Daily Answer Writing
25 February 2021

Q) Subdued growth in the Micro, Small, and Medium scale enterprises can have deep rooted consequences for the economy. Suggest ways for the sector to make a recovery and future growth in the present situation. (150 Words)

Source: The IE Editorial: An asymmetrical recovery

GS 3: Indian economy

Approach Answer: 

 

Introduction:  Micro, Small and Medium scale enterprises(MSMEs) contribute 34% of manufacturing output, 40% of the Manufacturing employment an nearly 40% of total export are done by MSME. Further it is known that 66% of India's MSMEs are owned by socially backward groups with higher participation by women than other sectors. Moreover about 3.61Cr MSMEs contribute 37.5% to GDP, (whereas Corporate sector accounts for 15%) according to the Economic Survey 2014-15. Thus, subdued growth can have deep rooted consequences for the economy.

 

Problems faced by MSMEs:

               1. Absence of adequate and timely banking finance

               2. Limited capital and knowledge

               3. Non-availability of suitable technology

               4. Low production capacity

               5. Ineffective marketing strategy

               6. Constraints on modernisation & expansions

               7. Non availability of skilled labour at affordable cost

               8. Follow up with various government agencies to resolve problems due to lack of man power and knowledge etc.

              

Ways for recovery and future growth:

               1. Rationalization of Taxes:

                              i. Lowering of corporate tax:  Firms with annual revenues of up to ?250Cr(MSME firms), saw an effective tax rate go down to 25% from 30% in 2018.

                              ii. Lowering of GST: Currently various important items such as chemicals like adhesives, metals, cement etc. come under 28% GST rate which make Indian material uncompetitive in the international markets.

                              iii. Brining Fuels under GST: Fuel is not only used for transportation, but various petroleum products are also used as raw material for manufacturing of chemicals. Brining it into GST would create a great chain of input credits lowering the effective taxes for MSMEs particularly.

                              iv. Bringing electricity under GST: This would lower the rate of electricity for the MSMEs.

               2. Ease of doing business: Promoting the ease of doing business by following ways:

                              i. Single window clearance: for various permits such as construction department, labour department, pollution departments etc. can help the MSME sector.

                              ii. Border compliance for exports as well as imports should be eased up further as a large proportion of MSMEs depend on exports.

                              iii. Ease of establishment: land conversion, getting electricity, water and sewerage connections should be eased.

                              iv. Contract enforcement: The law and order situation must be improved including Judicial reforms for better protection of business interests.

               3. Credit enhancement:

                              i. More Loans for the GST payee honest MSMEs: currently upto 1 cr within 59 minutes through an online portal. Interest subvention of 2% for all GST registered MSMEs.

                              ii. Greater subsidy on interests: For example, Currently Credit Linked Capital Subsidy Scheme (CLCSS) for facilitating technology up-gradation is being given.

               4. Enhanced Government Procurement: Currently, 25% procurement by Govt. from MSMEs via GeM. This can be enhanced.

               5. Easing Labour laws:

                              i. Quick implementation of new labour codes.

                              ii. Establishments to be visited by an Inspector should be decided through a computerized random allotment.

 

Conclusion: The government's focus on Production linked Incentives(PLIs) for various industries is a commendable step to boost economic recovery. However, it might help the larger enterprises more than the smaller ones. The current pandemic situation has created an asymmetry in the India's growth story with, cash strapped MSMEs facing existential crisis. For this a whole set of Tax rationalization, credit enhancement and ease of doing business related steps are required.

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