Abstract

The Micro, Small and Medium Enterprises in India are an important driving factor for the flourishing Indian economy. These MSMEs not only provide the country with employment opportunities but also helps in the process of Industrialization in rural areas along with reducing the unequal income distributions amongst its residents. The MSMEs in the country contribute significantly to the development of the Indian economy through its export production, domestic production, low investment requirements, operational flexibility, technology-oriented businesses et al.  The SMEs similarly are complementary to large industries operating in the economy and contributes significantly to the development of the country. On average the MSME sector has almost 36 million units that employ almost 80 million citizens of the country.

This article makes an attempt to understand the role of MSMEs in the Indian economy and how these MSMEs have grown and flourished in the country. It also details the contributions of the MSME sector in reference to the Economic and market contribution as well as the social contribution. The various challenges faced by the MSME sector on large scale as well as an Individual scale are also discussed. The article concludes by suggesting recommendations to strengthen the MSME sector in the country. These recommendations would help build up an optimistic ground not just for the MSMEs, but for the economy as a whole.

Introduction

India is a land of diversity, and with diverse cultures, languages, altitudes come diverse ways of earning bread. While the Northern region of the country boasts of minds and bodies engaged in agriculture and farming on plain lands; the Southern region of the country, with its peninsular envelope, offers a variety of occupations around the coasts. Apart from the country-border, brotherhood, and absolute appreciation for the diverseness, what unites these people of the country in the modern-day capitalist settings is their work and business.

Business requires innovation, and innovation attracts investments. With land so populated, it becomes arduous for several innovative-minds, to get a substantial amount of investment. Yet, India finds its name at the top of the list of the world’s fastest developing economies. While there are several reasons for the same, there is one often overlooked upon by many individuals and that is the promotion and development of Micro, Small and Medium Enterprises (MSMEs).

To maximize business profits and get huge returns; Banks, individual investors and various other entities that provide financial assistance lookout for major and established enterprises for providing commercial funds, while MSMEs are run by personal investments from the person(s) setting up the enterprise. These people possess great business minds however, often lack possession of sufficient resources, financial security and legal protection.

In order to end the prejudice around MSMEs, and to promote, assist and elevate their statutes, an important statute is known as the Micro, Small and Medium Enterprises Development Act (MSMED Act), which was introduced in the year 2006.

MSMED Act, 2006

The MSMED Act, 2006 (hereinafter referred to as “MSMED Act”) has not only given a new recognition and division to the Small-Scale Industry sector but also has paved a path for MSMEs towards growth and progression in scale and the scope of business activities. Carrying forward the idea of quick industrialization from previous five-year plans, the MSMED Act was enacted to increase the competitiveness [1] of MSMEs in India.

What is an MSME?

The MSMED Act [2] classifies enterprises into two primary particulars, the Manufacturing Enterprises and the Service Enterprises; which further are classified into Micro (M), Small (S) and Medium (M) Enterprises (E).

1. Manufacturing Enterprises-

Manufacturing Enterprises, as the name suggests, are business ventures engaged in the manufacture or production of goods pertaining to the industries specified in the first schedule of the Industries (Development and Regulation) Act, 1951. [3]

The limit for investment in plant and machinery for Manufacturing Enterprises and subsequent sub-classifications are as follows:

  • Micro Enterprise: Less than or equal to Rs. 25 Lakhs
  • Small Enterprise: More than Rs. 25 Lakhs, and less than or equal to Rs. 5 Crores
  • Medium Enterprise: More than Rs. 5 Crores, and less than or equal to Rs. 10 Crores

2. Service Enterprises-

Service Enterprises are commercial entities engaged in providing or rendering services [4] to other commercial entities or a private party. The limit for investment in equipment for Service Enterprises and subsequent sub-classifications are as follows:

  • Micro Enterprise: Less than or equal to Rs. 10 Lakhs
  • Small Enterprise: More than Rs. 10 Lakhs, and less than or equal to Rs. 2 Crores
  • Medium Enterprise: More than Rs. 2 Crores, and less than or equal to Rs. 5 Crores 

Primary Benefits of MSMED Act

The MSMED Act, by clearly demarcating the concept of enterprises, suppresses the limits of the MSMEs; as already existing smaller units can upgrade into medium units without losing the statutory benefits. This in addition, also reduces the chance of illegal and corrupt practices where large-business owners try to shop the benefits of such laws, by manipulating books of accounts, tax records et al.

