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Sector Overview

Micro, Small and Medium enterprises are the pillar of economic growth of the country. Often rightly termed as “the engine of growth”, MSMEs have played a prominent role in the development of the country in terms of creating employment opportunities (biggest employer after agriculture sector), scaling manufacturing capabilities, curtailing regional disparities, balancing the distribution of wealth, and contributing to the GDP significantly.

Definition: MSMEs in the country are governed by the MSMED Act 2006. This act also covers the definition of MSMEs. Earlier criterion for the classification of MSMEs was on the basis of investment in Plant & Machinery and Equipment for defining MSMEs in Manufacturing and Service Sector units respectively. However, in the recent cabinet meeting held on February 07, 2018 the union cabinet approved the change in the definition criteria of MSMEs to the annual turnover from investment in plant & machinery and equipment in Manufacturing and services sector respectively.

The new criteria of defining MSMEs will be:

Classification

Annual Turnover

Micro Enterprises

Less than 5 crore rupees

Small Enterprises

More than 5 crore rupees but does not exceed Rs 75 crore

Medium Enterprises

More than 75 crore rupees but does not exceed Rs 250 crore


Key Facts:
  • The total number of Working Enterprises went up from 361.76 lakhs in 2006-07 to 510.57 lakhs in 2014-15
  • Total employment in the MSME sector went up from 805.3 lakhs in 2006-07 to 1171.32 lakhs in 2014-15
  • The Market Value of Fixed Assets went up from 868543.79 crore in 2006-07 to 1471912.94 crore in 2014-15
  • The MSME Manufacturing Sector contributes 6% to GDP and the Service sector contributes 24.63% in GDP
  • The share of MSME Manufacturing Output in total manufacturing output went up from 33.12% in 2011-12 to 33.40% in 2014-15
  • In the current year till December 22, 2017, the total outstanding Gross bank Credit to MSME was Rs 10023 billion.
  • MSMEs contribute 45% in exports.
Issues & Challenges:

Though the MSME sector has been growing and contributing to the economy substantially, they face lot of challenges & issues. Some of the major challenges & issues are highlighted below:

Lack of Adequate Capital
Despite having the immense potential Indian MSMEs face bottlenecks in getting the low-cost funds which can help them to enhance their productivity and profitability. Capital being the essence of the business is very much required by each MSME units. Though contemporary tools are available in the market, MSMEs especially MSEs have limited outreach and there is still a big demand of cost effective funds amongst MSMEs in various formats such as Working Capital Loan, Collateral Free Loan etc which are still unfulfilled.

Poor Infrastructure
It is a matter of great concern that MSMEs don’t have the ample infrastructure to run the business. Water, Land, Electricity are the key enablers which are required to run a unit successfully. Multiple units don’t have access to such facilities.

Access to Modern Technology
In today’s scenario, technology has driven the market in totally different pace. Changing technology has completely changed the dynamics of the business and the global market. Using obsolete methods only lead to low productivity and quality. This impacts the business potential of MSMEs. Enterprises lack knowledge and finance required to adopt such technologies in the business. Getting Skilled manpower is a major issue.

Access to Markets
MSMEs have limited access to various and suitable markets as they have limited resources and knowledge of the latest trends. MSMEs only market the products to local or suburban region whereas the product might have the potential in other markets as well where their products could be sold at a higher price. Access to market will enable them to enhance the scalability.
Compliances
Cumbersome procedure and process of Compliance is a major concern for MSME units. Exploitation brings them down as they are not well versed with laws and rules. They also don’t have enough funds to outsource such formalities. Continuous visits of Inspectors leads to harassment as the inspectors misuse the power and exploit the units. Inspectors need to work as mentors to help MSMEs comply with various rules and regulations instead of penalizing them.

Taxation
Under the regime of GST, refund of Input Tax Credit is a major concern for MSMEs. Since the amount gets stuck in the process, MSMEs struggle for working capital as they have limited funds. This also hampers their productivity significantly.

Other Issues
  • Criteria for Tenders are not MSME friendly and therefore MSMEs are not able to participate or get the tenders of various projects. For example, security deposit is a big concern for MSMEs as they already lack funds
  • There is a poor mechanism for MSME receivables. MSMEs don’t get the payment under the stipulated time frame and it hampers the cash flow of the units. Though, facilitation council and recently a portal have been created by the Government in this regard, the effective implementation needs to be worked out so that MSMEs can get their dues on time
  • There is non-inclusion of service activities being carried out by Entrepreneurs in designated industrial areas. Service sector being the significant contributor in the GDP, non-inclusion of Service sector MSMEs in such industrial areas is leading to unnecessary harassment of such units. Therefore, Service Sector needs to be given due importance and should be allowed to function in the industrial areas
  • Obsolete regulatory framework causes troubles for MSMEs. There is an urgent need to review the existing regulatory framework for outdated regulations and undertake planned phasing out of obsolete procedures
  • MSMEs find it difficult to comply with the export compliances as they lack knowledge and expertise
  • By and large Sick MSME units do not find any hand holding. There is no defined process for sick unit revival. Sometimes hand holding exercise and the correct guidance can be useful for them to revive