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Micro, Small and Medium Enterprises in India: An Analysis

Context: Recently, the Indian Prime Minister announced a number of measures to make it easier for micro, small and medium enterprises (MSMEs) to access credit.

What are Micro, Small and Medium Enterprises?

  • According to Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, there are two categories of MSMEs in the country – manufacturing and services.
  • For the manufacturing sector, the definition of an MSME is based on a company’s capital investment in plant and machinery.
  • For the services sector, the definition of an MSME is based on a company’s investments in equipment.

MSMEs in India: Statistics

  • As per the National Sample Survey (NSS) 73rd round (2015-16), there were 633.88 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities
  • 31% MSMEs were found to be engaged in Manufacturing activities, while 36% were in Trade and 33% in Other Services.
  • Out of 633.88 estimated number of MSMEs, 324.88 lakh MSMEs (51.25%) were in rural area and 309 lakh MSMEs (48.75%) were in the urban areas
  • The Micro sector accounts for more than 99% of total estimated number of MSMEs. Small sector with 3.31 lakh and Medium sector accounts for 0.52% and 0.01% of total estimated MSMEs, respectively.
  • State of Uttar Pradesh had the largest number of estimated MSMEs with a share of 14.20% of MSMEs in the country.

Role of MSME in Indian economy

  1. Contribution to GDP: MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. Further, the sector has consistently maintained a growth rate of over 10%.
  2. Leveraging Exports: MSMEs contribute around 45% of the overall exports from India.
  3. Employment Opportunities: Since the enterprises falling in this sector require low capital to start the business, it creates huge employment opportunities for many unemployed youths. MSMEs provide employment to around 120 million persons
  4. Fostering Inclusive Growth: MSME is constructing inclusive growth in  numerous ways through promoting non- agricultural livelihood at least cost, unbiased regional development,  large female participation, and providing a protection against deflation.

Issues/ Problems faced by MSMEs in India:

  1. Access to Credit:
  • According to Economic Survey (2017-18), MSME sector faces a major problem in terms of getting adequate credit for expansion of business activities. The Survey had pointed out that the micro, small and medium enterprises (MSME) received only 17.4 per cent of the total credit outstanding.
  • Most banks are reluctant to lend to MSMEs because from the perspective of bankers, inexperience of these enterprises, poor financials, lack of collaterals and infrastructure.

  1. Poor Infrastructure: With poor infrastructure, MSMEs’ production capacity is very low while production cost is very high.
  2. Access to modern Technology: The lack of technological know-how and financial constraints limits the access to modern technology and consequently the technological adoption remains low.
  3. Access to markets: MSMEs have poor access to markets. Their advertisement and sales promotion are comparatively weaker than that of the multinational companies and other big companies. The ineffective advertisement and poor marketing channels makes it difficult for them to compete with large companies.
  4. Legal hurdles: Getting statutory clearances related to power, environment, labour are major hurdles. Further, laws related to the all aspects of manufacturing and service concern are very complex and compliance with these laws are difficult.
  5. Lack of skilled manpower: The training and development programs in respect of MSME`S development has been inadequate. Thus, there has been a constant crunch of skilled manpower in MSMEs

Legal provisions:

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006:

  • It governs the coverage and investment ceiling of MSMEs in India.
  • In February 2018, Union cabinet approved amendment to Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 for classifying MSMEs from current investment in plant and machinery criteria to annual turnover criteria.

New Classification:

  • A micro enterprise will be defined as a unit where the annual turnover does not exceed five crore rupees;
  • A small enterprise will be defined as a unit where the annual turnover is more than five crore rupees but does not exceed Rs 75 crore;
  • A medium enterprise will be defined as a unit where the annual turnover is more than 75 crore rupees but does not exceed Rs 250 crore.
  • Additionally, the Central Government may, by notification, vary turnover limits, which shall not exceed thrice the limits specified in Section 7 of the MSMED Act.

