Nano Enterprises

Nano enterprises (~11 million) are a distinct segment of micro, small and medium enterprises (MSME). They are typically businesses that are smaller than micro-enterprises.
Though not officially recognised as a formal category under the MSME classification, nano enterprises are often used in colloquial terms to describe businesses with very limited resources, few employees, and minimal turnover (between Rs 10 lakhs and Rs 1 crore).

Under the MSME Development Act of 2006, the classification for enterprises is based on investment in plant, machinery, or equipment and their annual turnover.
Micro enterprises (investments up to Rs 1 crore and turnover up to Rs 5 crore), representing 97% of all registered MSMEs, play a pivotal role in India’s economy, contributing 30% to GDP & 45% to exports.

Localised: Nano Enterprises have hyperlocal roots and focus (local shops, home-based businesses, and independent service providers).
Informal nature: Nano Enterprises are predominantly informal in nature, with a significant majority primarily dealing in cash transactions, and aren’t generally registered on the GST portal.
Employment: These enterprises wield significant economic influence and serve as major job creators, ranging from 2 to 15 employees per enterprise, resulting in millions of jobs nationwide.
Locally significant: Their hyperlocal focus enables them to cater to the specific needs of their immediate communities, bridging crucial gaps in last-mile delivery of essential services and goods. This localised approach strengthens the social fabric and fosters a sense of community cohesion.

Challenges Faced by Nano Enterprises

Lack of distinction: This segment is categorised within the larger MSME cohort and lacks a distinctive categorical analysis.
Access to finance: Their Access to formal credit is restricted due to factors like lack of designated places of work, short-term financing needs, and rigid bank guidelines. Estimates suggest that out of 11 million nano entrepreneurs, only 5% have access to formal credit, and 80% survive on their savings.
Procurement of raw materials: The requirement for raw materials is small, partly due to the small scale of operation and partly due to financial constraints. Furthermore, they struggle to withstand the market fluctuation in raw material prices.
Vulnerabilities in black swan events: The recent COVID-19 pandemic has shown us the vulnerability of these entrepreneurs, who are more prone to revenue loss and closures.

Empowerment of Nano Enterprises

Information campaigns about existing schemes, such as PM SVANidhi for street vendors and PM Vishwakarma for artisans, can be very helpful.
Longitudinal research on the impact of financing and asset quality in this sector would go a long way toward changing perceptions of traditional financial institutions.
Recognition as a differentiated segment within micro-enterprises and tracking data on their market linkages and access to credit will give impetus to the sector.

On the demand side, increased digitisation (like UPI) will create more data footprints and visibility. These data sets can help in credit assessment and enable additional loans.
On the supply side, new underwriting models (tools that help lenders assess financing risk) will enable fintech firms and NBFCs to offer customised products to enterprises, including credit lines.
Phygital (Physical + Digital) Lending Model: A blend of digital platforms (for better loan approval insights) and physical touchpoints (to ensure timely repayments) can improve the viability of small loans.

Nano entrepreneurs with no credit or business history can be given additional risk capital and guarantees. Such guarantees enhance better cash flow and reduce capital/risk costs for NBFCs.
Guarantees can be structured to incentivise simple registrations (such as Udyam), direct bank linkages for customers, reduced interest costs, etc.
The 2023 budget had provisioned a credit guarantee program of Rs 9,000 crore that could unlock Rs 2 lakh crore worth of loans for the MSME sector.

Increased Business Growth: Formalisation and timely access to formal credit mitigate the segment’s financial vulnerability, releasing their entrepreneurial energies.
New Job Creation: The increased stability and growth of the nano businesses will create employment opportunities and improve the buoyancy of the local economy. This will eventually create other micro-entrepreneurs that serve as a supply chain or a distribution channel for high-growth nano-entrepreneurs.
Quality of Life: Increasing business incomes of nano entrepreneurs enables better investments in their families’ education and skilling journeys, shaping the economy’s future. This is particularly true of women, who are likely to spend 90% of their income on their families’ nutrition, health, and educational needs, leading to improved communities (inclusion).
Economies of Scale: By offering digital and physical support, lenders can serve more nano entrepreneurs faster while potentially reducing the cost of servicing small-ticket loans.

Conclusion

It is crucial to unlock the hidden potential of India’s nano enterprises and propel them towards scaling up to micro and macro levels, thereby contributing significantly to the nation’s economic development.
Their resourcefulness and deep understanding of local needs enable them to devise market-specific solutions that larger enterprises might overlook.

India has 63.4 million MSMEs. China has only a quarter of this number but generates ten times the economic value because of efficiency, technology adoption, market access, and support infrastructure. Optimising these factors can help India unlock MSMEs’ potential.

Udhyam Learning Foundation has initiated interventions through Udhyam Vyapaar, focussing on solving the problems of nano businesses in India. It claims to have impacted over 6,000 nano entrepreneurs.
Their Istri Project, for instance, benefits people who iron clothes for a living. This intervention focuses on transitioning from traditional coal-based iron boxes to more efficient LPG iron boxes to enhance their economic prospects. It has helped reduce annual coal usage by 3,000 tonnes.
Their other initiative, New Solutions, helps onboard street food vendors on aggregator platforms like Swiggy and Zomato and mentors them.

Reference: Financial Express | Business Today | Financial Express

PMF IAS Pathfinder for Mains – Question 2

Introduction: Briefly explain what nano enterprises are and what sort of formal recognition they have.
Body: Enumerate the essential features. Explain how formalisation can foster inclusion (social, political and economic) and entrepreneurship.
Conclusion: Since the question does not ask you to present suggestions/solutions, keep it brief.