Status of Microenterprises in India

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Introduction

Since the merger of the Ministry of Small Scale Industries and Ministry of Agro and Rural Industries into Ministry of MSME, and since the execution of MSME Act, 2006, scope of microenterprises in India has widened. The Fourth All India Census of MSME (2006-07) provides good insight into the status of MSME in India and the future projections. A continuous but steady growth has been recorded in the MSME sector with microenterprises contributing the most among the three. MSME sector contributes 7.28% of GDP in the manufacturing output (Ministry of MSME, Annual Report 2013-14). In this context microenterprises play an important role in generating employment.

Size of Microenterprises Sector

Number of Enterprises

The status of Microenterprises in India in general has been discussed based on the available data from the reports of Ministry of MSME.

The Fourth Annual Census on MSME categorizes microenterprises as Registered and Unregistered. Among all the enterprises in the MSME sector, microenterprises make almost 95% in registered category and 99.82% in the unregistered category.

Urban (in lakh) Rural (in lakh) Total Microenterprises (in lakh)
Registered (in lakh) 7.98 6.87 14.85
Unregistered (in lakh) 78.78 119.61 198.39
Total Microenterprises (in lakh) 86.76 126.48 213.24

The unregistered category is the majority, within which the rural enterprises are lagging behind in registering their enterprises. This may be due to both lack of information and unwillingness of entrepreneurs, as they don’t want to reveal details about their enterprises to avoid tax and regulatory process (State of Financial Inclusion of Microenterprises: Missing Middle, GIZ, New Delhi, p.12).

However, by not registering their enterprises, they are missing out on the benefits like subsidies provided by the government. There is a need to create awareness on this front and to guide the entrepreneurs in such processes.

Gross Output

In terms of Gross Output, microenterprises contribute 44.2% of the gross output of MSME sector, which is 312973 crores, in registered segment. In Unregistered segment, they contribute 87.87% of gross output (324873 crores).

Microenterprises in India : Type of Ownership

In Microenterprises sector, majority of the ownership is proprietary. More than 90% of microenterprises are under proprietorship. In the Registered category, 91.77% of micro enterprises are proprietary in nature and in unregistered category 94.16% are proprietary. This shows that majority of the microenterprises need extra support, as a single owner is dependent on the enterprise and is the only person available to take care of all the operations of the enterprise.

Microenterprises and Employment

The total number of working MSMEs have been increasing steadily from 2010-11 to 2012-13. Microenterprises contribute to the major share of employment generated in the MSME sector. Since the Unregistered segment is mostly comprised of microenterprises, the employment share in this segment is more than 99%.

No. of Enterprises (in lakh) Employment (in lakh) Avg. Employment per unit % of Employment in MSME sector
Registered 14.84 65.33 4.4 70
Unregistered 198.39 405.52 2 99.19

 

Challenges for Microenterprises

The major characteristics of microenterprises are:

  • Most of the microenterprises are unregistered
  • Most of them do not maintain formal books of accounts
  • Most of the units prefer to avoid registration and other regulatory compliances to avoid compliance related costs, taxes and scrutiny attached to compliances

These characteristics of microenterprises result in their inability to establish formal credit linkage with financial institutions.

Status of Financing to Microenterprises in India

In addition to the above mentioned causes, the very institutional arrangements have posed hurdles to financing microenterprises. Since microenterprises fall in the ‘missing middle’ category that does not come under the purview of either MFIs or Banks, they have always found it difficult to meet their working capital requirement. The sub-group of planning commission on MSME estimated the demand and supply of credit for MSME. The projection is for the entire five year period from 2012-2017. The estimation for microenterprises alone, done by GIZ, is shown in the table.

YearWorking capital demand (Rs trillion)Term loan demand (Rs trillion)Total demand (Rs trillion)
2014-158.61.910.5
2015-169.5211.5
2016-1710.52.312.8

In the study published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ India), the demand of microenterprises for credit was about Rs. 7.9 trillion while the supply of loans from the banks was only estimated to be Rs. 1.5 trillion for microenterprises. Hence, there is a big gap to be filled with respect to the credit demand from microenterprises. Similar results have been shown in the study by IFC-Intellecap. The debt gap in the microenterprises sector Rs. 2.3 trillion, a majority share in the total gap of Rs. 2.9 trillion in MSME sector.

Sick Enterprises

The Fourth Census of MSME tried to estimate the number of sick enterprises in the MSME sector.  The estimate considers the enterprises with outstanding loan. The Fourth Annual Census of MSME observes that out of 1,02,322 microenterprises with outstanding loan 95,780 are sick/incipient sick enterprises (93.6%).

Reasons for Sickness

The reasons for sickness/incipient sickness in MSME enterprises as per the Fourth Annual Census of MSME are quite interesting. Problems like non-availability of labour and raw materials are not of much concern.  Among the reasons stated by such units, Lack of Demand and Shortage of Working Capital are the major ones (Figure 3). These reasons point to the lack of guidance to the microenterprises in regards to market analysis, financial planning, financial linkage etc. These enterprises, to be financially sustainable, need strong support in planning and execution of their enterprises. Figure 3 Reasons for sickness of MSMEs. Source: Fourth All India Census of MSMEs: Registered Sector, Development Commissioner, MSME, MoMSME The constant growth in the number of microenterprises is not attractive until there is a reduction in number of sick enterprises. This shows that microenterprises need constant support and guidance in taking up the challenges of market, finance and technology. Programmes that provide only training or financial support, have not proven beneficial in making microenterprises sustainable. There is a need of comprehensive programs that mentor the micro-entrepreneurs to scale up their business.

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