Editorial Articles

Volume-24, 15-21 September, 201820-26 October, 2018


Role of MSMEs and Startups in India's Economy


Apurv Kumar Mishra

Since taking over in May 2014, the present government has taken a two-pronged approach to make MSMEs and startups engines of India's growth. Firstly, a top-down approach to improve India's macroeconomic indicators and improve ease of doing business was adopted which benefits every entrepreneur but especially MSMEs and startups. Secondly, a bottom-up approach focused on special incentives for MSMEs and startups to thrive and generate employment for the 1 million Indians joining workforce every month.

The guiding philosophy for both set of reforms is to create a rule-based level playing field in which entrepreneurs can become globally competitive. Top-down reforms that will benefit MSMEs and startups include introduction of GST, institutionalizing insolvency and bankruptcy cases, gradual liberalization of FDI in all sectors, aggressive tackling of NPA crisis in banking sector, heavy investment in infrastructure and creation of a Government e-Marketplace (GeM) portal to streamline state procurements so that even smaller companies can bid for government contracts at competitive rates online.

Bottom-up reforms for both MSMEs and startups are focused on the following three pillars:

1.Improving access to capital

2.Improving access to technology

3.Reduction of transaction costs

Two big reforms for MSMEs were reclassification of such units from 'investment in plant & machinery/ equipment' to 'annual turnover' based on GST filings which removed inspector raj  and reduction of corporate tax rate from 30 percent to 25 percent for companies with annual turnover up to INR 250 crore that benefitted more than 60 million MSME units across India. 

The government has a long standing Public Procurement Policy under which every Central Ministry/ Department/ CPSE will procure a minimum of 20 per cent of the total annual purchases of the goods or services from Micro & Small Enterprises (MSEs). The policy includes other benefits such as exemption from Earnest Money Deposit (EMD), free of cost tender set, price preference and reservation of 358 items for procurement exclusively from MSEs.

Several measures have been taken to improve access to capital for MSME entrepreneurs. Prime Minister's Employment Generation Programme (PMEGP) is a major credit-linked subsidy programme  for micro-enterprises in non-farm sector which provided assistance to 4.49 lakh micro enterprises till December 2017. Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE) provides collateral free credit facility to MSMEs and has benefitted over 28 lakh enterprises. Its corpus has been tripled from INR 2500 crore to 7500 crore.

RBI has played its part by relaxing asset classification norms for MSMEs and removal of credit caps under Priority Sector Lending (PSL) for MSMEs. This ensures that loan of any amount to such units is treated as a priority sector loan without any credit caps.  Even the allocation for MUDRA scheme has been enhanced in this year's budget to INR 3 lakh crore for the 2018-19 fiscal year. Under this flagship scheme of the government, more than 11 crore loans totaling an amount of INR 4.5 lakh crore have been disbursed without bank collateral to create 3 crore new entrepreneurs. Of the total loan accounts, 76 per cent are of women and more than 50 per cent belong to SCs, STs and OBCs. 

To ensure access to latest technology for MSMEs so that they become innovative and globally competitive, government has launched a Credit Linked Capital Subsidy Scheme to provide upfront capital subsidy. A total of 48,618 units have been assisted utilizing subsidy of INR. 2904.53 crore till November 2017. Cluster Development Programme (MSE-CDP) is a pioneering initiative to promote cluster-led development of the sector by creating common "assets" as Common Facility Centers to ensure that MSME units can share them with each other. MSME Ministry also has a Technology Centre Systems Programme to set up 15 new Technology Centres (TCs) and upgrade existing TCs, at an estimated cost of INR 2200 crore with the support from World Bank .

Thirdly, to reduce transaction costs, a one-page Udyog Aadhar Memorandum has been launched to simplify the registration process for MSMEs so that they can avail the benefit of government schemes and formalize quickly to adapt to the GST regime. Two new engagement platforms have been launched- a MSME Sambandh portal for monitoring the public procurement policy of government for MSME units and a MSME Samadhan portal to register cases for delayed payments.

