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Economic Development > Indian Economy and issues > Union budget
SYLLABUS:
GS 3 > Economic Development >> Informal Economy >> MSMEs
REFERENCE NEWS:
Finance Minister Nirmala Sitharaman, in her Budget speech Tuesday, proposed a new assessment model for credit to Micro, Small and Medium Enterprises (MSMEs) that requires public sector banks (PSBs) to assess credit eligibility themselves instead of relying on external assessment. She also proposed to increase the limit of Mudra loans from Rs 10 lakh to Rs 20 lakh and introduce a credit guarantee scheme for purchase of machinery and equipment without collateral or third party guarantee.
MSME SECTOR IN INDIA:
Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. The sector has become a key driver of India's economy, fostering entrepreneurship and creating significant employment opportunities with low capital investment. It plays a vital role in the country's inclusive industrial development, complementing large industries as ancillary units.
MSME stands for micro, small and medium enterprises. MSMEs are businesses that produce, process, and preserve goods and commodities. These are broadly classified based on their investment in plant and machinery for manufacturing or equipment for service enterprises, as well as their annual turnover.
The sector is a critical source of livelihood and provides nearly 110 million jobs.
With the current emphasis on Atmanirbhar Bharat Abhiyan, these MSMEs have become even more significant to India’s economic and financial strategy.
Acknowledging the importance of the sector, the government of India envisioned that the sector would account for half of India’s GDP and add 50 million fresh jobs over the next five years.
MSMEs contribute to 40% of total exports from India
45% of manufacturing GDP
30% of GDP (6.11% from manufacturing sector and 24% from services sector)
It is the 2nd largest employment generator.
Rural-Urban Distribution: Around 51% of these are situated in rural India and 49% of them are situated in urban India.
99.5% of all MSME fall in micro category distributed all over. But small and medium are predominantly in urban India
Social Distribution of MSMEs: About 66 % of all MSMEs are owned by people belonging to the Scheduled Castes (12.5%), the Scheduled Tribes (4.1%) and Other Backward Classes (49.7%)
The gender ratio among employees is largely consistent across the board at roughly 80% male and 20% female.
CHALLENGES FACED BY MSME SECTOR IN INDIA:
Structural Challenges:
IPR Related Issues: Limited awareness and enforcement of Intellectual Property Rights.
Regulatory Cholesterol: Bureaucratic hurdles in obtaining government services and approvals like construction permits, contract enforcements, tax payments etc.
Out of the 6.3 crore MSMEs only about 1.1 crores are registered with Goods and Services Tax regime
Lack of Formalisation Amongst MSMEs: High number of unregistered MSMEs leading to limited access to formal credit.
Almost 86% of MSMEs in manufacturing sector are unregistered as per Economic Survey
Lack of Specialised MSME clusters: Indian MSME sector has a tendency of generalisation than specialisation
Chinese cluster exclusive for button manufacturing contributes to over 90% of world button exports
Government Policy Challenges:
GST rollout, demonetisation and frequent definition updates and its implementational challenges boost structural issues in MSMEs
Economic Challenges:
Credit Conundrum: Significant gap in credit supply to MSMEs. MSMEs in India typically rely on NBFCs and Micro Finance Institutions for their financing needs, given the lack of access to the banking sector.
A concerning gap in India’s MSME sector has been the credit supply shortage to MSMEs. The formal credit available to this sector is 16 trillion. The viable credit gap is 20 trillion against a total demand of 36 trillion.
High Energy Costs: Inefficiencies and outdated technologies increase operational costs leading to poor competitiveness.
Problem of Scale: Predominance of micro-enterprises limits scalability and growth.
Economic survey 2018-19 quoted the phenomenon of Dwarfism in MSME sector
Low Market Penetration: Limited reach compared to cheap imported goods.
For example, Chinese plastic toys compared to India’s traditional toys like Channapatna toys
Lack of Greater Budgetary push to MSME Sector:
The fact that MSMEs contribute 55% and 60% to the GDP of Germany and China respectively is a clear indication that India still has a long way to go in its MSME journey.
