Strengthening MSMEs must to create new jobs

May 05 2014, 21:52 IST
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SummaryNearly 93% of units in the MSME sector are dependent on self-finance and do not get any monetary support from the financial institutions

The Reserve Bank of India governor recently acknowledged that micro, small and medium enterprises (MSMEs) face difficulties in accessing credit and has suggested the use of technology to facilitate such flow of credit. KC Chakrabarty, deputy governor, also observed recently that inadequate flow of credit to MSMEs has been one of the factors constraining growth of the sector. Again, according to recent reports, the Standing Committee of RBI has been working on this problem.

MSMEs are an important sector contributing 8% of country’s GDP, 45% of manufacturing output and 40% of exports, according to the inter-ministerial committee on MSMEs (September 2013). It is estimated that 3 crore MSMEs providing employment to 7 crore persons are manufacturing more than 6,000 products. And the growth in the sector has been slowing down in recent years. Hence, there is a need to think out of the box to ensure flow of credit to MSMEs.

But first, some facts about the highly heterogeneous MSME sector where 94% of units are unregistered. MSMEs are mainly classified as manufacturing and service enterprises. There is a specific stipulated limit on investment in plant and machinery for each of the respective micro, small and medium segments in manufacturing with a maximum limit of R10 crore, and for equipment in service enterprises with a maximum limit of R5 crore.

The government has been making consistent efforts since 1948 to encourage MSMEs in India. The Office of Development Commissioner for MSMEs, operational since 1954, has 70 offices and 21 autonomous bodies spread across the country. The government has initiated various measures over the years such as cluster approach, special economic zones and MSMED Act, 2006, to encourage the sector. In fact, the government of India has a dedicated ministry for MSMEs since 1999. The Small Industries Development Bank of India (SIDBI), established in 1990, is the principal financial institution for promotion, financing and development of the MSMEs. Commercial banks, especially through the priority sector lending, play an important role. At the state level, state financial corporations and state industrial development corporations are the main sources of long-term finance for the sector.

Nearly 93% of units in the MSME sector are dependent on self-finance and do not get any financial support from the financial institutions. Issues related to credit such as adequacy, timely availability, cost and mortgages continue to be a concern. In India, a universally acknowledged reason for the reluctance of the commercial banks

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