Factors boosting MSME sector in India

The MSME sector in the country has shown promise over the recent years and is expected to grow at a fair pace.

India has about 388 small and medium enterprise clusters across the 180 districts which contribute to 40 percent of the industrial output of the country and 35 percent of direct exports in the country. With regard to employment, Micro, small and medium enterprises is second to agriculture and has provided employment to more than 14 million people.

The number of Micro, small and medium enterprises has grown at 4.4 percent in the last 7 years. At the same time, the penetration of loan has also increased by 2-3 times. Currently, the total demand for credit is Rs.40 lakh crore and the current supply is 60 percent through formal channels. This indicates that informal channels still exist and are very much active. There is an opportunity for formal channels like Banks and NBFCs to capture in the next few years. The major trends that have helped the MSME sector are discussed below:

1. GDP growth of 6.8 percent in the last 10 years.

2. Campaigns like “Make in India”, which give a strong thrust to improving manufacture in the country. This includes:
   a. Opening up of sectors like railways, defence, medical and insurance to Foreign direct investment.
   b. Development of industries across different regions in the country.

3. Reforms at the state and central level which enabled ease of setting up a business.

4. Improvement in the availability of formal credit for small and micro enterprise segment.

5. The impact of digitalization on the industrial sector. There has been an immense growth in engineering and automotive industry which has fuelled growth in the supply chain which is dominated by SME industries.

These five factors have helped the MSME industries to flourish in the country. Nevertheless, there needs to be additional efforts in four important areas in order to continue with this thrust:

1. With the usage of sophisticated machinery, the industry needs have moved from unskilled to highly skilled operators and there is a requirement of seamless supply in the future. Programs through National skill development agency can help provide skills to individuals and bridge the skill gap.

2. Change in policy reforms which enable ease of starting and exiting a business, single window system for approval and relaxation of foreign investment norms.

3. Improvement in infrastructure including roads and power.

Consistent supply of credit through formal sources of funds. Currently 40 percent rely on informal sources of funds which need to be replaced to make it formal and legal source of funding.