6 ways India's MSME sector can be made stronger

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The Micro, Small, and Medium Enterprises (MSME) sector in India is second only to China, according to MSME ministry data. There are about 6.3 crore enterprises in India. MSMEs play a key role in developing the Indian economy, contributing more than 29 percent to GDP from their domestic and international trade. Their numbers in India increased by a Compound Annual Growth Rate (CAGR) of 19 percent from 2019 to 2020.

In FY21, loan distribution to MSMEs increased by 40 percent to Rs 9,50,000 crore from Rs 6,80,000 crore. The highest number of loans were sanctioned in FY20. 6.22 crore loans amounting to Rs 3,37,495.53 crore were sanctioned, of which Rs 3,29,715.03 crore were disbursed during the year. The MSME Act of 2006 supports the creation and development of enterprises and encourages their ability to compete with other domestic and foreign counterparts. The MSME Act applies only to manufacturing and service industries.

Any individual above 18 years of age, who has passed the seventh grade, is eligible to avail a subsidy in the manufacturing sector. To promote the competitiveness of MSMEs, the government has prescribed specific turnover and investment limits to classify whether an enterprise falls under the Micro, Small or Medium category.

MSME registration, also termed Udyog Aadhar, bears a 12-digit unique number. It is not mandatory to register, but if registered, it is beneficial in terms of obtaining tax rebates, easy credit facilities/loans up to Rs 1 crore, or seeking open government tenders.

There are various other schemes for registered MSMEs:

There are challenges hindering the growth of MSMEs—poor infrastructure, low productivity, lack of innovation, financial economic issues, access to finance for small firms, lack of working premises, and lack of management and technical skill. Close to 99 percent of enterprises remain micro in their life cycle and are plagued with a lack of efficiency and low productivity.

In India, the SMEs in the auto sector have seen good growth. We have large automakers manufacturing 25 million vehicles against the 17 million vehicles in the US and another 12 million in Europe. This has provided a good ecosystem for auto ancillaries to thrive, and we have to replicate this model in other sectors such as aerospace, health care, IT hardware, telecom and so on.

The current package and reclassification, including the Athmanirbhar stimulus package, are inadequate to insulate the sector from the pandemic assault.

The following needs to be studied for their feasibility and implementation:

1) Consider MSME as a player exposed to the share market to raise capital for business expansion. The lack of equity capital restricts the growth and momentum of MSMEs.

2) Because of inadequate technical application and low investment in R&D activities, the sector cannot be competitive. The government could subsidise globally available technology so that MSMEs can produce good quality products.

3) Low demand due to economic constraints because of Covid-19, ban on imports from China, and hike in import duty on items makes input costs expensive by 10-30 percent. Alternate sources of supply for the components banned from China should be guided for MSMEs as an option. The Make in India alternates for those items should be prioritised. Government can subsidise items for a minimum period until their availability is channelised.

4) MSMEs can be grouped based on a common objective and provided legitimacy so that they can collectively bargain in the purchase.

5) Out of 6.3 crore enterprises in India, close to 1,500 are Medium Enterprises. When they gain the status of medium enterprises, they do not get the benefit of micro and small enterprises. These Medium enterprises have to compete with large corporate houses because the legal framework for medium and large is the same. And the growth of already the cash-strapped MSMEs deteriorates. Enterprises that had gained the new status from Micro / Small to Medium can be granted the same benefits, extended for a minimum of five years so that they can compete with others in the same segment.

6) Incentivising digital adoption within the sector, providing digital literacy, addressing skill challenges, and simplifying compliance framework and support would enable the growth of India as the manufacturing hub. Because of this, other units may consider shifting their operations from China to India.