CHAPTER MICRO, SMALL ANpD 6 MEDIUM ENTERPRISK, - AN OVERVIEW Evolution of Concept of Small-scale Industry Concept of Micro, Small and Medium Enterprises + Importance Small-scale Industry | * Policy Support to Small-scale Industry | * Problems of Small-scale Industry | Micro Small and Medium Enterprises (MSMEs) have been globally considered as an engine} economic growth and as key instruments for promoting equitable development. They employ of 50% of the world’s workforce. The MSMEs constitute over 90% of total enterprises in most off economies and are credited with generating the highest rates of employment growth and account fa major share of industrial production and exports. ; MSMEs have played a crucial role in the development of manufacturing and export sector China, Sri Lanka, Thailand, Indonesia, Vietnam and Egypt.\In India, micro and small enterprises agriculture, industry and service sector have a key role in equitable distribution of national inco value addition, employment generation, export earnings, regional dispersal of industries, producti utilisation of entrepreneurial skill and capital. The Micro and Small Enterprises sector includes diverse type of units ranging from tradi crafts to modem high-tech industries and ancillaries that supply components to most modem laf scale industries. According to MSME Annual Report 2011-12, the size of the MSME sector is estimated to beot 3 crore units employing more than 7 crore people. MSMEs contribute about 45% towards industri contribution to GDP stands at 17%, MSME shows that there are 4.48 ¢ group output at & 18,34,332 crore, i ial output and 40% towards exports. TH The fourth MSME census published in 2011-12 by the ministry! Tore units in MSME sector employing 10.12 crore persons wit!small and Medium Enterprises ~ An Overview Mier, 69 Joy 60 million peopl : isMEs emp I ple and create 1.3 million j . M ording o 2013 estimates and growing million jobs every year. This sector is worth $ 5 pilion 26 at 8% year, More than 8000 Products are produced by MSMES- Evolution of the Concept of Small-scale Industry the For instance, in USA, small business is one whic Genmany its less than 300 workers. In Japan, in a s ceed 100 million yen With 300 employees. In South fhe limit on employment is 200 people. ‘h has employment of less than $00 people. In ‘mall-scale industry, the investment should not Korea, the investment limit is 2 lakh dollars and In India, the definition of small-scale industry has undergone periodic changes. The first definition was adopted by the Small-scale Industries Board in 1955. The Board defined a small-scale industrial unit as follows: “A.unit employing less than 50 persons, if using power, and less than 100 persons without the use of power, and with a capital asset not exceeding & 5 lakhs.” The employment criterion was dropped in the year 1960 and a small-scale industrial unit was defined in terms of investment in fixed asset only. The Ministry of Commerce and Industries defined a small-scale industry as “a unit with a capital investment of not more than & 5 lakhs irrespective of the number of persons employed.” The ancillary industries engaged in the production of ancillary items and components needed by large industries required costly equipment and machinery, the ceiling on investment was fixed at 10 lakhs. The definition of small-scale industry was modified again in the year 1966, The Ministry of Industry defined a small-scale industry as follows: “An undertaking having capital investment in plant and machinery of not more than & 10 lakhs and % 15 lakhs in case of ancillary unit In view of the rise in the prices of capital investment and replacement, there was a need to revise the ceiling on capital investments. The Small-scale Industries Board in the year 1974 recommended the following revised definition, Small-scale Industries “Undertaking having investment in plant and machinery not exceeding ® 7.5 lakhs Ancillary Industries ) (Undertaking having investment in plant and machinery not exceeding © 15 lakhs, ctor within the small- nt and machinery and he Industrial Policy Resolution of 1977 created a new sector called Tiny s aca sty sector. All industries with a capital investment of @ 1 lakh in pla ‘ited in rural areas and small towns are included in the tiny sector. in in tiny units, small-scale | the year 1980, the Government of India raised the limit of investment in tiny Unt Mitgagy Sean "d ancillary industrial units as under: Po CANETTI: Entrepreneurship Dey, | 1. Tiny Units: From @ 1 lakh to 2 lakhs. 2. Small Units: From & 10 lakhs to & 20 lakhs. i 3. Ancillary Industries: From & 15 lakhs to € 25 lakhs. iA . i it In view of the escalation in the cost of plant and machinery, the Government of India de, is Plies Ci enhance the investment limit for small-scale industries to € 35 lakhs and for ancillary industries i lakhs in the year 1985. , As per the Industrial Policy Statement of 1990, the investment ceiling in plant and machj ‘ small-scale industries has been raised from & 45 lakhs, to % 60 lakhs and for ancillary units from, £ lakhs to @ 75 lakhs. Investment limit with respect to tiny units has been increased from & 2 tg %5 lakhs. According to the modified definition, an ancillary unit is one which sells not less than 50%, its manufacture to one or more industrial units, During 1997, on the recommendation of Abid Hussain Committee, the Government of India fing raised the investment limit to @ 3 crores for small-scale industries and to € 25 lakhs for tiny units, The Government of India, in its New Policy Initiatives for Small-scale Industry announced, 1999-2000, has reduced the investment for small-scale industry from % 3 crores to € 1 crore. Small and Medium Enterprises are units with investment in plant and machinery in excess of § limit and upto % 10 crores. Village Industry The definition of village industry has been changed by amending the KVIC (Amendment) Bi 2005, to raise capital investment ceiling from & 15,000 to 1 lakh. | Small and Medium Enterprises The Finance Minister in his 2005-06 Budget speech has said that small-scale industry has evold and now we are inclined to treat the sector as small and medium enterprises sector. Accordingly, tt SMED Bill was introduced to bring benefits to small enterprises to Providing a legal framework ft Promoting the sectors’ growth and enhancing its competitiveness. Units with investment in plant and machinery in excess of SSI Limit and upto & 10 crores may treated as medium enterprises, ae Concept of Micro, Small and Medium Enterprises The Micro, Small and Medium Enterprises Development Act, 2006, has changed in th small-scale industry. n the concept of ‘The earlier concept of industries has been changed to enterpri There are bro . ; ie ‘lly (Wo categories (i) Enterprises engaged in the manufacture/production of goods. (ii) Enterprises engaged in providing/rendering services. _—cf id Medium Enterprises - An Overview 7 icra, Small am _phe term Manufacturing Enterprises’ has been defined in terms of investment in plant and machinery. ig called a Micro Enterprise if the investment is upto @ 15 lakhs. As for a small enterprise, the A estment