Problems and Issues faced by MSMEs in India

Presented by

Prof.Bhushan Manchanda

Introduction

The MSME, or the micro, small and medium enterprises are vital constituents of
the Indian industrial sector. They contribute significantly to the GDP and export
earnings besides meeting the social objectives of developing backward areas,
reducing regional disparities, and providing employment opportunities to
millions of people across the country. Despite this, MSMEs in India suffer
from the problems of financial assistance, lack of business expertise, and
technological obsolescence. Indian SMEs are also facing tough competition
from their global counterparts due to liberalization, redundant manufacturing
strategies and uncertain market scenarios.

Let’s take a look at the problems faced by MSMEs in India :-

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1. Financial assistance

Finance is one of the most important problem confronting small scale industries
Finance is the life blood of an organisation and no organisation can function
proper у in the absence of adequate funds. The scarcity of capital and
inadequate availability of credit facilities are the major causes of this problem.

Firstly, adequate funds are not available and secondly, entrepreneurs due to
weak economic base, have lower credit worthiness. Neither they are having
their own resources nov are others prepared to lend them. Entrepreneurs are
forced to borrow money from money lenders at exorbitant rate of interest and
this upsets all their calculations.

Under the directions of the Govt., banks are now financing this sector. Earlier
these enterprises were struggling with the problem of inadequate availability of
high cost funds. These enterprises are promoting various social objectives and
in order to facilitate then working adequate credit on easier terms and conditions
is being provided to them.

The most common problem that all small-scale businesses have faced, and are
still facing in some cases is of credit. MSMEs struggle to obtain financial
assistance due to several factors like absence of collateral, lengthy paperwork,
and lack of trust in loan repayment capabilities. These obstacles remain despite
the government’s conscious effort to provide easy credit line to MSMEs. To
help the businesses overcome this, PSU and other Banks are now offering
hassle-free MSME loans at attractive interest rates. Entrepreneurs can enjoy
doorstep banking, customized product, comfortable repayment tenure, and
much more.

2. Marketing

Increasing marketability of products is a difficult task not just for MSMEs, but
for large-scale businesses as well. Inconsistence and sporadic marketing efforts
yield no results. When it comes to small-scale businesses, the lack of resources

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– time, money, and skilled employees make it impossible to increase visibility
and generate quality leads.

These small scale units are also exposed to marketing problems. They are not in
a position to get first hand information about the market i.e. about the
competition, taste, liking, disliking of the consumers and prevalent fashion.

With the result they are not in a position to upgrade their products keeping in
mind market requirements. They are producing less of inferior quality and that
too at higher costs. Therefore, in competition with better equipped large scale
units they are placed in a relatively disadvantageous position.

In order to safeguard the interests of small scale enterprises the Government of

India has reserved certain items for exclusive production in the small scale
sector. Various government agencies like Trade Fair Authority of India, State
Trading Corporation and the National Small Industries Corporation are
extending helping hand to small scale sector in selling its products both in the
domestic and export markets.

3. Technology

Majority of the MSMEs in India operate on stale and obsolete technology which
obstructs them from keeping up with the new age world. This is despite the fact,
that India is said to have the third largest pool of technologically trained
manpower. Adoption of new technology and training employees with these
technological upgradations is not only difficult, but also costly – especially for
manufacturing businesses where the scope is not just in terms of software, but
also in terms of production units. While lack of access to IT education is partly
responsible for the technological gap, the biggest factor is lack of awareness
which reduces willingness to investment in advanced tech solutions.

4. Upskilling

Skilled employees are essential for growth of businesses. Multi-national

companies (MNCs) understand this and keep on-the-job training at the centre of
their functioning. Unfortunately, small-scale enterprises fail in upskilling their
manpower, unknowingly taking a hit.

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A small scale unit located in a remote backward area may not have problem
with respect to unskilled workers, but skilled workers are not available there.
The reason is Firstly, skilled workers may be reluctant to work in these areas
and secondly, the enterprise may not afford to pay the wages and other facilities
demanded by these workers.

Besides non-availability entrepreneurs are confronted with various other

problems like absenteeism, high labour turnover indiscipline, strike etc. These
labour related problems result in lower productivity, deterioration of quality,
increase in wastages, and rise in other overhead costs and finally adverse impact
on the profitability of these small scale units.

5. Poor Business expertise and Managerial inadequacies

While entrepreneurs may have subject matter expertise relevant to their goods
and services, they might lack the business acumen needed to run an enterprise
smoothly. These include funding & financing, tracking sales, managing input &
output costs, etc.

Managerial inadequacies pose another serious problem for small scale units.
Modern business demands vision, knowledge, skill, aptitude and whole hearted
devotion. Competence of the entrepreneur is vital for the success of any venture.
An entrepreneur is a pivot around whom the entire enterprise revolves.

