Impact of MSME on Indian Economy

INTRODUCTION TO MSME

The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector the Indian Economy over the last 5 decades. MSME Sector has been one of the most focused sectors in prospects of Investments and has contributed significantly for our country’s Social Development as well as Economic development. MSME has also promoted women empower and has helped in generating largest employment opportunities at lower capital cost, next only to agriculture. It has helped abundantly by promoting the term ‘Entrepreneurship’. MSME have merged as complementary to large industries as ancillary units and they are widening their domain across all sectors of the Indian Economy as well as producing a range of Products and Services which will help to meet the needs of not only domestic market but International markets also. Government of India has never failed to support MSME in all ways possible and have promoted MSME sectors by starting a number of Schemes and other Incentives for them. The Ministry of MSME runs Various Schemes aimed at financial assistance, Infrastructure development, technology assistance and Upgradation, skill development and training, enhancing competitiveness and market assistance of MSMEs.

GOVERNMENT SUPPORT TO MSME

The ministry of MSME is doing its best to help MSMEs reaching new high and contributing more and more to The Indian Economy. The ministry recently came up with some Policy Initiatives like:

  • Ease of Registration Process of MSMEs- Udyog Aadhaar Memorandum
  • Framework for Revival and Rehabilitation of MSMEs
  • MSME Data Bank
  • MyMSME
  • Direct Benefit Transfer in the M/o MSME
  • GST rollout & Ministry of MSME
  • Digital Payments
  • Grievance Monitoring
  • MSME Samadhaan: To Address Delayed Payments to MSEs
  • MSME- Sambhandh
  • Technology Centre Systems Programme(TCSP)
  • Partnership with Industry
  • International MoUs
  • MoU with NSIC for provision of services for MSMEs
  • Swachhta Pakhwada by Ministry of MSME
  • National Scheduled Caste / Scheduled Tribe Hub

These Policies are being formulated to help MSME reach new heights and contribute more in Economic and Social Development of the Country. The Schemes by Government help MSMEs Financially/in-kind for their betterment. Government of India has Supported and Promoted MSME Sector not only on Domestic Levels but in International Markets also. The contribution made by MSME in development of Economy and Social Life in backward areas has been spectacular.

ROLE OF MSME IN INDIA

The MSMEs have been a great contributor to the expansion of entrepreneurial endeavours through business innovation. Since past 9 Years MSME have contributed around 29% in GDP of India(Source: CSO, Ministry of Statistics & Programme Implementation). The Gross Value added by MSMEs in contribution to Indian Economy as on 2015-16 was INR 1,24,58,642 Crs.

In India 324.88 Lakhs MSMEs are located in Rural Areas whereas 309 Lakhs MSMEs are located in Urban Areas. Shockingly 630.52 Lakhs of these MSMEs falls under Micro Sector whereas 3.31 Lakh MSME falls under Small sector and only 0.05 Lakh falls under Medium Sector(Data as per MSME Annual Report 2017-18). MSMEs have a big impact on Micro Sector helping small entrepreneur’s achieving their dreams.

Not only was these, it also seen that 22.24% of the ownership of these Enterprises in rural areas were of female. In urban areas Female ownership of these enterprises came around 18.42%. MSME have led a movement in supporting Female entrepreneurs and have helped them in achieving their dreams. One more interesting fact is that 50% of MSMEs in India have ownership of OBCs followed by 12.45% of SCs and ST having ownership of 4.10%. In total ~66% of MSMEs in India are owned by Socially Backward Groups.

Estimated number of MSMEs (Activity Wise) is as follows:

Activity Category

Estimated Number of Enterprises (in Lakh)

Share(%)

RURAL

URBAN

TOTAL

Manufacturing

114.14

82.50

196.65

31

Trade

108.71

121.64

230.35

36

Other Services

102.00

104.85

206.85

33

Electricity*

0.03

0.01

0.03

0

ALL

324.88

309.00

638.88

100

*Non-captive electricity generation and transmission and distribution by units not registered with the Central Electricity Authority (CEA)

MSMEs have helped women entrepreneurs, socially backward groups in excelling and have been a major player in generating employment. Truly Micro Sector has been a major contributor in Social and Economic development of our nation.

