In India, micro, small and medium enterprises (MSME) is a generic term used to describe all small scale industrial units and medium-scale industrial units. An MSME unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The MSME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. MSME sector also has a large number of service industries.The small scale sector in India comprises of a diverse range of units from traditional crafts to high-tech industries.
Micro, Small and Medium Enterprises (MSMEs) are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. They also play a key role in the development of economies with their effective, efficient, flexible and innovative entrepreneurial spirit. The socio-economic policies adopted by India since the Industries (Development and Regulation) Act, 1951 have laid stress on MSMEs as a means to improve the country’s economic conditions.
The Ministry of Small Scale Industries and Agro and Rural Industries was first created on 14th October 1999 and, on 6th September 2001, further bifurcated into two separate ministries, namely, the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries. Subsequent to enactment of “Micro, Small and Medium Enterprises Development Act, 2006” by the Parliament, the President under Notification dated 9th May, 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries and Ministry of Small Scale Industries were merged into a single Ministry, namely, “Ministry of Micro, Small and Medium Enterprises.” This Ministry designs policies and promotes/ facilitates programs, projects and schemes and monitors their implementation with a view to assisting MSMEs and helps them scale up.
The majorities of people living in rural areas draw their livelihood from agriculture and allied sectors. However, the growth and balanced development of other sectors such as industry and services is also necessary to sustain the growth of Indian economy in an inclusive manner. The Government of India is striving to improve the economic and social conditions of rural population and non-farm sector through a host of measures including creation of productive employment opportunities based on optimal use of local raw materials and skills as well as undertaking interventions aimed at improving supply chain; enhancing skills; upgrading technology; expanding markets and capacity building of the entrepreneurs or artisans and their groups or collectives.
Definition of MSMEs:
Micro, small and medium enterprises as per MSMED Act, 2006 are defined based on their investment in plant and machinery (for manufacturing enterprise) and on equipment for enterprises providing or rendering services. The defined limit on investment for enterprises to be classified as micro, small and medium enterprises is as follows:
|Classification||Manufacturing Enterprises*||Service Enterprises**|
|Micro||Rs. 2.5 million / Rs. 25 lakh||Rs. 1 million / Rs. 10 lakh|
|Small||Rs.50 million / Rs. 5 crore||Rs. 20 million / Rs 2 crore|
|Medium||Rs 100 million / Rs 10 crore||Rs. 50 million / Rs 5 crore|
* Investment limit in Plant & Machinery ** Investment limit in equipment
Products of MSMEs:
The micro, small and medium enterprises (MSMEs) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. The sector is estimated to employ about 595 lakh persons in over 261 lakh enterprises throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well known that the MSMEs provide good opportunities for both self-employment and wage employment.
MSMEs in the country manufacture over 6,000 products. Some of the major subsectors in terms of manufacturing output are food products, textiles and readymade garments, basic metal, chemical and chemical products, metal products, machinery and equipments, transport equipments, rubber and plastic products, furniture, paper and paper products and leather and leather products.
MSME in India:
The role of micro, small and medium enterprises (MSMEs) in the economic and social development of the country is well known. It is the nursery for entrepreneurship, often driven by the individual creativity and innovation, with a significant contribution in the country’s GDP, manufacturing output, exports and employment generation. MSMEs contribute 8 per cent of the country’s GDP, 45 per cent of the manufactured output and 40 per cent of our exports. The labour and capital ratio in MSMEs and the overall growth in the MSMEs is much higher than in the larger industries. MSMEs are better dispersed. In view of these factors, MSMEs are important for achieving national objectives of growth with equity and inclusion.
|Total number of working enterprises||Manufacturing||10.49||64.18||74.68|
|Services & maintenance||5.15||181.30||186.45|
|Services & maintenance||12.26||278.35||290.61|
Source: – Final Report of the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07: Registered Sector.2 : Quick Results : Fourth All India Census of Micro, Small & Medium Enterprises 2006-2007.: Regd. : Registered Enterprises, Unregd. : Unregistered Enterprises.
