From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Issues faced by MSMEs and dealing with them
The article highlights the importance of MSMEs for the economy and issues faced by the sector.
- The economy may have recovered from the trough of April but is yet to show signs of a sustained recovery on an annual basis.
- The number of establishments registered with the Employees’ Provident Fund Organisation declined by more than 30,800 in October, compared to September.
Incentives for MSMEs
- The above-cited numbers are indicator of the vulnerability of the employment situation, but also as a performance indicator of micro, small and medium enterprises (MSMEs).
- The MSME sector is vital for employment generation, as also for an economic recovery to sustain.
- Under Atmanirbhar Rozgar Yojana the government will bear the entire provident fund contributions for two years of all new employees hired.
- However, similar announcements earlier failed to enthuse the MSME sector.
- Along with the employment incentive, the MSME sector has also been provided collateral free credit.
- But the offtake from the scheme has not been impressive, pointing to deeper issues.
Why the incentives failed
- Part of the reason these incentives failed lies in the very nature of the MSME sector and its heterogeneity, which is inherent in its definition as a residual sector once large enterprises are excluded.
- A 2015-16 survey of the National Statistical Office shows that almost 94% of these enterprises are tiny, with less than four workers.
- Only 31% are registered under various acts, but these face regulatory hurdles, some of them related to compliance with the goods and service tax (GST).
Problems faced by MSMEs
- In 2015-16 survey of the National Statistical Office two most important problems mentioned were a lack of demand and unpaid dues.
- On both, the situation after 2015-16 has worsened, with the economy slowing down and the government responsible for the largest unpaid dues.
- With the finances of state governments also strained due to pandemic, the fiscal situation has added to the problem of unpaid dues.
- The sector is also affected by the political economy of state intervention, which seems biased in favour of large corporations.
- Unlike the ₹1.5 trillion tax bonanza that large companies received as part of a pre-pandemic stimulus, there was no such bounty for the MSME sector.
- With most state governments relaxing labour regulations for large companies, even the low-wage advantage that this sector enjoyed has got diminished.
- Policy changes have not only reduced the compliance burden of labour laws, but have also helped large enterprises reduce wage costs.
- Consequently, the MSME sector has to now compete with a corporate sector that has easy access to capital, cheap and unregulated labour and a lower tax burden than before.
- Apart from the fiscal stimulus, the sector requires a political-economy approach that prioritizes MSME interests.
- India needs to ease the regulatory burden of small units and aid their survival through fiscal support.
- Above all, they need a level-playing field vis-à-vis big businesses.
Consider the question “Despite several incentives by the government MSME sector fails to play the role expected of it. What are the issues faced by the sector and suggest the measure to deal with the issues.”
Given the important role played by the sector in the economy, issues faced by it must be addressed on ani urgent basis to revive the economy battered by the pandemic.