Chapter - Micro and Small Enterprises in India

B. Com (Hons) IIIyear

Paper No : XVIII, Indian Economy Performance and Policy
Unit No. V: Sectoral Trends and Issues
Chapter: 4, Micro and Small Enterprises in India

Fellow:Dr.Kawal Gill, Associate Professor

Department/ College: Department of Commerce, Sri
Gobind Singh College of Commerce, University of Delhi

Author: Dr. Poonam Bewta

Department/ College: JDM College, University of Delhi

Reviewer: Dr. Uma Kapila (Retd.)

Department/ College: Miranda College, University of Delhi

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Table of Contents

o 4.1 Role and Performance of Micro and SMALL SCALE

o 4.2 Government Policy and Future Challenges
o Summary
o Exercises
o Glossary
o References

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Chapter : Micro and SMALL SCALE ENTERPRISES in India

The small sector covers a wide spectrum of industries and small scale services and business
enterprises and thus is referred to as micro and small scale Enterprises (MSEs). The MSEs
include modern small scale Industries (SSIs), tiny or micro enterprises, small scale service
enterprises and village and cottage industries. The Government‟s industrial policy has given
special role to the small scale sector. The small scale sector plays a pivotal role in the Indian
economy in terms of employment, output and exports. The growth in this sector has resulted into
wider dispersal of industrial and economic activities and ensures better use of local resources.
The present chapter provides a discussion on the role and contribution of MSEs in India,
problems facing MSEs in India and measures taken by government to improve its performance.

4.1 Role and Performance of Micro and SMALL SCALE

4.1.1. Definition of Micro and Small Scale Enterprises (MSEs)

The definition of MSE is provided under Micro, Small & Medium Enterprises
Development (MSMED) Act, 2006. As per MSMED Act, 2006 MSEs are defined on the basis
of their investment in plant and machinery (for manufacturing enterprise) and on equipment for
enterprises providing or rendering services.

MSMED Act, 2006 introduces the concept of „enterprise‟ as opposed to the earlier concept
of industry. According to the provision of (MSMED) Act, 2006 the Micro, Small and Medium
Enterprises (MSME) are classified in two Classes:

(a) Manufacturing Enterprises- These enterprises are 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 Enterprises are defined in terms
of investment in Plant & Machinery.

(b) Service Enterprises: These enterprises are engaged in providing or rendering of services
and are defined in terms of investment in equipment.

Thus the new definition has clearly included industrial as well service into Micro and Small
Scale Enterprises (MSEs). The present ceilings on investment for enterprises to be classified
as micro, small and medium enterprises are as follows:

Table 1: Definition of Micro, Small and Medium Enterprises

Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed twenty five lakh rupees

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

Source: Micro, Small and Medium Enterprises Development Act, 2006

Value addition: Did You Know?

Structure of MSEs in India
MSEs consist of diversified structure of Modern, Traditional Cottage MSEs and Village
Industries.

Traditional MSEs are labor-intensive, requires specialized skills and craftsmanship which are
often handed down from one generation to another. The cottage industries are generally located
in the rural areas, mostly make use of local resources and cater to the local demands. These
industries involve the production of conventional goods.

Modern MSEs are capital-intensive and involves high-tech in the production. These are generally
concentrated in the urban areas and may procure raw materials from distant places and produce
sophisticated goods that are sold both in national and international markets. These industries
produce sophisticated goods.

The term “village industries” has been redefined in amended KVIC, Act, 1956 as "any industry
located in a rural area which produces any goods or renders any service with or without the use
of power and in which the fixed capital investment per head of artisan or worker does not exceed
one lakh (. one lakh and fifty thousand in case of village industry located in a hilly area) or such
other sum as may, by notification in the Official Gazette, be specified from time to time by the
Central Government".

4.1.2. Role and Contribution of Micro and Small Enterprises in India

MSEs have acquired prominent role in the industrial and economic development. It has
contributed significantly to the socio-economic welfare of the country. The SSEs continue to be
a vibrant sector of the Indian economy. It contributes significantly to the growth of Gross

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domestic product (GDP), employment generation, exports and creation of entrepreneurial base.
These are discussed as follows:

4.1.2.1 Employment Generation:

The small scale sector contributes about four-fifth of manufacturing employment in India.
The MSEs are generally labor-intensive and thus create more employment for the given amount
of capital. MSEs provide employment to locally available semi-skilled and unskilled workers
who would otherwise be unemployed. The units like khadi industries, village industries,
handloom, handicraft etc. are the major provider of employment opportunities.

Further, MSEs develop self-employment and entrepreneurial base in the country. Given
the acute unemployment problem in India, creation of employment opportunities largely depends
upon the development of MSEs. The sector is estimated to employ about 59 million persons in
over 26 million units throughout the country. The projected corresponding figure for the year
2008-09 was 28.5 million

enterprises generating employment for about 66 million persons.

