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MSMEs in India – Fueling these engines of economic growth

World over, the Micro Small and Medium Enterprises or MSMEs have been recognised as engines of economic growth. To achieve the targeted 10 per cent economic growth, India must promote the MSMEs.

By Harsh Agarwal

November 01, 2009

World over, the Micro Small and Medium Enterprises or MSMEs have been recognised as engines of economic growth. In India, MSMEs are the second largest source of employment after agriculture. They account for almost 40 per cent of industrial production, 95 per cent of the industrial units, 34 percent of the exports and manufacture over 6000 products.  It is estimated that to create one job in the MSME sector, only Rs 72,000 is required as against Rs 5.5 lakh required in the large organised sector.

In the present scenario of global recession, where several large industries are on the verge of collapse, the role of MSMEs assumes significance. It is estimated that to achieve the target of 10 per cent growth by 2011, the MSME sector needs to grow at 12%. However if we compare the growth of MSMEs in India with those in the neighbouring countries in South East Asia like Thailand, Malaysia, Japan, China, etc. it is found that we lag far behind. There are some major hurdles which do not allow this sector to flourish well.

The first major hurdle is that the credit availability is low for this sector. It is estimated that the unorganised sector comprises 95% of the total industrial units, employing more than 65 million people. Yet only 8% of the total bank credit finds its way into this sector. Though credit to MSMEs fall under the category of priority sector lending, but with the expansion of the priority sector lending to accommodate fast growing areas such as home loans, education loan, the percentage share of credit to MSMEs is falling. According to the Third All-India SSI Census (2001–02), only 14.2% of the registered and 3.09% of the unregistered MSEs availed finance from bank.

Arranging collateral security, documentation etc makes clearance of the loan all the more difficult and as a result the business of the local money lenders continues to flourish. Inevitably, many of these small units fall into the vicious cycle of debt and poverty and eventually many of them perish. Banks therefore should be encouraged to ensure that all loans upto Rs 5 lakh to MSEs are given free of collateral and at a low interest rate.

Formal sector has the option to raise huge sum from the money market, while the unorganised sector doesn’t have any such opportunity. In the 11th Five Year Plan, Planning Commission estimates that in the next five years the total working capital and loan requirement by the MSMEs/unorganised sector would be 2,96,000 crore. Given the small percentage of financing by the formal banking system, this huge credit requirement cannot be met by the banking system alone.

Need of the hour is venture capitalist approach to be encouraged in the unorganised sector as it is practiced in the developed countries. Secondly, if microfinance agencies can be properly regulated and monitored they can serve as a good avenue of investment for people who are interested in high risk- high profit investment. At present most, of the micro finance agencies/projects active in India are either operating with a welfare motive or are too small to make any impact. 

Second major hurdle is the lack of technological innovation and the knowledge of market demands. This is true particularly in the textiles sector. Most of the household units still work on obsolete technology because of which not only the cost of production remains high but the product also fails to meet the demand of the market in terms of quality. Because of liberalization and opening up of the economy, the MSEs are now facing stiff competition from imports and therefore need technological upgradation to manufacture better quality products at cheaper rates.

Though India ranks at top in terms of availability of human resource in science and technology but technology intervention in the small industry sector is still very low and as a result the cost of production is much higher in India than other developing nations in Asia. Similarly, our artisans and weavers remain unaware of the latest designs and current market trend. They continue to manufacture products with old design which fail to generate appeal among the consumers.

There exist a huge disconnect between the household unit owners/weavers/artisans, and the designers/engineers. There is need to encourage engineers and fashion designers to work with these small units owners, weavers, designers which would be mutually beneficial and would help revive the sector and make it globally competitive. Information dissemination about availability of recent technologies, literature on modern machinery, contact details of suppliers of raw materials, buyers, etc., among those working in the MSMEs is extremely essential.

Another major hurdle is the lack of market accessibility for the poor artisans, weavers, household unit owners, etc. Most MSEs do not have money to invest in market research and are unable to carry out design and technical improvements to keep up with market demands. It is because of this lack of information that the middlemen are able to take advantage of and exploit the poor artisans, weavers by paying a paltry sum for their products and selling those products in the international market at exorbitant prices.

Artisans and weavers, household unit owners are left with no choice but to depend entirely on these agents/middlemen and get exploited or else, die of starvation. It has been seen that majority of these products fail to compete in either domestic or international market. Thus, the skill and potential of a vast section of our people go waste.

Also, rural industries/unorganised sector produce more than 6000 products but most of us are unaware of majority of these products. Government of India and various State Governments need to vigorously promote these industries (clusters) by creating awareness of these products by adopting newer methods of marketing and brand promotion. Building promotional websites and geographical mapping of the clusters are some methods which could be tried.

This would not only create awareness in both international and domestic market but would also attract several suppliers, retail chain owners, foreign buyers to directly approach the clusters/weavers/artisans who would then have more buyers and thus higher bargaining power. Government need to create awareness among the weavers, artisans etc, on how to find the appropriate market and the potential buyers.

Similarly creating clusters and Self Help Groups of micro enterprises owners, research in the industry on energy conservation measures, better infrastructure/machinery, health insurance of artisans, etc. would go a long way in strengthening this sector. Though various scheme are being run by Ministry of MSME, Ministry of Textiles, Ministry of Food Processing and various State Governments to promote this sector, however lot many are unaware of such programmes. Government needs to adopt PPP (Public Private Partnership) approach and take the help of NGOs working in this field.

By addressing these issues we would not only enable India to realise its true economic potential but would also bridge the huge economic gap between the rich and the poor and put a check on the migration of people from rural to urban areas.

The author is a former Ambassador for UN Millenium Development Goals (MDGs).

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