Indian MSMEs: ‘The lifeblood of the Indian Economy

GS Paper II- Government Policies and Interventions GS Paper III – Infrastructure

Context: Indian MSMEs are facing tough challenges due to the influx of Chinese goods.

• The Ministry of Micro, Small and Medium Enterprises classifies MSMEs as

MSMEs: These enterprises are involved in producing, manufacturing, and processing a range of goods and commodities.

MSMEs (Micro, Small, and Medium Enterprises) are governed by the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, and are overseen by the Ministry of MSME.

Previously, MSMEs were classified solely based on their investment in plant and machinery/equipment. However, with revised regulations from July 2020, annual turnover has also been included as a classification criterion.

The classification criteria are:

1. Micro Enterprise: Investment and Annual Turnover Micro Investment less than Rs. 1 crore Turnover less than Rs. 5 crore
2. Small Enterprise: Investment less than Rs. 10 crore Turnover up to Rs. 50 crore
3. Medium Enterprise: Investment less than Rs. 20 crore Medium Turnover up to Rs. 100 crore

Statutory Bodies: The Ministry of MSME oversees five statutory bodies.

1. Khadi and Village Industries Commission (KVIC)—This statutory organization is dedicated to promoting and developing khadi and village industries to generate employment opportunities in rural areas, thus bolstering the rural economy.
2. The Coir Board—As a statutory body, it focuses on the overall development of the Coir industry and works to improve the living conditions of its workers.
3. National Small Industries Corporation Limited (NSIC)—Established in 1955, this organization is tasked with promoting, supporting, and fostering the growth of micro and small enterprises across the country, primarily on a commercial basis.
4. National Institute for Micro, Small, and Medium Enterprises (NI-MSME)—Founded in 1960, NI-MSME is tasked with promoting enterprises and developing entrepreneurship. Its responsibilities include facilitating enterprise creation, conducting diagnostic studies for policy formulation, and more.
5. Mahatma Gandhi Institute for Rural Industrialisation (MGIRI)—MGIRI aims to promote rural industrialization to support a sustainable village economy, empower traditional artisans, and drive innovation through pilot studies and R&D of alternative technologies that use local resources.
   These organizations play a crucial role in supporting MSMEs about government schemes and policies.

What is the Role of MSMEs in India’s Economic Growth?

Contribution to GDP and Employment: MSMEs contribute around 30% to India’s GDP, making them a key driver of the country’s economic expansion.

Job Creation: Being labour-intensive, MSMEs are essential in generating employment across multiple sectors, currently providing jobs to over 11 crore people in India.

Example: The textile industry, largely made up of small-scale units, employs a vast number of workers in activities like spinning, weaving, and garment manufacturing.

Contribution to Manufacturing: MSMEs play a vital role in the country’s manufacturing sector, particularly in industries like food processing, engineering, and chemicals.

• Example: Agra’s footwear industry, which is largely driven by MSMEs, contributes 28% to India’s footwear export figures.

Export Contribution: MSMEs currently make up nearly 45% of India’s total exports. Their wide range of products, often targeting niche markets, enhances India’s global trade footprint.

• Example: The Indian handicraft sector, dominated by small-scale artisans and businesses, has a global market reach and generates substantial export revenue.

Rural Industrialization: MSMEs are crucial in advancing rural industrialization and promoting inclusive economic growth.

• Khadi and Village Industries: This sector, made up of small-scale units, has been key in creating jobs in rural areas and empowering local communities.

Innovation and Entrepreneurship: The MSME sector encourages innovation and entrepreneurship, as small businesses are often more agile and able to quickly adapt to market changes by launching new products or services.

• Example: India’s startup ecosystem, the third largest globally and heavily driven by MSMEs, has led to innovative solutions across various fields, including e-commerce and fintech.

Government Initiatives Related to MSMEs :

Pradhan Mantri MUDRA Yojana: This scheme offers loans of up to ₹10 lakh to non-corporate, non-farm small and micro enterprises. These are known as MUDRA loans.

Credit Guarantee Schemes: Provided by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), these schemes help reduce the risk for banks and financial institutions, facilitating easier access to credit for MSMEs.

MSME SAMADHAAN: This is an online Delayed Payment Monitoring System managed by the Micro and Small Enterprise Facilitation Council, designed to resolve disputes related to delayed payments for MSMEs. Aggrieved enterprises can file cases and track their status online.

Government e-Marketplace (GeM): An online platform that streamlines public procurement from MSMEs, giving them access to a broader market.

Udyam Registration: A streamlined online registration process for MSMEs to access various government benefits and schemes.