Further, the most liberal approach has been put into drafting the statute, and the same can be substantiated through the fact that the MSMED Act does not mandate any registration under the Act, to avail the legal benefits by the person(s) engaged in running an MSME. The Statute has often been interpreted favorably and practically by the courts, as it has been held that even the filing of memorandum as per the MSMED Act [5] is optional/discretionary and there is no time limit (of 180 days) for such filing. [6]

Along with this, the MSMED Act provides protection to Micro and Small Enterprises from delayed payments. It explicitly provides that where a Micro and Small Enterprise supplies any goods or delivers any services to a purchaser, the buyer is needed to make the payment on or before the date agreed upon by them and under no circumstances the period can exceed 45 days from the date of acceptance.

With the introduction of the Goods and Services Tax (GST) in the year 2017, various amendments have also been suggested with respect to the classification of MSMEs. One such amendment which has been approved by the Union Cabinet is a change in the basis of MSME from investment in Plant and Machinery/Equipment to “Annual Turnover”. This shall construct a more inclusive and dynamic setting for MSMEs, as it encourages a growth-oriented approach while defining the boundaries of investment and business.

Growth of MSME Sector in India

The growth of industrialization in India itself can be a whole-dedicated study, with its basics being understood through the analysis of the ‘Five-year Plans’ of the country. Post-independence in 1947, India had to recover from the effects of colonization, while also promoting the idea of capitalized ventures with a socialist approach. The first Five-year Plan (1951-1956) mainly focused around the development of the Primary Sector of the Indian Economy, but it was the second Five-year Plan (1956-1961) that opened the doors for setting up small scale industries, as the plan was executed with an aim for “rapid industrialization”. India had a long way to go for opening up to global markets, which it eventually did in the year 1991, however from the very early years of independence, it was the small-scale industries (SSIs) being set up by citizens that set the motion for large-scale industrialization. Since then, the country has given prime importance to SSIs (now, MSMEs), and therefore have included their promotion, growth and development in the majority of Five-year Plans.

Apart from purely fiscal benefits, MSMEs have been promoted and have grown because of various other socio-economic contributions including but not limited to employment generation, necessary innovations to the market, and skill development and training. The MSME sector has employed over 11 crore people in India, [7] through more than 6 crore enterprises throughout the country. [8] The Ministry of MSME was mandated to provide skill to over 40 lakh persons during the twelfth Five-year plan (2012-2017). [9] Moreover, various schemes have been implemented in furtherance of the development of innovation.

Thus, the mission of the Indian government has been to “Promote growth and development of globally competitive Micro, small and Medium Enterprises, including Khadi, Village and Coir Industries, in cooperation with concerned Ministries/Departments, State Governments and other stakeholders by providing support to existing enterprises and encouraging the creation of new enterprises”. [10]

Growth through MSMED Act

1. Mandatory Measures

The MSMED Act lists down the “Measures for Promotion, Development and Enhancement of Competitiveness of Micro, Small and Medium Enterprises” [11] for the purposes of facilitating the promotion and development and enhancing the competitiveness of MSMEs, particularly of the micro and small enterprises, by way of development of skill in the employees, management and entrepreneurs, provisioning for technological up-gradation, marketing assistance or infrastructure facilities and cluster development of such enterprises to strengthen backward and forward linkages. [12]

2. Policy Development and Credit Facilities

The MSMED Act has revolutionized the overall policy-making in favor of MSMEs and the policies and practices in respect of credit to the MSMEs have been mandated to be progressive. [13] The Reserve Bank of India categorizes MSMEs to be under Priority-sector for lending which primarily includes only those sectors that impact large sections of the population, the weaker sections and the employment-intensive sectors. [14] The Banking Codes and Standard Boards of India has formulated Code of Banks Commitment to Micro and Small Enterprises, [15] that targets the certain specifics of public and private banks to facilitate flexible banking and lending for MSMEs.

