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A Study of The Role Played By SMEs in

Indian Economy and Its Future Prospects

A PROJECT REPORT Submitted by

JAYKISHAN JOSHI

[BATCH 2008-10]

[08024]

To

Director (PGDM)

In partial fulfillment of the requirements of

Tolani Institute of Management Studies, Adipur

For the award of the degree of

Post Graduate Diploma in Management

Tolani Institute of Management Studies

Adipur – 370205

January 2010

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1.1 Introduction:

This project is an endeavor towards understanding the contribution of SMEs in the

growth of our economy and to understand the ecosystem in which SMEs work. The study

will draw attention towards the opportunities and challenges for SMEs along with the

current role played by Government in SME sector.

India has been home to SMEs since prehistoric times. The earliest mention of them was

found at the time of first Indian Emperor “Chandragupta Maurya”. At that time small

enterprises were built by trading classes who were known as “Vaishya”.1

Since Independence India has moved from a moderate growth path of the first three

decades (1950 to 1980) to a higher growth trajectory since 1980s. Over the last two and a

half decades, India has emerged as one of the fastest growing economies of the world;

averaging about 6 percent growth rate per annum and ranking of the country in terms of

size of the economy, especially Purchasing Power Parity (PPP) Terms have improved in

the last three years. We have averaged a growth rate of 8 percent and the yearly variation

in growth in is low.

With the advent of planned economy from 1951 and the subsequent industrial policy

followed by Government of India, both planners and Government earmarked a special

role for small-scale industries and medium scale industries in the Indian economy. The

process of liberalization since 1991 has brought challenges as well as bouquet of

opportunities. The challenges include intense competition which makes imperative for

the enterprises to maintain, improve and sustain competitiveness through lower cost,

improved quality, making available wider choice. The opportunities include expansion of

business by entering into new markets both in terms of products and geography.

The Indian Industrial economy is characterized by a dynamic and versatile set of

enterprise actors, who are small and medium in terms of scale of operations. This SME

category has been leading a typical competitive advantage to Indian industry in terms of

controlling sufficient markets globally. It is because of their ability to make available

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low-volume customized products, flexible response and lower fixed overhead costs. The

other typical behavior of these SMEs is that in most of the cases depending upon their

specialization, they have evolved as clusters.

1.2 Definition of Micro, Small and Medium Enterprises:

In India the industries are defined into broadly two categories:

(i) Manufacturing

(ii) Services

Both have been further classified into micro, small and medium enterprises based on

investment in plant and machinery (manufacturing) or on equipments (services)

excluding cost of land and building.

TABLE 1: CLASSIFICATION BASED ON INVESTMENT

MANUFACTURING SERVICES

MICRO <Rs. 25 LACS < Rs. 10 LACS

SMALL 25 LACS TO 5 CRORES 10 LACS TO 2 CRORE

MEDIUM 5 CRORE TO 10 CRORE 2 CRORE TO 5 CRORE

Source: MSMED Act 2006, vide notification: RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated April

4, 2007.

SME SNAPSHOT:

Indian SME Sector

No. of units: 133.68 lacs (2007-08)

Employment generated: 322.28 lacs (2007-08)

Percentage share in GDP: 5.94 (2006-07)

Production by registered & unregistered units: Rs 700000 crore(2007-08)

Exports: Rs 150242 (2005-06)

Source: Annual Report, 2008-09, Ministry of Micro, Small and Medium Enterprises, www.msme.gov.in

Handbook of Statistics on Indian Economy (2009), Reserve Bank of India

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TABLE 2: SME CLASSIFICATION:

CLASSIFICATION

1)LOCATION RURAL AREAS

URBAN AREAS

METROPOLITAN AREAS

BACKWARD AREAS

2) ORGANIZATION PROPRIETORY

PARTNERSHIP

LIMITED

3) INDUSTRY STATUS SMALL SCALE

ANCILLIARY

SMALL SERVICE ESTABLISHMENTS

4) ACTIVITY STATUS MANUFACTURING

PROCESSING

5)OWNERSHIP STATUS S.C ENTREPRENEUR

S.T ENTREPRENEUR

WOMEN ENTREPRENEUR

Source: http://www.dcmsme.gov.in/ssiindia/statistics/statusSSI.htm

1.3 Significance of SMEs:

� Provides low cost employment since the unit cost of persons employed is lower for

SMEs than for Large Scale Enterprises (LSEs).

� Assists in regional and local development since SMEs accelerate rural

industrialization by linking it with more organized urban sector.

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� Help achieve fair and equitable distribution of wealth by regional dispersion of

economic activities.

� Contribute significantly to export revenues because of the low cost labour intensive

nature of its products.

� Have a positive effect on the trade balance since SMEs generally use indigenous

raw materials, reducing dependence on imported machinery, raw material or labour.

� Assist in fostering self-help and entrepreneurial culture by bringing together skills

and capital through various lending and skill enhancement schemes.

� Converts the raw material within the country into semi-finished items and later pass

it on the LSEs that have capital, skill and equipment to process these into finished

goods.

� Provide rural people an opportunity for income generation and personal growth

since they can work at home. This helps to achieve fair and equitable distribution of

wealth by creating nationwide non-discriminatory job opportunities.2

1.3.1 SME: The power of being small

� Being small gives them the greater flexibility in operations to respond quickly to

changing customer needs.

� They can create new market space rather than competing in an existing industry which

makes the competition irrelevant. They can also seek greater value to customers and low

cost simultaneously. Hence they can align the whole system of a firm’s activities in

pursuit of differentiation and low cost.

� In SMEs the proprietor is the decision maker whereas in big companies go through

multi layer operation before arriving at a decision. Hence decision making is faster in

SMEs as compared to big corporates.

� Low budgets make them crave for innovation and cost effectiveness.

� The small businesses are remarkably flexible because they operate near the customer,

thus it has the ability to adapt according to the ever changing needs of the customer3

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2. Research methodology:

Objectives:

Primary

1. To recognize the contribution of SMEs in the growth of Indian Economy

Secondary:

1. Role played by Government in promoting SME currently and analysis of the same

with suggestions for future

2. Challenges and Opportunities for SMEs

The project is carried out by collecting secondary data from various sources. The research

has been carried out in the following steps:

Step 1: Data regarding the contribution of SMEs in the economy was collected

Step 2: Literature Review

Step 3: Composition of data collected from various sources into a synchronized manner

Step 4: Analysis of data collected

Step 5: Review of current situation and future prospectus

Step 6: Suggested policy measures for the government and for the SMEs

Step 7: Conclusion

Sources of data: The various sources of data used are:

News Papers: Economic Times

Magazines: SME White book 2009-10, SME World Magazine

Books:

� Management of Small Scale Industries, Prof. I S Malhotra & Dr. S L Gupta, Galgotia

publishing Company, 2000

� Small Business Management, Leon C. Megginson Mary Byrd & William Megginson,

McGraw Hill Irwin, 2003

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Websites:

www.rbi.ind.org

www.msme.gov.in

www.laghuudhyog.com

www.imsme.org and various other websites

Others:

Various research papers, Reports published by Government and other agencies.

The case studies included in the report are selected on convenience basis as well as their

relevance in the context of the report was analyzed before their inclusion in the report.

The review of sectors was based upon availability of data.

Limitations of study:

The study is limited only to manufacturing sector relating to SMEs and does not cover

the service sector operated by the SMEs. Uniform time frame to analyze data was not

possible to maintain due to non availability of data. The opinions provided may not hold

true in all cases as they are given on the basis of observations during the study and

detailed analysis relating to each suggestion has not been carried out.

Time period of the study:

The time frame to analyze data has been taken from 1999 to 2010.

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3. Literature review:

SMEs are the proactive agents for sustainable development and industrial prosperity.

Since SMEs are less capital intensive, the ratio of investment to production value of

goods and services is high. While the manufacturing sector will be the flag bearer of

SME growth, many sunrise industries such as IT, Bio-Technology, Pharmaceuticals, and

Nanotechnologies will play a significant role in growth and development of SMEs.

The sustainability of SMEs will depend on the competitiveness they possess. At present

many SMEs in IT/ITES have made indelible mark in global market is due to knowledge

pool in the country available at low cost as compared to others. Quality and cost are the

two important criteria for success. The future will be bright if they are able to innovate

and they get support from the government.4

According to Mr. Dinsha Patel MSMEs promote balanced and equitable growth in the

country so to enhance their competitiveness the government aims at taking effective

measures to operationalize all the components of National Manufacturing

Competitiveness Programme. Also from the information received from MSME

Associations, the Ministry of MSME has proposed to exempt MSEs from purview of

Fringe Benefit Tax, enhancement of exemption limit for small service providers,

exemption from Service tax to MSEs providing Business Ancillary Services, etc.5

SMEs have been in the agenda of all political parties as well as policy makers since

independence. In India, the clusters of SMEs play a vital role in providing ancillary

services to cater the needs of large industries.

Horizontal clusters include units which process the raw material to marketing the final

product themselves. Large unit based clusters means developing small units nearby the

large units for supply of critical inputs. But such clusters are small in number since most

of clusters are formed on basis of location and availability of skilled labor. Whereas

vertically based clusters involve operations where the operations required in producing

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finished products are divided and carried out separately by different units. Clusters are

formed naturally and also they are created.6

According to Ghosh in a country like India, the state initiatives for eradication of poverty

have never lived up to the expectations. There are a lot of bureaucratic controls on the

utilization of funds and in the end the beneficiary receives a negligible amount as

compared to the allocated funds. At the same time SMEs have played the role of

“MESSIAH” by generating employment. They have helped in evolving an alternative

pathway of for poverty alleviation through income generation. SMEs are creative leaders

who have potential to eradicate poverty through profits. They have the capacity to

generate income for the people at the bottom of the pyramid. 7

As per NASSCOM DELOITTE study in the last two decades the Indian IT/ITES industry

has contributed significantly to Indian economic growth in terms of GDP, foreign

exchange earnings and employment generation. One notable feature of this growth is that

the sector gave opportunities to the SMEs in India. In most of the sectors the Corporate

Houses or MNCs have a hold since they have access to capital and economies of scale.

But in case of IT/ITES the focus shifted from physical capital to intellectual capital.

According to Software Technology Parks of India 1,905 units were registered during

2001 to 2005 most of which were set up by the first generation entrepreneurs.

The practice of Employee stock option was first started by the IT/ITES before it was

adopted by other industries. This lead to wealth generation not only of the founders but

also of the salaried people who were earlier treated only as a factor of production. Even

the services provided by the sector are of world class quality which has helped our

country move out of “mediocrity” and raised the bar for other industries also.8

According to Ghatak IT is perceived to play a crucial role in transforming the SMEs. The

IT environment helps in fast and accurate decision making along with mobility to access

information. IT solutions help SMEs in multitasking, expanding customer base, raising

productivity and cost controlling. Accounting softwares, Supply Chain Management

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Softwares, Knowledge Management Systems and Customer Relationship Management

are some of the IT solutions enabling SMEs to technologically upgrade their businesses.3

According to Kharbanda (2001) in today’s global environment, the awareness and

application of technological advances are vital for the SMEs. In order to position

themselves in global markets with their peers they need to adapt the latest technology.

Also it is the need of the hour to develop inimitable capabilities through innovation and

experience to cater the market with either unique products or low cost products. In India

most of the SMEs are building up Indigenous Technological Capacity (ITC) through the

process of “learning by doing”. This is related to incremental innovation and

technological change.