should be above % 25 lakhs and upto & 5 crores. With regard to medium enterprise the ne should be above & 5 crores and upto & 10 crores, ‘The term, ‘Service Enterprises’ has been defined in terms of investment in equipment. As for a Micro Enterprise, the ceiling on investment of T 10 lakhs has been prescribed, In the case of a small Mfeopiseitismore than < 10 lakhs and upto & 2 crores. In respect of medium enterprise, the investment ctould be in te range of € 2 crores or & § crores. MSMEs in Manufacturing and Service Activities Category Manufacturing Service Activity Micro Enterprises Upto % 25 lakhs Upto @ 10 lakhs ‘Small Enterprises 25 lakhs to € 5 crores % 10 lakhs to & 2 crores Medium Enterprises %5 crores to & 10 crores % 2erores to ® 5 crores portance of Small-scale Industry 1. Employment Generation: The small-scale industries are labour-intensive and they can provide more employment per unit of capital. The employment generating capacity of small-scale sector is cight times that of large-scale sector. In cottage and household industries, with given investment, egnployment possibilities would be ten or fifteen times greater in comparison with corresponding factory industries. In an economy, characterised by abundant labour supply and scarce capital, the small-scale industry assumes special significance. 2. Use of Local Raw Materials: The small-scale units make use of locally available raw materials. Most developing countries are rich in certain agricultural, forest and mineral resources. Small-scale industries can be based on the processing of locally produced raw materials. These industries not only economise the utilisation of resources but also help to conserve foreign exchange by producing and exporting goods processed by locally available resources. 3. Balanced Regional Development: Large industries are mostly concentrated in big cities. The small towns and rural areas are deprived of the benefit of industrialisation, In order to benefit the country as a whole, the industries should be dispersed in all regions. It is possible to start small-scale industries in almost all areas such as villages, hill areas and even remote comers of the country. Thus, Small-scale industries are helpful in achieving wider dispersal of industries and thereby ensure balanced regional development. 4. Decentralisation of Industries: The concentration of industries in urban areas, encourages ration of people from rural areas to urban centres in large pare) creates a number of ak aut Blamed Problems such as pollution, slums and shortage of civic facilities. The disfersal of small industries in lifer ‘ ba ent areas reduce the intensity of the problem. Further, decentralisation helps to tap the local Such as raw materials, idle savings, local talents, etc.i n Entrepreneurshi oP Develo 5, Mobilisation of Capital: Small-scale industries are helpful in mobilising capita economy, people havea tendency to keep their money idle rather than investing in ne Man seomo espa scale industries are located close to areas where people stay, mobilisation gr is easy. It mobilises capital from lower middle class section to invests in produ za ak © indi: st rn : tive activities 6. Developing Entrepreneurship: The growth of an entrepreneurial class requires an ol mall enterprises provide the environment which encourages a growing network ee ; complementary relations among plants and firms. It isin this environment the latent talent of ey can be developed. Thus, the latent resources of entrepreneurship can be tapped by the eae enterprises only. th of i 7. Equitable Distribution of Wealth: The growth of large enterprises results in concen / economic power in few people. The income and wealth, as a result, is distributed unequal} : country, On the other hand, small industries are either proprietary or partnership concems ia ownership is widely dispersed in rural and backward areas. So, the income generated in large i ot small units is dispersed widely, Thus, the growth of small-scale industry ensures a more cq distribution of income and wealth. | 8. Training Ground for Local Entrepreneurs: Small-scale industries are the training groun local entrepreneurs. The skills and knowledge acquired can be transferred to other industries and enterprises may grow into medium-sized industries. i | ec 9. Efficient Use of Productive Factors: Small enterprises use productive factors more eff ‘This results in lower capital-output ratios and higher labour-capital ratios. A rupee worth of fixed produces almost seven times the output in small-scale sector as compared to large industries. Fut the value added per unit of capital is higher in small units. It has been estimated that every one investment in fixed assets in this sector produces 4.6 rupee worth of goods. 10. Promotion of Export: The contribution of small-scale sector in export promotion is signifi ‘A notable feature has been the rapid growth in the export of non-traditional items. The smallst sector accounts for € 60,000 crore exports annually which is 40% of total exports in India. Small enterprises have better adaptability to varied production and c conditions. The flexibility ensures better innovation also. | 12. Innovation: Small industries have relatively higher necessity and capacity to innovate National Science Foundation, an organisation in USA found that small enterprises produce fou more innovations per research dollar than do big companies. Increased number of small A expected to result in more innovations and make the Indian industry compete in international i Policy Support to Small-scale Industry i ‘The Government of India has recognised the importance of small-scale industry for aati social objectives like generating more employment, removal of regional disparities and ol backwardness of rural areas. The importance of small-scale industry was underlined in the N04 Policy Resolution, 1948. The Policy recognised that, ‘these industries are particulary suited utilisation of local resources and for achievement of local self-sufficiency in respect of cerlail'™" essential consumer goods.” | 4fiero, Small and Mediu Enterprises ~ An Overview 73 In the First Five-Year Plan, the Government of India allotted a sum of € 43 crores for village and small-scale industries out of the total outlay of € 1,960 crores, Out of this a sum of € 5.2 crores was sennarked for small-scale industry. ‘Accepting the recommendations of the International Planning Team under the auspices of Ford Foundation, the Government of India set up the Central Small Industries Organisation as a nodal agency for the development of small-scale sector and the Small Industries Board as an advisory body and to provide industrial extension service through a network of Small Industries Service Institute in 1954-55. In the same year, the National Small Industries Corporation was established to supply machinery on hire purchase basis to small entrepreneurs and also to market their products. The Small-scale Industries Board adopted the idea of Industrial Estate Programme as tool for promotion of small industry. The first industrial estate was set up at Rajkot in 1955, In the Second Five-Year