MSME Sector in India

Table of Contents

Context: The United Nations General Assembly designated 27 June as “Micro-, Small, and Medium-sized Enterprises Day” to raise awareness of the tremendous contributions of MSMEs to the achievement of the United Nations Sustainable Development Goals (SDGs).

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The MSME day was designated by the UNGA in 2017.
The theme of MSME Day 2023 in India is “Future-ready MSMEs for India@100.”
- This theme highlights the focus on preparing micro, small, and medium enterprises (MSMEs) for the future and positioning them to contribute significantly to India’s growth and development as the country progresses towards its centenary year in 2047.
- The significance of this theme lies in recognizing the crucial role played by MSMEs in the Indian economy.

Understanding MSMEs

What are MSMEs?

MSME stands for Micro, Small, and Medium Enterprises. In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006, the enterprises are classified into two divisions.

Manufacturing enterprises – engaged in the manufacturing or production of goods in any industry.
Service enterprises – engaged in providing or rendering services

Stats IQ: The Indian MSME Sector

It is estimated that there are 633.9 lakh MSMEs in India.
The Micro sector includes 630.5 lakh enterprises, accounting for over 99% of the country’s total number of MSMEs.
The Small sector includes 3.3 lakh enterprises (0.5% of total MSMEs), while the Medium sector includes 0.05 lakh enterprises (0.01% of total MSMEs).
Around 324.9 lakh enterprises (52.3% of total MSMEs) are in rural areas, while 309 lakh enterprises (48.8%) are in urban areas.

Benefits of the MSME Sector to the Indian Economy

MSME Sector’s Contribution to Indian Economy: As per the Ministry of Statistics & Programme Implementation, the contribution of the MSME sector to the Gross Value Added (GVA) in the country’s GDP in FY 20 was 30%. The share has been around 30% over the past few years. The sector’s contribution to manufacturing in all India manufacturing gross value output in FY 20 stood at 36.9%, the same as that in FY 19.
MSME Contribution to Export in India: The MSME sector is among the country’s major exporters. Specified MSME-related product exports accounted for 49.5% of India’s total exports in FY 21, compared to 49.8% in FY 20. Textiles, garments, different types of shoes, rice and castor oil are among the major products exported by the Indian MSME sector.
Employment Generation: The MSME sector is one of the country’s major employers. The sector has been instrumental in generating employment opportunities in rural and remote areas of the country. As per the data from the Udyam Portal of the Ministry of MSMEs, 93,94,957 people were employed by MSMEs registered on the portal in FY 22.
Connecting Remote Areas to Rest of the Country: By preparing key raw materials and finished goods with global demand, MSMEs in remote and backward areas help connect these areas with the rest of the country and the world. Several MSMEs operate in rural areas while providing ancillary goods to large multinational companies across the globe.
Improving Standard of Living: By creating employment opportunities and connecting backward areas, the MSME industry in India plays a key role in lifting people out of poverty and improving their standard of living. Thus, the sector helps reduce regional imbalances across the country and increase equality among citizens.

Challenges faced by MSMEs in India

Finance

Delayed payment: Four years after MSME SAMADHAAN portal was set up to help enable faster payments and improved cash flows to India’s MSMEs, the number of applications filed for relief on the portal are piling up closer to one lakh.
Credit gap: MSMEs still find access to formal credit a challenge. Roughly 40 per cent of MSME lending is done through the informal sector (in 2018), where interest rates are at least twice as high as in the formal market. The reason for the enormous credit gap is two-fold:
- Lack of assets among MSMEs such as land and building etc. to secure asset-based financing or secured loans.
- Credit risk assessment challenges faced by financial institutions in owing to lack of financial data and credit history among small businesses.
Infrastructural bottlenecks:
- Land: Due to high cost of land, the circle rate of Industrial area is usually high making it unaffordable for the MSME entrepreneur.
- Power & water: Delay in getting access to power and water connection. Lack of adequate power supply in few parts of the country.
- Logistics: Lack of a cost effective and efficient logistics/supply chain infrastructure as well as lack of dedicated infrastructure i.e. ready to move-in, built-in factories with plug and play facilities.
- Poor infra for capacity building: Lack of access to R&D Centres, Product and Prototype Development Centres, Testing Laboratories, etc.
- Poor marketing strategy: MSMEs because of their size are unable to achieve economies of scale or hire a marketing specialist who can guide them to have robust marketing strategy. Also, they do not have adequate foot print on digital marketing platform.
Access to Technology: Though India has a vast pool of technical talent with well-developed intellectual capability, the country still scores low in terms of developing, commercializing and adopting new and innovative technologies.
Women specific issues: The number of women-led MSMEs in India has jumped from 2.15 lakh to 1.23 crore in just a decade. However, they face a finance gap of $158 billion and largely rely on informal sources. About 90 per cent of SMEs owned by women in the country still rely on informal ways of securing capital or loans. Besides, social attitude, and socioeconomic constraints also hold women back from becoming entrepreneurs.