Following Table shows how MSME helped in Employment Generation:

Activity Category

Employment (in Lakh)

Share(%)

RURAL

URBAN

TOTAL

Manufacturing

186.56

173.86

360.41

32

Trade

160.64

226.54

387.18

35

Other Services

150.53

211.69

362.22

33

Electricity*

0.06

0.02

0.07

0

ALL

497.78

612.10

1109.89

100

*Non-captive electricity generation and transmission

Interestingly, out of the total Estimated Employment Generated around 97% are generated by Micro sector which shows how it has been aiding in development of our nation and shaping a bright future.

MSME Sector has always been supported by Government and Big industries in every ways possible and MSME have returned the favour.

“No dream is too big and no dreamer is too small” these saying have been proved right as the smallest of enterprises have supported millions of peoples dream by providing them with employment.

*The figures were taken from the government MSME Annual Report of 2017-2018

Author
Aditya Majmudar
Volunteer- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

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How Does The 2019 General Election Results Alter The Market Dynamics For India?

The stock market indices and the share price of the companies listed on these indices constantly keeps changing due to company related factors and market-related factors. The company related factors are usually its annual performance in terms of revenue generated, market size captured, innovative product/service offered, capturing various synergies that derive its value on the index, etc. The key elements that drive the market-related factors are the macro events that take place which dictates the direction in which a particular company or the whole industry tends to move towards.

The prominent macro events such as inflation, monsoon, trade policies, financial factors, trade war, oil prices, global markets etc. are a few to name. But, one of the most crucial factors is the government that is ruling the country as it’s the epicentre of all the policies, reforms, schemes and decisions made in the country which acts as an indicator of the road which is ahead to come. Hence the importance of the motto and ambition of the incoming government is so crucial. However, the market overall will tend to thrive in the long-run irrespective as to which government comes into power.

As seen in the table below are the annual returns derived by the BSE index over the tenor of the ruling government. Here, it’s clearly visible that the returns derived from the market index have more to it than the party ruling the government.  

The markets always hope for a stable government at the Centre so as to have consistency and stability in the economy as the government is the sole authority of framing the prominent economic policies of India. The foreign players generally prefer to invest in economies that have a stable government with strong policies with long-term visibility. The Indian equities have witnessed foreign inflows worth a net of $6.7 billion from January to March, which is more than the outflows of $4.4 billion in 2018. This optimism has kept foreign investors bullish on India and the market is benefitting from huge emerging market inflows.

India is set to emerge as a USD 5 trillion economy over a period of five years and as a USD 10 trillion economy eight years after that. This gives a clear indication of the growth prospects and the sectors in which the opportunities will arise on these lines. In terms of fundamentals of the country’s economy, its inflation has come down from over 10% five years ago to about 4.6%, the fiscal deficit has come down from almost 6% to 3% which are very important indicators. We have already grown in the last five years from being the 11th largest economy in the world to the sixth. This has led to ease in the monetary policy (which we already have started to witness) which in turn can boost consumption.

To attain this kind of scales, the country needs inclusive and sustainable growth. And for this, the focus needs to be on physical and social infrastructure. The government has been taking a number of initiatives to address and correct the imbalances in both the economic growth and development of the country. BJP’s election manifesto this time around was focused on infrastructural development which has already started to witness growth from the ground level during their last tenor.

The government is expected to make a capital investment of Rs 100 lakh crore by 2024 in the infrastructure sector as well as announce a new industrial policy to improve the competitiveness of manufacturing and services. This has given a more optimistic outlook going forward. Hence, companies of sectors such as Infrastructure, Power, Capital goods, Manufacturing and Construction will witness significant progress and growth over the government’s next tenure. Some sectors such as FMCG, IT, Metals. Pharma keeps growing irrespective of the election cycles.

