Shodh Samarth- Research Journal of Commerce, Management & Economics

Vol.1(1), January 2024, pp.55-66

ROLE OF MSMEs IN INDIAN ECONOMY

Prof. Chatar Singh Negi
Faculty of Commerce & Management
Pt. L.M.S. Campus, Rishikesh
Sri Dev Suman Uttarakhand Vishwavidyalaya

Dr. Sanjay Kumar

Assistant Professor
Department of Commerce
Govt. Degree College, Narendranagar (Tehri Garhwal)
Email: [email protected]
Abstract
Micro Small and Medium Enterprises (MSMEs) have long been considered the foundation of
the Indian economy's growth. Known for their low capital and technology requirements, this sector
provides the second-highest employment opportunities in India especially in backward and rural areas
following agriculture. Furthermore, MSMEs play a crucial role in fostering development in
underdeveloped and rural regions, reducing regional disparities, and ensuring equitable distribution
of wealth and income nationwide. Despite its significance, the MSME sector in India has encountered
numerous challenges. With the advent of advanced technology and the presence of both local
enterprises and multinational corporations (MNCs) as competitors, this industry has been impacted
by liberalization and globalization in India since 1991. This study reveals the role of MSMEs in
India’s economy and also focuses on major issues and potential of MSMEs.

Key Words: MSMEs, Employment, Industrialisation, Globalisation Growth, Technology,

Economy.

Introduction:

Micro, Small, And Medium-sized enterprises (MSMEs) sector of India’s economy has
witnessed tremendous growth over the past seventy years. It’s India’s second most productive
industry, after agriculture, in terms of creating jobs at relatively low capital costs and promoting
entrepreneurship, both of which play an important role in the country’s economic and social
development. MSMEs supplement large corporations as support units and play a vital role in India’s
inclusive industrial growth. To meet the needs of domestic as well as global markets, the MSME
sector is expanding into new economic segments, offering a broad range of products and services,
and generating a diverse array of products and services.

The Ministry of Micro, Small, and Medium Enterprises (MSME) is working in collaboration
with relevant Departments, State Governments, and other Stakeholders to enhance the MSME sector,
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which encompasses Village, Khadi, and Coir Industries. This objective will be accomplished through
the support of existing businesses, the adoption of advanced technologies, and the promotion of new
business ventures. Various statutory and non-statutory departments operate under the guidance of the
Ministry of MSMEs, such as the National Institute for Micro, Small, and Medium Enterprises,
National Small Industries Corporation, Khadi and Village Industries Commission, Mahatma Gandhi
Institute for Rural Industrialization (MGIRI) and the Coir Board.

The Micro Small and Medium Enterprises Development Act was introduced in 2006 to
address several issues about SMEs, such as investment restrictions and industry coverage. Its primary
goal is to support these businesses' growth and improve their competitive standing. The establishment
of a National Council for Micro, Small, and Medium Enterprises, led by the Minister of MSMEs, is
one of the MSMED Act's notable features. This council's duties include studying the variables that
affect the expansion and development of SMEs, assessing the policies and programs of the state, and
making recommendations for enhancing competitiveness, development, and promotion. The law
creates a framework that encompasses both manufacturing and service entities for identifying the
notion of an enterprise. The paper depicts the role of MSMEs in India’s economy and also focuses on
the major issues and potential of MSMEs.
Objectives and Research Methodology:

• To understand how MSMEs generate more jobs.

• To analyze the growth and expansion of MSMEs in India.
• To identify the challenges encountered by MSMEs in India.

The present paper is mostly based on secondary data. The sources of data are various outlets
such as journals, annual reports of MSME, and the other published reports of respective departments.
The data is organized in a table form and analysis is conducted with a focus on the paper objectives.

Concept of Micro, Small, and Medium Enterprises:

Micro, Small & Medium Enterprises Development Act of 2006 outlines the categorization of
Micro, Small, and Medium Enterprises (MSMEs) as per the following criteria:

• Micro Enterprise: The investment in plant and machinery or equipment should not exceed one
crore rupees, and the turnover should not exceed five crore rupees.
• Small Enterprise: The investment in plant and machinery or equipment should not exceed ten
crore rupees, and the turnover should not exceed fifty crore rupees.

