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Why MSMEs are Vital to the Growth Story of India
India is taking pride in being the 5th target economy and is expected to soon become the 3rd largest. It also has the demographic dividend of 65% of its population being young but it needs proper handling, the growth needs to be inclusive and the young has to be gainfully engaged contributing to the growth of GDP. The unemployment rate is 6% plus and that is a point of worry as the numbers need to be verified and solutions to be flagged and executed. The gainful sustainable employment is the key to trigger the inclusiveness in the growth story and ensure increase in demand triggers the virtuous cycle of production and demand related to purchase capacity.
There is need to reduce the compliance burden and incentivise growth of the MSMEs.
The big manufacturing firms with the AI usage will be shifting to more and more automation and thus less and less requirement of manpower. The solution thus lies in in the MSMEs (Micro, Small and Medium Enterprises), that ensures penetration in hinterlands and ensures employment in a big way. 40% of the workforce is in the MSMEs. There are 6.3 crore registered MSMEs in the Udyam portal but only 2.5 crore have taken the credit till date and it has a potential of a CAGR increase by 2.5%.
There is a separate ministry for MSMEs so that the focus comes on the MSMEs for which the budget of INR 22,000 crores have been provided. Additionally, there are institutions for training which have come up besides KVIC (Khadi and Village Industry Commission). We also have MGIRI (Mahatma Gandhi Institute of Rural Industrialization) in Wardha and then we have NI (National Institute) for the MSME training. So, all these are there to impart training. Then, to provide the credits there are schemes where easy credit at lower rate of interest is available besides what the NBFCs (Non-Banking Financial Companies), micro finance institutions and SIDBI (Small industries Development Bank of India) is giving, the Mudra and other loans. Thus, the government has flagged the issue and provided a scheme for the same. There are 22 schemes of MSMEs, however contribution of MSMEs to GDP is just floating around 34%. China in decades of demographic dividends had it 50%. It is therefore very important to constantly evaluate as to what extent objective of the schemes have been achieved and what is the gap that is yet to be covered. It requires deep diving as growth and health of MSMEs is vital for the inclusiveness of growth for India.
It is important to separately monitor the micro, small and medium enterprises. Micro is where the investment is less than a crore and turnover is 5 crores; Small is where the investment is more than a crore and turnover is 50 crores; and Medium is 10 crores of investment and turnover more than 250 crores. So, if you look at it, it is the micro and medium which are taking advantage of the government schemes but yet not sustainable and small is getting left out. The labour laws need to be revisited as it incentivises continuation of being small as the moment they cross threshold the compliance burden increases. Thus, there is need to reduce the compliance burden and incentivise growth of the MSMEs.
Credit, power cost and logistics are among the most expensive across the globe, there is need to relook at these costs, enhanced production will add to the revenue of the country and that will offset by making them affordable and Indian goods competitive not just for exports but for domestic markets as well. The cheaper China-made goods are converting our manufacturers into traders, which is a matter of concern.
MSMEs are the life line for growth story of India after agriculture that requires enhancement of production and competitive price, better markets, and generate employment to boost the demand in the market. The services, also need deep dive by addressing the issues of gig workers in terms of social security and provident fund as they have fluctuating employers. There is a need to ease the boarding of e-commerce platform to explore the new markets.
MSMEs need holistic approach where the power sector ensures cheap and continuous power supply, infrastructure is provided, the logistics burdening of tax is relooked, local municipal laws to be conducive, taxation and compliances simplified. The problem is our rules, so as long as the MSMEs with a turnover of 40 lakhs and below are not boarding the ecommerce platform it does not require a GST, but the moment you upload it, you want a GST number. So, the moment you have a GST number even if you are eligible of all the exemptions, you have to file all the monthly returns.
The future of both domestic and international markets is through e-commerce. And that needs to be encouraged more and more than scuttling the ecommerce. Therefore, these e-commerce platforms have been advised to support MSMEs by providing them the technology which is automated so that it is not a burden for them. This allows MSMEs to focus on their manufacturing, feedback analysis, expanding market share and moving ahead, with better catchment areas.
The Ministry of Skill Development is working in a silo and therefore need to converge with the MSMEs by allowing apprentice. Maximum of the training is in garment making, despite India not being the biggest garment maker like Bangladesh. Therefore, the skilling also needs an introspection as to how do we go for it and whether through these introspection we can apprentice in the MSMEs as well like the Hon'ble Prime Minister has called for students being apprentice to the big industries. This shift is very important because here they will be trained and will be better skilled leading to more employment opportunities. Additionally, the MSMEs get an advantage of additional manpower at little or no cost while students gain a better hands-on experience and knowledge enhancing their employability.
One good thing has happened for the payments of the MSMEs is the Government e-Market (GeM) portal (procurement portal). It is constantly monitored that their payments are done within a specified time of a month or one and a half months. Similarly now in all the board meetings where it is mandatory that MSMEs should be first payouts and have to ensure in 45 days you're paying out that agenda is now in all good companies are bringing it into the board. Quick payment reduces the need for working capital and able to battle the expensive credit rates.
It is important to analyse why many of the MSMEs have closed. Reasons are to be dissected and corrected. To give an example the secondary sector of steel manufacturing in Karnataka, they lost it when India decided to go for auction of mines as only route. Due to court order, Karnataka had upper cap of only 35 million tonnes to be extracted which needed to be upscaled and with intervention of ministry of steel, the state government enhanced it to 50 million tonnes. Auction has been cornered not by miners but end users to safeguard their raw material. Resultant is less and less of minerals available in the open market. Such policies need to be relooked. Key is not ban but environment friendly mining with use of conveyer belts.
The four codes of Labour Laws release are long awaited. The need is to address new set of workers like gig workers, work from home, as old laws were factory centric but now service sector operates in entirely different way. Their EPF, working hours, working eco systems, social security and health care needs entirely different concerns and rules.
Taxation has also disrupted the new start ups and innovation by treating angel funding as income and research grant by companies to IITs as service for direct and indirect taxation and eventually withdrawn. Gaming is still suffering from retrospective enhanced GST tax.
The realization that India's problem solver is MSMEs, need is therefore, to increase the export and MSMEs to generate employment, Thus, MSMEs policies and programs constantly need to deep dive by constant resolving of impediments as it is instrument to encash demographic dividend, add to GDP growth, trigger demand of goods and services and most importantly to shift the wealth from urban to rural. Next to agriculture, it is this sector that needs breaking of silos and working to enhance functioning of more and more MSMEs. It is important that MSMEs in its driving seat need support from related ministries and need to vet that no policy becomes a hindrance in their growth. The policies should complement and supplement the purpose of MSMEs than being in silos and enable to accelerate their growth.
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Dr. Aruna Sharma, IAS (Retd.)
Dr. Aruna Sharma, 1982 batch from the Madhya Pradesh cadre is an avid practitioner of Development Economics. Prior, she has served as Secretary, Ministry of Steel, and at the Ministry of Electronics and Information Technology (MeitY), Govt. of India.
Owned by: Institute of Directors, India
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