The concept of Industrial Parks offers new insights into the role of SMEs. The sector

specific or geographically bound clusters help SMEs to access new technologies. They

also reap the advantage of location and information sharing. For instance Ludhiana

clusters make 95% of country’s woolen knitwear.10

According to Anindita it is estimated that annual benefits from carbon markets for one

SME wooden handicraft unit will be about $ 1,525. The Clean Development Mechanism

(CDM) project secured 91% of the carbon market globally in value terms in the category

of project based transactions. There is indication that there is high potential for CDM

benefits from carbon markets if the handicraft units shift from diesel to non conventional

energy sources. Hence there is a need to develop an integrated project to fulfill the

requirements of carbon markets in enabling SMEs leverage the opportunities in carbon

markets.11

A huge network of financial, academic and training institutes functioning in both public

and private institutes has been created in the country to ensure an impressive growth of

SME sector. But to meet the current changing environment there is need to address to

challenges in technical competency and IT as well as management skills of the

workforce. International studies have shown SME focus is more on short term goals of

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profitability instead of developing a long term prospective. It may not be an exaggeration

to say that the training provided to SME workers is not flexible and those who design the

course do not keep in mind the flexibility that need to be provided to the SME workers.

So for sustainability and growth in a dynamic environment SMEs must possess the

capability to constantly modify their long term business development strategy. Many

training institutes provide business improvement programs like Six Sigma, Lean Systems,

Balanced Scorecard, etc. These programs can be customized for SMEs in meeting their

needs and providing them effective solutions.3

According to Aryan in the development of an economy, the financial markets play an

important role relative with banks. Wider share ownership is beneficial as it spreads

wealth and will enable inclusive growth. So the aspect of growth in equity culture

through the platform of SMEs will explore new avenues for shareholders.13

According to Santigo the ability of firms to optimally exploit the business opportunities

crucially depend on the financial services available to them. There is limited scope for

SMEs to finance their projects internally they have to depend on external sources for

meeting regular or expansion needs. Loans and trade credit are identified as main sources

of funding for SMEs. The financing constrains arise for SMEs from investment-cash flow

sensitivity as observed by banks. But studies have shown that correlation between

investment and cash flow may not be a good indicator for decision relating to SME

lending.14

Since risks are inherent to any business the SMEs also face them. So to avoid disruptions

in business, insurance is one of the keys. Business interruption coverage risk should also

be covered under insurance since indirect losses are more severe in the eventual loss as

compared to direct losses. Small business owners need to protect themselves not only

against major crimes but also against trespassing, vandalism, workplace violence and

harassment.15

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According to Richard an important message emanating from the strategic management

literature is that not all SME owner-managers have the desire, or indeed the capability in

terms of resources and expertise, to grow their business Marginal to comfortable survival

at the present enterprise size, rather than growth, is most often the overriding strategic

objective. The reasons for this are many, ranging from personal wishes regarding life-

style to a disinclination to surrender control and/or be accountable to others within and

without the business in order that it may grow.16

As per Reserve Bank of India at the end of March, (1996) 2, 62,376 SME units identified

by banks were sick. Some major internal causes were faulty planning, management

deficiencies, inefficient financial control, diversion of resources, inadequate attention to

R&D, delay in sanction of working capital and time gap between sanction of term loan.

Heavy reliance on borrowing makes a unit vulnerable to environment pressures and

affects the operation on the unit. Small scale units generally start with low equity base

which makes them dependent on others for their financial needs.17

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4.1 History of SMEs in India:

Industries are an integral part of the Indian Economy since the Harappan Era. Until the

advent of British rule and modern industry, it had perforce, to be small scale. The

entrepreneurial spirit was stifled during the long colonial rule as also reflected in the GDP

growth rate of 0.9% during the first half of the 20th century. The Europeans were

expanding their colonial rule all over the world in search of raw material for their

factories and markets for the products of these factories. It was during this period that the

Industrial Revolution was sweeping the European continent. India missed the Industrial

Revolution as the foreign rulers did not allow the Indian Entrepreneurship to flourish. We

have only to recall the Swadeshi Movement and boycott of foreign goods in the first

quarter of the last century, to realize the place of entrepreneurs and small industry in the

developing consciousness of modern and free India.

The importance of SMEs in our country has its root from the Gandhian Model of

economic self reliance. Mahatma Gandhi’s vision for economic model was aimed at

providing employment to large numbers of people to address the issue of poverty.

Controlled policy:

Post independence, India adopted the Industrial Policy Resolution of 1948 that defined

the dual role of Government – that of the entrepreneur and the regulatory authority.

Centralized planning was a strong feature of the first few decades and several controls

were kept on private trade, investment, land ownership and foreign exchange.

Independent India’s economic planning gave a place of pride to the small scale sector,

especially, with the objective of fostering entrepreneurship and promoting employment.

The small scale sector flourished notably as ancillary to large industries, as a robust

export sector and under the policy of reservation of some products for small scale

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TIME LINE OF INDIAN PLANNING (with special reference to MSMEs)

FIRST PLAN

� Top priority to agriculture

� Gave village and small scale industries a place in rural development plan

� Village industries got government attention

SECOND PLAN

� Karve Committee shaped the government thinking

� Small Industrial Policy emphasized small industrial capital and employment

THIRD PLAN & FOURTH PLAN

� Industrial Policy Resolution began

� Promotions of SSI based welfare oriented employment programmes

FIFTH PLAN

� Industrial Policy Statement, 1977

� Wider dispersal of cottage industries and SSIs in rural areas

� Tiny sector concept introduced

SIXTH & SEVENTH PLAN

� Industrial Policy Statement, 1980 focus on integrated industrial development

� Nucleus plants setup in backwards districts

� SSI defined

� Shift from overall planning to sectoral or project planning

EIGHT, NINETH & TENTH PLAN

� Labor law rationalization

� Vision to create employment for 50 million

� Formulation of National Competitiveness Programme to support SMEs

ELEVENTH PLAN

� Recognizing the continuous need to facilitate the graduation of SMEs to higher level

� Stress on enhancing competitiveness of SMEs

Source: THE SME WHITEBOOK 2009-10, BUSINESSWORLD, 2009

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4.2 Sectoral Review

4.2.1 Food processing:

The food processing industry is one of the most promising sectors in India and has gained

tremendous importance during the post-reform period. The sector recorded a growth rate

of 13.14 per cent during 2006-07. The industry grew at 18 per cent during 2007-08,

according to Mr. Subodh Kant Sahai, Minister of Food Processing, scoring a 10 per cent

jump over 2004. The Minister further added that the sector is expected to grow at the rate

of 20 per cent by the year 2015

Structure:

The food processing industry is fragmented and most of the players are small in size and

primarily concentrated in the unorganized sector, which accounts for over 50 per cent of

the sector’s output in value, and 70 per cent in volume. According to 2007 estimates, the

food processing industry employs – directly or indirectly – more than 12 million people

across the country and has the potential to absorb many more

Figure 1: Market composition of food processing industry

0102030405060708090

100

Dairy

Frutis

& V

egetab

les

Mea

t & P

oluta

ry

Packa

ged F

ood

Bevera

ges

Staple

Foods

Unorganized Sector

Organized Sector

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Food%20Processing&FolderID=27

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Food processing industry at a glance:

� The organized small scale enterprises received investments worth $8.46 billion in

2007

� The sector experienced a growth rate of 13.14 percent in 2006-07 and it is expected

to touch 20 percent by 2015

� The unorganized sector made up of SSIs contributes over 50 percent of output in

terms of value and 70 percent in terms of volume

Source: THE SME WHITE BOOK 2009-10, BUSINESSWORLD, 2009

Policy initiatives:

� FDI up to 100 per cent is permitted under the automatic route in the food infrastructure

(food park, cold chain/warehousing).

� Regarding food retail, the FDI policy does not permit FDI into Retail sector except for

Single Brand Product Retailing. This policy is uniform for all retailing activity.

� FDI policy for manufacture of items reserved for the SSI sector is uniform for all items

so reserved and a separate dispensation for items in the food processing sector is not

contemplated.

� The policy for distillation of alcohol has been announced vide Press Note 4 (2006)

according to which FDI up to 100 per cent is permitted through the automatic route for

distillation and brewing of alcohol subject to licensing by the appropriate authority.

� Automatic approval of 100 per cent equity is available for most processed food items.

� Most of the processed food segments have been exempted from industrial licensing,

with the exception of beer and alcoholic drinks and items reserved for Small Scale

Sector, like bakery, bread and vinegar among others.3

4.2.2 Apparel & Textiles:

The textile sector has been thriving in India for decades. The traditional textile industry

of India had virtually decayed during the colonial regime. However, in the nineteenth

century, the industry was revived with the establishment of textile mills in Calcutta in

1818. The Indian apparel and textile industry is a thriving sector within the Indian

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economy with an annual growth rate of 9 to 10 per cent. Over the years, the industry has

made a significant contribution to national output, employment and exports.

Composition:

It consists of cotton sector, jute sector, sericulture industry, woolen sector, manmade

fibers and technical textiles.

Figure 2: Percentage wise production in Textile Sector

0%

20%

40%

60%

80%

100%

2003-04 2004-05 2005-06 2006-07 2007-08

HOSIERY

POWERLOOM

HANDLOOM

MILL

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Apparels_%26_Textiles&FolderID=25

Textile Industry at a glance:

� Annual growth between 9 to 10 percent � Important clusters at Bhilwara, Sanganer, Panipat, Palli, Jetpur, Jodhpur, Surat, Sambalpur, Mysore and Bhiwadi � Current size is $52 billion, to increase to $155 billion by 2012 � The country is the largest exporter of yarn in the world with a share of 25 percent � Accounts for 12 percent of world textile fibres and yarn production, 23 percent of world’s spindle capacity � Employs around 35 million directly and additional 56 million indirectly � Largest jute producer in the world � India is only country to produce all four kinds of silk (mulberry, tusar, eri and muga) � Carpet exports increased from $654.32 million in 2004-05 to $806.71 million in 2007-08 � Apparel accounts for 10 percent of the Indian retail market

Source: THE SME WHITE BOOK 2009-10, BUSINESSWORLD, 2009

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Policy Initiatives:

� 100 per cent FDI allowed through the automatic route.

� Technology up-gradation Fund Scheme (TUFS) which was launched to facilitate the

modernization and up-gradation of the textiles industry in 1999 has been given further

extension till 2011–12.

� Scheme for Integrated Textile Park (SITP) has been started to provide world class

infrastructure facilities for setting up textile units through the Public Private Partnership

model.

� 50 textile parks are being established to enhance manufacturing capacity and increase

the industry's cost competitiveness.

� 2 percent interest subvention till March 2011 for pre and post shipment export credit

� About 40 textile parks being set up under the scheme for Integrated Textile Parks and

10 jute parks are planned to be set up by 2012.

� Technology Up gradation Fund Scheme extended till 2011-12.3

4.2.3 Auto Component Industry:

The Indian auto components industry has evolved over a period of time from being a

domestic supplier of low-value auto components to a sought-after hub for a variety of

critical and high-end auto parts. Today, India has the potential to manufacture nearly

20,000 kinds of auto components ranging from engine parts, fasteners to brakes.

According to the Auto Component Manufacturers Association of India (ACMA), the

Indian auto components industry, currently worth US$ 10 billion, has the potential to

grow to a US$ 40 billion industry over the next decade.

Production:

The SMEs no longer have an India-centric approach, adopted in the early years of

liberalization, but have started collaborating with foreign players for technology and

skills, while also looking for potential overseas markets.

� North India is emerging as an important hub for SMEs and accounts for almost 35 per

cent of exports of this sector.

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� The Pune Auto cluster, in particular, is projected to export goods worth US$ 8 billion

by 2015.

According to the Commerce Ministry, almost 50 per cent companies in this sector have

achieved a 95 per cent increase in inventory turnover ratio, aided by Kaizen driven cost-

effective measures

Figure 3: Production by SMEs sector in Auto Component Industry

Source:http://www.imsme.org/ViewFolder.aspx?FolderName=Automotive%20Components&FolderID=21

Figure 4: Product Segmentation

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Automotive%20Components&FolderID=21

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Auto Components Industry at a glance:

� By 2016, GDP contribution of automotives sector to jump to 10 percent, creating additional employment for 25 million people and output to increase by $145 billion in the same period � Auto components clusters based in Indore, Jamshedpur, Kolkata, Pune, Manesar and Chennai � Pune auto cluster to export worth $8 billion by 2015 � Growth of exports by SMEs in the sector to go up to a CAGR of 34 percent between 2006 and 2014 � Indian Auto Components industry accounts for 0.4 percent of global trade in the segment.

