — address the COVID-19 crisis, discussing and developing solutions now and for the future. Aiming to foster the fruitful exchange of expertise and perspectives across fields to help us rise to this critical challenge, opinions expressed do not necessarily represent the views of the OECD. This piece was first published in the OECD's Development Co-operation Report 2021: Shaping a Just Digital Transformation
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Digital technologies, given their rapid rate of diffusion through globalisation, have become “glocal” in nature. They are becoming a mainstay of society, with their adoption further accelerated by the COVID-19 pandemic. The policies and governance approaches shaping them make the forward march to (more) digitalisation a concern for developed and developing countries alike.
This so-called glocal aspect complicates the question of what comprises digital transformation as well as the role of the international community in delivering on the governance of these technologies. Digital divides, for instance, are a major concern. They go beyond the divide between the connected and unconnected, they also manifest among the connected in both developed and developing nations. Digital divides take on access, skills, language, and gendered dimensions, to name a few. Digital transformation agendas must consider this diversity to ensure that advances in digitalisation do not widen existing inequalities and inadvertently create new ones.
Similarly, tech governance is not only about establishing guardrails for emerging technologies such as artificial intelligence; it also addresses socio-economic, cultural and political complexities that predate, and are exacerbated by, digitalisation. Market solutions alone, however promising and exciting, will not solve these intractable and interconnected challenges. For instance, driving down costs of Internet access – from infrastructure to connecting devices – will not per se directly result in more people contributing to and benefiting from digitalisation. The demand-side drivers for adoption are laden with inequalities. To illustrate, adverse socio-cultural norms like gendered disparities in access to education and income opportunities are mirrored in who gains access and who can meaningfully use and even create digital technologies. Digital governance at the global and local levels must therefore advance coherent, sustainable policies and requisite investments in eliminating systemic barriers – not merely fixate on the technologies of the day.
The discourse around global governance must better accommodate the real digital transformation challenges of developing countries – they are, after all, home to the majority of the digitally unconnected and thus offer the greatest potential for growth and even untapped innovation for our digital futures. The policy and governance options put forth by the international community require a wider cross-sectoral and interdisciplinary frame to ensure simultaneous contextual, progressive and sustainable digitalisation. All too often, digital development efforts are informed by a limited range of views, making it more difficult to realise the desired outcomes. At the same time, fascination with digital innovation frequently relegates governance considerations and undermines their critical role in driving appropriate digitalisation trajectories. This “innovation captivation” has given rise to technology solutionism – the assumption that development challenges can be solved through (more) technology – and leapfrogging, leading to enormous mistakes that risk widening inequalities. A sound example is investing in digital infrastructure without factoring in whether a developing country has the reliable and sustainable energy sources needed for the resulting connectivity. Similarly, digital education is not just a matter of flashy gadgets to power learning, but of sustained investment in well-trained teachers and a vast range of other context-specific enabling factors to ensure that the deployed digital tools can deliver on the desired outcomes. Leapfrogging may work in the context of bypassing legacy telecommunications infrastructure. But it can be an inappropriate and acontextual approach to investing in social dimensions such as health and access to education, and even in technical dimensions such as access to reliable and sustainable energy sources to power connectivity. The international community must rid itself of this myopia.
Before taking a decision, the international community must urgently consult developing nations, starting with the governments, as there are (unaddressed) concerns about their readiness to adopt the multistakeholder model, which may be unfamiliar (compared to the more established multilateralism) and frequently seen as both resource- and capacity-intensive and falling short in terms of producing enforceable actions.
There have been growing calls within the international community for global technology governance and co-operation to embody inclusive multilateralism and multistakeholderism. This rhetoric reflects the significant role of all stakeholders – whether from governments, inter-governmental organisations, civil society, the private sector, academia or technical communities – in shaping legitimate governance outcomes. In practice, however, the mechanisms and underlying assumptions about how to effectively implement the twin governance approaches do not get sufficient attention. Before taking a decision, the international community must urgently consult developing nations, starting with the governments, as there are (unaddressed) concerns about their readiness to adopt the multistakeholder model, which may be unfamiliar (compared to the more established multilateralism) and frequently seen as both resource- and capacity-intensive and falling short in terms of producing enforceable actions. Additionally, the multistakeholder approach to global tech governance typically features, by default, well-resourced stakeholders across sectors. This unintentionally raises the costs of engagement for small and developing nations, local civil society, and smaller private sector players. If these issues are not addressed, they could undermine the principal of inclusion sought in international digital co-operation.
