Q1. ‘The Micro, Small and Medium Enterprises (MSMEs) in our country have failed to realise their full potential’. In light of the above statement, state the significance of MSMEs in the country’s economic growth and mention the problems faced by them at multiple levels. Elaborate on the measures required to rejuvenate them. (15 marks, 250 words)
Topic- Manufacturing sector in India:
Introduction:
Micro, Small and Medium Enterprises (MSMEs) have been the building blocks of India’s industrial ecosystem. Their importance lies in their potential of providing employment, contributing to exports and in ensuring balanced regional development. Of the 6.4 crore MSMEs nearly 99% qualify as micro enterprises with most of them being in the unorganized sector facing challenges at multiple levels. A thorough review of their functioning is necessary to arrive at the possible solutions to resolve their plight.
Body :
- Significance of MSMEs in the country’s economic growth
- Multidimensional problems faced by MSMEs
- Procedural level
- Operational level
- Measures required to rejuvenate
Conclusion :
Micro, Small and Medium Enterprises (MSMEs) play a critical role in an economy that is marred by jobless growth and inadequate investment rates. MSMEs suffer from various bottlenecks that affect their growth trajectory by hindering access to markets, capital and skilled human resources. Thus a motley of interventions is necessary from formalizing their presence to exploring their market potentials in near and far away nations. Only then they can clock double digit growth, come out of the dwarfism phenomenon and contribute to India becoming a $5 trillion economy.
UPSC Syllabus Manufacturing sector in India:
Why was this question asked?
Q. Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. (UPSC CSE 2023)
Introduction
Micro, Small and Medium Enterprises (MSMEs) have been the building blocks of India’s industrial ecosystem. Their importance lies in their potential of providing employment, contributing to exports and in ensuring balanced regional development. Of the 6.4 crore MSMEs nearly 99% qualify as micro enterprises with most of them being in the unorganized sector facing challenges at multiple levels. A thorough review of their functioning is necessary to arrive at the possible solutions to resolve their plight.
Body Status :
Significance of MSMEs in the country’s economic growth
- It contributes to 29% of the Indian GDP. Thus, it plays a crucial role in India’s growth story.
- MSMEs contribute to 45% of the total goods exports. Thus, they are crucial for India in earning her precious foreign exchange.
- Balanced Regional development would be a wishful thinking without MSMEs as 60% of the MSMEs belong to rural India.
- MSMEs contribute to leveraging the demographic dividend as it is the second largest employer after the agriculture sector.
- Inclusive development is fostered by the MSMEs as 20% of them are owned by women.
Multidimensional problems faced by MSMEs:
Procedural level-
- Average insolvency process takes approximately 8 years for MSMEs. This further increases the compliance cost and quicker exit hindering efficient use of capital in profitable ventures.
- More than 90% of the MSMEs are in unorganised sector with poor labour and safety regulations and are inaccessible to government initiatives that improvise the position of MSMEs
- Many MNCs delay payments by a quarter jeopardizing cash inflows of these MSMEs and compromising their growth in the long run.
- According to the Asian Development Bank, 78% of the finance used by MSMEs is being met by informal sources increasing their cost of operations while decreasing the price competitiveness of their products.
Operational level
- Dwarfism – They suffer from a phenomenon called dwarfism. MSMEs avoid growing bigger to evade increased compliance burden regarding taxes, reporting etc. that is applicable for large firms. Thus, MSMEs don’t achieve their full potential.
- Certification – Quality checks and certification issues plague MSMEs. Without cost effective mechanisms regarding this, they suffer from low export revenues.
- Digital presence – Currently less than 10% of the MSMEs sell their products digitally. This affects their market reach and thereby revenues.
- Fourth Industrial Revolution – Labour intensive MSMEs face stiff competition from MSMEs that have automated processes. Unemployment is a systemic challenge that the MSME sector is facing and will face in future.
Measures required to rejuvenate
- Delayed Payments – SAMADHAN, a delayed payment monitoring system was put in place where the buyer would pay a compound interest on the amount to be paid to the supplier for any payment delay beyond 45 days. Its implementation is of great essence.
- Registration – Efforts must be taken towards registering the MSMEs on the UDYAM portal which allows the MSMEs access collateral free loans from banks and financial institutions.
- Implementing UK Sinha Committee recommendations – The committee had recommended to establish a government sponsored ‘Fund of Funds’ and to aggressively on-board MSMEs on digital platforms for marketing, procurement and receiving government benefits targeting MSMEs.
- Clusters – Government can establish a separate cluster for MSMEs near major markets to facilitate knowledge transfer, access capital at competitive rates and gauge market demand all at once.
- Certifications – A low cost certification mechanism must be devised for MSME products to fully exploit their export potential in the long term.
- Innovation – Regional initiatives on the lines of the ASPIRE Scheme should be explored by setting up technology and incubation centres to promote entrepreneurship.
Conclusion
Micro, Small and Medium Enterprises (MSMEs) play a critical role in an economy that is marred by jobless growth and inadequate investment rates. MSMEs suffer from various bottlenecks that affect their growth trajectory by hindering access to markets, capital and skilled human resources. Thus a motley of interventions is necessary from formalizing their presence to exploring their market potentials in near and far away nations. Only then they can clock double digit growth, come out of the dwarfism phenomenon and contribute to India becoming a $5 trillion economy.
Q2. ‘Despite various measures by the Union Government to improvise the indigenous defense production, the sector still faces multiple bottlenecks affecting the comprehensive national power.’ Discuss. Enumerate the steps required to increase the indigenous defense production. 15 marks (250 words)
Topic – Defence Technology :
Introduction
India which has the world’s 2nd largest standing army doesn’t have a robust domestic defense industrial setup. This is owing to the systemic issues that plagues the entire industrial ecosystem. There is need of deeper analysis of the nature of problems associated so that the country not only achieves self-reliance but also exports cost effective defense platforms to its close neighbours and strategic partners alike.