Source: SME WHITE BOOK 2009-10

Policy initiatives:

The National Strategy for Manufacturing, drawn by NMCC, has identified the

automobiles and auto components sector as one of the areas for priority action. The

Department of Heavy Industries and Public Enterprise of the Government of India aims

to make India a preferred destination for the design and manufacture of automotives and

auto components. ‘Automotive Mission Plan 2006-16’ seeks to double the contribution

of the automotives sector in the GDP from 5 per cent in 2006 to 10 per cent by 2016;

offer additional employment to 25 million people and take the output of this sector to

US$ 145 billion by 2016.

The government allows 100 per cent foreign direct investment (FDI) through the

automatic route.

Apart from this, the government’s Industrial Infrastructure Up gradation Scheme

offers a grant of up to 75 per cent of the total project cost or a maximum of US$ 12

million (whichever is lesser) on a one-time basis to chosen clusters for improving

industrial infrastructure through private-public partnership. Special Purpose Vehicle

(SPV), formed by the industry/cluster association at the specific cluster level has the

authority to implement the scheme.

One of the first to benefit from this scheme was the Pune Auto cluster, which was granted

a total project cost of around US$ 14.41 million during 2004-5, of which the centre was

scheduled to contribute nearly US$ 12.02 million.

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Recognizing the growing importance of clusters in the Indian auto component industry,

the Department of Heavy Industries and Public Enterprises of Government of India plans

to:

� Strengthen the export, communication and transportation infrastructure in and around

important clusters.

� Set up relevant governmental Institutes, research and educational facilities to serve the

growing requirements of the auto components sector.

� Create a National Level Specialized Education and Training Institute for Automotive

Sector during the Eleventh Five-Year Plan period.3

4.2.4 Leather:

The Indian leather industry comprises of a large number of artisan, cottage, small and

medium enterprises. The industry has an unorganized and an organized sector, and

according to a 2008 estimate, around 80 per cent of leather footwear units are in the

unorganized sector.

India has the highest livestock numbers in the world, providing a huge supply of raw

materials – as skins and hides – to this industry. As converting leather into value-added

products is a purely skill-based, labor-intensive process, the industry has the potential to

play a big role in creating employment- and income-generating opportunities in the

country.

The leather industry has huge potential in India. The footwear segment, for instance, is

poised to grow manifold with the rise in disposable income of the middle class, as will

the demand for leather goods. Export prospects have also brightened considerably,

especially since China’s leather exports have been stagnating and production has fallen in

Western Europe.

The industry has set a trade target of US$ 12 billion by 2012, including exports worth

US$ 7 billion and domestic sales worth US$ 5 billion. During Aril-December 2007,

exports of leather and leather items touched US$ 2485.58 million as opposed to US$

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2258.81 million during the same period in 2006, registering a growth of 10.04 per cent,

according to the Council for Leather Exports (CLE) estimates.

Some of the constraints slowing down the progress of this industry are lack of FDI – the

industry accounted for a meager 0.15 per cent of the total FDI inflow in 2006; lack of

technical expertise and competition from the Chinese leather industry. In recent times, the

unprecedented appreciation of the Indian rupee against the US dollar has put the sector

under tremendous strain. This has slowed down investments and led to a loss in

employment. The industry has also been dogged by environmental issues. In the leather

tanning and finishing stages, various chemicals that are used are polluting and have been

banned by some importing counties, thereby adversely affecting exports to those

countries.

Leather Industry at a glance:

� Employs around 2.5 million people, expected to provide employment to 1 million more by 2010 � 92 percent of people into skin collection, tanning, finished leather and products, rest in secondary and tertiary sectors � Exports grew from $2216.45 million in 2003-04 to $3477.52 million in 2007-08 � Annual growth rate of 20 percent needed to export goods worth $ 7 billion by 2010-11 � Capacity to fulfill 10 percent of the global leather requirement � Industry size approximately Rs. 250 billion

Source: SME WHITE BOOK 2009-10

Policy Initiatives:

Recognizing the potential of the leather industry and keen to take the industry’s share to 4

per cent of the world trade by 2010, the Government of India has taken certain policy

initiatives.

� Foreign equity up to 100 per cent is allowed, subject to certain conditions.

� Foreign equity up to 51per cent is accorded automatic approval in several key areas.

� Investments over 51per cent equity participation are approved on a case-to-case basis

by the Foreign Investment Promotion Board (FIPB). Clearance of proposals by the FIPB

takes around six weeks on an average.

� Foreign investors need not have a local partner.

23

� Free repatriation of profits and capital investment is permitted, except for a shortlist of

specified consumer goods industries.

Apart from these steps, the Union government commissioned a Tannery Modernization

Scheme and another scheme for footwear and leather products. The scheme is expected to

be implemented at a cost of US$ 71.21 million. The government is also encouraging the

setting up of footwear parks/complexes to enhance production capacity. During the 10th

Plan, the government provided financial assistance to build a Footwear Component Park

and a Footwear Complex at Chennai, and provided marketing and training assistance to

artisans and primary workers. The government also proposes to build a footwear park, a

tanning complex, a leather goods park and two footwear component parks for the leather

industry, all by 2010.3

4.2.5 Gems and Jewellary:

India is one of the fastest growing jewellary markets in the world and is the largest

consumer of gold (around 20 percent of global consumption) and also the largest

diamond processor (around 90 percent by pieces and 55 percent by value of the global

market).

The industry is highly unorganized and fragmented with around 96 per cent of the total

players being family-owned businesses. It is estimated that the country has around

450000 goldsmiths, 100000 gold jewelers, 6000 diamond processing players and 8000

diamond jewelers. Although, India is not a major miner of precious metals and stones, the

country’s inexpensive and skilled workforce is one of the best in the world for processing

of diamonds. Further, the retail sector has also seen an impetus in the recent past with

end-users buying branded jewellary, due to increase in quality consciousness.

Consumption:

India accounts for 20 per cent of the world gold consumption, the largest in the world.

The country consumes nearly 800 tonnes of gold, of which nearly 600 tonnes go into

24

making jewellary. Further, India is also emerging as the world's largest trading centre for

gold targeting US$ 16 billion by 2010.

The Indian diamond jewellary industry is the third largest consumer of polished

diamonds after US and Japan. Diamond jewellary consumption is likely to jump to nearly

80 per cent in 2010 and over 95 per cent between 2010 and 2015.

According to the Investment Commission of India and the industry is expected to have a

65 per cent share of the global market by 2010. In terms of domestic sales, branded

jewellary is likely to become the fastest growing segment and is expected to witness a

growth of 40 per cent per annum to US$ 2.2 billion by 2010, as per McKinsey.

Export:

The export industry mainly comprises of small-to-large units based in various special

economic zones (SEZs), export processing zones (EPZs) in Chennai and Noida and

Santacruz Electronics Exports Processing Zone (SEEPZ) in Mumbai, supplying primarily

diamond-studded jewellary.

Figure 5: Exports of Gems and Jewellary

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Gems_%26_Jewellery&FolderID=22

� As per the latest Gems & Jewellary Export Promotion Council (GJEPC) release, the

industry registered exports worth US$ 15 billion in April-December 2008 (Provisional),

25

compared to US$ 14.9 billion in the corresponding period of 2007, registering a growth

of .59 per cent.

� Further, the total gems and jewellary exports from India stood at US$ 20.8 billion in the

financial year 2007-08, against US$ 17.1 billion in the previous year, witnessing a growth

of 22.27 per cent. The sector accounted for 13.41 per cent of India's total merchandise

exports.

� Out of the total US$ 20.88 billion exports generated by the Indian gems and jewellary

sector, the United States and Hong Kong accounted for the largest import, with a share of

26 per cent each, followed by UAE at 21 per cent.

� Gold jewellary exports increased from US$ 5.2 billion in 2006-07 to US$ 5.6 billion

2007-08.

� Export of cut and polished diamonds grew from US$ 10.9 billion in 2006-07 to US$

14.2 billion in 2007-08, witnessing a growth of nearly 68 per cent.

� Export of colored gemstones increased from US$ 246.4 million in 2006-07 to US$

276.42 million in 2007-08.3

Policy Initiatives:

� Allow 100 per cent FDI in the gems and jewellary sector through the automatic route.

� Abolish duty on polished diamonds in May 2007.

� Setting up Gems and Jewellary Parks and SEZs to promote Sectoral investments

Fiscal stimulus package: In order to revive the Indian economy from the current global

economic downturn, the government announced a stimulus package on December 7,

2008. Some of the measures announced include:

� Increasing the Post Shipment Rupee Export Credit Period from 90 days to 180 days

with effect from November 28, 2008

� Increasing the Pre-Shipment Rupee Export Credit Period from 180 days to 270 days

with effect from November 15, 2008

� Providing an interest subvention of 2 percent up to March 31, 2009 subject to minimum

rate of interest of 7 percent per annum, to make pre and Post-shipment export credit for

labor intensive exports, such as gems & jewellary, more attractive

26

� Allowing exporters to avail refund of service tax on foreign agent commissions of up to

10 percent of FOB value of exports. They will also be allowed refund of service tax on

output services while availing of benefits under Duty Drawback Scheme.

4.2.6 Pharmaceuticals:

The Indian pharmaceuticals industry has been growing over the years in terms of product

profiles, technology and infrastructure development.

India has the potential to emerge as a global pharmaceutical hub by positioning itself as

an off shoring destination for pre-clinical and clinical research and exporting

indigenously manufactured generic products. According to A.T. Kearney, India ranks

second only to China as a preferred destination for clinical trials and an Ernst & Young

study says the market for clinical research-related activities in the country is expected to

touch US$ 1.5-2 billion by the year 2010.

The industry has the potential to attain the target of US$ 24 billion in formulations, with

bulk drug manufacturing going up to US$ 6 billion, by the year 2010. According to the

estimate of National Manufacturing Competitiveness Council (NMCC), the Indian drugs

and pharmaceuticals industry consists of over 20,000 companies, out of which around

8000 are operational. The formulation segment of Indian pharmaceuticals industry

consists of around 7,000 small scale units, a large number of which undertake contract

manufacturing on behalf of large companies.

The research and development (R&D) spend in India is around 4 per cent of sales

compared to 12-16 per cent in global scale. This has adversely affected the introductions

of new molecules, drug discovery and developments of new chemical entity (NCEs).

Exports: India exports drugs and related items to over 200 countries across the globe including

US, Japan, Europe and Australia. In the last few years before 2007, 50 per cent of the

sector’s revenue came from overseas trade. Out of the country’s total pharmaceuticals

27

exports, 55 per cent is in the form of formulations and 45 per cent in the form of bulk

drugs.

Figure 6: Exports from Indian Pharmaceutical Industry

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Pharmaceuticals&FolderID=24

Pharmaceuticals Industry at a glance:

� Pegged at $17 billion � Clusters in Andhra Pradesh, Gujarat and Maharashtra � Employment to over 3 million people(both direct and indirect) � India stands 4th (8 percent) in terms of volume and 13th (1.5 percent)in terms of value in the world � Annual growth rate of 14 percent � Production of 20 – 24 percent of the generic drugs in world in terms of value � Of the 1000 bulk drugs units in the country, 750 are SMEs � SMEs account for over 50 percent of India’s drug production and export

Source: SME WHITE BOOK 2009-10

Policy Initiatives:

The Government of India has recognized the importance of SMEs in the pharmaceuticals

sector and chalked out several policy initiatives in this direction. In the Draft National

Pharmaceuticals Policy-2006, the government has reinforced the country’s position as

one of the key global players in the manufacturing of pharmaceuticals, owing to its rich

human capital base and low cost of production. Some of the initiatives include:

� It plans to offer a subsidy on interest to SMEs to help them upgrade their facilities so

that these units can meet stringent quality norms. Once implemented, the scheme is

expected to benefit nearly 2,000 drug-making SMEs.

