MSMEs hold the key to $5-trn economy

A proactive and cohesive approach by the government to support micro, small and medium enterprises could raise their contribution to GDP to about 50 per cent in the foreseeable future

India’s ambitious target of expanding its economy to $5 trillion in the next three years will depend to a large extent on the ability of policymakers to unleash the animal spirits of micro, small, and medium enterprises (MSME), which play a pivotal role in employment generation and sustainable development.
 

According to the World Bank, MSMEs account for 90 per cent of businesses, 60-70 per cent of employment and contribute over 50 per cent of global GDP.  However, in India, their contribution was around 29 per cent of GDP in 2022. The FY22 Annual Report of the Ministry for MSMEs says there are 63.39 million MSMEs employing 111 million. 
 

Micro-enterprises — defined as those with a turnover of less than Rs 5 crore and investment in assets of less than Rs 1 crore, employing 1-10 people — are estimated at 63.1 million and made up 99 per cent of the MSME universe. Of this, urban MSMEs accounted for 55 per cent of jobs, with the rest situated in rural areas.
 

However, the latest data on MSMEs — often referred to in official documents — is dated: it is based on the National Sample Survey (73rd round) conducted in FY16! The numbers have since expanded, and according to Sivasubramanian Ramann, chairman and managing director of the Small Industries Development Bank of India, there are more than 90 million MSMEs. Of these, 15 million are under GST; the rest also need finance from banks and non-banking financial companies (NBFCs), but don’t have an Udyam registration.
 

Udyam is an online registration portal set up by the government for MSMEs. While it’s for MSMEs to register, the lack of awareness, the requirement and benefits of registration aren’t advocated effectively to these MSMEs. One of the key benefits is priority-sector lending classification, which leads to a reduction in their borrowing costs.
 

Further, shunned by banks owing to the lack of credit histories, MSMEs are at the mercy of loan sharks and unorganised lenders who give them short-term money at high rates of interest which these customers can ill-afford, pushing them deeper into a debt trap. The shortfall of credit to MSMEs is estimated at Rs 20-25 trillion by the U K Sinha-led Expert Committee on MSMEs.
 

Recognising their significance in employment generation and rural development, the government has launched several schemes and policy amendments like the Emergency Credit Line Guarantee Scheme, Credit Guarantee Fund Scheme, Factoring Regulation (Amendment July’21), and the inclusion of retail and wholesale traders as MSMEs, to help this segment to regain their footing after the pandemic’s disruption.
 

While these measures are laudable, much more needs to be done to unlock the full potential of this segment, as they not only contribute a substantial portion of GDP, but they are also the largest creator of jobs and provider of livelihoods in the country.

With investments picking up steam under the central government’s forceful Make in India pitch and production-linked incentive scheme, these programmes are set to spawn legions of ancillary units, mostly in the MSME sector. The availability of affordable and sustainable patient capital for MSMEs is essential to fuel the growth of this sector, thereby resulting in a huge opportunity for organised financiers like banks and NBFCs with rural reach to tap this demand.
 

Besides economic reasons, there’s a compelling social factor to boost micro-enterprises. They are not just the biggest job creators, but their hires are usually people with lower chances of finding employment elsewhere, such as uneducated youth, older workers, and poorly-skilled folk. Policymakers have a golden opportunity to enable India to achieve sustainable development goals, accelerate growth, create employment and alleviate poverty. A proactive and cohesive response by the government could drive the contribution of MSMEs to about 50 per cent of GDP in the foreseeable future.
 

The writer is managing director and chief executive officer, Adani Capital