DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY
SABBAVARAM, VISAKHAPATNAM, A.P., INDIA
PROJECT TITLE:
MSME INDUSTRY – PAST TO PRESENT VIEW AND ITS IMPACT ON INDIAN
ECONOMY
SUBJECT:
ECONOMICS
NAME OF THE FACULTY:
DR. ABHISHEK SINHA
NAME OF THE CANDIDATE:
MOUSUMI DAS
ROLL NUMBER:
20LLB075
SEMESTER:
III
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CERTIFICATE
I, MOUSUMI DAS, hereby declare that this project titled “MSME INDUSTRY – PAST TO
PRESENT VIEW AND ITS IMPACT ON INDIAN ECONOMY” submitted by me is an
original work undertaken by me, I have duly acknowledged all the sources and references
from which ideas and extracts have been sourced. This project is free from plagiarism and
does not utilize any unfair means whatsoever.
(MOUSUMI DAS)
20LLB075
Semester III
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TABLE OF CONTENTS
1. ACKNOWLEDGEMENTS……………………………………….…………………………...5
2. ABSTRACT………………….………………………………………………………………...6
3. INTRODUCTION……………………………………………………………………………..7
4. EVOLUTION…...……………………………………………………………………………..8
5. CONCLUSION.………………………………………………………………………………15
6. BIBILIOGRAPHY.…………………………………………………………………………..16
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ACKNOWLEDGEMENTS
I would sincerely like to put forward my heartfelt appreciation to our respected Indian Penal
Code (IPC) professor, Ms. Sunitha, for giving me a golden opportunity to select this project
topic: “MSME Industry – Past to Present view and its Impact on Indian Economy”. I
have tried my best to collect information about the project in various possible ways to depict
a clear picture of the subject.
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ABSTRACT
The MSMED Act, 2006 serves as the foundation for the current definition of MSMEs. The
terms of the production and service units as well as budgetary limitations were incredibly low
and different back then compared to status quo. The economy has changed significantly
since. The Prime Minister made the decision to raise the medium unit limit higher in light of
these representations. This has been done to facilitate commercial transactions, provide an
objective classification system, and be realistic with time.
The definition of micro manufacturing and services units was expanded to include units with
an investment of Rs. 1 crore and a turnover of Rs. 5 crore in accordance with this notification.
The investment and turnover threshold for small units was raised to Rs. 10 crore and Rs. 50
crore, respectively. In a similar vein, the medium unit limit was raised to Rs. 100 crore in
sales and Rs. 20 crore in investment. On June 1, 2020, the Indian government planned to
revise the MSME definition even more. It will now be Rs. 50 crore and Rs. 250 crore for
medium-sized enterprises.
A new composite categorization system for manufacturing and service units has also been
announced. The distinction between the industrial and service sectors will no longer exist.
Additionally, a new turnover criterion is included. In particular, the clause that exempts
exports from turnover calculations would motivate MSMEs to increase their export volume
without worrying about losing the advantages of being an MSME unit. It is anticipated that
this would significantly increase the nation's exports, spurring economic expansion and
employment development.
In order to facilitate the implementation of the upward adjustment in the definition and
criteria of MSMEs in the nation, the Union Ministry of Micro, Small, and Medium
Enterprises (M/o MSMEs) has published a notification in the Gazette. The revised criteria
and definition will take effect on July 1st, 2020.
Keywords: MSME, definition, turnover, investment, expansion.
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INTRODUCTION
The objective of the study: The objective of the study is to analyse the MSME sector's
contribution to the national and regional economies in terms of GDP, employment, and
industrial output and understand the challenges faced by entrepreneurs in the MSME sector,
such as access to finance, market penetration, and regulatory hurdles. Explore avenues for
encouraging innovation and creativity within MSMEs, fostering an entrepreneurial
ecosystem. Then, our aim shifts to evaluating existing policies and initiatives aimed at
supporting MSMEs and assess their effectiveness as well as the social impact of MSMEs on
local communities, including employment generation, skill development, and community
development projects. The study can heighten the level of technology adoption within
MSMEs and identify barriers to technological advancements in order to promote the use of
digital technologies within MSMEs, enhancing their efficiency and competitiveness.
