[Burning Issue] MSME Sector: Reforms & Challenges

Micro, Small and Medium Enterprises in India

Context

  • The Prime Minister, Shri Narendra Modi, launched a historic support and outreach programme for the Micro, Small and Medium Enterprises (MSME) sector. As part of this programme, the Prime Minister unveiled12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the country.
  • The Prime Minister said that the 12 decisions that he is announcing, will mark a new chapter for the MSME sector. Noting that MSMEs are one of the principal employment generators in India, the Prime Minister recalled the glorious Indian traditions of small-scale industry, including Ludhiana’s hosiery, and Varanasi’s sarees.

 Introduction

Amid a major decline in credit growth in the economy this year, micro, small and medium sector players are among the worst hit as banks continue to practice caution in lending to the industrial sector. But, for India to pursue high growth path, the MSME sector assumes a pivotal role in driving the growth engine

MSME in India

The MSME sector in India continues to demonstrate remarkable resilience in the face of trialling global and domestic economic circumstances.

  • The sector has sustained an annual growth rate of over 10% for the past few years.
  • With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive economic shocks, even of the gravest nature.

The guidelines with regard to investment in plant and machinery or equipment as defined in the MSMED Act, 2006 are:

The guidelines with Regard to Investment in Plant and Machinery or Equipment .

Source: www.indiafilings.com

The significance of MSME:

The significance of MSMEs is attributable to their calibre for employment generation, low capital and technology requirement.

  • They are also important for the promotion of industrial development in rural areas, use of traditional or inherited skill, use of local resources, mobilization of resources and exportability of products.
  • According to the estimates of the Ministry of MSME, Government of India, the sector generates around 100 million jobs through over 46 million units situated throughout the geographical expanse of the country.
  • With 38% contribution to the nation’s GDP and 40% and 45% share of the overall exports and manufacturing output, respectively, it is easy to comprehend the salience of the role they play in social and economic restructuring of India.
  • Besides the wide range of services provided by the sector, the sector is engaged in the manufacturing of over 6,000 products ranging from traditional to hi-tech items.

Why the MSME sector is important for India?

The Indian MSME sector provides maximum opportunities for both self-employment and wage-employment outside the agricultural sector and contributes in building an inclusive and sustainable society in innumerable ways through creation of non-farm livelihood at low cost, balanced regional development, gender and social balance, environmentally sustainable development, etc.

The Diversity of the Indian MSME Sector:

The MSME sector in India boasts of diversity in terms of its size, level of technology employed, range of products and services provided and target markets.

  • MSME Tool Rooms have been credited to provide at least ten components that were used in India’s Mangalyaan (Mars Orbiter Mission probe), the Indian Space Research Organization’s (ISRO) most ambitious mission till date, which is the country’s first inter-planetary space mission.
  • The sector has also contributed vital inputs for other space satellites such as the Chandrayan. India seeks to launch other ambitious projects like a global sea traffic monitoring system and an earth observation satellite, in cooperation with the EU. The projects envision significant contributions and convergence opportunities from the Indian MSME sector.
  • Many global companies are increasingly looking to Indian MSMEs for strategic partnerships of mutual benefit due to the innovative capabilities in niche manufacturing, comparative advantages of advanced engineering, low-cost manufacturing and overheads, ability to speedily absorb new technologies and local skills and capabilities that set these enterprises apart from other national and international players in the sector.
  • With its vast resource pool of engineering talent and high skill labour at competitive costs, India has the potential to become a significant player in the global auto industry, especially in engineering and component manufacturing. MSMEs assume a dominant position in the automotive and auto components sector.
  • Many more lucrative opportunities can be tapped by Indian MSMEs in the foundry industry, electronics industry, chemicals, leather, textiles, agro and food processing, pharmaceuticals, transport and tourism industries, etc.
  • The globalization of businesses has increasingly drawn SMEs into global value chains through different types of cross-border activities. Many entrepreneurs are recognizing the opportunities that this advent ushers and gaining access to global markets has become a strategic instrument for their further development.

Challenges faced by MSME sector:

  • The sector is always fund starved. Banks are often unwilling to lend. Besides, whatever bank finance these sector gets, comes at far higher interest costs than what large enterprises can negotiate.
  • Long receivables cycles make a mess of working capital management.
  • Little access to trained labour, technical progress and management support limit their growth.
  • Other common problems faced by small enterprises are related to availability of technology, infrastructure and managerial competence, and limitations posed by labour laws, taxation policy, market uncertainty and imperfect competition.

Government’s support for the sector:

Recognizing the potential of this sector for the nation’s development, the Government of India, through its various agencies, has taken many key steps to strengthen the MSME sector and promote innovation and capacity building in this sector.

