MSMEs in India – Growth Catalyst

My write up which appeared in the Cover Story of April 2019 issue of Monthly Economic Digest Published by Maharashtra Economic Development Council.

MSMEs in India – Growth Catalyst

India has the largest number of entrepreneurs in the world and it produces the largest number of entrepreneurs in a year. According to the latest survey by Dun and Bradstreet, there are 81 mn economic entities in the country (excluding entities involved in crop, public administration and defense). Many of them are single-person units operating from huts in villages, non-permanent structures. Excluding these entities, there are over 27 mn entities which could be termed as ‘commercially visible’. MSMEs account for around 99.9% of these 27 mn entities, they contribute to 35% of India’s GDP and employ 25% of India’s non-farm workforce.

MSMEs provide large employment opportunities at lower capital cost than large industries. At present, more than 15 crore are being employed in the MSME sector. The MSMEs in India are defined

 as follows :

Manufacturing Sector
Enterprises	Investment in plant & machinery
Micro Enterprises	Does not exceed twenty five lakh rupees
Small Enterprises	More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises	More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises	Investment in equipments
Micro Enterprises	Does not exceed ten lakh rupees:
Small Enterprises	More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises	More than two crore rupees but does not exceed five crore rupees

The enterprises go through an evolution, they evolve from micro to small to medium and then large entities. In developed markets, around 50% of the entities are micro and 40% are small/medium. In India, over 95% of total entities are micro and 4% are small/medium. Indian micro enterprises are finding it difficult to scale up and grow into small and medium sizes. The challenges they face in India are , access to finance, availability of adequate infrastructure, availability of skilled labour and inadequate power supply. Considering the contribution of MSMEs to the Economy, lot of new government initiatives were taken by the government to accelerate the growth of the MSMEs.  To support the MSMEs, RBI has constituted a committee in the month of March 2019 to enable higher level of funding to the MSMEs in India.

Realising the contribution, the MSMEs can make it to the Indian Economy , several initiatives were taken by the Government. The ministry of MSME plays a key role in accelerating the growth of the MSMEs.  A special cadre of officers has been created in the Ministry to focus only on MSME sector and those who join this cadre will mainly work in MSME department in their career.

One of the issues , relating to MSMEs is the access to the credit. As per the survey of Dun and Bradstreet, only 4% of micro enterprises have access to the format credit. This is one of the major challenges for the growth. To make this process simple, the government had introduced the Mudra Scheme. This scheme is operated under SIDBI and it refinances the loans given by Banks and NBFCs to the enterprises , which avail the loans under the Mudra scheme. In the year , 2017 – 2018, Mudra loans disbursed amounted to Rs.2,46,437 cr and in 2018 – 19 , so far, the loans disbursed amounted to Rs.2,02,668 cr. The total loans disbursed under this scheme stood at Rs.7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. This scheme has benefited many in the new economy sector including those who are focussed on selling their products through e – commerce and those who wanted to run ride hailing services. Many enterprises were created in Food and service sector and small scale manufacturing and they are using the e commerce platforms.

Start up India Scheme. Startup India Scheme is an initiative of the Indian government, the primary objective of which is the promotion of startups, generation of employment, and wealth creation. It was launched on the 16th of January, 2016 . Under the scheme, New-entrants are granted a tax-holiday for three years. The government has provided a fund of Rs.2500 crore for startups, as well as a credit guarantee fund of Rs.500 crore rupees. The Eligibility For Startup Registration  is as follows and many have availed this scheme.    

• The company to be formed must be a private limited company or a limited liability partnership.
• It should be a new firm or not older than five years, and the total turnover of the company should be not exceed Rs. 25 crores.
• The firms should have obtained the approval from the Department of Industrial Policy and Promotion (DIPP).
• To get approval from DIPP, the firm should be funded by an Incubation fund, Angel Fund or Private Equity Fund.
• The firm should have obtained a patron guarantee from the Indian patent and Trademark Office.
• It must have a recommendation letter by an incubation centre.
• Capital gain is exempted from income tax under the startup India campaign.
• The firm must provide innovative schemes or products.
• Angel fund, Incubation fund, Accelerators, Private Equity Fund, Angel network must be registered with SEBI ( Securities and Exchange Board of India).