Research Methodology: I have engaged in qualitative and quantitative research mostly,
where I have taken upon myself to analyse non-numerical data regarding the status quo of
penal jurisprudence as well as theoretical input from different eminent criminologists to
determine the alternatives to punishment. I have also done case studies, discourse analysis
and content analysis for my project.
Primary Sources: Journal of Social and Developmental sciences, Vol. 1, 2011.
Secondary Sources: include a multitude of websites, blogs and research papers
written by renowned professors and compeers.
Title of the Study: MSME Industry – Past to Present view and its Impact on Indian
Economy
Scope of the study: Scope of the study will be specifically limited within the bourns of
Indian economy, delving into its past and foreseeing the future through the lens of the
present.
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Significance of the Study: Learning about the MSME industry is vital for grasping
economic, social, and entrepreneurial trends. It provides insights into a significant portion of
the economy, fostering a more comprehensive understanding of the business landscape and
its implications on society.
Research Questions:
1) What lead to the rise of MSME industries?
2) What are MSME industries?
3) What is the future of MSME industries?
4) How does it affect the Indian economy?
Mode of Citation: The Researcher has chosen the 21st Edition of Bluebook Style of citations.
EVOLUTION OF MSME INDUSTRIES
This is demonstrated by their growing presence and share in exports, employment of labour,
technical advancements, and the development of entrepreneurial skills in addition to the
manufacture of products overall. This study aims to examine how the definition of micro,
small, and medium-sized businesses is evolving as well as the part these businesses are
playing in the expansion of our economy. The MSME sector employs the second most people
in India, behind the agricultural sector, and its output alone accounts for one-third of the
country's exports and 40% of the value added in the manufacturing sector. There is no need to
elaborate on the significance of Micro, Small, and Medium-Sized Enterprises (MSME) and
their role in the growth of the Indian economy. But as the emphasis shifts from economic
growth to inclusive growth, it is important to comprehend, investigate, and support the
MSME sector's contribution to India's socioeconomic development. While there is room for
growth in MSMEs, the reality is that most investment goes to larger, more solvent MSMEs as
well as those with connections to major corporations. Banks vie with one another to offer
loans to the most successful MSMEs.
In the 1990s, the Indian economy displayed an impressive record of economic development.
The real Gross Domestic Product (GDP) growth rate exceeded a peak of 9.7% in 2007.
Experts estimate that India's GDP will increase by 7% a year. One of the most important
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periods in the history of the nation's economic development is the period of social and
economic change. India is transitioning from a rural, agrarian society to one where the
services and industrial sectors dominate the economy. Global experience indicates that the
process of change is leading to a sharp increase in the number of people moving from rural
and village regions to cities and towns. This phenomenon is known as urbanisation. India's
rate of urbanisation has actually slowed down during the past ten years in comparison to this
trend. One third of Indians reside in towns, with megacities (populations of one or more
crores) housing the majority of the country's population (GOI Report). On the one hand, there
are possible risks brought about by the rapid expansion of slums, which is accompanied by
inequality, unemployment, and a decline in the standard of living in cities that might spark
violence. However, the community is unable to provide employment for its residents.
Furthermore, reforming agriculture will only lead to farming being more mechanised and
creating fewer employment. Thus, unless India urbanises more quickly and better than it has,
modernising its economy is not feasible.
The instability of the occupations held by the urban poor, which prevents them from moving
their families from the rural to the metropolis, is undoubtedly one factor slowing down Indian
urbanisation. Because these positions are frequently filled just on a daily basis, employees
never know if they will be employed or have a job the next day.
A third of Indians still live in extreme poverty, according to Ruchismita and Gupta's 2005
strategy paper on "Delivery of Comprehensive Financial Services to the Informal and
Unorganised Sector."1 The majority of these individuals work jobs that don't even cover their
most basic physiological demands, or they are jobless. Research indicates that small and very
small businesses will take up the majority of this excess labour, significantly boosting the
economy as a whole. These businesses range widely across the country in terms of their size,
job possibilities, and the items and services they provide. These 80 small businesses are
classified as belonging to the unorganised, informal, or "Residual Sector." This is supported
by the Planning Commission of India's study 2, which projects that GDP growth would reach
8% and be mostly driven by the unorganised sector (Government of India, 2002). The
1
Ruchismita, R and Gupta, P (2005). An Approach paper for the Delivery of Comprehensive Financial
Services to the Informal and Unorganized Sector. Source: ICICISocialinitiatives.org.
