IMPORTANCE OF MSME AND PRIORITY SECTOR TO THE INDIAN ECONOMY | IE & IFS STUDY MATERIAL | JAIIB EXAM 2024

IMPORTANCE OF MSME AND PRIORITY SECTOR TO THE INDIAN ECONOMY | IE & IFS IMPORTANT TOPIC

This article will help you understand the role of the priority sector and Micro small and medium enterprises (MSME) in the Indian economy.

Here we’ll focus on the definition & role of the priority sector, a list of PS identified in India, priority sector lending norms, the Definition of MSME, the Role and significance of MSME in economic development, the contribution of MSME in GDP, and recent initiatives in MSME sector. 

Let’s understand the aforementioned meticulously detailed way.

IMPORTANCE OF MSME AND PRIORITY SECTOR TO THE INDIAN ECONOMY

Since we know Development in the Priority sector is very much needed to fulfil the goal of inclusive and balanced growth. Governments and RBI understand the importance of the priority sector, for the development of the country’s basic needs and therefore it has prioritised this sector, over the others.

To foster consensus among all stakeholders, the RBI’s Priority Sector Lending classifications and standards are designed to align with newly developing national priorities which aim to place a stronger emphasis on equitable development.

Banks are tasked with fostering the expansion of these industries by offering suitable and timely finance.

Here’s how it’s been working out as an effective way to boost that would otherwise be hard to get.

• Better credit penetration is made possible in credit-deficient areas.
• Increased lending to vulnerable people including small and marginal farmers
• Give renewable energy more credit
• Greater praise for the health infrastructure and related industries
• Strongest movers of employment, innovation, and economic growth

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Footprint of MSME

The MSME sector in India is highly diverse in terms of firm size, product and service variety, and level of technology employed. It contributes significantly to the growth of the Indian economy, contributing 45% of manufacturing output, 40% of exports, and 28% of GDP while employing 120 million people, second only to agriculture in terms of employment volume. It plays a crucial role in supply chains, innovation, entrepreneurship, and the creation of new jobs.

A list of India’s priority industry sectors

Based on the changes observed in macroeconomics, any of the sectors have been modified after the PSL guidelines has been introduced. To Coordinated with the newly arising national priorities on September 4, 2020, the RBI updated the PSL guidelines as follows

• To include bank financing for start-ups (up to Rs. 50 crores)
• Loans to farmers for the construction of solar power plants for the solarization of grid-connected agriculture pumps
• Obtaining loans to build compressed biogas (CBG) facilities

The priority sector lending includes the following categories

• Agriculture
• Micro, Small and Medium Enterprises (MSMEs) 
• Export Credit iv. Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others
• Weaker sections

Priority sector lending standards

During the preceding year, the following priority sector lending targets and sub-targets were calculated based on Adjusted Net Bank Credit (ANBC)/Credit Equivalent of Off-Balance-Sheet Exposures (COBE).

DEFINING AN MSME

By the GOI Gazette Notification S.O. 2119(E) (Dated: June 26, 2020) the definition of Micro, Small and Medium Enterprises is revised as under:

MSME’s Importance and role in economic growth

Small and medium enterprises account for almost 90% of the business and 50% of the employment globally which depicts its great employment potential. 

PRESENT STATUS OF MSME IN INDIA

The MSMEs (Micro, Small & Medium Enterprises) have been contributing considerably to the growth of entrepreneurial projects through commercial breakthroughs. To meet the demands of both domestic and international markets, MSMEs are expanding their area of influence across several economic sectors.

Bank Credit to MSME Sector

The banking sector lending to the industry has lifted, dominated by payments made to the sector of micro, small, and medium-sized businesses (MSME). In September 2022, bank lending to the industry increased 12.6% year over year, as opposed to a subdued 1.7% growth in the same month of FY 2021.

Due to the extension of the Emergency Credit Line Guarantee Scheme until March 31, 2022, MSME credit growth may have been boosted. Due to the extension of the Emergency Credit Line Guarantee Scheme until March 31, 2022, MSME credit growth may have been boosted.

