JAIIB IE and IFS Paper-1 Module-A Unit 4: Role of Priority Sector and MSME in the Indian Economy

18/12/2023

JAIIB Paper 1 (IE and IFS) Module A Unit 4:Role of Priority Sector and MSME in the Indian Economy (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called “Role of Priority Sector and MSME in the Indian Economy ”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module A Unit 4:Role of Priority Sector and MSME in the Indian Economy
Aspirants must go through this article to better understand the topic, Banker Customer Relationship and practice using our Online Mock Test Series to strengthen their knowledge of Banker Customer Relationship. Unit 4: Role of Priority Sector and MSME in the Indian Economy

Role of Priority Sector and MSME in the Indian Economy

Development of Priority sectors are much needed, for balanced and inclusive growth.
The RBI’s Priority Sector Lending classifications and standards are meant to match with emerging national priorities and bring a deeper focus on inclusive development, thereby building consensus among all stakeholders.
Banks are entrusted with encouraging the growth of such sectors, by providing appropriate and timely financing
Micro, Small, and Medium Enterprises (MSMEs) : country’s strongest drivers of economic growth, innovation, and employment.
- vast network of over 64 million enterprises, the MSME sector contributes significantly to the growth of the Indian

The sector contributes

manufacturing output = roughly 45 %
Exports= >40%
GDP = >28%

Employing = approximately 120 million people

Ranking 2nd only to agriculture, in terms of size of employment.

Diverse: In terms of enterprise size, product and service diversity, and level of technology deployed.

Driver of economic growth : Potential to grow faster and viewed as a driver of economic growth and a means of promoting equitable development.

The MSME sector’s primary benefit is its employment potential, at a low capital cost.

The importance of the MSME sector in

employment creation,
innovation,
entrepreneurship, and
supply chains is critical.

Definition & Role Of Priority Sector

Social Control over banks : Banking Laws (Amendment) Bill 1967, tabled in the Lok Sabha on December 23, 1967
Banks were directed to align their activities with national objectives through social control.

The current framework of Priority Sector Lending (PSL)

Dec 14, 1967: States in Lok Sabha by Morarji Desai, then Deputy Prime Minister and Minister of Finance ,that persistent complaints that several priority sectors, such as agriculture, SSI, & exports, had not received their fair share of bank credit.
This appears to be the first time the phrase priority sector has been used. As a result, the concept of priority sector lending was born.
July 1968: At a National Credit Council meeting , it was stressed that commercial banks should boost their involvement in financing priority sectors such as agriculture and small-scale industries.
PSL comprises those sectors that have a substantial influence on vast portion of the population, the weaker sections & sectors that are employment intensive

List Of Priority Sectors Identified In India

To align it with emerging national priorities and bring a sharper focus on inclusive development, the RBI revised PSL guidelines on September 4, 2020, by including
- Bank finance to start-ups (up to Rs. 50 crores);
- Loans to farmers for the installation of solar power plants for solarisation of grid-connected agriculture pumps;
- And loans for the establishment of Compressed Biogas (CBG) plants.

The following are the priority sector categories:

I)Agriculture

II)MSMEs

III)Export Credit

IV) Education

V)Housing

VI)Social

VII)Renewable Energy

VIII)Others

IX)Weaker sections

Priority Sector Lending Norms

The priority sector lending targets and sub-targets are to be computed based on the Adjusted Net Bank Credit (ANBC)/ Credit Equivalent of Off-Balance-Sheet Exposures (CEOBE) as applicable on the corresponding date of the preceding year and are as follows.

Definition Of MSME

In terms of Government of India Gazette Notification S.O. 2119(E) dated June 26, 2020 the definition of Micro, Small and Medium Enterprises is changed as under:

All enterprises are required to register online on Udyam Registration Portal and obtain ‘Udyam Registration Certificate’.
The new definition of MSMEs will make it easier for small businesses to expand and flourish.
The resulting economies of scale can boost productivity without depriving MSMEs of government benefits such as market support, export promotion, preferential procurement in the public sector, and incentives through the Micro Small Enterprises-Cluster Development Programme (MSE-CDP), Prime Minister Employment Generation Programme (PMEGP), and Scheme of Fund for Regeneration of Traditional Industries (SFURTI), as well as the enabling of IT ecosystems. This favourable atmosphere will encourage competitiveness and help MSMEs avoid growth retardation.
The launch of the new Udyam Registration Portal in July 2020 is one of the recent efforts made by the government to boost the ease of doing business for MSMEs.
The registration procedure is entirely online, digital, and paperless, and it is based on self-declaration. There are no documents or proof necessary to be supplied while registering.

