Q) The next decade will be the metamorphosis of India from an emerging power to an established economic powerhouse and MSMEs will be an important cog in the wheel on this journey. Comment.
Why this question?
Issue of current importance.
Key demand of the Question
To write about the contribution of MSME in India’s growth, the issues affecting MSMEs and changes that are needed to Revamp them.
Comment– here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon.
Start with giving an introduction about MSMEs in India.
In the first part, discuss the significance of MSMEs in economic development and how they can be a backbone of the economy in the future.
In the next part, discuss the challenges pertaining to the sector that need attention.
Conclude with a way forward.
Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. Not only do the 6.3 crore MSMEs in India contribute one-third to the GDP of the country but also provide employment to large sections of society. Moreover, the sector is a critical source of livelihood and provides nearly 110 million jobs. Therefore, with the current emphasis on Atmanirbhar Bharat Abhiyan, these MSMEs have become even more significant to India’s economic and financial strategy.
MSME sector in India:
- 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.
- MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP are stressed due to depleting internal reserves and low visibility of demand for next six months at least.
- It is the second largest employment generating sector after agriculture. It provides employment to around 120 million persons in India.
- With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
- MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes a $5 trillion economy.
Issues and challenges in MSMEs:
- A recently conducted survey finds that production in SMEs has fallen from an average of 75% to 13%.
- With 110 million employed by Indian SMEs, it is crucial to ensure adequate institutional support, failing which we might see an even larger impact on livelihoods.
- SMEs also account for a third of India’s GDP, 45% of manufacturing output and 48% of exports and hence are crucial to manufacturing and export competitiveness.
- With SMEs’ operational challenges exacerbated by Covid-19, it is all the more important to focus on this sector.
- SMEs will be vital in absorbing a significant proportion of the 600 million entrants to the labour market in EMEs by 2030.
- With a large proportion of these entrants bound to be from India, it is imperative that the Union and state governments ensure financial and institutional support for SMEs.
- In terms of location, SMEs are relatively evenly distributed in comparison to larger organisations.
- Rural areas account for 45%, while the remaining are in urban areas. Hence, SMEs are well-poised to address poverty in both the cities and villages.
- Although the proportion of urban poverty has declined over the years, it has increased in absolute terms.
- In 2018, Kolkata, Delhi, and Mumbai had anywhere between 42-55% of their population living in slums. This number is certain to have increased in the pandemic.
Measures that need to be taken
- Developing Bond Market: With India’s bond markets starting to take shape, promotion of SME bond issuances can provide a fillip to debt capital markets participation of MSMEs. While such issuances will provide lower interest rates for MSMEs than other financial intermediaries charge, they will also be a viable high-yield instrument for informed and educated investors operating in the bond market.
- Creation of Independent Regulator: Given the growing importance of the data economy, it is paramount that the government creates an independent body which can advise and provide consultancy to MSMEs and enable them to win in this new, digital world.
- Reforming Labour Laws: Labour laws are not very conducive to MSME growth. They must strike the right balance between providing a growth-oriented framework for MSMEs to run in and providing sufficient protection for the rights of workers.
- Improving Regulation: While Ease of Doing Business has been a focus area, the reporting, approval and compliance requirements for small businesses continue to border on the higher side. If we truly want to create a country where MSMEs can influence our economic destiny, it is imperative that they are provided with a hassle-free regulatory framework which works for them rather than against them.
Indian MSME sector is the backbone of the national economic structure and acts as a bulwark for Indian economy, providing resilience to ward off global economic shocks and adversities. Given the important role played by the sector in the economy, issues faced by it must be addressed on an urgent basis to revive the economy battered by the pandemic.