[Burning Issues] Fiscal Push for MSME Sector of India (Part I)

The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India. All anecdotal evidence available, such as the hundreds of thousands of stranded migrant workers across the country, suggests that MSMEs have been the worst casualty of lockdown.

A closer look at the anatomy of the MSME sector explains why MSMEs are so vulnerable to economic stress.

Backgrounder: India’s MSME Sector

  • The Indian MSME sector is the backbone of the national economic structure and has unremittingly acted as the bulwark for the Indian economy, providing it resilience to ward off global economic shocks and adversities.
  • With around 63.4 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 as well as 33.4% of India’s manufacturing output.
  • They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India.

What are MSMEs? How are they defined?

  • Formally, MSMEs are defined in terms of investment in plant and machinery.

The significance of MSMEs:

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 specially for India?

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

How many MSMEs does India have, who owns them?

  • According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country.
  • Around 51 per cent of these are situated in rural India.
  • Together, they employ a little over 11 crore people but 55 per cent of the employment happens in the urban MSMEs.

  • The numbers suggest that, on average, less than two people are employed per MSME.
  • At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing.

What kind of problems do MSMEs in India face?

Given the shape and form of MSMEs, it is not hard to envisage the kind of problems they would face.

  • No/Low Formal registration: To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. But, as it is clear in a time of crisis, it also constrains a government’s ability to help them.
  • Away from Tax norms: GST has its threshold and most micro-enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
  • Lack of Financial buffer: According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund (Chart 5).

  • They don’t have the buffers of the bigger firms or access to cheap capital to help them tide over this period.
  • Bad credit history:

The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers or things likes GST refunds etc. A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans (Chart 6).

Other problems

  • Long receivables cycles make a mess of working capital management.
  • Limited access to trained labour, technical progress and management support limit their growth.
  • Other common problems faced by small enterprises are related to the availability of technology, infrastructure and managerial competence, and limitations posed by labour laws, taxation policy, market uncertainty and imperfect competition.

Opportunity areas for MSMEs in India

Telecommunications

  • Domestic manufacturing of low-cost mobile phones, handsets, and devices;
  • Manufacturing of telecom networking equipment, including routers and switches;
  • Manufacture of base transceiver station equipment;
  • Mobile customer data analytics – services oriented toward analytical solutions; and
  • Development of value-added services

Healthcare

  • Manufacturing of personal protective equipment (PPE) and face masks, as the COVID-19 pandemic has fundamentally changed social behaviour, public health and hospital needs, and created new demand;
  • Manufacturing of low-cost medical devices, and medical accessories such as surgical gloves, scrubs, and syringes;
  • Low-cost surgical procedures to reduce the cost of healthcare;
  • Telemedicine; and
  • Diagnostic labs.

Electronics

  • Domestic manufacturing of low-cost consumer electronics, consumer durables;
  • Nano-electronics and microelectronics;
  • Electronic Systems Design and Manufacturing including semiconductor design, electronic components design and hi-tech manufacturing under India’s ‘National Electronics Mission; and
  • Strategic electronics, as the government is keen on encouraging the domestic manufacturing of products needed by the security forces.

Others

  • Other areas that offer opportunities for MSMEs include information technology, pharmaceutical, chemical, automotive, renewables, gems and jewellery, textile, and food and agriculture.

Part II of the BI will be published shortly…………

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