During Xth plan period (2002-07), MSEs register around 4.57 percent growth in
employment where as large industries growth was around 0.85 percent. It is the segment which
provides employment next to agriculture. 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 growth in employment in this sector is much above the population growth of India
(i.e1.5 percent) The employment intensity of this sector can be judged from the fact that 1 person
is employed for every Rs.1.49 lakh rupees invested in fixed assets of MSEs as against 1 person
for every Rs. 5.56 lakh in the large organized sector. It is well known that the MSME sector
provides the maximum opportunities for both self-employment and jobs after agriculture sector.
The chart1 depicts the number of enterprises, employment and the magnitude of fixed investment
in MSME sector.

4.1.2.2 Equitable distribution of Income and wealth:

The equitable distribution of income and wealth occurs as the large numbers of MSEs are
dispersed in wide range of regions and is held by large number of people. The number of MSEs
account for more than 95 percent of total industrial units in the country. Large scale industries on
the other hand are owned by few big owners and so led to concentration of income and wealth in
the hands of few. Further, MSEs possess much larger employment potential as compared to large
enterprises. Small sector thus enable a vast majority of people to derive the benefits of economic
development. In fact MSEs help to achieve inclusive growth. It touches upon the lives of women,
children and minorities in village and urban areas.

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Value addition: Did You Know

Vital STATISTICS OF THE SECTOR

Projected data for the year 2007-08 and 2008-09. ** The data for the period upto 2005-06 is
only for small scale industries (SSI). Subsequent to 2005-06, data with reference to micro, small

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and medium enterprises are being reflected.

Source: Annual Report of MSME, 2009-10

4.1.2.3 Mobilization and utilization of local latent resources:

MSE mobilizes the latent i.e. unused or idle resources in terms of surplus labor, idle capital
and deploys these resources in the productive activity. The MSEs provide opportunities to
develop entrepreneurial skills and encourage the innovations at the grassroots level. It provides
large amount of supply links by sourcing inputs from the local areas and so have greater local
multiplier effect than large enterprises. This is a definite gain to the society as a whole.

4.1.2.4 Regional Dispersal of Industries:

MSEs are dispersed across wide range of areas and regions. The large scale industries are
concentrated in big metropolitan cities as these cities provide an easy access to the basic facilities
of power, transport, roads, banking etc. as such it resulted in regional disparities with already
well-off states developed faster than other. The small scale industries with localized operations
spread in the remote corner of the economy. These industries can be easily set up in different
parts of the country and energizes the village industries. This led to reduction of regional
economic disparities.

4.1.2.5 Contribution towards GDP and output growth:

MSEs contribute around 39 percent of gross manufactured output. The output in Xth plan
recorded a growth rate of 8.87 percent p.a. It is estimated that in terms of value, the sector
accounts for about 45 per cent of the manufacturing output in the year 2007-08 (Economic
Survey, 2010). 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 (Chart 1).

The contribution of MSMEs in GDP, Exports and Employment is given in the Table 1
below:

Table 1: Contribution of MSMEs in the GDP, Exports and Employment

NA: Not Available, Source: Annual Reports of MSME (figures are in percentage). The
growth in the employment is specified as a percentage of total organized employment

Year GDP Exports Employment

1980-81 9.2 24.5 31.0
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1990-91 11.0 29.7 47.6

2000-01 6.04 30.9 66.4
2001-02 5.77 34.08 29.93
2002-03 5.91 33.71 31.32
2003-04 5.79 33.28 33.37
2004-05 5.84 33.15 34.04
2005-06 5.83 32.92 34.19
2006-07 7.44 31.92 NA
2007-08 8.00 30.80 NA

The share of the small industry in national income increased in the protection period of 1980‟s
but declined considerably during 90‟s.The share of exports and employment increased
consistently and steadily in general during this period. The rate of growth however is more
prominent in 90s than in the 80‟s in case of exports but the growth rate of employment was more
significant in 80‟s than 90‟s. This clearly reflects the cost rationalization in MSEs as result of
liberalization efforts of 90‟s.

4.1.2.6 Contributes towards Foreign Exchange:

MSEs hold a significant share in exports earnings. The products like handicrafts, gems,
jewelry, carpets, silk which is a forte of MSEs possess huge demand in foreign market. These
products require low import-content. Further, the financial constraints and small size of MSEs
inhibit the sourcing of raw inputs from abroad and greater use of local resources and save foreign
exchange. Thus MSEs contribute to the precious foreign exchange of the country. The direct
exports from MSEs accounts for nearly 31 percent of total exports (Table 1). Besides direct
exports SSEs indirectly contribute to the export earnings in terms of production of parts or
components for use in exportable goods or export order from large units. It is estimated that in
terms of value, the sector accounts for about 40 per cent of the total exports of the country.
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Further, the non-traditional products account for more than 95 percent of total MSEs exports.
The products groups‟ where MSEs dominate are sports goods, readymade garment, processed
food and leather products.

