Mains Practice Questions

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.

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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.
• 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• Lack of Skilled Workforce: Most MSMEs use outdated technology, with only 45% adopting some form of AI and a mere 6% using e-commerce platforms for sales.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.
• 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.