MSMEs will be critical sector for pushing India's growth in next 25 years; here's why

A cluster of micro, small and medium enterprises (MSMEs) dot the periphery of Yamuna Nagar, a small district in Haryana. In the narrow bylanes of the eponymous town is located Microtech Industries—an electrical panel manufacturer. It is 5 pm. Perched on a chair in a small cubicle, the company’s owner, Sachidanand Mishra, makes a pensive point: “Business is not good, but at least it is better than what we have seen in 2020, 2021… All I can say is that we are clawing back to normalcy.” Sanjay Kumar, the owner of another MSME unit, Pharmchem, concurs with Mishra: “We managed to sail through the worst phase of life—at least for businesses—but now a glimmer of hope is visible.”

The MSME sector comprises nearly 63 million enterprises, which contribute 30 per cent to India’s GDP, 45 per cent to manufacturing, 40 per cent to exports, and provides employment to over 113 million people, per government data. As Mishra and Kumar testify, the sector has put up with several shocks in recent times. Demonetisation came first, followed by GST implementation that took time to settle down, which was then followed by the downturn in the economy, Covid-19 and, most recently, geopolitical tensions such as the Russia-Ukraine war. The biggest hit came from the pandemic. According to government data, more than 5,907 MSME units shut shop during the time. “The sector faced challenges related to financial liquidity, debt repayments, meeting fixed expenses like wages and salaries, statutory dues, etc. In addition, raw material prices also went up manifold, which led to an increase in the cost of production, thereby impacting cash flows,” says Mohit Jain, Chair, MSME Committee, PHD Chamber of Commerce and Industry (PHDCCI).

The government and policymakers have time and again reiterated the need to increase MSMEs’ contribution in almost every sphere ranging from exports to GDP. “The vision of the government is commendable, but there are some basic problems plaguing the whole MSME ecosystem. Until these problems are addressed, MSMEs will not be able to stride on the path of exponential growth,” says Mishra of Microtech Industries. The list of challenges is long—from expensive finance to inadequate infrastructure to poor market linkages to lack of information about appropriate technology, lack of skilled manpower, and inability to procure raw material at competitive prices, among others. “These hindrances have constrained the growth of MSMEs and more particularly the creation of new entrepreneurial ventures in the country,” says Jain of PHDCCI.

The government is cognisant of the challenges and has from time to time taken steps to alleviate them. During the pandemic, for example, to alleviate the pressure on the MSME sector, it came out with the Emergency Credit Line Guarantee Scheme (ECLGS). While that has helped to some extent, there have also been defaults in repayments. A Reserve Bank of India (RBI) report states that micro enterprises availed 24 per cent of the loans disbursed under ECLGS, but their share in overall NPAs stood at 43 per cent as of September 2022.

The distress is also reflected in the National Crime Records Bureau’s latest report that 12,055 businessmen died by suicide in 2021, which is higher than 11,716 deaths reported in 2020. “The distress was the by-product of the slowdown induced by Covid-19,” one person tracking the MSME sector told BT on condition of anonymity.

For India to achieve its $5-trillion economy dream, the MSME sector needs to play a big part. “From the development of MSMEs, we need to go towards development led by MSMEs,” says Saket Dalmia, MD of Marble City (formerly PG Industry). “For the next 25 years, the MSME sector as a whole needs a one-stop solution to provide businesses with integrated, seamless, and personalised access to relevant information, clearances and licences.” Kumar from Pharmchem says the share of credit to micro, small and medium enterprises is very small compared to the outstanding credit to large enterprises. “The government should focus on infusing more credit to the MSME sector,” he says.

Jain of PHDCCI believes that ease in approvals and registrations will serve as a key impetus for the growth of MSMEs going forward. “A single-window system should be set up to give clearances for all the required permissions to ensure faster and efficient action and decision-making. Along with that, contract enforceability and other legal reforms, ease of statutory and other taxation related compliances, flexible labour laws and reforms like digitising land records, building new industrial infrastructure and making available land for setting up new enterprises in the MSME sector should also be in focus,” Jain elaborates. Technology is another area that can boost MSMEs. “Technology upgradation, innovation and digitisation, if done imaginatively, could prove to be a game changer for MSMEs in India,” an observer of the sector told BT on condition of anonymity.

Access to credit and finance has been a perennial problem for MSMEs. According to International Finance Corporation, the credit needs of the sector stand at nearly Rs 32.5 lakh crore. Despite this huge demand, less than 5 million MSMEs have access to formal credit. There’s more. “India still lags in areas such as enforcing contracts (ranked 163 in the world) and registering property (No. 154),” says Mishra of Microtech. “There are many constraints with respect to availability of credit and its high cost, the requirement of seeking multiple registrations and approvals, higher taxation for proprietary and partnership concerns… these need immediate attention.”

Tall order? Maybe, but there are no choices here. Mission 2047 won’t be complete without a flourishing MSME sector in India. 

@RajatMishra9518