India’s MSME Sector:An Overview of Problems and Solutions
Rohit Joon
Coordinator, MSME and Corporate Affairs, AIPC
Introduction
Micro, Small, and Medium Enterprises also known as the MSME sector is an important pillar of the Indian economy and contributes greatly to its growth. The sector has been able to provide employment to around 120 million persons and contribute around 45 percent of the overall exports from India. It manufactures more than 6,000 products with a vast network of around 30 million units. With around 63.4 million units of MSMEs throughout the country, they contribute around 6.11 percent of the manufacturing GDP, 24.63 percent of the GDP from service activities. and 33.4 percent of the country’s manufacturing output. The initial public offering (IPO) route witnessed 16 SMEs enter the market; they raised Rs 100 crore (USD 13.74 million) in 2020.
In June 2021, the Bombay Stock Exchange (BSE) announced that it has collaborated with Electronics and Computer Software Export Promotion Council (ESC) to build awareness among small businesses and startups about the advantages of listing. This sector is very important for a more inclusive growth agenda. And it is this sector which can help realize the target of the proposed National Manufacturing Policy for raising the share of manufacturing sector in GDP from 16 percent at present to 25 percent by the end of 2022.
Battling for Survival: Voices from the MSME Sector
Inspire! Report
Development Editor: Anushree Gang
“It’s all Black, Black, Black; I am Blinded,” says Mr Sanooj Stephan, an appalled paint manufacturer and trading enterprise owner from Kerala. In these uncertain and chaotic times, this is the common sentiment of a large fraction of India’s Micro, Small, and Medium Enterprises (MSMEs) owners and workers.
“The real estate sector is a cash cow for the government. It is the largest generator of employment for people. Still, no specific benefits are extended to it. A three percent stamp duty cut by the state government of Maharashtra was a welcome move but they did it only for 6 months.
The central government however has done nothing to uplift real estate,” Sanooj Stephan says further by way of enunciation, warning, “The way the central government has handled things, if they still keep sleeping and not do anything for us, then we are finished if there is a third wave of Covid-19.”
The MSMEs sector contributes to around 30 percent of India’s GDP, and based on conservative estimates, employs around 50 percent of industrial workers (approximately 111 million). Over 97 percent of MSMEs can be classified as micro firms (with an investment in plant and machinery of less than Rs 25 lakh), and 94 percent are unregistered with the government. The current Covid-19 pandemic has disrupted this sector massively due to the sudden unplanned lockdown, restriction on worker movements, non-availability of raw materials, logistical challenges, and a dependence on cash-based economy.
“I had to lay off 60 percent of my workforce and my business is set back by five years due to a chronology of disasters beginning with Demonetization, GST, and unplanned Covid-19 management,” states Ms Alka Joon, a very vexed facility management women entrepreneur from Delhi. Female entrepreneurs contribute approximately 20 percent to the MSME sector.
Alka also underlines that it is not just the pandemic that caused the huge setback; the decline had begun earlier by bad government policies, commencing from demonetization. “The central government and the MSME policy makers should hear us and give relief, which will help us tackle ground difficulties,” she asserts.
Mr Farhan Chaudhary, a real estate entrepreneur who has been bracing the economic mayhem caused by the pandemic, says, “I had to leave the job because our employer did not respond to our concerns and for seven months there was no pay. I started my own work but this pandemic and the government’s attitude has created a permanent hole in savings and a loss of time with no relief in expenses whatsoever.”
After agriculture, the MSME sector is the second largest job creator in India. There are approximately 64 million enterprises in the country of which 36 percent are into trading, 31 percent into manufacturing, and the rest are into services.
The Confederation of Indian Industry (CII) claims to have taken measures to revive the MSME sector by an infusion of 25 percent of the working capital of the MSMEs to increase cash flow, to have automatic loans, and a Rs 20,000 Crore subordinate debt package, but the central government has paid hardly any actual concern to the crisis of this sector. When it was expected that the government would provide a complete waiver in interest, it offered more interest-based loans, when they required the change of point of GST deposit to the government, it adopted more strict measures and blocked the GST numbers of the undertakings due to any delay in the tax payments. Thus, the MSME sector did not just suffer from the natural disaster of the Covid-19 pandemic. The economy was already suffering at the hand of policy disasters and handling of the Covid-19 crisis in the utmost shambolic manner just made the situation more woeful.
“The Pradhan Mantri Awas Yojana is a pure marketing gimmick. Many people who could satisfy the laundry list of conditions realized later that the Rs 2.5 lakh relief is only on the interest and not on the principal amount. And the waiver kicks in only after 12 months,” adds Farhan, who has seen so many people getting fooled by the marketing of the scheme only to later realize that it is an interest subsidy and not a cash benefit.
