Prime Minister Narendra Modi’s ‘Make in India’ campaign is creating waves both in India and abroad. Given the government’s intention to boost domestic manufacturing and create new jobs, its proposal to introduce a new policy for Micro, Small and Medium Enterprises (MSMEs) deserves a closer look. While Mr. Modi’s invitation to international companies to make investments has been receiving a lot of attention, the government’s close interaction with industry associations from different regions and sectors within India to discuss specific problems inhibiting domestic enterprises deserves equal consideration.
India’s MSME sector has recorded more than 10 per cent growth in recent years despite the economic slowdown. MSMEs contribute nearly eight per cent to the national GDP, employing over eight crore people in nearly four crore enterprises and accounting for 45 per cent of manufactured output and 40 per cent of exports from India. Thus, the focus of the government on MSMEs at this juncture is justified given their potential for providing growth and employment.
Significant initiativesIn view of the significance of the sector, the government had announced a number of measures in its first budget. Some of the significant initiatives were setting up of Rs.10,000 crore of venture capital fund and establishing a nationwide, district-level incubation and accelerator programme for encouraging entrepreneurship. Other important budgetary announcements included establishing a network of Technology Centres; revising the definition of MSMEs for providing higher capital ceiling, friendly legal bankruptcy framework to enable easy exit, a programme to facilitate forward and backward linkages with multiple value chain of manufacturing and service delivery to be put in place, and launching the Skill India movement for youth with an emphasis on employability and entrepreneurship. A committee was also proposed to examine the financial architecture with a view to removing bottlenecks and creating new rules and structures for the sector. The government recently inaugurated a holistic, innovative and low-cost National Small Industries Corporation’s online e-commerce shopping portal for buying and selling of products produced by MSMEs.
MSMEs are mainly classified as manufacturing and service enterprises. There is a specific stipulated limit on investment in plant and machinery for each of the respective micro, small and medium segments in manufacturing with a maximum limit of Rs.10 crore, and for equipment in service enterprises with a maximum limit of Rs.5 crore. MSMEs with 94 per cent of units unregistered are highly diverse in terms of their size and the level of technology employed. The production in the sector ranges from output of grass-root village industries and auto components, to microprocessors, electronic components and electro-medical devices.
Since 1948, successive governments have been making intense efforts to encourage MSMEs but the sector continues to be under stress. The office of Development Commissioner for MSMEs was set up in 1954 and a dedicated Ministry for MSMEs in 1999. The Small Industries Development Bank of India (SIDBI), established in 1990, is the principal financial institution for promotion, financing and development of the MSMEs in addition to commercial banks, State financial corporations, and State industrial development corporations. Despite such efforts, some of the key problems faced by MSMEs continue to be related to availability of technology, infrastructure and managerial competence, and limitations posed by labour laws, taxation policy, market uncertainty, imperfect competition and the skill level of the workforce.
The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments. In general, there is need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly. More importantly, there is need for skill formation and continuous upgrade both for labour and entrepreneurs. While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected. These programmes for entrepreneurs could be offered in a structured way in Industrial Training Institutes and management schools to include modules on management, labour laws, accounting, financial markets, procurement and marketing skills. Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.
Consumer tastes have been evolving as greater integration with global markets takes pace. In order to keep pace with changing tastes, large corporate firms have made substantial investment in extensive research and developing suitable product ranges. However, due to shortage of office space and financial resources, many micro and small enterprises are unable to invest in R&D and develop new products, and perish as a result.
Therefore, government support in undertaking research to help develop new products that are being produced by MSMEs could be very helpful, similar to what agriculture universities do. Similarly, to encourage products manufactured by MSMEs, India could illustratively showcase and promote their products such as phulkari of Punjab, bamboo works of Assam and West Bengal, and cotton weaving of Tamil Nadu via galleries and museums.
Credit crunchIssues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSMEs. Consequently, 93 per cent of units in the MSME sector are dependent on self-finance. Profit margins are extremely thin due to stiff competition and the small size of firms. The government drive for financial inclusion could benefit MSMEs. The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for the MSMEs, as also providing line of credit to firms which are under financial stress. Given the grand financial inclusion initiative, maximum employment and growth with minimum difficulty to the entrepreneur will augur well for the country.
(Charan Singh is RBI Chair Professor of Economics, IIM Bangalore.)
Published - September 26, 2014 12:32 am IST
