“Explore the pivotal role of MSMEs & Startups in driving India’s economic growth. Learn about their contribution, significance, government initiatives, and the impact of Budget 2023 on their development. Uncover the symbiotic relationship between the economy and these dynamic businesses, fostering job creation, innovation, and sustainable practices.”
MSMEs (Micro, Small, and Medium-Sized Enterprises) have grown to become an important part of India’s economy over the past two decades, contributing nearly one trillion dollars to the country’s GDP. They contribute to the growth of the economy as a whole and account for between 20 and 25 percent of all employment in the nation. They contribute altogether to the financial and social improvement of the nation by encouraging business ventures and creating huge work opportunities at a relatively lower capital expense, next only to agriculture. The sector is the backbone of the national financial framework and has bestowed flexibility to avoid global monetary shocks and challenges.
As ancillary units, MSMEs complement large industries and significantly contribute to the country’s inclusive industrial development. They produce a wide range of goods and services to meet the needs of domestic and international markets, with MSMEs expanding their scope across all economic sectors.
Despite the effects of the pandemic, this industry has achieved remarkable growth, significant investment, substantial production volume, and an overall contribution to the nation. The review states that the MSME business segment contributes 33% of the nation’s Gross Domestic Product (GDP) and creates more than 120 million jobs across industries and regions by generating wealth at the grassroots level.
The Government of India’s flagship initiative, Startup India, aims to establish a robust ecosystem for the development of innovative startups and long-term economic growth, as well as to create large-scale employment opportunities. Through this initiative, the government wants to provide startups with the tools they need to grow through design and innovation.
More about the Empowered MSME Sector:
To address policy issues pertaining to MSMEs as well as the sector’s coverage and investment ceiling, the Micro, Small, and Medium Enterprises Development (MSMED) Act was notified in 2006. The Act aims to make it easier for these businesses to grow and become more competitive. It provides the first legal framework for the recognition of the concept of “enterprise,” which includes both manufacturing and service components. It defines medium enterprises and seeks to integrate the three tiers of these enterprises, namely micro, small, and medium.
The Ministry of MSME oversees many statutory and non-statutory organizations. In addition to the National Small Industries Corporation (NSIC), National Institute for Micro, Small, and Medium Enterprises (NIMSME), and Mahatma Gandhi Institute for Rural Industrialization (MGIRI), these include the Coir Board, Khadi and Village Industries Commission (KVIC), and Khadi and Village Industries Commission (KVIC).
Micro, Small, and Medium-Sized Enterprises, according to the MSMED Act, 2006, are characterized based on their investment in plant and machinery (for manufacturing enterprises) and on equipment for enterprises providing or producing services.
The following are the current investment caps for businesses that fall under the categories of micro, small, and medium-sized enterprises:
| Enterprises | Investment in Plant and Machinery or Equipment: |
| Micro Enterprises | Not more than Rs.1 crore and Annual Turnover; not more than Rs. 5 crores |
| Small Enterprises | Not more than Rs.10 crore and Annual Turnover; not more than Rs. 50 crores |
| Medium Enterprises | Not more than Rs.50 crore and Annual Turnover; not more than Rs. 250 crores |
Salient Features of MSME
Easy to organize: Everybody in the family is a supporter of business
Independent construction: They support modernizing the industry, expanding infrastructure, and enhancing development technology.
Competency prompts: Through the establishment of specialized training centers, they promote the expansion of entrepreneurship as well as the improvement of skills.
Low threat: have quality certificate programmes and modern testing facilities.
Advancement and new ideas: In line with recent trends, MSMEs are also supporting product creation, concept creativity, engagement, and packaging.
Negligible labour problems: The owners and their employees have a close personal relationship. Employment creation: MSMEs strive to make workers’ and artisans’ lives better. They help them by giving position, credits, and different administrations.
START-UP
Startup means an entity, incorporated, or registered in India not prior to Five years, with annual turnover not exceeding Rupees 25 Crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Key Points of Start-up
- Single Window Clearance even with the help of a mobile application
- 10,000 crore fund of funds
- 80% reduction in patent registration fee
- Modified and more friendly Bankruptcy Code to ensure 90-day exit window
- Freedom from mystifying inspections for 3 years
- Freedom from Capital Gain Tax for 3 years
- Freedom from tax in profits for 3 years
- Eliminating red tape
- Self-certification compliance
- Innovation hub under Atal Innovation Mission
- new schemes to provide IPR protection to start-ups and new firms
- Encourage entrepreneurship.
