MSMEs: The Backbone of Indian Economy

Lovey Chaudhary

MSMEs worldwide play a major role in propelling growth engine, sustaining livelihood and promoting equitable regional development. The MSME sector in India continues to prove remarkable resilience in the face of rambling global and domestic economies. Significance of MSMEs can be observed in the developing economies where this sector constitutes over 90% of total enterprises and greatly to industrial production, exports and employment generation. Thus, MSMEs play a key role in overall industrial economy of the country.

A distinctive feature of MSMEs is that a very large proportion of them are concentrated around likely 6000 clusters plus 1157 traditional industrial clusters, 3091 handicrafts clusters, and 563 handloom clusters. According to the assessments of the Ministry of MSME, Government of India, the sector generates around 100 million jobs through over 46 million units situated throughout the geographical expanse of the country.

MSMEs are no more shielded in the controlled economy; the competitive pressure of free market is riding high. MSMEs are transforming into a new business environment characterized by the emergence of national and global supply chains where they share a symbiotic relationship with hefty corporations.

The apparent innovative capacity of MSMEs around the world for boosting economic growth and development at regional, national and global levels cannot be overemphasized. With its dexterity and dynamism, the sector has shown venerable innovativeness and malleability to survive economic shocks, even of the gravest nature.

Besides the wide range of services provided by the sector, the sector is further engaged in the engineering of over 6,000 products ranging from traditional to hi-tech items. The 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 in numerous ways through making of non-farm livelihood at meagre cost, balanced regional development, gender and social balance, environmentally sustainable development, etc.

In framework of persistent uncertainty in the agriculture sector because of substantial dependence on rain-fed irrigation, an alternative power pack, unutilised, is micro, small and medium enterprises (MSMEs). As MSMEs are usually labour-intensive, they have the ability to create more jobs to furnish to a fresh demographic country like India. Further, in view of the on-going implications of climate change, it is necessary that the MSME sector is prepared to engage millions who may be rendered unemployed in the agriculture sector.

The MSME sector in India claims of diversity in terms of its size, level of technology employed, range of products and services provided and target markets. MSME Tool Rooms have been credited to provide at least ten components that were used in India's Mangalyaan (Mars Orbiter Mission probe), the Indian Space Research Organization's (ISRO) most ambitious mission till date, which is the country's first inter-planetary space mission. The sector has also contributed vital inputs for other space satellites such as the Chandrayan. India's second moon mission, Chandrayaan II, set to be launched in 2016-17, will have a soft land over a wheeled robotic vehicle to explore the landing area. India seeks to launch other ambitious projects like a global sea traffic monitoring system and an earth observation satellite, in cooperation with the EU. The projects envisage noteworthy contributions and merging opportunities from the Indian MSME sector.

Many more rewarding opportunities can be tapped by Indian MSMEs in the foundry industry, electronics industry, chemicals, leather, textiles, agro and food processing, pharmaceuticals, transport and tourism industries, etc. The globalization of industries has gradually drawn SMEs into global value chains through diverse types of cross-border activities. Many magnates are recognizing the opportunities that this dawn ushers and gaining entrée to global markets has become a tactical mechanism for their advanced development. These chances have risen as a result of the regime's increased focus on the MSME sector, grander investments in research and development, technological upgradation, drive towards international alliances and dealings to boost competitiveness and impel growth.

In the case of prevailing as well as potential MSMEs, entrepreneurs face the problem of finance. The government and non-governmental organisations seek out to finance and earmark resources for MSMEs, but these resources often do not reach the targeted audience. The successful launch of the Jan DhanYojana (JDY) could be used to direct monetary resources to targeted MSMEs. Still, access to bank finance may be testing for some MSMEs, and so there is a need to consider various substitutes of finance.

In the case of Japan, the government has imposed a cap on interest rates on loans that a money lender extends to MSMEs. As money lenders continue to play an important role in India, it is worth considering whether money lenders could be brought under regulation now, given technological progress, as achieved in the case of Japan, and an interest cap be imposed for lending to MSMEs.

Micro, Small and Medium Enterprises constitute the backbone of an economy in maintaining an appreciable growth rate and in generating employment opportunities.

In India, commercial banks are mandated to lend to MSMEs. In such cases there is also a need to ensure that the public sector does not crowd out the private sector. Further, MSMEs generally suffer from poor conduct by major banks. In some cases, mis-selling of financial products is a general complaint of entrepreneurs. This can take the shape of higher fee or interest rate, failure to explain exit costs, and sometimes threatening them with refusal to extend regular credit. Illustratively, weighted average lending rate of commercial banks, as reported in the RBI's latest AR, is the highest for MSMEs when compared with loans extended to agriculture, large industry and infrastructure. Therefore, the role of financial education is very important for MSMEs in assessing appropriate start-up finance and in empowering them to use financial products and services to manage risks and other business needs.

Globally, medium-size enterprises in the manufacturing industry vary by meaning. In China it is definite as those having investment ceiling of 300 million yuan (at the current price level $44 million); in Thailand it is with a ceiling on investment capital of up to 200 million Thai bahts ($6 million); and EU defines medium enterprises as those of having turnover of €50 million, which is approximately $58 million.

In contrast, the investment limits for medium enterprises in the manufacturing sector in India as defined in 2006 was Rs.10 crore, which was equivalent to $2.3 million then. Factoring for inflation, this figure stood at just Rs. 5.28 crore in 2016, or $0.8 million at the current exchange rate.

Preferably, the figure presently, taking into account inflation, should have been nearby Rs. 18.63 crore or $2.9 million, which is a major difference of Rs. 13.35 crore or $1.5 million.

This incongruity is a constraining for enterprises in this sector to mature and partake in the value chain. With such a bare investment ceiling, Indian MSMEs are both expanding laterally or engaging themselves at the lower end of the value chain.

The Government could boost the spread of the investment limits of MSMEs to house the technological needs of the sector.

This would permit the enterprises to endure as MSMEs while also empowering them to grow. Some expanses (such as EU and China) have kept the ceiling on investment for medium enterprises at high levels, cheering capital infusion, technology upgradation, quality improvement, export orientation and employment generation.

It is essential to review the investment limits every three to four years, factoring inflation. Since industrial operations are generally capital intensive, investment ceiling for SMEs should be reviewed every so often.

There should be a wide differentiation within the two broad categories - manufacturing and services, while outlining MSMEs. Within these comprehensive categories, each sector would have need of a different level and size of investments.

The need of the hour is to specify a classification which would study not only the capital employed, but also features such as turnover and number of people employed.

(The author is a working journalist based in New Delhi)