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Understanding MSMEs

Understanding MSMEs

By Ananya Mishra

Edited by, Namrata Caleb, Associate Editor, The Indian Economist

The Micro, Small and Medium Industries have been an emerging sector in the Indian economy. The sector has contributed to about 8 per cent of the GDP and till 2012 had employed about 60 million people with projections offering a growth of 10 per cent. Rural MSMEs have managed to rein urban migration.  Among these about 67 per cent of MSMEs are in manufacturing sector and 33 per cent in service sector. Now how can one group the industries into the three categories?

The term ‘MSME’ is widely used to describe small businesses in the private sector. Regulators and financial institutions across the world use parameters such as employee strength, annual sales, value of fixed assets, to define the sector in the context of finance. For instance, businesses with employee strength less than 500 are considered MSMEs in Mexico. According to the World Bank definition, a business is classified as MSME when it meets two of the three criteria – employee strength, size of assets or annual sales. In India however as per the provisions of Micro, Small and Medium Enterprise Development Act 2006 (MSMED Act) of the Government, the companies are segregated on grounds of initial investment, the capital. But the financial institutions have chosen turnover as the yardstick.

Yet the sector is facing many challenges. To start off, most of these enterprises are not registered. Out of 29.8 million enterprises only 1.8 million are registered. In addition, the unorganized sector has around 30 million enterprises. But this does not mean that government has not stepped up on the issue. There has been a marginal increase in registration when the government reduced the two step process of registration to one step. And while the definitions of different enterprises remain fixed on certain parameters; extraneous parameters like type of ownership structure determines the form of capital (equity or debt) these enterprises can access and absorb from external sources. This can significantly impact growth potential both at start-up stage as well as when the enterprise is in need of growth capital.

These enterprises have to face issues like lack of infrastructure, finance, obsolete technology, and lack of managerial skills and also the geographical constraints that the localized industries face. The enterprises have a serious debt demands which have to be met, and government based institutions cannot contribute without registration. Most of the companies are being run by family savings or own businesses. Majority section of enterprises can be registered by relaxing norms, which has given marginal results or improving access to such sectors. The Small Industries Development Bank of India was established in 1990 for their development as primary financial institution, but the issues remain more or less the same.

Globally many innovative steps were taken to provide separate market for MSMEs. Countries like Japan, Hong Kong and UK set up SME stock exchange where companies with any type of structure and capital limit could be listed and investors could directly invest and as the country grew and reached a certain capital limit, it would enter the Stock Exchange. The sector has been one of the active sectors and the government has laid out policies to protect the interest of upcoming Entrepreneurs through Rajiv Gandhi Udyami Mitra Yojana which seeks skill development or entrepreneurship development Programme in urban areas. The SFURTI scheme was introduced for integrated development of traditional clusters of Khadi, Coir, Village industries. Moreover KVIC or the Khadi and Village Industries Commission have been set to promote at rural level.

As Finance Minister Arun Jaitley in his budget speech stated that the sector has been empowering weaker sections of the society and thus holds in social development financing it has been a top priority. Understanding the financial architecture and reviewing its definition and skill development programmes will be rolled out with a sectorial allocation of 100 billion rupees. A district level “Incubation and Accelerator Programme” was announced to protect the upcoming start-ups from Bankruptcy. The most recent being the “Make in India” campaign which plans to give due impetus to the Indian industries as means to increase exports, The sector has not been marred by policy paralysis, but lack of will on company’s part. The owners may prefer not to be registered to evade taxes or fear intrusion in family business. They prefer short term small profits instead of long term larger profits. While slamming the government remains to be one of the options available, one cannot blame them for lack of intention or political will. The sector may or may not grow in coming time but it has generated excitement as it holds key to not only empowerment but also skill development which has emerged as an integral component of various public policies like NRLM or NULM.

Ananya Mishra is currently pursuing his BSc in Physical Sciences. He is a KVPY scholar and is into active research in data analysis. Apart from these, he is also an active student member of Institute of Actuaries India. His interest spans financial mathematics, investments, current politics and international affairs. Other hobbies include chess and computing. 

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