Bringing MSMEs into Global Value Chains

Syllabus: GS3/ Indian economy & related issues, Inclusive Growth

In News 

• Every year, Micro, Small and Medium-sized Enterprises (MSMEs) Day is celebrated on 27th June.

MSME Sector In India 

• The Micro Small and Medium Enterprises (MSMEs) sector is a major contributor to the socio-economic development of the country. 
• In India, the sector has gained significant importance due to its contribution to the Gross Domestic Product (GDP) of the country and exports. 
• The sector has also contributed immensely with respect to entrepreneurship development especially in semi-urban and rural areas of India.

Significance of MSME Sector

• Employment Generation: MSMEs are the largest employer in India outside of agriculture, employing over 11.1 crore people, or 45% of all workers. 
• Boost to GDP and Exports: MSME actually accounts for over 99% of businesses. 
  • This sector consists of nearly 64 million enterprises, second only in size to China’s in terms of GDP. 
• Promotion of Industries and Innovation: They help in the promotion of industrial development in rural areas, capacity building, local resource mobilisation and also an opportunity for budding entrepreneurs to build creative products.
• Inclusive Society: They create an inclusive and sustainable society through the creation of non-farm livelihood. They promote balanced regional development, gender equity and create opportunities for people to use banking services and products.
• Considering the above points, they are called ‘Growth Engine of the Nation’.

Challenges/Issues  

• The disruption of the pandemic severely impacted MSMEs, especially those in the services sector. 
  • The MSME sector was among the most pandemic afflicted sectors. Thousands of MSMEs either shut down or became sick after the government announced a nationwide strict lockdown.
• Inaccessibility of credit: The sector always funds starved and banks are reluctant to fund them, and delays in payments to MSMEs from their buyers.
• Unavailability of raw materials: Raw material obtaining is the major challenge to them. 
• Inaccessibility of market:  Lack of infrastructure and demand due to lockdown.
• Quality issues: Lack of quality assurance certification and marketing of the final goods.
• Lack of skilled manpower & Infrastructure: Mostly are present in rural areas, low ICT, lack of trained manpower, inadequate transport facilities, electricity are major issues
• GreenHouse Gases :
  • This sector also contributes significantly to greenhouse gases (GHGs), as it is energy intensive. 
  • As 70 per cent of the country’s power consumption is met by coal, the segment’s indirect contribution to global warming is significant. 

• Red-Tapism:
  • As the MSMEs require various approvals, the entrepreneurs have to run around various government departments for getting construction permits, enforcing contracts, paying taxes, starting a business and trading across borders.
  • These lengthy and time taking processes, regulatory risks and policy uncertainty shake the investor’s confidence.
• Digitalisation concerns
  • Digitalisation concerns the integration of digital technologies, such as big data, artificial intelligence and virtual reality, in business processes, also known as Industry 4.0. 

Governments efforts 

• The Government of India has identified the development of the country’s MSME ecosystem as a top priority for achieving Atma Nirbhar Bharat (self-reliant India). 
• India’s ambitious “Make in India” campaign aims to catapult the country up the manufacturing value chain to position itself as a global manufacturing hub.
• Initiatives such as the production linked incentives (PLI) schemes and the recently launched zero effect zero defect (ZED) certification are helping to promote and boost the sector.
• International Support 
  • The UN system in India is supporting these and other MSME development initiatives at the local, State and national levels.
    • Agencies such as the United Nations Industrial Development Organisation (UNIDO), International Labour Organisation (ILO), United Nations Development Programme (UNDP), UN Women, IFAD and others are working with MSMEs .
• For reducing Environmental impact
  • Greening” reduces the environmental impact of MSME operations and fosters cleantech innovation and entrepreneurship to accelerate the transition to a circular and low carbon economy. 
    • Energy efficiency provides a case in point as business and climate benefits go hand in hand. For example, together with the Bureau of Energy Efficiency (BEE), UNIDO provided energy efficiency advisory services to 695 MSMEs in 23 clusters covering brass, ceramic, dairy, foundry and hand tool sectors. 

• The Prime Minister’s Employment Generation Programme (PMEGP) is also creating opportunities for self-employment and micro enterprises, with over 7 lakh micro enterprises assisted in becoming economically viable. 

• Others include: ASPIRE scheme, Credit Guarantee Scheme, Credit Linked Capital Subsidy Scheme (CLCSS)etc.
• CHAMPIONS Portal to assist Indian MSMEs march into the big league as National and Global CHAMPIONS by solving their grievances and encouraging, supporting, helping and hand holding them.
• MSME Samadhan to enable them to directly register their cases about delayed payments by Central Ministries/Departments/CPSEs/State Governments.
• Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
• Interest Subvention Scheme for Incremental Credit to MSMEs
• The RBI also extended the scheme of one-time restructuring of loans to MSMEs without an asset classification downgrade and permitted bank lending to NBFCs for on-lending to agriculture, MSMEs and housing to be classified as priority sector lending (PSL).

Conclusion and Way Forward 

•  There is a need for replicable digital solutions adapted for MSMEs, including digital enhancements for machinery and equipment currently in use.
  • Government initiatives such as the Digital Saksham and the interlinking of the Udyam, e-Shram, National Career Service (NCS), and Atmanirbhar Skilled Employee-Employer Mapping (ASEEM) portals show the promise of targeted digitalisation schemes.

• To fully unlock emerging opportunities in the rapidly changing global value chain ecosystem and maximise the demographic dividend, MSME owners need to further commit to formalising their businesses, investing in improved productivity, compliance and most of all, decent work and jobs for India’s aspiring youth. 
• The government should control/regulate/support Micro and Small Enterprises from huge raw material price increases and also safeguard the interest of exporters.
• Promoting Small to Medium Enterprise (SME) bond issuances can provide a boost to debt capital markets participation of MSMEs.

• These will provide lower interest rates for MSMEs than other financial intermediaries charge and also be a viable high-yield instrument for informed and educated investors operating in the bond market.

• Government should create an independent regulatory body which can advise and provide consultancy to MSMEs.

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Mains Practice Question:

[Q] Micro, small and medium Enterprises (MSMEs) are the growth engines of the Indian economy. Critically analyse.