4.1.2.7 Arrest Rural-Urban Migration:

The rapid increase of population and lack of enough job opportunities in the rural areas
has caused migration of rural population to urban areas. This excessive migration has resulted in
problems like housing shortage, low level of civic facilities, growth of slums and additional
social problems like theft, robbery etc. The development of MSEs in the rural areas provides
employment opportunities near the homes of rural people and so reduce rural migration. The
Chart 2 depicts the percentage of rural and urban MSME according to the latest census of
MSME.

Source : MSME Annual Report 2009 -10

4.1.3. Progress of MSEs in India

The MSEs in India has made progress over past few decades. It has emerged as a very
significant sector of the Indian economy with considerable contribution towards Gross domestic
product (GDP), industrial production, employment generation and exports. It has grown
tremendously from mere 8.7 lakh units in 1980 to 285.16 lakh units in 2009 (Table2). The MSE
sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as would be
clear from the comparative data on growth rates of production for both the sectors during last
five years as shown in the Table 3.

Table2: Progress OF MSEs Sector

NA: Not Available, Source: various reports from Office of the Development

commissioner (MSME)

Year Units Production Employment SSI Exports

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(Lakh nos.) ( crore) (Lakh nos.) ( crore)

At 1993-94

prices
1980-81 8.7 72200 71.0 1600
1985-86 13.5 118100 96.0 2800
1990-91 67.9 84728 158.3 9664
1995-96 82.8 121175 197.9 36470
2000-01 101.1 184401 240.9 69797
2005-06 123.4 418884 299.9 150242
2006-07 261.01 473339 594.61 182538
2007-08 272.79 790759 626.34 202017
2008-09 285.16 880805 659.35 NA

Table3: Comparative Data on Growth Rates of MSE Sector

Year Growth Rate IIP

of IIP (Overall Industrial

(Base 2001-02) Growth Rate of Sector)

2002-2003 8.68 5.7
2003-2004 9.64 7.0
2004-2005 10.88 8.4
2005-2006 12.32 8.1
2006-2007 12.60 11.5
2007-2008 13 8.0

Source: Annual Reports of MSME (figures are in percent)

IIP - Index of Industrial Production

MSEs have also witnessed significant growth in the total production, employment and export
earnings during 80‟s as depicted in Table 4. However, during 90‟s, MSEs witnessed a reduction
in the growth rate of units, employment and output. This according to the Bala Subrahmanya is
an indication of increased competition due to the globalization. The growth rate of exports on the
other hand has increased moderately during 80‟s and 90‟s but declined considerably in 2007-08
due to global crisis.

Table4: Growth of MSE in India (figures are in percent)

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Period Units Employment Output Exports

1980s 18.4 5.84 18.66 19.38
1990s 5.62 4.0 15.31 20.62
1980-81 to 1985-86 9.18 6.21 16.88 11.0
1985-86 to 1990-91 7.63 5.4 20.46 28.4
1990-91 to 1995-96 6.88 4.02 18.05 30.42
1995-96 to 2000-01 4.37 3.99 12.62 11.56
2001-02 to 2006-07 9.76 12 37.45 28.29
2007-08 4.51 5.34 11.47 10.67
2008-09 4.53 5.35 11.39 NA

Source: Uma Kapila, 2009-10 Indian Economy: Performance and Policies

Table no. 20.2 & Annual Reports of MSME

Facts about MSEs according to Fourth All-India Census of Micro,

Small & Medium Enterprises with reference year of 2006-07

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Source: MSMED Annual Report 2009-10

An enterprise (manufacturing or of a services) managed by one or more women entrepreneurs in

proprietary concerns, or in which she/ they individually or jointly have a share capital of not less
than 51 percent as partners/ share holders/ Directors of Private Limited Company/ Members of
Co-operative Society is called a „Woman Enterprise‟. According to the fourth census it stands at
13.85 percent.

