UPSC Mains 2019: Support and Outreach Initiative for MSME sector

msme support and outreach

 

Topic: PM launches historic Support and Outreach Initiative for MSME sector

Topic in Syllabus : GS Paper 3 : Indian Economy

msme outreach

Context:

Launching the Micro, Small and Medium Enterprises (MSME) Support and Outreach programme, Prime Minister Narendra Modi Friday announced the 12 historic decisions including 59-minute loan portal for sanction of up to Rs 1 crore for small and medium enterprises.

 

More about on news:

  • The announcement will boost small and medium enterprises.
  • 12 major decisions taken by the Central government for MSMEs Sector are proof that when after breaking silos, collective initiatives are taken, collective responsibilities are fulfilled and collective decisions are taken, it creates a comprehensive impact.
  • The prime minister also talked about India’s jump in Ease of Doing Business Ranking. “It’s a matter of pride for us that India has taken a high jump of 23 ranks in “Ease of Doing Business” ranking this time.
  • India has moved from the ninth to sixth position in the global economic landscape.

 

The Prime Minister said that there are five key aspects for facilitating the MSME sector. These include

  • access to credit,
  • access to market,
  • technology up gradation,
  • ease of doing business, and
  • a sense of security for employees.

 

Access to Credit:

  • As the first announcement, the Prime Minister announced the launch of the 59 minute loan portal to enable easy access to credit for MSMEs. He said that loans uptoRs. 1 crore can be granted in-principle approval through this portal, in just 59 minutes. He said a link to this portal will be made available through the GST portal. The Prime Minister asserted that in New India, no one should be compelled to visit a bank branch repeatedly.
  • The Prime Minister mentioned the second announcement as a 2 percent interest subvention for all GST registered MSMEs, on fresh or incremental loans. For exporters who receive loans in the pre-shipment and post-shipment period, the Prime Minister announced an increase in interest rebate from 3 percent to 5 percent.
  • The third announcement made by the Prime Minister was that all companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS). He said that joining this portal will enable entrepreneurs to access credit from banks, based ontheir upcoming receivables. This will resolve their problems of cash cycle.

 

Access to Markets:

  • The Prime Minister said that on access to markets for entrepreneurs, the Union Government has taken a number of steps already. In this context, he made his fourth announcement, thatpublic sector companies have now been asked to compulsorily procure 25 percent, instead of 20 percent of their total purchases, from MSMEs.
  • The Prime Minister said his fifth announcement is related to women entrepreneurs. He said that out of the 25 percent procurement mandated from MSMEs, 3 percent must now be reserved for women entrepreneurs.
  • The Prime Minister said that more than 1.5 lakh suppliers have now registered with GeM, out of which 40,000 are MSMEs. He said transactions worth more than Rs. 14,000 crore have been made so far through GeM. He said the sixth announcement is that all public sector undertakings of the Union Government must now compulsorily be a part of GeM. He said they should also get all their vendors registered on GeM.

 

Technology Upgradation:

  • Coming to technological upgradation, the Prime Minister said that tool rooms across the country are a vital part of product design. His seventh announcement was that 20 hubs will be formed across the country, and 100 spokes in the form of tool rooms will be established.

 

Ease of Doing Business:

  • On Ease of Doing Business, the Prime Minister said his eighth announcement is related to pharma companies. He said clusters will be formed of pharma MSMEs. He said 70 percent cost of establishing these clusters will be borne by the Union Government.
  • The Prime Minister said that the ninth announcementis on simplification of government procedures. He said the ninth announcement is that the return under 8 labour laws and 10 Union regulations must now be filed only once a year.
  • The Prime Minister said that the tenth announcement is that now the establishments to be visited by an Inspector will be decided through a computerised random allotment.
  • The Prime Minister noted that as part of establishing a unit, an entrepreneur needs two clearances namely, environmental clearance and consent to establish. He said that the eleventh announcement is that under air pollution and water pollution laws, now both these have been merged as a single consent. He further said that the return will be accepted through self-certification.
  • As the twelfth announcement, the Prime Minister mentioned that an Ordinance has been brought, under which, for minor violations under the Companies Act, the entrepreneur will no longer have to approach the Courts, but can correct them through simple procedures.

 

Social Security for MSME Sector Employees:

  • The Prime Minister also spoke of social security for the MSME sector employees. He said that a mission will be launched to ensure that they have Jan Dhan Accounts, provident fund and insurance.
  • The Prime Minister said that these decisions would go a long way in strengthening the MSME sector in India. He said the implementation of this outreach programme will be intensively monitored over the next 100 days.

 

What is the new definition of MSME?

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

  • Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
  • A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;
  • A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;
  • A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.
  • In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide
  • Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.
  • A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh
  • A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore.
  • A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.
  • The new classification may result in many medium enterprises being classified as small enterprises (or small getting classified as micro) based on their turnover. Such reclassification would be positive for enterprises in sectors such as engineering, machine fabrication, apparel, construction contractors etc, where a large number of MSMEs are vendors to public sector enterprises (PSUs). These PSUs reserve 20 per cent of their procurement requirements for micro and small enterprises.

