MSME sector of India and various inherent issues GS:3 "EMPOWER IAS"

In news:

• The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India.
• All anecdotal evidence available, such as the hundreds of thousands of stranded migrant workers across the country, suggests that MSMEs have been the worst casualty of lockdown.
• A closer look at the anatomy of the MSME sector explains why MSMEs are so vulnerable to economic stress.

 

What are the MSMEs?  How are they defined?

 

• Formally, MSMEs are defined in terms of investment in plant and machinery.
• But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.
• That is why in February 2018, the Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST.
• According to the proposed definition, which is yet to be formally accepted, a micro-enterprise will be one with an annual turnover less than Rs 5 crore; a small enterprise with turnover between Rs 5 crore and Rs 75 crore; and a medium enterprise with turnover less than Rs 250 crore.

 

How many MSMEs does India have, who owns them, and where are they situated?

 

• According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country.
• Around 51 per cent of these are situated in rural India.
• Together, they employ a little over 11 crore people (Chart 3) but 55 per cent of the employment happens in the urban MSMEs.
• These numbers suggest that, on average, less than two people are employed per MSME.
• At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing.

 

Distributions of MSMEs:

• In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs.
• These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).
• This breakup provides a sense of where the pain of the MSME crisis would be felt the most.
• Chart 4 shows, 99.5 per cent of all MSMEs fall in the micro category.
• The medium and small enterprises — that is, the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees
• While micro-enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India.

 

How can the MSME sector help in achieving inclusive growth?

• Employment: As MSMEs are usually labour-intensive, they have the ability to create more jobs. MSME sector is the most useful vehicle for inclusive growth in India due to its inherent nature of large scale employment creation in the shortest possible time, especially to people belonging to weaker sections of the society.
• Rural entrepreneurship: According to 2011 Census 68.84% people are living in rural areas of India. People in rural areas suffer with unemployment, poor infrastructure facilities which may be solved with the development of the rural entrepreneurs. There is a lot of scope for rural entrepreneurship in MSMEs sector economy which plays a vital role in providing employment and income for the poor and unemployed in rural areas.
• Non-agricultural livelihood: Indian MSME sector offers maximum opportunities for both self-employment and wage-employment outside the agricultural sector and contributes in constructing an inclusive and sustainable society.The rural non-farm sector in the form of rural SMEs absorb those released from agriculture but not absorbed in the urban industries.
• Female participation: 20% of Every 1000 MSMEs in India are women Owned. MSMEs provide a platform for female participation, especially being informal in nature. MSMEs act as an imperative instrument for the development of women and realize the goals of economic growth and development of the nation.
• Better pays: In addition, evidence suggests that small enterprises provide better stability, higher pay and better benefits to their employees than large enterprises and informal firms especially to unskilled labour force. This enables poor to earn more and save more for their welfare.
• Cheap products: MSMEs comprise the majority of firms which have much deeper and market penetration than foreign firms. Local SMEs are often the principal provider of goods and services in lower and middle income communities. Thus, they provide affordable products to poor and middle income families leading to more savings.
• Reduce inequalities: MSMEs help in developing infrastructural facilities like roads, power, bridges etc. It reduces the gaps and disparities in income between rural and urban areas. Rural MSMEs can avoid the migration of people from rural to urban areas in search of jobs.

 

What kind of problems do MSMEs in India face?

• No/Low Formal registration: To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. But, as it is clear in a time of crisis, it also constrains a government’s ability to help them.
• Away from Tax norms: GST has its threshold and most micro enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
• Lack of Financial buffer: According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund don’t have the buffers of the bigger firms or access to cheap capital to help them tide over this period.

 

• Bad credit history: The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers or things likes GST refunds etc. A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans .

 

Challenges faced by MSMEs in India:

• Problem of Finance: An important problem faced by micro and small enterprises in the country is that of finance. 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.
• Problem of Raw Material: A major problem that the micro and small enterprises have to contend with is the procurement of raw material. Procurement of raw material at a competitive cost and shortage of raw materials is a common problem. The small units that use imported raw material face raw material problems with more severity mainly due to difficulty in obtaining raw material either on account of the foreign exchange crisis or regulator delays.
• 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.
• Government policy/infrastructure related challenges: MSMEs face bureaucratic hurdles and red Tapism. Delay in getting power connection, water connection, permission of concerned authorities to discharge effluents, etc. are some of the issues faced.
• Marketing related challenges: Lack of entrepreneurial, managerial and marketing skills and lack of professionally managed top management along with ineffective marketing strategy is a major hurdle in success of MSMEs. Non-exposure to best management practices in manufacturing, marketing, distribution and branding and lack of adequate information hinders their productivity.
• Labour related challenges: Lack of skilled manpower for manufacturing, services, marketing, etc. is a big issue for MSMEs. Further, multiplicity of labour laws and complicated procedures associated with compliance of such laws impact MSMEs ability to grow.