3. Convenient and Approachable Dispute Resolution

The MSMED Act has also established a dispute resolution mechanism towards delayed payments to Micro and Small Enterprises. [16] Various Micro and Small Enterprises Facilitation Councils (MSEFCs) across the nation, have been set up in order to ensure that the enterprises are not facing challenges in getting due payment for credible goods/services. The dispute resolution mechanism has been kept convenient and cost-friendly, and it has been mandated that any dispute be resolved/decided within a period of ninety days. [17] Moreover, the dispute resolution mechanism under the MSMED Act has been held to supersede the effect of an arbitration clause [18] in a contract between the MSME and another party, ensuring that small-scale business owners are not exploited with expensive and futile arbitrations.

4. Government Policies

The Indian Government has also designed various policies for the growth of MSMEs in India. The Budget allocation for MSME in FY22 is more than doubled to Rs.15,700 crore vis-à-vis Rs.7,572 crore in FY21. The government has also announced Rs. 3 lakh crore collateral-free automatic loans for businesses and have also announced funds worth Rs.10,000 crore for the ‘Guarantee Emergency Credit Line’ facility which is eligible for MSME borrowers, giving a major boost to the sector.

Contributions of the MSME Sector

Economic and Market Contribution

A collective global norm has often been that ‘what contributes, shall grow in an economy’. MSMEs are prioritized, promoted and developed, and the key reason for the same is the major contribution that this sector has in India. The share of MSMEs in All India Gross Domestic Product (GDP) during the fiscal year 2018-19 has been over thirty percent. [19] Under the previous Five-year plan, it was reported that the MSME sector accounts for over forty-five percent of the manufacturing output and over forty percent of total exports of the country, and over six thousand products ranging from traditional to high-tech items were being manufactured by the MSMEs in the country. [20] The contribution of Manufacturing MSMEs in the country’s total Manufacturing Gross Value of Output (GVO) has remained constant at around thirty-three percent during the period 2014-2019. [21]

Social Contribution

The MSME sector also provides contributions in form of the overall development of society and citizen’s well-being. MSMEs have advanced methods to open up new markets, with variety in product and service. Young minds are approaching bigger dreams with numerous ideas, as MSMEs have opened professional fields, thus boosting the overall confidence for entrepreneurs. With social media and the easy-internet, MSMEs have also opened up investment opportunities for long-term plans as well as for instant profit-making.

Thus, the MSME sector’s contribution to India’s economy is immense. However, despite the sector being under the primary focus of development by the government of India, and exhibiting exceptional statistical data in contribution; it still faces major challenges that need to be overcome for holistic expansion of Indian MSMEs in the global market.

Challenges to the MSME Sector

No privilege comes without a set of challenges. MSME sector faces various challenges ranging from large-scale public setbacks to various problems on an individual scale. Some of them are as listed below:

  • Large-Scale Public Setbacks

1. State-wise Delegation

The MSMED Act delegates power to make rules to the State governments. [22] While the provision certainly benefits intra-state businesses, it often creates a challenge for MSMEs having commercial associations with enterprises or individuals in different States. Indian system stands tall on the roots of cooperative federalism, however, party-politics, corruption, variance in the availability of resources, etc. can lead to a competitive race among States. This, in turn, leads to a decentralized system of rules and regulations that poses a challenge to the harmonious economic growth of the country, thereby defeating the very essence and purpose of cooperative federalism. Moreover, that also leads to confusion around the available legal remedies among small-scale business persons.

2. General Lack of Resources

The RBI has mandated loans with subsidized rates of interest for MSMEs, however, the small-scale business persons still face a major challenge in the availability of resources. Subsidized power supply, water supply, etc. are still a dream for many small-scale business persons, due to the lack of implementation of compulsory statutes. Technology and infrastructure are still under-developed in many parts of India, and business persons working and residing in rural areas with small-scale industries are still working and investing in limited and outdated technical resources.

