Are MSMEs the Engines for the Indian Economy’s Success Wagon?

In 2019, Prime Minister Narendra Modi envisaged transforming India into a powerful $5 trillion economy by the year 2024-25. Micro and small industries were supposed to be crucial player in achieving the goal due to the exceptional contribution of MSMEs in the Indian economy. The role of MSME in the Indian economy is evident just by looking at MSMEs contribution to GDP, 30%. But, India’s efforts towards this growth trajectory faced a major blow due to the Covid-19 pandemic. Obviously, the MSME sector also faced a huge blow. At present, the Medium, Small and Micro Enterprises are reeling under uncertainty, weak supply chains, tepid demands, and lockdowns. As we enter a fresh year, a lingering question that awaits the answer is, “What makes MSMEs the focal player to achieve a $5 Trillion Economy?”

Are Indian MSMEs still relevant in India’s $5 trillion marathon?  

Yes. In fact, MSMEs form the essential bedrock of the Indian economy. The sector represents immense potential to generate employment, boost exports, enhance GDP growth, and bring about sustainable economic development. Here are the key statistics that highlights the importance of MSMEs in the Indian economy:  

• As per Central Statistics Office, MoSPI; the share of the MSME sector in Indian Gross Value Added stands at 30%. Moreover, MSME contribution to GDP is around 8% and can be leveraged to 15% in upcoming years.
• The Indian MSME sector is solely responsible for creating around 11.10 crore jobs, i.e., employing around 40% of the Indian workforce. This makes the MSME sector the second largest job provider after the agriculture sector.
• The MSME sector’s contribution to manufacturing and production stands at 1/3rd of total output. Moreover, around 40% of the country’s major exports come from MSMEs alone. Thus, the pivotal role of MSMEs in the Indian economy makes them the piece that completes India’s economic development puzzle.
• Therefore, the role of MSMEs in the Indian economy can’t be emphasized enough. With a second-largest MSME base after China, the scope of small scale industries’ expansion and proactive collaboration is quite high. 

Thus, the importance of MSME in the Indian economy stands unparalleled compared to any other sector.  

Relevant read: Indian MSME sector and its Expectations from the Union Budget 2022-23?

What factors make MSMEs the powering fuel for India’s growth vehicle in achieving the $5 trillion target?

Commendable Outcomes

The MSME sector has time and again proved its ability to bring efficient outcomes. At present, India has around 6 crore MSMEs employing a gigantic 40% workforce. By furnishing jobs in rural and urban areas; the sector promotes literacy, regional development, better living conditions, and eliminates income inequality. 

Growth Engines

Due to their stupendous scaling capacity, caliber to bring income equality, and balanced wealth distribution; MSMEs function as growth engines of the Indian economy. SMEs alone contribute to around 80% of India’s enterprises. Moreover, MSMEs bring growth-leveraged exports with a contribution of 8% to Indian GDP. The statistics highlight why unleashing growth in MSMEs is essential for $5 Trillion Economy.

Capital Intensive Industries

Due to the lower capital-output ratio, growth scope in small scale industries is usually high even with a small investment. This results in the flourishing of small scale businesses in remote and rural parts, driving fair growth opportunities. 

Strong Linkage between MSMEs and MNCs

At present, Indian enterprises create more than 8,000 intermediary and value-added goods. Multinational companies, in turn, get these auxiliary goods for producing final products. As a result, a robust supply chain has been established over the years fuelling reliable supply of goods to various sectors. Building and leveraging upon these linkages can help India to truly become a self-sufficient nation. 

Relevant read: PayU introduces versatile product suite for SMBs to access credit

As the Government focuses on Atamnirbhar Bharat and Make in India, MSMEs are the ground players to achieve self-dependency. Under such programmes, MSMEs’ production capacities have increased greatly. Not only do they provide an alternative for India’s soaring import bills, but also bring down a huge trade deficit. For example, India’s toy imports declined from $ 304 million in 2018-19 to $ 130 million in 2020-21 owing to MSMEs and the Make in India Programme. Further, the Indian Government now plans to bring out a roadmap to establish a semiconductor ecosystem to boost designing, manufacturing and packaging of semiconductor chips majorly by MSMEs. Also, the Indian Government is planning to enhance the export contribution of MSMEs in the Indian economy to 60% in upcoming years.

Creates New Avenues of Growth

As the Indian Government and private sector come together to provide a conducive environment for MSMEs, the entrepreneurs are now exploring the new domains. Lately, there has been a massive growth in MSMEs engaged in tea, coffee, fishery, bamboo, food-processing, and organic farming domains. Not only do they produce diverse products for domestic and global market demands, but also offer huge unexplored areas with high outputs. 

Ensures Inclusive and Sustainable Growth

As a huge chunk of India’s rural population is still working in agriculture (mostly disguised employment), MSMEs offer a new wave of solutions. According to Government data, 50% of MSMEs in India operate in rural parts employing rural populations. Moreover, as MSMEs offer jobs for unskilled laborers, their importance can’t be emphasized enough in an economy like India. Besides providing jobs to rural and unskilled individuals, 97% of workers in MSME sectors come from the micro-strata of the society. 

Therefore, MSMEs are undoubtedly the underdogs of the Indian economy that will greatly facilitate GDP growth in upcoming years, as they had done in the past. 

Relevant Read: Digital Technology to Help MSMEs Spread Their Growth Wings

The Micro, Small, and Medium Enterprises of India have shown better growth trajectories as compared to the other sector. Thus, the proactive role of MSMEs in the Indian economy is crucial for making India a $5 trillion economic giant. Despite recording a huge contribution of MSMEs in the Indian economy, small-scale industries stand amidst grave challenges that require timely addressed. A regional imbalance in MSME distribution is quite evident as states like Uttar Pradesh and Madhya Pradesh tops the list while poor states such as Bihar lie at the bottom. The major reasons behind the regional disparity are the unavailability of resources; be it raw material, financial aid, technical knowledge, or entrepreneurial assistance. 

In recent times, the financial problems of MSMEs are at an all-time high due to disturbed demand and supply. The Financial Stability Report by the Reserve Bank of India highlighted the liquidity crunch and rising bad loans in the MSME sector. Even after numerous credit guarantee plans and MSME loan schemes, the NPA load in the sector is still on a rise indicating challenges of MSMEs. Moreover, high credit cost, almost zero R&D, lack of skill development, complicated labor codes, etc. are still the biggest challenges that MSMEs face. 

The Light at the End of the Tunnel for MSMEs

There exist solutions that can effectively eliminate the prevailing problems of MSMEs. The Indian Government has been launching various loan schemes to stimulate capital injection in the MSME sector. Moreover, the facilitation of more foreign investments can also solve the financial problems of MSMEs. Along with skill development and financial aid, the MSMEs are also lagging due to the slacking technology transfer. As resilient pillars of the Indian economy, MSMEs require a helping hand to come out strong of the pandemic stress. Scope of small industries is reflected by their ability to foster demand, promote innovation, and drive inclusive growth to the vulnerable section. The role of rural MSMEs can be promoted by setting up a village food factory ecosystem. Moreover, rural engineering development and khadi gramodyog products should become focus areas. 

Further, digitization is another domain where Indian MSMEs are lagging behind. As the world adjusts to the new normal and comes back to normalcy, the production activities are already gaining momentum. The evident signs of recovery in MSMEs highlight the scope of growth of MSMEs in India. However, a technologically advanced, financially sound, and digital MSMEs is imperative for India to become a $5 Trillion Economy.

By

Prasad Patkar