Technological Challenges:
Obsolete Technology: Hindrance in production efficiency and competitiveness. This leads to hindrance in large scale production and further dwarfism in the sector
Emerging Technologies: Challenges posed by advancements like AI, data analytics, and robotics.
Social Challenges:
Low Marginal Productivity: Inefficient use of manpower and resources.
PLFS reports that only around 13% of Indian workers are formally skilled
Quality Assurance and Certification Negligence: Affects product competitiveness and market acceptance.
Indian exports face larger phytosanitary standards and quality checks in international market
Due to these issues, the productivity of small firms in Indian manufacturing is abysmally low relative to larger firms. This has created a conspicuous ‘missing middle’ in the size structure of firms, which deters employment generation and dynamism in Indian manufacturing.
GOVERNMENT INITIATIVES TO BOOST MSME SECTOR:
The CHAMPIONS stand here for Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.
It is a technology driven Control Room-Cum-Management Information System which utilises modern information and communication technology (ICT) tools.
It is also fully integrated on a real time basis with the Government of India’s main grievances portal Centralized Public Grievances Redress and Monitoring System (CPGRAMS)
Launched by Ministry of Micro, Small and Medium Enterprises (MSME)
National Manufacturing Competitiveness Programme
Limited liability partnership Act,2008 to enable early corporatization of MSME.
Udyam Mitra Portal by SIDBI
MSME SAMBANDH-to monitor implementation of public procurement
MSME SAMADHAAN-to directly register cases of delayed payments by govt.
DIGITAL MSME SCHEME
REVAMPED SFURTI: traditional industries,artisans into clusters
CREDIT LINKED CAPITAL SUBSIDY SCHEME
ASPIRE: A SCHEME FOR PROMOTING INNOVATION,RURAL INDUSTRY AND ENTREPRENEURSHIP
PM MUDRA YOJANA: With recent budget extending loan facility from 10 lakh to 20 lakh
A credit guarantee scheme for purchase of machinery and equipment without collateral or third party guarantee.
REFORMS FOR REJUVENATING MSME SECTOR:
Institutional Reforms:
Creation of Independent Regulator: Given the growing importance of the data economy, it is paramount that the government creates an independent body which can advise and provide consultancy to MSMEs and enable them to win in this new, digital world.
Bodies like National Council for MSMEs, facilitation councils etc
Reforming Labour Laws: Labour laws are not very conducive to MSME growth. They must strike the right balance between providing a growth-oriented framework for MSMEs to run in and providing sufficient protection for the rights of workers.
Improving Regulation: While Ease of Doing Business has been a focus area, the reporting, approval and compliance requirements for small businesses continue to bother on the higher side.
Use of PAN as a unique enterprise identifier instead of present multiple registration processes in places like Udhyog Aadhar portal, GSTN, National state insurance Corporation etc.
Development service providers: in order to give expertise in product development to enhance quality
Economic Reforms:
Developing Bond Market: With India’s bond markets starting to take shape, promotion of SME bond issuances can provide a fillip to debt capital markets participation of MSMEs. While such issuances will provide lower interest rates for MSMEs than other financial intermediaries charge, they will also be a viable high-yield instrument for informed and educated investors operating in the bond market.
Expanding the scope of Government e-Marketplace target from present 25%
Capacity development: To utilise human capital by enterprise development centres to handhold entrepreneurs.
Access to Finance: PSB loans, non collaterised loan availability, insurance on the lines of PM Suraksha Bhima Yojana and PM Jeevan Jyothi Bhima yojana, government sponsored fund of funds to support Venture capital firms investing in MSMEs and Priority sector lending targets.
MSME Export Promotion Council Creation
Focussing on MSME Sector and prioritising their development is crucial for India’s economic trajectory. The vicious cycle of MSME growth can be managed by following the recommendations of U.K. Sinha Committee.
PRACTICE QUESTION Q. "Discuss the key challenges faced by the MSME sector in India and suggest measures to overcome these challenges. Provide suitable examples to substantiate your answer." (15 marks, 250 words)
