MSMEs - Lagging Behind Pre-Pandemic Strength Despite Massive Potential

By Eram Shaikh --
Wednesday, 13 Dec, 2023

Micro, small and medium enterprises (MSMEs) form the backbone of the Indian economy, contributing around 30% to India's GDP besides employing over 110 million people as per government data from 2019-20. However, the outbreak of the Covid-19 pandemic severely disrupted MSME operations across manufacturing and services. Recent data indicates that the MSME sector has been slow to recover back to pre-pandemic levels of economic contribution.

As per statistics from the Ministry of MSME, the sector consists of around 63 million enterprises that contributed around 28-29% to India's Gross Value Added at current prices in the past two financial years. This remains below the over 31% contribution seen in 2018-19 and earlier years before the pandemic hit. With MSMEs struggling with issues like labour shortages, supply chain disruptions, demand fluctuations and tight financing availability, they continue displaying lagging output potential two years after COVID-19 struck.

Economists emphasize that getting India's MSME engine firing on all cylinders again is crucial to achieving broad-based, inclusive GDP growth post-pandemic. However, rising input costs due to high inflation, slow rural consumption demand, and continued uncertainties around the pandemic's trajectory are delaying the MSME rebound. Urban demand remains relatively resilient but the rural slowdown is severely hitting micro and small enterprises focused on serving rural manufacturing, household and agrarian needs.

Moreover, analysts criticize current government schemes to provide low-cost credit, skills development and export enablement support for reaching too narrow a section of MSMEs to catalyze broad recovery so far. As per recent RBI loan data, credit flow to micro and small industries grew by a negligible 0.6% in the first eight months of FY 2022-23 versus 26% growth for medium firms and 32% for large corporates, indicative of a financial squeeze. Estimates also show the shutdown of 13,000 MSMEs in FY23 which stands highest in four years. On the other hand, MSMEs' share in Exports saw a decline in five years wherein it stood at 44% from USD 200 billion in exports.

Overall, MSME contribution expanding back to the 32-33% mark seen a few years ago still appears an uphill journey given the present challenges. Clear economic reforms focused on nurturing MSME competitiveness can provide a serious upside to GDP, exports and job creation. Industry associations have provided multiple budget recommendations including simplified taxation, increased R&D grants, flexible labour laws, cheaper power tariffs and increased government procurement quotas which may benefit the sector.

Combined all-of-government initiatives on enabling easier credit access, providing export incentives, supporting technology/infrastructure upgrades and skill training could enhance productivity in the lagging sector. The MSME growth upside remains crucial so that the "engine of the Indian economy" can power more equitable and sustainable post-pandemic development. Targeted reform support aligned to MSME needs offers strong potential economic and social dividends looking ahead.

MSMEs need continued hand-holding to achieve their full business and employment generation potential after the pandemic woes. How their lagging contribution progresses will indicate the strength of India's broader recovery.

MSMEs - Lagging Behind Pre-Pandemic Strength Despite Massive Potential. Micro, small and medium enterprises (MSMEs) form the backbone of the Indian economy, contributing around 30% to India's GDP besides employing over 110 million people as per government data from 2019-20. However, the outbreak of the Covid-19 pandemic severely disrupted MSME operations across manufacturing and services. Recent data indicates that the MSME sector has been slow to recover back to pre-pandemic levels of economic contribution.

As per statistics from the Ministry of MSME, the sector consists of around 63 million enterprises that contributed around 28-29% to India's Gross Value Added at current prices in the past two financial years. This remains below the over 31% contribution seen in 2018-19 and earlier years before the pandemic hit. With MSMEs struggling with issues like labour shortages, supply chain disruptions, demand fluctuations and tight financing availability, they continue displaying lagging output potential two years after COVID-19 struck.

Economists emphasize that getting India's MSME engine firing on all cylinders again is crucial to achieving broad-based, inclusive GDP growth post-pandemic. However, rising input costs due to high inflation, slow rural consumption demand, and continued uncertainties around the pandemic's trajectory are delaying the MSME rebound. Urban demand remains relatively resilient but the rural slowdown is severely hitting micro and small enterprises focused on serving rural manufacturing, household and agrarian needs.

Moreover, analysts criticize current government schemes to provide low-cost credit, skills development and export enablement support for reaching too narrow a section of MSMEs to catalyze broad recovery so far. As per recent RBI loan data, credit flow to micro and small industries grew by a negligible 0.6% in the first eight months of FY 2022-23 versus 26% growth for medium firms and 32% for large corporates, indicative of a financial squeeze. Estimates also show the shutdown of 13,000 MSMEs in FY23 which stands highest in four years. On the other hand, MSMEs' share in Exports saw a decline in five years wherein it stood at 44% from USD 200 billion in exports.

Overall, MSME contribution expanding back to the 32-33% mark seen a few years ago still appears an uphill journey given the present challenges. Clear economic reforms focused on nurturing MSME competitiveness can provide a serious upside to GDP, exports and job creation. Industry associations have provided multiple budget recommendations including simplified taxation, increased R&D grants, flexible labour laws, cheaper power tariffs and increased government procurement quotas which may benefit the sector.

Combined all-of-government initiatives on enabling easier credit access, providing export incentives, supporting technology/infrastructure upgrades and skill training could enhance productivity in the lagging sector. The MSME growth upside remains crucial so that the "engine of the Indian economy" can power more equitable and sustainable post-pandemic development. Targeted reform support aligned to MSME needs offers strong potential economic and social dividends looking ahead.

MSMEs need continued hand-holding to achieve their full business and employment generation potential after the pandemic woes. How their lagging contribution progresses will indicate the strength of India's broader recovery.