MSME and Entrepreneurship

Introduction

Micro, Small, and Medium Enterprises (MSMEs) form a crucial backbone of the Indian economy. They are vital for generating employment, promoting innovation, contributing to exports, and fostering inclusive growth across various sectors.

Entrepreneurship is the process of starting and running a business, often involving the identification and exploitation of new opportunities. MSMEs are typically founded and managed by entrepreneurs, making the concepts of MSME development and entrepreneurship closely intertwined.

Role Of Business In The Development Of Economy

As discussed previously, business, including MSMEs and large enterprises, plays a foundational role in economic development:

1. Resource Mobilisation and Allocation

Businesses gather capital, labour, land, and technology and combine them efficiently to produce goods and services, putting idle resources to productive use.

2. Capital Formation

Profits generated by businesses are reinvested, leading to increased capital stock and enhancing the productive capacity of the economy.

3. Employment Generation

Businesses create jobs across various sectors and skill levels, contributing significantly to reducing unemployment and improving livelihoods.

4. Income Generation and Distribution

Businesses generate income through sales, which is distributed among owners (profits), employees (wages/salaries), suppliers (payments), and government (taxes). This leads to higher purchasing power and demand.

5. Innovation and Technological Advancement

Businesses drive innovation by developing new products, processes, and technologies, leading to increased productivity and competitiveness.

6. Contribution to Gross Domestic Product (GDP)

The value addition created by businesses in producing goods and services directly contributes to the national GDP.

7. Infrastructure Development

Businesses often invest in infrastructure development, both directly and indirectly through taxes that fund public infrastructure projects.

8. Exports and Foreign Exchange Earnings

Businesses engaged in international trade earn foreign exchange, which is vital for funding imports and strengthening the national currency.

MSMEs, in particular, play a significant role in these aspects, often contributing more proportionally to employment and equitable distribution of wealth compared to large enterprises.

Micro, Small And Medium Enterprises (MSME)

The classification of enterprises as Micro, Small, or Medium in India is governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The criteria for classification were revised effective from 1st July 2020, based on a composite criterion of Investment and Annual Turnover.

The distinction between manufacturing and service enterprises for classification purposes has been removed under the revised criteria.

Revised Classification Criteria (w.e.f. 1st July 2020):

An enterprise is classified based on satisfying the investment criterion OR the turnover criterion. For example, if an enterprise has an investment of ₹9 Crore and a turnover of ₹60 Crore, it is classified as a Medium Enterprise because its turnover exceeds the limit for a Small Enterprise, even though its investment is within the limit for a Small Enterprise.

The calculation of investment in plant and machinery or equipment is linked to the Income Tax Act, excluding the cost of land, building, furniture, fittings, etc.

Annual turnover calculation is based on sales figures, excluding export turnover for certain purposes as specified by the government.

Enterprises must register under the Udyam Registration portal to be formally recognised as MSMEs and avail benefits under the MSMED Act.

Role Of MSME

MSMEs play a pivotal role in the Indian economy, contributing significantly to various facets of growth and development:

1. Significant Contribution to Employment

MSMEs are often more labour-intensive than large industries and are a major source of employment, especially in rural and semi-urban areas. They provide livelihood opportunities to millions across the country.

2. Contribution to GDP

MSMEs contribute substantially to the national Gross Domestic Product (GDP), manufacturing a wide range of products and providing numerous services.

3. Promoting Exports

MSMEs are key contributors to India's exports, particularly in sectors like textiles, handicrafts, leather goods, and engineering items. They earn valuable foreign exchange for the country.

4. Regional Balance

MSMEs help in reducing regional disparities by promoting industrialisation and economic activity in backward and rural areas where setting up large industries might not be feasible.

5. Promoting Equity and Inclusive Growth

MSMEs facilitate a more equitable distribution of national income and wealth by providing opportunities for a large number of entrepreneurs and employees, often from diverse backgrounds.

6. Acting as Ancillary Units

MSMEs often function as ancillary units, supplying components, parts, and services to large industries. This creates a symbiotic relationship and strengthens the overall industrial ecosystem.

7. Fostering Innovation and Entrepreneurship

MSMEs provide a platform for budding entrepreneurs to start ventures, experiment with new ideas, and innovate, contributing to a dynamic economy.

