© 2019 IJRAR February 2019, Volume 6, Issue 1 www.ijrar.

org (E-ISSN 2348-1269, P- ISSN 2349-5138)

A study on Prospects and Challenges of MSMEs in

India
Papaiah 1
Research Scholar, AIMS Centre for Advanced Research Centre, Bangalore
Dr.R. Jayaprakash Reddy 2
Professor of Commerce, AIMS Institute of Higher Education, Bangalore, Karnataka, India.

Abstract-

MSME (Micro, Small and Medium Enterprises) are the core of Indian Industry as they play a pivotal role in
changing the economy of a country, for which their contribution is immense as they not just create employment
opportunities but also encourage low skilled level workers to become entrepreneurs. It has spread in both urban
and rural areas. As per data in Economic Times, June 2013, MSMEs provide employment to close to 40% of
India's workforce. The MSME’s in India is highly assorted as they differ in terms of their size of employees,
variety of products and levels of technology. It helps in development of rural and backward areas, tumbling
regional disparities and guaranteeing more reasonable dispersal of national revenue and prosperity. MSME
contribute enormously to the socioeconomic development of the country. MSME manufacture more than 6,000
products. Even though contributing so much in industrial growth, MSME internal operation is still far behind
from the other developed industries.

Key words: MSMEs, Economic Development, GDP, MSME Act

INTRODUCTION

Over the last few decades Micro, Small and Medium Enterprises (MSMEs) has arose as a vivacious and lively
sector in the Indian economy. It is the second largest creator of environment opportunities after agriculture. It
contributes closely to 8 percent of the nation’s GDP, 40-45 percent of the manufacturing output and exports. It
contributes immensely to the socio-economic development of the country. They provide the largest share of
employment after agriculture. MSMEs play a pivotal role by avoiding wealth accumulation as they assure equal
distribution of national income and wealth by creating employment opportunities, encouraging lo capital cost
and involving rural and backward areas. MSMEs are spread across the country and manufacture variety of
products. They cater to local, district, state, national and international markets. Entrepreneurship is an important
requisite to accelerate the industrial growth. MSMEs can be a solution to major problems like unemployment,
poverty and over population. This article attempted at highlighting the implication of MSME on economic
development in India.

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MSME AS GROWTH DRIVER OF INDIAN ECONOMY

In the present scenario, MSMEs are imperative to the Indian economic system. In India, 95 percent of industrial
units (3.4 million) are in small-scale sector, manufacturing contributing 40 percent value addition. It has always
been centre of attraction for policy makers and research scholars with their features of employment generation
and emphasizing on exports. MSMEs produce over 7500 products with wide range of products and
specifications catering to different market segments. Small Scale sector has emerged as a major supplier of mass
consumption like: FOOD PRODUCTS, Chemical Products, Metal Products, Electrical Machinery & Parts,
Rubber & Plastic Products – etc.

LITERATURE REVIEW

Pillai (1994) in their research analyzed the role of small-scale sector in future on the evolving economic purview
and the challenges it may have to face to sustain its place as an important contributor to the development process.

Thiripurasundari, K and V. Gurumurthy (2009) in their study discusses the challenges faced by the micro, small
and medium enterprises of India.

Venkatesh and Muthiah (2012) found that the role of small & medium enterprises (SMEs) in the industrial
sector is growing rapidly. They emphasized that nurturing SME sector is essential for the economic well-being
of the nation.

Dr. A.S. Shiralashetti (2014), prospects & Problems of MSMEs in India. This paper covered growth,
performance and contribution of MSMEs to GDP and also mentioned about the problems faced by MSMEs
located in Dharwad district of Karnataka State.

Dr. Neeru Garg (Sept. 2014) in their paper on Micro, Small and Medium Enterprises in India: Current Scenario
and Challenges has made an attempt to highlight the growth of this sector and analyze various problems and
challenges faced by MSME sector in India.

The Indian economy is now the second fastest growing economy of the world. Many forms of technological
change are accompanied by changes in skill requirements. This is particularly true of the changes associated
with the adoption of the new advanced technologies that are being implemented in the manufacturing sector
(Doms, Dunne, and Troske, 1997).

