[Gist of Kurushetra April 2021] MSME- A Powerful Engine of India’s Economic growth

Mains Paper 3: Economy
Prelims level: MSME sector
Mains level: Covid-19 impact on MSME sector


• The MSME sector accounts for 29 percent of Indian GDP and employs 11 crore people in its 6.3 crore enterprises. However, hit by COVID-19 and its aftermath, the MSME sector had an adverse impact in 2020, facing a strong contraction in revenue.

• The sector suffered the most in ensuring business continuity, challenged by severe liquidity crunch and dipping demand. Apart from initial relief package to MSME during COVID-19 crisis, the Union Budget 2021-22 brought relief to the capital starved MSME’s with government infusing Rs. 15,700 crore for the sector.

• The decision to incentivise the incorporation of One Person Companies (OPCs) in the budget will feed the MSME eco-system. Also, by redefining MSME’s, the Central Government and the ministry of MSME have brought in a large number of micro and small units under the sector, benefitting them with measures, schemes and concessions. The government has already initiated numerous measures under Aatmanirbhar Bharat Abhiyan.

Covid-19 impact on MSME sector:

The Indian MSME sector has been hit by COVID-19 pandemic, with millions of businesses across different sectors seeing extensive economic devastation. The sector has challenges such as delayed payments, over dependence on few customers and lack of skilled workforce. The pandemic has broken MSME’s back and the biggest challenge is now survival. Looking at the sector wise impact of COVID-19 pandemic, it is seen that:

• The Textile and Apparel sector, which provides 45 million direct employment and contributes two percent of GDP, the demand shocks are expected to hurt the Indian Textile exports and employment will be impacted because of limited demand.

• The Auto and auto components sector which provides 40 million employment and contributes 7.1 percent of GDP, will be significantly impact people’s purchasing power. The Aviation and Tourism sector, which provides 42.7 million employment and contributes 2.4 percent of GDP, is amongst the first sectors to be hit. The tourism and the hospitality sector will see a huge job loss.

• The real estate sector is one of the biggest employment generator in the country and has a multiplier effect on around 250 allied industries. Housing is expected to have a muted demand and significant reduction in new launches.

• The consumer, retail and Internet business, which contributes 10 percent of the GDP and provides 8 percent employment, will see an immediate uptick due to hoarding of essentials; however, the retailers need to be wary of the supply chain disruptions.

• The Education and Skilling sector has a market size of $101.1 billion dollars. The sluggish human resource requirement is likely to increase unemployment and even after the operations resume, there will be issues relating to sustainability of MSMEs, thus leading to large number of layoffs. It will be important to introduce basic healthcare e-learning courses in order to meet the requirement of healthcare professionals.

• The Food and Agri sector which contributes to 16.5 percent of GDP and provides 43 percent of the total employment, the impact is likely to be low on both primary agricultural produce and usage of agri inputs like seeds, pesticides and fertilisers. However, all good exports to major economies will grapple for the next six months.

• The Transport and Logistics sector which contributes 14 percent of GDP and provides employment to 8.27 million people, will see a medium impact. However, reduced demand for logistics due to reduced production across all sectors will put a downward pressure across In this context, it is pertinent to mention that there are some certain sectors as mentioned below which are throwing open great opportunities for the entrepreneurs in the current context.

For MSMEs to recover from the COVID-19 crisis and identify opportunities, they need to:

• Embrace technology and digitisation.

• Change mindset and focus on business innovation.

• Monitor labour productivity on a daily basis.

• Think of strategies that can revive revenues of the businesses within a short span of time. Launching an e-commerce vertical is a good example.

• Business needs to be more agile and come up with crisis management strategies.

• Focus on three factors:
1. Managing short term disruptions
2. Catering to medium term needs
3. Planning for long term changes

• Building resilient and local supply chain

• Digitising supply chain completely

• Divesting unprofitable verticals of business

• Sticking to core and focussing on strengthening it

Way forward:

• The role of MSMEs is often highlighted in the context of their contribution to employment, economic growth and balanced regional development, it is important that these enterprises are sustainable and can deliver at scale. Even though contributing significantly to exports, Indian MSMEs are still not regarded as a force to reckon with in the international markets.

• Looking ahead, the challenges are in building the next generation of MSMEs that can function as power houses of the economy. With intense competition at global level and the demands arising from globalisation, it is imperative for MSMEs to demonstrate greater competitiveness, position themselves strategically and leverage their engagements in global value chains.

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