8. Meeting Consumer Demands

MSMEs cater to the diverse needs and tastes of both domestic and international consumers by producing a wide variety of goods and services, often with unique or customised features.

Given their widespread impact and contribution, the promotion and development of MSMEs are key priorities for the Indian government.

Problems Associated With Msme

Despite their significant contributions, MSMEs in India face several challenges that hinder their growth, competitiveness, and sustainability.

Finance

Access to timely and adequate finance is one of the biggest challenges for MSMEs. They often face difficulties in obtaining loans from formal banking channels due to lack of collateral security, stringent lending norms, and complex procedures. Reliance on informal sources of finance can be expensive. Lack of adequate working capital also impacts their day-to-day operations and ability to take on large orders.

Raw Materials

MSMEs often face problems in procuring quality raw materials at competitive prices. They may lack the bargaining power of large industries to negotiate bulk discounts. Shortage of specific raw materials or delays in their supply can disrupt production schedules.

Managerial Skills

Many MSMEs are managed by entrepreneurs who may have technical expertise but lack formal training or experience in professional management practices (e.g., finance, marketing, human resources, operations). This can lead to inefficient management and poor decision-making.

Marketing

MSMEs often struggle with marketing their products effectively. They may lack resources for extensive advertising or building strong distribution networks. Competition from large players with established brands and vast marketing budgets makes it difficult for MSMEs to reach a wider customer base.

Quality

Maintaining consistent quality and adhering to quality standards (like ISO certification) can be challenging for MSMEs due to lack of access to advanced technology, skilled labour, and quality control infrastructure. This impacts their ability to compete in national and international markets.

Capacity Utilisation

MSMEs often operate below their full production capacity due to various factors like insufficient demand, lack of working capital, power shortages, or machinery breakdowns. Low capacity utilisation leads to higher per-unit costs and reduced profitability.

Global Competition

With increased liberalisation and globalisation, MSMEs face intense competition from large domestic companies and international players who have access to superior technology, larger capital, and global markets. Competing on price, quality, and scale becomes a significant challenge.

Addressing these problems through supportive government policies, infrastructure development, skill development programs, and financial assistance is crucial for unlocking the full potential of the MSME sector.

Msme And Entrepreneurship Development

Entrepreneurship is the act of creating a new business, usually in response to an opportunity. It is a dynamic process involving innovation, risk-taking, and the organisation of resources to produce goods or services. Most MSMEs are founded and driven by entrepreneurs.

Entrepreneurship development involves promoting the skills, knowledge, and abilities required to start and successfully run an enterprise. It includes identifying potential entrepreneurs, providing training, and creating a supportive ecosystem (access to finance, infrastructure, mentoring, policy support).

Key characteristics of entrepreneurship:

Systematic Activity

Entrepreneurship is not a random or haphazard activity. It is a systematic process that involves careful planning, research, analysis, and execution. Entrepreneurs identify opportunities, develop business plans, mobilise resources, organise operations, and monitor performance in a structured manner.

Lawful And Purposeful Activity

Entrepreneurship involves setting up and running a business that is legal and complies with the laws and regulations of the land. The activity is purposeful, primarily aimed at creating value, satisfying customer needs, and achieving specific goals, usually including earning profits.

Innovation

Innovation is a core element of entrepreneurship. Entrepreneurs often introduce something new – a new product, a new method of production, a new market, a new source of supply, or a new organisation. This can be revolutionary or evolutionary, but it involves creativity and finding new ways to do things or satisfy needs.

Organisation Of Production

Entrepreneurship involves bringing together various factors of production – land, labour, capital, and technology – and organising them effectively to produce goods and services. The entrepreneur is the organiser who combines these resources efficiently to achieve the desired output.

Risk-Taking

Entrepreneurship involves inherent risk due to the uncertainty of future outcomes. Entrepreneurs invest their resources (time, money, effort) with the hope of earning profits, but there is a possibility of loss. They are risk-takers who are willing to face uncertainty and bear responsibility for the outcome of their ventures.

Entrepreneurship development programs and policies aimed at supporting MSMEs are crucial for fostering a culture of innovation, self-employment, and economic growth in India.