RESEARCH OBJECTIVES

1. To understand the contribution of MSMEs in economic development of India.

2. To study the challenges faced by MSMEs

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SCOPE AND METHODOLOGY OF THE STUDY

The scope of the present study has been confined to the contributions made by the MSME to the Indian
economy. The data for the present study have been collected from various Secondary sources especially from
the annual report published by Ministry of Micro, Small and Medium Enterprises for various years.

Contribution of MSMEs to Indian Economy

MSMEs have a greater opportunity for expansion and diversification. MSME have a prodigious role in the
balanced development of any economy. MSME sector presently accounts for 9% of the GDP by employing 100
million people over 44 million units. As stated in the Annual report of Ministry of MSME, MSMEs accounts
for about 45% of total export of the country and produces more than 7000 variety of products. Unfortunately,
there are 1.6 million registered MSME in India and majority of the MSMEs in India are not registered. Among
the registered MSMEs it can be seen that 67.1 percent are manufacturing units, 16.8 percent are service units
and 16.1 percent are repair and maintenance units. Majority of the MSMEs are micro enterprises who constitute
94.9 percent of the market share followed by small enterprises with 4.9 percent of share of which 55 percentages
operate in rural India and rest 45 in semi-urban and urban areas.

Generating Employment Opportunities: Conventionally MSMEs are labor rigorous and improving
unemployment problems to a great extent. Generating employment is one of the major variable for creating
economic growth of a country. For any economy to thrive it must first provide livelihood through employment
to its locals. It employs about 101 million people and creates 4 million employment opportunities a year. The
number of MSME has been increasing steadily. MSME is a boon to rural people as they do not demand highly
skilled employees for that matter even semi-skilled and unskilled people can be employed in such units.

MSMEs share to GDP: MSME sector is a key donor to nation’s GDP. In the fourth quarter of 2012-2013
(January to March 2013) witnessed a slid of GDP to 4.8 percent. MSME sector comprises a foreseeable portion
of GDP which draws attention from researchers and policy makers. The statistics show that the contribution of
MSME to GDP is ever increasing. The below given graph delineates the percentage share of MSME in the
nation’s GDP over the years. It has managed to increase from 28.77 percent 2015-16 to 31.72 percent in 2017-
18 (Source: Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation)

MSMEs share in Production and Exports: Since MSMEs are operating in wide variety of sectors such as
manufacturing, trade and services they constitute a formidable component of country’s industrial production.
MSMEs are the major contributors of industrial growth of a country as it accounts for more than 90 of the
percent Industrial units in India and it has been swelling remarkably for last many years. MSME had an impact
on various issues of the economy such as industrial progress, entrepreneurship, job creation, economic

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empowerment etc. Around 50% MSME are owned by rural people and hence increases the standard of living
of people living in the rural areas

As per the MSME Annual Report of FY 12 published by Ministry of Micro, Small and Medium Enterprises
MSME contribute 45% of the total manufacturing output. Currently, MSMEs are experiencing a momentous
surge in terms of investment. It is noticeable that MSMEs contribute 40 percent of the total export. The data
shows that the MSME always show an increasing trend in the contribution to the total export of the country

PROBLEMS OF MSMEs:

The MSMEs face a number of problems. As a result, many MSMEs turn sick and a large number have to
close down. The following are the main problems that MSMEs face in today’s world