28

� The Pharmaceutical Policy 2006 makes provision for more National Institute of

Pharmaceutical Education and Research (NIPER) that will come up in Bangalore,

Kolkata, Hyderabad, Ahmedabad and Guwahati. This will help meet the industry’s

demand for 1,000 highly-skilled personnel per annum up to the year 2010.

� SMEs in the pharmaceuticals sector are likely to be allowed to give a higher trade

margin to chemists in comparison to their larger counterparts. This would help SMEs to

compete with industry majors who employ a vast number of salesmen to push their

products.

� In March-2008, Indian Minister for Science & Technology and Earth Sciences, Kapil

Sibal announced availability of financial assistance up to US$ 240042 with 15 per cent

capital subsidy, to small scale drug and pharmaceutical companies. The aim of this

initiative is to assist in technical up gradation of these units under the credit linked capital

subsidy scheme of Ministry of Micro, Small and Medium Enterprises .3

29

4.3 Performance of SMEs

4.3.1 Growth Rate of SME sector:

For sustainable development of the economy, different sections of the economy should

grow. One such section is industrial production. The corporate sector is in the news day

in and day out with regards to its current happening and future plans. But in comparison

by no of firms, they form only a small percent of total units. In business turnover the

corporate houses lead the race but the vital ancillary inputs are provided by the SMEs. So

the growth of SMEs is also vital for the overall growth of the sector.

TABLE 3: Growth rate (%) of SMEs

YEAR SSI INDUSTRIAL

96-97 11.3 7.10

97-98 8.43 5.80

98-99 7.70 4.00

99-00 8.16 6.50

00-01 8.23 4.97

01-02 6.08 2.71

02-03 8.68 5.75

03-04 9.64 7.02

04-05 10.88 8.36

05-06 12.32 8.15

06-07 13.00 11.51

Source: http://eaindustry.nic.in/handbook_200607/Chapter%207.pdf

The table shows that there has been a continuous growth in the SSI from the year 2000

onwards. Also the growth of SSI has been more than the overall industrial growth. So for

future prospects of SSI it may be assumed that it will continue to have double digit

growth. This will increase the share of SSI as a percentage of GDP.

30

India is an emerging country and for fostering this growth the employment generation

will play a vital role. This is important for a country like India which also heads the list in

population. Due to over population the growth will be hampered when they become

dependent and increase the burden on government expenditure. So employment

generation is pivotal in changing dependent population to independent population which

will also contribute to growth of the nation.

4.3.2 Employment Generation

SMEs are a source of employment to most of the people. The SMEs are spread across the

country and they are one of the biggest employers in the country. The table below shows

employment generation by the SMEs which has shown a continuous increase. So growth

of SMEs also means increased employment which ultimately completes the circle of flow

of money and services.

TABLE 4: Employment generation (Figures in Rs. Lacs)

2000-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08*

238.73 249.33 260.21 271.42 282.57 299.85 312.52 322.28

*provisional

Source: www.msme.nic.in/AR2008-09-Eng-Chapter-2.pdf

31

4.3.3 EXPORTS by SMEs:

In recent years the SMEs have played a greater role in the world economy due to

reduction in trade barriers in international trade by the active intervention of government.

SMEs in India contribute to about one third of total manufactured exports.

Exporting is considered to be one way of stimulating growth of SMEs, gradually

improving the quality standards of SME products, and capturing more global shares.

Boosting the contribution of small and medium enterprises in total exports of India is

vital to India’s future economic growth.

Promoting the export competitiveness of SMEs needs the active involvement of various

stakeholders – governments, the private sector and the international community.

Export competitiveness of SMEs in India can be promoted in the following manner:

1) Independent SMEs specializing in specific niches and highly profiled productions;

2) SMEs that link up with Trans National Corporations or large domestic exporting firms

3) SMEs that are part of clusters and networks in order to reinforce their external

competitiveness

Table 5: Export by SMEs: (FIGURES IN Rs. CRORES)

2000-01 01-02 02-03 03-04 04-05 05-06

TOTAL

EXPORTS

202510 207769 252137 291582 375340 456418

SSI

EXPORT

69797 71244 86013 97644 124417 150242

SHARE 34.47 % 34.29 % 34.11 % 33.49 % 33.14 % 32.92 %

GROWTH

RATE

N.A 2.07 % 20.73 % 13.5 % 27.4 % 20.8 %

Source: http://www.dcmsme.gov.in/ssiindia/statistics/export_gr.htm

32

The table shows that growth in SSI export has not been consistent during the past years.

A steady increase in growth is expected from this sector on the back of recovering

economy in the country as well as the initiatives of government to foster the growth and

development of SMEs in the country.

As per the NCAER survey of Business Confidence Index for the quarter ended on 31st

December, 2009 the majority of exporting firms expected improvement in the coming six

months. About 62 per cent of the respondents believed that their exports are likely to

improve in the next six months; 33 per cent expect it to remain at the present level, while

only 5 per cent are expecting decline. Among those expecting growth in exports over the

next six months, the majority falls in the category expecting 5 per cent improvement.

Indian SMEs have harnessed the opportunities presented by the opening up of the

markets after the establishment of the World Trade Organization (WTO) and contribute a

sizeable percentage to India’s export basket. However, the proportional growth in exports

by SMEs that was expected to follow the reduction in tariffs and the dismantling of

quantitative restrictions has not really happened.

As tariffs have been lowered over time, non-tariff barriers to trade (NTBs) have become

prominent, negating the gains which were supposed to be accrued. NTBs refer to the

wide and heterogeneous range of policy interventions other than border tariffs that affect

and distort trade of goods, services and factors of production. By increasing the

transaction cost of doing business, NTBs render exports less competitive. For several

reasons, SMEs are more vulnerable than larger companies to the effects of trade barriers

in the form of NTBs. SMEs are largely unorganized, work with limited resources and

enjoy very low profit margins. This reduces their ability to successfully meet the

challenges arising from NTBs. The lack of financial resources means that SMEs cannot

respond adequately to product safety and other technical requirements imposed by

importing countries. In most cases, SMEs fail to raise sufficient capital to carry out the

necessary adjustments in their production processes to meet the ever-changing standards

33

and requirements. Those who can do so are forced to pass on the costs to the customers,

which in turn decreases their cost competitiveness.

As observed from the experience of India SMEs in the export market, the Indian SMEs

need special tailor made programs to overcome the NTBs with adequate support from the

government in various forms. Some of them are highlighted from the case study

mentioned below.

Lessons from international success:

Case: Brazil18

Brazil is one of the successes in realizing the export potential of its SME sector. The

country successfully overcame its export barriers and introduced multi-level initiative and

provided adequate support system in the form of export promotion policies and necessary

regulation.

1. EXPORT PROMOTION FINANCE PROGRAMS:

This program finances the exporters of goods produced by SMEs, in the phase pre-

embankment, through credential financial institutions. Under this scheme credit can go

up to 100% of FOB value and will be related to long term rate plus remuneration to the

credential financial institution (not more than 4%)

2. TECHNOLOGY SUPPORT PROGRAMME:

The main aim of introducing this program was to realize the full potential on Internet

based instruments. The program includes

a) Program of technology support to exporters: PROGEX which provides

technological assistance to the micro and small enterprises which want to become

exporters.

b) Creating trade platforms: the government has created a foreign trade platform

which allows online export operation and responds to the demands of small firms

willing to start exports.

34

3. Other programs:

PROJECT NATIONAL NETWORK OF TRADE AGENTS: REDEAGENTES: This

project involves training agents of international trade, entrepreneurs and employees of

diverse institutions such as cooperative, trade associations, etc. Then the agents are

integrated in a network based in the internet, the REDEAGENTES. In this way the agents

start to contribute in the process of spreading the export culture and to give orientations

to other small businesses on how to export.

35

4.4 SICK UNITS: After nationalization of banks in 1969, the banking sector became a key source of support

for small and medium industry. Technical consultancy support and various financial

institutions formed a framework for supporting SMEs. Within this framework, in 1987

and in 1989, Reserve Bank of India announced schemes for rehabilitation of small and

medium industries. These schemes entailed restructuring of debt of sick companies with

relief and concessions. The rehabilitation schemes worked selectively and were effective

where markets were available for the units’ products and where entrepreneurs were

skilled and serious. This was a period of economic growth ranging between 3% & 5%.

Growth of internal & international competition and technological changes continued to

erode the financial strength and viability of SMEs, putting them in need of rehabilitation

measures. The protection available to the industry has been gradually coming down since

1991 with integration of Indian economy with global economy. IRAC norms were

introduced in 1992, making the banks hesitant to lend to small enterprises as it is

perceived as risky lending.

Growth of MSME Sector:

The high rate of NPAs in small enterprises sector has created risk aversion among

lenders, which has hindered increase in flow of credit to the sector. The non credit related

factors responsible for slow growth rate of small enterprises sector are non-availability of

power and other infrastructural facilities, delay in getting clearance from different

agencies, prevailing condition of the economy, lack of entrepreneurship development

infrastructure and historical/social factors etc. Still, states that give due importance to this

sector and have provided adequate infrastructure and enabling environment have seen

good growth in small enterprises sector. However, there is tremendous potential for

growth of MSME due to its inherent strength to contribute to the economy of the nation.

It is observed that the banks consider marketing problems, inadequate infrastructure, and

technology related issues as major hindrances to growth. Besides these reasons, RRBs

consider lack of managerial competence as another important factor for poor growth.

36

MSME Associations have stated that delayed availability / shortage of funds, non-

responsiveness of the government departments, and high cost of funds, inadequate

infrastructure and marketing problems are the major reasons for poor growth of MSMEs.

Directors of Industries and EDIs have also opined on the same lines.

Source: Report of working group on rehabilitation of sick units, K C Chakrabarty, 20083

Credit related issues:

There is lack of transparency in accounts of small enterprises and their accounts are not

based on accounting standards and generally accepted accounting principles. Non-

maintenance of proper records by MSMEs is also a problem indicated by the banks

during interactions. It is indeed difficult for the banks to assess the capacity of the

enterprise to repay.

A banker’s risk perception towards SMEs is heightened by the poor historical

performance of SME loan portfolios, particularly loans extended by the public sector

banks, which account for more than 90 per cent of all lending to SMEs.

TABLE 6: Incidence of NPA in advances of public sector banks to small enterprise

(Figures in Rs Crores)

Year SME

advances

SME

NPA

Net Bank

Credit

Total

NPA

SME

NPA:ADVANCE

Total NPA: Net

Bank Credit

2001 48400 10339 341291 53174 21.36 15.58

2002 49743 10584 396954 56506 21.28 14.23

2003 52988 10162 477899 52806 19.18 11.05

2004 58278 8838 558849 50148 15.17 8.97

2005 67634 7835 717304 47696 11.58 6.65

2006 82434 6917 1017604 41378 8.39 4.07

2007 104703 5843 1317705 38602 5.58 2.93

Source: RBI

While public banks have large SME portfolios, the non-performing assets (NPAs) have

been extremely high. These NPAs have been gradually coming down from 21.36% in

2001 to 5.58% in 2007 but the level of gross NPA has reduced from 15.58% to 2.93%

37

during this period. Thus despite reduction of NPA in small enterprises by 75%, they still

stand at double the NPA level in total advances as on 31- 03-2007.In absolute terms

almost Rs 6000 crores of public banks are blocked in small enterprises NPAs. Hence

these banks are risk averse to expanding their small enterprises portfolio. A few of the

new banks report very low NPAs in their total SME portfolio. However, the NPAs of the

public and new private sector banks are not directly comparable as the private sector

banks have newer portfolios and losses may not yet be recognizable

Incidence of Sickness in the MSME Sector:

In a dynamic set up, industrial units which are non-competitive, uneconomical and

inefficient become sick and die out and new and more efficient units come up to take

their place. This process takes place in a cycle as a sequence of economic restructuring.

