Author : Shruti Gupta

Originally Published 2015-03-27 00:00:00 Published on Mar 27, 2015
In the Union Budget this year, Finance Minister Arun Jaitley seems to have tried his best to address the numerous issues being faced by the micro, small and medium enterprises and to invigorate them. For this industry, the way forward is through a reformist social programme which will aid the weak and inefficient enterprises.
FM's efforts to invigorate small industries

In the Union Budget this year, Finance Minister Arun Jaitley seems to have tried his best to address the numerous issues being faced by the micro, small and medium enterprises and to invigorate them. These enterprises are a commendable source of employment and income generation, and hence this area needs to be focused on in order to create more jobs as promised by Prime Minister Narendra Modi.

The introduction of the Micro, Small and Medium Enterprises Development (MSMED) Act in 2006 had brought alive the small-scale industries engaged in manufacturing, trading and provision of services. The Act provided a distinction to these enterprises on the basis of their investment in plant and machinery, and equipment. By drawing a concrete roadmap for the growth and development of small-scale industries, the Act enabled the creation of livelihood opportunities to boost employment.

The initiative indeed acted as a catalyst in unearthing the potential of the industry evidenced by a 110 percent surge in the number of enterprises in a of six years. The Act became a source of inspiration to budding entrepreneurs resulting in employment increasing four folds between 2006 and 2013. During 2012-13, the MSME had a significant stake in the Indian GDP at 37.54 percent. These statistics are validation of the prospective small businesses hold in the country.

However, there is an unbalanced growth within the industry leading to low productivity and profitability. The MSME census revealed that 95 percent of all MSMEs are micro-enterprises. Therefore, with limited financial resources, poor product marketing and branding and negligible technology innovations, these enterprises are able to cater to local markets only.

To expand market horizons for small scale industries, the government introduced a mandatory policy for all Central Government Ministries, departments and PSUs to purchase 20 percent of their annual procurement from MSMEs. Unfortunately, the scheme failed to achieve the desired results as enterprises were unable to build sustainable professional relationships. It is essential for schemes and policies to provide a vision to enhance production and growth, rather than providing short-term focused incentives.

In an effort to provide a lasting solution which fairly divides the onus of success, Mr Jaitley announced, as part of the 2015-2016 budget, measures to counter the primary deterrent for entrepreneurs -- the credit crunch. It is surprising to note that only 5% of MSMEs fall within the purview of institutional banking systems. The remaining 95% are established on the brink of the Indian banking system, leading to costly private borrowings. Other factors such as high service fees, improper collateral, and the inability to obtain long term sources of finances add to woe of these enterprises to procure credit for their operations. Therefore, the proposal to create a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of 20,000 crore rupees, and credit guarantee corpus of 3,000 crore rupees, aims to encourage aspirant as well as established entrepreneurs to grow and expand their capabilities.

Further, through the Pradhan Mantri Mudra Yojana, the government is targeting the provision of credit to hopeful young SC/ST/OBC entrepreneurs. With 62% of small businesses being owned by SC/ST/OBC, the recommendation to provide them priority in lending will be a bolster to the entrepreneurial spirit and ambitions of these enterprises.

The Finance Minister said "these measures will greatly increase the confidence of young, educated or skilled workers who would now be able to aspire to become first generation entrepreneurs; existing small businesses, too, will be able to expand their activities".

While the Mudra Bank is a laudable effort by the government to provide small scale units with the incentives they rightly deserve, it is important that the initiative transcends mere promises. It certainly is luring to fall into the trap of easy policy interventions. First, the incorporation of the Mudra Bank into the Indian financial system will require extensive restructuring of the banking system currently in place. The Modi government will have to once again personify strong administrative capabilities displayed in the past to derive the results it aims to achieve. Second, the role of the Mudra Bank as a regulator and a lender to microfinance institutions will lead to a conflict of interests. Therefore, the government must work towards mending the holes in the proposed scheme before these transition into implementation gaps.

It is definitely an uphill battle to exhume the untapped capabilities of small-scale industries. There are a number of areas of concerns that the government has briefly touched upon. For example, India's fall in rank to 134 in 2014 from 131 in 2013 in the Ease of Doing Business study is off-putting for both entrepreneurs as well as investors. Twenty-seven-day to start a business with nearly 35 procedures to undertake are rather frustrating figures for a wishful business venture.

The e-Biz portal launched in February integrates 14 regulatory clearances at one source. This move is certainly motivating for small-scale businesses, easing the burden of paperwork and red tapism weighing down their entrepreneurial spirit. However, currently this platform is being implemented and utilised by only a handful of states. In order to bring about transparency, accountability and effectiveness, such initiatives need to be enforced pan India.

At this juncture, there are several opportunities that small-scale industries can and must capitalise on. The MSME sector can grow substantially by diversification of their product and industry range. Projections show a huge potential in telecommunications, electronics, healthcare and pharmaceuticals to name a few. In addition, small-scale enterprises must capture the stage set-up for them by the 'Make in India' campaign. Under the umbrella of the campaign, it is more viable to undertake branding and marketing of products.

In essence, a strong policy support needs to be built around the five growth enabling pillars of infrastructure, regulation, funding, performance incentives and skilling backed by the principle of inclusive growth. Further governmental mechanisms need to be perpetrated in avenues of establishing sustainable market linkages, dispensing skill training, and development and provision of infrastructure. Intervention by private sector stakeholders at identified stages can contribute significantly towards effective growth and development of small scale industries. Therefore, the way forward is through a reformist social programme which will aid the weak and inefficient enterprises.

(The writer is a Research Intern at Observer Research Foundation, Delhi)

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Shruti Gupta

Shruti Gupta

Shruti pursued bachelors in commerce from Jesus and Mary College, University of Delhi. Post that she worked in the capacity of an Audit Analyst at ...

Read More +