Major issues concerning the MSME sector
Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are briefly indicated below:
• Lack of availability of adequate and timely credit;
• High cost of credit;
• Collateral requirements;
• Limited access to equity capital;
• Problems in supply to government departments and agencies;
• Procurement of raw materials at a competitive cost;
• Problems of storage, designing, packaging and product display;
• Lack of access to global markets;
• Inadequate infrastructure facilities, including power, water, roads, etc.;
• Low technology levels and lack of access to modern technology;
• Lack of skilled manpower for manufacturing, services, marketing, etc.;
• Multiplicity of labour laws and complicated procedures associated with compliance of such laws;
• Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable entities to close down speedily; and
• Issues relating to taxation, both direct and indirect, and procedures thereof.
The above mentioned problems can be classified into 6 major thematic areas and constituted separate Sub-Groups for detailed examination. These thematic areas covered
(iii) entrepreneurship training ,
(iv) rehabilitation and exit policy,
(v) infrastructure, technology and
The recommendations of the previous Committees, Working Groups and Study Groups, which are relevant in the current context, have been taken into consideration.
Credit or Finance to MSMEs
All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro,small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification, modernization/upgradation of facilities, capacity expansion, etc.
Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owner’s own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result, they have to depend largely on internal resources.
In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes, they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available.
|Enterprises by type of organization||Proprietary||14.09||232.41||246.50|
|Public Ltd. Company||0.08||0.66||0.74|
|Enterprises by source of finance||No Finance/Self Finance||13.64||228.51||242.15|
|Finance through Institutional Sources||1.71||11.77||13.48|
|Finance through Non-Institutional Sources||0.16||5.20||5.36|
Source: – 1 : Final Report of the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07: Registered Sector. 2 : Quick Results : Fourth All India Census of Micro, Small & Medium Enterprises 2006-2007.3: Regd. : Registered Enterprises, Unregd. : Unregistered Enterprises
Recognising the importance of easy and adequate availability of credit for ensuring sustainable growth of the MSME sector, the government has undertaken several measures:
Priority Sector Lending
Provision of finance to the sector is a part of the ‘Priority Sector Lending Policy’ of the banks (both domestic and foreign banks operating in India. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is earmarked for the small scale sector. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum.
Small Industries Development Bank of India (SIDBI)
SIDBI has been set up with the mission to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. It is the principal financial institution responsible for promotion, financing and development of the sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the small scale sector are:
SIDBI’s major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services.
Taking into account the fact that a majority of such enterprises which are at the lower-end of the sector are outside the ambit of institutional finance. Hence, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs. 1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries.
At the State level, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the sector. State Financial Corporations, the state-level institutions have played an important role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.
Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued.
Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was launched with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the policy package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year.
Marketing in MSMEs
Out of several problems faced by small and medium scale entrepreneurs, the absence of adequate marketing and export facilities is one of their main concerns. Almost all types of business enterprises face marketing problems, but the small and medium scale enterprises face greater difficulty in the marketing and distribution of their products. Some of these are:-
Small and medium entrepreneurs tend to face tough competition from the products and sales/ marketing strategies of large scale firm’s entrepreneurs. They, at times, find it very difficult to cope with large scale entrepreneurs in terms of cost, quality, standards, popularity, meeting ever-changing demands/ preferences of consumers, etc.
Most of them do not have their own marketing network. So, they ultimately have to rely on outside sources for distributing their products. This also tends to raise the cost of their products and services.
Most of them do not have good knowledge and/ or experience of various marketing concepts and strategies. As a result, they are unable to understand quickly and accurately the prevailing as well as constantly changing market trends. Furthermore, inspite of having huge potentialities of extensive market for their products, they are mainly unwilling to opt for efficient marketing techniques.
