MICRO SMALL AND MEDIUM

ENTERPRISES IN INDIA: AN ANALYTICAL

AND POLICY PERSPECTIVE

DISSERTATION
SUBMITTED TO

H.N.B GARHWAL UNIVERSITY (SRINAGAR)

GARHWAL, UTTARAKHAND

FOR THE DEGREE OF

MASTER OF ARTS IN
ECONOMICS

IN LIEU OF PAPER III OF THIRD SEMESTER

ACADEMIC SESSION 2019-2021

SUPERVISOR SUBMITTED BY

DR. RACHNA DIXIT SRIJAN NAITHANI

ASST. PROFESSOR M.A. ECONOMICS (FINAL)

ROLL NO. 19207305120

ENROLLMENT NO. G152073221

DEPARTMENT OF ECONOMICS

D.A.V (P.G.) COLLEGE, DEHRADUN

i
 DECLARATION

Title of Dissertation:
“MICRO SMALL AND MEDIUM ENTERPRISES IN INDIA: AN
ANALYTICAL AND POLICY PERSPECTIVE”

I, SRIJAN NAITHANI, Roll No. 19207305120, Enrollment No. G152073221, of

M.A. Economics – III Semester (2019 – 2021), hereby declare that,
- the present study is being submitted in lieu of Paper III (Course Code:
SOS/ECO(C)/303) and that it has not been published or submitted anywhere else.
- this study is my original effort and free from plagiarism. All references have been
duly acknowledged and cited.

Date: SRIJAN NAITHANI

M.A. Economics (III Sem)
Place: Roll No. 19207305120
Enrollment No. G152073221

ii
 CERTIFICATE

This is to certify that SRIJAN NAITHANI, student of M.A. Economics (III

semester), Roll No. 19207305120, Enrolment No. G152073221 has worked on
the topic “Micro Small and Medium Enterprises in India: An Analytical and
Policy Perspective” under my supervision.

This dissertation is being submitted in lieu of paper III of her M.A. Economics
(III Semester) degree.

The observations and suggestions incorporated are candidate’s own efforts.

DR. RACHNA DIXIT

Asst. Professor,
Dept. of Economics,
D.A.V (P.G.) College,
Date: Dehradun

iii
 ACKNOWLEDGEMENT

I would like to thank the Department of Economics, D.A.V. (P.G.) College,

Dehradun, headed by Dr. Devna Jindal and other faculty members for providing
me the opportunity to work on this project.

I owe a deep debt of gratitude towards Dr. Rachna Dixit, for her whole hearted
support and guidance to bring this project work up to the desired standard.

Without her guidance this project could never have been completed. Once again,
I express my gratitude towards her.

Date: SRIJAN NAITHANI

M.A. Economics (III Sem)
Place: Roll No. 19207305120
Enrollment No. G152073221

iv
 TABLE OF CONTENTS

Title ⅰ
Declaration ⅱ
Certificate ⅲ
Acknowledgement ⅳ
List of Tables and Figures ⅵ
Chapter 1
1. Introduction 8
2. Need and Objective of Study 13
3. Literature Review 14
Chapter 2
4. Evolution of MSMEs in India 16
5. Pre and Post Liberalisation Policies 20
Chapter 3
6. Statistical Analysis 22
Chapter 4
7. Econometric Analysis 37
Chapter 5
8. Challenges Faced by MSMEs 41
9. Policy Prescriptions 48
10. Conclusion 52
Appendix
Bibliography 54
Data Table 55

v
 LIST OF TABLES AND FIGURES
TABLES
Table 1 Pre-Liberalization Performance of ISSIs (1973-1990) 23
Table 2 Post-Liberalisation Performance of MSMEs (1990-2005) 26
Table 3 Post MSMED (Micro Small and Medium Enterprises and 29
Development Act, 2006) Performance of MSMEs (2006- 2014)
Table 4 Comparison of Annual Growth rates between Pre and Post 32
Liberalisation Era
Table 5 Comparison of Production (in Cr) Pre and Post Liberalisation 33
Table 6 Explanation of Variables and Data Sources 37
Table 7 Descriptive Statistics of data corresponding to 38
Regression Analysis
Table 8 Summary of the Regression Analysis 39
Table 9 Sector-wise projections of Employment in 2022 48

FIGURES
Figure 1.1 Percentage growth rate of MSMEs and the Industrial sector 9
Figure 1.2 Revised Definition of MSMEs 10
Figure 1.3 Percentage share of MSMEs in total GDP of India 11
Figure 2.1 Distribution of MSMEs in rural and urban areas 17
Figure 2.2 Percentage share of rural and urban MSMEs in India 17
Figure 2.3 Number of estimated MSMEs in Indian states 18
Figure 2.4 Percentage share of MSMEs exports in total exports 19
Figure 3.1 Annual Growth Rate of MSME Exports 24
Figure 3.2 Annual Growth Rate in MSME Employment 25
Figure 3.3 Annual Growth Rate of MSME Units 25
Figure 3.4 Annual Growth Rate of Sick MSME Units 26

vi
Figure 3.5 Annual Growth Rate of MSMEs Exports 27
Figure 3.6 Annual Growth Rate of MSMEs Employment 28
Figure 3.7 Annual Growth Rate of MSME Units 28
Figure 3.8 Annual Growth Rate of Sick MSME Units 29
Figure 3.9 Annual Growth Rate of MSMEs Exports 30
Figure 3.10 Annual Growth Rate of MSMEs Employment 30
Figure 3.11 Annual Growth Rate of MSME Units 31
Figure 3.12 Annual Growth Rate of Sick MSME Units 31
Figure 4.13 Production of MSMEs (in Cr) from 1973-2014 34
Figure 4.14 Annual Growth Rate of Pre-Liberalisation 34
Production of MSMEs
Figure 4.15 Annual Growth Rate of Post-Liberalisation 35
Production of MSMEs
Figure 5.1 Challenges Faced By MSMEs 41
Figure 5.2 Growth Rate of unregistered enterprises by sector 42
Figure 5.3 Position of Sick MSME Units (1973-2014) 44
Figure 5.4 Causes of Sickness of MSMEs 45
Figure 5.5 Research and Development Expenditure in MSMEs 46

vii
 Chapter 1
INTRODUCTION

1.1 Introduction

The contribution of individual MSMEs are small but collectively they have
emerged as a dominant player in the national economies. In the context of the
Indian Economy, the MSME sector has not only played a crucial role in
providing large employment opportunities than the large industries but has also
helped in industrialisation of rural and backward areas, thereby reducing regional
imbalances. MSMEs often complement the large industries in the form of
ancillary units and this sector contributes significantly in the socio-economic
development of the country. As per the Fourth All India Census of the Micro,
Small and Medium Enterprises, this sector has almost 36 million working units
that provide employment to about 80 million individuals. This sector through the
production of 6000 products contributes 8% to the GDP of the country. It
constitutes of 45% of the total manufacturing output and 40% of the total exports
of the country.

MSMEs are dominant players in some of India’s major export

sectors namely Textiles and Garment, Leather products, Sports goods, Gems and
jewellery, Handicrafts among others. They also contribute substantially in
industrial goods segments in sectors such as electrical, engineering, rubber and
plastics. The enterprises are expected to grow 20% year on year with 90% of the
industrial units belonging to the sector. This growth can be attributed to the fact
that the units need comparatively lower investment and some of them are backed
by local and foreign funding. The Micro and Small Medium Enterprises have
consistently posted impressive growth in the last decades. It has by and large
recorded higher growth rates in comparison with the industrial sector as a whole.
The following figure 1.1 depicts the fact that the MSME sector has consistently

8
registered higher growth rate compared to the overall growth rate of the industrial
sector.