4.1.4 Problems of MSEs in India

Concurrent with an impressive growth MSEs face number of problems which are
manifested in such a way that this sector fails to achieve the required amount of dynamism and
growth. A majority of Indian MSEs donot have an access to reliable and efficient infrastructure.
The infrastructural constraints can be broadly classified as economic, technological, marketing
and financial. The problems of MSEs are classified as follows:

4.1.4.1 Financial Problems:

Finance is the most important aspect for any industrial development. The scarcity of
finance and credit is the main obstacle in the growth of MSEs. These enterprises are generally
organized in sole-proprietary and partnership concerns and so have no access to the capital
market. According to 4th census on MSEs 90.36 % of the enterprises in the registered MSME
sector were proprietary enterprises. About 3.85% of the enterprises were run by partnerships and
2.69% of the enterprises were run by private companies (chart 6)

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Source: MSMED Annual Report 2009-10

There exists insufficient equity type institutional support. Delays in institutional finance,
unhelpful attitude of banks are the common problems of MSEs. The delay in sanctions of loans
occur due to lengthy procedural formalities, insistence upon certificate from local authorities
such as village office, block development officers etc and over-emphasis on collateral security.
Banks generally avoid financing smaller MSEs due to high mortality rate, low overall recovery
performance and high cost of servicing MSEs loans. In this scen ario MSEs have to depend upon
high cost non-institutional finance.

4.1.4.2 Slow Technological Progress:

Paucity of funds is the major area for the slow adoption of innovative practices in the
business. The unsatisfactory technology delivery mechanism such as arrangement for
demonstration of cost and use of new technology also cause low technical progress in MSEs.
There is very limited information dissemination about availability recent technologies, literature
on modern machinery, contact details of suppliers etc. MSEs especially the cottage and village
industries have to depend upon outdated and obsolete production technique. This adversely
affects the quality of output and increases manufacturing cost.

4.1.4.3 Marketing –Related Problems:

The problem of marketing products of MSEs generally arise due to small scale production
causing high product cost, lack of standardization of product, adequate marketing research,
competition from big industrial units and insufficient research and holding capacity. MSEs are
facing stiff competition from imports. Further these enterprises don‟t have money to invest in
market research and are unable to carry out design and technical improvements to keep up with
market demands. Another related problem is the weak bargaining power of tiny and village
industries vis-à-vis large buyers which is causing long overdue from these buyers. MSEs thus
fail to obtain fair and timely price for their products. Lack of proper marketing is an important
factor causing sickness in MSEs. The inadequate organized marketing support for cottage and
village industries also causes low promotion of their products.

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4.1.4.4 Lack of Proper Planning:

Planning comprises outlay of the quantum of output, time framework of implementation,

product and marketing strategies. The performance feasibility study are often neglected by MSEs
due to time and cost factors. As a consequence, MSEs face large sickness at early stage of their
operation.

4.1.4.5 Sickness:

There exists large level of sickness amongst MSEs. The incipient sickness (i.e. Sickness at
an early stage of existence) is largely due to lack of planning, professional management and
financial problems. The other causes of sickness in the MSE sector are lack of demand, shortage
of working capital, non-availability of raw material, power shortage, marketing problems etc.
According to an estimate around 14 percent of registered SSEs and 7 percent of unregistered
sector are either sick or incipiently sick. The sickness causes wastage of large amount of finances
that remain locked into these units. Further, sickness also leads to various socio-economic
problems such as lower production, employment and exports.

4.1.4.6 Shortage of Raw Material:

Raw material scarcity causes disruption in the production process. MSEs fail to make bulk
purchases and thus have to pay higher price for inputs. The suppliers of scarce raw material give
preference to bulk buyers. MSEs have to depend upon low quality localized high price raw
material. Further, MSEs fail to make alternative arrangements for critical inputs such as power
due to financial constraints. These factors adversely affect product quality and cost of
production. Lack of credit combined with inadequate raw materials often forces weavers, artisans
and entrepreneurs into the clutches of local moneylenders and middlemen.

4.1.4.7 Lack of reliable economic facilities:

The economic facilities such as power, water, transport, communication quite inadequate at the
grass root level in various regions. This adversely affects the performance and competitiveness
of small industry.

4.1.4.8 Low Utilization of Installed Capacity:

The industrial success depends upon the maximum utilization of installed capacity. According to
the third census of MSMEs around 83 percent of units in total MSEs operated for 9 months or
more but remaining can‟t work for long duration in the year.

4.1.4.9 Poor Awareness about Intellectual Property Rights (IPRs):

In the changing global scenario IPR has gained special importance for MSME sector. The Indian
MSME sector needs more information, orientation and facilities for protecting their intellectual
process.

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4.1.4.10 Lack of Awareness of global Trade Laws:

MSEs lack information capability to build international market position. Most of the enterprises
are more product and technology oriented than market oriented.

