Relevance: GS-2:Government policies and interventions for development in various sectors and issues arising out of their design and implementation/GS-3:Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Inclusive growth and issues arising from it; Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key phrases: MSMEs, Credit Linked Capital Subsidy, MSME Classification, Ease of doing Business, PLI Scheme, Start-Ups, Schemes related to MSMEs.

Why in News?

• Recently government announced the Special Credit Linked Capital Subsidy Scheme for the MSMEs (Micro Small and Medium Enterprises) in the services sector. The scheme has a provision of 25 per cent capital subsidy for procurement of service equipment through institutional credit to the SMEs for advancement of their technology.

Highlights:

• MSMEs contribute around 30 per cent to India’s GDP, employ about 11 crore people, constitute nearly 40 per cent of total exports, and more than half of them are located in rural India. In July 2020, government by redefining the MSMEs, addressed the ‘fear’ of MSMEs losing their benefits under various schemes if they expanded.

• Indian MSMEs were discouraged from scaling up their operations mainly due to regulatory limits on their assets. The phenomenon was described by Economic Survey as ‘Dwarfism’.
• After a gap of 14 years, the government revised the definition of MSMEs by factoring in inflation and depreciation of the Rupee vis-à-vis other currencies between 2006 and 2020.
• This made the MSMEs to operate at a low scale by creating subsidiaries/sister concerns/Export Oriented Units with a view to receiving incentives from the government.
• According to the new definition, export revenue is deducted from total sales while estimating the turnover of MSMEs, which is a positive sign not only for the sector but also for exports.
• Since the old MSME definition had a regressive effect on the firms’ exports, expansion plans and employment generation, the new policy is expected to act as a catalyst for development of ‘new India’.

Other Challenges with MSMEs:

• MSMEs face legacy issues such as information asymmetry, non-registration of firms, inadequate and untimely credit, delayed receivables, technological obsolescence, negligible market linkages, absence of exit policy, etc.
• An analysis of CMIE Prowess database reveals that the Indian MSMEs mainly rely on unsecured loans and take few long-term loans for capex.
• This is further corroborated by the research finding from a recent study (NIRDPR, 2021) that nine out of 10 MSMEs depend on informal sources (mostly unsecured loans) for their working capital and term loans.
• Lack of sufficient asset cover (collateral) discourages them from taking secured loans at lower interest rate and hence they have to rely on unsecured loans at higher interest rates. This dents profitability and economic viability of their businesses.

Steps Needed:

1. Ease of doing business: MSMEs should have better access to efficient factors of production through industry-friendly labour reforms, proper land acquisition policy, free access to capital, vibrant entrepreneurship culture, modern technology, enabling infrastructure, and simplified tax policy.
2. Export of services: The world is moving towards a clean, green, and lean corporate regime to achieve the triple bottom line — Planet, People, and Profits.
   • Since India has a comparative advantage in services sector, entrepreneurs of MSMEs may be re-oriented in this direction to enhance export of services by capitalising on the revised definition.
   • However, balanced growth of agriculture, manufacturing, and services may be maintained by leveraging demographic dividend.
3. Leveraging PLI scheme: Recently, the government introduced Productivity Linked Incentive Scheme with a total outlay of ₹1.97 lakh crore to boost 13 industry sectors with a view to harnessing Make in India, thereby enhancing our manufacturing prowess and export potential.
   • As part of this, the government announced three schemes for automotive industry wherein manufacturing of electric vehicles will be incentivised to reduce carbon footprint, import of fuel, and enhance competitiveness and growth.
4. Promoting start-ups: According to Nasscom, India has 66 unicorns till date and is still counting.
   • With a market capitalisation of $18 billion, Byju’s has become the largest and most valuable Edu-tech company in the world.
   • Similarly other decacorns namely Paytm, and Flipkart have market capitalisation of over $10 billion mainly due to burgeoning domestic market, massive funding opportunities, and evolving technology.
   • As such, MSMEs with innovative ideas should be nurtured with right incentives and be freed from the bureaucratic maze.
5. Market linkages: The Covid-19 crisis should be converted into an opportunity by going digital.
   • There should be a virtual platform exhibiting crafts, handlooms and frugal innovations of MSMEs, to reach out to the broader national and international markets thereby enhancing their revenue.
   • As most of the MSMEs don’t have adequate market linkages and branding for their products/services, the government may promote (RURBAN) clusters thereby building synergy and sustainable value chains in the ecosystem.
6. Emulating best practices:
   • Turkey has introduced ‘TURQUALITY’, a state sponsored scale up programme meant for SMEs to transform themselves into global players.
   • Another such initiative is ‘Growth Driver Programme’ of Business Development Bank of Canada to provide multi-disciplinary support system in terms of enterprise growth and job creation in SMEs.
7. Financial literacy and education: MSMEs should be imparted with financial/digital education to make use of digital channels including TReDS platform for speedy realisation of their receivables.
   • Also, MSMEs should be trained to utilise the services of SME stock exchange in order to mobilise risk capital for growth plans.

Conclusion:

• Policy support in the given areas will make MSMEs as engines of growth for ‘new India’. A resilient and healthy MSME sector is essential for achieving the goal of self-reliant India.

Source: The Hindu BL

Mains Question:

Q. Given the significance of MSMEs, reving up this sector is sine qua non to achieve inclusive growth thereby attaining Atmanirbhar Bharat. Critically Analyse.