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Q. Examine the role of MSMEs in India’s economic growth and employment generation. What are the key challenges confronting the MSME sector, and how can they be addressed? (250 words)
21 May, 2025 GS Paper 3 EconomyApproach
- Introduces MSMEs and explains their significance in India's economic development.
- Highlight their role in GDP growth and employment, discuss the challenges they face, and suggest policy measures to address these challenges.
- Conclude suitably.
Introduction
Micro, Small, and Medium Enterprises (MSMEs) play a vital role in driving India’s economic growth and job creation. With 5.93 crore registered units, they contribute significantly to manufacturing, exports, and inclusive livelihoods, particularly in rural and semi-urban regions.
Body
Role of MSMEs in Economic Growth and Employment Generation
- Employment Generation & Gender Equity: The MSME sector employs over 12 crore people, making it the second-largest employment provider after agriculture. This widespread employment generation contributes significantly to poverty alleviation and social stability.
- Schemes like PM Vishwakarma and Mudra Yojana have boosted micro-enterprises and self-employment, with 20.5% of Udyam registrations and 68% of Mudra loans supporting women, promoting gender equity.
- Contribution to GDP Growth: MSMEs contribute about 30% of India’s GDP and 45% of manufacturing output.
- Strengthening Rural Economy: Rural MSMEs reduce migration by creating local jobs and supporting agro-processing industries.
- The PM Vishwakarma Scheme and Self-Reliant India Fund boost rural industrialization. The Animal Husbandry Credit Guarantee Scheme (2023) offers collateral-free loans to livestock MSMEs, enhancing India’s dairy and meat sectors.
- Boosting Exports: MSME products account for 45.73% of India’s exports in 2023-24. Government initiatives such as Government e-Marketplace (GeM) and the Production-Linked Incentive (PLI) scheme have strengthened MSMEs’ participation in global supply chains.
Key Challenges Confronting the MSME Sector
- Formalization and Financial Constraints: A significant number of MSMEs operate informally, limiting access to formal credit, insurance, social security benefits, and government incentives.
- Only about 20% of MSMEs have access to formal credit. Many rely on informal sources, which increases costs and limits growth.
- Despite schemes like CGTMSE, only 2.5 crore out of 6.3 crore MSMEs have availed formal credit.
- Only about 20% of MSMEs have access to formal credit. Many rely on informal sources, which increases costs and limits growth.
- Regulatory Burden: MSMEs struggle with complex regulatory procedures and overlapping laws in labor, taxation, and environmental compliance, which hinder business efficiency and innovation.
- Lack of Skilled Workforce: Most MSMEs use outdated technology, with only 45% adopting some form of AI and a mere 6% using e-commerce platforms for sales. This limits productivity and market reach.
- Infrastructure Bottlenecks: Poor road and rail connectivity, high logistics costs (14-18% of GDP vs. global benchmark of 8%), frequent power outages, and lack of industrial parks affect MSME competitiveness, especially outside core industrial states.
- Environmental Compliance Pressure: Indian MSMEs emit around 110 million tonnes of CO₂ annually. Compliance with global ESG norms and carbon taxes, such as Europe’s Carbon Border Adjustment Mechanism, pose challenges, particularly for export-oriented units.
Measures to Address the Challenges
- Strengthening Formal Credit Access: To enhance credit access for MSMEs, collateral-free lending should be expanded through fintech and digital platforms.
- Mudra and CGTMSE schemes should be integrated, and payment timelines strictly enforced through the MSME Samadhan portal.
- Integrate MSME data with GSTIN and Aadhaar for better policy targeting.
- Mudra and CGTMSE schemes should be integrated, and payment timelines strictly enforced through the MSME Samadhan portal.
- Regulatory Simplification: To streamline regulatory processes for MSMEs, a single-window clearance system should be implemented.
- The RAMP scheme should be strengthened for deregulation, and state-level MSME facilitation councils established for faster grievance redressal.
- Boosting Market Access: To boost MSME exports, leverage Free Trade Agreements and cluster development, enhance e-commerce integration through ONDC and GeM, and offer subsidized branding and certification for global market access.
- Technological Adoption: Establish dedicated MSME tech hubs, expand apprenticeship and skill development programs, Scale up the Digital MSME 2.0 initiative, and promote the adoption of AI, IoT, and automation.
- Improving Infrastructure and Supply Chains: Developing raw material banks and promoting domestic manufacturing of key inputs can help tackle infrastructure lacunae.
- Strengthen warehousing and logistics and encourage cluster-based procurement and bulk buying cooperatives.
Conclusion
A coordinated approach involving policy reforms, digital adoption, market expansion, and enhanced institutional support is crucial for unlocking MSMEs’ full potential and ensuring sustainable, inclusive growth.
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