Re-allocation of resources, both material and human, from less efficient to more efficient

areas is expected to increase production and productivity. It is also likely to lead to higher

employment generation in the long run. However all failures cannot be attributed to

irreparable weaknesses. Failure of enterprises will deter the objectives of economic

development. It is in this context that the high incidence of NPAs and sickness in MSME

sector must be viewed. Thus failure is a hard fact and has to be accepted by all but the

corrective actions wherever feasible and warranted must be taken expeditiously.

TABLE 7: Incidence of Sickness in SME Sector (Figures in Rs Crores)

Year No. of A/c’s Amt O/S Amt O/S per A/c

1999 306221 4313.48 0.014

2000 304235 4608.43 0.015

2001 249630 4505.54 0.018

2002 177336 4818.92 0.027

2003 167980 5707.35 0.034

2004 143366 5772.64 0.040

2005 138041 5380.13 0.039

2006 126824 4981.13 0.044

2007 114132 5266.65 0.046

Source: RBI

38

Existing RBI Guidelines for Rehabilitation of sick units:

Definition of Sick Small Enterprises

A Small Enterprise should be considered 'Sick' if

a) Any of the borrowal accounts of the unit remains substandard for more than six

months i.e. principal or interest, in respect of any of its borrowal accounts has remained

overdue for a period exceeding one year. The requirement of overdue period exceeding

one year will remain unchanged even if the present period for classification of an account

as sub-standard, is reduced in due course; or

b) There is erosion in the net worth due to accumulated cash losses to the extent of 50 per

cent of its net worth during the previous accounting year; and

c) The unit has been in commercial production for at least two years.

Viability of Sick Small Enterprises:

A unit may be regarded as potentially viable if it would be in a position, after

implementing a relief package spread over a period not exceeding five years from the

commencement of the package from banks, financial institutions, Government (Central /

State) and other concerned agencies, as may be necessary, to continue to service its

repayment obligations as agreed upon including those forming part of the package,

without the help of the concessions after the aforesaid period. The repayment period for

restructured (past) debts should not exceed seven years from the date of implementation

of the package. In the case of tiny sector units, the period of relief/concessions and

repayment period of restructured debts not to exceed five and seven years respectively, as

in the case of other small enterprises.

Based on the norms specified above, it will be for the banks/financial institutions to

decide whether a sick Small Enterprise is potentially viable or not. Viability of a unit

identified as sick should be decided quickly and made known to the unit and others

concerned at the earliest. The rehabilitation package should be fully implemented within

six months from the date the unit is declared as 'potentially viable' / 'viable'. While

identifying and implementing the rehabilitation package, banks/FIs are advised to do

‘holding operation' for a period of six months. This will allow small-scale units to draw

39

funds from the cash credit account at least to the extent of their deposit of sale proceeds

during the period of such ‘holding operation'.

The data compiled by Reserve Bank of India on sickness in small and medium enterprises

as on 31-03-2006 and 31-03-2007 is given below:

TABLE 8: Bank-Wise Viability Position of Sick Small Enterprises

(Figures in Rs crores)

Source: Report of Working Group on Rehabilitation of Sick Units

TABLE 9: Bank-Wise Viability Position of Sick Medium Enterprises (Figures in Rs crores)

Source: Report of Working Group on Rehabilitation of Sick Units

The above data reveals that

� There was a perceptible decline of 10% in the number of sick SSI units in year 2007 but

the amount outstanding against them went up by almost 6% as compared with 2006

(126824 a/c’s in 2006 to 114132 a/c’s in 2007 with aggregate exposure of Rs 4981.13

crores in 2006 to Rs 5266.65 crores in 2007).

40

� In Small Enterprises Sector out of 114132 sick units, only 3.76% units were found

viable by the banks and out of the same only 13.72% units were put under nursing. Thus

only 0.52% of the sick SSI units were put under nursing.

� Among the sick medium enterprises, out of 17949 sick units, only 10.77% units were

found viable by the banks and out of the same only 6.05% units were put under nursing.

Thus only

� 0.65% of the sick units were put under nursing.

� For the SME sector as a whole, out of total 132081 sick units, the total units found

viable are only 4.71%, of which 11.33% were put under nursing i.e. only 0.53% of the

sick units were put under nursing.

� It is difficult to assess as to how many units were really studied for their viability out of

the 95-

� 97% units not found viable.

41

4.5 Surveys relating to SMEs

4.5.1 Milagrow Survey

The second edition of Milagrow’s annual survey on the “Effectiveness of Government

Policies for the MSME Sector in India” has thrown up certain startling facts. The study

aims to understand the effectiveness with which the needs have been addressed by the

provisions of the MSME Development Act, 2006 at the grass root level. It analyzes and

evaluates the degree of implementation, with reasons for success or failure across the

span of stakeholders, and suggests means for maximizing the benefits that can accrue

from the MSME Act.

The survey was conducted among the MSMEs which were distributed across the

geography of the nation. 26 percent MSMEs were contacted from the west, 22 percent

from east, 29 percent from south and 23 percent from north. Firms of several sizes were

approached and representation was taken varied industries to get a wide spectrum for

evaluation and analyze the details at a macroscopic level.

Highlights of the survey:

� Though the awareness level of Government MSME policies have improved from 25

percent to 35 percent over last one year, but still 65 percent of the MSMEs on an all India

basis are not even aware about the MSME Development Act.

� 95 percent respondents across the country say that corruption levels are very high or

high. The figure has not changed over the last one year.

� The efficacy index of the Government MSME policies and ecosystem is as low as 35

percent.

Findings:

The two issues that exist in the MSME policies can be categorized at two levels. The first

is the effectiveness and usability of the several schemes and policies. The second and

more important issue is the awareness of these policies and schemes among the MSMEs.

42

Figure 7: Unawareness levels of MSME Act at the grass root levels

74%

60%

49%

80%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

EAST WEST NORTH SOUTH OVERALL

It was revealed that 65 percent of the MSMEs are not even aware that an entire act with

several policies and schemes exist specifically for the MSMEs. The irony was that 90

percent of the respondents were actually registered MSMEs. The figure has improved as

compared to last year but it clearly indicates that there is still a long distance which needs

to be covered.

Figure 8: Availing of the benefits of the MSME Development Act

50%

35%31%

24% 22% 21%

0%

10%

20%

30%

40%

50%

60%

Cre

dit

facilita

tio

n

Re

co

gn

itio

n

as

"En

terp

rise

"

Pro

cu

rem

en

t

Su

pp

ort

Ma

rke

tin

g

pro

mo

tio

n

and

oth

er

en

ab

lers

Pa

ym

ent

De

lay

Dis

pu

te

Se

ttle

men

t

In terms of awareness of benefits of provisions in MSME Development Act, 2006 the

graph clearly reflects that inspite of funding and financing being the major concern for

the MSMEs, only 50 percent of the respondents had applied for the credit facilitation

provision that exist for the MSMEs. The availing of benefits of the other aspects is much

43

lower that credit facilitation. Considering the fact that the benefits can percolate to the

end users only if the end user is aware of them, the overall picture is very dismal. This

indicates there is a missing link between the policy makers and executive part of the

governance.

Figure 9: MSMEs who availed the schemes of Government of India

57% 56%

43%

33% 33% 32% 31% 31%

12%

0%

10%

20%

30%

40%

50%

60%

ISO

90

00/1

400

1

Ce

rtifi

ca

tion

Fee

reim

bu

rse

men

t

Sc

he

me

MS

ME

Dev

elo

pm

ent

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gra

mm

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The ISO Certification Free Reimbursement Scheme and the Credit Guarantee Scheme

have been utilized the most and about 57 percent respondents have taken benefit of the

same. In south and east more than 75 percent respondents have availed the scheme. The

Credit Guarantee Scheme also has been availed by 56 percent of the respondents. MSME

Cluster Development Programme ranks next in the levels of being availed by 43 percent

of the respondents.

Perceptual mapping in attitudinal improvement for various stakeholders paint a thorny

picture especially for the law authorities as they have gone on the negative side of the

performance. One out of every two respondents feels that the attitude of law authorities

towards the MSMEs has degraded over the last three years.

44

Figure 10: Effectiveness of Government Schemes

Not at all Effective,

45%

Slightly Effective,

35%

Average

Effectiveness, 16%

More than expected

effectiveness, 4%Very Effective, 0%

A whopping 80 percent MSMEs felt that the government policies are ineffective or less

effective than expected. The zone wise analysis indicates that except a couple of

respondents in the north, none of the respondents said that the Government policies for

MSMEs are more effective than expected.

Figure 11: Corruption Levels

CORRUPTION LEVELS

40%

55%

3%

1%

1%

Very High

High

Medium

Low

Very Low

Corruption levels are found to be perceptually very high for the country. 95 percent of the

respondents rated the corruption levels to be very high or high. When asked about the

impact of corruption on MSMEs, 82 percent said that it is higher than the moderate

45

levels. According to the study “Government backed initiatives and MSME progress in

India”, conducted by Milagrow in 2008, 97 percent of the respondents choose to avoid

giving any direct answer on corruption and bribery. In comparison to the same 98 percent

respondents feel corruption is not low. This clearly indicates that no improvements have

been witnessed in the last one year.

Figure 12: Adverse Impact of Corruption Levels

44%

29%

9%

15%

3%

Very High

High

Medium

Low

Very Low

Nearly 75 percent of the respondents felt that corruption has high or very high impact on

their business. 9 percent felt that the impact is medium. A small percentage of 3 percent

said that the impact is very low. This signifies that the reason for MSME Development

Act, 2006 has not being received well is also due to corruption.

The overall efficacy index was calculated for the MSME policies of the Government of

India and the MSME ecosystem. Weights were assigned to the several needs of the

MSMEs along with the other aspects of the MSME Ecosystem and based on the

responses from the MSMEs; the efficacy was calculated as 34.90 percent which is very

low.

46

4.5.2 FICCI Survey:

A survey was conducted by FICCI among 116 SMEs manufacturing a diverse range of

products from 20 locations across the country, mostly catering to the export market. The

results reveal that 94% of SMEs catering to export market have been “severely to

moderately” hit by the economic slowdown.

However, units are showing some resilience and are hopeful of recovery; their single

point demand is for better financial accommodation by banks at low interest rates. It has

been reported that the interest subvention announced for SME exporters is not reaching

the intended beneficiaries at the ground level. The survey finds out that a major chunk of

the enterprises have been found to be unaware of the incentive schemes announced by the

government. This calls for an action programme for better communication of government

initiatives for the SME sector.

According to the survey, global economic slowdown and flagging demand in both the

domestic and global markets have affected Indian companies severely. SMEs in

particular have received a hard knock. These enterprises are struggling to stay afloat.

The majority of the respondents said that they were not really aware of the steps being

taken by the government to help SME weather the crisis. Out of the total participating

companies 73 percent of the respondents said that they do not know of any steps that

have been announced under the stimulus packages to support their sector. Further those

who were aware of the incentives announced; a majority of them indicated that these

measures have not really enabled them to regain the business momentum. This is a cause

of real concern as it seems the benefits of the stimulus packages are not percolating and

these enterprises are receiving only limited benefit from the government.

What was more disturbing that 87 percent of the participants reported that they were in

general not aware of the different schemes run by the government for the SME sector.

This indicated a serious problem with information dissemination at ground level.

