From UPSC perspective, the following things are important :
Prelims level : MSMEs
Mains level : Paper 3- MSMEs issues and opportunities
MSMEs in India has huge untapped potential. This article suggest the ways to tap it and make the MSMEs major contributor to India’s growth.
What is an issue with MSMEs
- Despite MSME contributing 20% of the GDP and employing about 110 million workers, we have failed to make bold policy-moves to make it more productive and competitive.
- MSMEs are not becoming ‘larger’ and more dynamic, with 99% of the estimated 60 million being micro-enterprises with limited aspirations.
- At the core of this lack of competitiveness is a structural issue.
Addressing the structural challenges
- Consider India’s largest textile cluster vs Bangladesh’s largest.
- More than 70% of the units in Tirupur are micro-enterprises with less than 10 employees while only 20% of the units in Narayanganj in Bangladesh have less than 10 employees.
- This factor makes the cluster in Bangladesh more competitive and helping Bangladesh’s exports grow faster than India’s.
- Though Bangladesh has other advantages also, but this structural difference is critical.
Relation between size and productivity
- Productivity data from manufacturing MSMEs in OECD show that the productivity of medium firms (50-250 people) could be as much as 80-100% higher than that of micro firms (<9 employees).
- Growth in scale allows them to invest in people to improve skills, in better technology & processes, and in innovation.
- The most-competitive of them grow from their small beginnings to become world-beaters.
- This push to grow and improve capabilities and productivity is central to dynamism of any country’s industrial structure.
- This dynamism of micro-enterprises has been one of the less-reported policy levers behind China’s rise as an industrial powerhouse.
What stops MSMEs in India from growing?
- Our policy-legacy of highly restrictive asset-based definition which has only recently been relaxed, coupled with a mindset, and, policies, to support the ‘small is beautiful’ narrative.
- Overly complex regulatory regime doesn’t differentiate enterprises on their scale, other than the really tiny ones, in terms of compliance needs.
- For example, if a unit has more than six employees, the trade union law becomes applicable, If a unit has more than 10 employees, the Factories Act is applicable.
- Small enterprises thus face the same multitude of regulatory requirements as larger ones, and end up having compliance costs account for a higher percentage of revenue.
- For the tiny/micro units, there is simply no incentive to grow and enter the formal economy.
Policy intervention needed
1) Getting MSMEs into formal credit system
- To do this, we need to adopt an approaches that can help banks and NBFCs move away from asset-backed lending, towards some form of cash-flow-based lending.
- Small retailers are outside the formal credit system, unable to invest, modernise and grow, given they lack fixed ‘assets’.
- But, all of them are linked to, and sell, brands of well-known, large companies.
- If banks and NBFCs work with these companies and use anonymised data on sales and credit-performance to develop credit-scores for lending to them?
- Similar innovative ways could help cover other micro-unit segments.
2) Simplified tax and regulatory regime
- The second policy intervention needed is to de-average and implement a simplified tax and regulatory regime for MSMEs.
- This would also reduce the cost of compliance.
3) Development of digital platform
- The third intervention, appropriate for digital era, is to develop a comprehensive ‘digital platform’ for the sector.
- This will call for a mandatory, unique identifier for all.
- The platform will have to be linked to different relevant databases.
Consider the question “MSMEs in India continues to play an important role in India’s development yet it suffers from structural challenges which hinders it from fueling India’s growth. In light of this, examine the challenges MSMEs faces and suggest the policy interventions.”
As India launches the Atmanirbhar Bharat Abhiyan to reignite growth of the economy for a post-COVID world, building such a globally-competitive MSME has to become one of the initiative’s core pillars. Only then can our industry improve and sustain its global competitiveness.