Capitalism and socialism both are flawed economic principles which gave rise to various socio-economic problems and disturbed the old structure of the society. Political thinker Pandit Deendayal Upadhayaya visualized the evil impact of copying the western model of economic development where wealth maximization is the only objective and therefore he gave the principle of Arthyam. Deendayal Ji emphasized on decentralization as an alternative to skewed development and he was of firm belief that this would not only increase the productivity but improve the capital formation also. According to Pandit Deendayal, decentralization promotes enterprise of the individual and motivates individual to save for capital formation which is needed badly in a capital scarce country like ours. The government understood the necessity to promote the manufacturing sector for job creation as well as balancing the lopsided development achieved on the back of service sector growth. Revival of Medium, Small and Micro Scale Enterprises (MSMEs) is part of Make in India dream and success of PM’s dream project is highly dependent on contribution of MSMEs. Let us see the various aspects of MSMEs in Indian economy and way ahead for their revival.
Role of MSME- MSMEs play a pivotal role in the Indian economy which can be seen from the following facts-
- MSME sector contribute nearly 45 percent of the manufacturing output and 40 percent of the exports.
- This sector contribute app. 8 percent of country’s GDP
- MSME sector provide the largest share of employment after agriculture and this sector has a better record of employment generation per rupee investment as compared to large industries.
- Economic independence (i.e. self-reliance) can be achieved only by the growth of small sector. Over the period myopic policies of our leadership has created such a situation that a country of more than 1 billion population has just become a market for the big players. We spend billions of dollars of foreign currency on importing items (e.g. electronic items, consumer durables etc.) which can be easily made in India as they don’t require any specialized skills and small investment is needed to start the production. It is needless to say that we have man, material and market but we are lacking mechanism to put everything together to start the productive activities. Objective of import substitution can be achieved by reviving MSMEs.
- Apart from economic relevance, growth of small sector plays an important role in maintaining the overall social & cultural structure. Development of SSIs in dispersed geographies reduces the rate of migration to cities and thereby reducing the burden on cities to accommodate the large population.
Expectation from MSME/ Opportunities for MSME
Make in India is a challenge as well as opportunity for MSME sector (challenge from foreign players and opportunity as big players will outsource some of the small items/processes to other entities). The contribution of MSME segment to the GDP in some of the economies is in the 25-60 per cent range (refer table 1). MSME in India has the potential to increase the share of contribution to GDP from the current 8 per cent to about 15 per cent by the year 2020. With the increase in MSME contribution to the GDP, there is a potential to increase its contribution to employment to over 50 per cent over the next decade.
Table 1 – Share of MSME in GDP and employment generation
|Country||Share in GDP contribution||Share in employment generation|
|Non MSME||MSME||Non MSME||MSME|
Source- Analysis published by KPMG
As per the data published by ministry MSME exports are skewed in terms of both commodities which we export as well as the export destination (refer table 2). Europe, South America and Africa can be our next export destination.
Table 2 – Product wise MSME share in exports
|Commodity||%ge in exports|
|Pearls, gems, jewellery, metals etc.||35%|
|Electrical and electronics equipment||8%|
|Articles of apparels||11%|
Source- Ministry of MSME, Annual Report 2013-14
Steps taken for revival
Government has taken some serious measures for revival of this sector but the biggest problem is large number (in fact more than 70%) of enterprises are unregistered and therefore they are outside of the umbrella of government schemes. Schemes like “Startup India” are aimed to promote the entrepreneurship culture in the country and various incentives (procedural as well fiscal) are given for encouragement. There are three broad aspects of business viz. availability of credit, availability of technology and market. Let’s see the policy initiatives taken by the government in these areas-
- Credit facility- Reserve Bank of India (RBI) has issued revised master direction for lending to MSME sector on July 21, 2016 and loans to MSME sector are classified as priority sector lending. Banks are mandated to provide the acknowledgement for loan applications and put in place a system of e-tracking of MSE loan applications. No collateral security is required for loan up to Rs. 10 lakhs.
Sometimes back RBI announced the new “Framework for Revival and Rehabilitation applicable to MSMEs” having loan limits up to Rs. 25 crore, including accounts under consortium or multiple banking arrangement (MBA). Banks have to constitute a committee who will look into the stressed accounts and formulate a corrective plan (including restructuring of loan) in consultation with the experts.
- Technology- Although MSMEs are labour intensive but use of advance technology will increase the productivity. Government has announced setting up new Technology Centres/Tool Rooms for skill training and technical support to the MSMEs.
- Market- Identifying the buyer to sell the products is one of the biggest challenge because a MSME doesn’t have a credible brand name and at times it has to face bigger rivals in their product segment who have a natural benefit of their scale of operations. Competitiveness is very much important because our enterprises have a tough competition with Chinese companies in domestic market and other players in export market.
Considering the fact that a small enterprise has to face such challenges, there is a policy in place which mandates all Central Public Sector Undertakings (CPSUs) to procure at least 20% of their annual procurement from MSEs and also there is a sub-target earmarks 20% (i.e. 4% out of 20%) for procurement from MSEs owned by Scheduled Castes or Scheduled Tribe entrepreneurs). There is an exhaustive list of items which are to be procured by CPSUs from MSEs only (358 items) and there are 20 items which are reserved exclusively for manufacturing by MSEs only. Government is also organizing trade fairs, exhibitions etc. and various concessions are given to MSMEs in government bids. E-commerce has also provided an opportunity to MSEs to market their products.
Steps should be taken
Government’s intention is clear and necessary changes are made in the policy from time to time but monitoring of the performance is necessary otherwise everything will remain on paper only. Some of the measures which should be taken are –
- Unlike the big corporates, entrepreneurs in this sector are unregistered and therefore government has to act proactively to reach out to them by way of drives and campaigns. MSME ministry also needs to reach-out to the people and educate them about opportunity areas in various sectors and this is necessary because opportunities are business sector & geographical area specific.
- Smooth Exit procedure is also part of ecosystem and new bankruptcy law also accepts that business ventures can fail and allow entrepreneurs to get a fresh start and thereby facilitate restart.
- Corporate loan portfolios are rescheduled on a regular basis but the small borrower is left to his own perils. RBI has issued “Framework for Revival and Rehabilitation of MSMEs” and there should be proper monitoring of the matters considered by the committee under this initiative (i.e. monitoring of viable SMEs and entities put on nursing).
- Mandatory procurement of 20% from MSEs is applicable to CPSUs only. State governments should be requested to make it applicable to SPSUs also.
- The collateral free loaning guidelines of the RBI should be extended to loans up to Rs. 25 Lakhs, given the fact that “Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)” guarantees are available up to Rs. 1 Crore. Higher interest rate increases the cost and reduce the competitiveness and it not justified when guarantee is available to banks for their advances.
- With the devaluation of Yuan by China, import of Chinese goods has become more economical as compared to indigenous goods posing a major threat to survival of MSEs. India is bound by WTO convention and it can impose only anti-dumping duty only provided our officials get the necessary evidence. Industry associations and government has to act proactively & collectively to tackle the Chinese dumping.
By: – Shshank Saurav (Chartered Accountant and Anti Money-Laundering Specialist)