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• Medium Enterprise: The investment in plant and machinery or equipment should not exceed
fifty crore rupees, and the turnover should not exceed two hundred and fifty crore rupees.

the present MSMEs classification was implemented in 2020. Previously, the classification
criteria were based on the investment in plant and machinery/equipment, with distinctions between
production and service units and relatively low financial thresholds. However, due to significant
changes in the economy, the MSME classification criteria were revised to align with the self-reliant
package announced by the prime minister of India.

As a result, a new classification system was implemented in June 2020, which aimed to
simplify matters for current and potential entrepreneurs by combining the classification for both
production and service units. This revision eliminated the distinction between the manufacturing and
service sectors. In addition, a new turnover criterion was introduced, which now considers investment
in machinery and equipment as well as turnover. These new criteria have been designed to be more
inclusive and are expected to provide numerous benefits for the growth of small and medium-sized
enterprises (SMEs) in the Indian economy.

Furthermore, it was decided that the export turnover of any micro, small, or medium MSME unit
would not be taken into account when determining the turnover limitation. This strategic decision is
aimed at facilitating businesses, attracting investments, and creating more job opportunities within
the SME sector. The Ministry of MSME and its affiliated organizations are dedicated to assisting
nations in promoting entrepreneurship, generating employment and livelihood opportunities, and
enhancing the competitiveness of SMEs in the ever-changing economic landscape. The revised
classification criteria for SMEs is expected to provide significant support, particularly for exporters.
The primary responsibility for fostering and promoting SMEs lies with state governments, although
the Government of India also supports these efforts through various initiatives.

Skill Training Eco-system of Ministry of MSME:

The Ministry of Micro Small and Medium Enterprises has established a comprehensive skill
training ecosystem to drive the growth of the industry in the Indian economy. This ecosystem
primarily focuses on supporting Micro, Small, and Medium Enterprises (MSMEs) by addressing the
high demand for skilled manpower in various emerging and traditional sectors. The Ministry has
organized numerous skill development programs and courses to enhance the capabilities of both
existing as well as potential entrepreneurs. These training initiatives are designed to meet the
industry's needs and cater to the evolving dynamics and challenges of the MSME ecosystem in India.
The implementation of these programs is carried out through a network of agencies under the

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Ministry, including Khadi Industries and Village Industries Commission, National Small Industries
Corporation Ltd, Coir Board, National MSME Institutes, and MSMEs Technology Centres (TCs).
The TCs offer a wide range of degree programs, certifications, diplomas, and postgraduate degree
programs to individuals at different levels, from school dropouts to those pursuing M.Tech. courses.
Specialized training is also provided in traditional sectors such as the Khadi industries and village
industries, as well as the coconut industry in India.

Progress of Skill Development Programmes:

The Ministry of MSMEs oversees skill development programs that cater to both young
individuals seeking suitable employment and entrepreneurship opportunities, as well as existing
entrepreneurs and the workforce looking to enhance their professional skills. These programs are
carried out through various schemes like National SC/ST Centre, Mahila Coir Yojna Capacity
building, MSME-TCs, ATI, and Coir Vikas Yojna - Skill Upgrading. Additionally, customized
industry-specific training and mandatory courses are also provided by the Ministry.

The chart below illustrates the progress of skill development programs conducted by the
Ministry of MSME from 2016-2017 to 2022-2023

Source: Ministry of MSMEs Annual Report 2022-23

Government e-Market Place:

The Government GeM portal is being actively promoted by the MSME Ministry to encourage
the participation of MSMEs. A special button has been added to the Udyam application form for
MSMEs to indicate their interest in joining GeM, according to the GeM portal.

