ILM – Graduate School of

Management

REPORT ON MSMEs
IN INDIA

SUBMITTED TO: SUBMITTED BY:

Prof. Rakesh Gupta Anuj Sharma(FT-10-829)

Deepak Kumar (FT-10-843)

Shekhar Mittal (FT-10-944)

Trideep Kumar Goswami

(FT-10-965)
 Definitions of Micro, Small & Medium Enterprises

In accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two
Classes:

(a) Manufacturing Enterprises - The enterprises engaged in the manufacture or production

of goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms
of investment in Plant & Machinery.

(b) Service Enterprises - The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment. These will include small road & water
transport operators (owning a fleet of vehicles not exceeding ten vehicles), small business
(whose original cost price of the equipment used for the purpose of business does not exceed
Rs.20 lakh) and professional & self employed persons (whose borrowing limits do not exceed
Rs.10 lakh of which not more than Rs.2 lakh should be for working capital requirements
except in case of professionally qualified medical practitioners setting up of practice in semi-
urban and rural areas, the borrowing limits should not exceed Rs.15 lakh with a sub-ceiling of
Rs.3 lakh for working capital requirements). The definition of Micro, Small and Medium
Enterprises under the services sector is based on the enterprise’s investment in equipments.

The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:

Manufacturing Sector
Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but does not
exceed five crore rupees

Medium More than five crore rupees but does not exceed
Enterprises ten crore rupees

Service Sector
Enterprises Investment in equipments

Micro Enterprises Does not exceed ten lakh rupees:

Small Enterprises More than ten lakh rupees but does not exceed
 two crore rupees

Medium More than two crore rupees but does not exceed
Enterprises five core rupees

Characteristics of MSMEs
• Born out of individual initiatives &skills
• Greater operational flexibility
• Low cost of production
• High propensity to adapt technology
• High capacity to innovate & export
• High employment orientation
• Utilization of locally available human & material resources
• Reduction of regional imbalances

Contribution and Importance of MSMEs in India

In India, MSMEs, including khadi and village as well as rural enterprises, play a pivotal role in
the overall industrial development of the country. They have been the significant contributor to
the national income, with their huge involvement in country's industrial production, exports,
etc. They not only help in providing employment opportunities to millions of people across the
country, especially to the village artisans and rural people, but also check the problem of
economic concentration in the hands of a few. They create a sound entrepreneurial base in
the economy by developing and nurturing the talents, skills, etc. of small and medium scale
entrepreneurs. The labour intensity in the MSME sector isestimated to be considerable higher
than the large enterprises.
It has been observed that Indian MSMEs have some special traits which enables them to
contribute significantly in the economy of the country such as:
• · Operational flexibility
• · Location wise mobility
• · Capacities to develop appropriate indigenous technology

According to Finance Secretary Ashok Chawla the contribution of MSMEs in GDP is almost
10%. He said “MSME sector plays a vital role in country’s growth. From 3-4% to 6% and to 8-
9% now, the growth story has to move and will move to the higher level of about 10% soon
and that is what the country needs,”. He further added “The world now recognizes that the
MSME has reached a level of maturity and role of innovation, enterprise and initiative comes
in”.

Contribution in GDP – Acoording to finance ministry the micro, small and medium
enterprises (MSMEs) are expected to contribute up to 10% to the country’s gross domestic
product (GDP) soon. Total contribution of MSMEs in GDP was 8% in 2007-08. This
contribution was 7.44%. There is continuous growth in contribution in GDP in last years.

Contribution in Exports – The MSMEs play very impotatnt role in total export of India.
According to MSME's Secretary Dinesh Rai the sector employs 60 million people and
contributes 40% to total exports. MSME Sector plays a major role in India's present export
performance. More than 40% of the Indian Exports is being contributed by MSME Sector.
Direct exports from the MSME Sector account for nearly 35% of total exports. Besides direct
exports, it is estimated that small scale industrial units contribute around 15% to exports
indirectly. This takes place through merchant exporters, trading houses and export houses.
They may also be in the form of export orders from large units or the production of parts and
components for use for finished exportable goods. It would surprise many to know that non
traditional products account for more than 95% of the MSME exports.

