What is MSME, Meaning, Definitions of Micro, Small and Medium Enterprises, Benefit

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The growth of any country is dependent on the health of its industrial sector. The industries not only provide goods for internal consumption of the country bu also for the exports. Industries also offer employment opportunities for the people of the country. The micro, small and medium enterprises plays important role both in manufacturing useful products for the country as well as generating employment for such a large population of India. The reach and extent of this sector is so large that it employs almost 11 crore people in the country and contributes to around 18% of GDP.

These small units have enough potential to provide sustained growth for any economy. These enterprises also sustain the rural economy as many products are developed indigenously in rural areas. Due to low production costs and informal work environment, these industries can hold themselves up even during economic instabilities. If adequate infrastructural facilities are developed for them and these units are provided with latest technologies, skills, training and entrepreneurial calibre, they have the capability to give Indian economy a big leap forward and become pillars of growth.

Definitions of Micro, Small and Medium Enterprises

In India, the micro, small and medium enterprises in the service and manufacturing sector are classified on the basis of both investment in the plant and machinery as well as the turnover of the enterprise.

Those enterprises where investment is not more than 1 crore and annual turnove is not more than 5 crores, are classified as micro enterprises. Those enterprises where investment is not more than 10 crore and annual turnover is not greater than 50 crore are classified as small enterprises. Those enterprises where investments are less than 50 crore and annual turnover is not more than 250 crores are classified as medium enterprises. According to this criteria, there are around 6.3 crore MSME units in India. The micro enterprises in the country account for 99% of MSMEs. The small and medium units only account for 0.52% and 0.01% of the estimated number of enterprises in India.

MSMEs contribute to employment on a huge basis. This sector is second largest employment provider after the agriculture sector . The highest employment is in the trade sector followed by manufacturing. It accounts for nearly 33% of total manufacturing output per year and half of the country’s exports. Thus, these units have the ability to make India self-reliant or atmanirbhar.

Challenges Faced by MSMEs in India

The MSMEs play a major role in the socio-economic development of the country. This sector has registered higher growth rate as compared to other sectors but they face several challenges in the liberalisation era. These units have to continuously upgrade themeselves to meet the emerging challenges. They face the following challenges

Irregular Raw Material Supply

The small industrial units are dependent on local sources of raw material. They have to purchase raw materials in smaller quantities and often on credit basis. They are not able to compete with large enterprises due to fragmented procurement of raw material because of lack of working capital . These industries have to pay higher prices for inputs and suffer uncertainty in procurement. Unlike the large industrial units, they are not able to take advantage of economies of scale due to bulk purchase.

Shortage of Finance and Credit

Scarcity of finance is a major obstacle in the development of small industries. The capital base of small enterprises is weaker and often they have to procure credit at a high rate of interest. Difficultie arise in formal loan documentation and lack of collateral. Lack of finance and credit affects their ability to expand their operations and ensure economies of scale. When economy is not maintained, it leads to high running costs and subsequent losses.

Lack of Infrastructural Support

Small industrial units are often deprived of infrastructure such as adequate power supply, transport and communication services. Lack of these necessary services results in slowing down of their growth and hinders their expansion. Lack of these services also results in hindered development of ancillary and subsidiary industries. They are often not able to transport their manufactured products on time due to lack of efficient transportation

Lack of Technical and Managerial Skills

The small industrial MSMEs lack in trained and experienced managerial personell. Most of the MSMEs do not have th capacity to hire trained and experienced managers. These MSMEs operate on the basis of local experiences and locally available personell . Most of these are family enterprises which do not apply modern techniques of manufacturing and service delivery in their operations.

Marketing Problems

Access to adequate marketing facilities and opportunities becomes a major concern in terms of profitability of these enterprises. Though thi sector produces a large volume of industrial output yet they are vulnerable to volatility in demands. There is no concept of advertising in this sector and links with national or international markets are quite weak. These enterprises operate locally as well as they procure their raw materials locally. The demands for highe standard products in the national and international markets are not fulfilled by these small enterprises due to marketing problems.

Obsolete Technology

The techniques of manufacturing and service delivery in MSME sector are obsolete. This has led to a condition where these units produce less at higher costs. Technology is one of the most critical element in success and sustainability of these enterprises. If technology is not upgraded, these enterprises will loose their competitive edge in the international markets.

Relevance of MSMEs for Indian Economy

The MSME sector is creating nearly 11 crore jobs across the country. This sector is rightly known as India’s engine of growth. Despite various constraints this sector has grown by over 8% over the years after being hit by the COVID 19 pandemic. These smaller enterprises are very important for Indian economy. These encourage the growth of both rural as well as urban areas.

The micro, medium and smaller enterprises in India generate employment for a large number of people. They also help in reducing the poverty rate. Rural urban gap is reduced by these MSMEs as most of the migrant labour is employed by the MSME sector. If local MSMEs are opened in the rural sectors, it may also lead to balanced economic growth between rural as well as urban areas. This can also help in reducing the large scale rural to urban migration. If MSME clusters are developed regionally, it would encourage regional development.

MSMEs are major contributors to India’s export sector. The share of MSMEs in the exports of India stands at almost 40% of the total exports. This also indicates that MSME products are being accepted globally. Thus, MSMEs help in boesting exports from India.

MSMEs are also model industries for promoting inclusive growth in India as a large number of poor and low income groups spanning across classes, castes, gender, religion etc. are associated with the MSMEs. MSMEs increases the industrial and manufacturing capacity of India. It forms an essential component of the economy that can help in achieving self-sufficiency in manufacturing and service sector.

MSMEs manufacture diverse range of products from clothing to automobile parts, home appliances, cottage products such as honey, coir etc as well as various ancillary components used in other industries. Thus, a large number of daily use components are provided by the MSME sector to the 1.3 billion Indian population at lower costs.

The service sector MSMEs cater to the needs of the large manufacturing base of India as well as international firms that have outsourced their work to Indian MSMEs in the service industry. If the MSME sector of India is protected from foreign competition as well as provided institutional support, it surely can become the engine of growth of the Indian economy and propel the economy to newer heights.

Way Forward

The MSME sector, collectively, is much larger than the organised sector. To support the growth of MSMEs, the governments should earmark separate lands for the MSME sector which can be rented to them so that their running costs can be reduced. Registration and opening of MSMEs should be simplified so that it doesn’t disincentivise the startups from opening businesses that have the potential to grow and compete with even the international businesses.

The current credit gap in the MSME sector should be assessed and gaps should be filled by creating a specialised financial institution that could provide loans at cheaper rates to the MSMEs. The major detterent in getting credit is collateral. If collateral limits can be reduced, more credit could flow towards MSME sector. Availability of adequate long-term and working capital is necessary for the development of MSMEs.

For improving access to infrastructure and ancillary services, the government shall setup innovation hubs (so that research and development facilities shall be promoted) and MSME clusters (so that better infrastructure can be made available to MSMEs). For improving the quality of MSME products, the State Governments should collaborate with MSME enterpreneurs and facilitate these industries with upgraded technologies.

Marketing facilities can be developed with the help of a national portal that can enable the MSMEs in finding competitive deals through web interface. To facilitate international marketing, the Government must provide a comprehensive analysis on product wise export potential of various countries.

There must be a systematic approach to support MSMEs through their life cycle as the level of support varies at various stages. MSMEs are backbone of Indian economy. This should be nurtured and made more competitive to integrate them with the global market supply chains.

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