Home » Corporate Law » What Is The MSME Sector Means for India’s Growth?

What Is The MSME Sector Means for India’s Growth?

workers in a factory

The MSEME sector is an organizational business setup with the primary concern to manufacturing goods and providing services as generally, businesses do. The full form of MSME is Micro Small and Medium Enterprises and are firms which function with very a small capital base and are generally primary economic engines of Tier 2 or Tier 3 cities in India.

The economic boom has attracted investors and marketers in the development of manufacturing units which can be developed in local districts where the pay scale of the population is quite low and the availability of power let it function in an independent way. This has created a new sphere of economic development from bottom to top up in the economic ladder of the country.

Therefore, the Government of India has formulated through the MSME Act a detailed plan or schemes for the betterment of the MSME sector in getting the availability of credit for their businesses and to function well wide different market space.

Index

What Is The MSME Sector?

The MSME sector generally refers to the small firms which are into manufacturing of finished goods or using raw material to make goods for other uses. This booming sector incorporates industries in manufacturing of plastic items, candles, firecrackers, paper mills, handicrafts, auto ancillary parts and much more.

To advance the support to this booming sector the Parliament enacted the Micro, Small and Medium Enterprise Development Act, 2006. The law gave power to the Government to formulate credit policy for the MSME sector.

The title of the act states:

An Act to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.”


Also Read: What Is A Swap Ratio In An M&A Transaction And How Is It Arrived At?

The Act thoroughly defines each term in the title of the law and gives a legal meaning to it. However, the definition created by the law will only support those enterprises which qualifies the wordings of the law. This can be observed from the below-mentioned provisions:

Section 2(e) of the act defines “enterprise” which means an industrial undertaking or business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;

The Government has classified the MSME according to its capital structure and purpose of its business type. It has primarily divided into Manufacturing and service sector. This division is then further classified into as per the capital structure of the MSME enterprise.

Section 7 of the Act firstly describes those enterprises which are engaged in manufacturing or production of goods, having an investment in plant and machinery will be classified as:

Value of Investment Micro-Enterprise Small Enterprise Medium Enterprise
Minimum Investment 25 lakhs 5 Crore
Maximum Investment Not more than 25 lakhs 5 crore 10 Crore

Further, the provision explains those enterprises which are engaged in providing services where the investment in equipment the classification is:

Value of Investment Micro Enterprise Small Enterprise Medium Enterprise
Minimum Investment 10 lakhs 2 Crore
Maximum Investment Not more than 10 lakhs 2 crore 5 Crore

The talent of Indians in entrepreneurial skills is the growing aspect of the Indian economy and to enhance this ability a special law is created with which the Government will provide aid in the development of this Micro or Small business to setup.

The SME and MSME sector contributes to the national economy through its 64 million units established in India. The sector in manufacturing generates 6.11% of the manufacturing GDP and 24.3% of the service sector GDP. The whole sector generates 120 million employees in the nation and also contribute around 45% of the exports from India.

The sector has overall maintained a 10% growth rate per year. Therefore, this sector has its prevalence after the agriculture sector because 20% of the employment is generated through the villages.


Also Read: How Venture Capitalist Can Be Best Investment for Startups?: An Indian Policy Analysis.

 

The Legislative Intent To Enact MSME Act?

The Parliament enacted the MSME Act, 2006 which before the passing of was an unorganized sector, wholly dependent upon the states for its incorporation, the method for procurement of credit, land, power and labour from the market forces.

By enacting this law, the sector now is organized throughout the whole nation and the Central Government with the aid of the State Government and other regulatory bodies can better formulate policy for this emerging sector.

The Government with the MSME Act formulates schemes, incentives and offers through various taxation, regulatory and credit system thereby building the path for the quick and over the counter availability of the services to this sector.

