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BPSC Mains GS-2 Masterclass · Indian Economy

Small Industries & MSMEsThe Backbone of Jobs and Exports

About six crore small enterprises make nearly half of India's manufacturing output and exports, and employ about 11 crore people, second only to agriculture. This page explains how MSMEs are defined, why they matter, what holds them back and how the government supports them.

Scale~6 croreEnterprises

a vast network across the country.

Employment~11 croreJobs

second only to agriculture.

Output45%Of manufacturing output

and about 45% of exports.

GDP~30%Of GDP

MSMEs' contribution to the economy.

Structure99%Micro units

of all MSMEs are micro enterprises.

Law2006MSMED Act

definition revised in 2020.

Part 1 · What small industries and MSMEs are

Small Industries and the MSME Definition

What small scale industries are, how the MSMED Act defines MSMEs, and how the 2020 definition changed it.

A small workshop with a few workers at simple machines making brass utensils and garments

Small scale industries

Small scale industries comprise of small enterprises that manufacture goods or provide services with the help of smaller machines and a few workers and employees. These industries are labour intensive yet require little capital.

The enterprise must fall under the guidelines set by the Government of India.

MSMEs and the new definition

MSMEs, introduced by the Government via Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, are entities engaged in the production, manufacturing, processing or preservation of goods and commodities.

Last year (in 2020) government has revised the MSME definition. The changes in the definition of micro, small, and medium-sized enterprises were made as a part of the Atmanirbhar Bharat Abhiyaan relief package. Earlier, the MSMEs were defined on the basis of investments put in, now the revised definitions will also include turnover of the company.

Previous definition · Criteria: investment in plant & machinery or equipment

Classification	Micro	Small	Medium
Manufacturing enterprises	Investment < Rs. 25 lakh	Investment < Rs. 5 crore	Investment < Rs. 10 crore
Services enterprises	Investment < Rs. 10 lakh	Investment < Rs. 2 crore	Investment < Rs. 5 crore

Source: MSMED Act, 2006. (The 'Medium' column is cut off in the source document's table image and is filled in from the Act.)

New definition · Composite criteria: investment and annual turnover

Classification	Micro	Small	Medium
Manufacturing & Services	Investment < Rs. 1 cr. and Turnover < Rs. 5 cr.	Investment < Rs. 10 cr. and Turnover < Rs. 50 cr.	Investment < Rs. 20 cr. and Turnover < Rs. 100 cr.

As given in the source (May 2020 announcement). See the guide for the later revisions of the 'Medium' limits and the 2025 revision.

Changes in the new definition

Artificial separation between manufacturing and service MSMEs has been removed.
Investment criteria for such enterprises have been revised upwards, while an additional criterion of turnover has been introduced.
The definition being changed is done in the favour of MSMEs. It is expected to give them the confidence to grow.
- There has always been this fear, among successful MSMEs also, that if they outgrow the size of what has been defined as an MSME, they will lose their entitled benefits. This is why MSMEs like to remain within the definition rather than grow. With the revised definitions of MSMEs, they will not have to worry about growing their size and can still avail benefits.
Example: A garment unit with Rs 4 crore of machines was 'small' under the old rule and would lose its MSME benefits by buying one more machine; under the new rule it can grow to Rs 10 crore of investment and still be 'small'.
This new definition covers almost 99 per cent of all firms enabling MSMEs to grow in size and create jobs.
No incremental tax obligation ⇒ No fear of losing MSME benefits ⇒ Economies of scale ⇒ Job creation ⇒ productivity gain.

Part 2 · Output, exports, jobs and Aatmanirbhar Bharat

Why MSMEs Matter

Small scale industries are the lifeline of the Indian economy: important from a financial and a social point of view.

