A Driving Force to India’s Economic Growth: What are MSMEs?

Posted on Wednesday, November 30th, 2022 | By IndusInd Bank

MSME, you might have heard it in the news or in a discussion with your colleagues – but what really are MSMEs? 

MSMEs are micro, small, and medium-sized businesses that work in the service industry or the production, processing, manufacturing, and preservation of goods. According to the provisions of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, MSMEs can be categorized into two sectors – Manufacturing Enterprise & Service Enterprise. The Government announced revisions to the definition of an MSME, where turnover rather than an investment will define an MSME, with the goal of creating five crore additional job opportunities in the MSME sector. 

Here’s how the Government of India classifies MSMEs: 

 
Indian MSMEs employ over 11.10 crore people across a variety of businesses. In manufacturing alone, it employs 3.6 crore people while actively contributing 45% to India’s manufacturing output. It is also a major contributor to exports, accounting for around 40% of India’s total exports. <2>  

Why are MSMEs so important? 

India is home to the world’s third-largest pool of small and medium-sized enterprises. According to Narayan Rane, the Union Minister of MSME, the country’s MSME sector accounts for almost 30% of India’s GDP. These businesses, spread across the country, are the backbone of Indian economy – driving growth, employment, exports and productivity.  

As per the Central Statistics Office, Ministry of Statistics & PI, the share of the MSME manufacturing in All India manufacturing gross value output during the year 2018-19 and 2019-20 were 36.9% and 36.9% respectively.  Furthermore, as per the Directorate General of Commercial Intelligence and Statistics, the share of MSME related products to all India exports during 2019-20 and 2020-21 stood at 49.8% and 49.5% respectively. 
 
The success of MSMEs is crucial to the success of Make in India, an initiative by the Government of India to encourage companies to manufacture their products in India. The Make in India campaign was launched by Prime Minister Narendra Modi on 25th September 2014 with an aim to transform India into a global manufacturing hub. By providing finance for MSMEs, the campaign aims at creating employment opportunities and boosting economic growth. 

Why India is betting big on MSMEs? 

The Government of India is aiming to double its economy to $5 trillion by 2025. To realize this goal, MSME has come out as a major employment generator and therefore countless career opportunities can be created for the young enthusiastic population of India.  

To give you an idea, the micro sector has around 630.52 lakh enterprises, which employed 1076.19 lakh people – accounting for around 97% of total employment in the industry. The small sector with 3.31 lakh and the medium sector with 0.05 lakh estimated MSMEs employed 31.95 lakh (2.88%) and 1.75 lakh (0.16%) people of total employment in the MSME sector, respectively. <3> 

While providing employment to a large section of the population and contributing significantly to the country’s exports, MSMEs also play an important role in the development of existing infrastructure. 

The significant impact of Indian MSMEs 

By now, you have an idea why Micro, Small and Medium Enterprises (MSMEs) are crucial to the Indian economy. So, let’s take a look at the big impact of the MSME sector: 

• Achieving export targets: With the help of MSMEs, India Inc wants to reach the target of $400 Billion by FY23 and realize the challenging target of $1 trillion in exports by 2027.    
• Driver of change: Women entrepreneurs are going from strength to strength with 20.73% of proprietary MSMEs being owned by a female. And to top it off, the socially backward groups owned almost 66.27% of MSMEs.   
• Innovation and entrepreneurship: SMEs are known for their innovative products and processes. They are also responsible for a large part of the country’s startup ecosystem. 
• Fostering growth in backward and underdeveloped regions: A large number of SMEs are located in rural and backward areas which promotes economic activity and create employment opportunities in these regions. 
• Reducing costs and increasing competitiveness: MSMEs are an important part of the supply chain for many large companies and play a vital role in ensuring the timely delivery of goods and services.  

That’s why the Ministry of Micro, Small, Medium Enterprises plans to develop the MSME sector further by providing finance for MSMEs and increasing its share in exports as well as its contribution to the GDP. If you are planning to venture into entrepreneurship with an MSME then raising capital acts as a speed breaker in your journey, therefore Ministry of MSME regularly comes with different financing schemes at regular intervals whereas IndusInd Bank also provides attractive loan offering specially designed for MSMEs.  

Conclusion 

Over the past 50 years, the Micro, Small, and Medium-Sized Enterprises (MSME) sector has grown to be one of India’s liveliest and most dynamic economic segments. Since it encourages entrepreneurship and creates a lot of job opportunities, it significantly helps the economic and social growth of the nation. 

Given their importance, it is vital that the government continues to support MSMEs through policy measures such as easier access to credit and enhanced protection from bankruptcy. This will enable them to continue playing a key role in driving India’s economy forward.  

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision.  IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.