47

With regards to the factors adversely affecting the business performance, 59 percent of

the respondents indicated that high cost of financing persists to be a problem. This is

particularly bothersome as 90 percent of the participants reported that they were

dependent on banks for funding their operations. Further 62 percent of the participants

felt that banks do not encourage financing in the SME sector and 97 percent of the

respondents said that the cost of finance has gone up over the last one year. Amidst the

existing situation which is already difficult, the support from banks is most crucial.

Among other factors, rising cost of raw materials and lack of buyers for products were

reported to be areas of botheration. The reporting companies also indicated that they were

witnessing stiff product competition from Chinese goods as they were being dumped into

India. This further reaffirmed the results of an earlier survey done by FICCI on “Imports

from China and its impact on SME sector”, which indicated that a majority of the SMEs

are facing heat in the domestic market due to imports of Chinese goods.

Nonetheless, the companies showed some optimism with regard to the expected market

conditions six months hence. 66 percent of the respondents said that they foresee an

improvement in the market condition, while 21 percent felt that the situation would

worsen. The remaining 13 percent expected no change in the situation.

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4.6 FOREIGN DIRECT INVESTMENT IN SME:

Diaspora contribution to their state of origin has been made in various ways, through

remittances, foreign direct investment, transfer of knowledge and entrepreneurial

networks. India has the world’s second largest Diaspora next to China with a substantive

presence in all the six continents.

While the contribution of the Indian Diaspora to India’s economy and society is a matter

of great pride and achievement for Indian’s the world over, however the Indian Diaspora

has not come forward as investors for the Indian SME sector, in the scale that was

expected post-liberalization in the early 1990’s.

Diasporic FDI, especially in comparison with China, has been very modest in India. Only

4% of India’s FDI comes from the Diaspora. This is due to the certain policies and

procedures that restrict FDI in the SME sector. According to the present status an

industrial undertaking, i.e., a company with interests in industry can invest upto 24%

equity in a SSI unit, however, if the equity goes beyond 24%, the industrial unit loses its

SSI status. Consequently, manufacture of items reserved for SSI would require an

Industrial License and export obligation of 50%. This applies to an industrial undertaking

with foreign (including NRI) investment

Current Scenario of NRI Investment in India:

India has been growing rapidly in the last decade and a half and with the opening up of

the economy there has been a huge flow of FDI into the economy. According to reports

for the financial year ending 2007 the total FDI inflow in the country has been about $16

billion from just $5.5 billion a year earlier. Foreign direct investment flows now account

for 6.8 percent of total investment, compared with just 0.5 percent three years ago. This

doesn’t include the FDI coming into stock market and bond market.

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TABLE 10: The country wise flow of FDI into India for the period Apr.’00 – Nov.’

07

Source: http://www.dipp.nic.in/fdi_statistics/india_fdi_Nov2007.pdf

The table shows that the NRI investments in India are only 3.43 % of total FDI Flow in

India. While the 60 million Chinese Diaspora accounts for more than 50% of FDI flow in

China, 20 million NRIs contribute less than 5% of the total FDI flow in the country. With

the opening up of the economy and change in Govt. of India’s attitude towards Indian

Diaspora there is a tremendous scope for increasing NRI investment in the country

TABLE 11: Sector wise FDI inflow for the period April 2000 to November 2007

Source: http://www.dipp.nic.in/fdi_statistics/india_fdi_Nov2007.pdf

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The table shows that the FDI investment has been primarily in service and computer

hardware and software sector. Labor intensive sectors like textile and garments,

agricultural services, leather etc have received low FDI in comparison to sectors which

are capital intensive. Need of the hour is to increase the FDI investment in the labor

intensive sectors so that marginalized section of the society also benefits from the growth

story of India.

While a common policy level strategy can be developed to woo NRIs to invest in India,

operational level strategies have to be different for attracting investments. Strategies

which have been successful to attract investment for large scale industries would not

work for small and medium scale industry owing to the differences in the nature of

operations. Again different sectors would require different strategy. Strategy for

attracting FDI for MSMEs IT sector and in leather sector cannot and should not be the

same.

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4.7 Rating Agencies:

Need of rating agencies for SMEs:

Over the years, the Indian financial system has come to regard credit ratings as an

integral part of the framework for credit and investment decisions relating to larger

enterprises. But, as the banking sector increasingly focuses on lending and providing

other financial services to the SME sector, ratings can play the same pivotal role as they

do for larger enterprises. Ratings can make SMEs’ access to financial services more

efficient by providing benchmarks and improving transparency. Independent agency

ratings for SMEs, based on high standards of analytical rigor, can provide greater

confidence to lenders, and consequently broaden the range of financial resources

available to SMEs.

Benefits of Performance and Credit Rating

� An independent, trusted third party opinion on capabilities and credit-worthiness of

SSIs

� Availability of credit at attractive interest

� Recognition in global trade

� Prompt sanctions of Credit from Banks and Financial Institutions

� Subsidized rating fee structure for SSIs

� Facilitate vendors/buyers in capability and capacity assessment of SSIs

� Enable SSIs to ascertain the strengths and weaknesses of their existing operations and

take corrective measures.

Benefits to the SME sector:

Ratings can provide an important impetus in raising standards through better financial

discipline, disclosure and governance practices. Surveys among larger enterprises clearly

show that managements feel ratings have provided value that goes well beyond the rating

symbol. In the SME sector too, ratings can be an important feedback tool for

managements. An interactive rating process helps managements gain unique perspectives

on business and financial issues and on best practices, from rating experts who have in-

depth sector knowledge and understanding of risk. A rating exercise can help SMEs

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better understand what initiatives they need to take to improve their operating and

financial positions. Additionally, as the number of rated players in the SME sector

increases, there will be greater transparency, as more and more information is demanded

and made available.

Benefits to lenders:

The financial institutions will be in a better position to lend to SME sector with the SME

units getting ratings from the rating agencies. This will help them in deciding the

feasibility of extending loans to the units as they can rely on the ratings achieved by the

SME units. This will reduce the cost of assessing individual applications on various

financial and non financial parameters since such will already be done by the rating

agency.

Recognizing the SME rating need:

Need of a Performance and Credit Rating Mechanism for SSIs was highlighted in Union

Budget’04-05. Then The Performance and Credit Rating Scheme for SSIs was formulated

in consultation with Indian Banks’ Association (IBA) and Rating Agencies. For

implementing this scheme NSIC is the nodal agency.

Background of NSIC:

National Small Industries Corporation Ltd. since its establishment in 1955 has been

working to fulfill its mission of promoting, aiding and fostering the growth of SSIs and

industry related small scale services/business enterprises in the country. Over a period of

five decades of transition, growth and development, NSIC has proved its strength within

the country and abroad by promoting modernization, up gradation of technology, quality

consciousness, strengthening linkages with large medium enterprises and enhancing

exports, projects and products from small industries. NSIC acts as the nodal agency to

enable the SSI firms to get rated by leading credit rating agencies like CRISIL, ICRA,

CARE, SMERA, Fitch, ONICRA.

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TABLE 12: Reimbursement of Performance and Rating Fee

Turn Over of SSI Reimbursement of Fee through NSIC

Up to Rs 50 Lacs 75% of the fee or Rs 25000/- (Whichever is less)

Above Rs 50 to 200 lacs 75% of the fee or Rs 30000/- (Whichever is less)

More than Rs 200 lacs 75% of the fee or Rs 40000/- (Whichever is less) Source: http://www.nsic.co.in/creditrating.asp

The ratings given to the SME units help them not only in easy availability of finance but

a higher rating also allows them a subsidy of 0.5 to 1 percent of the prescribed rates by

the institutions. Thus ratings create a win-win situation for the SME units by providing

easy accessibility for their financial needs and the lenders get the confidence to give loans

to the units based on the ratings.

The Performance and Credit Rating Scheme also encourages the units to get rated as

some part of the rating cost is borne by NSIC. The rating not only helps in securing

access to finance but also helps in other avenues of business like vendor confidence and

large orders.

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4.8 Financing the SMEs:

The SMEs market in India, though growing at a fast pace is highly fragmented. Despite

the fact that the sector contributes around 7 percent to the GDP of the economy, it

remains a largely neglected and under serviced sector from the banking and formal

funding point of view.

The credit challenge

Most SMEs in India are promoted by enterprising technocrats. They are ingenious in

seizing new opportunities and adapting to environmental changes, provided that the

growth opportunities are supported by good infrastructure and financing requirements are

being met. However, like anywhere else in the world, India SMEs too face challenges in

assessing adequate funds on time from banks and financial institutions. Only 17% of the

SME units are able to assess institutional finance and most of them depend more on

internally generated funds and /or informal financing channels for their expansion and

modernization requirements and are deprived of cheaper institutional credit.

SMEs with assess to institutional credit at competitive rates are more likely to

significantly increase their contribution to the GDP and would be in a better position to

take on global competitive pressure. The issue also needs to be assesses from macro

prospective.

Inherent issues in SME lending:

Banks find it difficult to provide SME adequate and timely credit due to these reasons:

� Highly fragmented nature of SMEs

� Information asymmetry

� Multiple segments, multiple needs

� Lack of transparence and limited financial disclosures in financial statements of SME

� NPA and their legacy effects

Banks in India lend mainly against collateral. SMEs, by nature, are short on the same.

Even in schemes like Credit Guarantee Funds the cover is only up to Rs. 25 lakhs. There

55

is a need to assess a proposal sans collateral so that there can be independent appraisal of

the viability of the proposal.

Information asymmetry:

A proper assessment of the SMEs credit needs and of SMEs analysis of their balance

sheets and inter firm and inter size comparisons is not possible in a cost effective manner

in the absence of information. The multiple segments and multiple needs nature of SMEs

and the fine granularities arising due to the various types of ownerships, regions,

industries, products and processes, etc. further pose limitations on the lending banks.

Often, the low ticket size of an individual deal does not justify a detailed assessment on

the part of lender. Assessments take up a substantial part of the time of a banker. Bankers

have a tendency to concentrate on the larger ticket size. SMEs are hit both ways by

information asymmetry. While on one hand the lenders have little knowledge about them,

on the other hand SMEs are themselves not abreast with the latest happenings in the

finance world.

The government has made many efforts to provide finance to SME through the traditional

modes. But the following case study highlights the role of government as a facilitator for

meeting the needs of SMEs in their countries.

Case study on Government efforts to boost SMEs in Singapore19

The government plays a key role in supporting local business and their financing

requirements by providing various forms of financial assistance to help business at

different stages of growth. Below are two schemes provided by the Government of

Singapore to boost the SMEs which are the backbone to any economy of the world.

1. Debt Financing Schemes

2. Startup Enterprise Development Scheme (SEEDS)

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1.Debt Financing Schemes:

Internationalization Finance Scheme (IFS)

This is an asset based loan or structured loan on value of sales order/ contract amount/

project value, up to a maximum loan amount of S$ 15 million.

The eligible persons for the scheme

Singapore based companies who wish to expand overseas. The Singapore based company

or its overseas subsidiary can apply directly for the loans.

But the overseas expansion must:

� Complement or be related to Singapore business

� Result in economic spin offs to Singapore (eg. Jobs or R&D in Singapore) the

company group turnover cannot exceed the maximum amounts mentioned below:

TABLE 13: MAXIMUM PERMISSIBLE LIMITS FOR LOANS

TYPE OF COMPANY MAX. GROUP TURNOVER

Trading Company* Non listed <S$ 500 million

Listed <S$ 200 million

Non Trading Company Non listed <S$ 200 million

Listed <S$ 100 million

* If more than 50 percent of turnover comes from comes from buying and selling goods

The eligible employment of funds:

The loan can be used to buy fixed assets that will be used overseas, raise working capital

for secured overseas projects, raise working capital for confirmed overseas sales orders.

Types of loans:

Asset Based financing (Fixed Asset Loan) & Structured Loan (Working Capital Loan)

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Interest rates and re-payment:

Interest rates are tailored to borrowers need. They may be fixed or floating. Even

repayment period is tailored as per the needs.