 

How has Covid-19 made things worse?

• The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
• The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
• According to a recent survey he did for “small and medium” firms in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.
• A big hurdle to restarting now is the lack of labour availability.

 

Government schemes to promote MSMEs

• Udyami Mitra Portal : launched by SIDBI to improve accessibility of credit and handholding services to MSMEs.
• MSME Sambandh : To monitor the implementation of the public procurement from MSMEs by Central Public Sector Enterprises.
• MSME Samadhaan -MSME Delayed Payment Portal –– will empower Micro and Small entrepreneurs across the country to directly register their cases relating to delayed payments by Central Ministries/Departments/CPSEs/State Governments.
• Digital MSME Scheme : It involves usage of Cloud Computing where MSMEs use the internet to access common as well as tailor-made IT infrastructure
• Prime Minister Employment Generation Programme : It is a credit linked subsidy program under Ministry of MSME.

• Revamped Scheme of Fund for Regeneration Of Traditional Industries (SFURTI) : organizes traditional industries and artisans into clusters and make them competitive by enhancing their marketability & equipping them with improved skills.
• A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE) : creates new jobs & reduce unemployment, promotes entrepreneurship culture, facilitates innovative business solution etc.
• National Manufacturing Competitiveness Programme (NMCP) : to develop global competitiveness among Indian MSMEs by improving their processes, designs, technology and market access.
• Micro & Small Enterprises Cluster Development Programme (MSE-CDP) - adopts cluster development approach for enhancing the productivity and competitiveness as well as capacity building of MSEs.
• Credit Linked Capital Subsidy Scheme (CLCSS) is operational for upgradation of technology for MSMEs.S

 

Other recent initiatives to promote MSMEs:

• In June 2019, RBI committee headed by former SEBI Chairman UK Sinha suggested a Rs 5,000 crore stressed asset fund for the MSME sector to provide relief to small businesses hurt by demonetisation, GST, and an ongoing liquidity crisis.
• It has also recommended doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs.
• MSME Ministry announced in June 2019 to lift the ban on entry of corporates and private players in the MSME sector to pave way for the formation of 700 clusters to reduce dependence on imports as well as for job creation.
• MSME Ministry is also planning to set up enterprise facilitation centres across the country to make smaller businesses more competitive and help them integrate with big enterprises.

 

What can be done?

• The RBI has been trying to pump money into the MSME sector but given the structural constraints, it has had limited impact.
• There are no easy answers for the MSMEs’ sufferings.
• However, the government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products.

 

What about credit guarantees?

• Loans to MSMEs are mostly given against property (as collateral) — because often there isn’t a robust cash flow analysis available — but in times of crisis, property values fall and that inhibits the extension of new loans.
• A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.
• To the extent such defaults happen, credit guarantees are shown as a departmental expense in the Budget.

 

Way forward to strengthen the Micro, Small and Medium Enterprises (MSME) sector:

• Access to credit: Government of India and banks should design plans and measures to widen easy, hassle-free access to credit. Ministry of MSME implemented Credit Guarantee Fund Scheme for providing financial assistance to MSMEs. Government must ensure that banks should enable timely credit to MSMEs. The establishment of the MUDRA (Micro Units Development & Refinance Agency Ltd.) bank under the Pradhan Mantri MUDRA Yojana has been a major initiative.
• Coherent policy and regulatory frameworks: Coherent regulatory frameworks can provide an enabling environment to foster MSME development. Barriers to entry, including technical regulations, compliance with Environment, Health and Safety (EHS) standards, labour laws and regulations need to be addressed.
• Infrastructure: Government should provide enhanced development and upgrade existing rail & road network and other infrastructure facilities in less developed and rural areas to boost growth and development of MSMEs.
• Human capital: 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. Skill India, Startup India are important initiatives in this direction.
• Technological know-how: There should proper research and development in respect of innovative methods of production and service rendering. Further, the government should promote and subsidise the technical know-how to Micro and small enterprises.

 

Conclusion:

• Governments across the world have announced various measures ranging from wage support to direct subsidies to help these businesses tide over these difficult times.
• But, in India, more than a month after the national lockdown was announced; there is still no blueprint of how the government intends to support these businesses during this period.