They also lack the resources and funds needed for effective sales promotion. Many of such enterprises cannot afford to spend much on advertising, sales promotion, market research, etc.
They find it difficult to sell their output at remunerative prices because of higher cost of production and non-standardised quality of products.
They also have to sell their products at throwaway prices due to their weak bargaining power (especially in dealing with big buyers) and urgent needs of funds.
Thus, it is right to say that most of small and medium entrepreneurs do not correctly understand as to what kind of products are actually needed by the market, how big/small is the market, when the products are needed and how to deliver such products. All these problems keeps them mainly isolated from the market trends and conditions and, thus, tend to restrict their operations.
Besides, small and medium scale enterprises are the most significant contributor in the field of India’s exports. There has been a prominent increase in the exports from this sector of both traditional and non-traditional goods including jewellery, garments, leather, hand tools, engineering goods, software, etc. Also, the enterprises with good export performance have greater stability in the economy. But, there is still lot of problems in exporting the products by small and medium entrepreneurs to other regions/ countries/ areas. They are not very familiar with the steps and formalities involved in exporting goods from India. They need to be made aware of all the steps involved in the process, such as, registration of exporters; selection of export market and buyers; receipt of enquiries, letter of intent, letter of credit, bill of lading, etc; insurance coverage; obtaining shipping order; certificate of origin; sending documents to importers; etc.
Entrepreneurship training in MSMEs:
Entrepreneurship has been considered the backbone of economic development. It has been well established that the level of economic growth of a region to a large extent, depends on the level of entrepreneurial activities in the region. The myth that entrepreneurs are born, no more holds good, rather it is well recognized now that the entrepreneurs can be created and nurtured through appropriate interventions.
In the era of liberalization, privatization and globalization along with ongoing IT revolution, capable entrepreneurs are making use of the opportunities emerging from the evolving scenario. However, a large segment of the population, particularly in the industrially backward regions/rural areas generally lags behind in taking advantage of these opportunities. Therefore, there is a need to provide skill development and entrepreneurship development training to such people in order to bring them to mainstream of economic growth.
The industrial policies of the Government announced from time to time, have laid considerable emphasis on promotion of women entrepreneurship, particularly among first generation women entrepreneurs, through various training and support services. Special attention is being given by organising exclusive Entrepreneurship Development Programmes (EDPs) for women.
RURAL EMPLOYMENT GENERATION PROGRAMME (REGP)
REGP is a flagship scheme of the Government of India for employment generation programmes in the unorganised sector. Though there are no specific reservation for women entrepreneurs under this scheme, still there has been substantial participation (around 30 per cent) of women as a result of the promotional efforts undertaken in this regard. In order to encourage participation of women in the programmes, the following relaxations are being provided to women beneficiaries:
- Capital Subsidy in the form of margin money is provided at the rate of 30 per cent (for general category it is 25 per cent) of the project cost up to Rs.10 lakh and 10 per cent on the balance project cost up to Rs. 25 lakh.
- The borrowers’ contribution is 5 per cent of the project cost in case of women beneficiaries while in the case of general category, it is 10 per cent of the project.
- Bank finance in the form of loan is 95 per cent of the project cost in case of women and other weaker section borrowers as against 90 per cent of the project cost in case of general category.
|Employment by male and female||Male||74.05||412.75||486.80|
Rehabilitation and exit policy
Major Causes of sickness:
There are many and varied reasons for sickness in MSME sector. Some of these are:
- Inadequacy of working capital, delay in sanction of working capital and time gap between sanction of term loan and working capital.