 

MSME definition

EnterpriseEarlier definitionNew definition
Micro 

Manufacturing enterprises: Investment in plant and machinery< INR 25 lakhs

 

Service enterprises: Investment in equipment/machinery<INR 10 lakh

Annual Turnover< INR 5 crore
Small 

Manufacturing enterprises: Investment in plant and machinery between INR 25 lakhs and INR 5 crore

 

Service enterprises: Investment in equipment between INR10 lakhs and INR 2 crore

Annual turnover between INR 5 crore and INR75 crore
Medium 

Manufacturing enterprise: investment in plant and machinery between INR 5 crores and 10 crore

 

Service enterprises: investment in equipment between INR  2 crores and 5 crores

Annual Turnover between INR 75 crore and 250 crore

 

Role of MSMEs:

  • Worldwide, micro, small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development.
  • MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.
  • In India too, the MSMEs play a pivotal role in the overall industrial economy of the country.
  • MSMEs in India account for more than 80% of the total number of industrial enterprises and produce over 8000 value-added products.
  • It is estimated that in terms of value, the sector accounts for 45% of the manufacturing output and 40% of the total export of the country and employs over 6 crore people.
  • Further, in recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector.
  • The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 6 crore persons spread over 2.6 crore enterprises and the labour intensity in the MSME sector is estimated to be almost 4 times higher than the large enterprises.

 

Importance of MSME Sector in India

MSME- an abbreviation of Micro, Small & Medium enterprises- is the pillar of economic growth in many developed, and developing countries in the world. Often rightly termed as “the engine of growth” for India, MSME has played a prominent role in the development of the country in terms of creating employment opportunities-MSME has employed more than 50 million people, scaling manufacturing capabilities, curtailing regional disparities, balancing the distribution of wealth, and contributing to the GDP-MSME sector forms 8% of GDP. Though India is still facing infrastructural problems, lack of proper market linkages, and challenges in terms of flow of institutional credit, it has seen a tremendous growth in this sector.

The advantage of this sector is it requires less investment, thus creating employment on a large scale, and reducing the employment and underemployment problems. Moreover, this sector has survived almost all threats emerging out of still completion from both domestic and international market.

 

Let us take a look at some of the key importance of this sector in the development of India both in terms of economic, and social development:

 

Creates large scale employment:

  • Since the enterprises falling in this sector require low capital to start the business, it creates huge employment opportunities for many unemployed youth.
  • India produces about 1.2 million graduates per year, of the total number about 0.8 million are engineers. And, there is no economy in the world that can provide jobs to so many fresh graduates in one year. MSME is the boon for many of these fresh manpower.

 

Economic stability in terms of Growth and leverage Exports:

  • MSME is a significant growth driver in India, with it contributing to the tune of 8% to GDP. As mentioned in the table, Exports sector in India constitutes about 40% of contribution from MSME alone.
  • Looking at the kind of contribution of MSME to manufacturing, exports and employment, other sectors are also benefitting from MSME. MNCs today are buying semi-finished, and auxiliary products from small enterprises, for example, buying of clutches, and brakes by automobile companies.
  • It helps create a linkage between MSME and big companies.even after the implementation of the GST 40% msme sector also applied GST Registration which increase the government revenue by 11%.

 

Encourages Inclusive Growth:

  • About 50% of wealth in India in owned by just 100 people which is due to unequal distribution of wealth. Inclusive growth is on top of the agenda of Ministry for Medium, and Small, and Medium sized enterprises for several years.
  • While poverty and deprivation are a deterrent to the development of India, including marginalized sections of society is a key challenge lying before the Ministry of MSME.

 

 Cheap Labor and minimum overhead:

  • In large scale organizations, one of the key challenges is to retain the human resource through an effective human resource management professional manager. But in case of an MSME, the requirement of labor is less, and it does not need a highly skilled laborer.
  • Hence, the indirect expenses incurred by the owner is also low.

 

Simple Management Structure for Enterprises:

  • MSMEs do not require a huge capital to start. With limited resources available within the control of the owner, decision-making becomes easy and efficient. As in case of a large corporation wherein a specialist is required for every departmental functioning because of complex organizational structure, a small enterprise does not need to hire an external specialist for its management.
  • The owner himself/herself can manage it. Therefore, it can be run single-handedly.

 

Plays an important role in making “Make in India” possible:

  • Post the inception of ‘Make in India’, a signature initiative by the prime minister of India, the process of incorporating a new business has been made easy.
  • Since the MSME is the backbone in making this dream a possibility, the government has directed the financial institution to lend more credit to enterprises in MSME sector.

