A light on MSME Sector

Introduction 

MSME or Micro, Small, and Medium Enterprises in agreement with Micro, Small and Medium Enterprises Development (MSMED) Act of 2006.In India, MSMEs contribute nearly 8% of the country’s GDP, around 45% of the manufacturing output, and approximately 40% of the country’s exports. It won’t be wrong to refer them as the ‘Backbone of the country.’ Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. Not only do the 6.3 crore MSMEs in India contribute one-third to the GDP of the country but also provide employment to large sections of society.

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Moreover, the sector is a critical source of livelihood and provides nearly 110 million jobs. Therefore, with the current emphasis on Atmanirbhar Bharat Abhiyan, these MSMEs have become even more significant to India’s economic and financial strategy.

Acknowledging the importance of the sector, the government of India (in 2019) envisioned that the sector would account for half of India’s GDP and add 50 million fresh jobs over the next five years.

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Challenges Faced By MSME 

MSMEs contribute 55% and 60% to the GDP of Germany and China respectively is a clear indication that India still has a long way to go in its MSME journey. 

Lack of Formalisation Amongst MSMEs: The main reason for this credit gap is the lack of formalisation amongst MSMEs.

• The number of income tax filers are even less. As a result, Indian MSMEs’ credit requirement has been largely unmet due to limited availability and access to data and legacy underwriting methods.
• Almost 86% of the manufacturing MSMEs operating in the country are unregistered.
• Even today, out of the 6.3 crore MSMEs only about 1.1 crores are registered with Goods and Services Tax regime.

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The Credit Conundrum: A concerning gap in India’s MSME sector has been the credit supply shortage to MSMEs.

• The formal credit available to this sector is ₹16 trillion. The viable credit gap is ₹20 trillion against a total demand of ₹36 trillion.
• Further MSMEs in India typically rely on NBFCs and MFIs for their financing needs, given the lack of access to the banking sector.

Technological Disruption: India‘s MSME sector is based on obsolete technology, which hampers its production efficiency. With the emergence of new technologies like Artificial Intelligence, Data Analytics, Robotics and related technologies (collectively called as Industry Revolution 4.0) is a bigger challenge for MSMEs than for organized large-scale manufacturing.

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Regulatory Cholesterol: MSMEs require a lot of government services and approvals, for which the entrepreneur has to run around various government departments. Regulatory risks and policy uncertainty in the past have dented investor confidence. Getting construction permits, enforcing contracts, paying taxes, starting a business and trading across borders continue to constrain doing business.

Problem of Scale: Majority of the firms in MSMEs are micro-enterprises. The MSME space is virtually a micro space formed by a plethora of small and local shops and hence, scaling them up is a problem, especially when fund access is challenging. Due to these issues, the productivity of small firms in Indian manufacturing is abysmally low relative to larger firms. This has created a conspicuous ‘missing middle’ in the size structure of firms, which deters employment generation and dynamism in Indian manufacturing.

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Suggestions

• Creation of Independent Regulator: Given the growing importance of the data economy, it is paramount that the government creates an independent body which can advise and provide consultancy to MSMEs and enable them to win in this new, digital world.
• Reforming Labour Laws: Labour laws are not very conducive to MSME growth. They must strike the right balance between providing a growth-oriented framework for MSMEs to run in and providing sufficient protection for the rights of workers.
• Improving Regulation: While Ease of Doing Business has been a focus area, the reporting, approval and compliance requirements for small businesses continue to border on the higher side.

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If we truly want to create a country where MSMEs can influence our economic destiny, it is imperative that they are provided with a hassle-free regulatory framework which works for them rather than against them. India needs more such measures, especially in the current environment. The next decade will be the metamorphosis of India from an emerging power to an established economic powerhouse and MSMEs will be an important cog in the wheel on this journey.

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