Understanding the MSME sector in Kerala

Kerala MSME

 

The Micro, Small and Medium Enterprises (MSME) sector has often been hailed as the engine of economic growth for countries as it plays a crucial role in providing large-scale employment opportunities at a lower cost of capital, while also uplifting rural and backward communities through industrialization, resulting in a more equitable distribution of national income and wealth. MSMEs also act as ancillary units supporting large industries and have a huge potential in reducing poverty, boosting exports and contributing to overall socio-economic development. 

Presently, the MSME sector contributes 29% to India’s GDP and provides employment to more than 11 crore people, it also contributes 48.1% to India’s total exports in 2018-19. With the implementation of schemes such as interest subvention for fresh/incremental loans for MSMEs, the Stand-Up India scheme and Credit Guarantee Fund Trust for Micro and Small Enterprises which provide a collateral-free flow of credit from lending institutions, this sector is poised for further growth in India.

 

The MSME sector in Kerala 

As per the MSME Annual Report 2018-19, Kerala has the 12th largest number of MSMEs in India - around 23.79 lakh units of which, 23.58 are micro-enterprises, generating employment for approximately 44.64 lakh people. 

Although the fragmented nature of land banks available in Kerala is not conducive for the establishment of large-scale industries, the state government is trying to address this challenge by utilizing such fragmented land to bolster MSME growth in the state.

Over the years, Kerala has invested heavily in connectivity, communication networks, skill development and infrastructure, giving the state an intrinsic advantage for growth in this sector. Since 2016, a total of 52,137 MSMEs have been setup.  With investments of over INR 4,500 crore, the MSME sector of Kerala has generated employment for over 1.8 lakh people.

The three primary factors essential for growth in the MSME sector are credit availability, connectivity and power.
The credit-deposit ratio is considered as one of the key parameters used in understanding the financial stability of banks. As on March 2018, the credit-deposit ratio in Kerala of scheduled commercial banks was 63.90% implying that they have substantial amounts of credit which can be given to the MSMEs to foster growth.

The 7,421 operational bank branches within Kerala have also resulted in the state becoming the leader in promoting financial inclusion in the country. 

Kerala is also one of the first states in India that adopted micro-finance programs as a way of tackling poverty. The Kudumbashree program, set up in 1998, looks after the overall implementation of the poverty eradication and women empowerment programs across the state. It supports programs in economic and social empowerment through financial and technical assistance. Their community network had an outstanding bank loan of INR 3,115.69 crore as of March 2015. 

Seamless connectivity is essential for MSMEs to keep pace with customer demands and smooth operations. Kerala relies heavily on roads for transfer of cargo. The road density in Kerala is 590.14 km/100 sq. km, ahead of the national average of 387 km/100 sq. km providing the state with a clear advantage.

Access to affordable and quality power is vital to the viability of any business. Kerala, in 2017, has become the first fully electrified state in India which has clear benefits to nano and micro-businesses, most of whom run their operations within their households.   

Kerala has already established itself as being a hub for coir manufacturing, khadi, handloom industries and tourism. The coir industry plays a major role in the MSME ecosystem in Kerala and is an agro-based traditional one. It has the potential to enhance exports by value addition through technological interventions. India, mainly the coastal region of Kerala, produces 55% of the total world supply of white coir fibre. 

It is worth noting that the state is also doing increasingly well in the startup sector and IT industry. Kerala retained the top rank for Sustainable Development Goals index conducted by Niti Aayog in association with United Nations owing to the significant investments made into its health and education sectors. Leveraging this strong social and intellectual infrastructure, Kerala has produced many tech entrepreneurs who have helped build a strong startup ecosystem within the state. Kerala presently has 2200+ startups and 40+ accelerators & incubators. 

The large-scale migration of Keralites to the Gulf region and the remittances sent by them have played a significant role in the economic development of the state. As per SLBC, the inflow of NRI deposits increased 11.5% from ₹1,52,349 crore in March 2017 to ₹1,69,944 crore in March 2018. On noticing the tendency of Kerala expatriates to invest within the state, the state government has created a PPP company - Overseas Keralites Investment and Holding Ltd to execute investments which will fund infrastructure projects and NRI townships. 

Successive governments have made extensive efforts to promote Kerala as an investment destination. The recently held Annual Global Investors Meet of Kerala – ASCEND 2020, showcased 100+ ready-to-invest projects, in-depth sessions and panel discussions on focus sectors and provided more details on initiatives such as K-SWIFT, Kerala’s single-window clearance system and the recently passed MSME Facilitation Act of Kerala.

MSMEs in Kerala got a significant boost through the MSME Facilitation Act by which investments of up to INR 10 crore can commence operations without obtaining any licenses from the government. This is a crucial step taken towards building investor’s confidence and improving ease of doing business in Kerala. 

In the wake of this new legislation, the state intends to take a more proactive role in promoting itself as an emerging hub for investments and MSME growth in the country. The landmark bill along with the single window clearance system will trigger revolutionary changes in the industrial sector in Kerala and will create a large volume of job opportunities for the state’s workforce.