 

Major Problems of Micro and Small Enterprises:

Some of the major problems faced by micro and small enterprises are as follows:

Problem of Raw Material:

A major problem that the micro and small enterprises have to contend with is the procurement of raw material. The problem of raw material has assumed the shape of:

  • An absolute scarcity,
  • A poor quality of raw materials, and
  • A high cost.
  • The majority of micro and small enterprises mostly produced items dependent on local raw material. Then, there was no severe problem in obtaining the required raw materials. But, ever since the emergence of modem small-scale industries manufacturing a lot of sophisticated items, the problem of raw material has emerged as a serious problem on their production efforts.
  • The small units that use imported raw material face raw material problem with more severity mainly due to difficulty in obtaining this raw material either on account of the foreign exchange crisis or some of other reasons.
  • Even the micro and small enterprises that depend on local resources for raw material requirements face the problem of other type. An example of this type is handloom industry that depends for its requirement of cotton on local traders.
  • These traders often supply their cotton to the weavers on the conditions that they would sell their ready clothes to these traders only. Then, what happens that the traders sell cotton to them at fairly high prices. This becomes a clearest example of how the poor weavers are subjected to double exploitation at the hands of traders.

 

Problem of Finance:

  • An important problem faced by micro and small enterprises in the country is that of finance. The problem of finance in micro and small sector is mainly due to two reasons. Firstly, it is partly due to scarcity of capital in the country as a whole.
  • Secondly, it is partly due to weak credit worthiness of micro and small enterprises in the country. Due to their weak economic base, they find it difficult to take financial assistance from the commercial banks and financial institutions.
  • As such, they are bound to obtain credit from the money lenders on a very high rate of interest and are, thus, exploitative in character. It is a happy augury that ever since the nationalization of banks in 1969, the credit situation has improved still further.

 

Problem of Marketing:

  • One of the main problems faced by the micro and small enterprises is in the field of marketing. These units often do not possess any marketing organization. In consequence, their products compare unfavourably with the quality of the products of the large-scale industries. Therefore, they suffer from competitive disadvantages vis-a-vis large-scale units.
  • In order to protect micro and small enterprises from this competitive disadvantage, the Government of India has reserved certain items for the small- scale sector. The list of reserved items has continuously expanded over the period and at present stands at 824 items.
  • Besides, the Trade Fair Authority of India and the State Trading Corporation (STC) help the small-scale industries in organising their sales. The National Small Industries Corporation (NSIC) set up in 1955 is also helping the small units in obtaining the government orders and locating export markets.

 

Problem of Under-Utilization of Capacity:

  • There are studies that clearly bring out the gross under-utilization of installed capacities in micro and small enterprises. According to Arun Ghosh, on the basis of All India Census of Small-Scale Industries, 1972, the percentage utilization of capacity was only 47 in mechanical engineering industries, 50 in electrical equipment, 58 in automobile ancillary industries, 55 in leather products and only 29 in plastic products. On an average, we can safely say that 50 to 40 per cent of capacity were not utilized in micro and small enterprises.
  • The very integral to the problems of under-utilization of capacity is power problem faced by micro and small enterprises. In short, there are two aspects to the problem: One, power supply is not always available to the small units on the mere asking, and whenever it is available, it rationed out, limited to a few hours in a day.
  • Second, unlike large-scale industries, the micro and small enterprises cannot afford to go in for alternatives; like installing own thermal units, because these involve heavy costs. Since micro and small units are weak in economic front, they have to manage as best as it can within their available meager means.

 

Other Problems:

  • In addition to the problems enumerated above, the micro and small enterprises have been constrained by a number of other problems also. According to the Seventh Five Year Plan (GOI 1985: 98), these include technological obsolescence, inadequate and irregular supply of raw materials, lack of organised market channels, imperfect knowledge of market conditions, unorganised nature of operations, inadequate availability of credit facility, constraint of infrastructure facilities including power, and deficient managerial and technical skills.
  • There has been lack of effective co-ordination among the various support organisations set up over the period for the promotion and development of these industries. Quality consciousness has not been generated to the desired level despite various measures taken in this regard.
  • Some of the fiscal policies pursued have resulted in unintended splitting up of these capacities into uneconomic operations and have inhibited their smooth transfer to the medium sector. All these constraints have resulted in a skewed cost structure placing this sector at a disadvantage vis-a-vis the large industries, both in the domestic and export markets.

 

Conclusion:

Micro, Small and Medium-sized Enterprises (MSME) are one among the most important sectors, forming the backbone of the Indian economy. This sector has been instrumental in the growth of the nation, leveraging exports, creating huge employment opportunities for the unskilled, fresh graduates, and the underemployed, also extending the opportunities to banks for giving more credit to enterprises in this sector. The government should take utmost care of this sector in terms of providing more and more MSME Registration benefits through better regulations, Government simply , and enabling financial institutions to lend more credit at less interest rate for sustainability of this sector.

 

Sample Question:

Q) Examine on what basis classification of MSMEs are done and how would this classification impact indian industries  (200 Words)