MSEs that have completed their registration by December 31, 2022, have their order values
recorded as follows:

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Number of MSE sellers & Service Providers Orders value (MSE %)

8,34,696 55.10

Source: Ministry of MSMEs Annual Report 2022-23

The 41st India International Trade Fair (IITF) at Pragati Maidan on November 15, 2022,
featured the MSME Pavilion organized by the Indian Trade Promotion Organization (ITPO). The
Ministry of MSME established the Pavilion with the theme "Voice for Local, Local to Global" and
provided 204 stalls to Micro and Small Enterprises (MSEs) from 24 States/UTs. The showcased
products represented 26 diverse fields, such as textiles, food, metallurgy, fragrance, toys, chemicals,
leather, footwear, plastic, rubber, stone, gems, and jewelry etc. This year, the MSME Pavilion saw a
record high of 73% women-owned enterprises, along with 7% stalls allocated to Divyang
entrepreneurs, 12% to SC entrepreneurs (male), and 6% to aspiring community representatives.

UDYAMI BHARAT:

• The Hon’ble Prime Minister of India, Shri Narendra Modi, inaugurated significant initiatives
for the MSME sector under the 'Udyami Bharat' program.
• During his address at the Udyami Bharat Programme in New Delhi, the Hon’ble Prime
Minister emphasized the pivotal role played by the Micro, Small, and Medium Enterprises
(MSME) sector, which constitutes nearly one-third of India's economy. He also announced
the allocation of a self-reliant fund amounting to 50 thousand crore rupees for the sector.
Additionally, he encouraged MSMEs to register on the GeM portal for supplying goods to the
government. He highlighted its crucial contribution to India's growth journey and reiterated
the government's commitment to providing maximum support to Micro, Small, and Medium
Enterprises.
• The Prime Minister also presented 'The National MSME Awards, to acknowledge the
contributions of MSMEs, States/UTs, Aspirational Districts, and Banks in the growth and
development of the MSME sector in India.
• Furthermore, He launched several initiatives, including the 'Raising and Accelerating MSME
Performance' scheme, 'Capacity Building of First-Time MSME Exporters' (CBFTE) scheme,
and 'Prime Minister’s Employment Generation Programme' (PMEGP). Moreover, he digitally
facilitated assistance to beneficiaries of PMEGP. The Prime Minister also announced the
winners of the 'MSME Idea Hackathon-22' and presented Digital Equity Certificates to
MSME beneficiaries of the Self-Reliant India Fund.

Growth Performance of MSMEs

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The Indian Economy greatly benefits from the contribution of Micro, Small, and Medium
Enterprises (MSMEs). Moreover, they have played a crucial role in industrializing rural and
underdeveloped regions, thereby reducing regional disparities and promoting a more balanced
distribution of national income and wealth. These enterprises have been instrumental in driving
business growth by implementing innovative practices. In particular, small and medium-sized
enterprises have made their mark in diverse economic sectors, offering a wide range of products and
services to meet the demands of both domestic and international markets. Notably, Indian SMEs have
played a significant role in generating employment opportunities with relatively lower capital
investments compared to large-scale industries.

Registered MSMEs in India:

The presence of MSMEs in India is of great significance as they provide abundant

employment opportunities with minimal capital investment compared to larger industries.
Additionally, they contribute to the development of rural and underdeveloped regions, thereby
addressing regional disparities and promoting a more equitable distribution of the country's income
and wealth. As per the National Sample Survey (NSS) 73rd round conducted by the National Sample
Survey Office, Ministry of Statistics & Programme Implementation during the 2015-16 period, India
had a staggering 633.88 lakh unincorporated non-agriculture MSMEs engaged in various economic
activities. It is important to note that this count omits MSMEs registered under Sections 2m(i) and
2m(ii) of the Factories Act, 1948, Companies Act, 1956, and construction activities falling under
Section F of the National Industrial Classification (NIC) 2008. These activities encompassed 196.65
lakh in Manufacturing, 0.03 lakh in Non-captive Electricity Generation and Transmission, 230.35
lakh in Trade, and 206.85 lakh in Other Services.

