Mains Practice Questions

Approach

• Introduce by highlighting MSMEs as catalyst of growth
• Mention supporting arguments to MSMEs as the Backbone of Indian Economy
• Highlight the challenges faced by MSMEs
• Suggest measures to address their financial and operational constraints
• Conclude in a balanced manner.

Introduction

Micro, Small and Medium Enterprises (MSMEs) form the cornerstone of India's economic fabric, serving as catalysts for entrepreneurship, employment generation, and inclusive growth.

• Their significance has been further accentuated in recent years, particularly in light of India's aspirations for self-reliance, sustainable development, and achieving a USD 5 trillion economy.

Body

MSMEs as the Backbone of Indian Economy:

• Employment Generation: This sector is one of the largest employers in India.
  • The MSME sector generates 360.41 lakh jobs out of the 11.10 crore jobs in India.
    • The jobs mainly belong to the manufacturing sector, in the rural and urban areas.
  • Also, the handloom and handicraft sector directly employs over 7 million artisans, preserving traditional skills.
• Contribution to GDP and Exports: The sector contributes about 30% to India's GDP and accounts for 45% of overall exports.
• Fostering Inclusive Growth: By promoting entrepreneurship across diverse socio-economic groups, the sector helps reduce regional imbalances and ensures equitable wealth distribution.
  • It significantly empowers women entrepreneurs, acting as incubators for local talent and indigenous skills.
  • An example is the Kudumbashree mission in Kerala, which has supported a large number of women-led micro enterprises, transforming rural economies.
    • Also, 1.38 lakh projects have been set up by the women entrepreneurs under Prime Minister’s Employment Generation Programme (PMEGP) Scheme.
• Innovation and Adaptability: The sector is more flexible and adaptable to market changes compared to large industries and often pioneers in developing indigenous technologies and products.
  • It is crucial for India's transition to a knowledge-based economy and serves as testing grounds for innovative business models.
  • Many successful start-ups like Paytm and Ola began as small enterprises, revolutionizing their respective sectors.
• Support to Large Industries: Acting as ancillary units for larger industries, this sector forms a crucial part of the supply chain and contributes significantly to the manufacturing sector output.
  • It is essential for the success of the Make in India initiative and provides specialized services and niche products.
• Balanced Regional Development: The sector helps in the industrialization of rural and backward areas, reducing migration to urban areas by providing local employment.
  • It utilizes local resources and skills, promoting sustainable development and contributing to the development of industrial clusters.
  • The leather cluster in Kanpur, for instance, has transformed the local economy.
• Social and Cultural Impact: The sector preserves and promotes traditional arts and crafts, contributing to cultural tourism and India's soft power.
  • It supports local community development through CSR activities.
  • An example is the Chanderi handloom cluster in Madhya Pradesh, which not only provides livelihoods but also preserves a centuries-old weaving tradition.

Challenges Related to MSMEs:

• Limited Access to Credit: MSMEs often struggle with limited access to credit as banks perceive them as high-risk borrowers.
  • This is exacerbated by complex loan procedures, high interest rates, and a lack of collateral.
  • Furthermore, there is limited understanding of alternative financing options.
  • For instance, only 16% of MSMEs have access to formal credit, with many relying on informal sources at higher costs.
• Technological Obsolescence: Many MSMEs lack the funds necessary to upgrade technology, making it difficult to compete with larger, technologically advanced firms.
  • Limited access to research and development facilities and challenges in adopting Industry 4.0 technologies further hinder their competitiveness.
• Marketing and Branding Challenges: MSMEs often have limited resources for marketing and branding, making it difficult to compete with established brands.
  • For example, many handicraft producers find it difficult to market their products beyond local markets, missing out on global opportunities.
• Skilled Workforce Shortage: Attracting and retaining skilled workers is a significant challenge for MSMEs, compounded by limited resources for training and development and high employee turnover rates.
  • There is often a mismatch between industry requirements and the available skills.
  • The auto components sector, for instance, faces a significant skill gap, particularly in emerging technologies like electric vehicles.
• Raw Material Procurement: MSMEs face fluctuating raw material prices and difficulty in bulk purchasing due to limited financial capacity.
  • Small textile units, for example, often struggle with cotton price volatility, impacting their profit margins and competitiveness.

Measures to Address Constraints Related to MSMEs:

• Enhancing Credit Access: Strengthening schemes like MUDRA and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), encouraging fintech and digital lending platforms, promoting alternative financing options..
• Technology Upgradation and Innovation Support: Enhancing the Credit Linked Capital Subsidy Scheme (CLCSS), promoting industry-academia partnerships for technology transfer, establishing more Technology Centers (Tool Rooms) across the country, and encouraging the adoption of Industry 4.0 technologies through subsidies and training can support technology upgradation and innovation.
• Market Linkages and Export Promotion: Strengthening e-commerce platforms like the Government e-Marketplace (GeM), promoting participation in international trade fairs and exhibitions, providing export-specific credit and insurance support.
• Skill Development and Capacity Building: Expanding programs under the Skill India mission, encouraging industry-specific skill development centers, promoting apprenticeship programs in MSMEs, and developing entrepreneurship training programs can enhance skill development and capacity building.
• Ease of Doing Business: Simplifying regulations, promoting single-window clearance systems, implementing labor reforms to allow flexibility in hiring, digitizing compliance procedures, and providing dedicated MSME facilitation cells in government departments can improve the ease of doing business.
  • The Udyam registration process, for example, has simplified MSME registration, and is a significant step in this direction.
• Promoting Formalization and Digital Adoption: Incentivizing registration and tax compliance, providing benefits for joining the formal economy, encouraging the adoption of digital payments and accounting systems, and developing MSME-specific cloud-based solutions can promote formalization and digital adoption.
  • The recent change in MSME definition, for instance, has encouraged formalization, bringing more units under the formal sector
• Global Competitiveness and Quality Enhancement: Promoting the adoption of quality management systems, and developing export-oriented MSME clusters can enhance global competitiveness and quality.
  • Zero Defect Zero Effect (ZED) certification scheme, for example, has helped MSMEs improve quality and reduce environmental impact.

Conclusion

MSMEs are the engine of growth for the Indian economy. By addressing their financial and operational constraints through a multi-pronged approach, the government can empower them to unleash their full potential and contribute significantly to India's economic prosperity.