Employment generation by MSME

The MSME sector has been creating 11.10 crore jobs in the rural and urban areas of the country during the period 2015-16, as per National Sample Survey (NSS) 73rd round conducted during this period. 

Manufacturing has created 360.41 lakh jobs, non-captive electricity generation and transmission have created 0.07 lakh jobs, trade has created 387.18 lakh jobs, and other services have created 362.82 lakh jobs.

Trade, import and export for MSMEs

Since the Indian government has set a goal of $1 trillion in exports by FY27, MSMEs’ percentage of total exports appears to be essential. Accordingly, the government incorporated “Capacity Building of First-Time MSM. Exporters’ (CBFTE) scheme to upgrade/enhance the quality of MSME products globally and ramp up exports.

MSME’s Role in the Achievement of national objectives

• High contribution to domestic production
• Significant export earnings
• Low investment requirements
• Operational flexibility
• Location-wise mobility
• Low-intensive imports
• Capacities to develop appropriate indigenous technology
• Import substitution
• Contribution towards defence production
• Technology-oriented industries
• Competitiveness in domestic and export markets

CONTRIBUTION OF MSMEs ON GDP

• Over 64 million businesses make up the extensive network of Micro, Small, and Medium-Sized Enterprises (MSMEs), which has a substantial impact on the expansion of the Indian economy.
• The industry employs around a million (120 million) people and contributes over 45% of manufactured production, over 40% of exports, and over 28% of GDP.
• It is the second-most significant source of employment after agriculture.
• The Ministry of MSME has set a target of raising the MSME sector’s share of GDP to 50% by 2025 as India’s economy expands to $5 trillion.

RECENT GOVERNMENT-SPONSORED INITIATIVES IN MSME SECTOR

Various announcements along with the various MSME schemes have been made under the Atmanirbhar Bharat Package to offer urgent help to the MSME sector. To maintain business flow during and post-COVID-19 pandemic, the national government has also undertaken fast-track measures in the semblance of the Atmanirbhar Bharat Package.

Let’s learn about those schemes one by one.

Stand-up India

Under this scheme, entrepreneurs are provided collateral-free loans.

It provides loans up to Rs. 1 Crore to women entrepreneurs and SC/ST/OBC.

Make in India

A set of nation-building initiatives originated out of crisis circumstances in 2014.

The key objective: To turn India into a global manufacturing hub and aims to increase the manufacturing sector’s contribution to GDP to 25 per cent, by 2020-2022.

Four key pillars: New Processes, New Infrastructure, New Sectors, and New Mindset.

Start-up India

With the tagline “Start-up India and Stand-up India” The Government of India established in 2016 established the Start-up India initiative.

• The initiative aims to create a robust environment for catering innovation, promoting long-term economic growth, and creating large-scale employment opportunities. 
• The government of India’s flagship programme, Start-up India, aims to promote the start-up culture and forge an open, supportive environment for entrepreneurship and innovation in the country. 
• It aims to assist people or companies that have just launched their start-ups by providing better financing, including tax breaks, and making sure that the establishment of a start-up in India is a quick and easy process. 
• Start-ups encourage economic growth and wealth creation, job creation, and innovation culture, potentially resulting in the emergence of new industries.

Production Linked Incentive Scheme (PLI)

The Government Budget for 2021–22 allots Rs. 1.97 lakh crore for PLI programmes, for 13 significant industries during a 5-year period beginning in fiscal year (FY) 2021–22, in order to achieve the goal of “Self-reliant India.”

This technique is used by governments for raising the output of goods that are thought to be crucial for taxation, social welfare, and the creation of jobs. PLIs are merely financial inducements for businesses to boost output.

They could be in the form of tax reductions, lowered import and export duties, or lowered land acquisition standards.

The PLI plan is a government-sponsored programme that encourages domestic and local businesses to develop micro jobs as well as multinational businesses to hire people there and create jobs.

Also, it would support the digital economy, increase exports, protect communication infrastructure, and increase farmer income by twofold.

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