MSMEs in India: Challenges and Opportunities

Introduction

After independence, the focus has been given to either agriculture or big industries through different planning. But much focus has not been given to some sectors like micro, small and medium enterprises (MSMEs). Even big industries established by Government, we called licence raj. Also, some MSMEs have been set up by the private sector. The Government tried to protect MSMEs by increasing tariffs on imports, in addition, policy (liberalization, privatization and globalisation (LPG)) reform in 1991 and allowing foreign direct investment (FDI) in various sectors, investment in MSMEs has been increased significantly. Some companies were produced the same goods that produced by domestic companies as well and as a result, MSMEs could not compete with foreign companies and failed further due to lack of technological advancement. But gradually government is realising that the MSME sector is more important for the growth and development of the nation.

The Role of MSMEs in India

MSMEs have always played a vital role in the Indian economy. It has emerged as a highly vibrant and dynamic sector in the Indian economy over the last 5 decades. It contributes significantly to the economy and social development. MSMEs have always ensured some competitive intensity between domestic and imported products. This is a reason behind country does not rely on imported goods. Government is currently more emphasising ‘Atmanirbhar Bharat’ because MSMEs have even more significance to our economic and financial strategy of the country.

Figure 1: Registered units yearly in the 

manufacturing and services sector

        Source: Annual Report 2020-21, Ministry of MSMEs, Government of India.

MSMEs are an instrument of inclusive growth which touches upon the lives of the most vulnerable and marginalised for many families. This sector seeks to empower people to break the cycle of poverty and deprivation and if nurtured well can bridge the gap and create a 1 crore job in the next 5 to 6 years. Among the entire sector, MSMEs were the largest job creator in the last 5 years. It has been found that clustering facilitates MSMEs help to combat the challenges thrown up by globalisation-cluster policies. Over time there are definitional changes happed to the sector. The following diagram brings the changes in one frame.

Figure 2: Change in MSME definition

Source: JainSurbhi(2020, October), Business line: MSMEs –redefined for growth.

Their export share is 45 per cent. It has contributed approximately 33 per cent to the GDP of the country in 2020-21. It is expected to go long way in the coming future as compared to developed countries like Germany where MSMEs contribute 55 per cent of the GDP and are already in a saturated stage. China is a manufacturing hub which is a reason that MSMEs of China is contributing 60 per cent to the GDP. If we want sustainable economic growth and also increasing export, then we have to focus on MSMEs because non-traditional products account for more than 95 per cent of MSME export. Dominating in the export of sports goods, ready-made garments, plastic products etc. Since their product is mostly handicrafts that are eco-friendly in nature. There exists a tremendous potential to expand the MSMEs leads export to boost economic growth. It also helps in creating backward linkages for large scale industries provide them with raw materials.

Importance of MSMEs

It is a major provider of employment to a large segment of the population, particularly to the informal or unorganised sector in a country like India which is more services hub than a manufacturing one. Table 2 is recorded some employment figures related to village industries during 2016-17 to 2020-2021. It is showing a constantly growing trend. It is expected that when more and more investment of capital will happen in MSMEs, it will create more employment opportunities and also help in stopping migration from rural to urban areas.

Figure 3: Village Industries: Employment per year

Note: * up to 31/12/2020; # - up to 31/03/2021

Source: Annual Report 2020-21, Ministry of MSMEs, Government of India.

They produce a diverse range of goods and services to meet the demand of domestic as well as global markets. MSMEs are thought to have lower capital-output and capital-labour ratios than large scale industries, and therefore, better serve growth and employment objective. Even not only to help in enhancing employment opportunities in the upcoming times but also help in the growth of the nation.

Figure 4: The percentage share of employment in 

rural and urban areas in the country

Note: Numbers are in Lakhs.

Source: Annual Report 2020-21, Ministry of MSMEs, Government of India. 

It has almost 3.6 million MSMEs working in the geographical expanse of the country. They are also important for the promotion of industrial development in the rural area use of local resources and mobilization of resources. The development of MSMEs is expected to lead to the regional and social development of people in the backward area as more MSMEs settle in rural and tier-3 cities. It also leads to an increasing standard of living and will reduce poverty. As per the annual report of the ministry of MSMEs in the year 2017-18, the sector contributed around 3.6 crore jobs (70 per cent) in the manufacturing sector.

