Reforming the MSME sector and reviving the Indian economy



Micro, Small and Medium Enterprises (MSMEs) are the backbone of the Indian economy. Entrepreneurship development, job creation and innovation are three key areas in which the contribution of MSMEs is unprecedented. The sector contributes around 45% of manufacturing output, over 40% of exports, over 28% of GDP while creating jobs for around 11.1 million people, which in terms of volume ranks next to the agricultural sector. The heterogeneity of the MSME sector is visible in its size, the products and services provided, access to finance and marketing, and the technology deployed. Despite such diversity, it faces a common set of issues such as physical infrastructure bottlenecks, access to credit, lack of formalization, technology adoption, capacity building, linkages with the market, venture capital, late payments and the system of arbitrary inspections in some territorial jurisdictions. These problems threaten the development of a conducive business environment, hampering the expansion of the sector. To achieve the goal of a five trillion dollar economy, we need a thriving entrepreneurial ecosystem supported by a stable political environment.

The Union government has undertaken significant reforms in recent years to create a conducive business environment. This showed up well in India’s ranking in the World Bank’s Ease of Doing Business (EoDB) ranking. In 2015, India’s rank in EoDB was 142 out of 190 countries, in 2020 India is at the 63rd position. This unprecedented feat has only been achieved through mission-mode structural reforms backed by strong political will and driven by a committed bureaucracy. The former Department of Industrial Policy and Promotion (DIPP) replicated the EoDB concept among Indian states to increase competitiveness and promote a conducive business environment in various states. The MSME sector has also experienced tectonic changes in recent years. Streamlining the investment-based definition and recalibrating slices for MSMEs is a welcome step. Other reforms such as the introduction of a transparent, progressive and easier tax regime under the GST, the launch of the GeM portal and the mandatory procurement target of 25% for the government / PSU, Udyog Aadhar are often seen as an important impetus for the growth and development of MSMEs. Sadly, Covid-19 put an end to this growth story and dealt a blow not only to MSMEs, but to the global economy as a whole.
As the Indian economy recovers rapidly from Covid-19, green shoots of growth are visible across all sectors. It is imperative that the next round of reforms can be launched in the MSME sector to enable it to reach its full potential.

  • Late payments are one of the major problems and MSMEs are reluctant to apply the legal provisions available to them under the MSME Act due to their weak bargaining power. Such delays often lead to the creation of NPAs. Timely payments to MSMEs will reduce financial hardship and NPAs.
  • A portal can be created for government debts to the private sector. This will not only bring transparency, but will also help reduce fraud and data theft.
  • Banks can finance these debts at risk-free interest rates and the interest can be paid by industry or government.
  • TReDS is an effective mechanism that can be extended to resolve late payments and liquidity issues.
  • The GeM portal can be developed as a fully-fledged marketplace for MSMEs through which sellers can develop backward and forward links.
  • Udyog Aadhar or PAN can be used as a unique identifier for all compliance purposes and the annual registration process as a seller should be simplified or can be done with this identifier.
  • MSMEs lack expertise in product development, technology adoption and marketing strategy. To alleviate these problems, the government should create networks of development service providers who can provide tailored solutions to MSMEs.
  • Building the capacity of entrepreneurs is an essential prerequisite for the development of the sector, as it provides entrepreneurs with the knowledge and the means to operate.

Heterogeneity, fragmentation and informalization are the main characteristics of the MSME sector in India. As a result, these companies add less value to the economy than their international peers. Government interventions have focused primarily on supply and control until very recently. However, the formulation of targeted policies in the areas of infrastructure development, formalization, technology adoption, backward and forward linkages, credit gap reduction and timely payments and their effective implementation can help MSMEs realize their full potential and propel the Indian economy on a higher growth path.
On December 20, Prime Minister Shri Narendra Modi met with CEOs of companies from various industrial sectors. He spoke of the country’s inherent strength, displayed in the battle against Covid, and urged them to make full use of policies such as the PLI incitement. Policy coherence and government commitment are very encouraging for the industry. I am optimistic that the Prime Minister’s very proactive leadership will translate into accelerated and lasting reforms that will usher in the country’s economic progress.



The opinions expressed above are those of the author.




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