45%Manufacturing outputQ13 figures

45%ExportsQ13 figures

30%GDPQ13 figures

11 croreEmploymentsecond only to agriculture

The role of MSMEs in boosting industrial growth and Aatmanirbhar Bharat

Since MSMEs produce and manufacture a variety of products for both domestic as well as international markets, they help to promote the growth and development of various product segments and industries.
Micro, small and medium enterprises (MSMEs) are amongst the strongest drivers of the economy with a vast network of about six crore enterprises, contributing about: 45 per cent to manufacturing output, 45 per cent to exports, 30 per cent to GDP, and creating employment for about 11 crore — second only to agriculture.
Spread throughout the geographical expanse of the country → helps bridging the regional disparities. They help in the industrialization of such areas with a low capital cost compared to the larger industries in cities.
- The sector has consistently maintained a growth rate of over 10%. About 20% of the MSMEs are based out of rural areas, which indicates the deployment of significant rural workforce in the MSME sector.
Example: Bhagalpur's silk looms, Muzaffarpur's lahthi (lac bangle) makers and Madhubani's painting units are MSMEs that bring industry to small towns.
MSMEs play a key role in income augmentation, building rural infrastructure, women empowerment (Nearly 14 per cent are women-led enterprises), promotion of traditional goods, innovation etc.
They also played an essential role in the country's development in different areas like the requirement of low investment, flexibility in operations.
The 2018-19 Economic Survey clearly established that MSMEs that grow not only create greater profits for their promoters but also contribute to job creation and productivity in the economy.
They are crucial link and partner in global supply chains and provide dynamism to economic growth.
MSMEs are known to provide reasonable assistance for improved access to the domestic as well as export markets for businesses.
MSMEs support product development, design innovation, intervention, and packaging elements of a business.
MSMEs support the upgrading of technology, infrastructure, and the modernization of this sector as a whole.
It helps in creating a system that takes pride in local brands, encourages local capacity-building and indigenisation.
They provide funding support to various banks in the country.

MSMEs and Aatmanirbhar Bharat

Thus, the MSME has essential role to play in boosting the industrial growth and realising different elements of Aatmanirbhar Bharat Abhiyan e.g. active participation in post-COVID-19 global supply chains, building resilience, promoting the idea of decentralized localism etc.

Exports and employment: the numbers

Small scale industries in India are the lifeline of the Indian economy, and they offer several job opportunities for skilled labours. These are essential for the economy from a financial and social point of view.
MSMEs sector contributes to:
- 6.11 % of manufacturing GDP.
- 24.63% of the GDP from the service activities as well as 33.4% of India's manufacturing output.
- Around 40% of the total export.
According to 73rd Round of National Sample Survey (2015-16):
- MSMEs Sector is Largest Provider of Employment After Agriculture. It has created 11.10 crore of jobs out of which 76% are male employee and remaining 24% are females.
- The sector comprises of 633.88 lakh units (51.25% in rural areas and 48.75 % in urban areas).
- Micro sector account for more than 99% of total estimated number of MSMEs. Small sector and medium sector accounts for 0.52% and 0.01% of the total estimated MSMEs respectively.
- U.P. has largest number of MSMEs (14.2% of the total MSMEs in the country) followed by W.Bengal (14%). The top 10 states together account for a share of 74.05% of the total estimated number of MSMEs in the country.
- 31% MSMEs were found to be engaged in manufacturing activities, while 36% were in trade and 33% in other services.
- Male owned 79.63% of enterprises as compared to 20.37% owned by the female.
- The socially backward groups owned almost 66.27% of the MSMEs. (OBC: 49.72%, SC: 12.45% and ST: 4.10%).

MSMEs by activity (NSS 73rd)

Trade36%
Other services33%
Manufacturing31%

Ownership by social group

OBC49.72%
SC12.45%
ST4.1%

Jobs by gender

Male76%
Female24%

Units: rural vs urban

Rural51.25%
Urban48.75%

Part 3 · What holds MSMEs back

Challenges Faced by MSMEs

However, the MSME sector is faced with several challenges: credit, delayed payments, technology, skills, infrastructure, informality and, most recently, the pandemic.

The pandemic and after

Impacts of COVID-19 pandemic:
- Study conducted by Khadi and Village Industries Commission (KVIC) revealed that, of the MSMEs affected by the pandemic, more than 50% were shut down and reported a drop in production and revenue.
- The department-related Parliamentary Standing Committee on Industry noted in its report that the stimulus package announced by the government is "inadequate" as the measures were more of loan offerings and long-term, instead of improving the cash flow to generate demand as immediate relief.
- Other problems faced during the pandemic were delayed payments, high informality, low financial resilience, scarcity in raw material availability etc.
Infrastructure bottlenecks: MSME clusters, particularly the micro enterprises, are inadequately equipped with necessary support systems like new technologies, digital modes of payments etc.
- This makes them unable to take advantage of most Government schemes which are mostly based on digital infrastructure and require beneficiaries to have some form of digital identity and presence.
Limited capital and knowledge: The majority of MSME owners are from education-deprived and poverty-hit regions. Apart from this, India's MSME sector usually does not enjoy the same credit worthiness as owners usually do not have any assets in their name.
Non-availability of suitable technology: Limited access to IT education, knowledge, and information is restricting the growth of the sector which results in slower production processes and compromised product quality.
Labour challenges: MSMEs face a lot of inconsistencies when it comes to skilled manpower and labour law compliances. Moreover, the non-availability of a skilled workforce at an affordable cost is adding to the woes of the MSME sector.
Other challenges include Ineffective marketing strategy; Constraints on modernisation & expansions, high competition from cheap imports etc.