Figure 1.1 Percentage growth rate of MSMEs and the Industrial sector

1.2 Definition of Micro, Small and 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 as below:

(i) a micro enterprise, where the investment in plant and machinery or

equipment does not exceed one crore rupees and turnover does not exceed
five crore rupees;
(ii) a small enterprise, where the investment in plant and machinery or
equipment does not exceed ten crore rupees and turnover does not exceed
fifty crore rupees; and
(iii) a medium enterprise, where the investment in plant and machinery or
equipment does not exceed fifty crore rupees and turnover does not exceed
two hundred and fifty crore rupees.

9
The new classification has come into effect from 1st July, 2020. The earlier
criterion of classification of MSMEs under MSMED Act, 2006 was based on
investment in plant and machinery / equipment. It was different for
manufacturing and services units. It was also very low in terms of financial
limits. Since then, the economy has undergone significant changes. a revision in
MSME criteria of classification was announced in the Aatmnirbhar Bharat
package on 13th May, 2020

Figure 1.2 Revised Definition of MSMEs

Source: Times of India

The Micro, Small & Medium Enterprises (MSMEs) have been contributing
significantly to the expansion of entrepreneurial endeavours through business
innovations. The MSMEs are widening their domain across sectors of the
economy, producing diverse range of products and services to meet demands of
domestic as well as global markets. As per the data available with Central
Statistics Office (CSO), M/o Statistics & Programme Implementation, the
contribution of MSME sector in Country’s Gross Value Added (GVA) and Gross

10
Domestic Product (GDP) at current prices from 2014-15 to 2018-19 is as below
in figure 1.3.

The contribution of Manufacturing MSMEs in the country’s total Manufacturing

GVO (Gross Value of Output) at current prices has also remained constant at
around 33% i.e. one-third during the period from 2014-15 to 2018-19

Figure 1.3 Percentage share of MSMEs in total GDP of India

1.3 Outline of the Study

In the backdrop of the above statistical evidences, the rest of the paper is
structured as follows:

Chapter 1- Section 1 includes a brief introduction and definitions of MSMEs.

Section 2 Lays out the Need and Objectives for the Study undertaken

Section 3 contains a brief review of the relevant literature on Micro and Small
Medium Enterprises in India.

Chapter 2- Section 4 deals with the evolution of MSMEs in India since the 1950s
and gives a brief insight into the performance of MSMEs in India.

Section 5 describes the policies during the pre and post Liberalisation periods.

11
Chapter 3- A Cumulative Annual Growth Rate Analysis is performed in Section
6 wherein the Pre and Post reform performance of MSMEs is examined and
critically evaluated.

Chapter 4- The paper attempts to highlight the role of FDI in enhancing the
growth potential of MSMEs through a regression analysis in Section 7.

Chapter 5- Section 8 attempts to mirror the Challenges faced by the Micro and
Small Medium Enterprises in India.

Section 9 proposes some policies in the backdrop of the challenges that the
MSMEs faces.

The concluding remarks and Policy prescriptions are presented in Section 10.

12
 NEED AND OBJECTIVES OF THE STUDY

Micro, Small and Medium Enterprises in India has been confronted with an
increasingly competitive environment due to transformations brought about in
Micro and Macro environments following a series of policy changes brought about
by Government (i) Policy of Liberalization, Privatization and Globalization
favouring foreign direct investment at the international level, (ii) Formation of the
World Trade Organizations (WTO) in 1995, mandating member- countries to scale
down restrictions on imports, and (iii) Gradual erosion of protection regime for
MSMEs in domestic market. Impact of all these developments forced MSMEs to to
‘compete’. “Globalization has led to unequal competition- a competition between
giant MNCs and dwarf Indian enterprises”, Chandraiah M. (2013). Some of the
objectives which is aimed to be accomplished through this paper can be listed as
follows.

• Ascertain the growth rate of number of MSMEs post liberalization.

• Whether increase in number of units have resulted into proportionate

increase in MSMEs contribution to GDP of the country.

• Whether increase in number of units have resulted into proportionate

increase in MSMEs contribution to Employment rate of the country.

• Whether increase in number of units have resulted into proportionate

increase in MSMEs contribution to Export of the country.

The main objective of the present study is to analyze the impact of globalization on
the growth of small scale industries.

13
 LITERATURE REVIEW

The comprehensive literature demonstrates that MSMEs are necessary for

sustained economic growth and development of any economy including India.
To justify the need of present study, following literature has been reviewed:
UNIDO (1969) in a study based on evidence from a number of developing
countries indicated that small enterprises with a lower level of investment per
worker tend to achieve a higher productivity of capital than do the larger, more
capital intensive enterprises.

1. Mali (1998) observed that small and medium enterprises (SMEs) and micro
enterprises have to face increasing competition in the present scenario of
globalization, they have to specifically improve themselves in the fields of
management, marketing, product diversification, infrastructural
development, technological up gradation. Moreover, new small and medium
enterprises may have to move from slow growth area to the high growth area
and they have to form strategic alliance with entrepreneurs of neighbouring
countries. Data bank on industries to guide the prospective entrepreneurs
including investors from abroad is also needed.
2. Bala Subarhmanya (2004) highlighted the impact of globalization and
domestic reforms on small-scale industries sector. The study stated that small
industry had suffered in terms of growth of units, employment, output and
exports. The Researcher highlighted that the policy changes had also thrown
open new opportunities and markets for the small-scale industries sector. He
suggested that the focus must be turned to technology development and
strengthening of financial infrastructure in order to make Indian small
industry internationally competitive and contribute to national income and
employment.

14
3. Bargal et al. (2009) examined the causal relationship among the three
variables GDP, SSI output and SSI exports and also have compared the
performance parameters of SSIs in the pre and post liberalization era. The
study found that the annual average growth rate of different parameters of
SSIs have declined in the period of nineties vis-à-vis the pre-reform years.
There is an absence of any lead-lag causal relationship between exports and
production in small-scale sector and GDP of Indian economy.
4. Dixit and Pandey (2011) applied cointegration analysis to examine the
causal relationship between SMEs output, exports, employment, number of
SMEs and their fixed investment and India’s GDP, total exports and
employment (public and private) for the period 1973-74 to 2006-07. Their
study revealed the positive causality between SMEs output and India’s GDP.
5. Singh et al. (2012) analysed the performance of Small-scale industry in India
and focused on policy changes which have opened new opportunities for this
sector. Their study concluded that SSI sector has made good progress in terms
of number of SSI units, production & employment levels. The study
recommended the emergence of technology development and strengthening
of financial infrastructure to boost SSI and to achieve growth target.
6. Venkatesh and Muthiah (2012) found that the role of small & medium
enterprises (SMEs) in the industrial sector is growing rapidly and they have
become a thrust area for future growth. They emphasized that nurturing SME
sector is essential for the economic well-being of the nation. The above
literature highlights the various aspects viz. performance, growth & problems
of MSMEs in Indian economy and induces for continuous research in this
field.