Government Initiatives

The celebration of MSME Day in India, known as “Udyami Bharat-MSME Day,” signifies the government’s commitment to creating a conducive business environment for MSMEs.

It showcases the government’s efforts to support MSME growth through initiatives like the CHAMPIONS 2.0 Portal, which provides a platform for grievance redressal and handholding support, and the Geo-tagging of Cluster Projects and Technology Centers through a mobile app.
Additionally, the announcement and launch of the MSME Idea Hackathon initiatives underscore the government’s focus on promoting entrepreneurship, encouraging innovation, and empowering women entrepreneurs in the MSME sector.
RAMP Scheme: The scheme was launched under the Ministry of Micro, Small and Medium Enterprises (MoMSME) for supporting various COVID-19 Resilience and Recovery Interventions.
- It was formulated and proposed for strengthening MSMEs in line with the recommendations made by U K Sinha Committee, KV Kamath Committee and Economic Advisory Council to the Prime Minister (PMEAC).
- Aim:
  - Improving access to market and credit, strengthening institutions and governance at the Centre and State.
  - Improving Centre-State linkages and partnerships.
  - Addressing issues of delayed payments and greening of MSMEs.
- Outlay: The total outlay for the scheme is Rs.6,062.45 crore out of which Rs.3750 crore would be a loan from the World Bank and the remaining Rs.2312.45 crore Million would be funded by the Government of India (GoI).
Prime Minister Employment Generation Programme (PMEGP): It aims at providing financial assistance to self-employment ventures, in order to generate employment opportunities for unemployed youth and traditional artisans.
Credit Guarantee Trust Fund for Micro & Small Enterprises (CGT SME): Collateral free loan up to a limit of ₹ 100 lakh is available for individual MSE on payment of guarantee fee to bank by the MSE.
ZED Certification scheme: It aims at enabling MSMEs towards manufacturing quality products by inculcating Zero Defect & Zero Effect practices, to safeguard the continuous improvement thereby supporting the Make in India initiative.
Online Portal “Champions”: This covers many aspects of egovernance including grievance redressal and handholding of MSMEs.
Micro & Small Enterprises – Cluster Development Programme (MSE-CDP): The scheme aims at the growth of MSEs by addressing advancements in sustainable & green manufacturing technology, market access, skills & quality, etc. Creating infrastructural facilities in existing Clusters of MSEs and Industrial Areas.

Way Forward

Assessing the impact of Pandemic and other unforeseen incidences on informal sector MSMEs through a comprehensive survey to understand the gravity of the problems faced by these businesses.
Reorienting the SAMADHAAN portal to prevent delays in payment by providing standardized contract templates for various business deals and transactions, thereby acting as a proactive problem-solving mechanism.
Encouraging cash flow-based lending by financial institutions, allowing MSMEs to access working capital loans based on their cash flow and operational needs, even without significant assets to mortgage.
Promoting cluster development to overcome infrastructure bottlenecks, where MSMEs within a cluster collaborate and share resources for marketing, technology, and other business processes.
Providing marketing support to MSMEs by facilitating their entry into B2B and B2C e-commerce marketplaces, utilizing technology tools like SMS, digital newsletters, and electronic direct mail to target specific customer segments. Additionally, assisting MSMEs in procuring affordable and complete ICT solutions.
Strengthening government policies based on recommendations such as extending the loan repayment period under the Emergency Credit Line Guarantee Scheme (ECLG) for MSMEs, setting up a Central Market Intelligence Centre to promote domestic manufacturing, easing certification processes through existing Technology Centers and global testing partnerships, and formulating separate policies for medium enterprises based on their unique needs.
Resolving issues related to women entrepreneurs by fostering women’s education, encouraging funding institutions to grant loans to women entrepreneurs, and promoting collaboration among government agencies, NGOs, and civil society.