Much work lies ahead to advance digital development. Priority should be given to the intricacies of governance as the international community frames and shapes its tasks. Avoiding short-term, siloed and insufficiently informed action agendas is critical to ensuring that “glocal” technologies are governed in a way that maximises the benefits and minimises the harms of digitalisation.
Read the OECD's Development Co-operation Report 2021: Shaping a Just Digital Transformation
|Tackling COVID-19||SDGs||Digitalisation||Digital Inclusion|
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Access to technology by small business firms at low cost and customization should be the focus areas of governance in technology firms because they provide strength to the mid-corporate and large corproate firms. Advocacy and handholding till they stabilise in their supply chains are other important focus areas.
India's Small Enterprises Need gearing mechanisms
Digitization of the Micro and Small Manufacturing Enterprises
In India 95% of manufacturing micro and small manufacturing enterprises (MSMEs), estimated at 1.6crore are single owner enterprises whether they are proprietary or partnerships.
These MSMEs go through stages similar to biological organisms. Seeds whether they are sown humanly or by birds fight for their growth with worms, ants and insects and sprout. Thereafter they grow as plants and trees. Some give flowers, some give aromatics, and some others give fruits etc. This article discusses the issues relating to the digitization of manufacturing MSE and not the usual connotation of micro, small, and medium enterprises. They are in different typologies: micro, supporting enterprises providing forward linkages to the small and medium-sized enterprises and domestic market-oriented enterprises, and export-oriented enterprises. The last type is not going to be part of the article as they are already digitally transformed.
Digital transformation is the foundation for a sustainable future. It enhances the reach to the customers and markets and enables the supply chains transform as value chains. It helps in realization of the revenues fast.
Enterprise level hurdles
Most MSMEs have rigid mindsets, lukewarm approaches to change and fear of growth. Digitisation transforms such mindsets with ease. For example, the start-up manufacturing micro entrepreneur may be at bay as to where to locate his enterprise – closer to his home, closer to raw materials, closer to a political constituency, or closer to markets or locate where there is ease of starting. If digitised, (s)he can go through a search engine like google or binge and find out which location suits him best even through her/his smart phone or on a laptop if (s)he has one. This happens because of data transmitted through space or cloud technology. (S)he should keep his eyes and ears open – rather, be prepared to listen and learn from surroundings, develop, and keep reviewing business development plans and enhance customer satisfaction through continual improvements in quality of the product. (S)he will be able to produce what the market wants and to the extent required, optimise his resource-use. Knowledge plays a key role. With digitisation, the entrepreneur will be able to do due diligence of the seller of the machinery and raw materials, enter contracts responsibly, and realise sales fast. The entire supply chain management, branding or co-branding, franchising etc., will have the prospect of reaching global standards and markets.
why is digitisation not happening despite a big push by the Union and State governments in MSMEs?
First is cost. Second is access. It is also difficult to reach out to them either through a phone call or message. Third, even after identification of a firm, they lack ability to negotiate the terms of engagement. No MSME can verify or validate a software firm. These are not insurmountable problems, as today’s ecosystem facilitates the digital transformation, like never before.
Ecosystem means covers the effective interaction between various stakeholders of MSMEs both in terms of cost and speed. Policy advocacy, stakeholder interactions, Institutional supports both from the public and private, better communications and incentive delivery system etc are all part of the ecosystem.
Both the Union and State governments are going all out to support digitisation of the MSMEs. 2.5 lakh villages have been provided with broadband connectivity. Networking has improved. Business to businesses (B2B), Business to government (B2G), Business to Customers (B2C) have acquired speed. Realization of the transactions has become easier with factoring, Trade receivables Discount System (TReDS), for transactions of firms with Rs.100cr annual turnover and above, Government e-market Place (GeMs) portal for procurement of goods and services by the governments, PSUs, and larger firms, and for delayed payments, a Samadhan portal of the Union Government, MSE facilitation Councils of the state governments, and Insolvency and Bankruptcy Code (IBC) resolution for firms with Rs.1crore investment of the MSEs are just examples to mention a few change movers or facilitators.
In addition, RBI has established Account aggregators to resolve the information asymmetry and moral hazard issues of the lenders across the lending institutions – commercial banks, NBFCs and FINTECHs. Just last week, UGROW MD disclosed to Economic Times in an interview that they have lent over Rs.2969 crores to the MSMEs. He did not of course mention whether they are manufacturing or services. But he gave the hope that in the next few years he would cross a lending of Rs.12-13000cr for the MSMEs in the country. He also mentioned that during the next three years, data-based lending will explode. An estimated 70 percent job creation in the MSMEs in the first quarter of the current year is a vindication of the policy thrust by the union and state governments.
