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Need of exclusive emphasis on MSME sector to transform Indian economy

  • Category
    Economy
  • Published
    13th Dec, 2021

Context

MSME manufacturing firms have been imperative to the growth of the Indian economy. These small to medium sized ventures have always contributed largely to the country’s GDP, hence contributing to different aspects of its development.

Thus, there is urgent need of exclusive emphasis on this sector to further transform the economy.

Background

  • The Indian MSME sector contributes to about 29% towards the GDP through its national and international trade.
  • As per the MSME Ministry data, as of May 16, 2021, India has approximately 6.3 crore MSMEs (including both service and manufacturing firms).
  • It is to be noted that this sector still has a lot of unexplored territories for growth. It won’t be wrong to say that with so much of growth potential, emphasising on the development of MSME manufacturing firms can work as a long-term development tool for India.
  • India has a large number of MSMEs, however, the country faces the challenge of scaling up of MSME to compete in global market.

Analysis

What are MSMEs?

  • According to the Indian government, industries are classified on the basis of two factors i.e. investment and turnover. On the basis of these factors, industries are defined as –
  • Micro-enterprise- where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees
  • Small- enterprise-where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees
  • Medium enterprise- where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Ministry of MSME targets to increase the contribution of MSME towards GDP by up to 50% by 2025 as India moves ahead to become a $5 trillion economy

Benefits of MSME-

  • Rural growth-
  • All-inclusive growth: MSMEs promote all-inclusive growth by providing employment opportunities, especially to people belonging to weaker sections and women in rural areas
  • Inclusion of remote areas: It provides opportunities for people to use banking services in tier-2 and tier-3 cities, leading to the final inclusion.
  • Industrialization: It leads to industrialization of rural areas with a low capital cost compared to the large industries.
  • Balanced regional development: It also acts as a complementary unit to large sectors and enabling balanced regional development.

Indian economy-

  • Multiple benefits: It has a role in different areas due to benefits like low investment, flexibility in operations, low rate of imports, and a high contribution to domestic production.
  • Absorb a large workforce: It has the ability to absorb a large workforce and thus, harnessing demographic dividend.
  • Further generating new entrepreneurs: They have a capability to develop appropriate local technology and generate new entrepreneurs by providing knowledge, training, and skill up-gradation through specialized training centers.
  • Competition led growth: MSMEs promote innovation by providing an opportunity to budding entrepreneurs to help them build creative products hey and thereby boost competition in business and fuel the growth.

Challenges faced by MSME sector

  • COVID-19 pandemic and economic uncertainty which not only prevents further investment, it also prevent product consumption by the consumers.
  • MSMEs also has less availability of technical and economical guidance from industry experts
  • Entrepreneurs who are successful or are in profits would be reluctant to invest more and prefer reaping the benefits, thus leading to limited growth of MSMEs.
  • Policy related-
    • Delayed regulations and approvals, delayed enforcement of contracts and construction permits. In fact, the time taken by businesses to enforce a contract remains longer, at 1,445 days.
  • Lack of financial expertise to steer the business in the right direction
  • Technology-
    • Less connect of MSME with scientific class and researchers has led to less than potential growth. The government is working towards the launch of E-commerce portal ‘Bharat Craft’ that will act as a direct interface between sellers and buyers.
  • Labour issues- Lack of skilled manpower, and current migrant crisis has perpetuated the challenges.
  • Low production capacity of MSMEs is a hindrance to scaling up.

Government initiatives for the promotion of the sector

  • Atmanirbhar Bharat Yojana
  • Prime Minister Employment Generation Programme
  • Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)
  • Credit Linked Capital Subsidy for Technology Up-gradation (CLCSS)
  • Micro & Small Enterprises Cluster Development (MSE-CDP)
  • Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
  • A Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship (ASPIRE)

Key suggestive measures

  • Supportive policy framework to promote Ease of doing Business-
    • It can be done through financial incentives, faster regulatory clearances and codification of labour laws. These will improve economic productivity and integrate MSME’s into global value chains.
  • Promotion of Foreign direct investment (FDI)
    • An investor friendly FDI Policy can bring in more investment, high end technology leading to increase productivity and improve competitiveness of the MSME sector
    • It can lead to job creation and increase in tax revenue.
  • Development of MSME clusters and Special Economic Zones(SEZs)-
    • harness economies of scale
    • A group of MSMEs producing similar products in sectors such as automobiles, food processing, textiles, and pharma can enable them to harness economies of scale.
  • Use of innovative Technology
    • In order for MSMEs to develop a competitive advantage to operate in the global market, a strong focus on implementing new-age technology, developing indigenous technologies as well as technology collaboration with global partners can competitive advantage and scaling up of operations.
  • Access to Capital
    • Ease of access to capital through domestic and foreign sources is necessary for developing MSMEs to large firms.
  • Skilling of workers-
    • It is necessary to increase productivity and increase India’s social capital for greater economic growth.
    • It can also lead to creation of entrepreneurial spirit and rise of new MSME’s

Conclusion

To promote sustainable growth, MSMEs should be encouraged to measure and minimize emissions. These value chains would have to be incentivised by their suppliers to reduce their carbon footprint. For India to adopt the net-zero goals, the MSME sector’s inclusion is necessary.

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