Activity Wise Registered MSMEs

Activity Category) Number of Enterprises (in lakhs) Share (%)

Rural Urban Total

Manufacturing 115.14 82.50 197.65 31

Electricity 0.03 0.01 0.04 0

Trade 108.73 121.65 230.38 36

Other Services 102.00 104.73 206.73 33

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All 324.88 309.00 633.88 10

Source: Ministry of MSMEs Annual Report 2022-23

Category-wise Distribution Enterprise
The micro sector, which consists of approximately 630.52 lakh enterprises, makes up more
than 99% of the total estimated number of MSMEs. Among the total estimated 633.88 MSMEs,
324.88 lakh (51.25%) are located in rural areas, while 309 lakh (48.75%) are situated in urban areas.
On the other hand, the small sector, comprising 3.31 lakh enterprises, represents 0.52%, and the
medium sector, with 0.05 lakh enterprises, contributes 0.01% to the overall estimated MSMEs.

Distribution of Enterprise in Rural and Urban Areas

Sector Rural Urban All

Micro 324.09 306.43 630.52

Small 0.78 2.53 3.31

Medium 0.01 0.04 0.05

Total 324.88 309.00 633.88

Share (%) 51 49 100

Source: Ministry of MSMEs Annual Report 2022-23

Ownership by Gender (Male/Female)

Among the 633.88 MSMEs, 608.41 lakh (95.98%) were proprietary concerns. This trend
was consistent in both urban and rural areas, although male-owned enterprises were more prevalent
in urban areas (81.58%) compared to rural areas (77.76%). The ownership of proprietary MSMEs
showed a clear male dominance, with males owning 79.63% of enterprises, while females owned
20.37%.

Distribution Percentage of Enterprises in Urban and Rural Areas by Ownership Category

Sector Male Female All

Rural 76.96 21.64 100

Urban 80.88 17.72 100

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All 79.13 20.37 100

Source: Ministry of MSMEs Annual Report 2022-23

Gender Entrepreneurs

Category Micro Small Medium All

Male 78.56 93.64 96.83 78.93

Female 21.05 5.24 2.67 20.37

All 100 100 100 100

Source: Ministry of MSMEs Annual Report 2022-23

Category-wise Ownership of Enterprises

Sector SC ST OBC Others Not All

known

Rural 14.77 6.74 50.89 25.62 0.72 100.00

Urban 9.65 1.53 47.80 40.46 0.86 100.00

All 11.75 3.90 50.12 40.15 0.79 100.00

Source: Ministry of MSMEs Annual Report 2022-23

Employment Generation by MSMEs:

The 2015-16 National Sample Survey (NSS) 73rd round revealed that the MSME sector
played a significant role in job creation, contributing to the generation of 11.10 crore jobs. These
employment opportunities were spread across various sectors, with 360.41 lakh jobs in
Manufacturing, 0.07 lakh jobs in Non-captive Electricity Generation and Transmission, 387.18 lakh
jobs in Trade, and 362.82 lakh jobs in Other Services. It is worth noting that these job opportunities
were created in both rural and urban areas across the country. The distribution of MSME activities
can be observed in the table given below.

Employment provided by MSMEs

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Broad Activity Employment (in lakh) Share (%)

Category
Rural Urban Total

Manufacturing 185.86 174.16 360.02 32.37

Electricity 0.06 0.02 0.08 0.007

Trade 161.14 227.24 388.38 34.93

Other Services 151.23 212.31 363.54 33.35

All 498.29 613.73 1112.02 100

Source: Ministry of MSMEs Annual Report 2022-23

Analysis:

Micro, Small and Medium Enterprises Gross Value Added (GVA) contribution to India's
Gross Domestic Product (GDP) has displayed variations over the past three years. In the fiscal year
2019-20, it reveals 30.5%, experiencing a slight decline to 27.2% in 2020-21, and then rebounding to
29.2% in 2021-22. Similarly, the proportion of MSMEs manufacturing output in the total Indian
manufacturing output remained relatively stable, with percentages of 36.6%, 36.9%, and 36.2% in
the fiscal years 2019-20, 2020-21, and 2021-22, respectively. The export of MSME-designated
products followed a similar trend. The annual report revealed a decrease in the share of MSME
products in India's overall exports over the last three years. In the fiscal year 2020-21, MSME
products accounted for 49.4% of India's exports, dropping to 45.0% in 2021-22, and further declining
to 43.6% in 2022-23. Moreover, the MSME sector has made a significant impact on employment in
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India. The Udyam Registration Portal reported a substantial 12,36,15,681 individuals employed in
MSMEs registered between 2020 to 2023.

