(a) Highlight the role of MSMEs in Indian Economy. What steps have been taken by the Government to enhance its contribution ? (20…

(a) Role of MSMEs and policy response

The salient contributions of MSMEs are best highlighted by their scale, employment effect and spatial reach. They contribute about 30 per cent of GDP, generate over 11 crore jobs, account for more than 45 per cent of exports, and disperse industrial activity to towns and rural areas, thereby reducing regional concentration. Their small size allows them to use local raw materials, absorb unskilled and semi-skilled labour, and provide backward and forward linkages to large industry. They also support rural non-farm employment and enable entrepreneurship in areas where large capital-intensive units cannot operate profitably. This is especially important because MSMEs are numerous, geographically scattered and responsive to local demand. To enhance this contribution, the Government has used PMEGP for self-employment, MUDRA for small credit, the Credit Guarantee Fund (CGTMSE) to reduce collateral constraints, ZED certification to improve environmental performance, and the MSME Champions Portal to connect buyers and suppliers. The MSME definition was revised in 2020 to composite investment and turnover criteria with Udyam registration, and the Budget 2025-26 raised the limits (investment up to ₹2.5 crore, ₹25 crore and ₹125 crore, and turnover up to ₹10 crore, ₹100 crore and ₹500 crore for micro, small and medium units) so that firms can grow without losing benefits. The Emergency Credit Line Guarantee Scheme supported liquidity during COVID-19; credit-guarantee cover for micro and small enterprises has been enlarged; the TReDS platform and section 43B(h) of the Income-tax Act (payments to micro and small suppliers must be made within 45 days to be deductible) tackle delayed payments; and RAMP and PM Vishwakarma support technology, skills and artisans. Challenges remain: a large credit gap, delayed payments by large buyers, low technology, and a 'missing middle' of few medium-sized firms. These measures address the main constraints of capital, market access and compliance, moving policy from mere protection to facilitation. Post-1991 deregulation and post-2015 emphasis on credit, technology and market access have made MSMEs a central target of industrial policy, unlike the reserved-list approach that earlier treated them as protected but under-supported units.

(b) Growth and poverty, 1950-80

From 1950 to 1980, national income grew at roughly 3.5 per cent a year, the “Hindu rate of growth” (Raj Krishna's term), while population grew at over 2 per cent, so per capita income rose only about 1.3 per cent a year. The 1960s saw stagnation, while the 1970s recorded a slight rise, but growth remained too low to absorb the labour force or raise incomes rapidly. The trend was therefore one of slow, uneven growth rather than sustained take-off. With a large population, this rate left per capita income growth low, and the sectoral composition shifted away from agriculture as industry and services gained weight. Yet poverty reduction was limited. The poverty ratio stayed around half the population (54.9% in 1973–74 and 51.3% in 1977–78 on the Planning Commission's estimates), so the number of poor rose. Montek Ahluwalia (1978) found no significant trend in rural poverty between the mid-1950s and mid-1970s: it fell in good harvest years and rose in bad ones, showing its dependence on agricultural output. This led to direct anti-poverty programmes in the 1970s (Garibi Hatao, the Minimum Needs Programme and IRDP); rising national income did not automatically translate into broad-based consumption or asset formation among the poor. In other words, aggregate growth was not enough unless it created employment and reached the rural majority.

(c) Inadequacies of pre-liberalisation industrialisation

The pre-liberalisation process was structurally incomplete. The Mahalanobis model’s capital-intensive heavy-industry bias crowded out labour-intensive consumer goods, leaving employment generation weak. The licensing regime under the IDR Act, 1951, reinforced by the MRTP Act and FERA, created entry barriers, rent-seeking and inefficient allocation of capital. Public sector units often suffered from overstaffing, soft budgets and delayed investment, while import-substitution policies protected domestic producers from competition and produced costly, non-competitive industries. This also reinforced regional imbalance, with industry concentrated in a few states and cities and limited backward linkages in less developed regions. The result was an industrial structure that was heavy, protected and disconnected from mass employment. MSMEs were neglected through a reserved list that protected markets without providing credit, technology or scale. Industrial growth itself slowed from about 7% a year in 1951–65 to about 4% in 1965–80.