MSMEs contribution to India's GDP can be raised to 15%: Study

Creation of a vibrant entrepreneurial ecosystem could help increase the contribution of the micro, small and medium enterprise (MSME) sector to India's GDP from the current 8 per cent to 15 per cent by 2020, and increase the sector's share of employment from the current 28 per cent to over 50 per cent of total employment across the agricultural, manufacturing and services sectors, according to a new KPMG-CII study.

The distance India needs to travel in this regard is clear from the fact that in 12 other countries mentioned in the study, titled, The New Wave Indian MSME: An Action Agenda for Growth, the MSME sector's GDP contribution varies from a low of 22 per cent in Brazil to a high of 85 per cent in Taiwan.

The only countries with lower employment shares than India are Argentina (15 per cent) and Russia (23 per cent). Others vary from UK's 52 per cent to Canada's 90 per cent. India's 46 million MSMEs employ 106 million people; the study says appropriate policies can take this number up to 150 million.

Indian MSMEs, it adds, can benefit from growth in sectors such as telecom, electronics, IT/ITES, media, health care, pharmaceuticals, biotechnology, automotive, transport and logistics, industrial manufacturing, engineering and process equipment, chemicals, textiles, renewable energy, food and agriculture, retail, gems and jewellery, tourism and hospitality, education, civil aviation, real estate and defence and aerospace.

While India has the potential to build 2,500 scalable businesses over the next 10 years, it would require more than 10,000 start-ups to achieve that number, the study says, given the low probability of entrepreneurial success. These businesses could collectively generate $200 billion in revenues, matching the contribution to GDP of the IT/ITES industry, the study says.

However, this will require strong capital inflows, of up to $55 billion over the next decade, with about half of this in the form of debt. Achieving all this, the study says, would need strong policy support built around five 'growth-enabling pillars': infrastructure, regulation, funding, performance incentives and skilling.

To begin with, world-class infrastructure at industry-specific clusters should be set aside for MSMEs in public-private partnership mode, comprising physical infrastructure, knowledge infrastructure (tool rooms), e-platforms, and technology and innovation support. MSMEs should be allocated 25 per cent of the land available in all industrial corridors.

Under regulation, the study recommends a single comprehensive MSME law, applicable in all states and territories and to all MSMEs, within whose ambit would be labour law, the Factories Act and the Land Acquisition Act; single-window approval and a single application for setting up business; a national procurement policy for public and private enterprises; 100 per cent direct tax breaks on costs incurred in developing SME vendors; a policy to ensure timely payments to MSMEs by large companies; a bankruptcy policy that can help MSMEs exit a business without personal financial loss, with entrepreneurs being given a second chance; and simplification of Companies Act provisions and compliance obligations for MSMEs.

Under funding, the study recommends incentives for investments by high net worth individuals and funds into MSMEs as well as for debt funding in MSMEs, by reducing direct tax rates on income/profits generated by funding the MSME segment. It suggests incentives for incubation funds and early stage funds as well as for banks, to make lending to MSMEs more profitable. It also recommends low-cost credit schemes for start-ups and micro enterprises.

The study also recommends a variety of incentives designed to boost MSME performance (including in exports, import substitution and technology upgrades), and for modernisation of skill development institutions.