Challenges Faced by MSMEs:

MSMEs face various types of challenges such as accessing essential raw materials, skilled
labour, and other necessary inputs, hindering their ability to manufacture products competitively.
Limited access to bank credit, insufficient technological advancement, inadequate training programs,
and lack of diverse marketing channels also contribute to the struggles faced by MSMEs in India. The
inadequate infrastructure of these enterprises leads to low production capacity and increased
production costs. Global competition from multinational corporations offering quality products at
competitive prices further adds to the challenges.

1. Small and Medium Enterprises (MSMEs) face challenges in accessing essential raw materials,
skilled labor, and other necessary inputs, hindering their ability to manufacture products
competitively.

2. Despite the growth of MSMEs, inadequate infrastructure leads to low production capacity and
increased production costs for these businesses.

3. MSMEs struggle with intense competition from multinational corporations that offer quality
products at competitive prices in the globalized market.

4. MSMEs encounter difficulties in obtaining sufficient bank credit, with high-interest rates ranging
between 7.75% and 15.25% for loans.

5. Owners of MSMEs lack awareness of modern manufacturing techniques and advanced

technologies, hindering technological advancement.

6. Lack of knowledge of innovative production methods and insufficient government-led capacity

development programs contribute to the skills gap among MSME owners.

7. MSMEs often fail to utilize diverse marketing channels effectively, resulting in underperforming
sales due to ineffective advertising strategies.

Recommendations:

• It is crucial to boost employment opportunities for economic development by improving the

performance of small and medium-sized enterprises (SMEs) in urban areas.

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• Proper training initiatives can play a vital role in promoting the participation of women in the
workforce and entrepreneurship, not only in urban but also in rural areas.

• The Indian Government should take necessary steps to support the expansion of Micro and small-
sized enterprises.

• It is imperative to provide flexible bank credit and interest rates that cater to the specific needs of
an entrepreneur.

• Essential training for technology and innovations should be provided to entrepreneur in both urban
and rural areas to ensure their growth and success.

Conclusion:

Micro, Small, and Medium enterprises sector is experiencing rapid growth with increased job
opportunities. Manufacturing and Service segments of MSMEs play a significant role in contributing
to the country's GDP. The government of India is actively working towards promoting the growth of
MSMEs across the nation. To ensure the effective implementation of government policies and
provide guidance to entrepreneurs, partnerships, and agreements are being formed with NGOs,
government agencies, and universities.
Despite the above said efforts, MSMEs face various types of challenges at present. One of the
key challenges is the lack of upgrading technological awareness, which can be addressed through
efficient training and skill development programs. low-cost credit access is also crucial for MSMEs,
especially, due to decreasing involvement of foreign banks in approving loans for the industry.
Currently, it is also noted that less than 50% of the fixed assets utilized by MSMEs are funded through
bank credits. Owners rely on personal funds for working capital. Therefore, it is essential to establish
an expert panel to assess the needs and conditions of MSMEs. Additionally, measures like the online
portal Champions non-tax benefits for upward changes in MSME status, and the Raising and
Accelerating MSME Performance program have been introduced to foster the growth of the sector.
The Indian government has recently taken significant steps to further support MSMEs such as the Rs.
5 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS), and Rs. 50,000 crore equity
infusion through the MSME Self-Reliant India Fund. And the inclusion of Retail and Wholesale
trades as MSMEs demonstrates this commitment. India's MSME sector holds a promising future and
will continue the country's economic development in the future.

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