By Nilanjan Banik
At 8:30 am every day, 3000-odd labourers begin their work at a hot rolling steel plant in Jind, a small dusty town in Haryana. Hot rolling steel is used as an intermediary for making steel utensils. Although, the large steel plants have become mechanized, the hot rolling steel plant such as the one in Jind is categorized as micro, small and medium enterprises (MSMEs). There are many such other similar plants and they have been a source of employment for thousands of people, both skilled and unskilled. Labourers, technical people, engineers and other professional people work for this industry. Government data estimate that there are 6.63 crore MSMEs in India, out of which 99.47 per cent are categorized as micro enterprises, 0.52 per cent as small, and remaining 0.01 per cent categorized as medium enterprises. MSME sectors contribute around 30 per cent of India’s GDP, with a share of 40 per cent in exports, and employing around 11 crore people.
The smaller steel plants, like the one in Jind, for instance, has nearly 70 – 80 melting units and more than 500 units are engaged in rolling and employs over 400,000 direct and indirect labour. The firms which are in the business of manufacturing hot rolling steel have already invested about Rs 5,000 crore in plants and machinery, and have invested another Rs 5,000 crore in working capital. It has a wide geographical spread. Jodhpur produces nearly 25 per cent of the total output, Ahmedabad (25 per cent), Bhiwadi (15 per cent), Jagadhari (15 per cent) and National Capital Region, Delhi (20 per cent).At a time when fewer jobs are getting created, and India’s urban sectors are able to accommodate any further expansion, growth of MSME sector is important from the perspective of job creation and uniform growth process, pan-India.
However, the MSME sector is not competitive and is struggling to survive. Although contributing a fair share in India’s foreign exchange earnings, the MSME outputs are characterized by low-end products, unreliable delivery and uncertain pricing. Also, the MSME sector are in shortage of working capital for them to venture in market research, conceptualisation, design, prototyping, testing, compliance and certification for new product introduction. At present, MSME do not have the capabilities to manufacture high-technology intensive items. In comparison to the Chinese, where the MSME is contributing to 60 per cent of China’s GDP and 80 per cent of jobs, India’s MSME is lagging behind. Even when it comes to trade with China in MSME products, India is incurring a huge trade deficit.
To firefight this increase in the trade deficit, returning to protectionism seems to be a natural and an easier option. However, not so long ago – sometime during 2005 – India experimented with further opening up border trade. The country in fact signed six different Regional Trading Agreements (RTAs) between 2006 and 2010. This, however, led to an overall increase in the trade deficit for India. The current account deficit as a percentage of GDP also rose from 0.67 per cent in 2007 to 5.0 per cent in 2012. This prompted the policymakers to adopt an inward-looking policy by increasing tariffs, particularly on electronics, mechanical and electrical items. During the last decade, simple average tariffs for India rose 25 per cent from 8.9 per cent in 2010-11 to 11.1 per cent in 2020-21. The proportion of tariff lines exceeding the 15 per cent mark rose from 11.9 per cent in 2010-11 to 25.4 per cent in 2020-21. In spite of these measures, MSME sectors continue to struggle.
The association of hot and cold rolled steel manufacturing association is urging the government to protect their industry from Chinese and Indonesian cheaper steel imports by imposing anti-dumping and countervailing measures. But much more need to be done. The COVID-19 pandemic has hit the MSME sector the most, leading to loss in livelihood. Recent estimate from NCAER suggests, the share of temporary workers working in the MSME sector fell from 26.5 per cent in March 2020 to 10.1 per cent in June 2020. The corresponding numbers for permanent workers were 14.9 per cent in March 2020 to 5.1 per cent in June 2020, respectively. In another related survey conducted by National Small Industries Corporation, it was found that post COVID-19, around 9 per cent of the MSME plants had shut down. Interestingly, number of businessmen committing suicides increased from 9052 in 2019 to 11,716 in 2020. In addition to the trade policy instruments (tariffs and non-tariffs measures), government should provide some helping hand.
First, many plants belonging to the MSME sector do not access to formal loan and other government benefit. More than 95 per cent of the firms belonging to this category are not registered and therefore lack any legal entity. Even when they are getting access to bank loans, condition required providing bank guarantee (non-fund-based limit such as collateral) five times the loanable amount
At the time of pandemic there is a need to relax this limit. Second, tax benefits for the big corporates, for instance, lowering the corporate tax to 25 per cent, can also be extended for proprietorship firms (falling under the 30 per cent tax bracket). Third, increase budgetary allocation for schemes such as market access schemes. This will allow MSME sector to market their products outside India, and at the same time allow foreign buyers venture into the Indian market. Lastly, giving some tax benefits in the form of lower electricity, lower GST, and a faster refund of duty drawbacks for the MSME involved in the export sectors. (IPA Service)
(The author is Professor, Mahindra University, Hyderabad).