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A growth imperative for Indian MSMEs

India stands to become one of the biggest growth engines in the world, where Micro, Small and Medium Enterprises (MSMEs) play a crucial role. MSMEs are the largest providers of employment after agriculture. As per the 73rd National Sample Survey (NSS) conducted by National Sample Survey Office, Ministry of Statistics & Programme Implementation, during the period 2015-16, the estimated number of workers in unincorporated non-agricultural MSMEs in the country that engaged in different economic activities was 11.10 crores.


India has raised its share in the global economy from 2.6 per cent in 2014 to 3.2 per cent in 2017, according to the World Development Indicator database. Adding to that, the International Monetary Fund October 2018 database has also projected Indian economy to be the fastest growing in 2018-19 and 2019-20, growing at a rate of 7.4 per cent in 2019, which is faster than China. The driving forces behind this growth are urbanisation, changing consumer trends and the rising MSME sector.


In my opinion, the MSME sector is not an industry as defined by the government; all MSMEs should be looked upon as enterprises, and the people conducting the businesses as entrepreneurs. There is no doubt that the government has taken various steps for pushing the private sector MSMEs for generating employment in the country, fast tracking various projects involving substantial investment and increasing public expenditure on schemes.


The schemes such as Make in India, Skill India and Digital India have been implemented by the government and are likely to enhance the employment base. Also, MUDRA and START UP schemes have been initiated by the government for facilitating self-employment. But still there are several issues that are posing as critical barriers in the growth of MSMEs in India.


The MSME segment needs to seize the opportunities in order to have a robust infrastructure in place. This will require strong efforts by the government to fill in the gaps and bypass the challenges. This can only be made possible if the framework for growth has more and more domestic participation, apart from the growth in IT infrastructure, innovations in business and adaptation of better MSME policies. There must be a regulatory compliance approach and an incentive-based approach for all the stakeholders.


The new wave of MSME needs certain measures to lead the growth in the economy. Some of these are given below.

1. Increase in the share of MSME contribution to GDP.

2. Generate employment in the current MSME sector, more than the current MSME workforce of 11.10 crores across the different MSME sectors.

3. Growth in exports, and MSME contributions in public and private industry sectors.


Interestingly, India ranks at 58th position among 140 economies on the World Economic Forum’s (WEF’s) latest Global Competitiveness Report, moving up five places from 2017 ratings. It scored on the innovation level, yet the penetration of technology and digitisation are still non-uniform. Despite reforms and initiatives that the government is taking, MSME growth has slowed down. As a member of an industry association, I believe that the rules and regulations for MSMEs should be mellowed down. The procedures and processes should be simplified so that a not-so-educated person can also conduct the business without any problems.


Challenges are aplenty

Today, the biggest challenge the MSMEs are facing is financial inclusion. India's 60 million MSME – broadly defined as businesses with an annual revenue up to 250 crores (approximately 35 million) – make an enormous contribution to both India's employment and its gross domestic product (GDP). Yet, they do so at a level that is far below than other large nations, lagging 10 percentage points behind the US and 23 points behind China in GDP contribution.


The MSMEs are presently facing the problems of credit from banks, as the latter are not providing the adequate amount of loans to MSMEs. The loan-providing process is extremely long and formal. The primary reason for this gap is that these businesses often lack access to formal credit sources, which forces nearly 40 per cent of Indian MSMEs to borrow from informal sources and pay interest rates that average 2.5 times higher than rates charged by the formal sector. The owners of such MSMEs have to produce different types of documents to prove their worthiness.


Due to non-availability of credit to MSMEs due to collateral issues, many have had to shut down their operations. For such situations, an RBI expert committee has suggested doubling collateral-free loans from 10 lakh to 20 lakh. If the government implements this measure, it will be a relief to many estranged small businesses.


Another major issue that small businesses are dealing with is compliance with Goods and Services Tax (GST). The MSME sector has seriously been affected due to the high GST rates in India; however, the new government is working towards making certain amendments in GST laws for the sake of small tax-payers.


In this present era of globalization, the MSMEs are facing threat from multinational companies who are providing quality goods at extremely low price points, making it difficult to compete and survive in the market.

Although, the MSMEs are developing rapidly, their infrastructure is quite poor. This leads to production capacity being very low and production costs very high.


For MSMEs, the required raw material, skilled workforce and other inputs are not easily available in the market. Hence, it is difficult to manufacture at affordable prices.


The owners of MSMEs are unaware of the advanced technologies of production. Their methodology of production is outdated. The MSMEs are hesitant to adopt innovative channels of marketing. Their advertisements and sales promotions are comparatively weaker as compared to multinational companies. Ineffective advertisements and poor marketing channels lead to not enough profits.


The training and development programmes for the development of MSMEs are almost negligible, which cause the skilled manpower to be unavailable to MSMEs. The owners are aware of the innovative methods of production. However, the skill developmental schemes conducted by the government are not sufficient.


All laws related to all aspects of manufacturing and service are complex and, hence, compliance with these laws is practically difficult. The various decisions related to a factory depend on the factory commissioner and inspector, which leads to high occurrences of red tape in the operation of MSMEs.


The current growth of MSMEs is non-uniform, and there exists a significant gap in the growth of enterprises across services and manufacturing sectors.


Although, I am quite optimistic about the future prospects of the MSME sector in India, the government must maintain the remedial measures and infrastructure for growth for these MSMEs. There is a need to work on finding the root cause of the challenges, and simplification of rules and regulations associated with MSMEs.


- Author: Pankaj Kumar Gupta, National President, Indian Industries Association (IIA), & Director A-Powertech Electricals


Note: Author is National President at Indian Industries Association (IIA) is an apex body of Micro, Small and Medium Enterprises. However, the Column is personal opinion piece.