- Poor and obsolete technology
- Problem related to availability of raw material
- Inadequate demand and other marketing problems
- Erratic power supply
- Labour problems
- Infrastructural constraints
- Poor Management
- Inadequate attention to R&D
- Diversion of resources
- Inability of the units to face growing competition due to liberalisation and globalisation
Working Group on rehabilitation of Sick units
As per the recommendation of the Group of Ministers, RBI had set up a Working Group to review the exiting guidelines in regard to rehabilitation of sick MSME units and to recommend revision of guidelines making them transparent and non-discretionary for the rehabilitation of current sick and potentially viable MSME sick units. All the major recommendations were accepted by the RBI, including a change in the definition of sick MSME units, norms for deciding on the viability of sick units, etc. The revised definition would enable Banks to take action at an early stage for revival of the units. Based on the accepted recommendations of the Working Group, the RBI had drawn up the Revised Guidelines for Rehabilitation of sick MSME units, which were circulated to all the Scheduled Commercial Banks for implementation.
Adequate infrastructure facilities are necessary for the overall development of every sector of the economy. In the wake of liberalisation and globalisation, its presence and importance for the proper growth of small and medium enterprises cannot be underestimated. Both the Central and the State Governments are making continuous efforts to upgrade the infrastructural set up of the various States, Union Territories (UTs), Districts of the country. Inspite of all this, the small and medium scale entrepreneurs are constantly facing the problem of infrastructural bottlenecks, which restricts their day-to-day business operations as well as their future growth prospects.
Infrastructure needed by entrepreneurs include all types of transportation facilities like railways, waterways, roadways and airways (depending on the type of small and medium scale firm running by these entrepreneurs) as per the suitability of the business, as well as proper established channels of telecommunication and adequate supply of power. Lack of any of these facility can cause serious damages to the firm’s value chain process, that is, to the production, consumption and distribution of the products of small and medium entrepreneurs, who already face problems of lack of finance, inadequate marketing facilities, technological obsolescence, etc.
Some of the major problems faced by small scale entrepreneurs with respect to infrastructure are:-
- Inadequate infrastructural facilities creates the problem of acute shortage of basic raw materials, especially those which are scarce and need to be imported from distant places, needed by small and medium scale enterprises.
- Small and medium scale entrepreneurs find it difficult to distribute their products to the markets which are located at far off places because of incomplete construction or non-existence of basic roads/ highways.
- Lack of proper airways and waterways facilities also restricts the growth prospects of those medium/small scale firms whose target market is located abroad.
- Small and Medium scale enterprises face shortage of power supply, due to which they are unable to make full utilization of plant capacity. Most of them find it difficult to install their own power generating plants, so as to ensure their uninterrupted operations, due to lack of required funds.
- Most of them are located in rural areas or remote areas of the country, due to which they find it difficult to communicate with people outside the region. This is because of non-existence of proper telecom network.
Hence, small and medium scale entrepreneurs continued to face the problem of infrastructure bottlenecks in terms of presence of inadequate transportation facilities, low/ no access to sound power supply, lack of proper communications channels, inadequate marketing facilities, lack of funds, etc. All this affects the long run profit earning capacity of such entrepreneurs as well as inhibits the chances of survival of enterprises run by them.
Majority of the small scale units use old techniques of production and outdated machinery and equipment. Upgradation of the technology and achieving economies of scale is one of the major problems facing the sector. They cannot afford new machines and equipments and are therefore not in a position to use the latest techniques of production. They do not find it possible to conduct research and development on a continuing basis. Therefore, productivity and quality in small scale firms tends to be low while unit cost of production is generally high.
But with liberalization of the economy, the MSMEs are facing stiff competition from imports and need technological upgradation in order to produce better quality products at cheap rates.
As far as sourcing technology is concerned, small businesses face the following three essential problems:-
- Obtaining information about technology is the first important issue. For most of them, information about available technology options is through word of mouth or from a visit to an advanced unit. Few have access to technical literature, professional journals or information about new product launches. But with the advent of internet, new vistas are opening up through electronic journals, catalogue downloads and advanced search facilities.
- Actual procurement of the technology is the next important issue because even if information is obtained, there are barriers to import of technology and other problems relating to technology transfer, vendor capability, after sales support, import procedures, etc which impede procurement.