15
 Chapter 2

EVOLUTION OF MSME IN INDIA

The definition of MSMEs in India dates back to the year 1951 when the term
Small Scale Industry was defined under the Industries (Development and
Regulation) Act. The Factories Act defined the manufacturing units in terms of
workers employed and the Reserve Bank of India, at times made a distinction in
terms of quantum of advances granted to a unit. It was in August 9, 2005 that
ushered in a new policy for development of the MSME sector and more
importantly defined the MSME which later became a part of the MSME
Development Act, 2006.

In accordance with the provision of the Micro, Small and

Medium Enterprises Development Act (2006), MSMEs are classified into the
“Manufacturing” and the “Service Enterprises.” The former is defined in terms
of investment in Plant and Machinery and the latter in terms of investment in
equipment. The MSMED Act (2006) was a step forward to facilitate the
development of the enterprises and enhance their competitiveness. The act
provides a legal framework for “enterprise” which includes the manufacturing
and service entities. The Annual report of Micro, Small and Medium Enterprises
of India (2011) states that, MSMED Act 2006 was enacted to address issues
affecting Micro, Small and Medium Enterprises (MSMEs) and to cover the
investment ceiling of the sector. The salient features of the Act include, setting
up of a National Board for MSMEs, classification of enterprises, advisory
committees for promotion, development and enhancement of MSMEs and
schemes to foster the growth of the enterprises. It has been estimated that the
Micro sector with 630.52 lakh estimated enterprises accounts for more than 99%
of total estimated number of MSMEs. On the other hand, the small sector with

16
3.31 lakh and Medium sector with 0.05 lakh estimated MSMEs accounts for
0.52% and 0.01% of total estimated MSMEs, respectively.

Micro sector with 630.52 lakh estimated enterprises accounts

for more than 99% of total estimated number of MSMEs. Small sector with 3.31
lakh and Medium sector with 0.05 lakh estimated MSMEs accounted for 0.52%
and 0.01% of total estimated MSMEs, respectively. Out of 633.88 estimated
number of MSMEs, 324.88 lakh MSMEs (51.25%) are in rural area and 309 lakh
MSMEs (48.75%) are in the urban areas.

Figure 2.1 Distribution of MSMEs in rural and urban areas

Figure 2.2 Percentage share of rural and urban MSMEs in India

Percentage share of Rural and Urban MSMEs in India

(in Lakhs)

49% 51% Rural MSME

Urban MSME

Source: Annual Report, Ministry of Micro and Small Medium Enterprises (2017-18)

In the context of the Indian Economy, the state of Uttar

Pradesh has the largest number of estimated MSMEs with a share of 14.20% of

17
MSMEs in the country. West Bengal comes as close second with a share of 14%
again. The top 10 States together accounted for a share of 74.05% of the total
estimated number of MSMEs in the country. Figure 2.3 below shows the
distribution of estimated enterprises in the top ten States.

Figure 2.3 Number of estimated MSMEs in Indian states

Source: Annual Report, Ministry of Micro and Small Medium Enterprises (2017-18)

India’s foreign trade is deeply associated with MSMEs

exports. The capability of Indian MSME products to compete in international
markets is reflected in its share of about 40% in national exports. In case of items
like readymade garments, leather goods, gems and jewellery, engineering items,
the performance has been commendable both in terms of value and their share
within the MSME sector while in some cases like sports goods they account for
100% share to the total exports of the sector. Goods manufacturing in this sector
contributes substantially in country’s total exports. Since 1991, with the
introduction of reform measures, the government has gradually withdrawn many
protective policies for the MSMEs and introduced promotional policies to
increase the competitiveness of this sector. Figure 2.4 reflects the increasing
share of MSMEs exports in India’s total exports since 1991. A steep increase in

18
the share of MSMEs exports in the country’s total exports during the year 2011-
12 is pertains to the major diversification of exports that took place in the MSME
sector during that period.

Figure 2.4 Percentage share of MSMEs exports in total exports

Source: RBI handbook of statistics, Annual Report of Ministry of Small Medium Enterprises
2015-16

19
 PRE AND POST LIBERALISATION POLICIES

1. Pre Liberalisation Policies

Indian economic policy after independence was influenced by the colonial

experience (which was exploitative in nature) and by those leaders' exposure
to Fabian socialism.

• Policy tended towards protectionism, with a strong emphasis on import

substitution industrialization under state monitoring, state intervention at the
micro level in all businesses especially in labour and financial markets, a large
public sector, business regulation, and central planning.
• Five-Year Plans of India resembled central planning in the Soviet Union.
Under the Industrial Development Regulation Act of 1951, steel, mining,
machine tools, water, telecommunications, insurance, and electrical plants,
among other industries, were effectively nationalised.
• Elaborate licences, regulations and the accompanying red tape, commonly
referred to as Licence Raj, were required to set up business in India between
1947 and 1990.
• The Indian economy of this period is characterised as Dirigism.

2. Post Liberalisation Policies

The collapse of the Chandra Shekhar government in the midst of the crisis and
the assassination of Rajiv Gandhi led to the election of a new Congress government
led by P. V. Narasimha Rao. He selected Amar Nath Verma to be his Principal
Secretary and Manmohan Singh to be finance minister and gave them complete
support in doing whatever they thought was necessary to solve the crisis. [28] Verma
helped draft the New Industrial Policy alongside Chief Economic Advisor Rakesh
Mohan, and it laid out a plan to foster Indian industry in five points.

20
• Firstly, it abolished the License Raj by removing licensing restrictions for all
industries except for 18 that "related to security and strategic concerns, social
reasons, problems related to safety and overriding environmental issues.”
• To incentivize foreign investment, it laid out a plan to pre-approve all
investment up to 51% foreign equity participation, allowing foreign
companies to bring modern technology and industrial development.
• To further incentivize technological advancement, the old policy of
government approval for foreign technology agreements was scrapped. The
fourth point proposed to dismantle public monopolies by floating shares of
public sector companies and limiting public sector growth to essential
infrastructure, goods and services, mineral exploration, and defense
manufacturing.
• Finally the concept of an MRTP company, where companies whose assets
surpassed a certain value were placed under government supervision, was
scrapped.

21
 Chapter 3

STATISTICAL ANALYSIS

METHODOLOGY
The Cumulative Annual Growth Rate Analysis (CAGR) has been used to study and
compare the rate of change of each performance variables of MSMEs between the
periods under consideration. The various Performance indicators or variables taken
into consideration are Number of units, Export value, Employment and number of
sick units. The comparison has been made in a way that if number of units of
MSMEs is taken as a performance variable, then the CAGR for the Pre liberalization
period is computed first and then compared with the Post liberalization result. The
CAGR has been computed as follows: -
CAGR(Tn,T0) = [(VTn/VT0)1/Tn-T0] − 1
Where, V stands for value, Tn is the value of current Period and T0 is the value of
initial period. A higher CAGR for Number of units, Export value, Employment
reflects better Performance of the MSMEs. On the contrary, a higher CAGR of sick
units indicates poor performance of the MSMEs. The analysis has been computed
and interpreted in three time periods, namely the Pre reform period (1973-1990),
Post reform period (1991-2005) and the Post MSMED Act period (2006-2014).
While computing the CAGR, the data used has been collected from the various
Annual Survey Reports of the Ministry of MSME, Govt. of India. (Refer Appendix).

