THE IMPORTANCE OF MSMES

FINANCE MINISTER NIRMALA SITHARAMAN ANNOUNCED SEVERAL MEASURES FOR THE MICRO, SMALL, AND MEDIUM ENTERPRISES (MSMES) on the first day of her series of package announcements after Prime Minister Narendra Modi talked about ~20-trillion support to the economy. The need to support MSMES is evident if one looks at their contribution to the gross domestic product (chart 1).

The sector’s importance could be gauged from the fact that its share in GDP was still over 28 per cent in 2016-17, even after dropping in recent times. The share will increase further, merely through a change in definition of MSME, incorporating both investment and turnover criteria, announced as part of the package.

Similarly, its share in exports was well above 48 per cent, meaning that almost half of the exports came from the sector. The share in exports, though, has been sliding at a time when total exports have not been rising significantly (chart 2). The support is also required due to the lacklustre growth in bank credit to the sector (chart 3).

The credit guarantee support of ~3 trillion, though will not impact the government kitty at least immediately, is expected to address this problem. The sector is dominated by micro enterprises or entities where investment in plant and machinery is just ~5 lakh in manufacturing sector and ~10 lakh in equipment in services sector (chart 4).

The assurance given by the finance minister that benefits given to MSMES will not be withdrawn if they grow in size may solve this problem to an extent. Almost one-third of MSMES are in two laggard states of Uttar Pradesh and Bihar, shows the data based on online filing system, which started in September, 2015 (chart 5). If the plight of MSMES improves, these states will also benefit.