MSMEs in India

Introduction

Chapter I

The micro, small and medium enterprises (MSMEs) play a pivotal role in the economic and social development of the country often acting as a nursery of entrepreneurship. They also play a key role in the development of the economy with their effective, efficient, flexible and innovative entrepreneurial spirit. The MSME sector contributes significantly to the manufacturing output, employment and exports of the country and is credited with generating the highest rates of employment growth along with accounting for a major share of industrial production and exports. Table 1.1: Defining MSMEs in India
Particulars Micro Enterprises Small Enterprises Medium Enterprises Manufacturing Enterprises (Investment in Plant & Machinery) Upto ` 2.5 mn Above ` 2.5 mn & upto ` 50 mn Above ` 50 mn & upto ` 100 mn Service Enterprises (Investment in Equipment) Upto ` 1 mn Above ` 1 mn & upto ` 20 mn Above ` 20 mn & upto ` 50 mn

Source: Ministry of Micro, Small & Medium Enterprises

The MSMEs have been globally considered as the engine of economic growth and credited with promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of large enterprises. The MSMEs constitute over 90% of total enterprises in most economies and are credited with generating the highest rates of employment growth, account for a major share of industrial production as well as exports. In India too, the MSMEs play an essential role in the overall industrial economy of the country. In the recent years, the MSME sector has consistently registered higher growth rate as compared to overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession. Chart 1.1: Total MSMEs Vs total employment

Source: Ministry of Micro, Small and Medium Enterprises, GoI

The MSME sector in India is highly heterogeneous in terms of the size of enterprises, variety of products and services produced as well as the level of technology. The sector, not only plays a critical role in providing large employment opportunities at comparatively lower capital cost than large industries but also helps in industrialisation of rural and backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and contribute enormously to the socio-economic development of the country.

Box 1.1: Key features delineating the MSME Sector: The MSME sector accounts for about 45% of the manufacturing output of the country The MSME sector accounts for about 40% of the total exports of the country The sector is projected to employ about 69 mn persons in over 26 mn units throughout the country The MSME sector manufactures over 6,000 products ranging from traditional to high-tech items The MSMEs constitute over 90% of total enterprises in most of the economies The labour to capital ratio in MSMEs and the overall growth in the MSME sector is much higher than in the large industries More than 94% of MSMEs are unregistered, with a large number established in the informal or unorganised sector For FY10, the total production of the MSME sector was projected at ` 982,919 crore, an increase of more than 11% over the previous year For FY09, the MSME sector contributed around 45% to total industrial production and 8.72% to GDP at 1999-2000 prices

II. Performance of MSMEs MSMEs outperform GDP and IIP growth rates

MSMEs have outperformed IIP and GDP growth rates in the last five years. The domestic MSME sector has grown at a much faster rate than industrial and GDP growth. During 2009-10, MSMEs total production was projected to grow at 12% as compared to the industrial and GDP growth of 10.5% and 8% respectively. In FY10, MSMEs total production at current prices was equivalent to about 15% of Indias GDP (at current market prices). Total production of MSMEs for the year 2009-10 was ` 9,829.19 bn (at 2001-02 prices). Between 2005-06 and 2009-10, the sectors total production grew at a CAGR of 18.5%. This is a clear indication of MSMEs substantial contribution to the Indian economy through steady growth. Chart 1.2: Comparing the growth rate of MSMEs with IIP and GDP (%)

Source: Ministry of Micro, Small & Medium Enterprises, GoI and Economic Survey 2010-11, Ministry of Finance

Fixed investment and employment in MSME segment registered mutual growth

The MSME sector has observed drastic improvements in productivity. Fixed investment and employment in MSME is on a growth trend. This directly indicates the efforts in the sector to integrate the work force with technological enhancements to increase volumes. Fixed investment in MSME sector between FY07 and FY10 has grown at a CAGR of 11%. Employment on the other hand grew more than 5% y-o-y. Chart 1.3: Fixed investment Vs employment in MSMEs

Source: Ministry of Micro, Small and Medium Enterprises

PSBs remain the largest lender to MSMEs

The MSME sector has been accorded high priority in the industrial policy owing to its vital role in the economy. During FY10, the total outstanding credit by banks to MSMEs in India stood at ` 3640.01 bn, a y-o-y growth of 42%. Among bank categories, public sector banks (PSBs) have registered impressive growth in MSE lending, accounting for a major share compared to private and foreign banks. During FY10, total priority sector advances by PSBs grew 20.2% y-o-y to ` 8,649.54 bn, as against ` 7,197.67 bn in FY09. The total advances provided by public sector banks to MSE sector for FY10 stood at ` 2,783.98 bn, a y-o-y growth of about 45%. The advances to MSE constituted more than 30% of the total priority sector advances made by PSBs, which saw moderate growth versus the 27% share during FY09. Moreover, the share of MSE credit to net bank credit grew from 8.8% in 2005 to 13.4% in 2010. Chart 1.4: Bank category wise outstanding credit to MSMEs

MSMEs play a critical role in an economy. This is very much evident by looking at the economic and socio economic benefits achieved by the developed and the developing world.

III. Outlook

A dynamic global economic scenario has thrown up various opportunities and challenges to the MSME sector in India. While on the one hand, many opportunities are opened up for this sector to enhance productivity and look for new markets at national and international level, it has also, on the other hand, put an obligation to upgrade their competencies to meet the competition as new products are launched at an incredible pace and are available world wide in short time. Key challenges faced by the MSME sector: Lack of availability of adequate and timely credit High cost of credit Collateral requirements Limited access to equity capital Procurement of raw materials at a competitive cost Problems of storage, designing, packaging and product display Lack of access to global markets Inadequate infrastructure facilities, including power, water, roads, etc Low technology levels and lack of access to modern technology Lack of skilled manpower for manufacturing, services, marketing, etc Multiplicity of labour laws and complicated procedures associated with compliance of such laws Despite the various challenges, the MSME sector with its dexterity and vigor has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession.