Advances In Management

Vol. 5 (9) Sep. (2012)

Case Study:

Economic Problems in Micro, Small and

Medium Enterprises (MSMES) in India
Venkateswarlu P. *1 and Ravindra P.S.

1. Department of Commerce & Management Studies, Andhra University, Visakhapatnam, Andhra Pradesh, INDIA
2. Miracle School of Management, Miracle City, Bhogapuram, Vizianagaram (Dist.) 535216 (A.P.), INDIA
*po_venkat@yahoo.com

Abstract

government tax, VAT and customs duty; heavy advertising

and promotional costs; payroll, rent
and utilities;
transportation and petrol costs; high interest rates on loans;
ability to meet financial obligation; training and development
costs; insurance costs and delay in account receivables
payment.6

Globally, there is an increased recognition of the

important role played by micro, small and medium
enterprises (MSMEs) in the economic development of a
country. Similarly, in the South Asia region, MSMEs
are the main engines behind the economic growth. In
particular, MSMEs are one of the biggest contributors
to GDP, employment and play a core role in the supply
chain of large businesses. One of the major problems
faced by MSMEs in South Asian countries is lack of
finance to advance business growth. MSMEs lack setup
capital, liquid capital, working capital and investment
capital to survive and grow in a dynamic and predatory
competitive business environment. MSMEs heavily
depend on the financial institutions such as banks,
credit corporations and development banks for the
supply of finance to meet their daily financial needs.

Overview of MSMEs in the Manufacturing

Sector of India
Indias economy is principally resource oriented although the
size of the manufacturing sector has increased over the recent
years. The manufacturing
sector of India includes the
manufacture of items such as textiles, garments, footwear,
sugar, food processing, beverages (including mineral water)
and wood based industries. Initially, manufacturing basically
involved agricultural products such as sugar and timber.
Since 1986 the production of
garment has increased
tremendously due to the introduction of tax exemptions for
factories exporting 70% of their annual
production8.
Manufacturing sector contributes
to the GDP, creates
employment and generates foreign exchange earnings. GDP
from the manufacturing sector increased from around 12% in
3
the late 1980s to about 15% in 1990s.
According to the
Employment Survey Report (2009) there were a total of
22,599 wage earners and 2,412 salary earners employed in
the manufacturing sector of India.

Keywords: MSMEs, Post Crisis, Economic problems, Public

Policy, Development Banks, Regulatory Policies, India.

Introduction
MSMEs in the manufacturing sector of India are mainly
export oriented and include industries such as textiles,
garments, footwear, sugar, food processing, beverages
(including mineral water) and wood based industries. The
government has provided tax concessions to some selected
manufacturing sectors in recognition of the importance of this
sector to Indias economy. Manufacturing sector has been one
of the major contributors to GDP, employment and foreign
exchange earnings. Particularly, the
MSMEs in
the
manufacturing sector of India have made remarkable
contribution in economic growth, employment, innovation,
competition and poverty reduction. Financing the MSMEs is
one of the
major problems
faced by contemporary
owners/mangers of MSMEs in the manufacturing sector of
India.4

Literature Review
The issue of small business finance has been receiving
increasing attention over the recent decade in the extant
literature. There have been studies on various branches of
small businesses: two of these branches are namely financial
management practices of small businesses and implications
of financial management strategies on the survival and
growth of small businesses have been polarized by Berger
and Udell 2. Contemporary studies have tested the hypotheses
for financial variables for other developing countries. There
have been numerous studies that analyze the economic
problems affecting the growth and survival of MSMEs. These
studies are both quantitative and qualitative in nature.

Owners/managers in the manufacturing sector are faced with

a range of financial problems; namely, inability to obtain
external financing; inability to obtain internal financing;
insufficient capital, start-up costs; expensive raw materials;
high wholesale price; large losses due to scrap rate, sabotage,
breakage and crime; decline in sales volume; bad debts and
write offs; heavy equipment and
maintenance costs;

This study underscored eleven economic problems that affect

the survival of the MSMEs; namely, inability to obtain
outside financing; insufficient capital; heavy operating
expenses; poor money management; large losses due to

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Advances In Management

Vol. 5 (9) Sep. (2012)

crime; meeting the payroll; inability to obtain trade credit;

insufficient profit; ability to meet financial obligations; health
insurance costs and cost of workers compensation.

follows; 2 (1%) were less that 20 years, 51 (24.6%) were

between 20-30 years of age, 59 (28.5%) were between 31-40
years and 95 (45.91%) were more than 40 years old. A vast
majority of the
owners/managers working experience
concentrated between 5-10 years (77 owners/managers;
37.2%) followed by 11-15 years (57 owners/managers;
27.5%), less than 5 years (34 owners/managers; 16.4%), 1620 years (28 owners/managers; 13.5%) and more than 21
years (11 owners/managers; 5.3%). The secondary data were
collected from the annual reports of Reserve Bank of India.

Thevaruban11 examined small scale industries and its

financial problems in Sri Lanka. He underscored that MSMEs
of small scale industries in Sri Lanka find it extremely
difficult to get outside credit because the cash inflow and
savings of the MSMEs in
the small scale sector
is
significantly low .5 Hence, bank and non bank financial
institutions do not emphasize much on credit lending for the
development of the MSMEs in the small scale sector in Sri
Lanka.

Analysis and Discussion

The mean scores are sub-divided according to the size of the
business to get a broad understanding of how each of the
economic problems affects the MSMEs in the manufacturing
sector of India. Table 2 shows that factors with high mean
values are foremost economic problems facing MSMEs.
These economic problems are as follows: namely; inability to
obtain external financing; inability to
obtain internal
financing; insufficient capital, start-up costs; expensive raw
materials; high wholesale price; large losses due to scrap rate,
sabotage, breakage and crime; decline in sales volume; bad
debts and write offs; heavy equipment and maintenance costs;
government tax, VAT. and customs duty; payroll, rent and
utilities; transportation and petrol costs; high interest rates on
loans; ability to meet financial obligation; insurance costs and
delay in account receivables payment. Economic problems
which are of less significance to the owners/managers, are
heavy advertising and promotional costs; and training and
development costs.

Research Methodology
The definition of MSMEs varies from country to country . 1
The Commonwealth Secretariats definitions of MSMEs for
small states were used for tabulating and analyzing the size
distribution of the sample. In particular, businesses with
turnover (TO) of less than 100,000 (TO 100,000) were
considered as micro, more than or equal to 100,000 to less
than or equal to 200,000 (100,000 TO 200,000) were
tagged as small and more than or equal to 200,000 to less
than or equal to 500,000 (200,000 TO 500,000) were
regarded as medium. The present study consists of both
primary data and secondary data. After conducting the
literature review, a self administered questionnaire was
designed and delivered to the owners/mangers of MSMEs in
the manufacturing sector of India. Self responsibility was
taken in the delivery and assortment of the questionnaire
because the response rate seems higher than it is for straight
forward mail surveys.

During the start-up stage of a MSME, the owners/managers

will have to depend on both formal and informal channels of
financing12. MSMEs are faced with heavy start-up costs
(MB=4.07; SB=4.97; ME=4.92) because they need to secure
enough finance for purchase of assets and meeting daily
operational expenses 7. This outcome is clearly evident with
the high rating for expensive raw materials (MB=4.88;
SB=4.94; ME=4.88), high wholesale price (MB=4.81;
SB=4.88; ME=4.92), payroll rent and utilities (MB=4.09;
SB=4.97; ME=4.77) and transportation and payroll costs
(MB=4.02; SB=4.78; ME=4.92). Notably, the need for
finance by the MSMEs fluctuates due to the MSMEs age of
maturity in the pecuniary life cycle. Owners/managers of
MSMEs will distinctively rely on internal and external
sources of funds to finance their businesses. MSMEs in the
manufacturing sector of India find that debt financing is
necessary. Particularly, internal sources of finance for the
owners/managers of MSMEs include personal savings and
borrowings from family and friends. When the internal
financing is insufficient, then
the owners/managers of
MSMEs will resort to external sources of funds. The external
sources of financing
for owners/managers in
the
manufacturing sector of
India include banks, business
suppliers and asset based lenders.

