India’s MSME Sector

The Indian MSME Sector
Micro, Small and Medium Enterprises (MSMEs) form the cornerstone of the Indian economy. The MSME sector in India has exhibited a strong performance and protected the economy from global adversities and shocks. It is estimated that there are 633.9 lakh MSMEs in India. The Micro sector includes 630.5 lakh enterprises, accounting for over 99% of the country's total number of MSMEs. The Small sector includes 3.3 lakh enterprises (0.5% of total MSMEs), while the Medium sector includes 0.05 lakh enterprises (0.01% of total MSMEs). Around 324.9 lakh enterprises (52.3% of total MSMEs) are in rural areas, while 309 lakh enterprises (48.8%) are in urban areas.

Given below are the criteria for the classification of MSMEs.

The Indian MSME sector provides a crucial employment opportunity with low capital requirements. The sector helps uplift the country's rural and less developed areas, reducing regional imbalances and inequality. Moreover, the sector is complementary to large companies and industries, providing them with the necessary parts and components. All these factors make the MSME sector crucial in the country's socio-economic development.

Benefits of the MSME Sector to the Indian Economy
The Indian MSME sector provides several benefits to the Indian society as well as economy. Some of the benefits are given below.

• MSME Sector’s Contribution to Indian Economy: The sector significantly boosts the country's economy. As per the Ministry of Statistics & Programme Implementation, the contribution of the MSME sector to the Gross Value Added (GVA) in the country's GDP in FY 20 was 30%. The share has been around 30% over the past few years. The sector’s contribution to manufacturing in all India manufacturing gross value output in FY 20 stood at 36.9%, the same as that in FY 19. This share signifies the sector's role in India's economic growth.
• MSME Contribution to Export in India: The MSME sector is among the country's major exporters. Specified MSME-related product exports accounted for 49.5% of India's total exports in FY 21, compared to 49.8% in FY 20. Textiles, garments, different types of shoes, rice and castor oil are among the major products exported by the Indian MSME sector.
• Employment Generation: The MSME sector is one of the country's major employers. Setting up an MSME would provide owners with a job, helping them avoid hunting for jobs elsewhere. It also enables them to create employment opportunities for others. The sector has been instrumental in generating employment opportunities in rural and remote areas of the country. As per the data from the Udyam Portal of the Ministry of MSMEs, 93,94,957 people were employed by MSMEs registered on the portal in FY 22.

Number of persons employed by MSMEs registered on the MSME portal (in million)

Source: Ministry of MSMEs, PIB

• Connecting Remote Areas to Rest of the Country: By preparing key raw materials and finished goods with global demand, MSMEs in remote and backward areas help connect these areas with the rest of the country and the world. Several MSMEs operate in rural areas while providing ancillary goods to large multinational companies across the globe.
• Improving Standard of Living: By creating employment opportunities and connecting backward areas, the MSME industry in India plays a key role in lifting people out of poverty and improving their standard of living. Thus, the sector helps reduce regional imbalances across the country and increase equality among citizens.

Government Initiatives to Promote the MSME Sector
Considering the importance of the MSME sector in the socio-economic development of India, the government has announced several reforms to grow the sector and promote exports. Some of these reforms are mentioned below.

• The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act): The MSMED Act was passed by the parliament in 2006. The act categorised industries into manufacturing and services and further classified enterprises based on size into micro, small and medium enterprises. The act encouraged enterprises to register by providing certain safeguards and benefits such as skill development, marketing assistance, infrastructure facilities, and forward linkages, as well as facilitating credit.

• Prime Minister's Employment Generation Programme (PMEGP): The PMEGP scheme provides financial assistance for establishing small businesses and creating employment opportunities in urban and rural areas. It aims to generate sustainable employment opportunities for India's youth as well as prospective traditional artisans. Financial assistance will be provided in the form of a bank-financed subsidy programme. Margin money subsidy on bank loans in the range of 15-35% will be provided for manufacturing projects not exceeding Rs. 50 lakh (US$ 61,230) and for services sector projects not exceeding Rs. 20 lakh (US$ 24,492). For beneficiaries meeting certain criteria, the subsidy will be 35% for projects in rural areas and 25% for projects in urban areas.

• Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE): The CGTMSE scheme encourages first-generation entrepreneurs to opt for self-employment opportunities by providing them credit guarantee support for loans. Moreover, the scheme applies to aspiring and existing entrepreneurs. Loans not exceeding Rs. 2 crore (US$ 0.2 million) will be provided without any collateral or third-party guarantee. The guarantee under the scheme will be provided:
  • For micro enterprises, up to 85% of the loan amount not exceeding Rs. 5 lakh (US$ 6,123)
  • 75% for other enterprises
  • 50% for retail enterprises

• Entrepreneurship and Skill Development Programme (ESDP) Scheme: The scheme aims to promote the establishment of new MSMEs and enhance the existing MSMEs’ capacity, encouraging an entrepreneurship culture among the citizens of the country. Similar to the earlier scheme, this applies to aspiring and existing entrepreneurs. As the name suggests, the scheme provides entrepreneurship and skill development programmes and training to help entrepreneurs grow their enterprises rapidly.

Outlook
The Indian MSME industry plays a crucial role in the development of the Indian economy. The MSME contribution to GDP was nearly a third of the country's GVA and while the sector contributed nearly half of the country's exports. Moreover, the sector is a major employer, especially in the country's rural and less developed areas, helping reduce regional imbalances. The sector also strengthens other industries by providing them with raw materials and ancillary products. However, the sector faces challenges such as procuring raw materials and necessary funding. The government recognises the sector's importance and thus supports it by providing various financial incentives and training. These factors make the sector more competitive while boosting India's economic growth.