MSMEs: Driving Force Behind the Success of Indian Economy Through the Years
Updated: Mar 1, 2021
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The well-being of any nation depends upon its pace of economic growth. There are many determinants or causes for a country’s economic progress such as industrialization, agricultural production, population size, wage control, etc. One of the key metrics for economic growth is the rate of employment as it can have an adverse effect on the economy. Economic growth requires reaching a higher degree of productivity in nearly all industries and a greater quality of life for the general masses, which can only be made possible by productive employment. The route of economic growth for any nation is full of challenges and obstacles. One of the current challenges pestering the Indian economy is the pandemic-induced lockdown and its spilled over adverse effects. With the demands plummeting and people growing overly cautious to go back to work, even the well-to-do sectors have taken a major hit. However, when talking about bringing the country back to its feet, Micro, Small, and Medium Enterprises (MSMEs) have always spearheaded the cause, be it during the independence or even in this 21st century.
India’s bond with MSME is quite old. It has always been in focus in the ideologies of several esteemed personalities like Mahatma Gandhi, on whose back alongside several others, the dream of independent India was founded. When the industries were only a handful and India needed the right amount of fuel in terms of income to uplift the Indian economy, the heads turned towards the small village industries or cottage industries. Mahatma Gandhi was vocal for the local aspect, and his Charkha became a sign of revolt against the British policies as well as support for the small rural industries. However, on papers, it was still an industry in the dark, up until 2006 when The Micro, Small and Medium Enterprises Development Act was passed, providing for the facilitation, promotion and development of the competitiveness of micro, small and medium enterprises. It was at this time when all the eyes in the country were glued to this emerging underdog sector. Since 1950, there have been frequent changes and revisions in the name and definition of the MSMEs or SMEs, as it was formerly known before 2006.
Performance of MSMEs
Right from the first Five Year Plan, these enterprises have been on the receiving end of policies which were carefully curated for these enterprises’ development. During the post-Independence period, small firms were expected to play an important role in the growth process, especially in the absorption of surplus labor and the achievement of an equal distribution of income. This was the conventional critical position given to small businesses. At the start of the industrialization period, adaptability in production and the opportunity to deliver differentiated goods enabled smaller companies to expand rapidly. Later, big companies dominated the distribution system, made up a larger share of production, jobs, and value; added due to the scale of their economies, administrative productivity, greater access to financing and resources, and a favorable tariff system.
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As per the Ministry of MSMEs data, from 1973-74 up until 1989-90, the working units in small industries was 0.42 million in 1973–1974, while they reached up to 1.82 million by the end of the financial year 1990. While for employment, in 1973-74, these enterprises employed a total of 3.97 lakhs, and by 1989-90 the numbers soared approximately to 12 lakhs. Even during the pre-liberalization phase, the small scale industries were next to agriculture when it came to employment numbers. However, liberalization changed the ground scenario altogether. In 1990-91, the LPG reforms swept in and gave the economy the bout of fresh air that was required. The doors of the Indian economy for further development was opened for foreign investors. However, the growth rate of MSME, on an average, had declined substantially in terms of units and employment but improved slightly in terms of output and exports during the 1990s. Today, MSME accounts for 31% of India’s GDP and 45 percent of exports. An estimated 5.58 crore MSMEs are employing close to 1.3 crore people in India. Fourteen percent are women-led enterprises, and 59.5 percent are from rural areas.
The Road Ahead
While the economy has been brought down to its knees during this unprecedented situation, MSMEs continue to remain the worst hit sector. Grappled with lack of funds and lack of workforce, this can spill over to larger industries as well, which source their inputs from such small industries and firms. Manufacturing has taken a hit, and exports have plummeted with no respite in sight, except for the pharmaceutical sector. Several tranches of funds have been released by the Government of India and several policies formulated to give relief to such industries. The mega package of Rs 20 Lakh Crores to deal with the COVID-19 pandemic, has a bulk portion reserved for MSMEs, and the credit line refinancing that will give institutions attached with MSMEs a bit of relief in case of NPAs are a good way to ease the pressure on such industries. There has also been a change in the definition of MSME that will help bring more and more informal industries under the ambit of MSME laws and policies and will, in turn, help steer the economy upwards.
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Even though MSMEs are the worst hit, they can be the torchbearers to relinquish the dark shadow cast by Coronavirus on the Indian economy, as they have always done so when the economy needed support. Despite the cash crunch, it is one of the industries which requires the least amount of cash to pick itself up from the ground. So proper liquidity or cash flow to these industries can at least give the lower strata of the economy a kick start. Coming to the employment front, while the rest of the sectors of the economy and especially, seasonal migration and agriculture, are harshly hit by lockdown, allowing these micro-enterprises to operate smoothly could help such households cope by giving them financial backing through work. A robust supply chain ecosystem will also help at this moment so as to increase their reach when the entire world is stranded at the very exact spot. A quick and efficient push from the MSME sector has the potential to bring the economy engine up and running on track again.
Tathagat Sarthaka (Guest Writer)
MBA (Business Economics),Department of Finance and Business Economics
Tathagat Sarthaka is a First Year student of MBA (Business Economics) from Department of Business Economics, University of Delhi. He is a graduate in economics from Hansraj College, University of Delhi. Besides being a somewhat reading buff (Dan brown being the fav), he also enjoys playing football. He also loves writing poems (at times vers libre) under “Final Act” on YourQuote.
Economic Survey 2018-19, Government of India.
Annual Report of the Ministry of MSME
Performance Evaluation of MSMEs During Pre- and Post-Liberalisation Era, by M. Venkataramanaiah and B. Suneetha