- Stand India across the world as a start-up hub.
Benefits of Start-up Scheme
- No tax on income from Startups
- Capital Gains and ARCs
- 1-day incorporation
- Skilling India
- MUDRA scheme
- Presumptive taxation scheme
- Corporate tax for Small Companies Service Tax exemption
- 500 cr to support SC/ST, women entrepreneurs
Significant role of MSMEs in the rise of the Indian economy
The Indian economy has developed much like other economies, with small businesses gradually growing into large industries. The colonial era also witnessed the establishment of significant industries. When we look at the bigger picture, the journey of the Indian economy’s development is comparable to that of MSMEs’ development.
One of the foundations of the Indian economy is agriculture and manufacturing. While the former has largely remained unorganized from the beginning, the latter has also faced challenges until recently.
The Indian economy is built on MSMEs, or micro, small, and medium businesses. The MSME sector in India has performed well and shielded the economy from global challenges and shocks. India has an estimated 633.9 million operating MSMEs. The Micro sector includes 630.5 lakh enterprises, accounting for the majority of the country’s total number of MSMEs. The Small sector includes 3.3 lakh enterprises (0.5% of total MSMEs), while the Medium sector includes 0.05 lakh enterprises (0.01% of total MSMEs). Rural areas are home to approximately 324.9 lakh businesses, or 52.3 percent of all MSMEs, while urban areas are home to 309 lakh businesses, or 48.8 percent.
Small and large industries both contribute to manufacturing. In many cases, these small enterprises provide raw materials or semi-finished goods to larger ones. For example, the largest automobile manufacturer in India, Maruti Suzuki, assembles finished automobile parts from a number of small businesses for its vehicles. SMEs play a major role in the existence of numerous major players. Therefore, small businesses are the real players in the Indian economy, and they play a significant role.
Contribution of MSMEs to the Indian Economy
The contribution of MSMEs to the economy is immense. They not only contribute to the larger picture, such as GDP, but they also significantly help resolve the employment crisis. What makes MSMEs so dependable and unshakeable? Firstly, it is their close ties to the workforce and roots. MSMEs have areas of strength that interface with the economy, providing necessary support and boosting it.
Secondly, MSMEs are known for their adaptability to new circumstances. Profit and sustenance are two primary motivations for small businesses. If they believe that adjusting their processes will improve their output, they do not hesitate to do so. Small businesses are extremely adaptable and among the most change-driven businesses in the Indian economy.
On the other hand, MSMEs have access to several excellent opportunities. The Indian economy offers them a lot of scope to settle and grow. All of this has been made possible by the demand for goods and services that are adequately provided by MSMEs.
Symbiotic Relationship between Economy and MSMEs
The relationship between the economy and small businesses is unique and vital. Their interdependence and association are advantageous to each other. When micro, small, and medium-sized enterprises (MSMEs) provide the much-needed boost at the local level, the economy safeguards them, meets their requirements, and provides additional support during times of crisis (through loans).
Importance of MSMEs to the Indian Economy
MSMEs employ around 12 crore people, making them the second-largest job provider after agriculture. The number of jobs created by domestic startups in the country in 2022 alone was 2.69 million, up 35.8% from the previous year’s 1.98 million. With approximately 45 lakh units distributed across the nation, it contributes approximately 6.11 percent of GDP through manufacturing and 24.63 percent through service activities. Moreover, startups are expected to increase their current contribution of 2.5-3% to India’s GDP to 4-5% over the next three to five years. By 2025, the MSME ministry aims to increase its contribution to GDP by up to 50% as India strives to become a $5 trillion economy. Startups and MSMEs together account for about 45% of India’s exports. MSMEs foster inclusive growth by providing employment opportunities, particularly for low-income rural residents. MSMEs in level 2 and level 3 urban areas contribute to the creation of opportunities for people to access banking services and goods, which can result in the overall contribution of MSMEs to the economy. By assisting aspiring entrepreneurs in creating novel products, micro, small, and medium-sized enterprises (MSMEs) promote growth, market competitiveness, and encourage creativity.
Budget 2023: Making MSMEs the driving force behind India’s economic growth
The Union Budget 2023 is well-balanced, with a focus on inclusive development and the phenomenal growth of the country’s entrepreneurial ecosystem. It takes into consideration the age of businesses and strengthens local economies. The government has implemented measures in the budget to support and encourage the MSME sector.
The MSME sector has received an estimated budget of INR 22,140 crores from the government, a 42% increase from previous years. This funding will be utilized to upgrade technology, build infrastructure, and implement various schemes to make credit easily accessible and affordable. The government has also proposed several tax breaks and subsidies to assist MSMEs.
