India’s Economic Backbone: a Deep Dive into the MSME Sector

Introduction The Micro Small and Medium Enterprises (MSMEs) sector is a major contributor to the socio-economic development of the country. In India, the sector has gained significant importance due to its contribution to Gross Domestic Product (GDP) of the country and exports. The sector has also contributed immensely with respect to entrepreneurship development especially in semi-urban and rural areas of India.

A revision in Micro Small and Medium Enterprises (MSME) definition was announced under the Aatmnirbhar Bharat Abhiyaan Scheme on May 13, 2020. The Ministry of Micro, Small, and Medium Enterprises, vide its gazette notification dated June 1, 2020, has announced the upward definition and criteria of the MSME. The new classification for MSME came into effect from July 1, 2020.

Therefore, according to the new classification of Micro, Small and Medium Enterprises (MSME) under the Aatmanirbhar Bharat Abhiyaan Scheme, enterprises are defined based on the investment criteria in plant and machinery and turnover.

Criteria	Manufacturing Enterprises and Enterprises rendering Services
	Turnover	Investment
Micro	Rs. 5 crore(US$ 610,000)	Less than Rs. 1 crore (US$ 120,000)
Small	Rs. 50 crore(US$ 6.1 million)	More than Rs. 1 crore (US$ 120,000) but less than Rs. 10 crore (US$ 1.2 million)
Medium	Rs. 250 crore(US$ 30.4 million)	More than Rs. 10 crore (US$ 1.2 million), but less than Rs. 50 crore (US$ 6.1 million)

Market Size

The BSE SME (small and medium enterprises) platform is expected to witness >60 SMEs to enter the market in one year (2021-22) to bring up equity funds for meeting their business requirements. The initial public offering (IPO) route witnessed 16 SMEs enter the market; they raised Rs. 100 crore (US$ 13.74 million) in 2020. In June 2021, Bombay Stock Exchange (BSE) announced that it has collaborated with Electronics and Computer Software Export Promotion Council (ESC) to build awareness among small businesses and start-ups about advantages of listing.

MSMEs are being encouraged to market their products on the e-commerce site, especially through Government e-Marketplace (GeM), owned and run by the government, wherefrom Ministries and PSUs (public sector undertakings) source their procurement.

As per data from the Ministry of Micro, Small & Medium Enterprises, as of December 14, 2023, the Udyam Registration portal registered 21,516,394 MSMEs, replacing the former process of filing for a Udyog Aadhaar Memorandum (UAM). Registered micro-enterprises stood at 20,812,759 (96.74%), followed by small enterprises at 586,643 (2.69%) and midsized enterprises at 54,352 (0.25%).

As of May 9, the total number of transactions or orders processed on the Government E-Marketplace (GeM) portal stood at 1.50 crore by 68,620 buyer organizations from over 60 lakh sellers and service providers, of which 8.73 lakh sellers were micro and small enterprises (MSEs).

As of November 2022, the GeM portal has served 12.28 million orders worth Rs. 334,933 crores (US$ 40.97 billion) from 5.44 million registered sellers and service providers for 62,247 buyer organisations.

As of December 14, 2023, under the top five state-wise Udyam registrations, Maharashtra recorded the maximum number of registrations with 37.12 lakh units, followed by Tamil Nadu (21.74), Uttar Pradesh (20.28), Gujarat (15.53), Rajasthan (15.57).

The number of MSMEs in the country is expected to grow from 6.3 crore, of which only 2.5 crore have ever availed credit from formal sources to approximately 7.5 crore in the coming times, growing at a projected CAGR of 2.5%.

The Ministry of MSME spent Rs. 23,583.90 crore (US$ 2.84 billion) in FY23, over 260% increase from Rs. 6,513.13 crore (US$ 786.75 million) spent in FY19.

In FY22, the loan disbursals to MSMEs stood at Rs. 37.29 trillion (US$ 492.96 billion), a 5% increase compared to FY21.

Domestic business requires a strong financial stimulus with concessional working capital loans to ensure adequate liquidity is maintained in business operations from the government and financial institutes.

Indian Micro, Small and Medium Enterprises (MSMEs) are rapidly adopting digital payments over cash, with 72% payments done through the digital mode compared with 28% cash transactions. Rise in digital adoption presents prospects for further growth in the sector. In FY23 till December 31, 2022, the number of digital transactions stood at 9,192 crore and worth Rs. 2,050 trillion (US$ 24.73 trillion).

