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MSMEs in India – Pad for the next economic leap

IBEF, Knowledge Centre

Oct 20, 2020 06:10

India has approximately 6.33 crore micro, small and medium enterprises (MSMEs). The number of registered MSMEs grew 18.5% YoY to 25.13 lakh units in 2020, from 21.21 lakh units in 2019. Registered MSMEs are dominated by micro enterprises at 22.06 lakh units as of 2020, up from 18.70 lakh in 2019, while small enterprise units went up from 2.41 lakh to 2.95 lakh. Midsized businesses only increased from 9,403 units to 10,981 units in this period.

The MSME sector contributes ~6.11% to the manufacturing GDP and 24.63% to the GDP from service activities as well as 33.4% of India's manufacturing output. The sector also employs over 120 million people across the country. Exports are an integral part of the supply chain and contribute 35-40% to the overall exports; also, it is expected to grow, indicating a multiplier effect on the country’s economic growth. The MSME sector continues to drive India’s fortunes despite being impaired by factors such as poor digitalisation, inadequate capital, poor infrastructure, digitalisation, scattered markets, absence of compatible financial partners and statutory clearances.

According to the new definitions, in India, micro enterprises are companies with investment of less than INR 1 crore (~US$ 136,180)and turnover less than INR 5 crore (~US$ 0.7 million), small enterprises are companies with investment of less than INR 10 crore (~US$ 1.4 million) and turnover of INR 50 crore (~US$ 6.8 million), while companies with an investment of less than INR 50 crore (~US$ 6.8 million) and turnover less than INR 250 crore (~US$ 34 million) are categorised as medium enterprises.

Push from the government

With the coronavirus hitting India’s economic growth, foreign direct investments (FDIs) worth INR 50-60 lakh crores (~US$ 679–815 billion) are needed to increase liquidity and get back on the growth trajectory. The money can be tapped through infrastructure projects and the MSME sector. The government has focused on the MSME sector as it looks to prop up domestic manufacturing.

To ensure that MSMEs continue to guide the country towards economic growth, the government has announced various schemes to support progress of the sector. In May 2020, the government announced the ‘Atmanirbar Package’, i.e., the ‘Self-reliant India’ initiative worth INR 20 lakh crore (~US$ 266 billion) to boost industrial growth of the country. Also, all offices under the Government of India and Central Public-Sector Enterprises (CPSEs) have been mandated to clear all receivables within 45 days to improve liquidity status of the MSMEs. Additionally, procurement from domestic companies is being encouraged by disallowing global tender in government procurement tenders up to INR 200 crore (~US$ 27.2 million). This step is expected to create opportunities for domestic companies and encourage the local industry.

In May 2020, the government launched the ‘Champion portal’ to enable MSMEs in finance, raw materials, labour, permission, etc. The portal also seeks to help MSMEs tap into new opportunities including manufacturing of medical items & accessories, combined with a long-term view to identify MSMEs with growth potential.

Recently, the World Bank allocated an INR 5,600 crore (~US$ 750 million) emergency response funding to the MSME sector. This provided liquidity and supported government strategy of using Non-Banking Financial Companies (NBFCs) and small banks to channelise funds to the MSMEs.

Access to credit

The MSME sector has been facing a credit crunch for some time. With an intent to address this issue, the government announced an emergency credit line to MSMEs, wherein banks/financial institutions are proposed to sanction loans up to INR 3 trillion (~US$ 40.7 billion) to MSMEs. Additionally, to assist the MSMEs in bringing equity funding, the government has launched the Subordinate Debt Scheme, wherein promoters are provided a debt facility of up to 15% of the promoter contribution or INR 75 lakh (~US$ 0.1 million), whichever is lower. Under this scheme, banks will be able to fund the promoter’s contribution and the funding will get confirmed by the government. In a nutshell, this is a way of providing equity support by the government without banks taking any additional risk. The promoter, in turn, will infuse the amount in the MSME unit as equity and thereby, enhance liquidity and maintain a debt–equity ratio.

The government has also announced a new scheme ‘Funds of Fund Scheme’ with a corpus of INR 10,000 crore (~US$ 1.4 billion) for providing financial relief and funding to MSMEs with growth potential and viability.

As numerous MSEs in India are running their business with outdated technology and machinery, the objective of the Credit-Linked Capital Subsidy Scheme (CLCSS) is to facilitate technology upgrade among MSEs by providing a capital subsidy of 15%. Additionally, another government initiative—Prime Minister’s Employment Generation Programme—aims to generate employment opportunities in rural and urban areas by setting up new self-employment ventures/projects/micro enterprises. The programme also aims to provide continuous sustainable employment to prospective artisans and unemployed youth and increase the wage-earning capacity of artisans and contribute to the growth of rural and urban employment.

Way forward

To boost growth of the Indian MSME sector, the government should invest in providing more back-end services to improve performance of the MSME sector as it supplies goods and services to big industrial enterprises. Lack of technology-based production activities and low investment in R&D activities are bottlenecks hindering the sector to become competent. Globally available technology could be subsidised by the government so that the product quality of MSME players can be improved using the existing resources. This also requires the help of academic institutions in the form of providing research and development (R&D) services for product innovation.

With continued government focus on MSMEs, the sector is expected to continue being the growth engine of the Indian economy and provide employment to millions of unskilled and semi-skilled people across the country.