One of the most significant measures announced in Budget 2023 is the establishment of a INR 10,000 crore fund to support the growth of technology and infrastructure in the MSME sector. This fund will provide financial assistance to MSMEs to adopt new technologies, improve production processes, and modernize their operations. The government has also proposed the establishment of a national mentorship program to assist MSMEs.
Additionally, the government has proposed several changes to make it easier for MSMEs to access credit, including the establishment of a fund to provide credit guarantees to MSMEs. A new credit-linked capital subsidy scheme has been proposed for the purchase of new machinery and equipment. The Finance Ministry plans to inject INR 9,000 crores into the Credit Guarantee Fund Trust for Micro and Small Enterprises Credit Guarantee Scheme on April 1, 2023.
The government will also provide additional collateral-free credit of INR two lakh crores to MSMEs while reducing the cost of credit by one percent. This timely move has the potential to scale up the expansion of micro, small, and medium-sized enterprises (MSMEs), as observed through our experience of working with over 2000 female entrepreneurs over the past five years, facilitating financial links worth over INR 85 crores.
Furthermore, this budget has facilitated the transition of MSMEs and small businesses to non-cash transactions and compliance with the presumptive taxation schemes. The budget also allocates funds for skill development and the promotion of entrepreneurship and enterprise development in traditional industries such as agriculture and handicrafts. Additionally, new businesses that undergo changes in shareholding will benefit from carrying forward their losses related to the adjustment of stake in this financial plan.
Looking Ahead:
Business Profitability Expectations
Ninety-six percent of MSMEs anticipate an increase in profits in 2023. Out of these, 66% expect profits to increase by more than 30%, while 30% of MSMEs anticipate an increase of less than 30%. Only 4% of MSMEs anticipate a decline in business profitability.
Demand for Non-Metro MSME Credit
Eighty-four percent of MSMEs in non-metro areas, mostly categorized as “others” in the study, stated that they would seek business loans in 2023. The accelerated demand for credit from smaller cities indicates the business recovery of MSMEs, which require funds for their working capital needs, growth, and expansion.
Adoption of Digital Technology
Sixty percent of micro, small, and medium-sized enterprise (MSME) owners indicated their intention to increase investments in digital technology or other areas in 2023. Thirty-eight percent of MSMEs said they would focus on online selling, 23% mentioned building a social media presence, and 24% expressed their desire to digitize their accounts and payments to track cash flows. These responses demonstrate a willingness to embrace digital technology.
The adoption of digital technology by MSMEs has several advantages. It expands their geographic reach, allowing them to acquire new customers. It enables businesses, including women-owned enterprises, to access the global market easily. Digitalization helps in managing inventory, sourcing raw materials, and reducing costs. It also boosts revenue growth, with MSMEs expected to outperform their offline rivals by 27%. Digitalization allows MSMEs to monitor customer credit, control credit losses, and maintain a healthy cash flow. Additionally, going digital saves time and provides access to resources.
Employment Creation
Sixty percent of MSME owners stated that they plan to hire more people in 2023, with the manufacturing and services sectors expected to see increased hiring.
Sustainability
Seventy-one percent of MSME owners plan to implement sustainable strategies in 2023. Eliminating the use of plastic is a popular sustainable business practice among MSMEs. Other practices include energy conservation, renewable energy projects, tree planting, reducing carbon emissions, reducing the use of plastic and paper, and controlling or reducing air and water pollution.
MSMEs are a Catalyst for the Indian Economy
MSMEs account for 40% of India’s gross industrial value, making them a vital part of the country’s economy. Despite being referred to as “small,” these businesses have a significant impact. The MSME sector is the main driver of the country’s economic growth. The industry is expected to gain even more prominence in the future due to its employment potential.
The MSME sector contributes 31% to India’s GDP and 45% to manufacturing output. It employs approximately 130 million people, with 14% of businesses being women-led and 59.5% located in rural areas. The sector has the potential to drive economic growth across social, cultural, and geographic divides.
The Indian government implements numerous programs and frameworks to support the MSME sector, as it plays a crucial role in the government’s vision of making India a $5 trillion economy. MSMEs have contributed to economic expansion, reduced inflation, a smaller fiscal deficit, and increased foreign capital inflows for investment. Therefore, MSMEs form the backbone of the Indian economy.
Author Bio
Great explanation of MSME in simple language.
Thank you PCS Varsha.