DATA SOURCES
In order to analyze the performance of small scale industries over a long period of
time and to see whether liberalisation has any significant role on this, we need a
database that is consistent and comparable over time. The SSI sector includes both

22
the organised and unorganised sector. Our first source of data is the Ministry of SSIs
now known as the Ministry of Micro, Small and Medium Enterprises (MMSMEs).
Data from this source is used for the analysis of SSI in the organised sector. So far,
by the ministry, there have been four censuses conducted. The first SSI census was
conducted in 1973-74 with reference year 1972-73 and the Second SSI census was
conducted during 1990-91 with reference year 1987-88. The data from these two
censuses are used for calculating the growth and performance of the SSI sector in
the pre-liberalisation period. The third SSI census was conducted during 2002-2003
with reference year 2001-02 and the fourth SSI census was conducted in 2008-2009
with reference year 2006-2007. Data from the third 52 and fourth SSI census were
used to calculate the growth and performance of the SSI sector in the post
liberalization period.
The second source of data is the data collected by the National
Sample Survey Organization (NSSO), which covers the unorganized SSI sector. The
unorganized SSI sector is an important component of the total SSI sector. This data
has been used to calculate the growth and performance of the SSI in the unorganized
sector. NSSO surveys are countrywide and are conducted periodically.
3.1 PRE LIBERALIZATION PERFORMANCE OF ÍSSI’S (1973-1990)
Table 1
PERFORMANCE No of Units Exports Employment Sick Units
INDICATORS (in millions) (Cr) (Lakhs) (in numbers)

CAGR 0.167200816 0.193544782 0.079885688 0.25599066

CAGR % 16.72 19.35 7.98 25.6

Source: MSME Annual Reports

Table 1 depicts the Pre liberalisation performance of SSI’s during the period 1973
to 1990. On analysing the various performance variables of MSMEs through the

23
lens of the Cumulative Annual Growth Rate Analysis (CAGR), the following
observations have been made.

• The CAGR value for the number of units and exports is around
17% and 19% respectively, thereby indicating a better position
of the sector.
• The rate of growth of Sick units during this period is high,
thereby raising concerns about the sector.
• Moreover, the growth rate of Employment is low and this can
be attributed to higher sickness leading to lower productivity
and lower investment in this sector.
Figures 3.1 to 3.4 below depict the Annual Growth rate of various performance
variables of the MSME in the pre reform era, the data for which has been collected
from the various Annual Survey Reports of the Ministry of MSME, Govt. of India.
(Refer Appendix)

Figure 3.1 Annual Growth Rate of MSME Exports

Annual Growth Rate of MSME Exports

70
60
50
AGR in Exports

40
30
20
10
0
-10
Year

Source: MSME Annual Reports Data

24
Figure 3.2 Annual Growth Rate in MSME Employment

Annual Growth Rate in MSME Employment

35
30
AGR in Employement

25
20
15
10
5
0

Year

Source: MSME Annual Reports

Figure 3.3 Annual Growth Rate of MSME Units

Annual Growth Rate of MSME Units

300

250
AGR of Units

200

150

100

50

Year

Source: MSME Annual Reports Data

25
Figure 3.4 Annual Growth Rate of Sick MSME Units

Annual Growth Rate of Sick MSME Units

250

200
AGR of Sick Units

150

100

50

-50
Year

Source: MSME Annual Reports Data

From the above graphs the steep rise in the Annual Growth Rate of MSMEs in terms
of employment and number of units can be attributed to the SSI production which
reached an all-time high of 1,89,200 crores in 1989-90 after which it dropped
dramatically.

3.2 POST LIBERALISATION PERFORMANCE OF MSMEs (1990-2005)

Table 2
PERFORMANCE No. of Units Export Employment Sick Units
INDICATORS (Million) s (cr) (Lakhs) (in numbers)

CAGR 0.037928325 0.17207086 0.039059709 -0.030906262

CAGR % 3.79 17.2 3.91 -3.1

Source: MSME Annual Reports

Table 2 depicts the CAGR of the performance variables of MSMEs during the post
liberalisation period. The post liberalisation period is further categorised into,
performance of MSMEs for period 1991-2005 and for period 2006-2014.

26
 • The CAGR for sick units has fallen considerably as compared
to the Pre liberalisation period, thus reflecting sound signals.
However, the growth rate of number of units indicates poor
performance for the Post liberalisation period in contrast to
the 17% growth rate of the variable in the Pre liberalisation
period.
• From above, it can be observed that the CAGR in case of
Exports is on the higher side indicating a better position of the
sector during this period and the growth rate of employment
still continues to lag behind.
The graphs below (Figure 3.5 to 3.8) depict the Annual rate of growth of MSMEs
in the post reform era. The MSMEs exports have been subject to major fluctuations
courtesy the cut throat competition that the MSMEs were subject to after the
ushering of economic reforms which adversely affected the many enterprises
operating with primitive and poor technology.

Figure 3.5 Annual Growth Rate of MSMEs Exports

Annual Growth Rate of MSMEs Exports

45
40
35
AGR of Exports

30
25
20
15
10
5
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year

Source: Annual MSME Reports Data

27
Figure 3.6 Annual Growth Rate of MSMEs Employment

Annual Growth Rate of MSMEs Employment

6

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Annual MSME Reports Data

Figure 3.6 shows that employment during this period remained almost unaltered post
1996, however MSME units and Sick units were subject to fluctuations owing to the
immediate after effects of the Economic reforms of 1991.

Figure 3.7 Annual Growth Rate of MSME Units

Annual Growth Rate of MSME Units

4.14
4.12
4.1
4.08
4.06
4.04
4.02
4
3.98
3.96
3.94
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Annual MSME Reports Data

28
Figure 3.8 Annual Growth Rate of Sick MSME Units

Annual Growth Rate of Sick MSME Units

50
40
30
AGR of Sick Units

20
10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-10
-20
-30
-40
Year

Source: Annual MSME Reports Data

4.3 POST MSMED (Micro and Small Medium Enterprises and Development
Act, 2006) PERFROMANCE OF MSMEs (2006- 2014)
Table 3
PERFORMANCE No of Units Exports Employment Sick Units
INDICATORS (Million) (cr) (Lakhs) (in numbers)

CAGR 0.039019224 0.186278898 0.042518947 0.156136617

CAGR % 3.9 18.63 4.25 15.61

Source: MSME Annual Reports

The above table depicts the Performance of the sector during the
period 2006-2014. The analysis reveals that the CAGR of exports is
approaching 20% which asserts the export potential of this sector.
The growth rate of number of units and employment has marginally
gone up and the major source of concern has been the increasing
number of sick units in the MSMEs. The following graphs (Figure

29
 3.9 to 3.12) depict the Annual Growth Rate of the performance
variables of MSME, post the implementation of the MSMED Act.