  • Regular dialogue is facilitated between various stakeholders through the constitution of specific task forces and inter-ministerial committees.
  • The Micro and Small Enterprises-Cluster Development Programme is being implemented by the government for the holistic and integrated development of these enterprises in clusters through soft interventions, hard interventions and infrastructure upgradation for enhancing their productivity and competitiveness.
  • Provisions are also being made to strengthen the framework of virtual clusters with an aim to assist MSME accessibility of the Ministry from the remote location of their operation.
  • The Credit Linked Capital Subsidy Scheme also assists in the technological upgradation on MSMEs.
  • The National Manufacturing Competitiveness Programme is another flagship programme of the Ministry of MSME which endeavors to equip these enterprises with technology-based tools in the areas of quality upgradation, productivity, design development, energy efficiency and marketing.
  • To ensure better flow of credit to SMEs, the Ministry has introduced a Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) under which it operates schemes like the Credit Guarantee Fund Scheme and the Performance and Credit Rating Scheme.
  • PM Modi announced 12 measures to boost the Micro, Small and Medium Enterprises (MSME) sector, including a portal that would enable the units to get a loan in just 59 minutes and interest subvention of 2%.
  • Small businesses can use the ‘59-minute’ portal to avail loans of up to Rs 1 crore.
  • Small enterprises registered under the goods and services tax will also get a 2 percent tax rebate on incremental loans of up to Rs 1 crore.
  • More than 72,000 loans worth over Rs 23,852 crore have been sanctioned.
  • The portal is set up by the Small Industries Development Bank of India. MSMEs can register and apply for a loan.

The prime minister unveiled 12 initiatives for MSMEs, which he called “Diwali gifts”. They are:

Access to Credit

  • As the first announcement, the Prime Minister announced the launch of the 59 minute loan portal to enable easy access to credit for MSMEs. He said that loans upto Rs. 1 crore can be granted in-principle approval through this portal, in just 59 minutes. He said a link to this portal will be made available through the GST portal. The Prime Minister asserted that in New India, no one should be compelled to visit a bank branch repeatedly.
  • The Prime Minister mentioned the second announcement as a 2 percent interest subvention for all GST registered MSMEs, on fresh or incremental loans. For exporters who receive loans in the pre-shipment and post-shipment period, the Prime Minister announced an increase in interest rebate from 3 percent to 5 percent.
  • The third announcement made by the Prime Minister was that all companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS). He said that joining this portal will enable entrepreneurs to access credit from banks, based ontheir upcoming receivables. This will resolve their problems of cash cycle.

Access to Markets

  • The Prime Minister said that on access to markets for entrepreneurs, the Union Government has taken a number of steps already. In this context, he made his fourth announcement, thatpublic sector companies have now been asked to compulsorily procure 25 percent, instead of 20 percent of their total purchases, from MSMEs.
  • The Prime Minister said his fifth announcement is related to women entrepreneurs. He said that out of the 25 percent procurement mandated from MSMEs, 3 percent must now be reserved for women entrepreneurs.
  • The Prime Minister said that more than 1.5 lakh suppliers have now registered with GeM, out of which 40,000 are MSMEs. He said transactions worth more than Rs. 14,000 crore have been made so far through GeM. He said the sixth announcement is that all public sector undertakings of the Union Government must now compulsorily be a part of GeM. He said they should also get all their vendors registered on GeM.

Technology Upgradation

  • Coming to technological upgradation, the Prime Minister said that tool rooms across the country are a vital part of product design. His seventh announcement was that 20 hubs will be formed across the country, and 100 spokes in the form of tool rooms will be established.

Ease of Doing Business

  • On Ease of Doing Business, the Prime Minister said his eighth announcement is related to pharma companies. He said clusters will be formed of pharma MSMEs. He said 70 percent cost of establishing these clusters will be borne by the Union Government.
  • The Prime Minister said that the ninth announcementis on simplification of government procedures. He said the ninth announcement is that the return under 8 labour laws and 10 Union regulations must now be filed only once a year.
  • The Prime Minister said that the tenth announcement is that now the establishments to be visited by an Inspector will be decided through a computerised random allotment.
  • The Prime Minister noted that as part of establishing a unit, an entrepreneur needs two clearances namely, environmental clearance and consent to establish. He said that the eleventh announcement is that under air pollution and water pollution laws, now both these have been merged as a single consent. He further said that the return will be accepted through self-certification.
  • As the twelfth announcement, the Prime Minister mentioned that an Ordinance has been brought, under which, for minor violations under the Companies Act, the entrepreneur will no longer have to approach the Courts, but can correct them through simple procedures.

Social Security for MSME Sector Employees

  • The Prime Minister also spoke of social security for the MSME sector employees. He said that a mission will be launched to ensure that they have Jan Dhan Accounts, provident fund and insurance.
  • The Prime Minister said that these decisions would go a long way in strengthening the MSME sector in India. He said the implementation of this outreach programme will be intensively monitored over the next 100 days

Way forward

The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market.

  • The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
  • In general, there is need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
  • More importantly, there is need for skill formation and continuous upgrade both for labour and entrepreneurs.
  • While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
  • Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.

Conclusion

  • Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSME. These enterprises are dependent on self-finance. Profit margins are also low.
  • The government drive for financial inclusion could benefit such entities. The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing line of credit to firms which are under financial stress.
  • However, it remains to be seen whether new institutions such as MUDRA Bank can open the credit markets for small enterprises.
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