Telangana – Prime Mover in Digitisation of MSMEs
Telangana state is unique in the institutional building for strengthening the ecosystem. This is the only state where one can start the industry from day one of conceiving the idea, as all approvals will be delivered on the TSiPASS within less than 15 days and in the absence of receipt of approvals, the approvals are deemed to be given. Telangana State Program for the rapid incentives for Dalit entrepreneurs(TS-PRIDE), We-Hub for women entrepreneurs, T-Hub for start-ups, TS-HART for handicrafts and artisans, insurance for handloom weavers up to Rs.5lakhs like for the farmers, Telangana Academy for skills and knowledge (TASK), the best ranked innovation environment in the state through the state Innovation Council, Research and Innovation Centre of Hyderabad (RICH) and Telangana Industrial Health Clinic Ltd., (TIHCL), the only institution in the country for revival of stressed manufacturing MSEs etc., are autonomous institutions run on transparency and good governance practices. The state has minimum inspections and maximum facilitation for the MSMEs. Uninterrupted power supply to the industry, industrial water, twelve new industrial parks in addition to the existing 25-odd, and Industrial Local Area Authorities.
Let me illustrate with a case study of the TIHCL that assisted 334 MSMEs either through margin funding or non-finance stress resolution, stabilizing employment of around 13000 employees and around Rs. 1000cr capital.
Deccan Pulverisers, located at Talakondapally in Mahabubnagar district, run by a woman entrepreneur, engaged in manufacturing of Silica/potash powder from quartz/feldspar mineral stones, employing 27 workers. There was shortage of working capital funds due to increased investment on construction of factory premises, which was also damaged by a natural calamity and delay in delivery of machinery that further elongated the commencement of commercial operations. Unit became NPA in SFC books. TIHCL sanctioned Critical Asset Funding (CAF) loan which reduced the interest burden for the enterprise by 4% and provided much needed relief in working capital cycle that led to upgradation to standard asset from the NPA status within ten days. The unit that had an irregularity of Rs.24.90lakhs pre-revival with 50% capacity utilized, moved with the TIHCL support to 100% capacity use jumping from Rs.90lakh turnover to Rs.145lakh turnover in six months. Revival could happen because the firm could digitise its operations and allowed us to handhold and monitor till it realised its cashflows projected in the restructuring proposal.
TIHCL is a fully online functioning non-deposit NBFC, registered with good governance and efficient management practices. Anyone can reach with a click of the mouse. It does due diligence in five days and its USP is handholding and monitoring through a low-cost customised and consent-based enterprise resource planning (ERP) architecture set up with the MSMEs they serve. They lend at just 10% per annum interest. They are open to co-lending with interested banks and NBFCs. They have preferred terms for stress release of women enterprises with one percent reduction in financial support, and separate products for revival. Data and due diligence are its strengths. It works with minimum overheads and maximum facilitation from highly experienced team of consultants in financing the MSMEs. It has Memorandum of Understanding with FTCCI, ALEAP, SBI, for effective coordination and with CESS for research studies.
Trust the Entrepreneur
Trusting the entrepreneur is its major strength while it was trust deficit and perceived high risk despite low level of NPAs that detracted the commercial banks to do aggressive lending for the MSMEs. Even as per the Annual Report of the RBI for FY21-22, while the number of micro enterprise accounts declined during the year 21-22 by 38% amount outstanding increased by 8.1%, small enterprise accounts declined by 20.1% with outstanding amount increasing by 9.48%. The medium enterprise accounts declined by 27% while outstanding amount increased by nearly 37%. These figures reflect the continuing hesitancy in adding numbers to the MSME portfolio.
The Way Forward
The way forward lies in easier access through dedicated and state accredited software firms to help the MSMEs digitalise their operations. Advocacy with simple and cost-effective and low-cost package of customised ERP solutions and handholding would pave the way for further progress of this important constituent of the economy that contributes 8% of the GDP and front-ending the supply chains of the larger enterprises in the corporate and mid-corporate categories.
Data builds trust and this data should be reliable and verifiable easily by the stakeholders for rendering quick support and this is possible only through digitisation. Atma Nirbhar Bharat or self-reliant India would be truly competitive when the MSMEs are facilitated to become digitally savvy. We are already one of the largest users of smartphones in the world with leadership in software exports, the first step for digital transformation. Hopefully, the measures suggested above, would transform them fast.
(The views are personal and they have been presented in an interview with ‘nicheBrains’. The author can be reached at email@example.com )