The owners/mangers were asked to use their experiences in

their business to rate the questions on a five point Likert scale
where (1) signified not important and (5) signified extremely
important. The questionnaire was developed using the
previous questionnaires developed by Reynolds 10 for his
studies. The questionnaires used for these studies were further
modified to reflect the India context. The questionnaire was
pre-tested with 20 owners/managers of MSMEs. The
owners/managers comments were gathered and the questions
were revised accordingly.
The revised version of the
questionnaire was delivered to 300 owners/managers of
MSMEs in India.
Apparently, out of the 300 questionnaires distributed, 207 (69
per cent) owners/managers returned the questionnaires. Table
1 shows the sample distribution of the owner managers of the
MSMEs. The demographic indicators considered were
gender, social group, age and working experience. Out of the
207 owners/managers there were 164 (79.2%) males and 43
(20.8%) females. Of the 207 owners/managers to the social
group item, 30 (14.5%) were Scheduled castes, 148 (71.5%)
were Scheduled tribes, 22 (10.6%) were Backward class and
7 (3.4%) were Others. The distribution of the age item is as

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Advances In Management

Vol. 5 (9) Sep. (2012)

Essentially, it is difficult for the owners/managers in the

manufacturing sector of India to secure loan as banks and
other commercial lenders are charging high interest rates on
MSME loans. Table 3 shows interest rates on MSME loans
provided by banks in India.

liability insurance cover for MSMEs helps in securing good

customers. This is clearly evident from high responses from
owners/managers for heavy equipment and maintenance costs
(MB=3.93; SB=4.48; ME=4.81), large losses due to scrap
rate, sabotage, breakage and crime (MB=3.70; SB=3.94;
ME=3.77) and insurance
costs (MB=2.95;
SB=3.27;
ME=3.81). Apparently, the low means for heavy advertising
and promotional costs (MB=2.09; SB=2.24; ME=2.58) and
training and
development costs (MB=2.07; SB=2.28;
ME=2.38) indicate that MSMEs primary goal is to survive in
contracting economic environment of India.

Table 3 shows that ANZ is charging 10.95% on MSME

loans, Westpac Banking Corporation is charging 9.99%,
Baroda is charging 10% to 11% and FDB has various
schemes for MSMEs and it charges interest according to each
of the schemes. The high responses for interest rates on loans
from the owners/managers are
clearly evident of
the
economic problems that the manufacturing sector is currently
facing ((MB=4.86; SB=4.76; ME=4.88).

Recommendations
1. Minimum Government Regulation and tax: Notably,
one of the serious complaints from MSME owners/managers
is the impact of regulation on MSMEs and particularly the
disproportionate impact of government regulations on
MSMEs in India. The disproportionate impact of the
government regulation and taxation system hinders the
growth and survival of MSMEs in India and might otherwise
drive out some of these MSMEs who make substantial
contribution to the economy .9 Essentially, from the public
policy perspective, both the direct cost of regulation and the
cost of compliance of the regulation should be reduced.

In 2009, Indias economy contracted by an estimate of 2.5%.

Apparently, a contraction in the economy has resulted in
declining ability of the MSME to obtain internal (MB=4.74;
SB=4.79; ME=4.73) and
external (MB=4.83; SB=4.91;
ME=4.77) financing, diminishing sales volume (MB=4.86;
SB=4.64; ME=4.96), insufficient working capital (MB=4.93;
SB=4.87; ME=4.96), increase in bad debts and write offs
(MB=4.74; SB=4.82;
ME=4.88), delays
in accounts
receivables payments (MB=4.98; SB=4.88; ME=4.69) and
declining debt to equity
ratio (MB=4.91; SB=4.97;
ME=4.84).

2. Better Access to Finance: Importantly, commercial

markets work extremely well in providing financial services
to the MSMEs. Apart from the obvious banking services,
more specialist services such as term loans, factoring, invoice
financing, leasing and venture capital are offered by firms
which rigorously compete with each other to maximize their
profits. Also part of this competition, MSMEs find it difficult
to compete with its large counterparts and access the services
on offer. This constrains their growth and survival. It is
essential for policy makers to recognize that there need to be
cohesive and precise public policy targeted for MSMEs that
will ensure that MSMEs are well protected in this dynamic
and competitive environment. This recognizes the need for
extensive range of diverse and well targeted programmes
such as loan guarantee programmes; regulating the interest
rate charged on MSME loans by the commercial markets;
establishment of well established venture capital market;
establishment of markets for private placements and initial
public offerings of varying sizes; government sponsored
programs for delivering credit and equity funds of small
business units; creating good awareness on the financial
programs available to small businesses and ensuring that
MSMEs keep proper financial records.

