Micro, Small and Medium Enterprises

Micro, Small and Medium Enterprises


Why in the news?

Recently government has released an order demanding timely payments to MSME. This has once again revealed the gaps in knowledge about the structure as well as the everyday functioning of these enterprises.

MSMEs India: MSMEs demand centralised, single window system for licences and registration - The Economic Times
What are MSMEs?

MSMEs, which stands for Micro, Small, and Medium Enterprises, are businesses categories based on their size and scale of operations. Here’s a breakdown of each category:

  1. Micro Enterprises: These are the smallest entities, often run by a single individual or a small team. Micro enterprises typically have low investment in plants and machinery. In India, micro enterprises are defined as businesses with investment in plant and machinery or equipment not exceeding Rs. 1 crore and turnover not exceeding Rs. 5 crores.
  2. Small Enterprises: Small enterprises are slightly larger in scale compared to micro enterprises but still relatively small in terms of workforce and investment. They may have more employees and slightly higher investments in plant and machinery compared to micro enterprises. In India, small enterprises are defined as businesses with investment in plant and machinery or equipment between Rs. 1 crore and Rs. 10 crores and turnover between Rs. 5 crores and Rs. 50 crores.
  3. Medium Enterprises: Medium enterprises are larger than both micro and small enterprises. They have more employees and higher investments in plants and machinery. In India, medium enterprises are defined as businesses with investment in plant and machinery or equipment between Rs. 10 crores and Rs. 50 crores and turnover between Rs. 50 crores and Rs. 250 crores.


The MSME sector in India 

The Micro Small and Medium( MSME) sector in India is one the most significant sectors which contributes to GDP growth, provides employment to crores of Indians and helps boost rural demand. 

It Substantiate Gandhian vision of Self sufficiency emanating from a village based economy by providing employment opportunities to people living rural areas.Lets see why the MSME sector is significant for our country.


The MSME (Micro, Small, and Medium Enterprises) sector holds immense importance for India's economy due to several reasons:
  1. Employment Generation: MSMEs are significant contributors to employment generation in India, particularly in rural and semi-urban areas. They provide opportunities for self-employment as well as wage employment to almost 10.6 crore people, thereby contributing to poverty alleviation and inclusive growth.
  2. Contribution to GDP: The MSME sector contributes significantly to India’s Gross Domestic Product (GDP). It accounts for about 38% of the country’s GDP, showcasing its substantial economic contribution.
  3. Promotion of Entrepreneurship: MSMEs play a crucial role in fostering entrepreneurship by providing a platform for individuals to start their businesses with relatively low capital investment. This encourages innovation, creativity, and the development of new business ideas.
  4. Balanced Regional Development: MSMEs are dispersed across various regions of the country, including rural and backward areas. Their presence helps in promoting balanced regional development by creating economic opportunities outside of major urban centers.
  5. Contribution to Exports: MSMEs contribute significantly to India’s export earnings,almost 50 %. They manufacture a diverse range of products, including handicrafts, textiles, engineering goods, and agro-products, which are exported to international markets, thereby contributing to foreign exchange earnings.
  6. Promotion of Inclusive Growth: MSMEs provide opportunities for marginalized sections of society, including women, minorities, and disadvantaged groups, to participate in economic activities. As per data, 20% of MSMEs are owned by women entrepreneurs. This promotes inclusive growth and social development by reducing income disparities and fostering equitable access to opportunities.
  7. Support for Large Industries: MSMEs often act as suppliers and service providers to large industries, contributing to the overall industrial ecosystem. They play a crucial role in the supply chain by providing essential inputs, components, and services to larger enterprises.
  8. Flexibility and Adaptability: MSMEs are known for their flexibility and adaptability to changing market conditions. They can quickly respond to market demands, innovate new products, and adopt new technologies, thereby contributing to the overall dynamism of the economy.


Challenges faced by MSMEs in India

MSMEs in India face several challenges, which can hinder their growth and sustainability. Some of the key challenges include:

  1. Limited Access to Finance: One of the most significant challenges for MSMEs is accessing finance. Many MSMEs lack collateral and credit history, making it difficult for them to secure loans from traditional financial institutions. 
  2. Inadequate Infrastructure: Poor infrastructure, including transportation, power supply, and internet connectivity, poses challenges for MSMEs in terms of production, distribution, and accessing markets. Inadequate infrastructure increases operational costs and reduces efficiency, making it difficult for MSMEs to compete effectively.
  3. Compliance Burden: MSMEs in India face a complex regulatory environment with numerous compliance requirements related to taxation, labor laws, environmental regulations, and business licenses. Compliance can be time-consuming, costly, and confusing for small businesses, diverting resources away from core business activities.
  4. Limited Market Access: MSMEs often struggle to access domestic and international markets due to factors such as lack of marketing capabilities, limited market information, and stiff competition from larger firms. Limited market access constrains the growth potential of MSMEs and restricts their ability to scale up operations.
  5. Technology Adoption and Innovation: Many MSMEs in India operate with outdated technology and limited innovation. Because of less focus on R&D MSMEs are not able to do Economies of Scale which hinders their competitiveness and productivity
  6. Skill Shortages: MSMEs often face challenges in recruiting and retaining skilled employees due to competition from larger firms and limited training opportunities. Skill shortages can affect productivity, quality, and innovation within MSMEs, limiting their ability to grow and compete in the market.
  7. Access to Markets: MSMEs often struggle to access markets due to lack of market information, limited distribution networks, and challenges in reaching remote or rural areas. Access to markets is essential for MSMEs to sell their products and services and expand their customer base.
  8. Vulnerability to Economic Shocks: MSMEs are often more vulnerable to economic shocks such as fluctuations in raw material prices, changes in government policies, and market downturns. Lack of financial reserves, limited access to credit, and dependence on a few customers or suppliers can exacerbate the impact of economic shocks on MSMEs.


Government initiatives to strengthen MSME sector 

Collateral-free Loans-The government Started the Emergency Credit Line Guarantee Scheme (ECLGS) to provide collateral-free loans to MSMEs during the COVID-19 pandemic. As of March 2023, over ₹4.5 lakh crore has been sanctioned under the scheme.Credit Guarantee Scheme
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provides collateral-free credit to MSMEs. As of March 2022, the scheme has provided guarantees for over 1.5 crore loans amounting to ₹2.5 lakh crore.Udyam Registration Portal
The government launched the Udyam Registration Portal in July 2020 to facilitate easy registration of MSMEs. As of March 2023, over 1 crore MSMEs have registered on the portal.Public Procurement Policy
The Public Procurement Policy mandates that 25% of government procurement should be from MSMEs. As of March 2022, MSMEs have received orders worth over ₹2.5 lakh crore under this policy.Skill Development Initiatives

The government has launched several initiatives for skill development like the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) to train and upskill MSME workers. Over 1 crore people have been trained under PMKVY as of March 2023.

These initiatives have helped in improving access to credit, promoting ease of doing business, and enhancing the competitiveness of the MSME sector in India.

Thus, seeing the importance of the MSME sector there is an imminent need for strengthening the MSME sector in India.


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