Issues faced by MSMEs

Before the corona pandemic, the MSME sector endured a liquidity crunch and the pandemic further increase their problem.

1. As small businesses have declined during the lockdown phase across the country, sales plummeted to zero even when costs did not cut, this sector hitting hard pressure for money as it is.
2. During the journey of MSMEs have already faced various challenges, most of the MSMEs in India rely on NBFCs and microfinance institutions for their financing need, but lack access to the banking sector, as most of them are performing in the informal or unorganised sector.
3. There is a gap in the lack of formalization the main reason for facing the problem of financial access in the banking sector.
4. Some enterprises of MSMEs don’t have complete knowledge about the market dynamics, product trends and challenges to access the supply-demand gap to mitigate the risk.
5. Enterprises have been established in rural areas facing a lack of basic infrastructure like electricity, road connectivity, transportation, market access, etc.
6. Non-availability of suitable and advanced technology according to trend, in the digital era they use the traditional method for marketing.
7. Non-availability of skilled labour at affordable cost.
8. Government take more steps to simplify labour law but some labour laws are more challenging, therefore facing problems for working.

Government Initiatives

a) Formalization: Registration, documentation and certification of entities have been rapidly increasing in the last 5 to 6 years. In 2015, only 22 lakh MSMEs registered, now increasing at 88 lakh, a trend which is accelerating by enabling government action and the focus on ease of doing business.

b) National Manufacturing Competitiveness Programme (NMCP): This is made with the aim of enhancing the competitiveness of the Indian manufacturing sector by reducing their manufacturing costs through

• Better space utilization,
• Scientific inventory management,
• Improve process flow,
• Reduced engineering time etc.

c) Credit Guarantee Scheme: This scheme provides a guarantee to member lending institutes for loan sanction without collateral.

d) MSE Cluster Development programme: This includes infrastructure development, common facility centre etc.

e) PM Employment Generation Programme: Credit linked subsidy scheme for generation of employment opportunities through establishment of micro-enterprises in the rural and urban area.

f) Market Development Assistance scheme: This has been built to encourage exporters to access and develop overseas markets. The scheme offer funding for participation in international trade delegations and publicity.

g) Building Awareness for IPR in MSM: The government implemented several awareness programmes that stimulate the growth of the MSMEs sector to increase competitiveness between the clusters.

h) Technology and Quality Upgradation Support to MSMEs: The scheme advocates the use of energy-efficient technology in manufacturing units to reduce the cost of production.

i) Labour Reform: Introduction of Shram Suvidha Portal.

j) Stand Up India/ Start-Up India scheme: This one is made for funding for businesses start-up to particularly vulnerable weaker sections of society like SC/ST women to get easy loans from the banking sector. This scheme leads to women empowerment.

k) Mudra scheme: This scheme is for providing loans up to rupees 10 lakh to the non-corporate, non-farm small/micro-enterprises.

Need of steps to reform MSMEs

To reach the vision of a US$ 5 trillion economy, MSMEs have to play a much bigger role in employment generation, in export, in skilling people so we need more such a measure, especially in the current environment.

1. The government wants to create an independent body that can advise and provide consultancy to MSME business firms and enable them to win in the new digital world.
2. It also must want to set up a regulatory body to maintain the right balance between workers and management in industries and a growth-oriented framework for MSMEs to run in and provide sufficient protection for the rights of workers.
3. While ease of doing business has been a focus area of government, the reporting approval and compliance requirement for small businesses. India’s rank had 63rd among 190 economies in the ease of doing business index 2019. It shows an alarming situation for the emerging economy.
4. If we truly want to create a country where MSMEs can influence our economic growth then we provide a free regulatory framework that works for them rather than against them.
5. Tax reform gives tax incentives to compete with big industries.

Conclusion

MSMEs are the backbone of the resilient national economy. Prioritising their development is created to the future of the country. We are required to work on related all common national agendas and scientific solution frameworks for all stakeholders at the grassroots level.

Written by Mr Ritesh Bhurse, MA Economics, 1st Semester, Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of Research and Studies (MRIIRS)