7 PM | The problem of low investment in MSMEs and what we can do | 2nd July, 2019

Context:significance of Micro Small Medium Enterprises (MSMEs) and its structural reforms

• In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified as below:
• Manufacturing Sector Enterprise Category Investment in plant & machinery:
  • Micro Enterprises Does not exceed twenty five lakh rupees
  • Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees
  • Medium Enterprises More than five crore rupees but does not exceed ten crore rupees
• Service Sector Enterprise Category Investment in equipment:
  • the Micro Enterprises Does not exceed ten lakh rupees
  • Small Enterprises More than ten lakh rupees but does not exceed two crore rupees
  • Medium Enterprises More than two crore rupees but does not exceed five core rupees

Contribution of MSMEs to Indian economy:

• MSMEs account for about 45 per cent of India’s manufacturing output. As per estimation, a lakh rupee of investment in fixed assets in the sector produces 4.62 lakh worth of goods or services with an approximate value addition of ten percentage points
• MSMEs accounts for about 40 per cent of India’s total exports. The product groups which dominate the exports comprises of sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products.
• The sector employs more than 73 million people in more than 31 million units spread across the country. MSME in India creates largest employment opportunities, next only to Agriculture. It has been estimated that a lakh rupee invested in fixed assets in the sector results in generating employment for four persons
• MSMEs manufacture more than 6,000 products ranging from traditional to high tech items
• MSMEs sector is ideally suited to build on the strengths of traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices.

Structural problems facing by MSMEs:

• Loan Finance:The most dominant factor affecting the MSME sector has been access to loan finance, adequately and timely. There are strong structural underpinnings to the inadequate flow.
• The organizational structure of banks, and processes within them, has taken them far from task orientation, and has created a specific bias against small loan portfolios.
• It is also observed that the problem faced by Indian finance system is that there is no transparency regarding the financial conditions of MSMEs
• Labor regulation: India has a plethora of labor laws, regulations and rules, both at the centre and state levels. Example the Industrial Disputes Act (IDA), 1947 mandates firms with more than 100 employees, to get permission from government before retrenchment of employees.
• Employment and Productivity: an average 40-year old firm in the USA generates 5 times more employment and 2.5 times more productive than the average 40-year old Indian firm.
• NPAs in MSMEs:The main reason that is keeping commercial banks away from MSME lending is high transaction cost and NPAs thus leading to a perception of the MSME sector being non profitable for lending.
• Product reservation: This rather long-standing and unusual policy of reserving certain products to be exclusively produced by the small scale sector has come to be interpreted as a bottleneck to productive efficiency of the small enterprises.

Structural reforms of MSMEs:

• Alternative funding: the policy support to MSMEs and increase in bank credit to this sector in recent years, access to adequate credit at a reasonable cost is still a critical problem for the sector.
• Angel Funds / Venture Capital Funds: Venture/ Risk capital are often a more appropriate financing instrument for high-growth potential and start-up MSMEs.
• Private Equity Funding: These financial enterprises are typically focused on funding a company early, adding value to them and making an exit at a later stage. They are stable sources of capital and tend to have an investment horizon of 3-5 years looking at a multiple return on their investment.
• PE investors not only bring capital but also expertise and experience and expertise from established businesses and from the global markets.
• Labor regulations: Companies in Madhya Pradesh that employ up to 300 people will be allowed to retrench workers or shut shop without government approval (the current provision is for those employing up to 100 workers.)
• There should be relaxation in complex labor laws to avoid the inconvenience in compliance. The must be sooth running of the concern not to create a problem for them. Every effort must do to avoid the unnecessary red tape.
• Proper research and development: There should proper research and development in respect of innovative method of production and service rendering. The innovative products will provide the cheaper products and the MSME’S will be able to cope up with the situation.

Way forward: MSME’s provide job and employment and ultimately self- dependency. Therefore, MSME’s can be boon and a hope for Indian economy in near future. The MSME’S are providing the uniform development to the society and can be a strong mean to utilize the natural resources of the India. The MSME’s are very helpful to remove the regional imbalances if it is establish in the underdeveloped areas. Source: https://www.livemint.com/opinion/online-views/opinion-the-problem-of-low-investment-in-msmes-and-what-we-can-do-1564669940792.html.