Statuary Bodies

MSME Ministry has four statutory bodies namely, Khadi and Village Industries Commission (KVIC) who is responsible for promoting and developing khadi and village industries for providing employment opportunities in rural areas, thereby strengthening the rural economy, Coir Board in charge of promoting overall development of the coir industry and improving living conditions of workers in this industry, National Small Industries Corporation Limited (NSIC) responsible for promoting, aiding and fostering growth of micro and small enterprises in the country, generally on commercial basis, National Institute for Micro, Small and Medium Enterprises, (NI-MSME) in-charge of enterprise promotion and entrepreneurship development, enabling enterprise creation, performing diagnostic development studies for policy formulation, etc. and lastly, Mahatma Gandhi Institute for Rural Industrialisation (MGIRI) responsible for accelerating rural industrialisation for sustainable village economy, attract professionals and experts to Gram Swaraj, empower traditional artisans, encourage innovation through pilot study/field trials and R&D for alternative technology using local resources. New online system of MSME/Udyam Registration launched by the Union MSME Ministry, w.e.f. July 01, 2020, successfully registered >1.1 million MSMEs until November 2020. The Ministry of Micro, Small and Medium Enterprises extended the validity of Udyog Aadhaar Memorandum from December 31, 2021, to June 30, 2022.

Government Policies

The Government of India has designed various policies for the growth of MSMEs in the country.

• Since the launch of the Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE), till June 30, 2023 guarantees amounting to Rs. 4,50,163 crore (US$ 54.16 billion) have been issued under Credit Guarantee Scheme for Micro and Small Enterprises (CGMSE).
• The Department of Animal Husbandry & Dairying (DAHD) under the Ministry of Fisheries, Animal Husbandry and Dairying announced the launch of a new credit guarantee scheme. The scheme under the Animal Husbandry Infrastructure Development Fund (AHIDF) aims to facilitate collateral-free credit for MSMEs in the livestock sector.
• Under Pradhan Mantri Mudra Yojana (PMMY), in FY23, Rs. 4.56 lakh crore (US$ 55.58 billion) was sanctioned under 6.2 crore Mudra loans to non-corporate and non-farm MSEs, against a target of US$ 48.75 billion (Rs. 4 lakh crore).The “Vivad se Vishwas I-Relief to MSMEs” scheme was launched in May, 2023 by the Department of Expenditure, Ministry of Finance, to provide relief to MSMEs during the COVID-19 period. The programme was announced by Union Finance Minister Ms. Nirmala Sitharaman in the Union Budget 2023-24.
• The Defence Ministry will procure 928 strategically-important Line replacement units, subsystems, spares, and components from Indian MSMEs, as informed in May, 2023.
• Through the Public Procurement Policy, the Central Government is promoting small-scale enterprises by purchasing the products of MSEs. In the financial year 2022-23, the government spent Rs. 60,432 crore (US$ 7.3 billion), which is 42% more than the target.
• In February 2023, government revamped credit guarantee scheme for MSMEs to take effect from April 1, 2023 through the infusion of Rs. 9,000 crore (US$ 1.09 billion) in the corpus. This scheme would enable additional collateral-free guaranteed credit of Rs 2 lakh crore (US$ 24.41 billion) and also reduce the cost of the credit by about 1%.
• In February 2023, government announced in budget 2023-24 that a unified Skill India Digital Platform to be launched in order to enable demand-based formal skilling, linking with employers including MSMEs, and facilitating access to entrepreneurship schemes.
• As on July 8, 2022 the number of loans sanctioned under the Pradhan Mantri MUDRA Yojana (PMMY) scheme was 10.03 million and the amount disbursed was Rs. 73,199.89 crore (US$ 9.15 billion).
• In the Union Budget of 2022-23 MSMEs sector was allocated an Emergency Credit Line Guarantee Scheme (ECLGS) of Rs. 50,000 crore (US$ 6.55 billion).
• On March 30 2022, the Indian government allocated Rs. 6,062.45 crore (US$ 808 million) for the scheme Raising and Accelerating MSME Performance (RAMP). The programme aims to improve market and credit access, strengthen institutions and governance at the centre and state levels, improve centre-state connections and partnerships, resolve late payment difficulties, and green MSMEs.
• In November 2021, the Indian government launched the Special Credit Linked Capital Subsidy Scheme (SCLCSS) for the services sector. This scheme will help enterprises in the services sector meet various technology requirements.
• In November 2021, the Ministry of Micro, Small and Medium Enterprises launched SAMBHAV, a national-level awareness programme to push economic growth by promoting entrepreneurship and domestic manufacturing.

Recent Developments

Major Recent Developments in the MSMEs include:

