MSME Sector-Lifeline of Indian Economy

Introduction

The world is battling with horrors like the COVID-19, which has left the entire world to a standstill. MSME is the maximum hit sector due to this global pandemic. So considering this fact that the MSME sector is the lifeline of the Indian economy, the government announced immediate relief measures to re-energise this sector. Before going to the relief packages, let’s understand the concept of MSME.

The Micro, Small and Medium Enterprises (MSME) is a very important aspect of the Indian economy. This sector is considered as the job creator and plays a crucial role in providing large scale employment and industrialization of rural and backward areas. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which was notified on October 2, 2006, deals with the definition of MSMEs. The MSMED Act, 2006 defines the Micro, Small and Medium Enterprises based on:

1. the investment in plant and machinery for those engaged in manufacturing or production, processing or preservation of goods and

2. the investment in equipment for enterprises engaged in providing or rendering of services.

To revive the Indian economy amid Covid-19 pandemic, the government has announced an economic package under Atmanirbhar Bharat Abhiyaan. The package involves bold reforms to boost businesses with the major focus on the Micro Small and Medium Enterprises (MSME) sector. There are a total of 6 reforms to revive the MSME sector. These are:

1. Rs 3 lakh crores Collateral free Automatic Loans

2. Rs 20,000 crore Subordinate Debt for MSMEs

3. Rs 50,000 crore equity infusion through MSME Fund of Funds

4. Revised definition of MSMEs

5. Global tender to be disallowed up to Rs 200 crores

6. Other interventions for MSMEs.

Revised Definition of MSME

As per the new definition of MSMEs announced in May 2020, the investment limit increased and additional criteria of turnover introduced. On 1st June 2020, the Union Cabinet headed by Prime Minister Narendra Modi officially revised the MSME definition.

The distinction between manufacturing and services has been done away with.

Existing MSME Classification
Criteria: Investment in Plant & Machinery or Equipment
Classification	Micro	Small	Medium
Manufacturing Enterprises	Investment <Rs. 25 lakhs	Investment <Rs. 5 Crore	Investment <Rs. 10 Crore
Service Enterprise	Investment <Rs. 10 lakhs	Investment <Rs. 2 Crore	Investment <Rs. 5 Crore
Revised MSME Classification
Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover
Classification	Micro	Small	Medium
Manufacturing & Service Enterprises	Investment <Rs. 1 Crore And Turnover <Rs. 5 Crore	Investment <Rs. 10 Crore And Turnover <Rs. 50 Crore	Investment <Rs. 50 Crore And Turnover <Rs. 250 Crore

 Significance of MSMEs

• The Micro, Small and Medium Enterprises (MSMEs) sector contributes significantly to the Indian Economy in terms of Gross Domestic Product (GDP), Exports and Employment generation.
• With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output.
• In India at present, the MSMEs are employing around 120 million persons and contribute around 45% of the overall exports from India.
• Due to this, the MSME sector is called the growth engine of the Indian economy.

Role of MSMEs in Indian Economy

1. Generate Large-Scale Employment – Enterprises which are inclusive in this sector require low capital to start a new start-up venture, so it creates new employment opportunities for the youths. MSMEs play an important role in large scale employment creation.

2. Economic Growth and exports – It is the most significant driver in contributing the 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. MSMEs act as ancillary industries for large-scale industries since they provide the latter with raw materials, important components etc.

3. Backbone in the mission of “Make in India” – MSMEs have earned an irreplaceable position in the nation’s economic mix over the years. The initiative was taken by the Prime Minister of India “Make in India: has been made easy with MSME. Since the Make in India movement encourages firms to manufacture or develop their products within the country and attract investment opportunities, MSME’s can actualize the benefits through the initiative.

Challenges Faced by MSMEs

1. There is a need to improve the competitiveness of the overall MSME sector.

2. There are deficiencies in basic infrastructural facilities such as water, electricity, road, rail connectivity etc.

3. MSMEs are not able to invest in manufacturing, purchase raw materials on time, access new technologies or acquire new skills due to lack of funds which is a big handicap especially in its fight with global competitors.

4. Access to finance continues to remain the biggest challenge for MSMEs and has constrained their growth.

5. The MSME space is virtually comprised of a plethora of small and local shops and hence scaling them up is a problem, especially when fund access is challenging.

6. With the emergence of new technologies like Artificial Intelligence, Data Analytics, Robotics and related technologies, there is a big challenge for MSMEs than for others.

Key announcements of Atma-Nirbhar Bharat Abhiyaan

• Rs 3 lakh crore collateral-free automatic loans for MSMEs
• Rs 50,000 crore equity infusion through MSME Fund of Funds
• Rs 20,000 crore subordinate debt for MSMEs
• Expediting payment of dues to MSMEs from the government and CPSEs will be released within 45 day
• To protect Indian MSMEs from competition from foreign companies, global tenders of up to Rs 200 crore will not be allowed in government procurement tenders
• A special insolvency resolution framework for MSMEs under the Insolvency and Bankruptcy Code, 2016 will be notified.

Conclusion

MSME is a lifeline of Indian Economy as they provide employment and ultimate self-dependency. MSMEs can be boon and hope for Indian Economy soon. It also extended the opportunities to banks for giving more credit to enterprises to MSME Sector. The MSMEs are very helpful to remove the regional imbalances if it is established in the underdeveloped areas. The MSMEs are providing more employment per unit. If this contribution is to be sustained, then their uniqueness needs to be nurtured overtly and explicitly.