Key challenges

Limited capital: Absence of adequate and timely banking finance, as per Economic Survey 2017-18, the MSME received only 17.4 per cent of the total credit outstanding as of November 2017.
Problem of delayed payments is faced by MSMEs due to various reasons, which increase the financial crunch for their businesses.
Example: A small supplier who sells Rs 10 lakh of parts to a big company but is paid after six months must borrow, often at high interest, just to pay wages meanwhile.
Due to their lack of scale and in-house capabilities, MSEs find it difficult to access proper market for selling their products.
Large-scale presence of MSMEs in informal sector, which doesn't allow them to use different assistance available to MSMEs.
Non-availability of suitable technology, creating public perception of products with low quality standards.
Low production due to reasons such as Ineffective marketing strategy, constraints on modernisation & expansions etc.
Deficiencies in basic infrastructural facilities like water, power supply, road/rail and telephone connectivity, etc.
There are large numbers of clusters but the resource availability for undertaking cluster development activities is limited.
A huge divergence persists between research institutions (suppliers of technology) and the business requirements of MSMEs (consumers of technology).
Presently, MSMEs must do multiple registrations with various entities such as Udyog Aadhaar portal, GSTN, NSIC, etc. This leads to cumbersome registration process and duplication of efforts.

Part 5 · Way forward and the U.K. Sinha committee

The Way Forward for MSMEs

Pandemic support, global value chains, research, a new legal framework and stronger clusters.

Way forward

The government has taken various steps in designing a policy ecosystem for MSMEs to enable them to grow and contribute more effectively to the economy. Some of way forward can be:

Support the MSMEs in the current pandemic as suggested by Parliamentary Standing Committee on Industry. e.g. Soft loans to MSMEs at minimal interest rate of 3-4%, a larger economic package aimed at bolstering demand, investment, exports.
Integration of MSME sector with global value chains (GVC): It would enable MSMEs to produce quality goods and services which will have greater acceptability in the global market.
- Global Bharat program, designed by NASSCOM, UNDP and others to enable Indian MSMEs become globally competitive by equipping them with digital technologies is a step in this direction.
A Central Research Institute for enterprises and entrepreneurship at the national level, can foster a conducive environment for the growth of entrepreneurs and development of skill sets.

Key recommendations of the Expert Committee on MSMEs (U.K. Sinha committee)

Review the legal framework

The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 may be reimagined as a comprehensive and holistic MSME Code having a provision for sunset on plethora of complex laws scattered all over the legislative framework.

Turnover-based definition

Change in the definition of MSMEs from current investment based to turnover-based definition, as it would be more transparent, progressive, easier to implement. It will also remove the bias towards manufacturing enterprises in the existing definition.

Procurement

Strengthening the procurement mechanism by promotion of the Government e-Market (GeM) Portal and improving its payment system.

Role of agencies

State Financial Corporations (SFC) are set up to promote Small Scale Industries and they can be given more operational freedom by the State legislations. Khadi and Village Industries Commission (KVIC) should be corporatized with focus on promotional work.

Exit policy

Due to the lack of sophistication on the part of MSMEs, Insolvency code/ delegated legislation should provide for out-of-court assistance to MSMEs such as mediation, financial education, or the appointment of a trustee.

Clusters

Performance of Clusters needs to be improved by bringing synergy and coordination within large number of support schemes; involving local intermediaries such as business membership organizations in developing linkages with other stakeholders such as training, educational and research institutions.

Market support

Can be enhanced by developing networks of development service providers that can provide customized solutions to MSMEs that are struggling with capability and resources constraints.

Technology

Improving access to technology through a technology Mission for converging the efforts for the technology upgradation of the MSMEs. Apart from it more Industry specific Technology Centres can be opened.

National Council

Set up a National Council for MSMEs under the Chairmanship of the Prime Minister, in order to facilitate coherent policy outlook and unity of monitoring.

Conclusion

The development of MSMEs is crucial on many counts for Indian economy and society. Apart from proper implementation of these recommendations, a cue could be taken from the global best practices such as the Competition by cooperation concept in Italy, Contract Financing in Mexico and success stories of Shenzhen as a technology hub in China.

“The development of MSMEs is crucial on many counts for Indian economy and society.”

— BPSC Mains answer, 2001

Curated for BPSC, UPSC & State PCS Civil Services Aspirants | Indian Economy Master Module

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