A major problem MSMEs in India face is their very definition.
More than 95% are not legally identifiable as SMEs and that prevents proper allocation of institutional support.
Since MSMEs are not registered separately under statutes such as the Companies Act, there is no mechanism to distinguish them from other corporate entities. This fails to acknowledge the heterogeneity among enterprises.
With Atmanirbhar Bharat, the Centre has taken several steps redefining MSMEs, credit access, subordinate debt, preference in government tenders towards ‘energising the MSME sector’.
It has also launched the MSME Udyam portal for registration, though this is not mandatory. Information asymmetry on government schemes and incentives on registration must be addressed.
MSME sector in India:
- The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India.
- MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP are stressed due to depleting internal reserves and low visibility of demand for next six months at least.
- It is the second largest employment generating sector after agriculture. It provides employment to around 120 million persons in India.
- With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
- MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes a $5 trillion economy.
Issues and challenges in MSMEs:
- A recently conducted survey finds that production in SMEs has fallen from an average of 75% to 13%.
- With 110 million employed by Indian SMEs, it is crucial to ensure adequate institutional support, failing which we might see an even larger impact on livelihoods.
- SMEs also account for a third of India’s GDP, 45% of manufacturing output and 48% of exports and hence are crucial to manufacturing and export competitiveness.
- With SMEs’ operational challenges exacerbated by Covid-19, it is all the more important to focus on this sector.
- SMEs will be vital in absorbing a significant proportion of the 600 million entrants to the labour market in EMEs by 2030.
- With a large proportion of these entrants bound to be from India, it is imperative that the Union and state governments ensure financial and institutional support for SMEs.
- In terms of location, SMEs are relatively evenly distributed in comparison to larger organisations.
- Rural areas account for 45%, while the remaining are in urban areas. Hence, SMEs are well-poised to address poverty in both the cities and villages.
- Although the proportion of urban poverty has declined over the years, it has increased in absolute terms.
- In 2018, Kolkata, Delhi, and Mumbai had anywhere between 42-55% of their population living in slums. This number is certain to have increased in the pandemic.
Model that can learned from other economies:
- By providing employment and income, SMEs can raise income, living standards and consumer spending.
- SMEs can aiding the atmanirbharta vision, especially in the manufacturing sector.
- This pattern is observed in countries with strong manufacturing sectors such as Germany and China.
- China’s pattern is more relevant to India due to a similarity in size and population as well as its recency.
- SMEs make up over 99% of all enterprises in China today, with an output value of at least 60% of its GDP; they generate more than 82% of employment opportunities.
- As per China’s national economic census, manufacturing SMEs accounted for nearly 53% of its total incorporated SMEs and 65% of the total employment in SMEs.
- With global manufacturing moving out of China, our SMEs can play a key role in sustaining the manufacturing that is shifted to India.
Some other gaps remain, needing urgent attention:
- A primary one is the regulatory framework for SMEs that prevents a growth-oriented mindset.
- The concessions awarded to SMEs in terms of tax-breaks and low interest rates must be extended beyond what is currently provided if they are to target higher growth rate.
- Credit access to SMEs as well as the mechanism to seek payment from buyers needs bettering to ensure financially viable.
- The present redressal system on recovery of payments, particularly from organisations with influence such as PSUs, may discourage SMEs from pursuing formal action against defaulters.
- SMEs may find it difficult to choose grievance redressal over building business relationships with large buyers who may falter on timely payments.
- Priority ought to be given to scaling up economies with state support as the gains from such support in generating employment and overall economic prosperity outweigh the economic costs.
Factors led to the growth of MSME:
- Increasing internet penetration, customer’s familiarization with digital payments fuelled by B2C ecommerce players facilitate MSME sector growth.
- Tie-ups with new-age non-banking finance (FinTech) companies allowed access to timely collateral free finance to MSMEs.
- It provides opportunity for budding entrepreneurs to build creative products boosting business competition and fuels growth.
- Small industries and retail businesses in tier-II and tier-III cities create opportunities for people to use banking services and products.
- Campaigns like Skill India, Startup India, Digital India and Make in India aim to provide MSME players with a level playing field and a definitive push towards enhanced productivity.
- Younger generation shifting from agriculture towards entrepreneurial activities creating job prospects for others.
Thus, Indian MSME sector is the backbone of the national economic structure and acts as a bulwark for Indian economy, providing resilience to ward off global economic shocks and adversities.
Given the important role played by the sector in the economy, issues faced by it must be addressed on an urgent basis to revive the economy battered by the pandemic.
Apart from the fiscal stimulus, the sector requires a political-economy approach that prioritizes MSME interests.
India needs to ease the regulatory burden of small units and aid their survival through fiscal support. Above all, they need a level-playing field vis-à-vis big businesses.