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MSMEs Engines of Growth for New India

  • IAS NEXT, Lucknow
  • 05, Jan 2022
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Why in news?

Recently the government has revised the definition of MSME making it as engines of growth for ‘new India’.

Why MSME is important for Indian Economy?

  • Contributes ~ 30% to India’s GDP
  • Employs ~ 11 crore people
  • Constitutes ~ 40% of total exports
  • More than half of them located in rural India
  • Huge potential to boost self-reliance (Atmanirbhar Bharat)

What are the issues faced by MSMEs in India?

  • Regulatory limits on their assets discourage MSMEs from scaling up their operations.
  • Only after a gap of 14 years (2006 to 2020) the government revised the definition of MSMEs by factoring in inflation and depreciation.
  • This made the MSMEs to operate at a low scale by creating subsidiaries/sister concerns with a view to receiving incentives from the government.
  • Inadequate and untimely credit – 9/10 MSMEs depend on informal sources for their working capital and term loans.
  • Lack of sufficient asset cover (collateral) discourages them from taking secured loans at lower interest rate.
  • This dents profitability and economic viability of their businesses.
  • Other issues –
    • Non-registration of firms.
    • Delayed receivables.
    • Technological obsolescence.
    • Negligible market linkages.
    • Information asymmetry.
    • Absence of exit policy.

How will the new reforms benefit MSMEs?

  • Special Credit Linked Capital Subsidy Scheme provides 25% capital subsidy for the MSMEs in the services sector for procuring service equipment through institutional credit for advancement of their technology.
  • Revising the definition of MSMEs – According to the new definition a firm is classified under MSME-Medium category if
    • Investment in plant and machinery does not exceed Rs50 crore
    • Turnover does not exceed Rs250 crore.
  • This change in the policy gave a ‘comfort zone’ for the MSMEs.
  • Export revenue is deducted from total sales while estimating the turnover of MSMEs
  • This is a positive sign not only for MSME sector but also for exports.

What are the areas to improve in this sector?

Ease Of Doing Business –

  • Better access to efficient factors of production.
  • Friendly labour reforms
  • Proper land acquisition policy
  • Free access to capital
  • Vibrant entrepreneurship culture
  • Modern technology
  • Enabling infrastructure.
  • Simplified tax policy.

Export of Services –

  • The world is moving towards a clean, green, and lean corporate regime and India has a comparative advantage in services sector
  • MSMEs must be re-oriented to enhance export of services by capitalising the revised definition.
  • However, balanced growth of agriculture, manufacturing, and services may be maintained by leveraging demographic dividend.

Leveraging PLI Scheme – PLI Scheme will

  • Boost 13 industry sectors
  • Harness Make in India and enhance our manufacturing and export potential.
  • Incentivise the manufacturing of electric vehicles

Promoting Start-Ups –

  • According to Nasscom India has 66 unicorns till date and is still counting.
  • They should be nurtured with right incentives like market capitalisation and evolving technology.

Market Linkages –

  • A virtual platform exhibiting the products and innovations of MSMEs must be created to reach out to the broader national and international markets thereby enhancing their revenue.
  • Brand their products/services to promote (RURBAN) clusters.

Emulating Best Practices-

  • Turkey has introduced ‘TURQUALITY’ a state sponsored scale up programme to transform MSME into global players.
  • ‘Growth Driver Programme’ of Business Development Bank of Canada provides multi-disciplinary support system in terms of enterprise growth and job creation in SMEs.

Financial Literacy and Education –

  • Imparting financial/digital education
  • Make use of digital channels including TReDS platform for speedy realisation of their receivables.
  • Train to utilise the services of SME stock exchange in order to mobilise risk capital for growth plans.