Insights into Editorial: Micro, Small and Medium Enterprises
Amid a major decline in credit growth in the economy this year, micro, small and medium sector players are among the worst hit as banks continue to practice caution in lending to the industrial sector. But, for India to pursue high growth path, the MSME sector assumes a pivotal role in driving the growth engine.
MSME in India:
The MSME sector in India continues to demonstrate remarkable resilience in the face of trialing global and domestic economic circumstances.
- The sector has sustained an annual growth rate of over 10% for the past few years.
- With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive economic shocks, even of the gravest nature.
Significance of MSME:
The significance of MSMEs is attributable to their caliber for employment generation, low capital and technology requirement.
- They are also important for promotion of industrial development in rural areas, use of traditional or inherited skill, use of local resources, mobilization of resources and exportability of products.
- According to the estimates of the Ministry of MSME, Government of India, the sector generates around 100 million jobs through over 46 million units situated throughout the geographical expanse of the country.
- With 38% contribution to the nation’s GDP and 40% and 45% share of the overall exports and manufacturing output, respectively, it is easy to comprehend the salience of the role they play in social and economic restructuring of India.
- Besides the wide range of services provided by the sector, the sector is engaged in the manufacturing of over 6,000 products ranging from traditional to hi-tech items.
Why MSME sector is important for India?
The Indian MSME sector provides maximum opportunities for both self-employment and wage-employment outside the agricultural sector and contributes in building an inclusive and sustainable society in innumerable ways through creation of non-farm livelihood at low cost, balanced regional development, gender and social balance, environmentally sustainable development, etc.
The Diversity of the Indian MSME Sector:
The MSME sector in India boasts of diversity in terms of its size, level of technology employed, range of products and services provided and target markets.
- MSME Tool Rooms have been credited to provide at least ten components that were used in India’s Mangalyaan (Mars Orbiter Mission probe), the Indian Space Research Organization’s (ISRO) most ambitious mission till date, which is the country’s first inter-planetary space mission.
- The sector has also contributed vital inputs for other space satellites such as the Chandrayan. India seeks to launch other ambitious projects like a global sea traffic monitoring system and an earth observation satellite, in cooperation with the EU. The projects envision significant contributions and convergence opportunities from the Indian MSME sector.
- Many global companies are increasingly looking to Indian MSMEs for strategic partnerships of mutual benefit due to the innovative capabilities in niche manufacturing, comparative advantages of advanced engineering, low-cost manufacturing and overheads, ability to speedily absorb new technologies and local skills and capabilities that set these enterprises apart from other national and international players in the sector.
- With its vast resource pool of engineering talent and high skill labour at competitive costs, India has the potential to become a significant player in the global auto industry, especially in engineering and component manufacturing. MSMEs assume a dominant position in the automotive and auto components sector.
- Many more lucrative opportunities can be tapped by Indian MSMEs in the foundry industry, electronics industry, chemicals, leather, textiles, agro and food processing, pharmaceuticals, transport and tourism industries, etc.
- The globalization of businesses has increasingly drawn SMEs into global value chains through different types of cross-border activities. Many entrepreneurs are recognizing the opportunities that this advent ushers and gaining access to global markets has become a strategic instrument for their further development.
Challenges faced by MSME sector:
- The sector is always fund starved. Banks are often unwilling to lend. Besides, whatever bank finance these sector gets, comes at far higher interest costs than what large enterprises can negotiate.
- Long receivables cycles make a mess of working capital management.
- Little access to trained labour, technical progress and management support limit their growth.
- Other common problems faced by small enterprises are related to availability of technology, infrastructure and managerial competence, and limitations posed by labour laws, taxation policy, market uncertainty and imperfect competition.
Government’s support to the sector:
Recognizing the potential of this sector for the nation’s development, the Government of India, through its various agencies, has taken many key steps to strengthen the MSME sector and promote innovation and capacity building in this sector.
- Regular dialogue is facilitated between various stakeholders through the constitution of specific task forces and inter-ministerial committees.
- The Micro and Small Enterprises-Cluster Development Programme is being implemented by the government for the holistic and integrated development of these enterprises in clusters through soft interventions, hard interventions and infrastructure upgradation for enhancing their productivity and competitiveness.
- Provisions are also being made to strengthen the framework of virtual clusters with an aim to assist MSME accessibility of the Ministry from the remote location of their operation.
- The Credit Linked Capital Subsidy Scheme also assists in the technological upgradation on MSMEs.
- The National Manufacturing Competitiveness Programme is another flagship programme of the Ministry of MSME which endeavors to equip these enterprises with technology-based tools in the areas of quality upgradation, productivity, design development, energy efficiency and marketing.
- To ensure better flow of credit to SMEs, the Ministry has introduced a Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) under which it operates schemes like the Credit Guarantee Fund Scheme and the Performance and Credit Rating Scheme.
The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market.
- The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
- In general, there is need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
- More importantly, there is need for skill formation and continuous upgrade both for labour and entrepreneurs.
- While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
- Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.
Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSME. These enterprises are dependent on self-finance. Profit margins are also low. The government drive for financial inclusion could benefit such entities. The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing line of credit to firms which are under financial stress. However, it remains to be seen whether new institutions such as MUDRA Bank can open the credit markets for small enterprises.