Role of the MSMEs in Indias Economic development and challenges face by them.


Introduction: MSMEs sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth.
How are MSMEs defined?
Formally, MSMEs are defined in terms of investment in plant and machinery (Chart 1). But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities. Since, July 2020 onwards, the classification of MSME is revised and it is based on Investment in Plant & Machinery/equipment and Annual Turnover by amending the Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Role of the MSMEs in India’s Economic development:
  1. Contribution to nations’  growth and export : MSMEs contribute 29.7% of GDP and 49.66% of Indian Exports. The share of the sector in total manufacturing output was even higher at 45 per cent.
  2. Employment generation: Most of MSMEs are labour intentive and largely contribute in employment generation. At presently, It employs about 11 crore people.
  3. Socio-economic upliftment. About 66 per cent of all MSMEs are owned by people belonging to the Scheduled Castes (12.5%), the Scheduled Tribes (4.1%) and Other Backward Classes (49.7%). However, the gender ratio is major concern as it holds nearly 80% male and 20% female.

  1. Inclusive  growth: According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country . out of them around 51 per cent of these are situated in rural India . Together, they employ a little o ver 11 crore people (Chart 3) but 55 per cent of the employment happens in the urban MSMEs.
Challenges in the MSME sector: Despite the MSME sector contributing significantly to the economy, it continues to face several challenges
  1. Access to Credit and Formalisation: Credit plays a vital role in development of MSME sector as funds at a reasonable cost can increase their competitiveness. The lack of adequate and timely access to credit continues to remain the biggest challenge for MSMEs and has constrained their growth. The sector is not able to invest in its manufacturing, purchase raw materials timely, access new technologies or acquire new skills due to lack of funds which is a mainly hurdle especially in its fight with global competitors. Currently, Scheduled commercial banks account for 90 per cent of the share of total credit outstanding.
  2.  Infrastructure bottlenecks and Competition : MSME clusters, particularly the micro enterprises, are inadequately equipped with necessary support systems. While infrastructure constraint is only one side of the story, MSMEs also need to do their bit to improve competitiveness.
  3. Lack of branding and packaging play an important role in marketing and help the product to establish itself and survive. The Common Facility Centers should continuously engage in research and innovation in this sphere and sensitize the local units in this regard.
  4. Delayed Payments: MSMEs often face the problem of delayed payments, affecting their cash flow and working capital availability. Most of the time, delay in realisation of such receivables increases their operating cycle and reduces their ability to procure new orders or fulfil the existing ones. A primary survey conducted by Reserve Bank in December 2019 showed that 44 per cent of MSMEs engaged in manufacturing activities faced delay in payments. Although Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 contains provisions related to penalty in case of delayed payments by the buyers.
  5. Low production capacity and constraints in modernisation & expansions which inhibits the sector to profit from ‘economy of scale’
  6. Non-availability of skilled labour at affordable cost
  7. They need to shed their inhibition to adopt new technologies; accept e-payments; and foster in-house innovation which will help them manage their businesses digitally and compete globally. Given the current scenario of global trade, the age-old methods of operating business with low levels of technology adoption deprives them of potential economies of scale. Lack of expertise in product development, designing, packaging and marketing strategy due to their small size adds up to the pressure of adapting to the changing environment around them.
Various schemes and programmes initiated by the government for promotion and development of Micro, Small and Medium Enterprises (MSMEs)
  1. These include the schemes/programmes such as Prime Minister’s Employment Generation Programme (PMEGP)
  2.  Scheme of Fund for Regeneration of Traditional Industries (SFURTI),
  3. A Scheme for Promoting Innovation, Rural Industry and Entrepreneurship (ASPIRE),
  4. Entrepreneurship and Skill Development Programme (ESDP),