Figure 3.9 Annual Growth Rate of MSMEs Exports

Annual Growth Rate of MSMEs Exports

90
80
AGR of MSME Exports

70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: Annual MSME Reports Data

Figure 3.10 Annual Growth Rate of MSMEs Employment

Annual Growth Rate of MSMEs Employment

200
180
160
AGR of Employment

140
120
100
80
60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: Annual MSME Reports Data

30
Figure 3.11 Annual Growth Rate of MSME Units

Annual Growth Rate of MSME Units

250

200
AGR in MSME Units

150

100

50

0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: Annual MSME Reports Data

Figure 3.12 Annual Growth Rate of Sick MSME Units

Annual Growth Rate of Sick MSME Units

200

150
AGR in Sick Units

100

50

0
2005 2006 2007 2008 2009 2010 2011 2012 2013

-50
Year

Source: Annual MSME Reports Data

A major diversification of Export products is reflected in the year

2008-09 (Fig 3.9) where exports of gems and jewellery increased to
15.08% of the total exports. Moreover, a steep fall in the growth rate
of MSMEs units (Fig 3.9) in the year 2007- 08 is attributable to the

31
 redefinition of MSMEs by virtue of the MSMED Act of 2006. The
rate of growth of sick units has witnessed a rise in the recent years
because of a revision of the definition of sickness with effect from
1st November, 2012. The following comparative analysis of the
Performance variables of MSMEs tries to examine the overall
growth of MSMEs visa-vis the various Performance indicators taken
into consideration during 1973 to 2014

4.4 COMPARISON OF ANNUAL GROWTH RATES BETWEEN

PRE AND POST LIBERALISATION ERA
Table 4
TIME PERIOD PRE POST POST
LIBERALISATION LIBERALISATION LIBERALISATION
(1973-1990) (1991-2005) (2006-2014)

MSME units 16.72 3.79 3.9

Exports 19.35 17.2 18.63
Employment 7.38 3.91 4.25

Sick Units 25.6 -3.1 15.61

Source: MSME Annual Reports

• The Compound annual growth rate for MSME units for the Pre-Liberalisation
period was 16.7% which declined to 3.79% in the Post reform period.

• The data on employment of the MSME units reveals an increasing trend during the
overall period (1973-2014) but a significant CAGR of 7.4% is noticeable in the Pre-
Liberalisation period as against a CAGR of 4% in the Post reforms era.

• A significant CAGR of 19% for exports value of MSMEs was observed in the
Pre-Liberalisation period which quite strangely declined in the Post reforms era.
However, it has shown signs of acceleration in the recent years with a CAGR of 18.6
%.

32
• Increasing rate of growth of Sick units posed an immense challenge for the SSI’s
in the Pre-liberalisation era, as evident with a high growth rate of 25.6% which
declined quite significantly in the Post reform period with a negative growth rate of
3.1%.

4.5 COMPARISON OF PRODUCTION ( in Cr ) PRE AND POST

LIBERALISATION
Table 5
PRE-LIBERALISATION POST-LIBERALISATION
Year Production(in Cr) Year Production(in Cr)
1974 7200 1991 78802
1975 9200 1992 80615
1976 11000 1993 84413
1977 12400 1994 98796
1978 14300 1995 122154
1979 15800 1996 147712
1980 21600 1997 167805
1981 28100 1998 187217
1982 32600 1999 210454
1983 35000 2000 233760
1984 41600 2001 261297
1985 50500 2002 282270
1986 61200 2003 314850
1987 72300 2004 364547
1988 87300 2005 429796
1989 106400 2006 497842
1990 132300 2007 709398
2008 790759
2009 880805
2010 982919
2011 1095042
2012 1397738
2013 1556789
2014 1832046

CAGR 19.45 14.65

Source: Annual Reports MSME

33
Production has been declining from 19.45% CAGR to 14.65%. Though the no. of
units and Production has increased but the growth in production has declined.

The Figure 4.13 below shows the rise in production and CAGR for each year from
1973-2014.

Figure 4.13 Production of MSMEs (in Cr) from 1973-2014

MSME Total Production (in Cr)

1800000
1600000
1400000
1200000
Production

1000000
800000
600000
400000
200000
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year

Source: Annual MSME Reports

Figure 4.14 Annual Growth Rate of Pre-Liberalisation Production of MSMEs

Pre-Liberalisation CAGR in Production

40
35
CAGR in Production

30
25
20
15
10
5
0
1975197619771978197919801981198219831984198519861987198819891990
Year

Source: Annual MSME Reports

34
Figure 4.15 Annual Growth Rate of Post-Liberalisation Production of
MSMEs

Post-Liberalisation CAGR in Production

45
40
CAGR in Production

35
30
25
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Year

Source: Annual MSME Reports

Figure 4.14 and 4.15 highlight the comparison of production done by MSME sector
during Pre Liberalisation(1973-1990) and Post Liberalisation(1991-2014) Era.

4.5 FINDINGS AND RELATED DISCUSSIONS

It’s quite interesting to notice that the overall performance of this sector was better
in majority of the indicators during the Pre liberalisation Period. However, the
sickness rates have fallen considerably since the pre liberalisation era but recent
developments suggest an increasing trend of the growth of sick units. The
deceleration of the sector can be attributed to the impacts of economic reforms of
1991 on the sector. After the reforms were initiated in 1991, the reservation policy
gradually stopped and de-reservation policies were implemented. The subsequent
years were marked by considerable deregulation of industrial economy through
delicensing and dereservations, “opening up‟ the industrial sector to both internal
and external competition, lowering of tariffs, removal of quantitative restrictions etc.
These reforms as evident from the analysis above had an adverse effect on the small
scale sector in the form of cheap and better quality imported goods which posed a

35
serious threat to small scale units operating in various industries like chemicals, silk,
sports goods etc. This could have probably led to various MSMEs exiting the
market, thereby affecting MSME employment and Units in the Post reform era. The
exports of MSMEs reveals fluctuating trends during the post liberalization period.
Besides facing competition from large domestic firms and MNCs, the sector has
been subjected to operations with poor and primitive technology. This could have
been one plausible reason regarding the poor export performance of the sector in the
post reform period.

The policies post reforms namely the Credit Guarantee

Scheme, the Micro Finance Programme, the performance and credit rating schemes
etc. have primarily focused on providing increased financial assistance which is
undoubtedly a pre requisite for the growth of the enterprises, however given the
infrastructural and technological bottlenecks, there should be an effective balance
of policies catering to the financial as well as the non-financial aspect of the sector
i.e. training, technological development, skill development, market assistance etc.
One of the most significant contribution of the reforms to the sector has been
reflected in the considerable reduction in the sick units in the post reforms era. This
may be due to improvements in infrastructure, Research and development and
technology. However, the sharp fall in the sick units has been offset by the
increasing growth rate of Sick units (Graph above 2006-2014) in the decades of
2000s and this continues to remain a major source of concern in the performance of
the sector. In Section 5, the paper attempts to throw light on the sickness aspect of
MSMEs.

36
 Chapter 4
ECONOMETRIC ANALYSIS
(DEPENDENCE OF THE OVERALL PRODUCTION OF MSMEs ON FDI)

With the promulgation of the MSMED Act, 2006, the restrictive 24% ceiling
prescribed for equity holding by industrial undertakings, whether domestic or
foreign, in the MSEs has been done away with and MSEs are defined solely on the
basis of investment in plant and machinery (manufacturing enterprises) and
equipment (service enterprises). The following analysis shows how FDI is related
to the productivity of MSMEs.

6.1 DATA DESCRIPTION

A formal definition of the variables used in the empirical study is provided below in
Table 6.

Table 6

VARIABLES Proxy Variables Data Source Description

Output of MSMEs Production of Indiastat.in Production of MSME

(Y) MSMEs (Y) (in Cr.) has been taken
as a dependent
variable in the
regression analysis.
Foreign Direct Foreign Direct data.worldbank.org Data on FDI is taken
Investment (FDI) Investment (F) from World Bank
(Current US$). FDI is
taken as the
independent variable

37
 in the regression
analysis.

A regression analysis has been performed showing the relationship between FDI and
the overall production of MSMEs.