2
Government of India (2002). India Vision 202. Planning Commission, India.
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informal and unorganised sectors cannot be easily distinguished, despite the organised sector
being well recognised.
According to one definition, the informal sector comprises all businesses that are not
incorporated and do not have a full set of accounts, but yet provide some sort of output for
the market. Any output intended for personal use or non-commercial markets is not included
in this definition, nor are any agricultural endeavours.
In the Indian context, the informal sector is a subset of the unorganised sector, which also
include all agricultural operations and ambitious businesses only involved in non-market
output, such as production for one's own gross fixed capital creation and ultimate
consumption. It is necessary to lay forth a plan for a large-scale, national financial
infrastructure that will provide the unorganised sector with a full range of financial services.
Additionally, it's important to pinpoint the gaps and offer solutions for building a "Enabling
Environment" by investing in infrastructure that will support the sector's expansion. The
following tenets serve as the foundation for the main justifications for building a facilitative
infrastructure:
1. Micro businesses, which employ around 92% of the nation's working population, are said to be
labour-intensive and contribute to the local economy.
2. Because the industry is widely distributed across the nation, it promotes favorable wealth
distribution.
3. The unorganized sector's expansion may be accelerated by the presence of a thriving financial
infrastructure that is tailored to it.
4. Financial demands of the Poor: Every household has certain demands for investments and
consumption, regardless of whether they live in an urban or rural area or are economically
disadvantaged.
Spending on things like food, transportation, education, and so on is considered consumption.
Investing is any outlay of funds that generates revenue in the future, such as buying assets or
property. Many analysts believe that there is no distinction between investing and
consumption among the impoverished. A family in poverty usually has the following
financial needs:
1. Life cycle needs: Festivities, marriages, deaths, and births within the family, etc.
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2. Emergencies: Accidents, robberies, natural disasters, medical crises, etc.
3. Investment requirements: launching small and micro companies, buying assets.
Menon (2005)3 has noted that 75 million Indian households rely on moneylenders to satisfy
their financial needs; about 90% of rural residents lack access to insurance; and 50 million
landless households require minor loans to begin small-scale business ventures. Furthermore,
even urban families making between Rs. 4000-5000 per month spend a significant amount of
their income on debt repayment. However, out of need and grit, those shut out of the banking
system have discovered a workaround known as microcredit, which is the granting of tiny
loans to those who are too impoverished to be eligible for regular bank loans because they
lack assets to give as collateral.
These are primarily female-dominated and are governed by three basic principles: save,
accumulate, and lend money to one another. It is gradually emerging as one of the most
successful methods to eradicate poverty on a global scale. In India, there are presently
thought to be two million families served by microcredit lending organisations.
The largest banks in India are all public sector institutions, meaning they are corporate banks
with the government holding a majority of the shares, notwithstanding the rise of several
vibrant private sector banks and the arrival of numerous international banks. More than 90%
of all branches and more than 77% of deposits are handled by public sector banks. Although
longer-term loans are occasionally offered by Indian banks, specialised long-term lending is
largely responsible for funding fixed capital.
Long-term lending organisations such as the Industrial Finance Corporation of India are
generally responsible for funding fixed capital, but banks in India do offer longer-term loans
on occasion. Generally, banks give businesses short-term operating cash. With an interest rate
that is set a few percentage points over the prime rate, these loans are provided as a credit line
with a predetermined maximum. Based on the firm's credit rating and other factors, the
difference between the interest rate and the prime rate is predetermined and cannot exceed
4%. In India, interest is only charged on the portion of the credit line that is actually used.
3
Menon, R. (2005). Film on micro credit, to their credit .... Produced by The Energy and Resources
Institute Financed by The Swiss Agency for Development and Corporation.
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Because the interest rate is predetermined, many borrowers want to obtain the largest credit
line possible.
A minimum of 40% of the net credit of all banks, whether public and private, must be
extended to the "priority sector," which comprises small businesses, the transportation sector,
agriculture, and agricultural processing. The Government of India has mandated that banks
lend money to certain agencies at extremely low interest rates if they are unable to fulfil the
aim of 40% lending to the aforementioned priority sector sectors. The understanding that
Micro, Small, and Medium-Sized Enterprises (MSMEs) are catalysts for most countries'
development is spreading around the globe. This is demonstrated by their growing presence
and share in the production of products as a whole, exports, employment of labour,
technological advancements, and the development of entrepreneurial skills.
