Question 2 (a)

Micro, small and medium enterprises: definition, classification and role in the economy

9 marks

Time to write
About 18 minutes
Topic
Entrepreneurship and MSMEs
Notes
Crux notes

Question

Question 2 (a) · 9 marks

Define micro, small and medium enterprises, and classify them. Explain how MSMEs industry is regarded as the backbone of an economy?

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

18 minfor 9 marks

Read from the question

  • Define…Explain…?Two asks in one question: answer both.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Definition of MSMEs 1½ marks 1 min
  3. 2 Classification criteria and limits 2½ marks 5 min
  4. 3 Role as the backbone of the economy 4½ marks 9 min
  5. 4 Conclusion ½ mark 1 min
  6. Check: every ask answered, key terms underlined 1 min

Easy marks

  • Definition of MSMEs (step 1, 1½ marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.

Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks. End with step 4 in a line or two.

Try it first. About 18 minutes for 9 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Definition of MSMEs

Micro, small and medium enterprises (MSMEs) are business units engaged in manufacturing or in providing services whose size, measured by investment in plant, machinery or equipment and by annual turnover, falls within limits laid down by the Government of India under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. They are registered online through Udyam registration, on the basis of self-declaration.

Classification

Since 1 July 2020 a single composite criterion: investment and turnover: applies to both manufacturing and service enterprises:

EnterpriseInvestment in plant, machinery or equipment not more thanAnnual turnover not more than
Micro₹1 crore₹5 crore
Small₹10 crore₹50 crore
Medium₹50 crore₹250 crore

Source of the limits: the Ministry of MSME notification of 26 June 2020.

These were the limits when this paper was set (December 2023).

Why MSMEs are the backbone of the economy

  1. Employment. MSMEs are the second largest employers after agriculture, and they create more jobs per unit of capital than large industry.
  2. Share of industry. Small industries make up about 95 per cent of the industrial units in the country and turn out a huge range of goods, from mass consumption items to electronic and engineering products.
  3. Exports. The sector has large export potential; handlooms, handicrafts and other traditional products are notable for their export value.
  4. Balanced regional development. They can be set up almost anywhere, in small towns and rural areas, spreading industry and checking migration to cities.
  5. Entrepreneurship. They widen the base of entrepreneurs and encourage grass-root innovation.
  6. Equitable distribution of income. Spreading industry over many small units helps reduce income inequalities.
  7. Support to large industries. They work alongside large firms as ancillary units in their value chains.
  8. Use of local resources and skills, including local raw materials and indigenous skills.
  9. Low capital. They are labour-intensive and need relatively little capital, which suits a country with surplus labour.

Example. A cluster of small units making auto parts in a district town employs thousands of local workers, supplies large car makers and exports components: showing employment, linkage and export roles together.

Conclusion

Because they provide jobs, output, exports and wide-spread enterprise, MSMEs rightly form the backbone of the Indian economy. Government policy, easier credit, timely payment, technology and market support, aims to strengthen this backbone further.

Where the 9 marks sit

#ComponentMarks
1Definition of MSMEs1.5
2Classification (criteria and limits)2.5
3Role as the backbone of the economy4.5
4Conclusion0.5
Total9
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