Organizational structure

  • The primary responsibility of promotion and development of MSMEs is of the State Governments
  • The role of the Ministry of MSME and its organisations is to assist the States in their efforts to encourage entrepreneurship, employment and livelihood opportunities and enhance the competitiveness of MSMEs
  • The Ministry of MSME consists of Small & Medium Enterprises (SME) Division, Agro & Rural Industry (ARI) Division, Integrated Finance (IF) Wing and Data Analytics and Technical Coordination (DATC) Wing, the Office of the Development Commissioner (DCMSME) and other attached organizations

Attached Organizations

Steps taken:

  1. Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE): Ministry of MSME and Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement Credit Guarantee Fund Scheme for Micro and Small Enterprises and provide financial assistance to MSMEs. The corpus of CGTMSE is being contributed by GoI and SIDBI

  1. A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE): It aims to set up a network of technology centers, incubation centres to accelerate entrepreneurship and also to promote start-ups for innovation and entrepreneurship in rural and agriculture based industry
  2. Micro & Small Enterprises Cluster Development (MSE-CDP): It aims to support the sustainability and growth of MSEs by addressing common issues such as improvement of technology, skills and quality, market access, access to capital, etc.
  3. National Manufacturing Competitiveness Programme: The objective is to develop global competitiveness among Indian MSMEs. This programme targets at enhancing the entire value chain of the MSME sector.
  4. SFURTI-SI (Scheme of Fund for Regeneration of Traditional Industries, Credit Guarantee Scheme): The scheme aims to organize the traditional industries and artisans into clusters to make them competitive and provide support for their long term sustainability and economy of scale
  5. Technology Centre Systems Programme (TCSP): Under this programme, technology centres have been developed for giving technical education and support to MSMEs
  6. MUDRA (Micro Units Development & Refinance Agency Ltd.): The establishment of the MUDRA (Micro Units Development & Refinance Agency Ltd.) bank under the Pradhan Mantri MUDRA Yojana has been a major initiative. The Bank gives loans for working capital and additional requirements to income generating small business activity in manufacturing, processing, services or trading.
  7. Credit Linked Capital Subsidy Scheme (CLCSS): CLCSS aims at facilitating technology upgradation of Micro and Small Enterprises (MSEs) by providing 15% capital subsidy (limited to maximum Rs.15 lakhs) for purchase of Plant & Machinery.
  8. Prime Minister’s Employment Generation Programme (PMEGP): The major objective is to generate employment opportunities in rural as well as urban areas of the country through setting up of new self- employment ventures/ projects/ micro enterprises.
  9. Udyog Aadhaar Memorandum (UAM): It is a simple one-page registration form aimed at easing out registration process.
  10. MSME SAMADHAAN:The Ministry of MSME launched a portal samadhaan.msme.gov.in. to facilitates MSEs to file their delayed payments related complaints online.
  11. Market assistance Scheme: It aims to help MSMEs to participate domestic and international exhibitions/trade fairs etc.

Recent Measures:

Support and Outreach Initiative for MSME Sector:

  • 59-minute loan portal (loans up to 1 crore) to enable easy access to credit for MSMEs.
  • 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans.
  • increase in interest rebate from 3% to 5%, for exporters who receive loans in the pre-shipment and post-shipment period
  • All companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS). Joining this portal will enable entrepreneurs to access credit from banks, based on their upcoming receivables.
  • public sector companies have been asked to compulsorily procure 25%, instead of 20% of their total purchases, from MSMEs. Out 25% procurement mandated from MSMEs, 3% must now be reserved for women entrepreneurs.
  • Technology upgradation: 20 hubs to be formed across the country, and 100 spokes in the form of tool rooms to be established.

Way Forward:

  1. Government of India and banks should design plans and measures to widen easy, hassle-free access to credit.
  2. The RBI should bring stringent norms for Non-Performing Assets (NPA) and it will help curbing loan defaulters and motivate potential good debts. Further, according to critics, the Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency
  3. Government should provide enhanced development and upgradation of existing rail & road network and other infrastructure facilities in less developed and rural areas to boost growth and development of MSMEs
  4. There should proper research and development in respect of innovative method of production and service rendering. Further, the government should promote and subsidise the technical know-how to Micro and small enterprises.
  5. Government should encourage procurement programme, credit and performance ratings and extensive marketing support to revive the growth of sick units.
  6. Skill development and imparting training to MSME workers is a crucial step to increase the productivity of the sector. The government should emphasise predominantly on skill development and training programs
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