Plan, an outlay of & 175 crores was envisaged for cottage and small-scale industry. But of this, 7 56 crores were allotted to small-scale industry. It was the Second Five-Year Plan that really initiated the development process in the field of small-scale industry. The Industrial Policy Resolution, 1956, gave adequate policy support for accelerating the process of development. During the period, the Government Stores Purchase Programme was introduced by the Government of India to provide an assured market for the product of small-scale industry. In addition, certain products were reserved for exclusive purchase from small-scale sector in 1956-57. In the Third Five-Year Plan, € 264 crores were earmarked for the promotion of village and small- scale sector and & 113.06 crores was set apart exclusively for the small-scale industry. During the plan period, the Credit Guarantee Scheme was introduced in 1960, to encourage the banks to meet the credit requirement of small-scale industry. The setting up of Industrial Development Bank of India in 1964 led to the flow of funds to small-scale sector. During the Annual Plan (1966-67 to 1968-69), a sum of € 53.48 crores was allotted for the development of small-scale industry. The Government of India reserved certain goods manufactured exclusively for small-scale sector to protect them against the competition from large industries, The Fourth Five-Year Plan provided an outlay of € 243 crores for village and small-scale industries and 221.74 crores for modern small-scale industry. The Fourth Plan envisaged to widen the range of products in small-scale sector, encourage dispersal of small units and promote exports from small- scale sector. During the plan period, in 1969, fourteen major banks were nationalised and the banks included the small-scale industry in the priority sector for financial assistance. In 1970, the Government of India formulated a variety of promotional measures to boost export from small-scale sector. In order to intensify the activities for the development of new entrepreneurs, a separate jon called ‘Entrepreneurs Development Division’ was set up by the Small Industries Development Organisation. In 1971, the Government of India introduced the Central Investment Subsidy and announced income tax concessions in 1973, to stimulate investment in backward regions. The interest subsidy scheme was implemented in 1973, for the benefit of engineers and technocrats. In the Fifth Five-Year Plan, a sum of € 2,930 crores was earmarked for the development of village and small industries. Of this, € 221.74 crores were allotted to modem small-scale sector. The Fifth74 e neurship Devel ; ntrepreneurship OP, a sis i , l in emphasised regional dispersal, application of modem technology and provision of incemtivg, establish electronic industries. mie thrust of, Industrial Policy Statement, 1977, was an effective promotion of cottage lustries widely dispersed in rural areas and small towns. It was decided that whatever cay Produced by cottage and small industries must only be so produced. The list of industries which Feserved for small-scale sector was significantly expanded. It was proposed to pay special attentig, units in tiny sector, The setting up of District Industries Centre in 1978 has been @ hallmark in, i development of small-scale industry, The District Industries Centre offers various services to small-scale sector under one roof at the district level. The Sixth Five-Year Plan allocated a sum of € 616.10 crores for small-scale sector. During plan period, the Government of India took efforts to build buffer stock of raw materials 10 engy supply of critical inputs in time. Facilities were provided for import of components, raw materials a machinery under Open General Licence. y of € 1,120.15 crores for small-scale sector. Th The Seventh Five-Year Plan has allotted an outla} ment Fund with = Government of India, in May 1986, launched the Small Industries Develop crores. The Fund, under the Industrial Development Bank of India, provides assistance for thy development, expansion, diversification and also rehabilitation of small units. ‘The Eighth Five-Year Plan dealt with beneficial consequences of the Seventh Plan and reaffirme that new opportunities would be generated in small-scale sector so that weaker sections of the sociy as a whole would be able to draw the benefits of this sector by direct participation and widesprey employment generation. A new policy for small and tiny enterprises was announced by the Government on 6th Augis 1991. The policy promises to meet 100% credit demand of small and tiny industries. The empha would be shifted from providing cheap credit to adequate flow of credit on a normative basis. Equi participation by other industrial undertakings upto 24% of their total shareholding is allowed. To enhanr the supply of risk capital to SSI sector. a Limited Partnership Act was proposed to be introduced. avoid delayed payment by the large units, factoring services through SIDBI was proposed. In addito, suitable legislation to ensure prompt payment has also been proposed in the policy. i ‘A new scheme of Integrated Infrastructural Development for Small-scale Industries would introduced to promote linkage between agriculture and industry. A Technology Development Cell wail be set up in the Small Industries Development Organisation which would provide technology inputs ind competitiveness of the small-scale sector. An Export Development Cent improve productivity a1 10 to serve SSIs to further augment export activities in this sector. would be set up in SID Simplification of rules, regulations and procedures, setting up of special monitoring agency oversee the genuine oredit needs of small-scale sector, channelising composite loans through commercid banks, enlarging the single window scheme to project upto & 20 lakhs are the other measures suggest in the policy for the promotion of small-scale industry. | | ‘sum of €6:334 crores was earmarked forthe village and small industries inthe Eighth Five Plan (1993-97).yr pant Medi Enterprises ~ An Overview ico 5 B ernment of India announced in 199-2000, the New Policy initiatives for the development a alk scale industries: ci 1, Mistry of $SI and Agro and Rural Industries has been setup to focus on problems of SSL ital limit was determined on the basi 9 2 Working cai he basis of 20% of annual tumover. Fit is enhanced from & 4 crores to ® 5 crores a 4, Anew Credit Insurance Scheme for providing security to banks and improving the flow of credit to SSI, particularly, export-oriented and tiny units was started, Lending by banks to non-banking financial companies or other financial intermediaries for the purpose of lending to tiny industries has been included within the definition of priority sector for lending. 