Role & Significance Of Msme In Economic Development

Feature : Employment potential at a low capital cost.
Small and Medium Enterprises (SMEs) account for around 90% of businesses and more than 50% of employment globally.
The significance of the MSME sector is critical.
Hence, it is important to foster, nurture, and assist new business ideas, as they develop into enterprises.
The sector has benefited the economy, by encouraging the development of industries in all parts of the country. Factors such as SME finance from both domestic and foreign investors, as well as new technologies, are supporting SMEs in bringing substantial value to their businesses

I)Job creation,

II)Innovation,

III)Entrepreneurship

IV)Supply chains

MSME – Present Status In India

Contributing significantly to the expansion of entrepreneurial endeavours through business innovations. The MSMEs are widening their domain across sectors of the economy, producing diverse range of products and services to meet the demands of domestic as well as global markets.

Contribution to GDP

As per the data available with Central Statistics Office (CSO), M/o Statistics & Programme Implementation, the contribution of MSME sector in Country’s Gross Value Added (GVA) and Gross Domestic Product (GDP) at current prices from 2014-15 to 2018-19 is as below:

Bank Credit to MSME Sector

The banking sector lending to industry has picked up, led by disbursals to the micro, small and medium enterprises (MSME) sector.
Bank credit to industry improved 6% year-on-year in September 2022, compared to a muted 1.7% growth in the same month in FY 2021.
Banks’ lending:
- Micro and small businesses: Grew 27% YoY
- Medium enterprises: Increased 36% during the month.
The higher credit growth for the MSME sector may have come due to the extension of the Emergency Credit Line Guarantee Scheme till March 31,2022.

Employment Generation

MSME sector has been creating
- 10 crore jobs in the rural and the urban areas across the country.
  - 41 lakh in Manufacturing,
  - 07 lakh in non-captive Electricity Generation and Transmission,
  - 18 lakh in Trade
  - 82 lakh in Other Services
- Trade, import and export for MSMEs’ share in exports assumes significance as the government has been targeting $1 trillion in exports by FY27.
- In accordance with the target, the government had added ‘Capacity Building of First-Time MSME Exporters’ (CBFTE) scheme to enhance the quality of MSME products globally and increase exports.

MSME Sector has helped the country to achieve the following objectives:

High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defence production
Technology-oriented industries
Competitiveness in domestic and export markets.

Contribution Of Msme In GDP

MSMEs are among the most powerful engines of economic development, innovation, and employment generation.
With a broad network of over 64 million firms, the MSME sector contributes significantly to the growth of the Indian economy.
- Industry generates
  - Manufacturing output = roughly 45 %
  - Exports= >40%
  - GDP = >28%
- Employing = approximately 120 million people
  - Ranking 2nd only to agriculture, in terms of size of employment.
- As India grows to a $5 trillion economy, the Ministry of MSME has set a goal of increasing the MSME sector’s contribution to GDP to 50 per cent, by 2025.

RECENT INITIATIVES IN MSME SECTOR, VIZ., ATMANIRBHAR BHARAT PACKAGE, MAKE IN INDIA, START-UP INDIA, STAND-UP INDIA, ETC.

The government revised the definition of the MSME in 2020, and the new MSME definition includes around 99% of all enterprises.
AIMS: to assist MSMEs in expanding and creating more jobs.
Abolish the difference between manufacturing and service MSMEs
The Government of India has taken deliberate measures to guarantee that the benefits of these MSME initiatives reach MSMEs on time.
Numerous announcements under the Atmanirbahar Bharat Package to offer urgent help to the MSME sector.
The ‘Make in India’ initiative and the ‘Atmanirbhar Bharat Abhiyaan’ (Self Reliant India Campaign) have played significant role in enhancing business and local manufacturing in the country, with a special emphasis on MSMEs
To maintain business continuity during the COVID-19 pandemic, the national government has also undertaken fast response measures in the guise of the Atmanirbhar Bharat Package. Some of the most important measures are listed below.

Make in India

Introduced: by The Prime Minister in September 2014
As part of a larger set of nation-building initiatives.
Objective: Turning India into a global design and manufacturing hub.
Built on four pillars established to boost entrepreneurship in India, not just in manufacturing but also in other sectors.
Aims: to increase the manufacturing sector’s contribution to GDP to 25%, by 2020–2022.

Four Pillars:

1.New Processes,

2.New Infrastructure,

3.New Sectors,

4.New Mind-set

Emergency Credit Line Guarantee Scheme (ECLGS)

During COVID, the government introduced a Rs. 3 lakh crore collateral-free credit scheme that is intended to benefit 45 lakh MSMEs.
Aims to provide much-needed relief to the MSME sector by incentivizing Member Lending Institutes (MLIs), to provide extra credit at reasonable interest rates, allowing MSMEs to fulfil operational liabilities and restart their businesses.

Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE)

Individual Micro and Small Enterprises can apply for collateral-free loans (up to Rs. 1 crore) from the Ministry of MSME and the Small Industries Development Bank of India (SIDBI).
To strengthen the credit delivery system and facilitate the flow of credit to the MSE sector: Acknowledging that the availability of bank credit without the hassles of collaterals or third-party guarantees would be a substantial source of support to first generation entrepreneurs, in realising their dream of having established their own Micro and Small Enterprise (MSE), the Ministry of MSME launched the Credit Guarantee Scheme (CGS)
The CGTMSE supported the pandemic affected MSME sector in regaining its footing

Interest Subsidy Eligibility Certificate (ISEC)

The plan has been implemented as a funding mechanism for the khadi programme run by the country’s khadi institutions.
It facilitates borrowing from banks and bridges the gap between the availability of funds from budgetary sources and the real financial requirements.

Start-up India

Started : In January 2016
Tagline : “Start-up India and Stand-up India.”
The initiative intends to create a robust environment for fostering innovation, promoting longterm economic growth, and creating large-scale employment opportunities.
Apart from the technology sector, the start-up movement will expand to agriculture, manufacturing, healthcare, and education; and from current tier 1 cities, it will spread to tier 2 and tier 3 cities, including semi-urban and rural areas.
Aims: to support individuals or businesses that have recently formed their own start-ups, by offering better finance, including tax breaks, and ensuring that the process of establishing a start-up in India is smooth and quick.
Aimed at catalysing start-up culture and creating a robust and inclusive environment for innovation and entrepreneurship
Start-ups promote economic development and wealth creation, create jobs, and foster an innovation culture, transforming millennials from job seekers to job givers—and so, potentially emerge as a vehicle to capture the demographic dividend.

Stand-up India

Launched : To provide a business opportunity to those who are either females or belong to the SC/ST category and require financial assistance to start their greenfield business ventures. These individuals are given special loans ranging from Rs. 10 lakhs to Rs. 1 crore, at a low interest rate.

Production Linked Incentive Scheme(PLI)

Keeping in mind India’s ambition of becoming an ‘Atmanirbhar,’ an allocation of 1.97 lakh crore has been earmarked in the Union Budget 2021-22 for PLI programmes, for 13 important sectors over a 5-year period, beginning with fiscal year (FY) 2021-22.
The PLI is a traditional and widely employed government method, for increasing the production of products considered important for job creation, social welfare, and taxation.
PLIs are simply financial incentives for enterprises to increase output.
They might take the form of tax breaks, reduced import and export levies, or reduced land acquisition requirements.
The PLI scheme is a Government of India initiative that encourages not only international enterprises to locate workers in the country and so produce employment, but also domestic and local industry to create micro jobs.

The PLI schemes provide

Qualifying manufacturers, incentives ranging from 4%-6% on additional sales, above the base year of 2019-20, for a 4 to 6 year period.
It is comparable to a subsidy provided through direct payments as budgeted for locally made items by the selected beneficiaries.

These specialised sectors would make Indian firms globally competitive, encourage investment in core competencies and cutting-edge technologtechnology, assure efficiencies, produce economies of scale, boost exports, and integrate India into the global supply chain. Furthermore, it would promote the digital economy, boost exports, safeguard communications infrastructure, and double farmers’ income.

Some of the other schemes to promote MSME are,

Udyami Mitra Portal: Launched by SIDBI to improve accessibility of credit and handholding services to MSMEs.
MSME Sambandh: To monitor the implementation of the public procurement from MSMEs by Central Public Sector Enterprises.
MSME Delayed Payment Portal: This will empower Micro and Small entrepreneurs across the country to directly register their cases relating to delayed payments by Central Ministries/Departments/CPSEs/ State Governments.
Digital MSME Scheme: It involves usage of Cloud Computing, where MSMEs use the internet to access common as well as tailor-made IT infrastructure.
Prime Minister Employment Generation Programme: A credit linked subsidy programme under Ministry of MSME.
Scheme of Fund for Regeneration of Traditional Industries (SFURTI): Organises traditional industries and artisans into clusters and make them competitive by enhancing their marketability & equipping them with improved skills.
A Scheme for Promotion of Innovation, Rural Industries & Entrepreneurship (ASPIRE): It creates new jobs & reduce unemployment, promotes entrepreneurship culture, facilitates innovative business solution, etc.
National Manufacturing Competitiveness Programme (NMCP): To develop global competitiveness among Indian MSMEs, by improving their processes, designs, technology, and market access.
Micro & Small Enterprises Cluster Development Programme (MSE-CDP): Adopts cluster development approach, for enhancing the productivity and competitiveness as well as capacity building of MSEs.
Credit Linked Capital Subsidy Scheme (CLCSS): It is operational for upgradation of technology for MSMEs.