“Big things have small beginnings.” If this famous quote of T E Lawrence referred to the impact of a small Bedouin army on the war against the Turks in Lawrence of Arabia, it is equally true in today’s busy and competitive environment. Admittedly, a small business unit rarely turns out to be a giant monolith but small businesses together have enormous potential to contribute to the national economy. And they are doing exactly that in India.
The Indian economy primarily relies on two areas, agriculture and manufacturing. While the first one has generally stayed unorganised, the second one which is backed by small enterprises has gradually come into the limelight, with expanded concentration from the public authority and other government organizations, corporate bodies and banks. Strategy-based changes; interests in the area; the opening up of the economy to the world and the development of the rapid growth of the financial sector have opened up new business opportunities for this sector.
The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the years. It contributes significantly in the economic and social development of the country by promoting entrepreneurship and generating large employment opportunities at comparatively lower capital cost, next only to agriculture. MSMEs are complementary to large industries as ancillary units and this sector contributes significantly in the inclusive industrial development of the country. The MSMEs are widening their domain across sectors of the economy, producing a diverse range of products and services to meet demands of domestic as well as global markets. They have become a big partner in the country’s export growth.
MSME in Indian economy
India has more than 63 million MSMEs. These MSMEs are distributed nearly equally in the urban and the rural areas with 51% and 49% share, respectively. Size-wise, about 630.52 lakh or 99.5% of the MSMEs are under the micro category, that is, enterprise whose capital investment does not exceed one crore rupees and turnover does not exceed five crore rupees. Uttar Pradesh had the largest number of estimated MSMEs with a 14.20% share. Top five states accounted for about half of the total estimated number of MSMEs in the country. Uttar Pradesh and West Bengal accounted for about 14% share each with 89.99 lakh and 88.67 lakh units, respectively. Tamil Nadu, Maharashtra and Karnataka were the others in the top five lists with 7.8%, 7.5% and 6% share total count.
These estimates were, however, lacked accuracy. And to have a more authentic database on MSMEs on 1st July, 2020, after adoption of new definition of MSMEs, a new registration portal ‘Udyam Registration’ has been launched by ministry of MSME. Some 41,37,443 classified MSMEs have been registered on the portal so far (from 01.07.2020 to 31.07.2021).
Most of these registered MSMEs on the new portal are service enterprises. While 36% were in the manufacturing sector 63.8% were in the service sector, the government had said in the Rajya Sabha in August 2021.Udyam Registration is essentially a zero-cost, self-declaration portal for entrepreneurs to register their enterprises with only the Aadhaar number. The portal will help the government to aggregate the data on the number of MSMEs in the country. Moreover, the government would also get data of the product category, for instance, garment, electronics, gems, auto, etc., and the size of the enterprise along with the investment and turnover. Also, geographically, the government would get the data to understand the density of the MSMEs based on city, state, or district wise.
New definition of MSME
To meet the need of the changing ecosystem FM changed the definition of MSME last year while declaring her’ Aatmanirbhar Bharat’ economic package. Earlier, they were defined on the basis of investments but the revised definitions include turnover of the company too. A micro enterprise is now defined as one whose capital investment does not exceed one crore rupees and turnover does not excee d five crore rupees. Capital investment and turnover of a small enterprise will not exceed Rs.10 crore and Rs.50 crore, respectively while the capital investment and turnover of a medium enterprise will not surpass Rs.50 crore and Rs.250 crore The definition of MSMEs included only manufacturing and service enterprises and retail and wholesale trade was not classified under the same. Now under the revised guidelines, retail and wholesale trade will also get the benefit of priority sector lending under the Reserve Bank of India (RBI) guidelines.
Retail and wholesale traders have been facing severe liquidity crunch after sales were hit by the Covid-19 lockdowns. Considering this, the government has issued an order to include retail and wholesale trade as MSME and extend to them the benefit of priority sector lending under RBI guidelines. Accordingly, the central bank on July 07, 2021, has notified the new definition of micro, small and medium enterprises (MSMEs) by adding retail and wholesale trade in this category. According to RBI the revised guidelines will benefit 2.5 Cr retail and wholesale traders.
The growth imperative of MSME sector
The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services, and levels of technology. It helps in industrialisation of rural and backward areas, reducing regional imbalances and assuring more equitable distribution of national income and wealth.
MSMEs play a major role in the Indian economy. They contribute significantly to the Indian economy in terms of GDP, exports, and employment generation. MSMEs contribute 30% of India’s GDP. Most of the MSMEs operate in the food and agriculture sector. Medium-size firms mostly cater to the automobile, pharmaceutical, textiles, and chemicals sectors. The growth of the manufactured food industry has acted as a catalyst to the big rise in small sale units’ output while the growth of the automobile sector and the textile industry, prior to the coronavirus pandemic, boosted the growth of the medium-size units.
The share of MSMEs in GDP has not only remained high but it has increased over the years; albeit, marginally – from 29.3% in 2014-15 to 30.3% in 2018-19. The contribution of these small industries to India’s gross value added has risen 1.7 percentage points during the same period, from 31.8% to 33.5%.