5, To coordinate the latest developments with regard to World Trade Organisation, a cell has been set up to disseminate information to SSI associations regarding recent developments and organising WTO seminars and workshops. S 6, ANational Programme for Rural industrialisation has been announced with a mission to set up 100 rural clusters every year to give a boost to rural industrialisation. Policy Initiatives in 2004-05 1. Bighty-five items reserved for exclusive manufacture in small-scale sector were dereserved in October 2004, Further, 108 items were dereserved in March 2005. With these, the number of items reserved for exclusive manufacture stood at 506, ‘To facilitate technology upgradation and enhance competitiveness, the investment limit in plant and machinery in respect of seven items of sports goods were raised from % 1 crore to ¥ 5 crores in October 2004. 3. Composite loan limit for SSI sector was increased from % 50 lakhs to € 1 crore by the RBI. x 4. Agro processing industries would receive high priority in credit allocation from financial institutions. ‘Anew thrust on a level playing ground for the MSMEs was operationalised through: ()) collective efficiency strategies, and (ii) a comprehensive legislation for the sector i.e., the MSME Development Act, 2006. The preamble of the Act affirms to provide for facilitating the promotion and development and enhancing the competitiveness of small and medium enterprises. ‘Anew Ministry of MSME was set up by merging the erstwhile Ministries of SSI and ARI. Besides, the all India SSI Board was restructured and renamed as National Board for MSME. Policy Initiatives, 2007 1. Increase of credit threefold from public sector banks, e., € 67,000 crores as on 31.3.2005 t0 % 1,90,958 crores as on March, 2009. 2. Inclusion of MSE in priority sector with ‘sublimits for micro units’ 3. Collateral should not be taken for loans up to & 5 lakhs from MSE units. =- 76 Entrepreneurship Dey i ‘The Eleventh Plan recognised the continuing need to facilitate the graduation of these ex, to higher levels, particularly, from small to medium, ente ‘The Twelfth Five-Year Plan recognised debilities of the country on the manufactutin outlined the need for a National Manufacturing Policy. Becta SME Rating Agency Credit Information Bureau (India) Ltd, (CIBIL), Dun & Bradstreet Information Servic Private Ltd. (D&B), SIDBI and a few other banks have together set up SMERA (SME Rained — the first rating agency focusing primarily on the SME segment. It has developed a transparent, system for SME thereby, incentivising SMEs to get credit rated. The rated companies get bel terms of interest rate reduction, larger loan size, faster turnaround in processing loan application 4 Since its inception in September, 2005, SMERA has rated over 1,400 SMEs. 4 1 Network Enterprises Fund Network Enterprises Fund was created by Institute for Financial Management and Rese (IFMR) Trust in January, 2008, as an equity fund that invest in commercially viable and susta enterprises in sectors impacting low households. It aims to go beyond by providing microfinance to entrepreneurs by ensuring participation in economic activities on a sustainable basis. It seeks to cred a network of enterprises to provide economically disadvantaged a platform to engage with the mag as producers and consumers of goods and services. NEF are expected to act as intermediaries betwe the formal markets and low income groups, to implement market based solutions. NEF will be exph the potential for supporting industries such as dairy, BPO, food, crafts, village tourism, waste re health care and rural energy. A task force was constituted by the Government of India to consider various issues of M and draw up an agenda for action. Based on the recommendations, RBI issued circulars for the banks to implement the followi 1, 40% of the total advances to MSEs sector should go to micro manufacturing and ser enterprises having investment upto & 5 lakhs and ® 2 lakhs respectively. | 2. 20% of the total advances to MSE sector should go to micro manufacturing enterprises hav investment above & 5 lakhs and service enterprises above @ 4 lakhs. 3. Achieve a 20% year on year growth in credit to MSMEs | 4. Open more MSE focussed branches. 5, Each lead bank may adopt one MSE cluster. Union Budget 2008-09 announced MSME (Refinance) Fund and MSF (Risk Capital) Fund wit were established with SIDBI in 2008. } 3 Union Budget 2009-10 announced a Special Fund of & 4,000 crores to SIDBI to facilitate credit flow at reasonable rate to MSME sector.micro, Small an Medium Enterprises ~ An Overview Micro, 7 ( is going to launch a Venture Capital SIDBLis 8 pital Fund of $ 220 milli ‘ili it “pncnsMe 6 million & 10,000 million) to provide loan \ fe 2016-17 pelea Le ore ‘ax exemption for small units up to € 2 cores. The budget also proposed z 10, ure capital fund to act as catalyst to attract private capital. ‘The key programmes for MSME sector include (i) The Prime Minister's Employment Generation Programme (PMEGP) (ji) The Scheme for Promotion of Innovation, Rural Industry and Entrepreneurship (ASPIRE) / ily The Scheme of Fund for Regeneration of Traditional Industries (SFURTI) (iv) Weaver Mudra Card SCHEME and (v) The Start-up India Scheme ‘The PMEGP, man by the Khadi and Village Industries Commission offers credit linked subsidy to set up new enterprises for generating continuous and sustainable employment in rural and urban areas. ‘The primary aim is to generate Jobs by way of self-employment ventures, micro enterprises and other projects. The ASPIRE scheme launched with a corpus of € 210 crore. It seeks to set up a network of technology and incubation centres to accelerate entrepreneurship and also to promote start-ups in rural and agriculture based industry. To improve credit availability to small artisans and weavers, Weaver Mudra Scheme has been introduced, Under this scheme, weavers can draw credit upto % 50,000 from ATM using Rupay debit cards. To improve ease of doing business, MSME units shall file an Udyog Aadhaar Memorandum (UAM). The existing system of filing manually in many places is dispensed with and the entrepreneur in the MSME sector need to file online, simple one page UAM on a given official website and instantly get a Unique Udyog Aadhaar Number. Problems of Small-scale Industry Gre various policy measures taken by the Government to foster the growth of small-scale industry have resulted in enormous growth of small units. However, many problems of production, distribution and finance still continue to afflict the small-scale sector. The problem and difficulties faced by the small industries are discussed below: 1. Finance: Inadequate finance is the major problem for small-scale units. Since most of the SSI Units are either proprietary concern or partnership firms, their internal resources are small. The credit Provided by the various institutional agencies such as banks, SFCs and SIDBI are inadequate to meet the requitements of small units. The initial investment of small units comes from relatives, friends, non-banking and non-government sector. The institutional agencies are still reluctant to » advance money to small industries as they are unable to offer security/guarantee required by them.