Mr Trideep Singhvi, a dejected heritage hospitality sector hotelier, says, “I would give the central government 0/10 for its efforts to revive or help the MSME sector. All their schemes and packages are a hogwash, and their scheme on loans have no truth in them.”
Trideep was expecting the government to provide a relief package for the tourism industry and expedite the vaccination drive to revive the tourism industry. “Government wants us to follow Covid-19 protocol for all our employees, but where are the vaccines for vaccinating our staff and getting back on our feet to deliver our services?”
Many MSME undertakings, in spite of going through a watershed moment, have proven to be Corona warriors and are providing free accommodation facilities in their hotels/guests houses, making personnel available for sanitization services to various residential complexes, and providing necessary help to the underprivileged and daily wage workers severely hit by the unplanned lockdown. The glaring question this poses is: If individual groups and organizations can help the underprivileged in these unprecedented times, why is the central government being a mere spectator?
The MSME sector has witnessed a very steady growth of 15 percent since 1977 but a sharp fall started to surface from 2015-16, registering a sharp negative growth rate of 8.1 percent. According to an article in Business Standard (15 June, 2020, by Press Trust of India, Mumbai), a 5 percent fall in GDP in 2020-21 will lead to a 21 percent fall in the revenue of MSME sector with negligible profit margin, which will lead to an existential crisis for the sector. At least 43 percent of the existing MSME undertakings may disappear due to liquidity crunch and a loss of 23 million direct jobs. During April-May 2021, 1.72 Crore daily wage earners, 57 lakh business persons, and 32 lakh salaried persons have lost jobs. The Index of Industrial Production (IIP) figures from Ministry of Statistics and Programme Implementation is unsettling. The following graph depicts the dismal numbers for 2020 compared to 2018 and 2019.
The various steps taken by the central government to revive the MSME sector have been concentrated towards the more organized and bigger MSMEs, thus defeating their entire purpose and proving to be inadequate and ineffective for the majority of unorganized undertakings in the sector. Since the majority of the undertakings operate on cash, immediate liquidity and cash flow-based measures are required to equip them to reemploy the huge workforce (directly or indirectly) relying on them. Expanding of procurement of raw material under government contracts, preference in bidding/tender process, increase in subsidies in water and power supply, extending of interest free loans, are the expected steps which the undertakings look forward to for their revival.
If the central government wants to make its “Make in India” policy a reality, now is the time to show some seriousness towards this policy and provide actual subsidies and contracts to further this mission. But through its brashness in the handling of the current situation and the performance of the economy, it appears that the government is intending to eradicate the MSME sector totally and let oligopolistic behavior prevail. This will lead to an uncertain, very dark future for the MSME sector and the economy as a whole.
MSMEs are divided into Micro, Small, and Medium Enterprises. The definition of micro manufacturing and services unit has been increased to Rs 1 Crore of investment and Rs 5 Crore of turnover. The limit of small unit has been increased to Rs 10 Crore of investment and Rs 50 Crore of turnover. Similarly, the limit of medium unit has been increased to Rs 50 Crore of investment and Rs 250 Crore of turnover.
Distribution of MSMEs
The sector has consistently maintained a growth rate of over 10 percent. About 20 percent of MSMEs are based out of rural areas, which indicates the deployment of significant rural workforce in the sector and marks the importance of these enterprises in promoting sustainable and inclusive development as well as in generating large scale employment particularly in rural areas.
In terms of geographical distribution, seven Indian states alone account for 50 percent of all MSMEs. These are Uttar Pradesh (14 percent), West Bengal (14 percent), Tamil Nadu (8 percent), Maharashtra (8 percent), Karnataka (6 percent), Bihar (5 percent), and Andhra Pradesh (5 percent). This breakup provides a sense of where the pain of the MSME crisis would be felt the most.
About 66 percent of all MSMEs are owned by people belonging to the Scheduled Castes (12.5 percent), the Scheduled Tribes (4.1 percent) and Other Backward Classes (49.7 percent). The gender ratio among employees is largely consistent across the board at roughly 80 percent males and 20 percent females.
Reflecting on female-owned MSMEs, these business-owners could potentially create 150 to 170 million jobs in India by 2030, as per a 2019 report, “Powering the Economy with Her: Women Entrepreneurship in India” by Google and Bain & Company. Globally, India ranks third among countries reporting gender gap in business—only 33 percent of early-stage entrepreneurs in India are women, as per “Financial Inclusion for Woman-Owned Micro, Small & Medium Enterprises (MSMEs) in India”, a 2019 report of the International Finance Corporation (IFC) of the World Bank Group. The report says 98 percent of women-led MSMEs are in the micro category and these are the vulnerable businesses that folded up first in the pandemic-led crisis.