4.2 Government Policy and Future Challenges

4.2.1 Government Measures:

An important place is assigned to MSEs sector in the development policy of the country.
Till 90‟s Government focused more on protectionist policy towards MSEs. The shift in policy
paradigm towards this sector occurred since1991 to impart more vitality and growth-impetus to
the sector. The sector has been substantially delicensed. The regulations and procedures have
been reviewed and modified to instill competition and efficiency in this sector. The policy
initiatives adopted to promote this sector are discussed below:

4.2.1.1 Reservation:

The policy of reservation was initiated in 1967 primarily as a promotional and protective
measure for exclusive production in MSEs. The number of items reserved is continually revised
by Government. In 1967, 47 items were reserved for exclusive production by MSEs which
expanded to 873 in October 1984. The rationale of reservation policy was to expand employment
opportunities through setting up of MSEs and to protect them from competition by large
enterprises. In the new global scenario with WTO agreement, Government is required to remove
quantitative restrictions on imports of items. A large number of items exclusively reserved for
MSEs can now be freely imported. Thus the reservation has lost its relevance. The government
has drastically reduced the number of items reserved for exclusive manufacture by micro small
and medium enterprises (MSME). As on March 2007, the list of items for exclusive production
contains 114 items which was further reduced to 21 in October 2008. Non-MSME units can
undertake manufacture of reserved items only if they undertake 50 percent export obligations.

4.2.1. 2. Financial Support:

Government has made efforts to ensure adequate and timely availability of financial
assistance to MSEs. RBI has issued guidelines to public sector banks to ensure 20 percent growth
in credit to MSEs. Small Industries Development Bank of India (SIDBI) which is an apex
institution and coordinates the financial assistance availability to MSEs has scaled up and
strengthens its credit operations to this sector. The branch network of SIDBI has been increased.
In order to improve an access to the capital market, the equity participation by other industrial
undertaking not exceeding 24 percent of total shareholding has been allowed for MSEs. This
would limit the financial liability of some partners who have invested capital. Risk capital fund
has been created to provide equity-type long term loans to MSEs. The credit guarantee fund
scheme is launched by government in 2000 to allow collateral free credit to MSEs.

4.2.1.3. Fiscal Support:

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Government has allowed tax concessions in terms of lower excise duty on production,
lower sales tax on sales, tax-holiday and extended the time limit for payment of excise duty by
MSEs.

4.2.1.4. Marketing Support Measures:

In order to provide market support to MSEs, Government has taken following measures:

i) Preferential Purchases and Price Preferences by Government

The Government organizations are statutorily required to make specified level of purchase
from MSEs and the same has to be disclosed in their annual reports. At present the number of
items for exclusive purchase from MSEs stood at 358. Government also provides price
preference to MSEs in their purchases over large scale units.

ii) Financial Assistance is allowed for participation in the international trade fair by
representatives of MSEs.

iii) Training Programmes on various aspects of marketing like marketing management, export
marketing etc are conducted by Government.

(5.4.4) Institutional Marketing Support is provided by National Small Industries Corporation

(NSIC) and Small Industries Development Organization (SIDO) now called Micro, Small and
Medium Enterprise Development organization (MSMEDO).

4.2.1.5 Institutional Support:

Government has established various organizations to help MSEs. These institutions assist
MSEs in purchase of raw material, marketing of goods, technological and skill improvement and
arranging credit. The important organization established are Khadi and Village Industries
Commission and commodity specific organizations such Handloom Board, Cottage Industries
Board, Coir Board etc. Specialized financial and consultancy institutions such as SIDBI,
NABARD (for supporting rural industries), MSMEDO (erstwhile SIDOs), NSIC has been
established to provide financial, marketing and managerial assistance to MSEs. MSMEDO has a
network of more than 3000 technically qualified personnel working through its small industries
service institutes, testing centres and autonomous organizations such as the tool room, product
and process development centres, etc.

4.2.1.6. Raw Material Assistance:

The institutional support is provided to allow availability of raw material (both indigenous
and imported) at fair price. The centers have been established to distribute scarce raw material to
MSEs. Buffer stocks are maintained for raw materials. This has helped MSEs to focus on
production of quality products.

4.2.2 Recent Government’s Initiatives:

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In view of liberalization and globalization and reduced Government intervention in

market-driven economy the protectionist policies has been replaced by supportive policies. The
recent measures adopted by government are as follows:

4.2.2.1 Legislative Measures:

Micro, Small and Medium Enterprises Development Act, 2006 has been enacted to
facilitate the promotion and development of MSEs. This Act seeks to facilitate promotion and
development and enhancing competitiveness of these enterprises. It provides the first-ever legal
framework for recognition of the concept of “enterprise” (comprising both manufacturing and
services) and integrating the three tiers of these enterprises, namely, micro, small and medium.
The basic purpose is to develop the consultative mechanism at the national level that represents
stakeholders from three classes of enterprises. The act provides for the establishment of specific
funds to support MSEs. The progressive credit policy with targeted growth of credit to MSEs has
been incorporated in the Act. The mechanism has been designed to reduce the problems of
delayed payment to MSEs.

