Daily Answer Writing GS Paper 3

DAILY ANSWER WRITING QUESTIONS-8TH NOVEMBER,2020

Q . In what way MSME can prove to be key to India’s urban future, job creation, and growth revival of the economy. Analyze. 8TH NOVEMBER,2020 (15 marks, 250 words, GS-3)

Answer-

Approach-

  • In the first para about the MSME sector, present situation and stats.
  • Second para could be about the importance of MSME sector
  • Then next para could include the issues and challenges.
  • The final para could be about the measures taken and the further reforms and initiatives required.

In the last two decades, the growth curve of the Indian economy has been largely controlled by its Micro, Small, and Medium Enterprises (MSMEs). The sector has done some heavy lifting across operations and is contributing a whopping 40% to the country’s GDP through the 20 lakh crore of goods and services it produces. It is also the engine of livelihood to millions of people.

The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India. MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP are stressed due to depleting internal reserves and low visibility of demand for next six months at least.

Though the MSME sector is marred by various factors such as: lack of adequate capital, infrastructural hurdles, inadequate digitalisation, scattered markets, absence of compatible financial partners, and statutory clearances among others.

Drawing on innovation and adaptability, the MSME sector has particularly shown a brave face as the government set out with its One India, One Tax vision with GST regulations.

  • Even though in the initial stages, the MSME industry faced problems with cash flows and GST compliance, the bumpy roads are now behind these enterprises. 
  • Many MSME businesses are moving towards a formal economy which is clear from the increase in the tax-payer base. This is not only giving them more visibility but also sprouting new opportunities in the market.
  • The sector is relentlessly work-horsing to tap the demand in the local and global markets and is also acting as a potential job creator in times of a currency slump.
  • Trade and foreign exchange solutions: India has one of the largest MSME industries in the world that has been making a massive contribution to its economy. This industry contributes nearly 50% of country’s exports. But for most MSMEs, global markets are a confusing space.Banksare allowing these enterprises to power both global and domestic trade by minimising buyer’s cost, maximising seller’s offer, and managing the commercial, political and currency risks on both sides.
  • Guidance on FDI/ODI regulations under FEMA: In a country where capital is not readily available, understanding FDI and ODI becomes the need of the hour to make the right domestic and international investments. The banksare providing a service delivery model to multinational MSMEs which are looking at capitalizing on India’s growth story, so that they can enter the Indian market, establish their enterprise, and successfully operate and grow in the robust Indian economy.
  • Team of specialists: For many MSMEs who have ventured into the global market for the first time, the presence of a reliable banking partner for hand holding is crucial to overall success.
  • Cash and liquidity management: micro, small, and medium businesses are relying on cash management partners to optimize their net earnings by managing, and eventually decreasing, their liquid assets.

 

  • 5 task force for MSME to make it future ready:
  1. Industry 4.0, including elements like artificial intelligence, 3D and virtual reality, and this task force has been formed with the objective of making India a global leader in Industry 4.0.
  2. export promotion and import reduction, including how to focus in the key manufacturing areas, how to improve our quality standards, designs and technology, packaging.

The final objective is to see that India becomes a global manufacturing hub and a leading exporter in the world.

  1. re-engineer vertically and horizontally our existing cluster schemes so that they are able to assist the grass-root and the micro-level enterprises as well as the high-end enterprises.
  2. to integrate our technology centres.
  3. explore interventions to align various modernisation schemes like ZED (zero defect and zero effect) and LEAN (for manufacturing competitiveness), as well as other schemes related to design, intellectual property rights and marketing scheme.

Further government on the recommendation of U.K. Sinha committee has broadened the definition of Micro, Small and Medium Enterprises (MSMEs) by revising the limit of investment in machinery or equipment and introducing a “turnover” criteria — a reform measure that seeks to reverse the traditional policy bias in favour of units staying small in order to qualify for benefits. 

Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and a service MSME. The change in definition of MSMEs will also help because “turnover” is the more efficient way to identify an MSME and it also allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centres to be eligible for benefits as an MSME.

Challenges:

  • Too small to be registered
  • Even GST has its threshold and most micro enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs. But, in a time of crisis, it also constrains a government’s ability to help them. 
  • Lack of financing – Most of the MSME funding comes from informal sources. This is the reason why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs has had a limited impact.
  • Banks dither from extending loans to MSMEs – because of the high ratio of bad loans; data show higher slippage for relatively bigger enterprises.
  • Delays in payments to MSMEs — be it from their buyers (which includes the government also) or things like GST refunds etc.
  • Too small to be registered
  • Even GST has its threshold and most micro enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs. But, in a time of crisis, it also constrains a government’s ability to help them. 
  • Lack of financing – Most of the MSME funding comes from informal sources. This is the reason why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs has had a limited impact.
  • Banks dither from extending loans to MSMEs – because of the high ratio of bad loans; data show higher slippage for relatively bigger enterprises.
  • Delays in payments to MSMEs — be it from their buyers (which includes the government also) or things like GST refunds etc.

Along with Credit guarantee government should also provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products. 

  1. reserving government procurement orders of up to Rs 200 crore.
  2.  clear invoices within 45 days
  3. ‘One Nation One Card’ scheme and ‘Ajeevika’ app are in various stages of implementation. This can help employers tap into the locally available labour workforce and restart production activities that were hampered due to the migration of labour to their hometown.
  4. Government e-Marketplace (GeM) has already been set up to boost MSMEs’ share in government procurement of goods and services. 
  5. the current face-off between Indian and China has led to an increased demand for locally manufactured goods, unleashing new opportunities for Indian MSMEs.

Way forward:

  1. MSMEs can also foster product as well as process innovations by partnering with knowledge partners, that is, academic institutions, tech startups, and students. Many state governments are funding such initiatives through grants. 
  2.  MSME clusters can crowdsource solutions to improve their overall competitiveness as well as resilience. 
  3. Technology adoption is another factor that can help MSMEs to improve process efficiency, reduce cost, information visibility, and enhance worker safety. With the advent of cloud and cloud-based technologies, they can easily create an elastic and flexible IT infrastructure.
  4. Partnerships could be another avenue for MSMEs. Especially in sunrise sectors, MSMEs can partner with established foreign players looking to explore the Indian market or make a low-cost manufacturing base.

In a country like India where the twin problem of poverty and unemployment continues to plague the economy, supporting the growth of MSMEs is crucial to sustainable development. As every individual MSME continues to reform and transform itself, it is pertinent for financial institutions to provide them with the resources to scale ahead.

The government has set up the stage, consumer perception can be made favourable, and means available with MSMEs are several. This provides them with the perfect platform to emerge stronger in the post-Covid-19 world.