Government financial regulation on MSMEs has significantly

disadvantaged the MSMEs as compared
to its large
counterparts. Specifically, the financial regulations imposed
on MSMEs such as government tax, VAT and customs duty
have various implications on the success and survival of
small business. More importantly, government has provided
enormous tax breaks to large employers who operate in tax
free jurisdictions- tax free
zones. Owners/managers of
MSMEs in the manufacturing sector of India usually have the
political clout to enjoy such tax free advantages however, the
idea of MSMEs tax free
zones have not yet been
implemented in India. Currently, the owners/managers of the
manufacturing sector are charged 31% income tax on their
profits and 12.5% VAT. This is clearly evident from high
rating for responses for government income tax, VAT and
customs duty from owners/mangers from the manufacturing
sector of India (MB=4.98; SB=4.96; ME=4.58).
MSMEs in the manufacturing sector of India are handicapped
with low echelon of process automation and elevated cost of
importing better technology. The imported technologies and
the software solutions are not customized and further the cost
of customization is
exorbitant. More importantly, the
maintenance is expensive and time consuming. In particular,
the manufacturing sector in India is also faced with large
losses due to scrap rate, damage, breakage and crime.
Simultaneously, the MSMEs have to develop an insurance
plan for their business. MSMEs in the manufacturing sector
of India often insure for property and liability insurance. Of
greater significance is the fact that having a property and

3. Proper Cash and Credit Management Practices: MSME

owners/managers need to realize that the real success of the
business is based on their ability to keep close control over
cash flows, avoiding holding excessive stocks and collecting
debts on time. Many MSMEs in India have failed because the
owners/managers focused more on technical matters and
forgot about cash flows. MSMEs still believe that delivering

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Advances In Management

Vol. 5 (9) Sep. (2012)

a quality service ensures timely payment however, owners

and managers of MSMEs in India need to recognize that they
need to do something positive to ensure timely payment from
debtors. Owners/managers of MSMEs have to ensure that
they send timely invoices to their customers. Overdue credit
accounts avert further sales to the slow paying customer. This
overdue account ties up sellers working capital and can also

lead to losses from bad debts. There are four key items which
the MSMEs need to tightly manage i.e. annual profit growth
percentage, to equal or exceed sales growth percentage; cash
flow effectiveness to minimize external debt; efficient use of
assets that is as slim as possible to achieve sales and interest
avoidance since the cost is a drain in profits.

Table 1
Demographic Characteristics of the owners/managers
Demographic
Characteristics
Gender

Civilization

Age

Working
Experience

Demographic Variables

Micro Business
(MB) N=67
No % No
Male
49
73.1
Female 18
26.9
Scheduled Caste
16
23.9
Scheduled Tribes
36
53.7
Backward class
10
14.9
Others 5 7.5 0 0.0 2 2.8 7 3.4
Less than 20 Years
0
0.0
20 30 Years
15
22.4
31 40 Years
24
35.8
More than 40 Years
28
41.8
Less than 5 Years
10
14.9
5 10 Years
29
43.3
11 15 Years
15
22.4
16 20 Years
10
14.9
More than 21 Years
3
4.5