4.2.2.2 Support for Cluster-Based Development:

The holistic approach is adopted to develop cluster of MSEs so as to provide common

facilities in these clusters. The existing industrial infrastructure will be upgraded and new
facilities will be created in the public-private partnership mode for the MSEs.

4.2.2.3 Technology and Quality up Gradation:

The support is provided by establishing training-cum product development centers. In

2006 the government launched the National Manufacturing Competitiveness Programme. The
programmes include setting up of design clinics, application of lean manufacturing technologies
for increasing competitiveness of firms by systematically identifying and eliminating waste
throughout the business cycle.

4.2.2.4 Strengthening of Entrepreneurial and Managerial Development

Programmes:

Financial assistance is provided to B-schools to conduct tailor-made management courses

for MSEs. Entrepreneurial clubs are established in the Colleges or Universities.

4.2.2.5 Empowerment of Women-Owned Enterprises:

The concessions, marketing and credit facilities on priority basis are provided to
enterprises owned and managed by women.

4.2.2.6 Strengthening of Data base for MSEs:

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It is decided to collect database on MSEs through annual sample surveys and quinquennial
(i.e. happening every five years) census so that policy decisions can be framed for MSEs based
on systematic data that provides inputs for systematic policy initiatives. For collecting and
compiling the data for the MSME sector (including khadi, village and coir industries), the Fourth
All India Census of MSMEs with reference year 2006-07, was launched during 2007-08 in the
country. The collection of data from the registered part of the Census units has been completed.

4.2.3. Prospects and Challenges of MSE in the new Globalized

Era:

Globalization has created beneficial opportunities for MSEs. The removal of quantitative
restrictions and the reduction of import duties, particularly after the setting up of WTO in 1995,
have opened up foreign markets to Indian MSEs.

The various agreements entered into by WTO member nations including India will have far
reaching implications on Indian Industry particularly the micro and small enterprises. Some of
the challenges and opportunities are highlighted below:

-Reduction in import duties under GATT and removal of Quantitative Restrictions (QRs) had
increased the inflow of low cost imports particularly from China and affected the domestic sales
of micro and small enterprises leading to dwindling profit margins.

On the positive side reduction in duties on imports of good quality raw materials and accessories
had improved the access of domestic industry to crucial raw materials resulting in improving the
quality of finished products like high value ready-made garments, leather goods, gold jewelry
etc., resulting in better export realizations.

-Wider opportunities to Indian manufacturers in the markets of other member countries are
made possible as no discrimination is permitted between imports from member countries.
Enterprises will have to concentrate on manufacturing products in which they have a clear cost
advantage.

-The Agreement on Technical Barriers to Trade (TBT) has permitted member countries to lay
down their own stringent manufacturing standards on products imported from the developing
countries to protect health and safety of their people and to protect the environment. This would
require increased investments in latest technologies, R&D, Quality Certifications and in turn
increase the cost of production of micro and small enterprise.

-Some of the non-permissible subsidies under WTO, like export subsidies, waiver of income
tax on export earnings, export credits at rates below the cost of government borrowings, currency
retention, might be removed, which might affect the profit margins of micro, small and medium
enterprises. Removal of certain non-permissible subsidies prevalent in the developed countries
would in turn render Indian exports more competitive in the international market provide quality
is improved and superior manufacturing standards are adopted.

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-Agreement on Trade Related Intellectual Property Rights (TRIPS) requires WTO member
countries to amend their legislations for various Intellectual Property Rights including
Trademarks, Copyrights, etc. This Agreement and the amendments in the Indian Patent Act will
put severe restrictions on MSEs manufacturing patented products. These enterprises being unable
to mobilize huge resources for R&D and patenting of their products will have to tie up with large
manufacturing companies as contract manufacturers.

-Agreement on TRIMS (Trade Related Investment Measures) would enhance the flow of FDI
into Indian industry as most of the restrictions imposed on foreign investors, would be removed.
MSEs would also benefit due to increased inflow of FDI which will also bring in latest
technology and open up new market opportunities for these enterprises through strategic
linkages. Already selective de-reservation of some sectors has started taking place with a view to
enhancing exports and competing effectively in the global market.

4.2.4. Eleventh Plan Strategy for Promotion of MSEs:

The eleventh plan (2007-12) approach to the MSE sector marks a shift from the welfare
approach to that of empowerment. The plan looks at this sector as an engine for sustained and
inclusive economic growth and employment. The eleventh plan considers the MSE sector as an
important segment of industry which is unorganized and hence, needs support and access to all
schemes of industry with special enabling provisions.

Eleventh plan emphasizes complementary relationships between various segments of industry

and MSEs. The cluster-based approach is being focused thereby to create the cluster of micro
units, weaver and artisans to improve their bargaining power and to enable them to pool
resources. The groups comprising weavers, artisans and entrepreneurs, will be given full control
over cluster decisions and will be provided support in the form of credit, improved expertise and
marketing links.

