Strengthening the Micro, Small and Medium Enterprises (MSMEs) sector is key to growth in the Amrit Kal to make India a developed nation by 2047, the 100th year of India’s Independence.
With approximately 30 per cent of the country’s GDP, 45 per cent of manufacturing output, and 211 million employees/workers, MSMEs are the backbone of the Indian economy.
In recent years, the Centre has taken several measures to boost the growth of the MSME sector, through initiatives such as the allocation of Rs 5 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for businesses, including MSMEs.
As per the government’s Udyam Portal, 58.4 million registered MSMEs. Of these nearly 99 per cent are micro firms while the small and medium account for the remaining 1 per cent.
In other words, despite so many interventions, there are very few small or medium businesses. Most micro firms remain micro forever, holding back from growing to their potential and being job creators of substance.
MSMEs have played a key role in defining the economic trajectory of some of the major developed or developing economies including China, which has become a factory of the world.
In India, the MSMEs continue to face extensive regulation and compliance requirements for incentives, affordable credit, etc., which hinder their growth.
Threshold-based concessions and exemptions create the unintended effect of incentivising enterprises to cap their sizes below the thresholds. So, threshold-based incentives must have sunset clauses.
When lots of concessions are given to enterprises on a threshold basis, many of them choose to remain below the threshold so that they can enjoy the concessions. So, instead of thresholds on an absolute basis, those could be set more in tandem with GDP. Due to compliance issues for incentives, many MSMEs subdivide themselves into smaller units to continue to enjoy those concessions. So, the current threshold-based incentives have to be unshackled for the Indian economy to grow.
Currently, firms with investments less than Rs 1 crore and turnover less than Rs 5 crore are termed ‘micro’, investments less than Rs 10 crore and turnover less than Rs 50 crore are ‘small’ and investments less than Rs 50 crore and turnover less than Rs 250 crore are known as ‘medium’ enterprises.
In order to support MSMEs, there are several schemes such as the Pradhan Mantri Mudra Yojana and the Credit Guarantee Fund Trust for Micro and Small Enterprises, aimed at providing affordable credit to MSMEs. Banks also lend to MSMEs for certain purposes under the liberal priority sector lending mechanism.
Even then, MSME credit penetration is just 14 per cent in India compared with 50 per cent in the US and 37 per cent in China. There is a credit gap of Rs 25 trillion for the Indian MSME sector, reflecting the large untapped credit market.
The Centre should look at launching a new credit guarantee scheme for the manufacturing sector on the lines of the Rs 5 lakh crore ECLGS for MSMEs launched in 2020 to insulate them from Covid-19 pandemic impact. The ECLGS was introduced in May 2020 with a guarantee corpus of Rs 3 lakh crores, which was later scaled up to Rs 5 lakh crore.
The scheme was valid till March 31, 2023. Under the scheme, 1.19 crore guarantees worth Rs 3.68 lakh crore were issued to MSMEs and other businesses.
Among other challenges, small firms find it difficult to expand due to a lack of suitable digital infrastructure. MSMEs should be facilitated to use platforms like Trade Receivables Discounting Systems (TReDS) to generate working capital. The government can give some incentives in favour of the Fintechs so that they can encourage MSMEs to shift to TReDS.
Given the licensing, inspection, and compliance requirements that MSMEs have to deal with, particularly at the state level, holding them back from growing to their potential and being job creators of substance, the Centre can take some measures in the upcoming budget to address these issues.
Large companies should show some heart by timely releasing dues to MSMEs, which are cash-starved. Despite the government mandate, large enterprises still look at micro and small enterprises as sources of working capital for them, rather than them being sources of working capital for micro and small enterprises.
If MSMEs have this kind of uncertainty hanging over their heads concerning their earnings receipts, then banks will also be slow to lend to them.
To support worker’s productivity for manufacturing growth, the Centre should also fast-track affordable rental housing for industrial workers under a public-private partnership (PPP) model with viability gap funding (VGF) to the private concessionaires.
Besides large industries, a large number of workers in MSME clusters would benefit from affordable rental housing projects. The safe and secure accommodation would help provide a healthy living environment, which could contribute to an increase in their productivity levels.
Over the last two decades and more, India has been taking several policy steps intending to increase the share of manufacturing in its gross domestic product (GDP) to 25 per cent. However, the share of the sector in GDP hasn’t risen and has been hovering around 16 per cent since FY12.
Besides the issues flagged above, the government needs to have a more dynamic vision to overcome the challenges faced by the MSMEs arising out of weakened consumer demand, sluggish private investment, a global economic slowdown, inflation, and upward interest rates.
MSMEs are more than mere foot-soldiers in the vision of Viksit Bharat.
