1.1 Overview of Indian MSMEs
In India, Micro, Small and Medium-sized Enterprises (MSMEs) are recognized as pillars of economic development since they contribute about 37% to the country’s gross domestic product (GDP) and this contribution is likely to become 42% by 2021.1 In addition, Indian MSMEs represent about 90% of India’s industrial tissue and has registered a stable growth rate of 5%.2 According to World Bank’s Financing India’s Micro, Small and Medium enterprise report (2018), there are approximately 55.8 million3 MSME in India is employing about 124 million people. Among these, 55.8 million MSMEs, 53 million (94.9%) are micro-enterprises, 2.7 million (4.9%) are small enterprises and 0.1 million (0.2%) are medium enterprises. Additionally, only 8.2 million (14.6%) MSMEs are registered while as 47.6 million (85.4%) MSMEs are unregistered4 making the MSME sector of India, one of the largest unregistered sector across the globe. Further, 11.7 million (21%) MSMEs are operational in the manufacturing sector and 44.1 million (79%) MSMEs are functional in the service sector. Additionally, as per the report, these MSMEs are operational in five major industries like Retail industry with 25.66 million (46%), Food products and beverages industry with 3.34 million (6%), Wearing apparels industry with 2.8 million (5%), Repair and Maintenance of Motor Vehicles industry with 2.23 million (4%) and Textiles industry with 1.67 million (3%) MSMEs.5
Furthermore, MSMEs offer a broad spectrum with regard to the ownership structure and geographic spread, for instance, the total MSMEs with proprietary ownership are 52.35 million (93.83%), ownership as a partnership are 0.85 million (1.53%), private firms 0.128 million (0.23%), public firms 0.022 million (0.04%), cooperative societies 0.072 million (0.13%) and others 2.36 million (4.24%). Further, with regard to the geographical spread, the World Bank’s financing Indian MSMEs report (2018) mentions that about 1.9 million (3.4%) MSMEs belong to the northern states of India. Further, 23.6 million (42.3%) MSMEs belong to low-income states and 30.3 million (54.3%) MSMEs belong to India’s rest.
For promoting the growth and development of Indian MSMEs, the MSMED Act, 2006 was enacted. However, prior to enacting this act, tiny, cottage, traditional, village enterprises and MSMEs were called Small Scale Industries (SSIs) and were regulated by the Industrial Development and Regulation (IDR) Act, 1951. The enactment of the MSMED Act, 2006 edifice the way forward for enabling a robust legal and regulatory framework, government support and financial infrastructure support for MSMEs. Through these measures, MSMEs were empowered to function and sustain in a highly competitive environment.
The legal and regulatory support was provided by enacting financial regulation for inclusion of MSMEs under the purview of priority sector lending (PSL) and boosting the supply of finance through Securitisation and Reconstruction of Financial Assets Enforcement of Security Interest Act (SARFAESI), 2002. Further, government support was provided in the form of policies that promote skill development and technology adoption. Additionally, the government also provided schemes to support credit guarantee and enhance unsecured financing. The financial infrastructure support was provided by way of credit bureaus that were enabled to keep track of enterprises’ credit history. Additionally, credit rating agencies were also impanelled for providing rating services to MSMEs and asset reconstruction companies were allowed to facilitate MSMEs in paying for bad loans to banks and other financial institutions.
1.2 Definition of MSME
There is no universal definition of MSME across the globe. Different parameters like the number of employees, sales turnover, asset base, etc., are used to classify firms into Micro, Small and Medium enterprises. Earlier in India IDR act 1951 used the number of employees as a parameter to define small industries. However, the non-availability of data on the number of employees did not allow such a parameter to be useful for identifying MSMEs. Following, IDR act 1951, investments in plant, machinery and equipment was used as a proxy by MSMED Act, 2006 for defining MSMEs. Table 1.1 provides the threshold limits on the investment in plant, machinery and equipment (as per MSMED act 2006) applicable for classifying firms into Micro, Small and Medium enterprises in manufacturing and service sectors, respectively.
Table 1.1
Definition of MSMEs
Manufacturing (Amount in Rs.) | Services (Amount in Rs.) | |
|---|---|---|
Micro | 2.5 million | one million |
Small | 2.5 million to 50 million | one million to 20 million |
Medium | 50 million to 100 million | 20 million to 50 million |
According to this act, firms are defined as Micro manufacturing firms, if their investment in plant, machinery and equipment is up to 2.5 million. Further, firms are defined as small manufacturing firms if their investment in plant, machinery and equipment is between 2.5 million and 50 million and medium manufacturing firms if such investment is between 50 million and 100 million. However, for being classified as micro firms in services sector the total investment in plant, machinery and equipment should be up to one million, for small service firms the investment in plant, machinery and equipment shall be between one million and 20 million and for medium service firms this investment should be between 20 million and 50 million.
1.3 Constraints to MSME Development in India
Like other developing countries, the development of Indian MSMEs is hampered by several factors included in them are lack of availability and accessibility to an adequate amount of credit (Rao et al. 2019; Biswas 2014), high cost of credit (Mukherjee 2018); lack of advanced technology (Biswas 2014); inadequate infrastructure facilities, lack of skilled manpower for manufacturing, services, marketing (Mukherjee 2018).
The banking sector in In...