The big thinking behind these initiatives is that our MSME sector must cater not just to India's needs but also the global markets. Prime Minister Shri Narendra Modi has given a clarion call of "Zero Defect, Zero Effect" to ensure that MSMEs undertake high-quality manufacturing as per international standards that is also environmentally sustainable. To quote Adil Zainulbhai (Chairman, Quality Council of India), "ZED will be for MSMEs what Startup India is for startups. After all, an MSME is a startup."

The combined impact of government programs like Digital India, Smart Cities, Skill India, Make in India, Jan Dhan- Aadhar-Mobile (JAM) trinity and other such initiatives is to transform India into a knowledge economy in which technology-led startups will play a critical role. As the Prime Minister said at the ET Global Business Summit earlier this year, "The trinity of one billion bank accounts, one billion Aadhaar cards, and one billion mobile phones will create an ecosystem that will be unique in the world."

To accelerate the growth of startups and create a culture of innovation in the country, the present government has undertaken far-reaching reforms across Ministries as part of its "Startup India, Stand Up India" initiative. As part of the Start Up India Action Plan, 19 action points where identified to improve access to capital and technology and reduce transaction costs for startups.

For easy access to capital, a "fund of funds" was created with a corpus of INR 10,000 crores for SIDBI and Alternate Investment Funds to invest in startups. Income tax exemptions have been provided to startups for 3 years and to investors on capital gains from their investments. Even SEBI has made exceptions to its listing norms so that startups can raise funds without going for an IPO.  AIF Regulations have also been suitably amended to allow angel investors to support small startups that can not access capital through traditional sources like banks and NBFCs .

Ministry of Commerce and Industry has launched a "Startup India Virtual Hub" as a one stop digital incubator for startups, providing access to industry programmes, government schemes and networking opportunities within startup community.

Some key decisions to reduce transaction costs include a compliance regime based on self-certification for environmental and labour laws so that startups are free from government inspections. Government- appointed facilitators now help startups with their patent and trademark filings. As of March 2018, 768 Startups have been facilitated for 80% rebate in patent filing fees. 858 Startups have availed 50% rebate in trademark filing fee.

One of the big challenges facing the startup ecosystem was ensuring easy exit for investors and entrepreneurs. The Ministry of Corporate Affairs has amended the Insolvency and Bankruptcy Code to ensure that startups can wind up their businesses in 90 days compared to 180 days for other companies.

A key difference in this governments approach to startups is to ensure that new economic opportunities are distributed all over the country (including in Tier 2 and Tier 3 towns) and benefit all sections of society (especially women, SC and ST communities). For example, the Startup Yatra is an initiative of DIPP wherein a mobile van travels to tier 2/3 towns to identify and nurture entrepreneurial talent. Currently in Madhya Pradesh, the Yatra has previously been to Gujarat, Uttar Pradesh, Odisha, and Uttarakhand to create new centres of entre-preneurship beyond big cities like Bengaluru, Mumbai and Delhi.

Similarly, a National Schedule Caste and Schedule Tribes (SC/ST) Hub was launched by the Prime Minister in Ludhiana in 2016 to provide professional support to SC/ ST entrepreneurs so they could leverage the

Stand Up India initiative

and the terms of Public Procurement Policy 2012 which stipulates that 4 percent of procurement done by ministries, Departments and CPSEs will have to be from MSMEs owned by SC/ST entrepreneurs.

In order to assess the performance of States in promoting startups, Department of Industrial Policy and Promotion has issued detailed norms in the form of States' Startup ranking framework in February 2018. This was done to create a spirit of healthy competition between states to encourage entrepreneurs and nurture startups.  The net impact of these far-reaching reforms has been that more than 11,234 startups have been registered by government so far  and 18

states have prepared startup policies since October 2014. 

MSMEs remain the backbone of Indian economy and will have to play a decisive role if India is to achieve its goal of becoming a USD 5 trillion economy by 2022 and providing employment to 12 million young people every year. Similarly, India is already the world's 3rd largest startup ecosystem  and the youngest startup nation. These technology-based companies will be critical in the next chapter of India's economic growth and solving the country's social challenges.  The good work done by government to support MSMEs and startups will create in a new generation of companies that will lead India's growth in the next decade.

Email: apurv@indiafoundation.in Views expressed are personal