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

MSMEs are the connective tissue between India’s industrialisation and inclusive growth: they translate macroeconomic expansion into household incomes, while their pre-1991 neglect shows why growth alone did not remove poverty.

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. 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.

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”. 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. Ahluwalia’s findings show that rural poverty persisted because growth was jobless and inequality remained high; 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.

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 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.

Critical assessment and way forward Post-1991 reforms removed many licensing bottlenecks and opened markets, and later MSME-specific measures have improved visibility, credit access and market linkages. But continuing challenges remain: a credit gap, delayed payments by large buyers, and technology obsolescence. The growth-poverty relationship in 1950-80 was not purely statistical; it was shaped by policy choices that favoured capital over labour and urban industry over rural livelihoods. Thus, the lesson of 1950-80 is that industrial policy must be employment-oriented, and the lesson of MSME policy is that protection must be converted into capability. A stronger MSME strategy must therefore combine easier credit, enforceable payment norms, technology upgradation and regional dispersal, so that industrialisation becomes both faster and more inclusive.