MSMEs Engines of Growth for New India

• IAS NEXT, Lucknow
• 05, Jan 2022

Why in news?

Recently the government has revised the definition of MSME making it as engines of growth for ‘new India’.

Why MSME is important for Indian Economy?

• Contributes ~ 30% to India’s GDP
• Employs ~ 11 crore people
• Constitutes ~ 40% of total exports
• More than half of them located in rural India
• Huge potential to boost self-reliance (Atmanirbhar Bharat)

What are the issues faced by MSMEs in India?

• Regulatory limits on their assets discourage MSMEs from scaling up their operations.
• Only after a gap of 14 years (2006 to 2020) the government revised the definition of MSMEs by factoring in inflation and depreciation.
• This made the MSMEs to operate at a low scale by creating subsidiaries/sister concerns with a view to receiving incentives from the government.
• Inadequate and untimely credit – 9/10 MSMEs depend on informal sources for their working capital and term loans.
• Lack of sufficient asset cover (collateral) discourages them from taking secured loans at lower interest rate.
• This dents profitability and economic viability of their businesses.
• Other issues –
  • Non-registration of firms.
  • Delayed receivables.
  • Technological obsolescence.
  • Negligible market linkages.
  • Information asymmetry.
  • Absence of exit policy.

How will the new reforms benefit MSMEs?

• Special Credit Linked Capital Subsidy Scheme provides 25% capital subsidy for the MSMEs in the services sector for procuring service equipment through institutional credit for advancement of their technology.
• Revising the definition of MSMEs – According to the new definition a firm is classified under MSME-Medium category if
  • Investment in plant and machinery does not exceed Rs50 crore
  • Turnover does not exceed Rs250 crore.
• This change in the policy gave a ‘comfort zone’ for the MSMEs.
• Export revenue is deducted from total sales while estimating the turnover of MSMEs
• This is a positive sign not only for MSME sector but also for exports.

What are the areas to improve in this sector?

Ease Of Doing Business –

• Better access to efficient factors of production.
• Friendly labour reforms
• Proper land acquisition policy
• Free access to capital
• Vibrant entrepreneurship culture
• Modern technology
• Enabling infrastructure.
• Simplified tax policy.

Export of Services –

• The world is moving towards a clean, green, and lean corporate regime and India has a comparative advantage in services sector
• MSMEs must be re-oriented to enhance export of services by capitalising the revised definition.
• However, balanced growth of agriculture, manufacturing, and services may be maintained by leveraging demographic dividend.

Leveraging PLI Scheme – PLI Scheme will

• Boost 13 industry sectors
• Harness Make in India and enhance our manufacturing and export potential.
• Incentivise the manufacturing of electric vehicles

Promoting Start-Ups –

• According to Nasscom India has 66 unicorns till date and is still counting.
• They should be nurtured with right incentives like market capitalisation and evolving technology.

Market Linkages –

• A virtual platform exhibiting the products and innovations of MSMEs must be created to reach out to the broader national and international markets thereby enhancing their revenue.
• Brand their products/services to promote (RURBAN) clusters.

Emulating Best Practices-

• Turkey has introduced ‘TURQUALITY’ a state sponsored scale up programme to transform MSME into global players.
• ‘Growth Driver Programme’ of Business Development Bank of Canada provides multi-disciplinary support system in terms of enterprise growth and job creation in SMEs.

Financial Literacy and Education –

• Imparting financial/digital education
• Make use of digital channels including TReDS platform for speedy realisation of their receivables.
• Train to utilise the services of SME stock exchange in order to mobilise risk capital for growth plans.