With the progressive economic steps of implementing Goods & Service Tax, De-monetization, the government looks to roll out further steps to organize and streamline the conduct of businesses and trades. Hence it would advisable to avoid the sectors or companies which have an unorganised structure and a low sustainability business model.

The Modi government’s return to power is likely to propel the agriculture sector stocks as well. New agricultural reforms, policies, financial aids availed to the farmers and the export policies and incentives has improved the quantity and quality of the output which can be used for domestic consumption as well as for exports.  This will leave more money in the hands of farmers which will be spent on buying tractors, cars and two-wheelers in the rural market.

The power sector has also witnessed a significant improvement in energy deficit situation over the last four years of the tenure. The country’s energy deficit, which remained in the range of 8% and 10% during 2011-13, has improved in FY14 to 4-4.5%, and subsequently contracted to a mere 0.7%.

With the implementing of Housing for All, Rural Development & Electrification, Smart City Projects, development of roadway and waterway connectivity, and many such policies being already rolled on and many being in the pipeline as well, industries that have been directly linked with these schemes and policies such as construction, building materials and accessories etc. will directly benefit from the same.

Banking sector stocks are also likely to rise since sales in the auto sector, demand for housing loans and agriculture loans will lead to a rise in their loan books. The re-organisation of the increased banking NPA’s has also propelled these stocks towards profitability. Also, banking stocks have been at the forefront of almost all rallies on the benchmark indices.

The Make in India policy and Start-up incentives provided by this government is expected to increase the employment opportunities in this market. With the kind of global recognition India is gaining throughout has been reflected by the way other economies and government is viewing India as an investment destination. This has led to strengthened relations with major member nations giving the country a much greater economic, financial, technological and political horizon to look forward to.

Though many of the investors have a different philosophy and they prefer not to try and time the stock market. They prefer to stay invested for a long time and usually have a diversified portfolio which can smoothen the impact of the immediate volatility of the market. However, analysis of this event helps to not only smoothen the immediate impact of the volatility in the market but also helps to plan the portfolio reshuffling. Thus, understanding the vision and policy-making of the government over the next tenure will help to identify the sectors that will grow in the upcoming tenor and investing in the most efficient business model of the company in that particular sector can give the investors multi-beggar returns. 

Author
Dhrumil Wani
Team Leader – Equity Research & Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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Gaining the edge: Parallel banking for Indian economy

India is going to emerge as the fourth largest economy in the world by 2025 with a GDP of about $5 trillion. With that, India needs to address financial credit access to its rural population that today constitutes about 66% but having an economic contribution of 15%. To achieve a figure like this, the country needs to create 10 million jobs a year, which can be best achieved by meeting the credit needs of small businesses. Moreover, meeting the gap requirements of infrastructure investments, of over US$ 526 billion over the next 20 years is another challenge. Fact scan, check. Problem Statement, check.

Figure 1 – India’s GDP growing at a CAGR 20.83%
Source – RBI

Now let’s look at what the parallel banking sector has in store for us

A quick google check tells us that it is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. A simple solution. Empower NBFC’s. Check.

It is likely that the next 5-year period will be marked by corporate CAPEX cycle as well as continued Government spending in the Infrastructure sector. Assuming a steady Credit-GDP ratio of 85% and a nominal GDP CAGR of 10-11% suggests that the banking cum NBFC credit can increase by 12-13% CAGR to touch levels of US$ 2.7 trillion by 2025. The question arises, can our present banking infrastructure support this requirement or do we need more vibrant participation by NBFC’s?

Figure 2- Credit-to-GDP ratio
Source – RBI
Figure 3 – GDP Contribution
Source – DBEI

In the last few years, the ratio of Manufacturing & Industry – Credit to GDP has consistently fallen from 79% (2013-14) to 72% (2018-19). Indeed, this was the period marked with NPA’s that fettered the bank’s ability to lend to the manufacturing sector. On the other hand, the NBFC’s share of credit-GDP ratio has gone up substantially from 6.5% in FY-08 to 19.1% in FY-18. Participation of NBFC’s has been across the value chain from high-risk and un-collateralised credit to mortgage financing for salaried class.