Small Business
(SB) N=69
% No
52
75.4
17
24.6
4
5.8
65
94.2
0
0.0

Medium Enterprises
(ME) N=71
%
63
88.7 164
8
11.3 43
10
14.1
47
66.2
12
16.9

Total
N=207
No
%
79.2
20.8
30
14.5
148
71.5
22
10.6

0
6
9
54
4
10
34
15
6

2
30
26
13
20
38
8
3
2

2
51
59
95
34
77
57
28
11

0.0
8.7
13.0
78.3
5.8
14.5
49.3
21.7
8.7

2.8
42.3
36.6
18.3
28.2
53.5
11.3
4.2
2.8

1.0
24.6
28.5
45.9
16.4
37.2
27.5
13.5
5.3

Sources: Primary data

Table 2
Simple statistics of the Economic Problems facing owners/managers
Economic problems
F1
Liability to obtain external financing
F2
Inability to obtain internal financing
F3
Insufficient working capital
F4 Start-up costs
F5
Expensive raw materials
F6
High wholesale price
F7
Large losses due to scrap rate, breakage and crime
F8
Decline in sales volume
F9
Bad debts and written off
F10 Heavy equipment maintenance costs
F11 Government tax, VAT and customs duty
F12 Heavy advertising and promotional costs
F13 Payroll, rent and amenities
F14 Transportation and petrol costs 4.02
F15 High interest rates on loans
F16 Ability to meet financial obligations
F17 Training and development costs
F18 Insurance costs
F19 Delays in account receivables payment
Sources: Primary data

Micro
Business
MB
4.83
4.74
4.93
4.07
4.88
4.81
3.70
4.86
4.74
3.93
4.98
2.09
4.09
4.86
4.91
2.07
2.95
4.98

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Small
Business
SB
4.91
4.79
4.87
4.97
4.94
4.88
3.94
4.64
4.82
4.48
4.76
2024
4.97
4.78
4.76
4.97
2.27
3.27
4.88

Medium
Enterprise
MB
4.77
4.73
4.96
4.92
4.88
4.92
3.77
4.96
4.88
4.81
4.58
2.58
4.77
4.92
4.88
4.84
2.38
3.81
4.69

Min Max
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00

Advances In Management

Vol. 5 (9) Sep. (2012)

Table 3
Interest Rates on MSME loans Provided by Banks in India
Bank

Type of MSME Loan

Limits

ANZ India
FDB

MSME loans
Micro Credit Scheme
Agri Finance Scheme
Focus sector loans less than 25,00,000
Micro loans and SME loans in:
Wholesale, retail, hotels & restaurants
Transport, communication & storage
Professional & business services
MSME loans

<25,00,000
-

Interest Rate on MSME loans

p.a.
10.95%
6.5%
7.5%
8.6% - 9.6%
8.6% - 9.6%

9.99%

25,00,000 1,00,00,000
<25,00,000

10%

Westpac
Corporation
Baroda

Banking

Commercial loans

11%

(Source: Reserve Bank of India reports)

4. Datta D., Small Business Finance: Implications of Delay in
Formal Sector, International Journal of Economics and Finance, 2
(4), 25-31 (2010)

Conclusion
This study analyzed the importance of nineteen economic
problems facing owners/managers of MSMEs. Economic
problems of great concern to owners/mangers of MSMEs are
as follows: namely; inability to obtain external financing;
inability to obtain internal financing; insufficient capital,
start-up costs; expensive raw materials; high wholesale price;
large losses due to scrap rate, sabotage, breakage and crime;
decline in sales volume; bad debts and write offs; heavy
equipment and maintenance costs; government tax, VAT and
customs duty; payroll, rent and utilities; transportation and
petrol costs; high interest rates on loans; ability to meet
financial obligation; insurance costs and delay in account
receivables payment. Economic problems which are of less
significance to the owners/managers are heavy advertising
and promotional costs; and training and development costs.

5. Ganesan S., Management of Small Construction Firms: A Case

Study of Sri Lanka,Singapore, Hong Kong, Thailand, the Philippines
and Japan, Japan, Asian Productivity Organisation (1982)
6. Laxmi M. N. and Kumar S., Industrial Development, New
Delhi, Discovery Publishing House (1999)
7. Levy B., Berry A. and Nugent J.B., Fulfilling the Export
Potential of Small and Medium Firms,
Kluwer Academic
Publishers, USA (1999)
8. Narayan P.K. and Prasad B.C., Indias Sugar, Tourism and
Garment Industries: A Survey of Performance, Problems and
Potentials, Journal of Indian Studies, 1(1) (2003)
9. Price J., Understand Your Accounts: A Guide to Small
Business Finance, 4th Ed., London, Kogan Page Limited (1999)

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(Received 13thFebruary 2012, accepted 20th June 2012).

YYY

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