(The shortage of funds makes it difficult to install modern machinery and maintain well organised and fully equippedEntrepreneurship Dev 78 sed goa factori (they are unable to buy and store required raw materials or stock of finished goog. a their own sales organisation, Pespite the liberal credit provided by the institutional agencies, the ma of finance still exists in small-scale sector. e As per the ‘Third Census Report’, only 14.26% of the registered SMEs and 3.09% of the unre S SMEs avail credit from institutional sources. The bank credit to SME sector declined from 13, % the total bank credit to 10.9% in 2007-08. 2. Raw Materials: The availability of raw materials is a great problem for Small-scale These units use either local raw materials, or imported raw materials. For the small units makin, local raw materials, the problem is not a serious one. The industries that use imported TaW mates! face acute raw material problem. The shortage of right type of raw materials at standard price and the capacity utilisation and production programme. The efforts taken by the government to adequate supply of raw materials has met with partial success. (The raw materials supplied by government is hardly enough to meet 30% to 40% of the installed capacity of the SSI unit), AS ate the small industries have to resor{ to open market purchase at high price} which in tum Increases (cost of production and adversely affects the pro 5 fh f . aa Almost 70% of the MSME costs are its raw material. As input cost increases(MSMEs are unahy to pass the cost increase to their customers and their profits gets affected. According to Sachin Niga Senior Director, CRISIR SME Ratings, a 1% cost decline or rise could impact the profitability of ty company by almost by 12%, | The raw material problem has been extremely acute for steel-based industries. Industries ag forced to buy these materials in lack market at prohibitive prices which upset their cost calculation, There is great variation in the Pa and it affects on the quality of final produ Generally, the industries are faced with the problems of substandard raw materials supplied by dealen There are also great delay in supply of raw materials and because of this entrepreneurs have to key their inventory level high. The small-scale units in the mubber industry are also facing serious problems because of imbalasd between demand and supply of raw materials. Supply of raw materials should be streamlined at reasonabt Prices and quality should be maintained if the small industries are to compete in the free market. 3. Marketing: In marketing their Products, the small units have to face competition from olbt small-scale units and also from large industries, The small units do not possess their own marketith organisation. They do not have the resources and expertise to market their products effectively. Furth, their produets are often not standardised and of variable quality. Therefore, the small industries suffé from a comparative disadvantage vis-d is large-scale units. Financial constraints compel the sti units to sell their products at unremunerative pricés>Many small units sell their products to large sellitt houses at low prices, The National Small Industri 8 Cot : Mporation and Small Industries Development Corporation 5% the small units to get government o} é rders. The Trade Fair Authority and the State Trading Corporati help small-scale industries to market their Products and locating export market. However, th arrangements are inadequate. suainat and Medium Enterprises ~ An Overview jet, 79 4. technology: Most si small-scale units use ? onl ves and equipment) Adoption of latest technol 'y gbsolete and outdated technology and old chine y limite ; logy alone can ensure good ies capital, the small industri dense iis plato eguctivity- DY 0" Z es find it diffi ae eas a esl he cost oF Production tends tobe hi ficult to modernise their plant and machinery: H be hi i rey ro the products of large industries. The small i eher and quality of products lower as aa industries are financial! kK k toma opment activities. Market link i i 2 coagled with ot ad develop i inkages and inadequate infi se se a ae ‘quate infrastructure coupled with use of obs «5, Underutilisation of Capacity: The small industries have ' ie city due to two reasons: (i) frequent power and (i ooentoes ang installation of thermal units. On an average, 40% to lerent problem of underutilisation ability to go for alternatives like 50% of the capacity is not utilised in small unit 6. Recovery: One of the basic problems of small-scale industry is recoveries from sales. The buyers do not pay their dues in time, most of the ‘principals’ do not pay the ancillaries for six months even longer after purchase of goods. The financial assistance obtained from a bank is taken advantage of by the customers of small-scale units. 7. Institutional Constrain: he entrepreneurs face many constraints in availing themselves of the various concessions and facilities extended by various financial institutions and government agencies. Thesmall entrepreneurs have to approach several agencies to get their requirements. The local bureaucracy often makes entrepreneurs run from pillar to post to make qualify for various credits and essential raw materials of competitive prices. As a result, they are not able to get the assistance in time. 8. Lack of Access to Relevant Information: An entrepreneur starting a business requires access to reliable information on various aspects of business such as regulatory issues, statutory compliances, infrastructure and so on. The lack of readily available information compels new entrepreneurs to employ intermediaries to advise them on essential aspects of starting an industry thereby, incurring additional costs. oi : 9. Difficulty in Starting and Operating Business: Difficulty and delays in pense government requirements such as registration, obtaining licenses and registering ae - Sd ae The World Bank Report, 2007 doing business in South Asia says t ae eee (in Mumbai)/52 days in (New Delhi) to start a business in India, The official cost o are high and the process is quite complex. |-scale industries 10 Otter Problems: In addition tothe problems enumerated above the smal face problems such asi imperfect knowledge of market conditions, Inc s supporting institutions. All deficient Managerial skills and lack of effective coordination amon various Sup] wa fail i sition in domestic an the above Problems have put the small-scale sector at 2 disadvantageous po: ®Xport markets,STARTING A pTER MICRO, 7 SMALL AND MEDIUM INDUSTRY ee + Business Idea Preparation of Preliminary Project Report = Form of Ownership Preparation of Detailed Project Report + Location « Procurement of Land/shed Apply for Registration Apply for Term Loan and Working Capital Loan + Apply for Subsidy Place Order for Machinery Arrange for Power Connection * Insurance + Government Clearances ° Procurement of Raw Materials * Recruitment and Training of Staff * Establish Product Distribution Network * Trial Runs Commencement of Commercial Production tat The Promotion of a new enterprise, in fact, is similar to the birth of a child with one difference, is the gestation period for a business unit varies according to the nature of work undertaken by it -81-; Entrepreneurship Den elon, The entrepreneur is both the mother and midwife in this operation and as such he has to bear rf pangs and the