Economy India

Reform MSME sector and revive Indian economy

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by

modestadorsett

According to a report in Times of India, Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian economy. Entrepreneurship development, employment generation and innovation are three key areas in which MSMEs contribution is unparalleled. The sector contributes about 45% to manufacturing output, more than 40% of exports, over 28% of the GDP while creating employment for about 11.1 crore people, which in terms of volume stands next to the agricultural sector.

The heterogeneity of the MSME sector is visible in its size, products and services delivered, access to finance and marketing and technology deployed. Despite such diversity, it faces common set of problems such as physical infrastructural bottlenecks, access to credit, lack of formalization, technology adoption, capacity building, market linkages, risk capital, delayed payments and arbitrary inspections system in some territorial jurisdiction. These problems are impending the development of a conducive business environment thereby hindering expansion of the sector. To achieve the goal of five trillion-dollar economy we need a thriving entrepreneurial ecosystem backed by a stable policy environment.

The Union government has undertaken significant reforms in last few years to create a conducive business environment. It has aptly manifested in India’s rank in the World Bank’s Ease of Doing Business (EoDB). In 2015 India’s rank in EoDB was 142 out of 190 countries, in 2020 India stands at 63rd position. This unprecedented feat was achieved only due to mission mode structural reforms backed by strong political will and driven by the committed bureaucracy. The erstwhile Department of Industrial Policy and Promotion (DIPP) replicated EoDB concept among the Indian states to increase competitiveness and promote business friendly environment in various states. MSME sector has also witnessed tectonic changes in last few years. The rationalization of definition based on investment and recalibrating brackets for MSMEs is welcome step.

Other reforms such as introduction of transparent, progressive and easier tax regime under the GST, launch of GeM portal and mandating procurement target of 25% for government/PSU, Udyog Aadhar are often seen as significant impetus for the growth and development of MSMEs. Unfortunately, Covid-19 put a break to this growth story and struck down a hard blow not just to MSMEs but overall global economy.

As the Indian economy is rapidly recovering from the Covid-19, with green shoots of growth are visible across the sectors. It is imperative that next set of reforms can be unleashed in the MSME sector that can enable it to achieve its full potential.

  • Delayed payments is on of the major problems and MSMEs hesitate to enforce legal provisions available to them under the MSMED Act due to their low bargaining power. Such delays often lead to creation of NPAs. Timely payments to MSMEs will reduce financial distress and NPAs.
  • A portal can be created for Government to private sector payables. It will not only bring transparency but also help in reducing frauds and misappropriation of data.
  • Banks can can finance these receivables at risk free interest rates and interest can be paid by industry or government.
  • TReDS is an effective mechanism that can be scaled up to solve the payments of delayed payments and liquidity issues.
  • GeM portal can be developed as a full fledge marketplace for MSMEs through which sellers can develop forward and backward linkages.
  • Udyog Aadhar or PAN can be used as a unique identifier for all compliance purpose and annual registration process as a vendors must be simplified or can be done with this identifier.
  • MSMEs lack expertise in product development, technology adoption and marketing strategy. To alleviate these problems, Government should build networks of development service providers that can provide customized solutions to MSMEs.
  • Capacity building of the entrepreneurs is an essential pre-requisite for development of the sector as it equips the entrepreneurs with the necessary knowledge and wherewithal to function.

Heterogeneity, fragmentation and informalization are the main characteristics of MSME sector in India. As a result, these enterprises add lesser value to the economy than their international peers. Government interventions have been mainly supply-driven and control oriented till very recently. However, formulation of targeted policies in the areas of infrastructure development, formalization, technology adoption, backward and forward linkage, credit gap reduction and timely payments and their effective implementation can help MSMEs to achieve their full potential and propel Indian economy in higher growth trajectory.

On 20th December, Prime Minister Narendra Modi interacted with CEOs of companies from various sectors of industries. He talked about the inherent strength of the country, displayed during the battle against Covid and exhorted them to make full use of policies like PLI incentives. Policy consistency and commitment from government is very encouraging for the industry. I am hopeful that, given very proactive leadership by the Prime Minister will result into accelerated and sustainable reforms which will usher economic progress of the country.