  • Exploitation for Capitalist Gains

The large-scale industries/business ventures often engage with MSMEs for bulk manufacturing of various types of goods or services such as logistical assistance, technical support, etc. These big companies often exploit the proprietor, employees, agents and affiliates of the MSMEs, for their capital gains. The MSMEs are often expected to meet exceptionally high demands of the bigger companies, and more than often these companies use their influence to stop due and credible payments of the MSMEs and threaten them with malicious legal actions.

3. Less Number of Facilitation Councils

With the number of enterprises in India touching double-digits of crore, it is of prime importance that the number of MSEFCs shall be fairly and reasonably increased. While many states in India have opened up Zonal Councils, the other parts of the country still have only one or no facilitation councils. MSEFCs are the key grievance redressal forum for MSMEs and therefore overcrowding, overworking and distanced presence of the councils pose a major challenge to the growth and development of MSMEs.

4. Unawareness of Laws

MSMED Act is still considered to be a new and unknown law to many. Proper taxation compliances, available credit facilities, selectable legal remedies, are some of the many areas which small-scale business persons are still unaware of. The general unawareness of the laws favoring MSMEs has led to various enterprise owners giving up their businesses due to trivial reasons.

5. Disguised unemployment

Small-scale business persons often choose their family members to be employees in their enterprise. This defeats the very purpose of promotion and growth of MSMEs, as the primary contribution of MSMEs, apart from financial ones, is the generation of employment.

  • Covid-19 Pandemic

It is needless to say at this hour that the Covid-19 Global Pandemic has posed a major challenge in front of the MSME sector. Due to various health and travel norms, many MSMEs had to face a major loss of customers/clients, finances or overall businesses. 

  • Problems on an individual scale

6. Lack of Motivation and Patience among Entrepreneurs

Due to the fast-moving world, young entrepreneur’s lookout for ways to make quick money. More than often, small-scale businesses boost only after a substantial amount of investment in terms of work, money and time. Entrepreneurs often lose motivation and patience which leads to wastage of potential and innovation; this leads to shutting down of new MSMEs, thus affecting the overall growth rate of the sector.

7. Individual Needs

India’s diversity is not restricted to its cultures, languages, food or geography, as it also includes dynamic needs. Individual needs cannot be controlled through laws or even morality, and thus they pose a major challenge to the growth of MSMEs, in general. Market progresses with the collective needs of human beings and their desires; however, today’s world is fast-paced and changes its collective needs on the basis of social constructs. Thus, collective needs shall be assessed on an individual basis, in order to avoid hurried market dynamics.

Conclusion

MSMEs continue to contribute majorly to the fiscal, socio-economic and all-around development of the country. Jobs are being created, while innovation is heading towards the peak. Small-scale enterprises are playing an equal role in the economy as large-scale industries. Stats are being assessed regularly to create a system with a fair and equitable approach.

Today, India has found a powerful and respectable place in the global market and MSMEs are a major reason for the same. The small-scale enterprises are growing parallel to the growing world, and various programs and schemes have been implemented to continue the line of the graph in an upwards direction. Science and Technology Development Training (S&T), Vikas (Progress) Schemes, Skill Development Training for Women, etc. have led to the all-inclusive approach towards the growth of the MSME sector. MSME Samadhaan has been provided to MSME owners for a fair, convenient and quick grievance redressal and dispute resolution mechanism.

Think tanks like the NITI Aayog shall work on policy-building and analysis of by-laws of different States and suggest means of facing the challenges towards MSMEs, for strengthening the co-operative federal structure of the nation. Subsidies shall be provided to small-scale business persons, and loan schemes, financial assistance, etc. shall be made more flexible and approachable. Large-scale industries must be regulated through legal provisions, in order to protect the MSMEs from capitalist exploitations. Awareness campaigns should be planned and initiated for owners of MSMEs. Entrepreneurs should be guided and led through motivational and practical workshops.