initial botheration of bringing up the infant. sy Starting a new business venture involves the following steps. Business Idea The first and foremost step in starting a small business js to find out a suitable busi give a practical shape to the idea. The entrepreneur should be convinced that idea is, i one and likely to give reasonable return on his investment. The search for an appropriate business iu is a complicated exercise because the entrepreneur comes across innumerable business opportuni To choose a business idea, skill, foresight and ingenuity are required on the part of the entrepreney, x should keep in view his competencies, capabilities and ies idea n fact, a sot t resouroes while identifying the business ig, (a) Sources of Business Idea An entrepreneur can identify a project idea himself out or profession. The project idea can also be identified wit entrepreneurs who are engaged in the same trade or indust of his experience in his previous trade, jg th the help of friends or relatives of fy ry or business. Besides, there are numerous sources from which an entrepreneur can get business idea (@ Observation: Human mind has infinite cay pacity to observe and deduct. Observation is one the most important sources of project idea. Thi 1¢ observant mind continuously comes across situation, Which can be utilised to develop investment opportunities, For instance, the non-availability of a particuly product may lead to development of an industrial unit. i) Market Characteristies: The demand and supply conditions of various products will givems idea about the unfulfilled demand for certain products, For example, people especially youngstes prefer fast food or ready to eat food. The demand for fast food is expected to increase manifold a coming years. Indian companies and business organisations spend crores of rupees on giving gifts their employees, shareholders and business associates on many occasions. As per rough estimates corporates in India spend & 1,000 crotes every year on corporate gifting and the culture is on the rise So also, the demand for gift articles is expected to rise in future. Gii) Conversion of Waste into Wealth: A study of the end products and by-products can thron light on new project ideas. For example, rice bran which was considered as waste and sold at minimun Price is used to produce rice bran oil. Such business ideas help in improving the wealth of the socied). (iv) Adoption of Technology: Commercial exploitation of indigenous or imported technologiesis another source of business idea. In this era of severe competition, the entrepreneur has to be on the lookout for high technology-oriented product/process. The new product/process developed by nation level research institutions like NRDC, CT-TRI, CIECRI, etc., provide good business ideas, Th entrepreneurs can go for commercial exploitation of these produeVprocess which have been provel successful at the laboratory level\ \ | ing A MEET: Small and Medium Industry sta jo-economic Changes: Th ; (9) Socio-econom! : The change in the soci pvasnes ono By careful observation, a busine, fem etree of people foward foreign brand cn (vp Trade Fairs: Industrial ond Trade Fai : so by Trade ASS vciations at the state, national an se sings ens wsting these fies, iy Trade and Professio : (vil) Trade “idea, The at nal Journals: Trade and professional magazines provi i sores of oes en. The atisties and information given in these magazines ceva fen i ies often reveal busi , reports professional bo cal business opportunities. Bulletins of Research Institutes re cley a Fe also a Me of information for new project ideas. These bullet i soumprocesses oF products developed by the Institutes, ins generally give the broad outlines of the 83 eacma status of people provide scope idea can be identified easily. For example cauty parlours, cellphones, etc. (viii) Publications of Government Department: the $IDO, SISI and SIDCO also provide project ideas. The Techno-economic survey conducted by (b) Identifying Business Opportunity Business opportunity may be defined as an attractive project idea which an entrepreneur accepts asa basis for his investment decision. A business opportunity has two major ingredients: (i) Good market (ij) Attractive/Acceptable return on investment. The entrepreneur has to prepare a list of project ideas identified from various sources. The business opportunists are evaluated against a set of specific criteria to select those projects which are commercially viable. The following are the criteria for evaluation, 1. Compatible with the Promoter: The entrepreneur should ensure that the proposed project is compatible with the financial and human resources available with him. 2. Government Regulations: The project to be undertaken should not violate government rules and regulations. 3, Market: With an assured market for the products or services, the project can run successfully. nthe market, consumption trends, nature of competition, So, the existing and potential demand ii Jopment, sales efforts required, export possibilities are availability of substitutes and technological devel the factors to be evaluated by the entrepreneur. 4. Raw Materials: Assured supply of raw materials at reasonable rate ensures success of a project, So the availability of raw materials, cost of obtaining it and supply of raw materials by the government at concessional rate are the factore to be considered by the entreprenci, sume risk is a major characteristic of an entrepreneur However, he future. But the possible effect of unfavourable I. The following factors should be considered 5. Risk: The willingness to a unnecessary risk is foolhardy. It is dif ficult to predict t future events on each of the project idea can be examinedEntrepreneurship p, 4 (i). Market stability in economic eycles (ii) Technological risk oft (iti) Competition from import a (iv) Legislations and controls a (x) Seasonal demand . (vi) Predictability of demand. f Preparation of Preliminary Project Report (PPR) ; After selecting the line of business activity, the next step is to eae ‘ fe ater ee ? regarding the financial requirements, namely, working capital and fixed capi ana illgy rough idea about the requirements of machinery, power, labour and raw materials. \, zz Form of Ownership | Depending upon the financial and other requirements, the entrepreneur has to decide the fomy | onsanisation which may be proprietorship, parinershi, cooperative or joint stock company, The ownership pattern of small-scale i is sole proprietorship, about 11.5% is par company. industry in India shows that about 87% of the total induse, ‘nership and others are either cooperatives or joint sto : ' as sol Business requiring pooling of funds and skill are started as Partnership firms and busi; eS Sader) concerns, manufacturing activities and huge investment are set up as companien ness which invoke 2. Size and Area of Operation: Small and medium-scale busine Proprietorship or partnership. Large-scale enterprises catering to nat organised as private/public companies. Further, if the area of operat is appropriate whereas the proprietorship or partnership is suit toa particular