  5.  Credit Guarantee Fund Scheme for Micro and Small Enterprises,
  6. Credit Linked Capital Subsidy - Technology Up-gradation Scheme (CLCS-TUS)
  7. launched an online Portal “Champions” on 01.06.2020. The portal covers many aspects of e-governance including grievance redressal and handholding of MSMEs.
  8. Under the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 under MSMED Act. 25% of annual procurement by Central Ministries /Departments/Public Sector Enterprises (CPSEs) has to be made from Micro & Small enterprises. This includes 4% from MSEs owned by SC/STs and 3% from MSEs owned by Women entrepreneurs.
  9. Ministry of MSME has launched SAMADHAAN portal to enable Micro & Small Enterprises (MSEs) to directly register their cases on the portal relating to delayed payments by Central Ministries / Departments/ CPSEs/ State Government & other buyers.
  10. Ministry of MSME implements a scheme namely “Building Awareness on Intellectual Property Rights (IPR)”, to encourage registration of IPR by MSMEs.
  11. Financial Support to MSMEs in Zero Defect Zero Effect (ZED) Certification Scheme:
ZED – Zero Defect and Zero Effect – This is a certification scheme. The MSMEs will be assessed for their process in achieving Zero defects in their products and processes. Similarly the process which they adopt for production should not affect the environmen
  1. Government package under Atmanirbhar Bharat Abhiyaan. Under this package, the MSME sector has not only been given substantial allocation but has also been accorded priority in implementation of the measures to revive the economy. The package included:
    • Rupees Three lakh crore collateral-free automatic loans for MSMEs to meet operational liabilities, buy raw material and restart businesses.
    • Revision of MSME definition to render maximum benefits to the sector;
    • Disallowing global tenders in procurements uptoRs. 200 crores- to create more opportunities for domestic players,
    • And clearing of MSME dues by the Government and Public Sector Units within 45 days.
Note: In order to understand the structural bottlenecks and factors affecting the performance of the MSMEs, RBI had set up an Expert Committee on MSMEs under the Chairmanship of Shri U.K Sinha in January 2019. The Committee has undertaken comprehensive review of the sector and given several recommendations for the economic and financial sustainability of the MSME sector
Conclusion: (MSMEs) have always been vital in the socio-economic development of India. Spread across both urban and rural areas, MSMEs produce a diverse range of products and services and provide large-scale employment at low capital cost. They not only support in industrialisation of rural and backward areas, but also help in reducing regional imbalances and assuring equitable distribution of national income and wealth.
Further , Government has envisioned to increase its contribution to GDP to over 50 per cent in next few years as the country aspires for a ?5 trillion economy.
Q.1 Choose the most suitable statement about the ZED – Zero Defect and Zero Effect scheme.
  1. It provides for construction of qualitative roads under National Highway Programme.
  2. It provides for the planting of trees along the both sides of roads.
  3. It aims for Zero defects in manufacturing products and processes by MDME  while considering the  environmental pollution.
  4. None of the above.
Correct answer is ( C)
Q2 .  Which of the following schemes and programmes initiated by government for promotion and development of Micro, Small and Medium Enterprises (MSMEs)
1. SAMADHAAN portal
2.  “Champions” portal for grievance redressal.
3. E-nivaran' Scheme.
Select the correct answer using the code given below: 
(a) 1 and 2 only 
(b) 2 and 3 only 
(c) 1 and 3 only 
(d) 1, 2 and 3
Correct answer is (A)
The Income Tax department launched ‘e-nivaran’, a special electronic system in order to fast track taxpayer grievances and ensures early resolution or redressal of their complaints.
Q.3 Consider the following statement, with respect to the contribution of the MSMEs in India’s economic development.
  1. It  contributes nearly 15% of GDP
  2. It accounts nearly 50% of Indian Exports
  3. Nearly 51 % MSMEs are located in rural areas.
Select the correct answer using the code given below: 
(a) 1 and 2 only 
(b) 2 and 3 only 
(c) 1 and 3 only 
(d) 1, 2 and 3
Correct answer is (B)
Quiz of the Day for IAS Prepation
Test Your UPSC Preparation With Vajirao's Daily Current Affairs Quiz

Select the correct answer and click on the “Finish” button Check your score and explanations at the end of the quiz

Start Quiz