• Google plans to make a calculated investment in digital payments with the aim to strengthen the dynamic Indian Micro, Small and Medium Enterprise (MSME) market, said Mr. Sanjay Gupta, Country Head and Vice President of Google India. Google plans to expand its impact beyond payments, aiming to unlock India’s MSME potential through financial inclusion and digital empowerment.
• In a significant move to bolster the MSME sector in India, the Technology Development Board (TDB) and the Small Industries Development Bank of India (SIDBI) formalized a Memorandum of Understanding (MoU) to facilitate easier access to credit for enterprises engaged in the development and commercial application of indigenous or imported technology.
• As announced in December 2023, the share of MSME-related products in all India exports stood at 45.56% as of September 2023 (FY24), informed the Minister of State in the MSME Ministry Mr. Bhanu Pratap Singh Verma.
• The Reserve Bank of India on August 17, 2023 announced the launch of the Public Tech Platform for Frictionless Credit (PTPFC) pilot project. The PTPFC has been created by the Reserve Bank Innovation Hub (RBIH), a wholly-owned subsidiary of the central bank. The aim of the pilot project is to connect borrowers and lenders, which will make credit more accessible to millions of individuals looking for small loans. The PTPFC will be enabling the disbursal of non-collateral based loans for Micro, Small and Medium Enterprises (MSMEs), Kisan Credit Card loans up to Rs. 1.6 lakh (US$ 1,924.07), dairy loans, personal loans, and home loans.
• In August 2023, Flipkart partnered with the Government of Gujarat through a MoU with the Commissioner of Cottage & Rural Industries, Government of Gujarat, under its Flipkart Samarth program. The tie-up aims at digitising local businesses that focus on the development of the crafts in every district and to revive the languishing crafts in the state.
• In August 2023, DBS Bank in collaboration with supply chain platform Infor Nexus announced the launch of a pre-shipment financing solution for SMEs part of the Infor Nexus supply chain ecosystem.
• In May 2022, Aditya Birla Capital launched Udyog Plus, an MSME-focused portal, which provides capital and other business solutions to small businesses, including investments, advisory services, and utility services. It offers online loans up to Rs. 10 lakh (US$ 120,000) to MSMEs through various product offerings such as supply chain finance and transaction-based loans.
• Life insurance company Max Life on May 8, 2023 announced a strategic tie-up with an MSME representative body Indian Industries Association (IIA) to provide life insurance to employees working in MSMEs based in Uttar Pradesh. The insurance programme will cover more than 11 lakh MSME workers affiliated with IIA and their families in the state and will be undertaken with Sana Insurance Brokers as the enrolment partner.
• In February 2023, government announced in budget 2023-24 that Entity DigiLocker is to be setup for use by MSMEs, large businesses, and charitable trusts to store and share documents online securely.
• In February 2023, government announced in budget 2023-24 that 95% of the forfeited amount relating to bid or performance security, shall be returned to MSMEs by the government and government undertakings in cases wherein the MSMEs failed to execute contracts during the Covid period.
• In June 2022, the central government announced a new initiative called “Promotion of MSMEs in North Eastern Region and Sikkim.” The main purpose of this project was to stimulate MSMEs in the North East by establishing mini-technological centres, developing new and existing industrial estates, and promoting tourism.
• In November 2021, the Small Industries Development Bank of India (SIDBI) inked a pact with Google to pilot social impact lending with financial assistance up to Rs. 1 crore (US$ 133,939.60) at subsidised interest rates to micro enterprises. To reinvigorate the Indian MSME sector, Google India Pvt. Ltd. GIPL, will bring a corpus of US$ 15 million (~Rs. 110 crore) for micro enterprises as a crisis response related to COVID-19.
• In November 2021, digital freight forwarder Freightwalla, launched a shipment tracking service for MSME exporters and importers based on predictive analytics to help businesses tackle risks associated with shipment delays and improve supply chain efficiency.
• In November 2021, Cashinvoice, a supply chain financing (SCF) platform, announced that it will aid MSMEs with over Rs. 10,000 crore (US$ 1.33 billion) worth of financing in the year ahead, as it has raised Pre-Series A funding of US$ 1 million from Accion Venture Lab.
• In October 2021, Sundaram Finance and the MSME Development Institute (Chennai), provided marketing assistance to MSMEs. Entrepreneurial and managerial development of MSMEs will be done through an incubator scheme, that will give innovators opportunities to develop and nurture ideas for the production of new products.
• In September 2021, Aerospace Engineers Private Limited, a Tamil Nadu-based MSME, secured a contract from Boeing to produce and supply critical aviation components.

Achievements in this Sector

The Ministry of MSME runs numerous schemes targeted at providing credit and financial assistances, skill development training, infrastructure development, marketing assistance, technological and quality upgradation and other services for MSMEs across the country.

Road Ahead

The Government of India has envisioned doubling the Indian economy to US$ 5 trillion in five years. In order to achieve this goal, career opportunities for the young population have been generated and MSMEs have the potential to serve as a key employment generator. Therefore, the government has taken up promotion of MSMEs in order to create new jobs in the sector. Further, the government aims to enhance MSME’s share in exports and its contribution to GDP.

In order to achieve these targets, the government should invest in providing more back-end services to improve performance of the MSME sector as it supplies goods and services to big industrial enterprises. Lack of technology-based production activities and low investment in R&D activities are bottlenecks hindering the sector to become competent. Globally available technology could be subsidised by the government so that the product quality of MSME players can be improved using the existing resources. This also requires the help of academic institutions in the form of providing research and development (R&D) services for product innovation.

Source: IBEF.