locality. ss ar and ine, Set up either as i ional mark, ion is marke able if the ari °SPPe0d, coy oo le if the area SF operay Pany form rath 'on is confined 3. Capital Requirements: The choice of ownership depends proprietorship or partnership is a desirable form where small form is desirable where huge amount of capital is required on the requi, : n ‘Wire, Amount of capital ig Ment oj for the business, capi equate as ital. The 4. Degree of Risk and Liability: The willingness and eapabiity 1g important consideration, If an entrepreneur is prepared to bear the risk, he ¢ prey concern or a partnership firm, Otherwise it is better to start a proprit <2 the busin an oman? the ys is an YW) is limited. here tlstarting A Micro, Small and Medium Industry 85 5, Duration of Business: Business started for a specific duration and on temporary basis can be organised as proprietary or partnership concem as it is easy to start and dissolve. In case, the business isto run on permanent basis it can be organised as company or ‘cooperative because they enjoy perpetual succession. 6, Degree of Control: Degree of control over business operations is a factor that influences the form of organisation. The proprietorship or partnership is suitable where direct control over business operations is required, and the company form is desirable where such control is not required at all. 7. Managerial Requirements: Small enterprises using simple process of production and distribution can be managed effectively by proprietary or partnership. Large enterprises which require professional management, company is the best form of organisation. Re Of all the considerations discussed above, the choice of organisation depends basically on the nature of industrial activity proposed to be undertaken, the scale of operation, the scope of market to be covered and the sharing of risk. Preparation of Detailed Project Report A project report is a statement of what an entrepreneur proposes to take up and how he is going to achieve it in his business. It provides all information of the unit proposed to be set up. This report is required by various agencies which help setting up of the unit and provide financial assistance. Preparation of project report needs considerable thought and foresight. ee Location The location of the plant may have a substantial effect upon the operation of the unit. So, an entrepreneur has to consider various aspects like neamess to raw materials, availability of power, labour, climatic conditions, transport and banking facilities, incentives, tax rate, provision for future expansion, environment, etc., to decide the location, Some of the important factors to be considered for selecting the location are described below: 1. Land: The availability, geology and cost of land are the major considerations in choice of location. Land must be available as per immediate needs with scope for future expansion. The geology of land should be such that it would support the loads likely to be placed on it. The cost of the land varies depending upon its location. Rural sites are cheaper than the urban ones. Land is expensive in and around busy industrial centres. 2. Services: The availability of five services needs to be considered carefully: () Water (i) Electricity (ii) Gas (iv) Drainage (%) Waste disposal. ee neseEntrepreneurship Deng 3. Labour: Availability of manpower, particularly with proper skills is of great impor selection. oe / 4, Transport: Availability of road, rail and air links at the site has to be considered ine sy location. Neamess to sea is advantageous if the manufacture is export-oriented. | : a 5. Climate: Climatic conditions like temperature, humidity and dust free atmosphere ing certain type of manufacture. For example, humid climate is required for spinning mills and au atmosphere is required for pharmaceutical concerns. ; 6. Surroundings: The plan should be located in clean surroundings. There should be no mig of polluted and noisy atmosphere. " 7. Safety: Some plants pose potential danger to the surrounding neighbourhood. Leather chemical units, ete., have the problem of polluting the neighbourhood. Such units may be se A remote places. 8. Incentives: The State and Central Government offer incentives in the form of subsidy, cost land, tax concessions, etc., to start industries in industrially backward areas. Such concesy are to be considered before selecting the location as it reduces the total cost of initial investment 9. Material For certain industries, location near main suppliers of raw material is advantagen, 10. Other Factors: Proximity to market, availability of bank, goverment rules and regulatiy regarding the location of new factories are the other factors to be considered for selecting the locaiy for the proposed industrial unit. There are a number of methods to select a Particular location. Some of the methods are expla below: @ Examine the various factors and assign them weights according to the importance off factor to the situation being studied. The least important factor may be assigned a weight of one. Other factors may be given multiples of one. The assigning of weights may be dontt @ panel of a minimum three members, (ii) Each of the location is studied and ranked for each factor. factor and not location by location. (iti) The ranking given, The ranking is done by factor}wa Micro, Small annd Mediuin Industry ng A 87 stat - | authorities and also ensure that the plan of the building conforms to norms sti ao of Factories. : ecto ins ne sould also check with SIDCO the possibility of getting a ql neon oulght purchase basis, SFCs and banks extend loans area eat is found Viable the P pulated by the hed in industrial estate. The sheds for acquiring the sheds whenever Apply for Registration After deciding on the product and preparing the Project report, the entrepreneur should obtain a nrovisional ssl Registration Certificate. ‘The entrepreneur has to apply in the prescribed form to the es al Manager, District Industries Centre of the respective district. The provisional certificate is valid for five years: Provisional registration entitles the new entrepreneur to; 1. apply for allotment of shed in Industrial Estate or plot in industrial area. 2. apply to Municipality/Corporation for licences. 3. apply for power connection. 