Clearly, the approach going forward will require a massive expansion of a banking network, re-tooling the NBFC’s for expansion of credit especially to small businesses, creation of a dedicated Rural banks, specialised NBFC’s for diverse assets, and other measures that would stimulate private investment and provide mechanisms to  promote project financing and infrastructure development.

In India, we have the situation that banks finance large businesses, medium and small businesses, home mortgages, auto loans, personal loans, and credit cards, each of which have totally diverse risk management requirements. Should we not adopt the model of the developed economies where there are specialised financial institutions for different assets? While we do have housing finance companies, NABARD for Agri-credit, NBFC’s for auto loans etc, the need is to allow a larger number of NBFC’s specialised in the diverse asset class. This enables focused risk management, relevant to the nature of the asset being financed.

Presently, the NBFC’s balance sheets are pre-dominantly funded from the banking sector. NBFC’s access to public deposits is very tightly regulated by the RBI due to issues of the past.

Moreover, the rising importance and the geographic reach of the NBFC’s especially to the small businesses requires a refreshing look on the allowing the NBFC’s to tap the public deposits and making them as cost-effective competitors to the banking sector. The fear of default or misuse of public funds by NBFC’s can be managed by the deployment of technology to manage the risks on a real-time basis.

Another challenge for India is to finance its massive infrastructure requirements estimated at US$1.5tn over the next 20 years (“Around US$4.5trillion worth of investments is required by India till 2040 to develop infrastructure to improve economic growth and community wellbeing. The current trend shows that India can meet around US$ 3.9trillion infrastructure investment out of US$ 4.5trillion. The cumulative figure for India’s infrastructure investment gap would be around US$ 526bilion by 2040.” – Economic Survey 2017-18).

The key issue plaguing the financing of infrastructure is a lack of long-term debt market in India. Perhaps, the time has come to allow a relaxation of the present rating norms for the investment of 5-10% of the corpus of pension funds, insurance funds and provident funds to invest in A-rated infrastructure finance companies.

The banking sector has limited ability to provide project finance, which acts as a barrier to attract private investments in new projects. Perhaps, we need to once again revive the old concept of development financial institutions (DFI’s) that will take the lead in providing project finance. The business model could be that the DFI’s are owned by the Government and international financing institutions – investment funds. The proceeds of bank privatization could partly offset the capitalization requirement of the DFI’s from the  Government.

Let us now look at what could be done to the existing banking sector:

In the 1970s and 80’s the nationalization of the banking sector was to support and promote the socialistic economic ideology. Since 1992 India has been on a path of private capitalization and has aborted the socialistic pattern of economic development. This being so, why is our banking sector still Government-owned? We have also evidenced that Governmental control of the banking sector necessarily implies that the banks must fall in line with Government guided lending directives whether they make economic sense or not. The saga of NPA’s and loan waivers proves the above and establishes the basis of Government divestment in the commercial banks. The privatization proceeds so received by the Government should be used to capitalize the launch of rural banks. Ideally, the State Governments should join hands with the Centre – RBI for capitalization of the rural banks.

In conclusion, if in the next 11-12 years India is to emerge as a $7 trillion economy thus being the third largest in the world, and if we are to ensure an economic development percolates to the bottom of the pyramid, we will need banking reforms which lead to:

  1. Privatization of existing PSU commercial banks
  2. Expanding the participation of Small Finance Banks, as well as allowing a level playing field for the NBFC’s to raise public deposits
  3. Establishment of Rural banks with technology support
  4. Establishment of Development Financial Institution’s to provide project financing support to private and PPP projects
  5. Creation of a long-term debt market, and
  6. Commercial banks to focus on doing short to medium term loans and consumer loans.
Author
Anushka Chordia
Team Member– Alternative Investment Funds
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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