MSME Challenges in India

Micro, Small and Medium Enterprises (MSMEs) are amongst the strongest drivers of economic development, innovation and employment. The MSME sector also contributes in a significant way to the growth of the Indian economy with a vast network of about 63.38 million enterprises. The sector contributes about 45% to manufacturing output, more than 40% of exports, over 28% of the GDP while creating employment for about 111 million people, which in terms of volume stands next to agricultural sector. 

The MSME sector in India is exceedingly heterogeneous in terms of size of the enterprises and variety of products and services, and levels of technology employed. However, the sector has the potential to grow at a faster pace. To provide impetus to the manufacturing sector, the recent National Manufacturing Policy envisaged raising the share of manufacturing sector in GDP from 16% at present to 25% by the end of 2022.

 In order to enable identification and facilitate development of MSMEs, Government of India had enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Prior to the enactment of this act, small industries encompassed tiny, cottage, traditional, and village enterprises and MSEs in India were collectively termed as Small Scale Industries (SSIs) under the Industrial Development and Regulation (IDR) Act, 1951. The MSMED Act, 2006 has provided the legal framework for identifying the concept of ‘enterprise’ which includes entities both in manufacturing and service sectors and has categorized the enterprises into three tiers viz., Micro, Small and Medium.

 Major Challenges faced by the sector

The contribution of the sector in the economy is currently constrained due to several challenges affecting growth of the sector. Some of the major ones are mentioned below:

Policy and institutional interventions:

In order to provide support to the MSME sector and to facilitate its growth, there are numerous institutions in the country. At the apex level, the Ministry of MSME formulates policies for overall growth of the sector while the Office of Development Commissioner MSME implements these policies through its various organisations. MSMED Act, 2006 contains various facilitative provisions for the promotion and development of the MSME sector. SIDBI is the apex financial Institution for supporting financing and development of MSMEs. RBI and SEBI frame broad policies for facilitating funding support to the sector. The above institutions through their legislative and policy interventions are enabling growth of the sector. However, formulation of targeted policies in the areas of infrastructure development, formalisation, technology adoption, backward and forward linkage, credit gap reduction and timely payments to MSMEs and their effective implementation has been a challenge for all the stakeholders. Government interventions have tended to be fairly supply-side oriented and unable to effectively respond to demands of the market.

 Accelerating growth and enabling formalisation

The role of MSME sector is critical in job creation, innovation, and entrepreneurship and supply chains. Hence, there is a need to facilitate, nurture and support innovative business ideas and shape them into enterprises. Further, with limited number of entrepreneurial development and incubation centres, entrepreneurial ethos of the MSME eco- system is not evolving. Utilisation and reach of various schemes and credit support is constrained due to lack of formalisation and low level of registration of MSMEs in Udyog Aadhaar Memorandum (UAM). Promoting formalisation and digitisation amongst MSMEs and encouraging them to register in UAM has remained a challenge.

Addressing infrastructural bottlenecks:

Infrastructural bottlenecks affect the competitiveness of MSMEs and reduces their ability to venture into domestic as well as global markets. Inadequate availability of basic amenities such as work sheds, tool rooms, product testing laboratories, electricity, rural broadband and innovation hubs is acting as a deterrent to the growth of the sector. Development of MSME clusters has been largely confined to Government organisations with low level of private investment.

Facilitating capacity building:

Traditionally, MSMEs are subject to severe information asymmetry problems. Lack of information about various schemes for instance, deprive MSMEs from availing benefits offered by Government, banks and other agencies. Access to information about market opportunities is sub optimal and unstructured. In many cases, they also lack managerial, legal and technical knowhow and the necessary wherewithal to function effectively.

 Facilitating access to credit and risk capital

Due to their informal nature, MSMEs lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing.

 Technological interventions for improving underwriting standards and delivery

Implementation of GST has made turnover data available at a single network. However, MSMEs are not identifiable as the data on investments in plant and machinery is not captured under GSTN. Income tax data base contains information relating to financials of the units. On the other hand, Udyog Aadhaar portal contains registration related information of MSMEs. However, there is no single interface available for the lenders to access, map or triangulate data from these data sources and they have to primarily rely upon manual information furnished by borrowers. Further, absence of data protection laws and unique enterprise identifier limit ability of various agencies to share data.

 Enabling market linkage and tie-up with public procurement platforms:

MSMEs face the twin challenge of limited access to quality raw material and market for finished product. National Small Industries Corporation (NSIC) through market assistance scheme facilitates MSMEs to discover markets for their products and the Government e-Marketplace (GeM) portal has enabled MSMEs to connect with buyers from Public Sector Undertakings (PSUs) and Government Departments. However, the number of MSMEs availing benefits under the schemes are few. For example, the GeM portal has 38,609 registered MSMEs on the platform as on June 12, 2019..

Best Practices in effective implementation of MSME model in the state  of Telangana :

Telangana, aims to promote innovation and entrepreneurship, leveraging upon its natural demographic assets as well as its base of skilled technology and research professionals. The innovation policy of the Government of Telangana is based around five broad pillars:

• Developing physical infrastructure & program management capabilities

• Focus on creating sustainable funding models, through funds and other instruments

• Develop human capital, by creating the right environment and support systems for learning, experimentation and innovation from the early phases of education

• Proactive engagement with industry to continuously promote and identify innovation

• Encourage startups in the Rural and Social Enterprise space by providing additional incentives

Incentives for Incubators:

Reimbursement of paid Stamp Duty and Registration Fee – Incubators and Host Institutes shall be eligible for 100% reimbursement of the Stamp Duty and Registration Fee paid on sale/ lease deeds on the first transaction and 50% thereof on the second transaction.

Incentives for startups:

1. Reimbursement of SGST: The unit can pay SGST to the concerned department and avail reimbursement on a yearly basis. This will be applicable only on the SGST paid to the State of Telangana and for a maximum total turnover of ₹1 Crore/annum for the first three years of operation.

2. Promotions: Government shall provide reimbursements of 30% of the actual costs including travel incurred in international marketing through trade shows. This incentive will be subject to a maximum of ₹5 lakh per year per company.

3. Patent Filing Cost: The cost of filing and prosecution of patent application will be reimbursed to the incubated startup companies subject to a limit of ₹2 lakh per Indian patent awarded. For awarded foreign patents on a single subject matter, upto ₹10 lakh would be reimbursed. The reimbursement will be done in 2 stages, i.e., 50% after the patent is filed and the balance 50% after the patent is granted.

4. To promote idea stage companies, the government shall offer recruitment assistance of ₹10,000 per employee for the first year.

5. Startups that record a year-on-year growth rate of 15%, as per audited accounts, shall be eligible to get a grant of 5% on Turnover, subject to a limit of ₹10 lakh within a period of three years from the date of incorporation.