Things to note:

� If the overseas subsidiary is applying for the scheme, the Singapore based parent must

be willing to put up a corporate guarantee.

� The maximum loan amount of S$ 15 million is computed on the group basis, i.e. S$ 15

million is the maximum amount the parent company and its entire subsidiary can obtain

under the scheme.

2.Startup Enterprise Development Scheme

Targeted at the non technology based business, SPRING Singapore will match S$ 1

raised from private investors, up to a maximum of S$ 300000 for this scheme. The

minimum investment by private investors must be at least S$ 75000. So for every S$ 1 an

investor puts into the business, Spring SEEDS Capital Pvt. Ltd. will invest S$ 2.

The eligible persons for the scheme:

For start ups in Singapore involved in developing new or better products, processes or

applications.

The start up enterprise must be:

� A private limited company incorporated 0-5 years in Singapore

� Has a paid up capital of S$ 50000 – S$ 1 million

� Carries out its core activities in Singapore

The eligible employment of funds:

To encourage private sector investments in innovative seed or early stage start up

companies developing innovative products or processes that can be marketed and sold

globally.

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Points to note:

� Both SPRING SEEDS Capital and the business angel group will take equity stakes in

the company proportion to their investments. Corporate or individual investors must not

have prior interest in the company at the point of application.

� Corporate investors must be legal entities with minimum paid up capital of S$ 500000

� The individual should possess management experience, business contacts or technical

expertise that can add value to the start up.

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4.9 Enterprise Social Responsibility (ESR) in SMEs:

The term ESR refers to socially responsible nature and behavior of individual business or

group of enterprises. ESR’s agenda refers to the theory and practice of attempts to

maximize the positive contributions of businesses to sustainable development, while

minimizing their negative impact. A balanced approach will eradicate socially

irresponsible behavior and encourage responsible practices which will succeed through a

combination of market driven and regulatory interventions.

The literature available suggests that MSMEs have not proved to be responsible citizens

or at best ignore their contribution to the society. In fact most radical literature actually

highlights the comparative more polluting nature of SMEs which skip compliance of

genuine welfare laws and at worst employ child labor.

Some instances of SMEs following ESP:

� ESR activities are loosely organized and are primarily owner oriented.

� Religion, social conditions, social capital, personal Indian values, financial condition of

the cluster ect dominate ESR behavior

� ESR activities of MSMEs are more personal in nature which the owner of MSMEs

hesitates to share with the world.

The biggest issue with MSMEs in India is that not much is known about to what extend

and how they take care of their responsible citizen issues like employee well being,

workplace issues, environment quality enhancement, community development and

stakeholder involvement for social responsibility issues.

Issues of concern for SMEs because of not being socially responsible:

• Poor Management system

• Environmental Degradation

• Polluting nature

• Child labor

• Low wages to labor community

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• Long working hours

• Do not follow the minimum standard of labor welfare

• Working environment

• Non compliance of regulatory norms

• Poor Health & safety at work place

• Lack of skilled manpower

• Poverty

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4.10 SMEs and the need for innovation: Innovation has always been the hallmark of small and medium enterprises. MSMEs that

integrate innovation can reap significant benefits. Notwithstanding their large share in all

enterprises and the overall employment generated, MSMEs continue to remain weak on

the revenue front when compared with their large counterparts. At the same time, the

increasing globalization is bringing in more competition in the home market, the

traditional stronghold of many MSMEs.

Providing innovative products with enhanced utility may help firms strengthen their

competitive position in home as well as international markets. This necessitates

innovation efforts to bring new and/or better products into the market while developing

organizational and manufacturing processes that enable more efficient and cost-effective

production, distribution and after-sales services.

MSMEs frequently operate in niches and have direct contact to customers thereby

potentially gaining valuable impulses in the form of customer feedback. Acting often in a

more informal manner and confronted with fewer intra-firm hierarchy levels than large

firms, MSMEs seem to be, in many respects, better placed for innovations than their large

counterparts. This potential edge, in normal course, should enable them to develop

products better suited to market demands and thus bring more success.

Barriers to Innovation for Indian MSMEs:

The most important external barrier to Innovation, as perceived by MSMEs, is skill

shortages due to the lack of emphasis on industrial Innovation, problem-solving, design,

experimentation, etc. in the education curricula. Other prominent external barriers are

lack of effective collaboration with research in universities and R&D institutions,

excessive government regulation, lack of collaboration with TNCs as well as insufficient

pricing power to derive value from Innovations.

For MSMEs, prominent internal barriers are skill shortages due to lack of effective in-

house training programmes; inability to move beyond the first successful Innovation and

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develop a sustainable model for continuous Innovation; as well as poor understanding of

customer needs and market dynamics.

Innovation has to be adopted favorably by the managers at the helm of affairs as without

their commitment innovation cannot become an integral part of the unit.

Managerial barriers to innovation can be classified as:

� Adopting an innovation is risky by definition. It is possible for most MSMEs to deal

with perceived risk – if they have enough time and resources. Unfortunately, today both

time and resources are in short supply.

� Most of the MSMEs do not have access to well researched database whether it

pertains to market intelligence or technology

� Information regarding the latest development and competency understanding is much

less. Work sharing is not seen in the local and national clusters, as it is a fight for the

same customer, in the same market. Even though the product and technology used by the

entrepreneurs are similar, the tendency to share is less among the cluster participants.

� MSMEs find it difficult to match the wage rate, job security and career development

opportunities, available in larger organizations and therefore are not in a position to hire

skilled and competent manpower.

� MSMEs find it difficult to match the wage rate, job security and career development

opportunities, available in larger organizations and therefore are not in a position to hire

skilled and competent manpower.

Current Status of innovation in SMEs:

Innovation can take place in the basic three forms viz. Product Innovation, Process

Innovation and People. Here the product innovation refers to either incremental

innovation i.e. a new feature in existing product or it may be a new differentiated product

designed as per the market needs. Process innovation includes use of new processes to

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enhance the production processes or making innovative, redesigning the existing

processes by eliminating waste activities. Whereas the heart of innovation lies in creating

an innovative culture where people in organization are willing to try and innovate backed

by the support of management.

SMEs are recognized for their innovation but in the current conditions innovation is only

practiced as either incremental innovation or product innovation on basis of latent market

needs. Majority of SMEs have still not accepted management practices related to making

innovation as a part of their organization. There are examples of big companies

innovating like 3M and Google but to find such examples of SMEs is not an easy job.

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4.11 Role of Clusters:

Across the globe in at least fifty developed and transition economies; MSMEs producing

same or similar range of products; have often been found to naturally co-exist in typical

geographical locations - "clusters". While clusters have benefited from natural external

economies; only those have excelled, where firms have gone for promotion of selective

"active cooperation" or "targeted joint action" and also taken the benefits of linking to

winner value chains within and outside the cluster. As a result clusters worldwide are

being acknowledged as a strategic mechanism through which regions and nations can

attain higher level of industrial development.

For the development of MSMEs the development of clusters in the SME eco system is

vital. Such clusters help in the growth of the units as the clusters are generally formed

naturally based on demographic factors. Therefore to facilitate the development of

clusters the government has developed artificial clusters i.e. clusters created by the policy

of government instead of natural formation of clusters.

The definitions of clusters in India are different for different clusters as defined by their

respective agencies according to the minimum number of units operating in the cluster.

The details of which are given in Annexure I.

In India, as per 2007 estimates, there are over 6400 clusters. Agencies have come up with

a range of definition of clusters by specifying a minimum number of units in a given

measured location. However, from a policy perspective it makes sense to typify cluster

by their broad challenges relevant for policy intervention. Accordingly, clusters in India

can be classified into three broad categories, namely, high-tech clusters targeting

innovation for existence, traditional manufacturing clusters targeting competitiveness and

consequent employment responsibility and low-tech micro enterprise 'poverty intensive'

clusters that have both employment as well as poverty implication.

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TABLE 14: Various Clusters and their importance to the National Economy

Source: Policy and Status Paper on Cluster Development in India, 2007.

In a cluster, MSMEs derive advantages that large firms usually get due to their size,

through agglomeration economies that attract transporters, raw material and machinery

suppliers, etc. to the cluster and also through knowledge spillovers and increased

specialization. Clusters also gain due to motivational effects that arise due to demanding

customers, inter-firm rivalries and complementarities. Firms also gain due to low

transaction cost because of the level of trust that is found in a cluster in general.

However, these are all passive economies of scale and are omnipresent in a cluster.

The problems faced by the SMEs, particularly in accessing technology and maintaining

competitiveness have been formidable. The reasons for the inability of SMEs to identify

their technology needs are:

1) Poor financial situations and low levels of R&D;

2) Poor adaptability to changing trade trends;

3) Desire to avoid risk;

4) Non-availability of technically trained human resources;

5) Emphasis on production and not on production costs;

6) Lack of management skills;

7) Lack of access to technological information and consultancy services;

8) Isolation from technology hubs.

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Policy recognition for clusters was first made in the Abid Hussain Committee Report

(1997). This was followed up in several Budget Statements and recognition in the 11th

Five Year Plan Approach document and culminated in the creation of the Expert Group

of Ministers. During the last decade 24 schemes/ programmes have supported around

1358 clusters. The resource allocated for cluster development under the listed schemes of

assistance is estimated at a cumulative of Rs 700 crores till 2006-07. It is estimated that

91.4% has been contributed by the Central Government, 2.4 per cent by the State and the

remaining 6.2 per cent by the technofinancial institutes and international organizations.

The support has been highly driven by promotion of infrastructure (94 per cent). It is

estimated that during the next 5 years resources worth Rs 4500 crores are likely to be

invested for cluster development. 80 percent of this amount will be for cluster

infrastructure. A subjective evaluation of the Schemes based on stated areas of support

shows that there is hardly any support for promotion of local institutional capacity and

promotion of private sector led development. 86 per cent of the implementing agencies

belong to the experience group of 1-2 cluster-years and 0.57 per cent has more than 50

cluster-years of experience. Similarly, 65.39 per cent of resource organizations have

cluster experience of less than equal to 5 cluster-years.

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5. PESTEL ANALYSIS:

5.1 POLITICAL ENVIRONMENT:

Government Policies:

1. Gujarat Industrial Policy 2009, scheme for assistance to Micro, Small and Medium

Enterprises

� Interest subsidy

a) Graded interest subsidy for micro, small and medium enterprises, interest Subsidy @

7% for micro enterprises and @ 5% for small and medium enterprises.

b) 1% additional interest subsidy to youth having less than 35 years of age in case of

first project

c) Maximum amount of interest subsidy will be Rs. 25 lakhs per annum, for a period of

five years.

� Venture capital assistance

To promote Venture Capital Funding for MSMEs, for projects adopting innovative

technologies such as Technical Textiles, Nano Technology, Information Technology,

Bio-Technology etc., the Government would provide funds to Financial

Institutions/Banks who have the necessary expertise in operating Venture Capital Funds.

The maximum amount to be given to any such funds would be Rs. 10 Crores during the

operative period of the scheme.

� Quality certification

Assistance will be granted to the eligible MSMEs for maximum 3quality certifications, at

the rate of 50% of cost of quality certification within overall ceiling of Rs. 6 lakhs in 5

years.

� Skill enhancement:

50% of fees, subject to maximum Rs. 5000 per person for a minimum one week duration

training of skill up gradation in MSMEs in a programme conducted in institutions

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suggested by an Anchor Institute or specialized institution in specific sector will be

reimbursed

2. Trading policies:

Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and

Ancillary Industrial Undertakings, penal provisions have been incorporated to take care

of delayed payments to MSME units given as under:

1) Agreement between seller and buyer shall not exceed more than 120 days

2) Payment of interest by the buyers at the rate of one and a half times the prime lending

rate of SBI for any delay beyond the agreed period not exceeding 120 days.