A breakup of all MSMEs into micro, small, and medium categories is even more revealing. About 99.5 percent of all MSMEs fall in the micro category. While micro enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India. In other words, micro enterprises essentially refer to a single man or a woman working on their own from their home. The medium and small enterprises—that is, the remaining 0.5% of all MSMEs—employ the remaining 5 crore-odd employees.
Problems of MSMEs
The role of the MSME sector is critical in job creation, innovation, entrepreneurship, and supply chain management. Hence, there is a need to facilitate, nurture, and support innovative business ideas and shape them into enterprises.
However, with limited entrepreneurial developments and incubation centres, the entrepreneurial ethos of the MSME ecosystem is not evolving. Utilization and reach of various schemes and credit support is constrained due to lack of formalization and low level of registration of MSMEs in Udyam registration, the government’s recognition certificate for MSMEs. Promoting formalization and digitization amongst MSMEs and encouraging them to register has remained a challenge.
Non-registration of many enterprises is often attributed to the overly complicated structure created in Udyam Registration Scheme and perhaps the threshold of GST is also limited, adding to the scrutiny of income tax. MSMEs are also subject to severe problems around information asymmetry. Lack of information about various schemes, for instance, deprive MSMEs from availing benefits offered by the government, banks, and other agencies. Access to information about market opportunities is sub optimal and unstructured. In many cases, they also lack managerial, legal, and technical knowhow and the necessary wherewithal to function effectively.
The MSME sector also comprises the micro players which simply do not have the experience or resources to use bank finance or engage in product promotion to ensure adequate returns. Real stimulus is possible only if credit flow is discernible. The ‘59-Minute loan Programme’ that was launched by the government did ensure that loans were sanctioned at the earliest but the actual disbursement was simply not there. Further, the PSBLOANSIN59MINUTES portal as of now caters only to existing entrepreneurs GSTIN, Income Tax returns, bank statement, but doesn’t cater to new entrepreneurs.
The government in May 2020 announced a slew of measures to help MSMEs tide through the Covid-19 crisis, including the Credit Guarantee Scheme for Subordinate Debt, through which the government meant to provide Rs 20,000 crore as subordinate debt. The response to the scheme has been relatively cold, however, as per officials. Business Standard, a financial newspaper reported that guarantees of only Rs 68.39 crores were issued till the time of the writing of the article in September 2021, aiding only 632 businesses. For women-owned micro enterprise, only 17 percent were aware of any financial schemes rolled out by the government.
The Way Forward
The requirements of MSMEs are the simplification of GST and reduction of the tax rate, something that is direly required as the sector revives and adapts to the new normal. Also, the government can vindicate duty and tariff rates to increase their contribution to exports. This can be encouraged by research and development through incentives and helping small industries with tech upgradation plans.
Around 68 percent of MSME respondents have not benefitted from the government's MSME- and startup-centric schemes like Startup India, MSME Samadhan, no or low interest loans, Make in India, Atmanirbhar Bharat, etc., in the past 12 months. The main hurdle in availing the Centre's Rs 3 lakh crore emergency credit line was that it was restricted only to MSMEs that have existing debt or loans on their books. Now, if an MSME finds itself incapable of meeting its financial obligations, the insolvency resolution process could be initiated at default of at least Rs 1 lakh. But this may not find financial creditors coming on board and cooperating. So those creditors that are falling below the Rs 1 crore limit, or are owed up to Rs 1 lakh by larger private firms cannot invoke insolvency. Under these circumstances, bank managers would rather not lend.
Adding further to the problems with the schemes, the annual estimates from the Ministry of MSME for the number of enterprises, employment, production, and exports of MSMEs, which are barely sufficient to capture the magnitude of impact that an unforeseen and unexpected crisis would make on MSMEs, are not available anymore. This poses a major challenge for any meaningful assessment of the change in the size of the sector from time to time, particularly in times of crisis such as the current one.
This brings out the need for policy makers to put in place reliable statistical data collection systems. It is imperative to gauge the size of the sector in terms of enterprises and employment. The system must cover the entire country and it must be done periodically.
The need for a more relaxed and informative taxation system also cannot be stressed enough. The limited data that is now available clearly shows that the dissemination of the schemes has to be more widespread and vivid, and, as a matter of fact, accessible to each entrepreneur who is a part of the MSME sector. The schemes rolled out by the government should help in boosting the economy but not just for moral support.
MSMEs possibly create the highest rate of employment, are an integral part of the supply chain, contribute significantly to exports, and are the booster for the GDP. They are intertwined with the rural economy too. Hence, as one of the growth engines of the Indian economy, this sector needs very special attention and care, especially given its current state of acute crisis.