India is a land of diversity, and the diversity shall always channelize favorably and constructively towards a path of innovation, hard work, development and positive approach; and the same would help build up an optimistic ground not just for the MSMEs, but for the economy as a whole.

About the Author

Ankit Rajgarhia is a Senior Associate at Karanjawala & Co.

Rhythm Katyal is a 4th-year law student at Symbiosis law School, Noida.

Muskaan Singh is a 3rd year law student at University of Petroleum and Engineering Studies (UPES), Dehradun and is also an Associate Editor at IJPIEL.

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel & Aakaansha Arya

Senior Editor: Akanksha Goel

Associate Editor: Muskaan Singh

Junior Editor: Kshitij Pandey

Preferred Method of Citation 

Ankit Rajgarhia, Rhythm Katyal, and Muskaan Singh, “Micro, Small and Medium Enterprises in India: Growth, Contribution and Challenges” (IJPIEL, 26 June 2021)

<https://ijpiel.com/index.php/2021/06/26/micro-small-and-medium-enterprises-in-india-growth-contribution-and-challenges/>

Endnotes

[1] MSMED Act, 2006, Section 9, (India).

[2] MSMED Act, 2006, Section 7, (India).

[3] MSMED Act, 2006, Section 7(I)(a), (India).

[4] MSMED Act, 2006, Section 7(I)(b), (India).

[5] MSMED Act, 2006, Section 8, (India).

[6] Uttar Haryana Bijli Vitran Nigam Ltd v. PM Electronics Ltd., (2020) 140 ALR 852; GE T&D India Limited v. Reliable Engineering Projects and Marketing,(2017) 162 DRJ; Indur District Cooperative Marketing Society Ltd. v. Microplex (India), WRIT PETITION NOS.35872 OF 2012.

[7] Ministry of MSME, Annual Report 2020-21, MSME govt.in, (https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf).

[8] Ibid.

[9] Ministry of MSME, Report of The Working Group on Micro, Small & Medium Enterprises (MSMEs) Growth for 12th Five Year Plan (2012 – 2017), Development Commissioner Ministry of MSME(dcmsme).gov.in (http://www.dcmsme.gov.in/working_group2012.pdf ).

[10] Ministry of MSME, Results-Framework Document (RFD) for Ministry of Micro, Small and Medium Enterprises(2012-2013),MSMEgovt.in(https://msme.gov.in/sites/default/files/MSME-Framework Document-Results-2012-2013.pdf ).

[11] MSMED Act, 2006, Chapter IV, (India).

[12] MSMED Act, 2006, Section 9, (India).

[13] MSMED Act, 2006, Section 10, (India).

[14] Reserve Bank of India, Master Direction-Priority Sector Lending – Targets and Classification RBI/FIDD/2016-17/33-MasterDirection-FIDD.CO.Plan.1/04.09.01/2016-17, ReserveBankofIndia.org.in, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10497.

[15] Banking Codes and Standards Bank of India (BCSBI), http://www.bcsbi.org.in/Codes_MSE.html.

[16] MSMED Act, 2006, Chapter V, (India).

[17] MSMED Act, 2006, Section 18(5), (India).

[18] Principal Chief Engineer v. M/S Manibhai and Bros (Sleeper), First Appeal No. 637 Of 2016; Mackintosh Burn Limited v. Micro and Small Enterprises Facilitation Council, W.P. No. 17659 (W) of 2019.

[19] Ministry of MSME, Annual Report 2020-21, MSME govt.in, (https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf).

[20] Ministry of MSME, Report of The Working Group on Micro, Small & Medium Enterprises (MSMEs) Growth for 12th Five Year Plan (2012 – 2017) Development Commissioner Ministry of MSME, (http://www.dcmsme.gov.in/working_group2012.pdf ).

[21] Ministry of MSME, Annual Report 2020-21, MSME govt.in,  (https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf).

[22] MSMED Act, 2006, Section 30, (India).