After agriculture, the MSME sector employs the second most people in India. One-third of
India's exports come from this industry, which also accounts for 40% of the country's
industrial output. The performance of India's small-scale enterprises between 1973–1974 and
2007–2008 is shown in Table 1. The contribution that MSMEs provide to the Indian
economy can be seen in the output figures at current prices, the employment generated by the
sector, and the exports of the industry in both INR and USD. The significance of Micro,
Small, and Medium-Sized Enterprises (MSMEs) in the expansion of the Indian economy is
well-documented and requires no more explanation.
But as the emphasis shifts from economic growth to inclusive growth, it is important to
comprehend, investigate, and support the contribution of the MSME sector to India's
socioeconomic development.
Broad reach: There are approximately 12.34 million MSMEs in India, of which 1.9 million
are registered and dispersed around the country. Roughly 10% of India's population, or 123.4
million people, may be impacted by them directly or indirectly.
Large portion of GDP: The total production of MSMEs accounts for around 7% of the GDP
of the nation.
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Large provider of jobs: The MSME sector employs more people than any other industry in
the nation, second only to the agricultural sector. It employs around 20 million people, or
about 2% of the total population of the nation. From a social perspective, it aids in resolving
the issue of underemployment and unemployment in the community.
Dispersed MSMEs around the nation encourage decentralised industrial growth, which helps
to eliminate regional disparities. MSMEs may be found anywhere, including in backward and
forward places, rural and urban areas, coastal areas, deserts, mountains, and forests. This
decentralised idea also aids in the reduction of other issues such housing, sanitation, traffic,
pollution, and so on.
aids in the fair distribution of income and wealth: The distribution of revenue occurs when
entrepreneurial skill is let to flourish throughout many locations and areas, rather than being
concentrated in the hands of a select few.
This aids in resolving the significant societal problem of closing the wealth disparity.
Become a haven for entrepreneurs: MSMEs offer an ideal environment for entrepreneurs to
thrive.
With this platform, the untapped/raw talent in the area may develop their abilities, try new
things, be creative, and turn their ideas into products and services that the community needs.
The Story of MSME Evolution in India
The meaning of a SME is A situation that varies: A common definition of small and medium-
sized businesses does not exist. Depending on the number of employees, some objective
norms in various countries categorise the units as Micro, Small, or Medium Enterprises.
India's Small-Scale Industries (SSI) Sector
Since gaining independence, India's industrial strategy has placed a strong emphasis on
growing the small-scale industry, however the goals of each five-year plan have caused the
focus of attention to shift. With varying degrees of emphasis on the primary goals, the
Industrial Policy Resolutions issued since 1948 have laid forth the principles for the nation's
industrial growth. The fundamental basis for the post-independence industrialization policy
was established by the Industries Development and Regulation Act of 1951.
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Because capital-intensive heavy industries formed the foundation of the 1950s
industrialization paradigm, small-scale units prioritised creating jobs.
The policy focus shifted towards corrective measures to counter regional imbalances (1977),
promote ancillarization (1980), encourage exports and dispersal in rural areas (1990), and
then promote small, tiny, and village industries (1991) as the process of economic
development led to shifting priorities.
With the creation of the Small Scale Industries Board in 1954, the framework for SSIs was
established in the 1950s. The Small Industries Development Organisation (SIDO), which
reported to the Development Commissioner for Small Scale Industries, and the Department
of Small Scale Industries and Agricultural & Rural Industries were two other significant
national organisations. The Commissioner/Directorate of Industries served as the primary
institutional authority for SSIs at the State level. Only 86 of these institutions still exist,
despite the establishment of several more in the 1970s and 1980s, mostly at the state level.
Over the past four decades, the Indian government has established many committees to assess
the operations of Self-Sufficiency Institutes (SSIs) and encourage their expansion and
effectiveness in line with the primary goals of the country's economic policies. One of the
first initiatives to provide a safeguarding atmosphere for the development of small businesses
in India was the Karve Committee Report (Government of India 2007) 4. Since then, among
other requirements of the sector, policies directed at the SSI sector have sought to promote its
growth by positive policy interventions in the areas of financing, technology, infrastructure,
and extension services. Throughout the 1960s, 70s, and 80s, measures that provided support
included product reservations that were only available to the SSI sector.
