Micro, Small and Medium Enterprises (MSME)

(RATIONALE-SCOPE-OPPORTUNITIES-ROLE)
Rationale
 Worldwide, MSMEs have been accepted as the engine of economic growth
and for promoting equitable development.
 They constitute over 90% of total enterprises in most of the economies and
are credited with generating the highest rates of employment growth.
 With low investment requirements, operational flexibility and the capacity to
develop appropriate indigenous technology, SMEs have the power to propel India
to new heights.
 Hence, it seems like there is a silent revolution happening in India powered by
MSMEs.

Importance of MSMEs for Indian Economy

 Employment: It is the second largest employment generating sector after
agriculture. It provides employment to around 120 million persons in India.
 Contribution to GDP: 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.
o MSME ministry has set a target to up its contribution to GDP to 50% by
2025 as India becomes a $5 trillion economy.
 Exports: It contributes around 45% of the overall exports from India.
 Inclusive growth: MSMEs promote inclusive growth by providing
employment opportunities in rural areas especially to people belonging to weaker
sections of the society.

o For example: Khadi and Village industries require low per capita
investment and employs a large number of women in rural areas.
 Financial inclusion: Small industries and retail businesses in tier-II and tier-
III cities create opportunities for people to use banking services and products.
 Promote innovation: It provides opportunity for budding entrepreneurs to
build creative products boosting business competition and fuels growth.
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.
 MSME redefined the characteristics
 The Micro, Small and Medium Enterprises Development (Amendment) Bill,
2018 proposes to reclassify all MSMEs, whether they are manufacturing or
service-providing enterprises, on the basis of their annual turnover.

 The bill was introduced in the Lok Sabha and further referred to the Standing
Committee which tabled its report on 28 December 2018.

Benefits of proposed reclassification

 The new classification would eliminate the need for frequent inspections
which was earlier required to check the investment in plant and machinery.
 It would be a non discriminatory, transparent and objective criterion.

Factors which led to growth of MSMEs

 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.
 Digitization: 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.
 Changing employment patterns: Younger generation shifting from
agriculture towards entrepreneurial activities creating job prospects for others.

Issues faced by MSMEs and steps taken to improve their

condition along with relations of MSME
 Issues and Challenges Steps Taken

Access to credit  Launch of the 59 minute loan portal to enable easy access
to credit for MSMEs.
90% of the MSMEs are
 2 percent interest subvention for all GST registered MSMEs,
dependent on informal sources for
on fresh or incremental loans.
funding
 Trade Receivables e-Discounting System (TReDS) to enable
Lack of sufficient collateral and
access to credit from banks, based on their upcoming trade
high working capital needs
receivables from corporate and other buyers.

Access to Markets  Union government announced to launch an e-commerce

platform on the lines of “Amazon and Alibaba" to sell products
Low outreach and non from MSMEs and the Khadi and Village Industries Commission.
availability of new markets.
 Public sector companies now compulsorily procure
Lack of skilled manpower and 25%, instead of 20% of their total purchases, from MSMEs.
ineffective marketing strategy.
 More than 40,000 MSMEs registered on Government e-
Difficult for MSMEs to sell Marketplace (GeM) portal. It provides transparency in
products to government agencies. procurement and facilitates MSMEs to directly reach out to the
buyers.
Competition from MNCs and
other big industries.

Technology Access  20 hubs and 100 spokes in the form of tool rooms will be
established across the country. This will facilitate product
Limited human resources and design and easy access to latest technology to MSMEs.
weak financial standing.
 Financial assistance is provided for implementation of lean
MSMEs, particularly in the manufacturing techniques to enhance the manufacturing
unorganised sector, show lower competitiveness of MSMEs.
adaptability of new technology and
innovation.

Quality and Export Issues  Financial support to MSMEs in ZED(Zero Defect Zero Effect)
certification to improve quality of products.
Low quality products impact
 Government provides subsidy towards the expenditure
export competitiveness.
incurred by enterprises to obtain the product certification licenses
Inadequate access to quality raw from national and international bodies.
materials.
Use of traditional machines
causes low productivity.
Ease of Doing Business  The return under 8 labour laws and 10 Union regulations
must now be filed only once a year.
Cumbersome government
procedures and rules for establishing  Computerised random allotment for inspector visits to the
new units. establishment.

Bureaucratic delays in getting  Environmental Clearance under air pollution and water
clearances. pollution laws, have been merged into one. Also, the return will be
accepted through self-certification.
Poor litigation system in the
country.  For minor violations under the Companies Act, the
entrepreneur will no longer have to approach the courts, but can
correct them through simple procedures. This
signifies simplification of government procedures and instilling
confidence among entrepreneurs.

Government schemes to promote MSMEs and get

opportunities for an entrepreneurial career
 Udyami Mitra Portal : launched by SIDBI to improve accessibility of credit
and handholding services to MSMEs.
 MSME Sambandh : To monitor the implementation of the public procurement
from MSMEs by Central Public Sector Enterprises.
 MSME Samadhaan -MSME Delayed Payment Portal –– will empower Micro
and Small entrepreneurs across the country to directly register their cases relating
to delayed payments by Central Ministries/Departments/CPSEs/State
Governments.
 Digital MSME Scheme : It involves usage of Cloud Computing where
MSMEs use the internet to access common as well as tailor-made IT infrastructure
 Prime Minister Employment Generation Programme : It is a credit linked
subsidy program under Ministry of MSME.
 Revamped Scheme of Fund for Regeneration Of Traditional Industries
(SFURTI) : organizes traditional industries and artisans into clusters and make
them competitive by enhancing their marketability & equipping them with improved
skills.
 A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship
(ASPIRE) : creates new jobs & reduce unemployment, promotes entrepreneurship
culture, facilitates innovative business solution etc.
 National Manufacturing Competitiveness Programme (NMCP) : to develop
global competitiveness among Indian MSMEs by improving their processes,
designs, technology and market access.
 Micro & Small Enterprises Cluster Development Programme (MSE-
CDP) - adopts cluster development approach for enhancing the productivity and
competitiveness as well as capacity building of MSEs.
 Credit Linked Capital Subsidy Scheme (CLCSS) is operational for
upgradation of technology for MSMEs.

Other recent initiatives to promote MSMEs

 In June 2019, RBI committee headed by former SEBI Chairman UK
Sinha suggested a Rs 5,000 crore stressed asset fund for the MSME sector to
provide relief to small businesses hurt by demonetisation, GST, and an
ongoing liquidity crisis.

o It has also recommended doubling the cap on collateral-free loans to

Rs 20 lakh from the current Rs 10 lakh extended to borrowers falling under the
Mudra scheme, self-help groups, and MSMEs.
 MSME Ministry announced in June 2019 to lift the ban on entry of corporates
and private players in the MSME sector to pave way for the formation of 700
clusters to reduce dependence on imports as well as for job creation.
 MSME Ministry is also planning to set up enterprise facilitation
centres across the country to make smaller businesses more competitive and help
them integrate with big enterprises.
Therefore, the government should continue to put concerted efforts for holistic
development of MSMEs in key areas like human capacity development,
knowledge services, access to finance, technology, infrastructure, market
access, and ease of doing business.

International Experiences
 According to World Bank, formal SMEs contribute up to 60% of total
employment and up to 40% of national income (GDP) in emerging economies.
 600 million jobs will be needed in the next 15 years to absorb the growing
global workforce, mainly in Asia and Sub-Saharan Africa. In emerging markets,
most formal jobs are generated by SMEs, which also create 4 out of 5 new
positions.
 However, access to credit remains a major problem to the MSME sector
globally.