But MSMEs are not only contributing largely too GDP kitty, they have become big partners of India’s export growth. The share of micro, small and medium industry-related products in total exports from India during 2018-19 was 48%. And if despite the pandemic-induced slowdown, Indian merchandise exports have been growing well, small businesses remain a mainstay of this performance, accounting for around half the country’s merchandise exports. Cumulative merchandise exports during April-July 2021 have grown 70.9% over the same period last year and by 30.2% over April-July 2019. The government has pegged merchandise exports to cross the targeted $400 billion this year. With that target in mind, the current contribution of the MSME sector to merchandise exports would have to at least double from the current level.
The MSME sector accounts for 95% of the industrial units, 30% of GDP and about 48% of exports. And these were achieved through a vast army of workers. The sector provides employment to more than 110 million people, making it the largest source of employment after agriculture. The development of this sector, thus, holds key to inclusive growth and plays a critical role in India’s future. The urban area accounted for 55% of total employment in the MSME sector while rural areas accounted for the other 45%. At the other end trading MSMEs have turned out as the biggest employment provider with 387 lakh jobs followed by other services with 362.22 lakh jobs..
Changing MSME Ecosystem
MSMEs’ special role was highlighted in the economic package, declared last year to rescue the economy from the despair of Covid-19 induced lockdown. In the economic package a collateral free loan of Rs.3 lakh crore was provided for MSME. In addition, subordinate debt provision of `20,000 crore for two lakh stressed MSMEs was granted. Besides, there was provision for Rs 50,000 crore equity infusion via Mother fund-Daughter fund for MSMEs that are viable but need hand holding. The Budget 2021-22 later doubled the allocation to MSME to Rs.15,700 crore from Rs.7,572 crore in 2020-21. Majority of the allocation is for the Emergency Credit Line Guarantee Scheme, initiated last year. Rationalisation of custom duties on steel screws, plastic builder wares, prawn feed, finished gem stones and rationalising exemption on duty free items to incentivise exports of garments, leather and handicraft items will benefit the MSME sector comprehensively, FM has claimed. To boost start-up investments the budget has proposed an extension of eligibility for claiming tax holidays for start-ups along with the capital gains exemption for investment in start-ups till March 31, 2022. As part of the Aatma Nirbhar Bharat Abhiyaan, under the Emergency Credit Line Guarantee Scheme (ECLGS), around 1.09 crore MSME borrowers have been provided with guarantee support amounting to Rs.1.65 lakh crore as on 02.07.2021.
What is important now is that the bank lending to the micro and small enterprise sector, which is among the priority sectors in India, has shown a positive year-on-year (YoY) growth in July 2021 amidst easing of the Covid related restrictions for businesses after three months of negative YoY credit growth. According to RBI credit deployment by banks to micro and small enterprises in July posted a 0.2% growth at Rs.10.99 lakh crore from Rs.10.96 lakh crore in July last year. And if lending growth to MSEs in the current FY so far (from Rs.11.07 lakh crore deployed in March till July), was negative, it improved to minus 0.7% from minus 6.4% in June, 2021.
The MSME was one of the most damaged sectors by the Covid-19 pandemic. As supply chains that supported its operations got disrupted, it brought to light some of the systemic challenges faced by this sector that only got exacerbated in a post-Covid-19 world.
Most of the MSMEs need regular sources of working capital to stay afloat. The ticket sizes of the loans they require are normally small, ranging from `50,000 to Rs 1 lakh. Yet, the formal banking system can meet only a fraction of the demand from the sector. According to a report by the International Finance Corporation India’s formal banking system can only supply about Rs 11 lakh crore of the credit that MSMEs need, which is less than one-third of the requirement of the sector. While the MSME sector employs a large section of the non-farm workers, a majority of them hire fewer than five workers, with the World Bank pegging this number to be nearly 94.6% of all MSMEs. About 99% of MSMEs have less than 10 workers. And while there is no concrete data on productivity of MSMEs in India, the productivity data from manufacturing MSMEs from countries of the Organisation for Economic Co-operation and Development (OECD) show that the productivity levels of medium firms that hire between 50 and 250 people are around 80-100 percent greater than the productivity of micro firms, which hire less than nine people. Understandably, productivity has its own cycle. Higher productivity generates higher growth, which means greater revenue that can be invested in hiring and skilling more workers, providing better technology and processes, and in innovation to enable further growth of the firm. Access to marketplaces is probably even more crucial for the growth of any enterprise. Most MSMEs of India in pre-Covid-19 times were known to carry out their operations solely through a brick and mortar model, which is known to limit the outreach to their geographical location, and also productivity. And, while MSMEs in India can produce goods of a certain standard, lack of access to global value chains hinders their ability to increase their revenue and set off the virtuous cycle of growth as mentioned earlier.
The way ahead
India has the second largest number of MSME in the world after China and they contribute 30% of GDP, over 40% of the labour force and 48% of exports and yet the sector is suffering from problems, many of which can be solved. Solving these challenges requires coordinated efforts from various private and public sector stakeholders. The government announced many steps to support the revival of the MSME sector. The government also called for banks to support the sector with schemes for stressed MSMEs, such as the Emergency Credit Line Guarantee (ECLG) and mandated public and private sector banks to supply the much-needed credit. These are good proposals, but the sector needs more than that to achieve its potential.