MSMEs Contribution to the Indian Economy; All You Need To Know

Micro, small, and medium enterprises (MSMEs) have been monumental in accelerating the growth of the Indian economy. They not only play a pivotal role in generating employment opportunities at relatively low capital costs but also support industrialization and formalisation of the economy. They are also instrumental in ensuring financial inclusion by reducing regional imbalances.

MSMEs are veritably hailed as the backbone of the Indian economy, as they contribute 30% to the GDP. With a 50% contribution to exports, they also form an integral part of the supply chain. The government of India is planning to increase the MSMEs' output and export contribution to 50% and 75%, respectively, by 2024, in line with the aim to make India a $5 trillion economy.

What are MSMEs?

MSMEs, in layman's terms, refer to the enterprises that are involved in the development as well as the manufacturing of goods and services. The Micro, Small, and Medium Enterprises Development (MSMED) Act 20006 classifies MSMEs based on investment and turnover limits, which are listed below.

Micro Enterprise: Investment in plant and machinery (P&M) or equipment does not exceed Rs. 1 crore, and turnover does not exceed Rs. 5 crores.
Small Enterprise: Investment in plant and machinery (P&M) or equipment does not exceed Rs. 10 crores, and turnover does not exceed Rs. 50 crores.
Medium Enterprise: Investment in plant and machinery (P&M) or equipment does not exceed Rs. 50 crores, and turnover does not exceed Rs. 250 crores.

MSMEs Trends

Normally, MSMEs were restricted to the khadi and as Coir industry. Since then, they've had to diversify into new industries. For instance, micro and small businesses mostly manage food and agriculture, whereas medium-sized firms belong to the automotive, pharmaceutical, or chemical industries.

According to the MSME ministry, India has an estimated around 633.88 lakh unincorporated non-agricultural MSMEs, of which 31% are involved in manufacturing, and 36% are in trading activities. Around 51.25% of MSMEs are in rural areas, whereas, the remaining 48.75 percent are situated in urban areas. The micro sector accounts for 99% of total MSMEs.

MSMEs: The Growth Accelerators

MSMEs act as innovation stimulants, encouraging the diffusion of skills, and the inclusion of an entrepreneurial culture. They serve as a source of healthy competition and boost economic dynamism. It works as a catalyst for the socio-economic transformation of the country, MSMEs contribute to the economy in the ways given below.

Sustainable Growth

MSMEs play a pivotal role in accelerating the GDP growth story on account of their contribution to production and processing. Their growth results in increases in value addition, final output, and profitability.
Their contribution is increased manifold when one accounts for the multiplier effect of the economic activity undertaken by their employees and suppliers. The CSO data states MSMEs' contribution to gross value added (GVA) at 30% for FY 2019-20, with the manufacturing share standing at 36.9%. MSMEs are being supported by the government through 'Make in India' with the 'Zero Defect, Zero Effect' initiative to promote sustainability and higher quality standards.

2) Localized employment generation

MSMs generally implement labor-intensive production processes, thereby generating a huge number of employment opportunities. Their small scale restricts them to a particular area or region, which helps them in local population being hired.These productive employment opportunities consequently help increase income and alleviate poverty.
As per the 73rd Round of the NSS Report on Unincorporated Non-Agricultural Enterprises', MSMEs employ 11.10 crore workers. The microsector accounts for over 97% of the employment share as it recruits almost 10.76 crore people.

3) Export Earnings and Mushrooming Trade

During FY 22, the MSMEs contributed around 45.04% to overall exports. They are expected to benefit further from the 'China plus one' policy, which is being increasingly employed by MNCs looking to diversify their production. The government is targeting $1 trillion worth of MSMEs' exports by 2027. It has even introduced the 'Capacity Building of First-Time MSME Exporters' (CBFTE) schemes for MSMEs' export growth.

4) Contribution to Taxes

MSMEs contribute to the government's coffers through direct business taxes levied on their revenues and profits. They also pay indirect taxes, including GST, sales tax, excise duty, and cess. The tax provision requiring MSMEs to mandatorily register on the GST portal has even incentivized the formalisation of the MSME sector.

5) Poverty Alleviation

The MSME sector plays a significant role in alleviating poverty and correcting regional imbalances. They ensure a more equitable distribution of income due to their localised nature of business and stave off any rural-urban migration. They also stimulate entrepreneurship, hence kickstarting investment and innovation cycles.

6) Financial inclusion

Out of 11 crore employees in the MSME sector, almost 24% are women. Additionally, the socially backward groups, including SCs, STs, and OBCs, collectively own over 66% of MSMEs, with OBCs accounting for almost half of the share. Almost 74% and 59% of the MSMEs are owned by the vulnerable sections in rural areas and urban areas, respectively.
) Meeting SDG Goals
MSME development can assist in better meeting SDG goals, including SDG 1 (ending poverty), SDG 2 (ensuring zero hunger), SDG 3 (promoting good health), SDG 5 (gender equality), and SDG 8 (inclusive growth and decent work).

8) Concerns Over Finance

As can be seen from above, a robust MSME sector is acutely required for the Indian economy to grow. But these enterprises continue to suffer from the unavailability of timely capital. This lack of access to capital forces MSMEs to scale down or liquefy their business. As a result, there has been an upsurge in the number of financial institutions, including Protium, that are collaborating with MSMEs to provide prompt financing