Many small scale units have turned sick due to lack of managerial competence
on the part of entrepreneurs. An entrepreneur who is required to undergo
training and counseling for developing his managerial skills will add to the
problems of entrepreneurs.

The small scale entrepreneurs have to encounter numerous problems relating to

overdependence on institutional agencies for funds and consultancy services,
lack of credit-worthiness, education, training, lower profitability and host of
marketing and other problems. The Government of India has initiated various
schemes aimed at improving the overall functioning of these units.

Inadequate management skills hamper business expansion and often cause non-
competitiveness of small enterprises. A successful business must be able to
grow workforce, cater to diverse customer needs, manage inventory, deal with
new competitors, keep the supply chain running and sustain the company’s

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culture. More often than not, entrepreneurs undermine the importance of
effective management and face numerous hurdles when the business expands at
the later stage.

6. Procurement of raw material

The prices of raw materials have increased manifold, especially since the
beginning of the Covid-19 pandemic. For MSMEs in the manufacturing sector,
the procurement of raw material is extremely important to continue operations.
However, lack of bulk orders, credit facilities and transportation of raw material
make the procurement tedious. To eliminate these limitations, the NSIC runs a
‘Raw Material Assistance Scheme’ which helps small businesses by financing
the purchase of raw material – both indigenous and imported.

7. Under Utilisation of Capacity

Most of the small-scale units are working below full potentials or there is gross
underutilization of capacities. Large scale units are working for 24 hours a day
i.e. in three shifts of 8 hours each and are thus making best possible use of their
machinery and equipments.

On the other hand small scale units are making only 40 to 50 percent use of
their installed capacities. Various reasons attributed to this gross under-
utilisation of capacities are problems of finance, raw material, power and
underdeveloped markets for their products.

8. Project Planning

Another important problem faced by small scale entrepreneurs is poor project

planning. These entrepreneurs do not attach much significance to viability
studies i.e. both technical and economical and plunge into entrepreneurial
activity out of mere enthusiasm and excitement.

They do not bother to study the demand aspect, marketing problems, and
sources of raw materials and even availability of proper infrastructure before
starting their enterprises. Project feasibility analysis covering all these aspects in
addition to technical and financial viability of the projects, is not at all given
due weight-age.

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Inexperienced and incomplete documents which invariably results in delays in
completing promotional formalities. Small entrepreneurs often submit
unrealistic feasibility reports and incompetent entrepreneurs do not fully
understand project details.

Moreover, due to limited financial resources they cannot afford to avail services
of project consultants. This result is poor project planning and execution. There
is both time interests of these small scale enterprises.

9. Procurement of raw material

The prices of raw materials have increased manifold, especially since the
beginning of the Covid-19 pandemic. For MSMEs in the manufacturing sector,
the procurement of raw material is extremely important to continue operations.
However, lack of bulk orders, credit facilities and transportation of raw material
make the procurement tedious. To eliminate these limitations, the NSIC runs a
‘Raw Material Assistance Scheme’ which helps small businesses by financing
the purchase of raw material – both indigenous and imported.

10. Hiring

MSMEs struggle to hire skilled and competent manpower. Lack of name

recognition of the company reduces the talent pool from which MSMEs can hire
employees as there are fewer responses to job postings by small-scale
businesses. Even after finding the right candidate from this small pool, MSMEs
lose the right candidate due to inability to offer competitive salary, job security
and career development opportunities similar to larger organizations.

11. Innovation

The rate of changes is accelerating rapidly. The role of creativity and innovation
has increased in this change process for survival. Businesses are becoming
knowledge-based and their success & survival is directly related to their
creativity, innovation, discovery and inventiveness. MSMEs will have to learn
and imbibe the process of innovation in their day to day working to remain
competitive.

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12. Stiff competition from giant businesses

Indian MSMEs are finding it difficult to sell their products in the domestic and
international markets because of increasing competition. Small-scale enterprises
face a tough competition from their global counterparts due to liberalisation, as
well as from domestic giants due to their immense scale of operation. While the
Government does run protective schemes for such small-scale enterprises, the
competition remains one-sided by and large.

Conclusion

The problems faced by the small traditional enterprises with poor support
system and little exposure, particularly in accessing technology and maintaining
competitiveness, have been formidable. The non-availability of institutional
finance on affordable and easy terms is seen as the biggest challenge faced by
MSMEs. Further adding to the limitations of MSMEs are lack of formalized
contractual relations and the reliance on cash payments.

Apart from this, most of the small-scale enterprises do not have access to well
researched database – whether it pertains to market intelligence or technology.
This information needs to be disseminated proactively, and on a regular basis.