Contribution in providing employment - The MSMEs provide employment to about 60

million persons through 26 million enterprises. The geographic distribution of the MSMEs is
also more even. As per the latest 4th Census with reference year 2006-07, there were about
261 lakh enterprises providing employment to about 595 lakh persons. The projected
corresponding figure for the year 2008-09 was 285 lakh enterprises generating employment
for about 659 lakh persons. The following chart depicts the number of enterprises,
employment and the magnitude of fixed investment in MSME sector.

Contribution in output - According to the 4th Census(2006-07),the total number of MSMEs

in the country is estimated to be 2.61 crore MSMEs. Of the total, 28% are in manufacturing
and 72% in services. These units are largely in Apparel (14.03 %) followed by Food Products
and Beverages (13.53%) and Maintenance of Personal and Household goods (9.25%).

CHALLENGES BEFORE MSME

1.SHORTAGE OF WORKING CAPITAL:

A large number of MSMEs particularly those who are a part of supply chains are facing
problem due to unpaid or delayed bills .in majority of cases the delay is more than 180 days.
The NPA norms classify a bank A/C NPA after 90 days(extended to 120 days now).

2.COMMODITY CRASH:
Many MSMEs unit that contracted for import of raw materials during 2008 suffered huge
losses as by the time consignments arrived ,the prices had halved ,choking their working
capital. Many Progressive Companies that went for expansion or started a new unit during
the boom period are finding it extremely difficult to service period repayments as market
conditions suddenly reversed.

3.CURRENT LEGAL SYSTEM NOT APPROPRIATE:

The current system does not recognize failure of business as a possibility and nedd to be
more tolerant towards it. The Competition Commission needs to be made more functional o
ensure that MSMEs are not victimized by monopolies and cartels.

4.NEED OF A PUBLIC POLICY:

There is a need of a public policy on procurement of goods & services from MSMEs which
comprises 13 million units in India .in India the public procurement is less than 1%.

5.COST OF FUNDS HIGH:

Banks have raised their rate of interest which puts more pressure on the MSMEs .Cost of
funds is very high.

STRENGTH AND WEAKNESSES

STRENGHTS OF MSMEs

1.) The MSME sector is often driven by individual creativity. A major strength of the
sector is its potential for greater innovation both in terms of products and processes.

2.) An inherent strength of the sector is that these enterprises can be set up with very
small amounts of investments and have the locational flexibility to be located anywhere
in the country.

3.) Their employment potential is higher as compared to large enterprises and are
presently estimated to employ 6 crore persons.

4.)They are amenable to ancilliarisation and thus have natural linkages with large
enterprises.
5.)They have short gestation period and have a lower administrative cost.

6.)Induce growth of Industrially backward regions ensuring balanced regional

development.

WEAKNESSES OF MSMEs

1.) Of the 2.6 crore enterprises, a predominant number is in the unorganized sector, often
located in non- conforming urban zones.

2.) The sector is heterogeneous with pockets of high technology enterprises and majority
suffering from low technology base resulting in low productivity and poor quality of
product.

3.) The units being small in size also have poor access to credit and equity.

4.) While we have large pool of human resources, this sector continues to face shortage of
skilled manpower due to lack of paying capacity and lack of poor managerial
 capabilities.

5.) The absence of marketing channels and brand building equity is also one of the major
weakness of this sector.

6.) There is a lack of coordination among the various organizations involved in the
promotion of MSMEs, including organizations of the State/UT Governments and
poor linkages with the institutional stakeholders in the private sector.

7.) The absence of a suitable exit mechanism is a major constraint for the
entrepreneurs.

8.)The lack of reliable and updated data base is another area of concern as it

inhibits monitoring of development initiatives and formulation of appropriate schemes

to meet.
the differential needs of the heterogeneous profile of the beneficiaries.

MEASURES TO PROMOTE THE SECTOR

Among the Promotional measures, a few important ones are as follows:

• A quality certification scheme has been launched to improve the quality standards of the
products which are to be assisted by awareness programmes and financial support to acquire
ISO 9000
or similar international quality standards.

• Since 2002, expenses incurred to acquire ISO 14001 Environment Standard are being
reimbursed.

• A Small Enterprise Information and Resources Centre Network (SENET) has been set up by
installing net linked computers in small industries service institutes, technology nodal centers
and the office of the Development Commissioner of the Central Government.

