New Credit Guarantee Scheme for MSMEs Announced

The Government of India is set to introduce a new credit guarantee scheme aimed at the Micro, Small and Medium Enterprises (MSME) sector. This initiative follows the announcement made by Finance Minister Nirmala Sitharaman in the Budget for 2024-25. The scheme will facilitate loans up to ₹100 crore without requiring collateral or third-party guarantees for existing enterprises. This move aims to boost the MSME sector, which plays a vital role in the Indian economy.

Overview of the Scheme

The upcoming credit guarantee scheme will allow MSMEs to access funding. It is designed to cover loans up to ₹100 crore. The scheme will operate by pooling credit risks associated with these enterprises. A self-financing guarantee fund will be established to provide guarantee cover to applicants. Borrowers will be required to pay an upfront guarantee fee along with an annual fee based on the reducing loan balance.

Significance of MSMEs in India

The MSME sector is a mainstay of the Indian economy. It employs approximately 50 million people and contributes substantially to the country’s GDP. The Gross Value Added (GVA) by MSMEs increased from 29.7 per cent in 2017-18 to 30.1 per cent in 2022-23. This sector has shown resilience and adaptability, crucial for economic growth.

Export Growth

MSMEs have boosted India’s export performance. Exports from this sector rose from ₹3.95 lakh crore in 2020-21 to ₹12.39 lakh crore in 2024-25. This remarkable increase marks the sector’s contribution to enhancing India’s position in global trade.

Focus on Rural Entrepreneurship

To further promote entrepreneurship, the government is focusing on lending to rural areas. This initiative aims to empower rural entrepreneurs and enhance economic activities in these regions. Nagaraju emphasised the need for quality, export linkages, capacity building, and support to achieve the vision of a developed India, termed Viksit Bharat.

Future Prospects

The new credit guarantee scheme is expected to be presented to the Union Cabinet for approval shortly. If implemented effectively, it could transform the MSME landscape by providing much-needed financial support. This initiative aligns with the government’s broader goal of encouraging economic growth and job creation.

Questions for UPSC:

1. Discuss the role of Micro, Small and Medium Enterprises in enhancing India’s economic growth.
2. Critically examine the significance of the new credit guarantee scheme for the MSME sector.
3. What are the challenges faced by MSMEs in rural India? How can government schemes address these challenges?
4. Explain the concept of Gross Value Added. How does it reflect the performance of the MSME sector in India’s economy?

Answer Hints:

1. Discuss the role of Micro, Small and Medium Enterprises in enhancing India’s economic growth.

1. MSMEs employ around 50 million people, contributing to job creation.
2. They account for approximately 30.1% of India’s Gross Value Added (GVA) in recent years.
3. MSMEs are crucial for encouraging innovation and entrepreneurship, driving economic diversification.
4. The sector has shown remarkable resilience, adapting to market changes and global challenges.
5. MSMEs play a vital role in boosting exports, with substantial growth from ₹3.95 lakh crore to ₹12.39 lakh crore in recent years.

2. Critically examine the significance of the new credit guarantee scheme for the MSME sector.

1. The scheme facilitates loans up to ₹100 crore without requiring collateral, easing access to finance.
2. It aims to pool credit risks, reducing the burden on individual MSMEs and financial institutions.
3. By establishing a self-financing guarantee fund, it enhances financial stability for MSMEs.
4. The upfront and annual guarantee fees introduce a sustainable funding model for the scheme.
5. Overall, this scheme is expected to stimulate growth, innovation, and competitiveness within the MSME sector.

3. What are the challenges faced by MSMEs in rural India? How can government schemes address these challenges?

1. MSMEs in rural areas often face limited access to finance and credit facilities.
2. Infrastructure deficiencies hinder operations, affecting productivity and market access.
3. Skill gaps among the workforce can limit innovation and efficiency in rural MSMEs.
4. Government schemes can provide targeted financial support and capacity-building initiatives.
5. Improved infrastructure and better linkages to markets can enhance the operational environment for rural MSMEs.

4. Explain the concept of Gross Value Added. How does it reflect the performance of the MSME sector in India’s economy?

1. Gross Value Added (GVA) measures the contribution of an entity to the economy, calculated as output minus intermediate consumption.
2. It reflects the economic performance and productivity of sectors, including MSMEs.
3. MSMEs’ GVA share increased from 29.7% to 30.1%, indicating their growing importance in the economy.
4. Higher GVA signifies enhanced productivity and economic resilience within the MSME sector.
5. Monitoring GVA helps policymakers assess the effectiveness of growth strategies for MSMEs.