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25 Years of Reforms: MSE sector Sports a New Look

By. V.N. PRASAD*

Its 25 years since the Government began dismantling the protective net over the head of Micro and Small Enterprises (MSEs). Apparently, MSE sector, though with some causality, has overcome the initial glitches of free-market economy policies.  The sector has no other option but to steer through the troubled waters.

The Small Scale industry (SSI), the earlier avatar of MSE, sector, which was shielded from competition (to the extent of being  called a pampered segment) till then, was exposed to competitive forces as part of the llberalisation and globalisation of the economy.   The sector saw removal of quantitative restrictions on imports and throwing open of the earlier reserved items (800+) for its exclusive manufacture to others.  The earlier ‘protectionist’ policy approach has been replaced by that of being a facilitator.  A small enterprise is now expected manage on its own.

New Nomenclature

In this quarter century, the landscape of MSE sector has transformed drastically, both in terms of administrative set-up and its very physical structure. The administrative authority developed over the years in to an independent Ministry in 2007, from being a department in Industries’ Ministry earlier.  Along with this, all promotional agencies were not only renamed but were also expected fend on their own and render the market-related services to small enterprises.  The enactment of the Micro, Small and Medium Enterprise Development Act (MSMEDA) in 2006 – a major landmark in the history of small enterprises – has altered the facade of the sector.

The 2006 limits for classification of MSEs reflect the acknowledgement of the need for higher investment to be competitive. The concept of small service enterprises too changed from the earlier connotation of only industry-related services. Prior to MSMEDA, the micro enterprise was not officially defined, nor was the medium-sized enterprise part of sector.  The scope and coverage of the sector now comes closer to the internationally acknowledged terminology of SMEs. Principal

Changed Contour

Unlike the predominantly manufacturing facilities on the eve of reforms, the sector presently comprises practically all non-agricultural enterprises.  Non-manufacturing enterprises accounted for 61 per cent of the total number of 36 million enterprises in 2006-07.  The bulk of the increase in the total size of MSEs came from service enterprises. A major trigger for this has been lack of employment opportunities.

The services’ segment has changed considerably owing to technological developments. The revolution in telecommunication and automobile industries to name just two, for example, has had pushed once the income-generating enterprises (e.g. telephone booths, fax centres and several repair activities) to become a part of the history. At the same time, other components of the segment such as road transport and e-businesses/commerce (including bill payments), have not only emerged as new avenues for self-employment but also have become job providers.

The sector abounds with instances of professionals quitting their jobs and becoming self-employed (e.g. financial services, ITES and metro transport). Print and social media are replete with success stories of first-generation entrepreneurs in diverse activities and some start-ups have even attracted investment from established businessmen.  However, Start ups need support of authorities to become viable commercial ventures.

De-reservation

While several new activities were included in the ambit of service part, the manufacturing segment of the sector, on other hand, saw a complete overhaul of the policy. The total withdrawal (by April 2015) of a decades old principal – and unique – constituent of ‘protective net’ i.e. reservation of items for its manufacture has completely altered its configuration. One would now find even foreign brands in the hitherto ‘reserved items’ (e.g. footwear, garments, wooden furniture, processed foods, etc).

In addition, increasing the threshold limit for qualifying as MSEs has brought several of the previously ineligible enterprises into the sector’s fold. This explains, to some extent, for the higher share of manufacturing enterprises (55%) in the Fourth Census of MSMEs, compared to less than 40 per cent in the Third Census.  Unregistered enterprises continue to dominate the sector. The simplification of regulatory process, such as introduction of online filing of ‘Udyog Adhaar’ a year ago for the purpose of registration, may alter this status in future.

The technically-sound enterprises have found new opportunities to manufacture for, or on behalf of, large enterprises (LEs) – both domestic and foreign. LEs in industries such as automobiles, telecommunications, electronics and even in services’ are increasingly sourcing critical parts, components, and some products/services too, from MSEs.

Enterprises adapting operations to the market requirements and those which are inventive have multitude opportunities, but they need proper guidance and hand-holding services.  The recent initiatives such as Make in India Stat-up India, and Digital India too have provided additional prospects to creative small enterprises.

The foregoing does not mean that all is well with sector, particularly when bulk of micro enterprises are basically an income-generating activity for the operator.  The Third Census of MSMEs, with 2001-02 as reference year, observed that some nine lakh enterprises were closed due to their inability to cope up with market pressures (lack of demand was identified as a major cause for sickness among MSEs).  The ‘marketing issues’ continued to be a key concern even during the Fourth Census (published in 2012), though the total number of enterprises pulling down their shutters was less.

Paradoxical

A small entrepreneur, at the same time, has gained some respectability:  he/she is a welcome visitor on premises of a bank now unlike in the past.  All banks have established SME Division; SMEs have become a new slot to park their funds. Yet, inadequate access to finance continues to be a major issue for them, particularly for relatively small and micro enterprises. Such a paradoxical situation raises doubt about the effectiveness of the delivery mechanism. The recently established MUDRA Bank and the proposed small finance banks may, to some extent, improve the access of micro enterprises to the institutional finance.

Conclusion

Unlike the pre-reform era growth of the sector, which was driven by a concerted and deliberate thrust of the government, the expansion in the post-reform phase is an outcome of a combination of factors. These include (a) widening of the scope and coverage, (b) increasing of entry limits, (c) coming up of new enterprises to tap market opportunities and (d) shrinking employment opportunities. The changed composition of the sector renders it difficult to make a comparative study of performance in pre and post-reform periods.

The present wide and complex structure, however, underscores the need for a segmented policy approach to facilitate the future growth of different components of the MSE sector.

About the author: 

Mr. V. N Prasad is an economist and SME expert. He has  vast experience working on  projects related to micro, small and medium enterprises.  He is the Principal Advisor Institute for Enterprise Research & Development(IERD), Editorial Advisor, GSME News.  Formerly Senior Economic Advisor, World Association for SMEs. He can be reached at vnpj@yahoo.com

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