CHAMPIONS Portal: This is an ICT-driven Control Room and Management Information System designed to boost productivity and strengthen the nation’s MSMEs through modern processes.

Purpose: It aims to turn Indian MSMEs into National and Global Champions by resolving their issues and offering guidance, support, and assistance.

 What are the Major Challenges Related to MSME?

Limited Access to Finance: Even with government initiatives such as Mudra loans, MSMEs still face significant hurdles in securing credit.

• Bank Perception: Traditional banks often view MSMEs as high-risk borrowers due to their limited credit history and lack of collateral.
• Impact: This perception limits their capacity to invest in growth, innovation, and working capital.

Delayed Payments: A significant challenge for MSMEs is the problem of receiving payments late from larger companies or government bodies.

• Impact: This delay can put considerable pressure on their working capital and cash flow, disrupting their operations.
• Financial Strain: A small supplier or contractor may experience severe financial issues due to payment delays for delivered goods or services, risking their business stability.

 Limited Skilled Workforce: Many MSMEs face difficulties in recruiting workers who possess the skills needed to operate sophisticated machinery or adopt new technologies. This can result in inefficiencies, delays in production, and lower product quality.

• Example: For instance, a small manufacturing unit might struggle to find qualified personnel to handle advanced equipment, leading to operational disruptions and reduced product standards.

Limited Branding and Outreach: MSMEs often lack the financial resources and expertise required for effective marketing and brand development. This limitation hampers their ability to compete with larger companies or well-established brands, particularly in the digital market.

• Example: A small apparel business may find it challenging to build an online presence and attract customers compared to major fashion brands with substantial marketing budgets.

 Infrastructure Constraints: Poor infrastructure, including inadequate road connectivity, unreliable electricity supply, and lack of modern facilities, can significantly impact the operations and growth potential of MSMEs.

• Example: A small food processing enterprise located in a rural area may struggle with transporting its products due to poor road conditions and experience frequent production interruptions because of inconsistent power supply.

Way Forward

MSME Innovation Centers: Developing physical or online innovation hubs that link MSMEs with industry professionals, researchers, and advisors.

• Advantages: These centers would enable knowledge sharing, collaborative development of innovative products, and access to advanced technological resources and design expertise.
• Example: An apparel MSME could team up with a design professional at one of these hubs to launch a new fashion line, promoting innovation and setting itself apart in the market.

Blockchain-Enabled Smart Contracts: Utilizing blockchain technology and smart contracts could transform the payment process for MSMEs.

• Implementation: A blockchain-driven platform could be created to ensure secure and transparent transactions between MSMEs and their clients, including larger corporations or government bodies.

AI-Enhanced Mentorship Programs: Creating AI-driven mentorship programs that offer tailored guidance and advice to MSMEs based on their unique needs and industry data.

• Benefit: This approach can address the mentorship gap, particularly benefiting MSMEs located in remote areas.

Adopting Digital Transformation: To stay competitive in today’s digital era, MSMEs need to embrace technological advancements.

• Actions: This involves using e-commerce platforms, adopting digital marketing techniques, and integrating automation and digital processes into their operations.
• Support: Programs for upskilling, digital literacy campaigns, and incentives for technology adoption can facilitate this shift.

 Promoting Sustainable Entrepreneurship: Supporting MSMEs in adopting eco-friendly and socially responsible business practices can benefit both the environment and society.

• Approaches: This might involve advocating for sustainable production techniques, encouraging green business ventures, and providing incentives for using renewable energy.

Entering the Global Arena: With globalization on the rise, MSMEs should be ready to expand into international markets.

• Strategies: Export promotion programs, trade facilitation centres, and mentorship from seasoned exporters can provide the necessary support to help MSMEs manage the complexities of international trade.

Prelims:

Q.1 What is/are the recent policy initiative(s)of the Government of India to promote the growth of the manufacturing sector? (2012)

1. Setting up of the National Investment and Manufacturing Zones
2. Providing benefit of ‘single window clearance’
3. Establishing Technology Acquisition and Development Fund

Select the correct answer using the codes given below:

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Ans: (d)

Q.2. Which of the following can aid in furthering the Government’s objective of inclusive growth? (2011)

1. Promoting Self-Help Groups
2. Promoting Micro, Small and Medium Enterprises
3. Implementing the Right to Education Act

Select the correct answer using the codes given below:

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

Ans: (d)

Q3. Consider the following statements concerning India : (2023)

1. According to the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the ‘medium enterprises’ are those with investments in plant and machinery between `15 crore and `25 crore.
2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: (b)

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