6.2 DESCRIPTIVE STATISTICS

A summary of the descriptive statistics corresponding to the regression analysis is

given in Table 7. The original data has been provided in the Appendix.

Table 7

VARIABLES Production of Foreign Direct

MSMEs Investment (FDI)
(Y)

Years 1974-2014 1974-2014

Mean 381283.375 8032201685

Median 140006 1558449790

Range 1821046 43442337076

Standard 494851.2617 12700784156

Deviation

No. of Observations 40 40

6.3 METHODOLOGY

38
The regression analyses the dependence of production of MSMEs on FDI in India.
We consider a Classical Linear Regression Model (CLRM) given as:

Y = β1 + β2F + U

where U denotes the random disturbance term Y is the Production of MSMEs. F is

the Foreign Direct Investment. U follows a normal distribution with mean zero and
variance 𝜎2 . The parameters β1 𝑎𝑛𝑑 β2 are estimated by the method of ordinary least
squares (OLS).

6.4 RESULTS AND DISCUSSIONS

This section gives an account of the results of the above regression analysis. The
regression equation obtained is given as

Y= 98787.28741 + 3.51704E-05* F

The regression is performed at 95% confidence level and table 7 shows the results
of the analysis. The value of R square = 81.4% which shows that it is a good fit.

Table 8

Regression Statistics
Multiple R 0.85684788
R Square 0.73418828
Adjusted R Square 0.72719324
Standard Error 1.4619246
Observations 40
Standard
Coefficients Error t Stat P-value
Intercept 0.28876265 32421.7452 3.21740373 0.002735828
FDI 0.12645423 0.0181235 6.97736254 2.63901E-08
_____________________________________________________________
t critical at 5% LOS : 2.024394164

39
From the results obtained it can be inferred that production of MSMEs is positively
related to Foreign Direct Investment in India. The coefficient of FDI is quite
significant in explaining the behaviour of production, given the p value or the t stat.
The above empirical result is interpreted as FDI complements and supplements
domestic investment. The small and medium enterprises (SMEs) would be benefited
through FDI, by way of enhanced access to supplementary capital and advanced
technologies, enhancing its financial capabilities, exposure to global managerial
practices as well as opportunities for integration into global markets. This shall entail
a process of higher production, thereby propelling the growth and development of
MSMEs in India. This empirical analysis asserts the significance of FDI in the
MSME sector.

40
 Chapter 5

CHALLENGES FACED BY MSMEs

The MSME sector faces a lot of challenges irrespective of clocking impressive

growth in the recent years. Literature suggests that the lack of support from
Government departments, banks, financial institutions and corporate have been
major issues of concern. Limited capital availability, lack of knowledge,
infrastructure and technology also pose a threat to the development of the sector.
The sector needs high end research and more penetration in the rural areas.

It is very important to empower the SME sector to utilize the

limited resources (human & economic) they have in an optimum manner. SMEs are
now exposed to greater opportunities than ever for expansion and diversification
across the sectors. Indian market is growing rapidly and Indian entrepreneurs are
making remarkable progress in various Industries like Manufacturing, Precision
Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail,
IT and ITES, Agro and Service sector.

Figure 5.1 Challenges Faced By MSMEs

41
 Source: Times of India

Internal factors include all management related factors like production, marketing,
human resource development, financial and infrastructure related factors etc. In
considering both internal and external factors, SMEs can manage and control
internal factors but external factors can be dealt with by government’s involvement
through implementing some specific schemes and programs for respective sector
wise and also by category of industry wise.

Internal challenges are production, marketing, financial, human

resource development and infrastructure etc. Production challenges include lack of
power, lack of resources, lack of scarcity, lack of high cost raw materials, poor
quality of raw materials, lack of machinery etc. Marketing challenges include lack
of promotional strategies, lack of market channels, lack of networking, lack of
organized distribution channels, lack of delivery time etc. Financial challenges
include lack of credit from banks, lack of awareness on schemes and services,
delayed process in bank, lack of working capital etc. Internal Challenges also
includes the Human Development Challenges which includes the lack of training,

42
lack of motivation among employees, lack of skilled employees, lack of technical
and managerial training, improper way of recruiting etc.
Growth Rate of unregistered enterprises by sector
Besides the above challenges the MSMEs face there are few
(2014-2015)
constraints35the MSMEs predominately faces namely the Unregistered units and the
Sick units. Most of the unregistered MSMEs would predominantly comprise micro
30
enterprises, particularly confined to rural India, operating with obsolete technology,
limited access
25 to institutional finance etc. And there is a need to transform the huge
unregistered MSME into registered MSME, for them to reap the benefits of
20
registering under the MSMED Act, 2006.

15
Manufacturing Services
g

Figure 5.2 Growth Rate of unregistered enterprises by sector

Source: Annual MSME Report 2015

As stated by the RBI, a Micro and Small Enterprise is considered as sick if :-

a) Any of the borrowal account of the enterprise remains NPA for three
months or more.

43
 b) There is an erosion in the net worth due to accumulated losses to the extent
of 50% of its net worth during the previous accounting year.

In general, industrial units which are non-competitive, uneconomical and inefficient

become sick and die out and new and more efficient units gradually come up to take
their place.

Consequently, most of the Indian MSMEs nowadays fall under

the category of a sick unit. The number of sick micro, small and medium enterprises
(MSMEs) in March 2013 was 248,890. This number increased from 88,635 in
March 2012 on account of the revision of the definition of ‘sickness’ made by the
RBI as mentioned above. Figure 5.2 below reflects the position of sick units from
1995 to 2016.

Figure 5.3 Position of Sick MSME Units (1973-2014)

Position of Sick MSME Units (in Lakhs)

5

4.5

3.5
No. of Sick Units (in Lakhs)

3
Sick Units
2.5

1.5

0.5

Year

Source: Handbook of Statistics,2015 RBI: Table 37

44
In this context, the Fourth All India Census of MSMEs reported eight major reasons
for their sickness namely:

1. Lack of demand,
2. shortage of working capital,
3. non availability of raw materials,
4. power shortages, marketing problems,
5. equipment problems and management problems.
6. Labour Problems
7. Marketing Problems
8. Management Problems

The reasons were enlisted on the basis of the responses of various MSMEs units
who suffered from sickness across the country.

Figure 5.4 Causes of Sickness of MSMEs

Source: Fourth All India Census of MSMEs

45
 A small scale unit is considered sick when it has accumulated
losses equal to or exceed 50% of its peak net worth in the immediately preceding
five accounting years. The signs of sickness are discernable quite early in the form
of decline in capacity utilization, shortage of liquidity, irregularity in maintaining
bank accounts, delay in meeting statutory dues, etc. The persistence of these signals
takes the form of symptoms like continuous shortage of liquid, funds worsening
financial position, continuous tumble in share prices, frequent request to financial
institutions for loans, etc. The various causes of industrial sickness are classified
into external and internal causes. While small scale units fall prey to external factors
like lack of infrastructure, lack of finance, problems of marketing, etc., large and
medium scale units fall sick mainly due to internal factors like mismanagement.
Whatever may be the causes of sickness, the main consequences of sickness on an
economy have been locking up the country’s financial resources, wastage of scarce
capital assets, loss of production and increase in unemployment. Industrial sickness
is, thus, the bane of an economy. Hence, it needs to be detected and cured. With the
bulk of the modern small scale industry in India is a post independence phenomenon
the problems it faces are also peculiar to the rapidly changing economic scenario of
the planning years. Most of the MSMEs established in India are confronted with the
delay in supply of raw material, delay by bankers in sanctioning working capital and
poor selection of entrepreneurs

As evident from the pie chart above, Lack of demand is a

significant contributor to the sickness of MSMEs. This pertains to the lack of
demand of the finished products in the market, due to lack of an innovative approach
in production, overestimation of demand and change in product mix and other
elements of marketing mix to suit the changing environment. Keeping the reasons
aside, it’s inevitable that the sickness of MSMEs directly affects the workforce. In
addition, it impacts the small investor who has put in their hard earned money in
setting up the industrial unit. Such a situation calls for urgent remedial measures

46
which would not only aim at restoring viable sick units back to health, but would
also support industries on the verge of sickness. Added to this, policymakers need
to consider the full range of issues confronting MSMEs, including MSME financing,
entrepreneurship and skills development, innovation and technology, market access,
and the overall appropriate public policy framework for MSME development.