The improved financial infrastructure will be the core component of Government‟s MSE‟s
policy. In this context the flexible norms for the sanction of credit especially export credit will be
designed. Commercial Banks will be encouraged to ensure that all loans up to 5 lakhs to MSEs
are given free of collateral at the interest rate of 8 percent. The coverage under the Credit
Guarantee Trust Fund will be increased. Further the sub sector target for MSE sector within the
overall stipulated 40 percent ceiling for the priority sector lending by banks will be designed.

During the eleventh plan period, an aggressive marketing campaign using the media and icons
will be launched. Handloom, handicrafts, food processing and other cultural industries will be
linked to tourism. In the west, the cultural industries have become the most rapidly growing
sector in the world, contributing over 7 percent of the world‟s GDP. Giving an industry status to
craftsperson is important because it entitles them to tax benefits and export promotion schemes
makes them eligible for banking and credit support and helps them lobby for protection of
intellectual property. Further preference policy for procurement of goods and services produced
by MSEs both at central and state levels will be developed. A policy for women in the micro and
small sector particularly in the unorganized segments will also be formulated to ensure that
women get their rights and that their special needs are catered to.
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The infrastructural bottlenecks notably the power failure, affect the MSEs much more than the
larger enterprises. Although some states do offer differential power tariffs in favor of MSEs, the
real deficiency is the quality and quantity of power supply. During the XIth plan the group/
associations of the MSEs will be incentivised to establish captive power plants as enjoined in the
Electricity Act, 2003 or to set up common large-scale generation facilities with dedicated feeder
lines.

The administrative and legal bottlenecks will be reduced. As labor and factory Laws have
created problems for MSE units in terms of number of inspections. The recommendation of
committee set up under Planning Commission of third- party inspection to give enterprises an
option to get their regulatory compliance certified by accredited agencies would be implemented
soon. Once such certification has been obtained; the unit would be exempted from routine
inspection. Special inspections would be authorized only on receipt of credible complaints.

The initiative of creating database would be further strengthened. In this context during XIth
plan the financial support to the MSEs Associations would be provided for their capacity
building, strengthening the database and contacts with the grass root.

During the eleventh Plan, the Ministry of MSME will establish a Technology Mission to
promote new and emerging technologies, assess present levels of technology and their up
gradation, set up technology information centres and an IT portal for information dissemination
to carry out detailed technology audits.

4.2.5. Suggestions to Improve Performance of MSEs in India:

Irrespective of the degree of support extended by the government and irrespective of the amount
of effort put in by small industries and their association, India is going to experience the
technologically vibrant and internationally competitive environment in the next 5-10 years
because the inefficient ones are likely to vanish gradually. The objective of the policy makers as
well as small industry associations should be to enable the sector to be vibrant and competitive
without a considerable reduction in its size and thereby enable it to take a sustainable
contribution to national income, output and exports (Bala Subrahmanya, 2009)

4.2.5.1 Encouragement to private sector Investment in Infrastructure: The state

governments along with industry associations should involve the private sector in the
development of infrastructure services. Similarly private sector investment should be encouraged
for the development and management of existing as well as new industrial parks/ clusters/estates
(Hussain, 1997)

4.2.5.2 Enhancement of Investment limit: The investment ceiling on plant and machinery used
for defining the small scale units create problems. Efforts such as raising investment ceiling to
Rs. 5 crore for micro and small- scale units will help these units to graduate to medium-scale
enterprises. The excise duty exemption, available to SSIs is now restricted to 1.5 crore of the
transactions. This limit is too small for many modern large SSEs and constrained the expansion
of MSEs. In fact it encourages the horizontal expansion and deliberate fragmentation mainly to
stay within the limits of excise exemptions.
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4.2.5.3 Channelisation and Development of Innovative Potential: Technological innovation

contributes to competitiveness (Bala Subrahmanya et al., 2002). It is important to incorporate
schemes in terms of technological and financial assistance to in- house technological innovations
and make it easily accessible to small enterprises.

4.2.5.4 Creation of Research and Development Fund: There is a need to create R&D fund at
the state level for disbursement of funds to encourage MSEs to undertake formal R&D. Further
the Department of Science and Technology may allocate funds to universities and engineering
institutions, which could provided institutional infrastructure for R&D of conduct of R&D for
small industry units at the regional level (Bala Subrahmanya et al. 2002)

4.2.5.5 Broader Financial Infrastructure: The competitiveness of small industry is largely

dependent upon the availability and quantum of finance. The financial requirements of MSEs are
diverse due to technology up gradation and modernization, expansion, quality improvement,
R&D and technological innovations and environment-related investments (Bala Subrahmanya,
2002a). In order to meet the growing and diversified investment demand specifically to take care
of the technological transformation of small industry and lay more thrust on adequate flow of
finance to the sector.

