MSME: Backbone of Indian Industry

MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

MSME accounts for more than 45% of total manufacturing output of the country, contributes around 9% to GDP and accounts for more than 40% of total exports of the country. 

There are total around more than 40 million such enterprises in India (which is 2nd largest after China) it employs over 11 Crore people in India. 


• Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951) or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery.

1. Micro Enterprises: Less than 25 Lakh rupees.

2. Small Enterprises: More than 25 Lakh rupees but less than 5 Crore rupees.

3. Medium Enterprises: More than 5 Crore rupees but less than 10 Crore rupees.

• Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

1. Micro Enterprises: Less than 10 Lakh rupees.

2. Small Enterprises: More than 10 Lakh rupees but less than 2 Crore rupees.

3. Medium Enterprises: More than 2 Crore rupees but less than 5 Crore rupees.

Recent government initiatives

• Public Procurement Policy 2012: Each Ministry/PSU shall set an annual goal and procure minimum 20% from MSME within 3 years.

• In many FDI proposals such as FDI in Retail, there is clause that 20-30% inputs shall be procured only from MSME.

• Labour Reforms: Introduction of Shram Suvidha Portal to compliance with labour laws, flexible & time bound labour inspection scheme and Unique Labour identification number (LIN) to every unit.

• Mudra Scheme: This is the first ever credit scheme designed for micro entrepreneurs or household enterprises. Lesser documents formality, no collateral and cheap interest rate are some of the major features of this scheme. Connecting last mile financer with Mudra bank is another remarkable feature of the scheme to provide credit facility to each household enterprise.  

• Udyog Aadhaar Memorandum (UAM): This is a path breaking step to promote ease-of-doing-business for MSMEs in India as the UAM replaces the filing of manual Entrepreneurs’ Memorandum (EM part-I & II) with online facility of filing EM and each MSME to instantly get a unique Udyog Aadhaar Number (UAN). The information sought is on self-certification basis and no supporting documents are required at the time of online filing of UAM.

• A Scheme for Promotion of Innovation, Rural Industry and Entrepreneurship (ASPIRE):  ASPIRE has been launched with an objective to set up a network of technology centers, incubation centers to accelerate entrepreneurship and also to promote start-ups for innovation and entrepreneurship in rural and agriculture based industry with a fund of Rs 210 Cr.

• Scheme of Fund for Regeneration of Traditional Industries (SFURTI):  The objectives of SFURTI is to organize the traditional industries and artisans into clusters to make them competitive and provide support for their long term sustainability by way of enhancing the marketability of products, improving the skills of artisans, making provision for common facilities and strengthening the cluster governance systems.

• Stand Up India: Recently government approved “Stand-Up India Scheme” to promote entrepreneurship among SC/ST and Women entrepreneurs. The Scheme is intended to facilitate at least two such projects per bank branch, on an average one for each category of entrepreneur. It is expected to benefit at least 2.5 Lakh borrowers in time limit of 36 months from the launch of the Scheme.

• Credit Linked Capital Subsidy Scheme: it has been implemented by the government for up-gradation of technology. Under this 15% (subject to maximum of Rs.15.00 lakhs) upfront subsidy on capital investment for technology upgradation is provided to micro and small enterprises for modernization of their production equipment(plant and machinery).

Problems faced by MSME sector

 • Lack of Finance: It is estimated that more than 90% MSME’s does not have access to institutional finance and dependent on local finance such as relatives or moneylenders where interest cost is generally on higher side. However government have started lots of scheme to provide institutional finance to MSME’s but corruption and long procedures makes it difficult for MSME’s to avail the benefits of these schemes. 

• Lack of Basic Infrastructure: MSME’s are growing rapidly but does not have access to basic infrastructure such as power, water, road or connectivity to towns, telecom, etc. Further government support is limited in providing basic infrastructure facilities to MSME’s in all areas of the country.

• Access to Market: In digital era, marketing play a significant place but due to lack of funds and professional knowledge, MSME’s adopt poor advertisement and selling methodologies which restrict the reach of their products despite of good quality. Further there is poor linkage between Heavy industries and MSME to sale their products.

• Access to Modern Technology:  The owners of MSME’S are not aware of advanced technologies of production. Their methodology of production is outdated which cause low quality production at higher cost. 

• Labour Laws: All the laws related to all aspects of manufacturing and service concern are very complex and compliance with these laws is practically difficult. The various decisions of factory’s are depend on the factory commissioner and inspector, so there are so many chances of red tape in the operation of MSME’S.

 • Access to Raw material and Other Inputs: MSME’s require raw material, skilled work force and other inputs, which are not available in the market. Due to unavailability of these essentials, it is very difficult to produce the products at affordable prices.

 • Lack of Skill development and training: MSME’s entrepreneurs are generally not well educated and skilled in their field area which restricted quantity and quality of output of MSME’s. The skill developmental schemes conducted by the government are not sufficient to address the skilling issues of MSME’s.

• The existing mechanism for addressing revival, rehabilitation and exit of small enterprises is very weak in the country. The most recent Doing Business (DB) Report ranks India 130 out of the 189 economies for resolving insolvencies. It notes that resolving insolvency takes 4.3 years on average and costs 9.0% of the debtor’s estate.

• Poor tax structure, high level competition with MNC’s and large industries are other major problems faced by MSME sector.

 Measures need to be taken 

• Tax reforms: There is need to roll out GST to simplify tax structure and to reduce tax spending of MSME’s. Further there is need to provide tax incentives to MSME sector such as increase tax exemption limit to avoid tax evasion.

• Industrial Training Institutes and management schools:  There is need to establish new industrial schools or upgrade previous ones to include modules on management, labour laws, accounting, financial markets, and procurement and marketing skills.

• Promote R&D: To comply with rapidly growing and changing world, there is need to promote R&D in MSME sector so that new products can be developed such as Phulkari of Punjab, bamboo works of Assam, etc.

• E-Commerce and Marketing:  Rather than depending on private e-commerce companies only, government shall endeavour to create a dedicated e-commerce platform for marketing of MSME sector.

• Bankruptcy code to make insolvency procedure is also need of the hour to reduce exit time and capital of entrepreneurs. 

The above measures may help MSME sector to act as a major driver to the economic growth of the nation.