The literature indicates that MSMEs have a significant

potential that favours innovation. As against big players, the MSMEs can distinguish
themselves with less bureaucracy in R & D system. Innovations are not meant for
only large firms which happen through rational and analytical approach. In the
existing competitive market, MSME should take an initiative to adhere to all unmet
needs and convert them as opportunities for its growth against the large firms. The
following graph 5.5 depicts the R&D expenditure in products manufactured by
MSMEs which comprises of a major chunk of India’s exports.

Figure 5.5 Research and Development Expenditure in MSMEs

Source: MSME Annual Reports

As evident from the graph, this insufficient R&D expenditure is

a major constraint to the infrastructural development of MSMEs. In this regard, the
47
presence of Foreign Direct Investment(FDI) can improve infrastructure along with
quality of labour force, R&D activities of domestic firms and improve production
technology which would have long term positive effects. This relationship between
FDI and overall growth of MSMEs has been further justified with an empirical
analysis in the next section.

POLICY PRESCRIPTIONS

The approach to Economic Development since Independence has been historically

driven by the premise that the launching of large investment projects would
inevitably result in the growth of the small industrial establishments which shall
service the growth of the “mother” industry. It was only during 1950-70 period that
the growth of small industry sector occurred and various policy measures were
initiated. The industries (Development and Regulation) Act of 1951 laid down
regulations with regard to the definition of the Small Scale industries i.e. a small
scale unit should be an entrepreneur directed concern and not a subsidiary to another
industrial undertaking. Since then, the broad policy thrust has remained the same: to
expand the capability of small and micro enterprises to generate employment,
promote exports and further the process of rural industrialisation. It’s to be noted
that the lack of timely availability of bank credit possess an immense challenge in

48
the growth process of MSMEs in India, however the paper addresses issues apart
from the financial aspect of MSMEs in India. In the above backdrop, few policy
options are proposed to further strengthen the Indian MSMEs.

Table 9: Sector-wise projections of Employment in 2022

Incremental
Employment Projected
S.No Sector Human
Base in 2013 Employment
Resource
(million) by 2022
Requirement
(million)
(2013-22)

1 Auto and Auto Components 10.98 14.88 3.9

2 Beauty and Wellness 4.21 14.27 10.06
3 Food Processing 6.98 11.38 4.4
4 Media and Entertainment 0.4 1.3 0.9
5 Handlooms and Handicrafts 11.65 17.79 6.14
6 Leather and Leather Goods 3.09 6.81 3.72
7 Domestic Help 6 10.88 4.88
8 Gems and Jewellery 4.64 8.23 3.59
9 Telecommunication 2.08 4.16 2.08
10 Tourism, Hospitality & Travel 6.96 13.44 6.48
11 Furniture and Furnishing 4.11 11.29 7.18
12 Building, Construction and Real 45.42 76.55 31.13
Estate
13 IT and ITES 2.96 5.12 2.16
Construction Material and Building
14 Hardware 8.3 11 2.7
15 Textile and Clothing 15.23 21.54 6.31
16 Healthcare 3.59 7.39 3.8
17 Security 7 11.83 4.83
18 Agriculture 240.4 215.6 (24.8)
19 Education/ skill development 13.02 17.31 4.29

49
20 Transportation and Logistics 16.74 28.4 11.66
21 Electronic and IT Hardware 4.33 8.94 4.61
22 Pharma and Life Sciences 1.86 3.58 1.72
23 BFSI 2.55 4.25 1.7
24 Retail 38.6 55.95 17.35
Grand Total 461.1 581.89 120.79
Source: National Policy for Skill Development and Entrepreneurship, 2015

According to the National Policy for Skill Development and

Entrepreneurship, 2015, it is estimated that by 2022 the number of skilled people
required for MSME sector will be around 150 million that is one fourth of the total
working population. So it’s the responsibility of the government to ensure
implementation of various skill development schemes. Moreover, investments need
to be made on a large scale into the domain of skill development. In this regard,
greater participation between the public and private sectors is the framework for
future which involves long term commitment of resources as well as sharing of risks.

Secondly, the concept of “Cluster Development” offers new

insights into the potential role of MSMEs in enhancing their access to new
technology and together moving forward by creating an environment for mutual
learning. Clusters can be best defined as an agglomeration of small scale industries
with concentration of similar related products or that are faced with common
opportunities and threat. The success of the UNIDO Cluster development initiative
in the knitwear cluster of Ludhiana helped MSMEs overcome major challenges and
to meet competition through superior quality and technology upgradation.
Moreover, the process of liberalization and market reforms since 1991 has brought
about intense competition for MSMEs in both domestic and overseas markets. This
has made it imperative for Indian MSMEs to overcome the challenges that they face
and maintain, improve and sustain their competitiveness through lower costs,
improved quality, making available wider choice by initiating various measures,

50
including innovation and the upgradation of technology. In this regard, FDI can act
as a catalyst in transferring techniques for inventory and quality control and can
contribute to the overall efficiency of MSMEs. FDI and investments from the private
sector can be possible in the sector in the marketing segment, which is currently
weak. Moreover, this shall also entail a process of sharing of knowledge, experience
and technical expertise, thereby enhancing the growth potential of MSMEs. Policies
like Marketing Assistance and technological upgradation scheme, Micro and Small
Enterprises Cluster Development Programme, MSME Market development
assistance programme etc. were significant steps in this direction, however they
haven’t achieved their desired objectives.

Indian MSMEs continue to face the problem of infrastructure

bottlenecks in terms of a lack of adequate transportation facilities like railways,
waterways, roadways and airways, low or no access to a reliable power supply, lack
of proper communication channels, inadequate marketing facilities, lack of funds,
etc. Hence the key demand of the Indian MSME sector is the availability of adequate
infrastructure at reasonable rates. Policy makers need to create an enabling
environment by providing adequate infrastructure to attract investments in India,
most importantly in the MSME sector. The state governments, along with the
industry associations, should involve the private sector in the development of
infrastructure in existing industrial estates and clusters and permit the provision of
infrastructural services.