4.2.5.6 Need to develop Global outlook: MSEs have many inherent advantages such as
exclusivity, ability to produce small order quantities, etc. Globally the world offer new markets,
especially of handcrafted products. The information technology can be used as a tool to provide
online information on the indigenous products. The Patent Acts can be used to prevent cheap
imitations of designs and products by other countries.

Summary

MSEs enjoy inherent advantages over their larger counterparts in terms of generation of
employment opportunities, equality of income and wealth and greater export potential. The
globalize economy has ushered in greater accessibility to the market, need of greater linkage of
MSEs with larger companies and improved manufacturing techniques. The measure adopted by
Government have been attempted to alleviate the problems of MSEs. The recent initiatives have
changed the outlook of business from protection to liberalization. It has created a sense of
competition amongst MSEs.

Exercises

4.1 Distinguish between Small Scale and Cottage Industries.

4.2 Explain the role and importance of Small-Scale Enterprises in Indian Economy.

4.3 What are the problems facing MSEs in India?

4.4 Discuss Indian Government‟s measures to improve the development of MSEs.

4.5 Discuss the opportunities and challenges of MSEs in the present globalized scenario.
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Glossary

Cluster indicates a sectoral and geographical concentration of enterprises, which produce and
sell a range of related products.

Collateral refers to the property or assets made available by a borrower as security against a
loan.

Cottage Industries: The cottage industries are generally located in the rural areas and have local
operations i.e. mostly make use of local resources and cater to the local demands.

Employment Intensity is a numerical measure of how employment varies with economic output
or investment.

Inclusive Growth is growth process that allows people to contribute to and benefit from
economic growth. It refers to the sustainable growth which is broad-based across different sector
of the economy.

Micro Enterprises are the enterprises where the investment in plant and machinery does not
exceed twenty five lakh rupees in case of manufacturing sector and does not exceed ten lakh
rupees for the service sector.

MSMED Act: MSMED Act was notified in 2006 to address policy issues affecting MSMEs as
well as the coverage and investment ceiling of the sector. The salient features of the Act include
Setting up of a National Board for MSMEs, Classification of enterprises, Formation of Advisory
Committees to support MSMEs and Designing Measures for promotion, development and
enhancement of MSMEs.

National Small Industries Corporation Ltd. (NSIC) was established in 1955, to promote aid
and foster the growth of small scale business enterprises in the country.

Sickness in Small Scale Sector refers to the continuous decline in gross output compared to the
previous two financial years; ii) Delay by more than 12 months in repayment of loan taken from
institutional sources; and iii) Erosion in the net worth to the extent of 50 percent of the net worth
during the previous accounting year.

Small Enterprises are the enterprises where the total investment in plant and machinery is more
than twenty five lakh rupees but does not exceed five crore rupees in case of manufacturing
sector and more than ten lakh rupees but does not exceed two crore rupees in case of service
sector.

Small Industries Development Bank of India (SIDBI) was established in April2, 1990 as a
principal/apex Development Financial Institution for the promotion, financing and
development of Industries in the small scale sector and co-coordinating the functions of other
institutions engaged in similar activities.

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Small Industries Development Organization (SIDO) is an apex body of the Government of

India, Ministry of Small Scale Industries established for formulating policy, projects, schemes
etc. for the development of Small Scale Industries in the country and also coordinating and
monitoring the implementation of these policies and programmes.

Village Industries is an industry located in a rural area which produces any goods or renders
any service in which the fixed capital investment per head of artisan or worker does not exceed
Rs. one lakh (Rs. one lakh and fifty thousand in case of village industry located in a hilly area).

Tax Holiday refers to the temporary period during which time the government removes certain
taxes (usually sales tax or excise duty) on certain items, or industries in order to encourage that
sector or item.

References

Works Cited

Bala Subrahmanya et al., 2002, “R&D and Technological Innovations in Small Scale
Industries”, New Delhi: Allied Publishers

Bala Subrahmanya (2008), Small Industry and Globalisation, in Readings in Indian Agriculture
and Industry by K.L.Krishna and Uma Kapila,2009, Academic Foundation, New Delhi

Government of India, Annual Report of MSME, 2009-10

Government of India, Economic Survey 2008-09 and 2009-10 New Delhi.

Government of India, Eleventh plan (2007-12) Document, New Delhi.

Hussain, 1997, Report of the Expert Committee on Small Enterprises, New Delhi.

Sabade, B.R. 2001, “WTO- A Threat or An Opportunity, Centre for Business and Industry”,
Pune.

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