Niti Aayog, India’s nodal think tank, has rightly identified micro, small and medium enterprises (MSMEs) as one of our foremost engines of growth in its recently released report, ‘Designing a policy for medium enterprises’. It has underlined the “under-leveraged” role of these enterprises. Considering that the sector is made up of 63 million registered enterprises that account for 29 percent of the country’s GDP, 40 percent of the exports and a whopping 60 percent of the workforce, it deserves far greater policy intervention than it has seen so far. To correct the neglect, Niti Aayog has suggested a six-pronged strategy including providing easy access to working capital with a ₹5-crore credit card facility and a rapid disbursement mechanism through banks. Other proposals include upgrading technology and a focused skill development programme.
Unfortunately, though MSMEs are periodically feted, little moves on the ground. The sector found significant provisioning in the latest Union Budget. The definition of each MSME category was enhanced by two to two-and-a-half times, credit guarantee for micro and small enterprises was increased from ₹5 crore to 10 crore, while exporting units became eligible for loans up to ₹20 crore. However, the bitter truth is that these units, located mostly in rural and semi-urban regions, often lack the finesse to make compelling loan proposals. Ultimately, fearing mass defaults, hard-nosed bankers reject the proposals on the ground of weak collaterals.
Therefore, it’s no surprise that the sector’s credit penetration stands at an abysmal 14 percent; this is comparable with China’s 37 percent and the US’s 50 percent, though their definitions of MSMEs vary. Studies estimate the credit gap at a whopping ₹30 lakh crore. As it’s considered a high-risk sector, the interest rates offered are as high as 9.5-14 percent, which deters loan seekers. That’s why the government first needs to set up a separate, easy-access non-banking mechanism for disbursing credit to the sector. Second, it must be realised that there is no glory in staying small—micro enterprises must be helped to scale up and be more efficient. As many as 97 percent of the registered MSMEs are micro enterprises, 2.7 percent are small, and only 0.3 percent are medium enterprises. However, it is the tiny share of medium enterprises that contributes 40 percent of MSME exports. This reflects the untapped potential that will be released if they get the help they so desperately need.