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Role of MSMEs in Indian Economy

Role of MSMEs in Indian Economy

 

India is considered to be one of the fastest emerging economies of the world. In the light of a positive political and economic scenario, the country is making development in various segments and is strengthening its global position.

Among the many factors driving the Indian economy, The Micro, Small and Medium Enterprises segment (MSMEs) is a significant factor. All over the world, the development of MSME sector is recognized as the key driver behind growth momentum of an economy.

 

Contribution of MSMEs in Indian Economy

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 of the country. With around 63.4 million units throughout the geographical expanse of the country, the sector employs around 120 million persons and contribute around 45% of the overall exports from India. The sector has consistently maintained a growth rate of over 10%.

Rural areas consists of about 20% of the country’s MSMEs. This shows a significant shift from primarily being an agrarian economy towards an industrial economy. These enterprises are essential for creating large scale employment and thus promoting sustainable and inclusive development.

(Data source : www.cii.in)

The contribution of MSME segment to the GDP in some of the global economies is in the 25-60 per cent range. MSME sector in India has tremendous potential and its development is vital to solve employment and poverty related problems in the country.

 

What do we mean by Micro, Small and Medium Enterprises (MSMEs)

In Indian context, the MSMEs are generally classified on the basis of investment in plant, machinery or services equipment. The classification mentioned by Government of India is stated as below: (source: www.rbi.org.in)

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

For enterprises engaged in the manufacture or production, processing or preservation of goods, the classification is:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries.

For enterprises engaged in providing or rendering of services, the classification is:

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

 

Government Initiatives

Strategic Government initiatives are necessary in establishing a conducive and competitive business environment. Some of the ongoing initiatives for the development of MSMEs and startups in India are listed below:

Prime Minister’s Employment Generation Programme (PMEGP) - It is a major credit-linked subsidy programme for micro-enterprises in non-farm sector. It has provided assistance to 4.49 lakh micro enterprises till December 2017.

Credit Guarantee Scheme for Micro and Small Enterprises (CGTSME) - Under this scheme collateral free credit facility to MSMEs is provided.

Credit linked Capital subsidy scheme - The objective of the Scheme is to facilitate technology upgradation in MSEs by providing an upfront capital subsidy of 15 per cent (on institutional finance of upto Rs 1 crore availed by them) for induction of well-established and improved technology in the specified/ approved sub-sectors or products.

 Startup India Initiative - As part of the Startup India Action Plan, 19 action points are identified to improve access to capital and technology for startups.

 

Way Ahead

The MSMEs in India are not well organized which limits their contribution to the economy. Skill development, mentoring, technology and market access are some of the challenges which can be overcome through proper partnership between government and local bodies.

Other top- down reforms that will benefit MSMEs and startups include :

  • GST implementation
  • Proper handling of insolvency and bankruptcy cases
  • Gradual liberalization of FDI
  • Increasing transparency in system
  • Streamlining the processes to increase ease of doing business

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