- Acquiring finance for technology upgradation is also a problem. Small enterprises generally look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs.
With a view to foster the growth of MSME sector in the country, government has taken up several initiatives:
ISO 9000/14001 Certification Fee Reimbursement Scheme was introduced in order to incentivise technological upgradation, quality improvement and better environment management by the MSEs. The scheme provides incentive to those small scale/ ancillary undertaking who have acquired ISO 9000/ISO 14001/HACCP certifications.
In order to reduce the cost of funds, a scheme called Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation in Small Scale Industries has been put into place. It aims at facilitating technology upgradation by providing upfront capital subsidy to small scale industry units, including tiny, khadi, village and coir industrial units, on institutional finance (credit) availed of by them for modernisation of their production equipment (plant and machinery) and techniques.
National Manufacturing Competitiveness Programme (NMCP) has been launched by the government in order to help MSMEs improve their competitiveness. The schemes under this Programme are aimed at addressing the technology/quality upgradation needs of the sector, mainly in the public-private partnership mode.
Small Industries Development Bank of India (SIDBI) in collaboration with United Nations-Asian Pacific Centre for Transfer of Technology (UN-APCTT) had established Technology Bureau for Small Enterprises (TBSE) to bring synergy between Technology and Finance for Small and Medium Enterprise (SME) sector. The objectives of the company are to:
- provide professional services for technology transfer in order to enhance market competitiveness of small and medium enterprises and promote sustainable development.
- maintain and provide data base on technology options available from different countries.
- provide micro small & medium enterprises information on sources of technology and means of accessing them.
- provide background information on technology seeking enterprises to technology suppliers and collaborators.
- identify business partners willing to collaborate and extend support to tie up financial assistance and other requirements such as drafting agreements, obtaining various approvals and preparation of business plans required for transfer of technology.
- provides financial syndication through banks and financial institutions.
Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to enhance technology options for small scale industries. An ISO 9001 certified company, it has been working to fulfill its mission of promoting, aiding and fostering the growth of small scale industries and industry related small scale services/business enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports – projects and products from small industries.
Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and Training Centres in the country in order to assist small scale units in their technical upgradation by providing good quality toolings.
Further, in order to facilitate investments for technological upgradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture by such enterprises is being undertaken.
High tax rates are one of the major reasons for firms to drift into the informal economy. This holds for the countries all over the world, including developed countries. These effects are compounded by high compliance costs for small firms to deal with tax laws and other forms of government regulation. This is a specific size-related disadvantage compared to large-scale firms, which have not only the necessary accountants, but also frequently, also in-house tax and legal advisors. Compliance costs have monitory implications (such as paying tax advisor fees or salary payments to personnel dealing with tax issues); time cost implications (in the form of time spent by a taxpayer to handle tax issues), and physiological cost (in terms of anxiety, stress and apprehensions related to possible mistake or a possible audit by the tax authorities).
The Department of Revenue in collaboration with MSME Associations (including CII) shall organize seminars and workshops on Goods and service tax (GST), with special sessions for MSMEs, for wider debate and allaying the apprehensions of the MSMEs about GST.
MSME Associations will take steps to guide their members in the facility of e-filing of IT returns through interactive workshops.
None of these measures will work unless their implementation status is monitored regularly at the highest level. The issues are simply too diverse to be handled by a single line Ministry. MSME organizations accordingly recommends the establishment of Prime Minister’s Council on Micro and Small Enterprises in the Prime Minister’s Office which may oversee implementation of these recommendations on a half yearly basis. The Ministry of MSME shall be the servicing arm for the Council.
- 5th census MSME sector
- MSMEs in India_Issues and Possibilities in Times of Globalisation
- Report of the Task Force on Micro, Small and Medium Enterprises
- MSME Annual report 2011-12
Asst.Prof. Department of Management
Sree Ramu College of Arts and Science