Skill India Scheme. One of the challenges, MSMEs  face today is availability of talent. To overcome this , skill development initiatives were taken at both Centre and state levels and there is an objective to train more than 50 cr people in the coming years. The model will be focussing on Vocational training similar to the vocational training system in Germany. Under this scheme , Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was introduced and it  is the flagship scheme of the Ministry of Skill Development & Entrepreneurship (MSDE). The objective of this Skill Certification Scheme is to enable a large number of Indian youth to take up industry-relevant skill training that will help them in securing a better livelihood. Individuals with prior learning experience or skills will also be assessed and certified under Recognition of Prior Learning (RPL). Under this Scheme, Training and Assessment fees are completely paid by the Government.  In four years, this scheme is likely to benefit more than 10 million youth.

Cluster development Scheme. Industrial clusters play a major role in development of Industries in a country. Government of India  has adopted the Cluster Development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their contribution. A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous area and producing same / similar products / services. The essential characteristics of enterprises in a cluster are (a) Similarity or complementarity in the methods of production, quality control & testing, energy consumption, pollution control, etc., (b) Similar level of technology & marketing strategies / practices, (c) Similar channels for communication among the members of the cluster, and (d) Common challenges & opportunities. By part of being a cluster, MSMEs will find it easy to source raw material and buyers for the products. Further, the common costs are being shared among the enterprises operating in the cluster. There are various subsidy schemes operated by Centre and States and in many clusters, the participating companies have to incur only 10% of the total cost of cluster development.

PSU procurement. One of the challenges for MSMEs is to find buyers for their produce. To facilitate the demand creation for MSMEs, government has created a scheme , whereby , Now it is mandatory for all Central PSUs to take membership of the Government e-Marketplace (GeM) and they will put their purchase requirements in the market place,  which MSMEs can identify easily and participate in the process. Now, PSUs have to procure, at least a quarter of their requirement (25%) from MSMEs. With a view to encourage , more women to pursue entrepreneurship, out of the 25% procurement mandated from MSMEs from PSUs, 3% has been reserved for women entrepreneurs. A website has been created under the brand of MSME Sambandh and all the procurement notices of PSUs have to be placed on the website. In the previous financial year, more than Rs.25,000 cr was procured from MSMEs and this is likely to cross Rs.30,000 cr, this year.

Digitisation. To make the procedures simple, the government has embarked on several initiatives. The MyMSME is portal for web based application module to submit and track online application under the various schemes of the ministry.  Under the Udyog Aadhhaar Memorandum, mobile friendly application could be used for registration of MSMEs on self – certification basis. MSME Samadhaan scheme has been created to resolve the issues of delayed payments to MSMEs. Further, the digitisation and Introduction of GST has brought many MSMEs into the formal economy and this is helping MSMEs to build a credit profile and enable credit ratings by Credit rating agencies. This enables MSMEs to avail the formal channels of finance.

Some of the recent initiatives of the government include , approval of Rs.1 crore loan in 59 minutes, rebates in interest to be paid by them, Trade Receivables e- Discounting System (TReDS) , e market place for MSMEs, Cluster development subsidy for pharma companies, single annual return to be filed for   compliance matters , simplifying the factory inspection procedures and certain exemptions from punishment for minor violations.

In conclusion, a good , supportive and growth oriented , eco system has been created for the MSME development in India and various initiatives are being taken to create effective implementation policies and procedures. By creating an awareness among all the MSMEs about the various schemes and ensuring inter – departmental coordination in the government, the potential of MSMEs can be fully capitalised for a higher economic growth.