Body
- Government initiatives
- Multiple bottlenecks faced by the sector
- Negative impact on Comprehensive National Power
- Steps required to increase the indigenous defence production
Conclusion
The recent Russia-Ukraine War has made it crystal clear that a country must have a solid defense production ecosystem if it must maintain strategic depth. Otherwise, its strategic autonomy will be compromised by the countries catering to its defense needs. India’s defense ecosystem suffers from human resources issues, offset concerns and a poor manufacturing base. Therefore, having a sound defense industrial base is necessary for both strategic autonomy and India’s global influence. Its realisation requires efforts on part of the volley of stakeholders that are responsible for the rollout of such a system.
UPSC Syllabus Defence Technology:
Why was this question asked?
Q. Analyse the multidimensional challenges posed by external state and non-state actors, to the internal security of India. Also discuss the measures requires to be taken to combat these threats. (UPSC CSE 2021)
Introduction:
India which has the world’s 2nd largest standing army doesn’t have a robust domestic defense industrial setup. This is owing to the systemic issues that plagues the entire industrial ecosystem. There is need of deeper analysis of the nature of problems associated so that the country not only achieves self-reliance but also exports cost effective defense platforms to its close neighbours and strategic partners alike.
Body
Government initiatives
- Revision of the Foreign Direct Investment (FDI) limit: FDI limit has been revised upwards to 74% under the automatic route to promote the indigenous manufacturing of complex defense platforms
- Corporatization of the Ordnance Factory Board: Public listing of these firms improves the ability to raise investments, accountability and performance.
- Mission Raksha Gyanshakti: To infuse a culture of Intellectual Property Rights (IPR) for the innovations in the defense sector, the mission was launched. It provides institutional and knowledge support to improve IP Rights of new innovations.
- SRIJAN Portal: More than 10,000 earlier imported items are displayed on the portal for indigenisation by the Indian industries. This will give a signal to the Indian industries that there will be an assured demand for these products if they are manufactured indigenously.
- Industrial Corridors: Industrial Corridors are being developed in Uttar Pradesh and Tamil Nadu to boost integrated ecosystem for defense production thereby generating employment, boosting indigenous production and improving the overall innovation potential in the country.
Multiple bottlenecks faced by the sector
- Lack of Research and Development: Only 0.7% of the GDP is being spent on Research and Development. Indigenous defence production is also dwarfed by this poor Research and Development Ecosystem.
- State of the manufacturing sector: India’s manufacturing sector is in deep distress, contributing only 13% to the GDP while it is 31.7% for China. This affects the institutionalization of an ecosystem for indigenous defense production.
- Revenue expenditure: As per a Ministry of Defense report, on 27.67% of the total budgetary allocation on defense goes to capital expenditure with the rest being spent as revenue expenditure.
- Partial success of Defense Offset Policy: The CAG report released in 2020 highlighted that only 8% of the total offset targets in terms of value had been realised. Most of the foreign manufacturers promise larger offsets to win contracts and then go back on their commitments.
- Lack of manpower at crucial places: DRDO is function with a shortfall of more than 800 scientists, this amounts to a more than 15% of its sanctioned staff strength.
Negative impact on Comprehensive National Power
- Border skirmishes: India’s rivals gain confidence out of an ailing domestic defense ecosystem inspiring them to kick-start border skirmishes on the slightest difference of opinions.
- Demographic dividend: Mitigated employment generation as a consequence of dwarfed defense industry affects the full exploitation of demographic dividend.
- Soft power: India will find it difficult to make its point on the global high table for a permanent seat at the UN Security Council. India’s soft power is intricately connected to the vibrancy of its defense ecosystem.
- Geopolitical blackmail: India relies on import for 90% of its defense equipments making it the world’s largest defense importer as per SIPRI. In the event of a war, defense suppliers can hold India to a ransom for satisfying their national interests.
- Economic growth: In the long term, a country with poor credentials in defense sector is vulnerable to capital flights with the slightest hints of a geopolitical conflict. This in turn hampers sustained economic growth.
Steps required to increase the indigenous defense production:
- Research and Development: India should increase its research expenditure to at least 2% of the GDP in line with major economies like China, Brazil, and a host of EU countries.
- A comprehensive export policy: India’s Defense Production and Export Promotion Policy visualises $5 billion export of defense and aerospace items by 2025. Implementing it in letter and spirit is the need of the hour.
- Testing rigs: A low cost testing rig for private sector developers must be provisioned in order to cut costs during the product conceptualisation and development phase.
- Joint Ventures: India and Russia setup a joint venture to pump out AK-203 assault rifles with 70% indigenisation by 2026. Such examples can be emulated in manufacturing other defense platforms.
- Increase the defense budget: The defense budget as a proportion of the overall budget stood at 11.6% in 2018 against 30% in 1950. Thus, a respectable increase in the defense budget is necessary to improve the domestic defense ecosystem.
Conclusion
The recent Russia- Ukraine War has made it crystal clear that a country must have a solid defense production ecosystem if it must maintain strategic depth. Otherwise, its strategic autonomy will be compromised by the countries catering to its defense needs. India’s defense ecosystem suffers from human resources issues, offset concerns and a poor manufacturing base. Therefore, having a sound defense industrial base is necessary for both strategic autonomy and India’s global influence. Its realisation requires efforts on part of the volley of stakeholders that are responsible for the rollout of such a system.