4. apply for financial assistance from banks and financial institutions. Apply for Term-loan and Working-capital Loan Finance is one of the important prerequisites to start a business enterprise. In fact, the availability of funds that facilitate an entrepreneur to bring together land, labour, machinery and raw materials to combine them to produce goods. The funding requirements of a business unit are: 1. Long-term capital for acquiring fixed assets like land and building, plant and machinery, etc. 2. Short-term finance for working capital. The small-scale units can be started with the owned funds of the entrepreneur or borrowed funds or both. The small-scale entrepreneurs are not in a position to bring the entire amount required the for purchase of fixed capital. The State Financial Corporations provides term loan to purchase land and building and plant and machinery for the proposed units under various schemes. Commercial banks have evolved various schemes to extend credit facilities to entrepreneurs in small-scale sector. The quantum of finance is based on the needs of the industrial units. The industrial units require short-term loans for purchase of raw materials, stock in process and credit sales. Banks provide working capital in the form of cash credit, overdraft and bills purchased which and discounted. The SFCs also provide working capital in the form of working capital term loa is temporary in nature. The working capital term loan is a fixed amount given along with the fixed capital loan which is repayable in installments over a period of time. Application for term loan can either be submitted to SFC or to a commercial bank. The permanent working capital will be available from commercial banks only, In case, the entrepreneur needs seed Capital/equity funds assistance, a separate application should be submitted to the agency concerned.Entrepreneurship Deve 88 e the financing pattern accorg roe of his 0WN COntTIDUton \ ject and deter™m! he prose onfirm the Sou Financial institutions or banks appraise t is hould con! their norms. At this stage, the entrepreneur $ Proposed project. Follow-up and Sanction of Loan __ e visits to financial institutiongy, has to maké s sur he lending agency will Sanction an entreprenel \d viable, # During the project appraisal stage, : he project is foun and give them necessary details. When t! loan to the entrepreneur. H al formalities to be complied y, Before actual di ¢ loan, | i i Security ee in the ation/equtable petae ee mortgage depending upon the nature of security and locati e asset. On roa ion of the lyy formalities and documentation, the amount of loan sanctioned is disbursed in installments depen} upon the physical progress of the venture. there are some leg Apply for Subsidy Units located in declared backward areas are eligible investment subsidy ranging from 15 to 25% of the cost of fixe Government is encouraging certain specific thrust areas like food processing, the subsidy is provided upto 50% of the investment in fixed assets. Claim for subsidy should be submitted on prescribed application form through the DIC concemel for getting Central or State governmay .d assets. Apart from the above, Cent horticulture, etc., wheres Place Order for Machinery After securing premises and making arrangement for finance, steps to procure machinery are be initiated. Careful selection of equipment and machinery constitute an important part in tt tation of the project. With a view to helping entrepreneurs to select the right type of machin} | SISI has set up a Machinery Catalogue Bank. The catalogue contains information .d and supplied by about 700 firms in the country. implemen and suppliers, machinery manufacture Arrange for Power Connection ‘A major bottleneck in the timely commencement of production is delay in getting power connecti®® ‘Therefore, immediately after placing order for machinery, the entrepreneur should apply for pot connection to the Assistant Divisional Engineer, Electricity Board. It is advisable eae powtt connection before starting erection of machinery. Insurance ‘a tendency to treat expenditure on insurance premium as unproductive and essa! e and unnec There is 1 insure the TI ‘here ¢ entrepreneurs are reluctant to insure the assets, This attitude i - This attitude is not correct. So, many of th—— ‘a Micro, Small and Medium Industry 89 startin 1 entrepreneurs hi in ces where the PI ave incurred huge loss on account of fire, earthquake and other insta en porwr ca @mites: e, taking an insuran policy for the shed, plant and machinery is essential. The ‘therefor cntrepreneuts should take appropriate policies to cover the factory shed and machinery, Government Clearances Government licences and clearances should be taken well in advance, before starting commercial . al production. ‘The following is the statutory requirement: Product Line/Activity Licensing Authority { Approval of production programme for (i) Production programme approval is not necessary, but while obtaining provisional items requiring compulsory licence. registration brief product outline is to be submitted to DIC. (ii) Manufacturing of drugs and cosmetics. (ii) State Drug Controller. (iii) Deputy Director of Food and Vegetable {i Fruits and vegetable based products. Preservation. Ministry of Agriculture. (jv) Effluent Disposal. (iv) Clearance from: (a) District Health Officer (b) Director of Public Health (c) Pollution Control Board. (v) Registration under Sales Tax Act. (v) Superintendent of Central excise. (vi) Units employing 10 or more workers (vi) Chief Inspector of Factories. (when power is used) or 20 or more workers (power not used) approval under Factories Act. (vii) Inspector of General Registration. (vii) Registration of partnership firm. Procurement of Raw Materials ery and got power connection, then he shoul purchase ay, Anentrepreneur has to ensure timely and adequate iction. It is always advisable to identify a number of ariyce, Quota for scarce raw materials such as ion Axed for small-scale industries by State Directorate putes indigenous and imported ra terials for his unit. Sa coe has installed machin rage eommence production without del supply aie of raw materials for continuous produ ey re instead of depending on a singl ottng ak? WEN potassium chlorate, etc., : Materials ae allotted through SIDCO. NsIC supplies and distri © entrepreneur can avail of the existing facilities to get raw ma- Entrepreneurship Developme. 90 " | for the supply of, In recent years, the dependence on government agencies has been ay aera igen materials. Due to the advent of liberalisation, many of the raw materials, bo > are available in the open market. Recruitment and Training of Staff ns of various Procurement of raw materials follows the recruitment of personnel — eee given ce such as supervisor, skilled, semi-skilled and unskilled labour should be recruit ch i i ay it similar to th ‘raining at this stage. Ifnecessary, a few key personnel may be given training in a unit simi ony Proposed by the entrepreneur, Establish Product Distribution Network On receipt of machinery, the entrepreneur will start erection work and within few weeks or few months he is expected to start commercial production. It is advisable to chalk out a marketing plan we in advance. The entrepreneur should decide the distribution channel for his product. Direct sale, sale through retailers, sale through wholesalers, sale through agent, middlemen are the channels available for manufactured goods. An entrepreneur should establish contact with some dealers and finalise arrangements for selling his products. Trial Runs On receipt of raw materials, trial runs can be started, The Period of trial run depends on the nature and complexity of the project and size. Commencement of Commercial Production it is established in trial runs, the entre rer : When the quality of the product is es ns the entrepreneur can go j , production. This is the last step in setting up a small-scale industrial unit, 8° in for commercial