MSME article for WHEF London during September 2015

Role of Micro, Small and Medium Enterprises [MSME], in the Indian Economy

by Prof R. Vaidyanathan

Definition of MSME

As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the micro, small and medium enterprises are defined as below:

Table 1: Definition as per MSMED Act, 2006

Categories Manufacturing

(Investment in plant and machinery)

Services

(Investment in equipments)

Micro Does not exceed ` 25 lakh Does not exceed ` 10 lakh
Small More than ` 25 lakh but does not exceed ` 5 crore More than ` 10 lakh but does not exceed ` 2 crore
Medium More than ` 5 crore but does not exceed ` 10 crore More than ` 2 crore but does not exceed ` 5 crore

 

MSMED (Amendment) Bill, 2014

The Ministry of MSME has released a draft document on the proposed amendments to the MSMED Act, 2006 to incorporate a new section on a change in definition for MSMEs. The Bill proposes to change the definition of MSMEs by raising the capital limits in plant and machinery to the following revised levels:

 

Table 2: Proposed definition by Ministry of MSME

Categories Manufacturing

(Investment in plant and machinery)

Services

(Investment in equipment)

Micro Does not exceed ` 50 lakh Does not exceed ` 20 lakh
Small More than ` 50 lakh but does not exceed ` 10 crore More than ` 20 lakh but does not exceed ` 5 crore
Medium More than ` 10 crore but does not exceed ` 30 crore More than ` 5 crore but does not exceed ` 15 crore

 

The Ministry of MSME in consultation with other government authorities may take a view on any modifications required to the MSME definitions from time to time. It is suggested that value-based limits such as investment should have a mechanism for automatic indexation linked to an appropriate inflation benchmark.

In most domains like USA and EU the definition of MSMEs is based on aspects such as sales turnover and number of employees.

 

Role of MSME

The Micro, Small & Medium Enterprises (MSME) sector is a critical component of Indian Economy, making significant contributions to GDP, employment and exports. MSMEs contributed around 37.5% of India’s GDP in 2012-13, a number which has remained steady over the past three years. Of this, around 30% of the GDP is contributed by the services sector and the remaining by the manufacturing sector. This translates to a gross value added of ` 20.56 lakh crore. Of the aggregate gross value added (GVA), 71.2% was contributed by the services sector and 18.8% by the manufacturing sector.

Table 3 Share of MSME Sector in Total GDP (%)

Year 2010-11 2011-12 2012-13
Manufacturing Sector MSME 7.39 7.27 7.04
Service Sector MSME 29.30 30.70 30.50
Total 36.69 37.97 37.54

Source: Ministry of MSME

 

Table 4 Estimate of GVA of MSME (` in lakh crore)

Year 2010-11 2011-12 2012-13
Manufacturing Sector MSME 3.63 3.82 3.86
Service Sector MSME 14.43 16.11 16.70
Total 18.06 19.93 20.56

Source: Ministry of MSME

 

As per the Ministry of MSME’s Annual Report for 2013-14, MSMEs account for nearly 40% of India’s exports and also contribute significantly to the generation of employment in the country, employing nearly 80-100 million people.

 

 

 

Challenges:

Availability of finance is a key enabler for economic activity and the growth of entrepreneurship. In the MSME context, finance encompasses equity capital, loans for fixed asset investment and working capital for meeting cash flow gaps. Several policy, regulatory & institutional initiatives have been taken to promote availability of finance to MSMEs. These include, among others, credit support mechanisms administered by government institutions.

 

As per data from RBI, aggregate credit outstanding from scheduled commercial banks to MSMEs has in aggregate increased from ` 6.81 lakh crore in March 2012 to ` 10.35 lakh crore in March 2014.

The incidence of NPAs [around 5%] in MSMEs is sizeable and this aspect needs to be addressed. An efficient system of receivables factoring/discounting is one way to significantly address this issue and recommendations for such a system form a part of this report.

Easing access to finance for the MSME sector is critical to job creation, export growth and development of a manufacturing base, as envisaged in the Government of India’s “Make in India” initiative. The MUDRA financing initiative The MSME sector forms the bedrock of Indian entrepreneurship, and must be nurtured appropriately to realise India’s potential.

Mudra Initiative:

  • It will be more Relationship based and not just rule based
  • Easy accessibility with less paper work
  • It deals with cash flow based lending rather than asset based lending
  • More requirements for cash credit or working capital limit than for fixed assets
  • These units substantially in service sectors and so more need to focus on income generated rather than fixed assets etc.
  • The institutions should be less rigid in terms of risk adjusted capital/NPA provisioning etc.
  • Encourage Collection mechanisms to be technology based for ease of transactions
  • Mudra Bank is likely to evolve as a regulatory body for microfinance institutions though it is yet not clear if it will emerge as the sole regulator of the sector, replacing the Reserve Bank of India, which regulates MFIs that are registered as non-banking finance companies (NBFCs).
  • A decision if the Mudra Bank will regulate all NBFCs-MFIs will be taken at the time when the bill will be framed.
  • Till the government passes the bill, Mudra Bank, a subsidiary of Small Industries Development Bank of India, will be registered as an NBFC.
  • Mudra will refinance financial institutions for lending to micro businesses and entrepreneurs covering loans from Rs.50, 000 to Rs.10 lakh. The government is hoping the agency will help shopkeepers, fruit and vegetable vendors, truck operators and self-help groups to meet their funding requirements.

 

It is expected to be linked to Pradhan Mantri Jan-Dhan Yojana (PMJDY ) – The first step towards the development of the country is Jan-Dhan yojana to link entire country with banking system .PMJDY is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. Account can be opened in any bank branch or Business Correspondent (Bank Mitr) outlet. PMJDY accounts are being opened with Zero balance. However, if the account-holder wishes to get cheque book, he/she will have to fulfill minimum balance criteria. It has already got more than 17.7 crore accounts opened as of 19th August 2015.[http://www.pmjdy.gov.in/scheme_detail.aspx]

We have also elaborated hoe the mobile revolution can be leveraged in facilitating credit availability to the India Uninc. [See Chapter 27 of the book “India Uninc” Published by Westland Limited –2014]

We expect the MUDRA initiative will integrate large number of individual money lenders and other micro/mini financial bodies into the main financial markets. The process of rating all these entities will enhance credibility and help in risk assessment. This will reduce to some extent cost of lending. All in all this refinancing/rating/regulating body will reduce cost of capital and integrate our segmented financial markets. The process of funding the unfunded results in the last mile existing financier made part of the system. Let us hope the coming bill fulfils our expectations.

_______________________________

Author is Professor of Finance at Indian Institute of Management –Bangalore-Views are personal

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One comment

  1. balayogiv · · Reply

    Excellent actually micro finance is very vital for Indian economy

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