To face the competition in the long run and to be economically

viable, the MSME sector needs to improve its productivity and quality, reduce costs
(given the higher qualities) and innovate. Government policy should promote
MSMEs by helping them to increase their efficiency and competitiveness within a
market driven economy. For this it is essential that these enterprises no longer
follows a protectionary stance, as that has already been shown to be harmful to the
sector. In order to prevent the major sickness in MSME sector, new approaches like

51
the cluster approach or harnessing the power of industry associations should be
encouraged. Undoubtedly the MSME sector has enormous potential, and is a crucial
aspect of the Indian economy. However it is essential on the part of the government
to take careful decisions and honest policy implementation to overcome the
problems of MSME sector. A technologically vibrant, internationally competitive
small and medium industry should be encouraged to emerge, to make a sustainable
contribution to national income, employment and exports. It is imperative to take
care of MSME sector to enable it to take care of the Indian economy.

CONCLUSION

In a nutshell we can say that Micro, Small and Medium Enterprises (MSMEs) have
emerged as an engine of growth in Indian economy. They have emerged as a vibrant
and dynamic component of the economy by virtue of their significant contribution
to GDP, industrial production and exports. However, the most important
contribution of this sector is towards employment generation which is second only
to agriculture in India. The experiences of recent years show that employment in
agriculture sector has been declining as well as large industries are also experiencing
jobless growth. In such a situation, the main responsibility for job creation rests with
unorganized sector. Undoubtedly, the MSME sector has the huge potential to
contribute in the course of time to making India a 20 trillion-dollar economy. But in
order to unleash the growth potential of this sector, there are some stark issues and
challenges which need to be resolved first. Despite various incentives and facilities
being provided to Indian MSMEs, they are losing their economic strength and

52
emanating signals of large-scale sickness. Thus, more efforts are needed for reviving
and promoting the Indian MSME sector. The efficiency and competitiveness of this
sector can be improved through continuous technology innovation; quality
improvement; easy access to finance, better infrastructural facilities, and upgrading
skills.

In case of unorganised manufacturing enterprises, we observe

that the average annual growth rate of the number of enterprises was better at almost
3 percent during 1994-95 to 2000-01. But during 2000-01 to 2010-11, the growth
rate was negligible – close to zero percent. A number of major states have
experienced negative growth. The growth rate of the number of workers was positive
and relatively significant at almost 2 percent annually during 1994-95 to 2000-01
but thereafter there was a decline in the number of workers employed. The average
number of workers employed per enterprise has remained at about 2 throughout the
period under consideration. Thus, the opening up of the Indian economy in the form
of liberalisation has had a mixed impact on the growth of unorganised or the
informal sector. While small trading units have grown in number and has contributed
to the growth of employment generation, unorganised manufacturing units have
registered negative growth in the later years of economic reforms. Accordingly, their
employment generation capacity has shrunk. Perhaps, the domestic small producers
who run their businesses informally cannot compete with the large scale sector or
units importing products.

Thus, the paper tries to posit that addressing only the financing
constraints in isolation is not enough. In light of the CAGR analysis which suggests
the lacklustre performance of MSMEs in the post reform period, It’s important that
in addressing the constraints that MSMEs face, there should be a more focused and
sustained intervention to prepare the MSMEs for the challenges ahead and to take
full advantages of the liberalised trade environment. The econometric analysis also
highlights the role of FDI in ensuring higher productivity. Hence, it is not the choice

53
between regulatory and promotional policies but the balance between the two and
their overall effectiveness that shall determine the future of the MSME sector in
India.

Thus the most important finding of our study is that:

though the small scale sector has grown in absolute number of units, the units have
become smaller in terms of average employment, average production, average fixed
investment and capital per unit. Labour productivity and Capital productivity have
declined in the post liberalisation period. Further, most of the units are
unregistered, i.e., they belong to the category of unorganised enterprises. Since
various problems that the SSIs suffer stem from this very reason, it appears that the
SSI sector will continue to have the problems and sickness that have been well
documented in the literature. It implies that this sector will continue to need
government support.

APPENDIX

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3. Goyal K.A et al. An Overview of Sickness in Micro, Small & Medium

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5. Kumar, Pankaj. 2014. An Empirical Study on Performance of Indian MSME.

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6. Venkatesh, Sudha et al. 2012. SMEs in India: Importance and Contribution. Asian
Journal Of Management Research. Vol.2, Issue 2.

7. Singh Sumanjeet, Paliwal Minakshi. 2017. Unleashing The Growth Potential Of

Indian MSME Sector. Comparative Economic Research, Vol.20: 36-52

8. Micro, Small and Medium Enterprises in India. 2017. Taxmann Publications,

Indian Institute of Banking and Finance, Mumbai.

9. Handbook of Statistics, Reserve Bank of India.

10. Annual Survey Reports, Ministry of Micro and Small Medium Enterprises,
Govt. of India

DATA TABLE USED FOR ANALYSIS

YEAR Export(MSME) Employment MSME Sick units Production FDI
in Cr of MSME Units (MSME) of MSME (CURRENT
(lakh) (in million) USD)
1973 400 39.7 0.42 0.04 NA
1974 500 40.4 0.5 0.08 NA
1975 500 45.9 0.55 0.09 11000 -10326246.7
1976 800 49.8 0.59 0.1 12400 -7706430.54
1977 800 54 0.67 0.14 14300 -36060000
1978 1100 63.8 0.73 0.16 15800 18090000
1979 1200 67 0.81 0.21 21600 48570000
1980 1600 71 0.87 0.25 28100 79160000
1981 2100 75 0.96 0.3 32600 91920000
1982 2000 79 1.06 0.32 41600 72080000
1983 2200 84.2 1.16 0.4 50500 5640000
1984 2500 90 1.24 0.47 61200 19240000

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1985 2800 96 1.35 0.5 72300 106090000
1986 3600 101.4 1.46 0.54 87300 117730000
1987 4400 107.1 1.58 1.58 106400 212320000
1988 5500 113.1 1.71 2.21 112812 91250000
1989 7600 119.6 1.82 2.32 132300 252100000
1990 9664 158.34 6.79 2.42 78802 236690000
1991 13883 165.99 7.06 2.21 80615 73537638.39
1992 17784 174.84 7.35 2.46 84413 276512439
1993 25307 182.64 7.65 2.38 98796 550370024.9
1994 29068 191.4 7.96 2.56 122154 973271468.7
1995 36470 197.93 8.28 2.69 147712 2143628110
1996 39248 205.86 8.62 2.62 167805 2426057022
1997 44442 213.16 8.97 2.35 187217 3577330042
1998 48979 220.55 9.34 2.21 210454 2634651658
1999 54200 229.1 9.72 3.06 233760 2168591054
2000 69797 238.73 10.11 3.04 261297 3584217307
2001 71244 249.33 10.52 2.49 282270 5128093562
2002 86013 260.21 10.95 1.77 314850 5208967106
2003 97644 271.42 11.4 1.67 364547 3681984671
2004 124417 282.57 11.86 1.43 429796 5429250990
2005 150242 294.91 12.34 1.38 497842 7269407226
2006 182538 805.23 36.18 1.26 709398 20029119267
2007 202017 842 37.14 1.14 790759 25227740887
2008 214387 880.84 39.37 0.85 880805 43406277076
2009 391159 921.79 41.08 1.04 982919 35581372930
2010 507739 965.15 42.87 0.78 1095042 27396885034
2011 630105 1011.8 44.76 0.9 1397738 36498654598
2012 698166 1061.5 46.75 0.85 1556789 23995685014
2
2013 806878 1114.2 48.86 2.2 1643297 28153031270
9
2014 849248 1171.3 51.06 4.65 1832046 34576643694
2

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