• SIDBI introduced a scheme of assistance for supporting the development of industrial areas.
Under the scheme, assistance will be extended to the state small industries development
corporations,
state infrastructure development corporations and other such bodies engaged in developing
industrial areas.

• Small enterprises are treated as a priority sector for extending credit by financing
institutions. As such, 10 percent of the total credit to be advanced by commercial banks
should go to small scale units.

• Banks have been allowed to provide lines of credit to state industrial development or
financial corporations for extending loans to smallscale units, which will be treated as part of
priority sector loans.
• National Equity Fund has been set up to promote small industries. The fund will help bridge
the critical industries. The Fund will help bridge the critical gap in entrepreneurs’ contribution
for commencing a project or undertaking modernization.

• A credit Guarantee Fund Trust for small industries has been constituted.

• A credit rating agency, by the name of SMESIL, has started functioning. This would enable
banks to determine appropriate pricing of loans.

• The RBI has directed banks to adopt ‘cluster-based’ approach by adopting a 4-C approach,
namely customer focus, cost control, cross-sell and contain risk.

• A scheme for Small Enterprises Financial Centers has been implemented since 2005-06. It
encourages banks to establish mechanisms for better coordination between their branches
and those of SIDBI, which are located in the identified clusters, for cofinancing the SMEs.

• A Market Development Assistance Scheme has been launched exclusively for the small
sector.

• A sub-contract exchange (SCX) has been set up. It helps the small sector gain information
or areas in which they could work jointly with large industries.

• The NSIC has launched a B2B web portal and established a marketing intelligence cell
which shall provide database and information support to the MSMEs. It can therefore be seen
that the government has adopted a multi-faceted program me of development for MSMEs.
This program I have gained
strength with the adoption of the new policy for small industries.

CREDIT FLOW TO MSME

Credit flow to micro, small and medium enterprises (MSMEs) had doubled in two years to Rs
2.57 lakh crore in the financial year ending March 2009.
However in the Budget 2011, MSME gets an increase in credit flow of Rs.1000 crore only. The
sector as a whole seems to be very dissapointed with this allocation.

STRATEGIES FOR GROWTH AND REVITALISATION

Significant changes in the economic environment are being heralded in by the WTO. The
removal of QRs has led to increased competition with imports. Many sectors of industry are
facing competition from Chinese or Taiwanese imports within the country or from Bangladesh,
Sri Lanka or Nepal in export markets. It is the belief of the Indian Government that promotion
and not protection is the answer to the issues of survival and growth. Thus while reservation
of items for exclusive production continues , the focus must now be on strengthening
capabilities.The Indian Government therefore, is working on a new vision for the SSI sector
through a flexible approach and motivated team. Along with improving quality they are being
given the opportunity of overseas travel ,conducting market surveys, test marketing etc. The
existing industrial centers are being revamped by involving industry associations with some
Government assistance and finally a migration from sunset industrial tosunrise industries
being encouraged through a comprehensive and graceful exit policy, which balances interest
of labor with those of the owners.

CONCLUSION

MSME have become one of the major contributors in the growth of any economy..Their role in
economic activity is manifest in both tangible and intangible ways. If this contribution is to be
sustained, then their uniqueness needs to be nurtured in an overt and explicit manner . The
Indian experience has shown that it is possible to design targeted interventions, be they area
specific like in clusters or be they sector/Subsector or product specific. Other countries, be
they Asian or OCED, also have policies which aim at similar support. The need of the hour is
for us to learn from each other , drawing upon experiences and identify “best practice
policies”. These in turn have to meet local conditions and circumstances . A “one size fits all”
approach will not work. Nevertheless , there can be no two opinions about the priority that
SME policies deserve for achieving the socio justice, along with the individual’s aspirations.
 References
• www.msme.gov.in
• www.dcmsme.gov.in
• Annual report of year 2009 -10 by ministry of Micro, small and medium
enterprises
• Report on growth of MSMEs by Mr. Jugal Kishor (VP of IIA)
• Report “INDIAN SMEs AND THEIR UNIQUENESS IN THE COUNTRY” by
DrA.P. Pandey (Dept of economics, Banaras Hindu University)