Download Drivers of Change and MSMEs – Oct 21 2015

Drivers of Change: Role of MSMEs
Charan Singh1
The global economy is passing through sunset times with increasing ageing population, and India,
with its demographic dividend, could avail this opportunity of providing the world with skills and
man-power. The drivers of change for the world and India are the youth of India. India has world’s
youngest work force with a median age way below that of China and OECD Countries, while rest
of the world, especially Western countries, are ageing rapidly because of low fertility rates and
increased longevity of life. Consequently, according to Government of India, the global economy
is expected to witness a skilled man power shortage of around 56 million by 2020. Thus, the
“demographic dividend” in India needs to be exploited not only to expand the production
possibility frontier but also to meet the skilled manpower requirements in India and abroad.
The demographic dividend not only implies increased labor supply but also a challenge in finding
capacity in the economy to absorb and productively employ extra workers. Also, to make larger
number of people employable would necessitate large investment in human capital. Finally,
increased savings consequent to larger working population would require more production to meet
increased domestic demand. It is in this context that investment in educational and vocational
training needs to be strengthened if India has to successfully reap the benefits of demographic
dividend. In 2011-12, according to Government of India, in nearly 18 per cent of households in
rural and 6 per cent in urban areas, there was not a single member in the age group of 15 years and
above who could read and write a simple message with understanding.
Similarly, the recent report by National Sample Survey Organization mentions that during the
survey period of July 2011 to June 2012 nearly 25 per cent of males and 29 per cent of females in
the age range of 5-29 years do not consider education necessary for etching out a living. Again,
nearly 25 per cent males in rural areas and 33 per cent in urban areas reported that they do not
attend educational institutions because they need to work to supplement household income. In the
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Charan Singh is the RBI Chair Professor of Economics, IIM Bangalore.
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case of nearly 30 per cent females, the reason for not attending educational institution was to attend
to domestic chores.
In case of vocational training the situation is further dismal. Amongst persons of age 15-59 years,
only 2.2 per cent reported to have formal vocational training and 8.6 per cent received non-formal
vocational training. As expected, the situation in rural areas was worse than that in the urban areas.
Amongst rural males, the most significant share of vocational training was driving and motor
mechanic work while for rural females, it was textiles related work.
The demographic dividend is expected to result in nearly 20 million people joining the work force
annually in the next ten years. With the rising level of income, expectations of people, especially
young, are also rising. Illustratively, next generation of farmers want to be a part of the growth
India story and therefore out of agriculture sector. In addition, given the climate change and
resultant El-Nino, agriculture sector which absorbs nearly half of the work force in India will yield
labour surplus, which would be seeking employment in urban areas. To absorb such a large size
of labour force, it is necessary to plan for appropriate vocations and employment opportunities.
Prime Minister Modi has recently observed that India will now need large number of ITIs, and a
new ministry of skill development and entrepreneurship, would coordinate skill development
needs of our country. The skill development system by the Government has also been developed
and is being maintained by the National Skill Development Corporation. The Pradhan Mantri
Kaushal Vikas Yojana has been announced to encourage skill development for youth by providing
monetary rewards. While all these efforts are encouraging, the fact remains that skill development
strategy has yet not been successfully implemented. Consequently, despite the policies, the skill
level in the country continues to be inadequate and workers unemployable as discussions with
industry associations reveal.
The growth rate of the Indian economy from April to June 2015, as measured by gross value added, has
been lower at 7.1 percent as compared with 7.4 percent from April to June 2014. The growth rate is
definitely lower than expectations given that the union government has not only been emphasizing on
Make in India. If India has to successfully achieve Make in India, it will have to accommodate
more manpower in manufacturing. India’s work force of nearly 484 million in 2012 could
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increase to 850 million by 2025, accounting for nearly one quarter of global work force. To
absorb such large number of workers, one most potent area, untapped, is micro, small and
medium enterprises (MSMEs).
There has been a significant slowdown in manufacturing from 8.4 percent in April to June 2014 to 7.2
percent in April to June 2015. Similarly, but as was expected, slowdown has also been recorded in the
growth rate of agriculture, forestry and fishing from 2.6 percent to 1.9 percent during the period,
because of impact of weather and truant rainfall. The deficient monsoon following the summer may
again result in slower agriculture growth in the current year. To achieve higher growth rates, India has to
reconsider its strategies of growth. Given that nearly two-third of agriculture even today is rain
dependent, and assuming that climatic changes and El Nino’s will continue to play havoc with our
agriculture growth, alternative mechanisms to augment employment and growth need to be urgently
explored.
It is in this gloomy context that micro, small and medium enterprises (MSMEs) hold a promise.
According to Asia SME Finance Monitor released recently by Asian Development Bank (ADB), as of endMarch 2014, 5 crore MSMEs employ 11 crore people. In 2013, MSMEs contribution to national income
was 38 percent and to exports about 42 percent which according to global standards can be improved.
And, all this, with MSMEs just concentrated in a few states like Maharashtra, Tamil Nadu, Karnataka,
Gujarat, Andhra Pradesh and Punjab. Thus, MSMEs need to be encouraged as they have the potential to
improve productivity and achieve higher growth. According to various studies, MSMEs in India suffer
from various growth-inhibiting problems like shortage of skilled labor and lack of appropriate ecosystem but the most important factor is lack of financial support.
Historically, and even recently, the government has been continuing initiatives including Micro Units
Development and Refinance Agency (MUDRA) Bank but commensurate results are not emerging. There
is probably need to think out of the box, especially, on financing of MSMEs and more so when the
country has been successful in opening 16 crore bank accounts in six months and achieving financial
inclusion for nearly 95 percent of households. That is probably where the potential reserve army of
MSMEs could be.
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To encourage growth in the MSME sector, commercial banks and Small Industries Development Bank of
India (SIDBI) are making efforts to increasingly finance MSMEs. Still, MSMEs are generally self-financed
in India as most of them are unregistered as well as are small, and do not have any collateral to offer to
commercial banks. The fear of more non-performing assets, high as they already are, will also impact
lending to MSMEs which will lead to slower growth again. According to above quoted Report by ADB,
implementation of Basel – III could also slow down extension of banking credit to MSMEs.
Thus, alternative sources of finance to banking sector needs to be considered. One alternative is listing
of MSMEs in stock exchanges, and progress in last three years has been successful in listing nearly 106
enterprises on Bombay Stock Exchange. Obviously, much more needs to be done on this promising
aspect.
There is still one more alternative, rather more potent, and successfully experimented in Mongolia that
can be explored. An allocated fund of fixed amount can be earmarked for each district, by the
Government, partially financed by the Centre and matched by the states. At the district level, authorities
can be assigned the responsibility of dispersing the fund, need-based, to promising MSMEs. In
distribution, allocation and regular monitoring of such a fund to individual entrepreneurs, assistance can
be sought from block level bankers committee which is operational in every block of each district. The
advantage of such a fund could be that it is available free of interest rate as compared with bank loans
which attract a higher interest rate, to be commercially viable. This scheme could be more effective in
triggering entrepreneurship and nurturing creativity without being expensive Illustratively, if Rs. 100
crore are allocated to each of the 640 districts, the total budgetary allocation would be merely Rs.64,000
crore of which Rs.32,000 crore could come from the Center and remaining from the States. This could
ensure more wide-spread growth of MSMEs across the country.
MSME sector is cross-cutting as it addresses concerns regarding climate change and agriculture, poverty
reduction and gender empowerment by ensuring increasing finance to women-led MSMEs. The future
of Indian growth story, probably, will find roots in MSME sector and therefore needs to be encouraged
by new methods that are entrepreneur-friendly.
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