MSME: Growth Driver of the Indian Economy

30 Jan 2020

The MSME sector is one of the key sectors of the Indian economy. Being one of the biggest job creators, small enterprises contribute significantly to the economy. The sector is the backbone of the national economic structure and has imparted resilience to ward off global economic shocks and adversities.

With around 63.4 million units spread across the geographical expanse of the country, MSMEs contribute around 6.11 per cent of the GDP and 24.63 per cent of the services. They contribute around 40 per cent of the overall exports from India. The MSME sector is by far the largest provider of employment following agriculture, employing over 120 million people, with 51.2 per cent in rural areas.  

CII works intensively towards driving the MSME agenda forward. With the objective of creating an enabled and supportive system for Indian MSMEs and empower MSMEs to be globally competitive, CII addresses the needs of MSMEs through continuous engagement with the Government.

The CII SME Finance Facilitation Centre, launched in June 2014 provides advisory and credit facilitation support to MSMEs. It is operating as a one-stop shop for aggregating financing options for MSMEs from multiple large financial institutions.

The CII Technology and Deployment Centre for MSMEs (CII TFC) was launched in November 2016 to provide the latest technological support for MSMEs. This service operates through online portal, summating different upgraded and latest technologies from multiple technology partners.

 Keeping in mind the upcoming Budget, CII has come out with below major recommendations for boosting growth in the MSME sector.

Implementation of Public Procurement Policy for procurement from MSMEs

The Public Procurement Policy mandates all Public Sector Undertakings (PSUs) and Government departments to procure 25 per cent of their annual requirements from MSMEs. CII recommends the following measures to address this low engagement issue in the Budget:

All PSUs/government departments must be required to meet their procurement targets through the Government e-Marketplace (GeM) portal.
MSMEs often face challenges in servicing large orders in a short span of time and to  resolve this, the concept of MSME aggregators could be launched. The aggregators could be listed with NSIC,  and the PSUs could approach them  for meeting their 25 per cent procurement from MSMEs.
RBI has been requested to allow banks to sanction Buyers’ Credit facility on import of raw material or components under Letter of Credit (LC) by the bank.
Integrating domestic MSMEs into Global Value Chains

A ‘Digital Platform’ under the aegis of Ministry of MSME could be announced to capture information on all aspects of domestic MSMEs (location, products, etc.) registered under the Udyog Aadhaar Portal. This will help the global firms to get access to ‘one-stop’ platform on domestic MSMEs and encourage integration between the two.

Incentivize export-oriented MSMEs

MSMEs with 70 per cent turnover from exports could be awarded special status, entitling them to various incentives such as subsidized land in an export promotion zone, faster clearances, cheaper finance, etc.

Bank guarantees
Amendment in Indian Contract Act to address the issue of  12 months claim period as all MSMEs already suffer from high cost of BGs as banks demand upfront margin money.  Period of one year specified herein should be read as two months in case of guarantees issued by any bank or financial institutions on behalf of Micro Small and Medium Enterprises as defined in the Micro, Small and Medium Enterprises Development Act, 2006 .
Requirement to return BGs to close claim period to be removed and the sanctity of claim period as stated in BG should be honored and any existing anomalies to be removed.
Charges for the BGs for over 2 years to be debited on an annual basis and not upfront as a step to ease cash flow pressures of the MSMEs.
Annual BG charges for longer period validity should be lower for subsequent years due to diminishing efforts required by the Bank.
Increasing access to finance
Monitoring of 59 mins loan for timely disbursal of loans by RBI. At present, only 10% of the loans sanctioned by the 59-minute scheme have been disbursed within 30 days.
Turnaround time (TAT) of  requests for sanction / enhancement of limits for working capital / term loans to be clearly fixed, basis the product and amount of loans.
Standardization of the percentage of the margin money for loans, cap the bank guarantees and accept these as collateral or cash.
Institutional credit system should be aligned to the ‘National Digitization-Drive’, with digitization at each stage of credit procedure and documentation.
Social Venture Funds may be encouraged so that the conversion of Micro Enterprises to Small Enterprises can be actualized.
Simplification of IPO process to encourage more companies to access capital markets
Simplification and ease of documentation and compliances for the small financiers applying for refinancing under PMMY
Timely availability of data on MSMEs

The MSME Census and the Economic Census which provide information on MSMEs are very dated. The Government could appoint some agency to commission regular surveys on the MSME sector as the paucity of timely and accurate data hampers research in this sector which in turn prevents formulation of suitable policies.

With the forthcoming Budget providing impetus to the MSME sector, a fillip to growth and employment can be expected.

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