Bringing MSMEs into inclusive and sustainable global value chains
GS Paper 3: Effects of Liberalization on The Economy, Changes In Industrial Policy and their effects on Industrial Growth
Important for:
Prelims exam level: MSMEs: Definition, MSME Act
Mains exam Level: MSMEs and their role in Indian Economy
Context
MSMEs are the ones that have faced the harshest of environments over the last few years
What’s MSME?
• Micro Enterprise: a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed 1 crore rupees and turnover does not exceed 5 crore rupees
• Small Enterprise: a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed 10 crore rupees and turnover does not exceed 50 crore rupees
• Medium Enterprise: a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed 250 crore rupees.
Significance of MSMEs
• Though the growth and achievements of large businesses in India have received much attention, micro, small and medium enterprises (MSME) actually account for over 99% of businesses.
• MSMEs are the largest employer in India outside of agriculture, employing over 11.1 crore people, or 45% of all workers.
• It is no exaggeration to call MSMEs the backbone of the Indian economy.
• Every year on June 27, World MSME Day provides us with the opportunity to appreciate their valuable contribution to job creation and sustainable development across the world. Yet, these businesses are the ones that have faced the harshest of environments over the last few years.
Impact of COVID, Climate change and Rising Prices on MSMEs
• The disruption of the pandemic severely impacted MSMEs, especially those in the services sector.
• Their small size and lack of access to resources meant that many were only beginning to mount a fragile recovery just when war, supply shocks and soaring fuel, food and fertilizer prices presented a host of new threats.
• All of this comes against the backdrop of the ongoing climate crisis, the greatest disruption multiplier of all.
The potential of India’s small businesses
• The potential of India’s small businesses is truly immense.
• India faces a unique moment in history, a potential demographic dividend of tremendous proportions.
• To leverage this opportunity, India needs to create many jobs, especially for the one million young people entering the labour market every month.
Broader benefits of a dynamic MSME sector
• The broader benefits of a dynamic MSME sector for the entirety of society is plain to see — more jobs, a broader tax base, increased economic growth, prosperous and productive communities, in turn expanding domestic markets for goods and services.
• The term MSME itself clubs together a range of businesses as diverse as India itself: from backyard workshops to IT and other technology start-ups with cutting edge technology.
• While no single narrative, policy or scheme can address the full diversity and complexity of Indian MSMEs, they share some important commonalities.
Challenges
• While some MSMEs operate at the highest industry standards, most do not meet today’s standards on productivity, environmental sustainability, and health and safety of workers.
• This is further exacerbated by the high degree of informality in the sector, with many enterprises unregistered, and both employers and workers are lacking awareness of and commitment to comply with labour and environmental laws.
• As a result, informal enterprises cannot access formal MSME support and financing nor participate in global value chains that require full compliance with all applicable regulations.
Initiatives taken by Government & other global agencies
• The Government of India has rightly identified the development of the country’s MSME ecosystem as a top priority for achieving Atma Nirbhar Bharat (self-reliant India).
• India’s ambitious “Make in India” campaign aims to catapult the country up the manufacturing value chain to position itself as a global manufacturing hub.
• Initiatives such as the production linked incentives (PLI) schemes and the recently launched zero effect zero defect (ZED) certification are helping to promote and boost the sector.
• To help accelerate this process, the UN system in India is supporting these and other MSME development initiatives at the local, State and national levels.
• Agencies such as the United Nations Industrial Development Organization (UNIDO), International Labour Organization (ILO), United Nations Development Programme (UNDP), UN Women, IFAD and others are working with MSMEs as they navigate a rapidly changing post-pandemic economic landscape shaped by large-scale transitions, chiefly digitalization, greening and the reorganization of value chains.
• Under the Partnership for Action on Green Economy, UNIDO and ILO work to support government initiatives on inclusive and green transformation strategies for key manufacturing sectors, together with UNDP, the United Nations Environment Programme (UNEP) and the United Nations Institute for Training and Applied Research (UNITAR).
• ILO works in Pune and Ahmedabad to formalize municipal solid waste management for clean food, textile and garment value chains in Odisha and Andhra Pradesh.
Issues with Digitalization
• Digitalization into smart manufacturing is still in infancy: Digitalization concerns the integration of digital technologies, such as big data, artificial intelligence and virtual reality, in business processes, also known as Industry 4.0. With few exceptions, digitalization into smart manufacturing operations is still in its infancy.
Digitalization schemes
• There is a need for replicable digital solutions adapted for MSMEs, including digital enhancements for machinery and equipment currently in use.
• Government initiatives such as the Digital Saksham and the interlinking of the Udyam, e-Shram, National Career Service (NCS), and Atmanirbhar Skilled Employee-Employer Mapping (ASEEM) portals show the promise of targeted digitalization schemes.
Environmental impact
• “Greening” reduces the environmental impact of MSME operations and fosters cleantech innovation and entrepreneurship to accelerate the transition to a circular and low carbon economy.
• Energy efficiency provides a case in point as business and climate benefits go hand in hand.
Job creation
• The Prime Minister’s Employment Generation Programme (PMEGP) is also creating opportunities for self-employment and micro enterprises, with over 7 lakh micro enterprises assisted in becoming economically viable.
• ILO, together with the Federation of Indian Chambers of Commerce & Industry (FICCI) and corporates, is supporting MSMEs in creating and retaining jobs, with over 150 MSMEs having improved productivity, aligned to international standards and integrated into global supply chains, and the Start and Improve Your Business programme helping over a lakh young people across five States launch enterprises.
Suggestions
• Recognizing and supporting the role MSMEs play : A forward-looking mindset centres on policy makers and society at large fully recognising and supporting the central socio-economic role that MSMEs play in India, as across the world.
• Formalizing the businesses: To fully unlock emerging opportunities in the rapidly changing global value chain ecosystem and maximise the demographic dividend, MSME owners need to further commit to formalizing their businesses, investing in improved productivity, compliance and most of all, decent work and jobs for India’s aspiring youth.
Conclusion
The compelling vision of India as a world-class manufacturing and services hub for the world, moving towards upper middle-income status and achieving the Sustainable Development Goals, can best be achieved with the widespread and transformational uplifting of the MSME segment. Government initiatives, supported by UN agencies and partners, have helped demonstrate this is doable if further scaled up, with lessons for enhancement being drawn together, including the Ministry of MSME.
As UN Secretary-General Antonio Guterres has urged, “Let us renew our commitment to leverage the full potential of MSMEs, rescue the Sustainable Development Goals and build a more prosperous and just world for all.”