MSME Outlook

India is transforming into a self-reliant economy. The support received and provided by the Atmanirbhar Bharat is being absorbed in the spirit of the nation. India’s GDP has grown at 8.7% in FY 2022 as against contraction of 6.6% in FY 2021. It is expected to grow at 7.2% in FY 2023 (RBI). The success of the self-reliant economy is conditioned on the growth of the MSME sector.

The MSME sector contributes in a significant way to the growth of the Indian economy with a vast network of about 6.34 crore enterprises. This sector contributes to around 30% of India’s GDP, over 45% of India’s exports, while creating employment for about 11.1 crore people, which in terms of volume stands next to agriculture sector. The distribution of number of MSMEs is marginally skewed in favour of rural areas (with share of 51%) as against urban areas (with share of 49%) which is reflective of the gumption that entrepreneurs across India exhibit despite varied challenges and limited infrastructure. This necessitates nurturing of the aspirations of these MSMEs and budding entrepreneurs.

Some of the recent measures undertaken by the Government of India (GoI) to provide an enabling environment for MSMEs include revision in the definition of MSMEs wherein composite criteria of investment in plant and machinery and turnover has been used for classification of MSMEs. Government has also included Retail and Wholesale trades as MSMEs. Pushing forward the MSME formalisation, GoI has launched the Udyam Registration portal for smoothening the registration process for MSMEs. This shall induce MSMEs to come into the fold of formalisation and avail the benefits of the various schemes and facilities extended to the sector.

Efforts have also been made to improve the formal credit flow to the MSME sector. These measures were well timed to provide relief to MSMEs during pandemic. Some of these measures include Emergency Credit Line Guarantee Scheme (ECLGS) as part of the Atmanirbhar Bharat Package to enable MSMEs tide over the distress caused by the pandemic, ₹20,000 crore subordinate debt for stressed MSMEs in need of equity support, disallowing global tenders up to ₹200 crore in government procurement to provide fillip to MSMEs, creating Self-Reliant India Fund with GoI as the sole anchor investor with the initial budgetary support of ₹10,000 crore to the mother fund in phased manner which shall stand leverage to the extent of ₹50,000 crore through Daughter Funds.

MSME Outlook: The Way Forward

The MSME outlook shall be guided by various global and domestic factors which will likely impact the MSME sector, a key player in the value chain of the economy.

The global economy is expected to witness pressures on prices due to protracted war in Europe and the accompanying sanctions, fast pace of monetary policy normalisation by advanced economies (AEs) leading to heightened volatility in global financial markets. As a consequence, appreciation of US dollar / depreciation of Emerging Market Economies (EMEs) currencies, capital outflows from EMEs are being witnessed. Further, slowdown in the global economic activity and rising inflation are raising concerns of stagflation.

On the domestic front, while inflation levels are elevated, economic activity has gained traction. As per RBI OBICUS survey, capacity utilisation of the manufacturing sector improved to 75.3% in Q4:2021-22 from 72.4% in Q3:2021-22. Going ahead, the investment activity is likely to be supported by the capex push by GoI, improved capacity utilisation, recovering demand in rural and urban areas. Going forward, this shall bode well for the MSME sector. Elevated prices of commodities and increases in policy interest rate impacting lending rates to the sector are some of the downside risks to the MSME sector.

Several measures are being undertaken for the holistic development of the sector. In the Union Budget 2022-23, the ECLGS has been extended up to March 2023 with the guarantee cover expanded by ₹50,000 crore earmarked exclusively for the hospitality and related services. This shall provide much-needed relief to such contact intensive sectors in the post-COVID world. An outlay of ₹6,000 crore for Raising and Accelerating MSME Performance (RAMP) was also announced in the Budget to make the sector more resilient, competitive and efficient. Further, Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme shall be revamped with required infusion of funds which shall facilitate additional credit of ₹2 lakh crore for Micro and Small Enterprises and expand employment opportunities.

Timely and adequate credit to the MSME sector is the crucial link which needs strengthening. Digital lending and various facets of technology is the enabler that can address the challenges of lack of proper documentation, inability to provide adequate collateral, information asymmetry, onerous application processes that turn MSMEs towards informal credit at higher interest rate. Buttressed by the increasing formalisation of MSMEs in India, onboarding on e-commerce platforms, use of digital payment methods creating a digital footprint, digital lending can cater to the MSME sector by faster credit dispensation, automated account analysis with minimal physical interactions between lenders and borrowers. It may be relevant to mention that emerging data points due to increased digitisation may also shape and transform the credit underwriting process in the near future. For instance, transition from asset based lending to cash-flow based lending with low transaction costs can provide adequate credit to the MSME sector without requirement of physical collateral. In this direction, GST Sahay, a first reference app for invoice-based financing is under development by SIDBI.

As the economy is gaining traction, MSME sector shall assume significant role in the recovery of the economy. Going forward, the outlook of the MSME sector shall be supported by the policy interventions by the GoI, various digital enablers like Udyam registration portal, GST Network, TReDS platform and the budding domestic and international demand. Digital lending can help formalise the informal credit intake of MSME by bringing in fold the MSMEs presently operating in the informal sector.

The MSME sector is set to take centre stage and charter the growth story of India. The policy and digital enablers are targeted to make the MSMEs champions of growth and significant contributors in the Amrit Kaal, the 25-year-long leadup to India@100.