This week we’ll take a peek into how MSMEs contribute to GDP.
MSME’s (Micro Small Medium Enterprise) more popularly known as the backbone of Indian economy; a backbone that seems to be crippled more or less. But before we go into the crippling side of it, let’s take a look at the contributions these enterprises have made on the national and state economy.
- For a start they provide employment to over 80 million people.
- Account for 45% of the manufacturing output and 40% of exports.
- Additionally they generate over 1 million jobs annually.
Data taken from Recommendations of the Inter-Ministerial Committee for Accelerating Manufacturing in Micro, Small & Medium Enterprises Sector.
Access to Credit
The existential woe for all small business in India- credit. Or in other words the option to get a loan. The problem is that not every MSME will be approved by the bank as eligible for a loan. Lets look at it this way, according to the RBI records, approximately 5 lakh crore Rupees were credited to approximately 1 crore small businesses during 2011-2012. There are an approximate 3.6 crore MSMEs
Now if we divide ₹5 lakh crore by 1 crore, that puts the average each small business received at ₹5 lakhs. But the number of small businesses in India is 3.6 crore units not 1 crore units. This means that 2.6 crore units are effectively without access to institutional credit. This puts the demand for credit among MSMEs at ₹10 lakh crore which is 9% of the GDP for 2011-12.
But what’s unpleasantly surprising is that less than 40% of the credit requirement is being fulfilled. This means that growth is stagnated for these small businesses whether they like it or not.
During 2005 the average growth rate of the manufacturing sector was 9% but during 20012-13 this fell sharply to 1.9%. (According to the Recommendations of the Inter-Ministerial Committee for Accelerating Manufacturing in Micro, Small & Medium Enterprises Sector report by the Ministry of MSME)
The last time something fell that steep, it was the retreating northern glacial ice and now you know why this summer was merciless. Yeah the glacial family decided to vacation further north this year.
A drop in manufacturing output is bad news, particularly for employment. In one of our earlier posts, we’ve seen how MSMEs contribute to employment. A drop in manufacturing output would imply that the manufacturing sector is in a slump and employment would go downhill as well. The report also states that the employment in this sector declined from 55 million in 2005 to 50 million during 2010. The problem is that the sector would need to create an additional 70 – 75 million jobs in the next 10 – 15 years in order to cater the growing workforce.
There’s been a steady decline in the MSME manufacturing sector’s contribution to the GDP over the past decade. Efforts to empower MSMEs tend to be stone walled because of the segmented nature of the MSME sector.
|Mfg Output||Gross value of output MSME mfg sector |
(in ₹ crore)
|Share of MSME mfg to total GDP (%)||Total Output (in ₹ lakh crore)||MSME output |
(in ₹ lakh crore)
|% of MSME contribution to total mfg output (%)|
What we are seeing here is a decline in the MSME contribution to manufacturing output. The general slowdown in the Indian economy and the global economy have taken their toll on the manufacturing sector. But at the same time this has also led to the government taking steps to empower the manufacturing units among the MSMEs.
However there are genuine concerns, these small businesses are highly segmented. With one end of the spectrum being occupied by the high end enterprises and the other dominated by low end enterprises in unorganized clusters.
The fact is that these unorganized units provide employment to a large section of the population. The unskilled and poor sections of the workforce; as such their contribution to the economy is vital. The only issue is being able to effectively monitor them. Unless these sections are able to organize and upgrade themselves, the chance of various policy benefits reaching them are slim.
TL;DR: So much for the manufacturing sector and its general slump in the face of a slowing global economy; the Indian MSME contribution to manufacturing is significant. But they’ve been facing a decline in output and employment. They will need to generate 70 million new jobs in the next 10 years time to cater to the growing workforce. In order for these MSMEs to grow it is evident that the benefits of government policies should reach them, however because of the segmented nature of the MSME sector this is not always possible. The MSMEs need to focus on value addition and step up their contributions.