MSME Sector in India

In News

Recently, entrepreneurs and companies from Tamil Nadu have highlighted their concerns regarding the Micro, Small and Medium Enterprises (MSME) sector.

About MSME Sector

• The Government of India enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under
  • Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
    • a micro-enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.
    • a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.
    • a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Significance

• Employment Generation: MSMEs are the second largest employer after the agriculture sector, giving employment to about 11 crore people with low capital and technology requirements.
• Boost to GDP and Exports: They account for almost 30% of the country’s GDP and half of the country’s exports come from products and services within this sector.
  • The Ministry of MSME has set a target to increase its contribution to GDP to 50% by 2025 as India becomes a USD 5 trillion economy.
• 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’.

Concerns

• Non-availability/Delays of Funds
  • Mounting losses and debts, non-availability of proper financial help and delays from the government, reluctance from the banks for the funding, etc.
  • MSMEs in India typically rely on NBFCs for their financing needs, which in itself has been enduring a liquidity crunch since September 2018.
• Lack of Infrastructure and Technology
  • Poor quality of power with unscheduled cuts, no substations, no proper roads, no effective stormwater drainage, inadequate sewage treatment plants and transport facilities.
  • Most of India’s MSME sector is based on out-dated technology, which hampers its production efficiency.

• Lack of Formalisation
  • Almost 86% of the manufacturing MSMEs operating in the country are unregistered. Out of the 6.3 crore MSMEs, only about 1.1 crores are registered with the Goods and Services Tax (GST) regime and the number of income tax filers are even less.
  • As a result, Indian MSMEs’ credit requirement has been largely unmet due to limited availability and access to data and legacy underwriting methods.
• 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.
• Issues with Manpower and Scale
  • There is a huge shortage of labour and also identifying candidates through skill development initiatives is a challenge.
  • The majority of the firms in MSMEs are micro-enterprises and scaling them up is a problem, especially when fund access is challenging.
• Hampered Productivity
  • These issues hamper the productivity of small firms which is already very low relative to larger firms, which deters employment generation and dynamism in Indian manufacturing.
• New Emerging Concerns
  • Significant signs of a slowdown due to Covid-19 (on the demand side) and structural reforms like GST rollout and demonetisation (on the supply side), which also had adverse effects on the MSME sector.
  • Obtaining raw material obtaining and no/low demand due to the lockdowns were major challenges.

Suggestions

• Form a Conducive Atmosphere
  • The government should control/regulate/support Micro and Small Enterprises from huge raw material price increases and also safeguard the interest of exporters.
  • Hiring of skilled labour and skilling of the existing labour.
  • Set up new infrastructure and development of the existing one with support to investments and provisions of other amenities like water supply, electricity, etc.
• Development of Market
  • 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.
• Regulations and Regulatory Body
  • Government should create an independent regulatory body which can advise and provide consultancy to MSMEs.
  • It is important to provide MSMEs with a hassle-free regulatory framework which works for them instead of working against them.
• Labour Law Reforms
  • Labour laws should try to maintain a balance between providing a growth-oriented framework for MSMEs and providing sufficient protection for the rights of workers.
• Inclusion of Technology
  • The sector should be incorporated with the new and emerging technologies like Artificial Intelligence, Data Analytics, Robotics and related technologies (collectively called as Industry Revolution 4.0) for organized large-scale manufacturing.

Source: TH