Big Hopes, Small Enterprises

An article titled ‘Empowering India’s MSME Sector’ in the monthly journal Yojana, featured the Secretary of Ministry of Micro, Small and Medium Enterprises (MSME), Arun Kumar Panda, speaking about the importance of MSMEs in India and the world in terms of their contribution to GDP and economic growth. Another brief, titled ‘Small and Medium Enterprises (SMEs) Finance’, published by The World Bank, talks about the importance of Small and Medium Enterprises (SMEs), in terms of their enormous contribution of about “60% of total employment and up to 40% of national income (GDP) in emerging economies.”

According to the Organization for Economic Co-operation and Development (OECD), “Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ fewer than a given number of employees.” In certain countries, such enterprises are also defined by the amount of investment made in Plant & Machinery, like in India.

SMEs employ a major section of the population in most developing countries– In India, almost 40 per cent of the workforce is employed by these enterprises; in Japan, SMEs account for 70 per cent of the total employment. With the degree of flexibility that SMEs offer, a great boost is given to entrepreneurship and innovation. Due to the glowing prospects offered by MSMEs /SMEs, the sector acts as a ray of hope in meeting the World Bank ‘s estimates of the creation of six hundred million jobs that are required to employ the growing workforce, especially in developing countries. This is precisely the reason as to why the government is expected to create an appropriate environment that facilitates the growth of such industries.

The prime and the most crucial factor adversely affecting the development of MSMEs is that they lack timely access to credit. According to The World Bank, “approximately 70% of all micro, small and medium-sized enterprises (MSMEs) in emerging markets lack access to credit.” In the Indian context, many solutions have been extended by the government. An excellent example is the Credit Guarantee Fund Scheme (The scheme covers only medium and large enterprises). As far as the Micro and Small Enterprises are concerned,  provisions have been made to bring before them opportunities to avail considerable loans from selected institutions.

Another issue that SMEs face is that of the availability of better infrastructure and technology. The kind of financial constraints that these units face, results in limiting their capacity to avail the right kind of technological facilities. In India the Government has made provisions like the Technology Center System Project (TCSP) and Credit Linked Capital Subsidy Scheme (CLCSS) . To tackle the issues of availability of utilities, appropriate technologies and other facilities the government has taken up Cluster Development Programmes. Such programmes aim to provide facilities whereby a common pool of facilities is created for a set of enterprises which have some kind of similarity. These programmes have the capacity to tackle not only the issue of the availability of resources but they also aim to assist in resolving the financial crises in the country.

A very important question presents itself at this point: If provisions have been made to resolve practically all issues related to MSMEs, then why is it that these enterprises are not performing as per expectations? Why is their “great potential” not translating into “great output”?

One of the main reasons for the underwhelming performance is that “unregistered micro units are roughly 13 times the number of registered ones, the average employment per enterprise is just about three persons, maybe lower”, as reported by ToI. Most MSMEs are concentrated in the micro enterprises section, which has very little to contribute to the economy. This is furthered by the fact that most businesses of this kind want to remain in the micro zone or rather continue to report themselves as such because of the lack of incentives for upgradation. Therefore, the problem lies with not the number of policies existent for these enterprises to function, but in the deficient nature of current policies. The existent policies are meant for a rational economic actor, which is not an entity that exists in reality.

There is a need of persuasive incentives for the players in micro-enterprises’ that enable them to be more competitive.

-Contributed by Richa Bhatt

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