 Lack of Skilled workers: Though India has abundance man power, most of them are unskilled
workers. Large firms pay higher remuneration and employ skilled workers. The MSMEs have to
operate with unskilled or semi-skilled workers. Thus, the MSMEs suffer from low managerial
capabilities.
 Infrastructural constraints: In their survey on 1,063 MSMEs, Keshav Das and Sebastian Morris
found that 716 firms out of 1063 (or more than 67 percent) faced significant infrastructural problems.
This is huge and confirms that most of the productive activities are constrained by scarce
infrastructure. Power and water being the most important constraints in the Infrastructure. Having
power backup is difficult for these small firms and hence increases their dependency towards the
power supplied from the State electricity boards, who do not supply regular and adequate power.
On the other hand, transportation and communication, Corruption by the SEBs on the other hand
poses a huge challenge for MSMEs. Using inferior and outdated machines are the reason for
increased production costs and inferior quality. Failure to adapt to changing consumers needs and
preferences fuels it
 Lack of Technology: Because of their small size, MSMEs cannot enjoy large-scale production
economies and since there is a considerable heterogeneity among the MSMEs in India only a few
firms operate with sophisticated technology base whereas majority of firms use outdated technology
which in turn results in low productivity and poor product quality.
 Raw material handiness: MSMEs contribute about 40% of the country’s exports. Few firms use
raw materials and intermediate goods that are imported and they end up paying high tariff rates.
While firms that use raw materials that are available locally also face a number of problems like
dependency on local traders for raw materials and selling it back to the local market at a
comparatively lesser price

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 Investment and Credit: The dearth of investment and lack of credit is the foremost hindrance in
the development of MSMEs. The capital base of the micro enterprise is weak since they generally
have partnership or single ownership. The artisans running cottage industries either run their business
with whatever little capital they possess or take credit from the traders who supply raw material to
them. In most of the cases the credit is given on a very high interest rate
 Reversed tariff structure: This has created the problem of a significant inversion in tariff structure,
which specifically hurts small firms since they are more labor using and have high material-to-output
ratios for certain metals like steel, copper, and many non-ferrous metals, etc. remain high in
comparison to tariffs on manufactured goods apart from consumer goods.
 Lack of Marketing: Scarce of financial and capital sources forces MSMEs to sell at a lesser price
and become less known among its competitors as these units often do not possess any marketing
organization
 Impact of reforms and globalization: The LPG policy marked the deregulation of industrial
economy through de-licensing and de-reservations, thereby opening up the industrial sector to both
internal and external competition, as per Globalization thereby lowering of tariffs, removal of
restrictions on quantity and this had a major impact on the MSMEs. Cheaper and better quality
imported goods are posing a serious threat to MSMEs in various industries like chemicals, silk,
automobiles, toys etc.

Major findings of study:

 MSMEs in small-scale sector, manufacturing contributes to 40 percent value addition

 MSMEs produce over 7500 products with wide range of products and specifications catering to
different market segments
 MSMEs account for about 45% of India’s manufacturing output and 40% of India’s total exports.
 MSME sector presently accounts for 9% of the GDP by employing 100 million people over 44
million units
 Among the registered MSMEs it can be seen that 67.1 percent are manufacturing units, 16.8 percent
are service units and 16.1 percent are repair and maintenance units
 Majority of the MSMEs are micro enterprises who constitute 94.9 percent of the market share
followed by small enterprises with 4.9 percent of share of which 55 percentages operate in rural
India and rest 45 in semi-urban and urban areas
 MSMEs employs about 101 million people and creates 4 million employment opportunities a year.
 Share of MSMEs to GDP has increased from 28.77 percent 2015-16 to 31.72 percent in 2017-18
 Lack of skilled workers, technology, raw materials, investment and credit, infrastructural constraints,
globalization, EXIM policies are the challenges faced by MSMEs

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Conclusion

The small scale sector has grown rapidly over the years. The period of liberalization and the development
the MSMEs sector constituted an important segment of our economy. MSMEs are a very important segment
in the Indian industrial sector and would continue to play a crucial role in the Indian Economy in the future.
At the same time MSMEs sector faced Key Challenges like as Lack of availability of adequate and timely
credit, High cost of credit, Collateral requirements, Limited access to equity capital, Procurement of raw
material at a competitive cost, Problems of storage, designing, packaging and product display, Lack of
access to global markets, Inadequate infrastructure facilities, including power, water, roads, Low technology
levels ,Lack of skilled manpower for manufacturing, services, marketing, etc. Despite the various challenges
it has been facing, the MSME sector has shown admirable innovation, adaptability and Resilience to survive
the recent economic downturn and recession. A rewarding feature of economic development in India is due
to impressive growth of modern MSMEs.

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