A strategy of priority sector lending through nationalised banks has been adopted to enable
the increased credit flow to the SSI sector; nonetheless, this has not been sufficient for the
industry's growth requirements. Around the world, there have been noticeable shifts in policy
towards lower government interference and free markets since the 1980s and, more
specifically, the 1990s. With the creation of the World Trade Organisation (WTO), there has
been an increase in international trade liberalisation and global economy integration.
4
Government of India (2007). Industrial Policy and Promotion. Karve Report, 10(3), Ministry of
Commerce and Indus
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Technology is changing at a breakneck speed, particularly in fields that are expanding
quickly like information and knowledge-based enterprises.
Future policy will primarily focus on fostering the expansion of this dynamic industry by
targeted, extensive, and long-term initiatives, as the SSI industry has up until now been
largely shielded from the challenges of both local and foreign competition5.
CONCLUSION
In the course of this project, a comprehensive understanding of the Micro, Small, and
Medium Enterprises (MSME) sector has been developed, shedding light on its pivotal role in
economic growth, employment generation, and fostering innovation. The MSME industry,
often considered the backbone of many economies, including India, has demonstrated
remarkable resilience and adaptability, particularly in the face of challenges such as
technological disruptions and economic uncertainties.
Our research has highlighted several key points. First and foremost, the MSME sector is not a
homogeneous entity; it comprises diverse businesses ranging from traditional artisans to
high-tech startups. Recognizing this diversity is essential for crafting targeted policies that
cater to the specific needs of different MSME categories.
Secondly, the significance of the MSME sector in employment generation cannot be
overstated. Small and medium enterprises are significant contributors to job creation,
especially in regions where larger industries find it challenging to establish operations. As we
move forward, it is imperative to implement policies that encourage skill development and
entrepreneurship, ensuring that the youth population can actively participate in this sector.
Furthermore, technology has emerged as a game-changer for MSMEs. Digitalization, e-
commerce platforms, and Industry 4.0 technologies have enabled these enterprises to expand
their market reach, optimize their operations, and enhance their overall competitiveness.
Encouraging the adoption of these technologies through training programs and financial
incentives should be a focal point of future policies.
5
Bodla, B. S. and Verma, S. R. (2008). An analysis of the performance of SSIs in the era of
globalization. The Icfai Journal of Managerial Economics, 6(3): 40-53.
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Access to finance remains a perennial challenge for many MSMEs. While various
government initiatives and financial institutions have been working towards easing this
challenge, there is still a need for streamlined processes, reduced bureaucracy, and increased
awareness about the available financial schemes. Additionally, mentorship programs and
networking opportunities can empower MSME owners with the knowledge and resources
they need to navigate the complexities of the business world.
In conclusion, nurturing the MSME sector is not just an economic necessity but a social
imperative. By providing adequate support, fostering innovation, ensuring financial
inclusivity, and encouraging sustainable practices, we can unlock the full potential of this
sector. Governments, financial institutions, educational bodies, and society at large must
collaborate to create an environment where MSMEs can thrive. As we invest in the growth of
these enterprises, we invest in the future stability and prosperity of our economies.
BIBLIOGRAPHY
Government of India (2002). India Vision 202. Planning Commission, India.
Government of India (2007). Industrial Policy and Promotion. Karve Report, 10(3), Ministry
of Commerce and Industry.
Rahman, A. (1999). Micro-credit Initiatives for Equitable and Sustainable Development:
Who Pays? World Development, 27(1): 67-82.
Bodla, B. S. and Verma, S. R. (2008). An analysis of the performance of SSIs in the era of
globalization. The Icfai Journal of Managerial Economics, 6(3): 40-53.
Dodge, H. R. and Robbins, J. E. (1992). An empirical investigation of the organizational life
cycle model for small business development and survival. Journal of Small Business
Management, 30(1): 27-37.
Shaw, E. (1999). A guide to the qualitative research process: evidence from a small firm
study. Qualitative Market Research: An International Journal, 2: 59-70.
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