The law also creates a National Board for Micro, Small and Medium Enterprise as per the Section 5 of the Act. The Board will consist of members from different Minister of the Central Government, Member of Parliaments, Secretary rank government bureaucrats from several departments, the Directors of National Bank and Small Industries Bank, Chairman of Indian Bank Association and members from other statutory and Governmental bodies. The National Board consists of a total of 47 members with 18 ex-officio members and 29 others having a tenure of two years from the date of notification.

The Board examines the factors affecting the promotion of MSME sector in general and also providing representation and recommendation to the Central Government for facilitating the promotion and development and enhancing the competitiveness of the MSME.

Role of MSME in Entrepreneurship Development

The scheme imitated by the Government of India incentivising MSME growth has the following advantages that an entrepreneur can begin with:

  • The contemporary Indian Market is huge for the development of Indian entrepreneurial skills. India is set to become the third-largest consumer market whereby the estimated value of consumption will reach USD 6 million by the year 2030. Whereas, India is poised to become the manufacturing hub of the world directly competing China.
    The current manufacturing contribution to the GDP was 13.7% in the year 2019, which although has reached the highest at 17.1% in the year 2010. The economic blunders and availability of credit in the market has drastically affected the manufacturing market.Although in the current COVID-19 crisis the manufacturing has taken a quite a large hit. This does not mean that the overall growth in Indian GDP does affect MSME if no proper state intervention or incentives are not taken.
  • The potential job market and skilled/young labour for employment will also test the entrepreneurial skills of the MSME in creating new market leaders in future.
    As mentioned before in this article, the MSME sector generates 120 million jobs and 20% of the enterprises in the sector are located in the villages or small towns. An MSME enterprise generally has 20 or more than 1000 employees working in an establishment.Therefore, these enterprises create successful entrepreneurial leaders in the market.
  • Availability of credit from the market for the MSME enterprise. The Government formulates credit facility schemes for classified enterprises.
    The Credit Guarantee Fund Scheme for Micro and Small Enterprise (CGFSMSE) launched in the year 2000, for providing collateral-free loans from the Banks. For this, the Ministry of MSEME of Government of India has established a Credit Guarantee Fund Trust for Micro and Small Enterprise (CGFTMS).The Trust is formed with the intention of implementing the scheme under (CGFSMSE) by contributing packages for the sector.[1] The trust by the year 2016-17 has approved guarantee up to Rs. 61 crores from the date of its formation[2]

Also Read: How Indian Company Makes Foreign Investment Under FDI Policy : An Explanatory

Examples of Micro Enterprise in India

These are the industrial companies which are generally referred to as micro-enterprise:

  • Cottage Industries
  • Handicrafts
  • Auto Ancillary manufacturing
  • Plastics manufacturing
  • Transportation
  • Cloths and wearables manufacturing
  • Servicing of vehicles
  • Vendor sales of foods or other items
  • Sale of finished products
  • Hotels and catering services
  • Tourist services
  • Sports products manufacturing
  • Manufacturing of chemical products
  • Packaging and production of food products
  • Manufacturing of biddi and tobacco-related products

Conclusion

The MSME sector is the vibrant structure of business which are better equipped for attaining inclusive growth in the economy, generating employment and tax collection for the government. Thus, better policy and wide acceptably from the business community will enhance the prospect of growth in the MSME sector. Though at present the economy is suffering from the impact of COVID-19 pandemic and Government around the globe are hugely incentivising through various economic programs. The GOI’s implementation of ‘Aatma Bharat’ reform program will directly benefit the MSME sector. However, the stage of the program is too early and time will tell the effect of it.

[1] https://www.cgtmse.in/files/CGS-I.pdf

[2] https://www.dcmsme.gov.in/schemes/sccrguarn.htm


Dear Reader,

Thank You for reading this article.

If you think this blog post is good and worth reading do share it with your friends and colleagues. You can also send me your suggestions by commenting on this article.

However, if you like to receive Newsletter of our post send us your details by submitting this form below.

Leave a Reply

Your email address will not be published.