3) In case the buyer to make payment on or before the date agreed on between him and

the supplier in writing or, in case of no agreement before the appointed day. The

agreement between seller and buyer shall not exceed more than 45 days.

4) In case the buyer fails to make payment of the amount to the supplier, he shall be

liable to pay compound interest with monthly rests to the supplier on the amount from the

appointed day or, on the date agreed on, at three times of the Bank Rate notified by

Reserve Bank.

5) For any goods supplied or services rendered by the supplier, the buyer shall be liable

to pay the interest as advised at (2) above.

6) In case of dispute with regard to any amount due, a reference shall be made to the

Micro and Small Enterprises Facilitation Council, constituted by the respective State

Government.

3. MONITERING CREDIT SUPPORT20

In line with the Policy Package for Stepping up Credit to Small and Medium Enterprises

(SME), the Reserve Bank of India (RBI) has already issued guidelines to the public

sector banks to ensure 20 per cent year-on-year growth in credit to the SME. Action has

also been initiated to operationalise other elements of the said Policy Package. The RBI

and the Government will closely monitor implementation of these measures.

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4. Schemes for Technology/Knowledge based start ups

TABLE 15: Schemes for Technology/Knowledge based start ups

Ministry Schemes

Source: Report of Working Group on Science and Technology for SMEs

5. Scheme for Manufacturers of consumer products

TABLE 16: Scheme for Manufacturers of consumer products

Ministry Schemes

Source: Report of Working Group on Science and Technology for SMEs

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6. PORTFOLIO RISK FUND

The Small Industries Development Bank of India (SIDBI) will scale up and strengthen its

credit operations for micro enterprises and cover 50 lakhs additional beneficiaries over

five years beginning 2006-07. Government will provide grant to SIDBI to augment

SIDBI’s portfolio Risk Fund for this purpose.

7. RISK CAPITAL FUND

Government will also provide grant to SIDBI to enable it to create a Risk Capital Fund

(as a pilot scheme in 2006-07) so as to provide, directly or through intermediaries,

demand-based small loans to micro enterprises

8. PROGRAM FOR CLUSTER DEVELOPMENT INSTITUTES IN INDIA

TABLE 17: Program for Cluster Development Institutes in India

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Source: Policy and Status Paper on Cluster Development in India

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9. Credit Guarantee Scheme for MSMEs to cover loans up to Rs. 100

lakhs21 A robust and vibrant MSME sector is the backbone of a developing economy like India.

Amongst the myriad problems faced by startups and young entrepreneur, credit remains

the single most pertinent issue.

The common hurdle faced in accessing credit comes from the obligation to provide a

collateral security or a third party guarantee. In order to address this overbearing concern

for credit, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

was setup by the GOI and SIBDI in August 2000. This is the only credit guarantee

institution in the country exclusively set up for the benefit of entrepreneurs in the MSME

sector.

Objective of CGTMSE:

The main objective is that the lender should give importance to project viability and

secure the credit facility purely on the primary security of the assets financed. The other

objective is that the lender availing guarantee facility should endeavor to give composite

credit to the borrowers so that the borrowers obtain both term loan and working capital

facilities from a single agency. The Credit Guarantee scheme (CGS) seeks to reassure the

lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails

to discharge its liabilities to the lender, the Guarantee Trust would make good the loss

incurred by the lender up to 75 / 80/ 85 per cent of the credit facility

The Credit Guarantee Trust Fund promises collateral free credit for SMEs. Under the

scheme, CGTMSE extends guarantee for credit facility up to Rs. 1 crore sanctioned to its

Member Lending Institutions (MLI), both in the manufacturing and services sector,

excluding retail trade. Entrepreneurs in the MSME sector can contact any of the member

lending institutions of CGTMSE. All public sector banks, major private sector banks,

selected Regional Rural Banks and financial institutions are registered as MLI of

CGTMSE.

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Under the scheme the CGTMSE shall cover credit facilities extended by MLI into a

single eligible borrower in the Micro and Small Enterprises Sector for credit up to Rs. 50

lakh (Regional Rural Banks) and up to Rs. 1 crore(Scheduled Commercial Banks and

selected Financial Institutions). The credit extended will be by the way of term loan

and/or working capital facilities.

The lender should extend credit without any third party guarantee or a collateral security.

The credit facility thus extended will carry zero percent risk weight for the MLIs for the

guaranteed portion.

TABLE 18: CGTMSE Scheme details

Maximum extent of Guarantee where credit facility is Category Up to Rs. 5 lakh Rs. 5 lakh – Rs.50 lakh Rs. 50 lakh – Rs. 1 crore

Micro Enterprises

85 percent of the amount in default subject to a maximum of Rs. 4.25 lakh

75 percent / Rs. 37.5 lakh

Rs. 37.5 lakh plus 50% of amount in default above Rs. 50 lakh subject to overall ceiling of Rs. 62.5 lakh

Women entrepreneurs/ Units located in North East Region other than credit facility up to Rs 5 lakh to micro enterprises

80 percent of the amount in default subject to a maximum of Rs. 40 lakh

Rs. 40 lakh plus 50 percent of amount in default above Rs. 50 lakh subject to overall ceiling of Rs. 65 lakh

All other category of borrowers

75 percent/ Rs. 37.5 lakh Rs. 37.5 lakh plus 50% of amount in default above Rs. 50 lakh subject to overall ceiling of Rs. 62.5 lakh

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Regulatory bodies:

MSMEs are regulated under the Ministry of Micro, Small and Medium Enterprises under

the Government of India. This separate ministry was set up to address the needs to the

MSME sector. The Commissionerate of Industries and Commerce is the nodal agency for

the development of Micro, Small and Medium enterprises in the State.

There are many bodies that help MSMEs in various aspects. They are:

National Manufacturing Competitiveness Council (NMCC), Small Industries

Development Organization (SIDO), Small Scale Industries Board (SSIB), National Small

Industries Corporation Ltd. (NSIC), Confederation of Indian Industry (CII), Federation of

Indian Chamber of Commerce and Industry (FICCI), PHD Chamber of Commerce and

Industry (PHDCCI), Associated Chamber of Commerce and Industry of India

(ASSOCHAM), Federation of Indian Exporters Organization (FIEO), World Association

for Small and Medium Enterprises (WASME), Federation of Associations of Small

Industries of India (FASII), Consortium of Women Entrepreneurs of India (CWEI),

Laghu Udyog Bharti (LUB), Indian Council of Small Industries (ICSI), Indian Institute of

Entrepreneurship (IIE), National Institute of Small-Industry Extension Training

(NISIET), National Backward Caste Finance Development Corporation, National

Institute for Entrepreneurship and Small Business Development (NIESBUD), Small

Entrepreneurs Promotion and Training Institute (SEPTI), Small Industries Development

Bank of India (SIDBI).

The non government promotion structure:

There are three national associations representing all type of industries, small and large.

These are 'Federation of Indian Chambers of Commerce and Industries' (FICCI),

Confederation of Indian Industries (CII) and 'Association of Chambers of Commerce and

Industries' (ASSOCHAM). These associations represent mainly the interests of large

scale industries. However, these associations have membership of small sector as well

and represent mainly the policy related interests of SSI sector.

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The exclusively small industry related associations are diversified geographically and

sectorally and are supposed to have been linked with 'Federation of All India Small Scale

Industries' (FASSI), 'Federation of Small and Medium Industries' (FOSMI) and also

Indian Council of Small Industries (ICSI).

Union budget 2009-10 and SMEs:

The government has announced hike in allocation of funds to Market Development

Scheme and introduced special funds of Rs.4000 crore to be operated by banks for SMEs

to revive from the recessionary trends.

The economists say that the budget proposed by the UPA government has very little for

the SMEs reeling under tough times as a result of recessionary trends. More importantly

no worthwhile steps are taken to support the needier micro and small enterprises. Apart

from the special fund scheme no special package was announced by the Government to

heal the wounds of SMEs.

Government term and Manifestos of Parties for 2009 Lok Sabha Elections:

The Congress lead United Progressive Alliance has been ruling the country since 2004.

Thus there is political stability since the UPA government was able to maintain its

position even in the 2009 Lok Sabha elections.

1) Congress party manifesto:

“We will give special focus to the small entrepreneur and to small and medium

enterprises”

“Small and medium enterprises and the self-employed are the backbone of our industrial

and service economy. They are the major generators of productive employment for our

youth. The Indian National Congress pledges a “new deal” for SMEs and for first-

generation entrepreneurs by assuring them greater access to collateral-free credit,

liberating them from the multiplicity of laws and forms, and freeing them from the

clutches of inspectors. The Indian National Congress pledges a targeted cluster-based

approach to the growth of SMEs. There are a very large number of such clusters already

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in different areas like textiles, food processing, handlooms and handicrafts, consumer

goods, khadi, coir and other traditional industries, and engineering. These clusters, mostly

in small and medium towns, will be given access to finance, technology and marketing

and will be provided vastly improved infrastructure.”

2) BJP Manifesto:

“The slowing down of India’s growth has had an adverse impact on people across the

country. To control inflation, the UPA Government drained liquidity out of the system,

which, in turn, hobbled both the organized and unorganized sectors. It is now desperately

trying to reverse that flawed policy, but clearly such half-hearted measures are not

sufficient. The situation calls for determined, direct and visible Government intervention.

The BJP plans to do so through robust policies aimed at revitalizing the economy and

placing India on the path of employment-generating growth coupled with rapid

development.”

“Promote SMEs and the retail sector which can generate a large number of jobs and make

a meaningful contribution to the national economy. The criteria for classifying SMEs will

be reviewed.”

3) Communist Party of India Manifesto:

The manifesto talks about implementing encouraging policies for SMEs in the labor

intensive sectors. The Left promises relief packages for sectors affected by recession like

textile and garments, gems and jewellary, leather, handicrafts, coir, cashew, marine

products, software and IT, particularly the SMEs. Providing adequate incentives,

infrastructure, support and ensuring sufficient credit from banks and financial institutions

are the major thrust areas.

The CPI (M) believes that SMEs cannot survive all on their own. There has to be specific

intervention by the government for this sector to survive. It intends to reverse the new

liberal paradigm of the past few years and have a renewed focus on the growth of public

sector and SMEs.

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Banks will be made more competitive. However, reforms will not mean more

privatization or FDI, especially in retail. As far as employment is concerned, the Left

wants employment guarantee to be extended to all adults. The Left wants taxation to

increase including on capital goods.

Lobbying by the MSMEs:

In a democratic set up it has been observed that the policies of government are influenced

by the lobbying of the influential people belonging to giant corporate business groups.

But in case of MSMEs, lobbying is a far thought since they are even not able to represent

themselves before the government in the way the large corporates. So for them first step

to climb is to have their voice recognized.

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5.2 ECONOMIC ANALYSIS:

Macro economic variables relating to the country have their impact on the operation of

SME units. So any change in these factors will have a resulting impact on the SME units

as well.

India's Gross Domestic Product is likely to grow by 7.2 per cent in 2009-10 as compared

to the growth rate of 6.7 per cent achieved in 2008-09 as per data released by the Central

Statistical Organization (CSO). This favorable growth rate shows that the recessionary

trends are now slowly being replaced by increase in demand.

Advance Estimates for 2009-10, for GDP at factor cost at constant (2004-05) prices is Rs

44,53,064 crore in 2009-10 as against the Quick Estimates of GDP for 2008-09 of Rs

41,54,973 crore.

The National Income at factor cost at 2004-05 prices is likely to be Rs. 39,24,183 crore

during 2009-10, as against the previous year's Quick Estimate of Rs. 36,72,192 crore. In

terms of growth rates, the national income is expected to rise by 6.9 per cent during 2009-

10 in comparison to the growth rate of 6.4 per cent in 2008-09.

The Per Capita Income (at 2004-05 prices) during 2009-10 is likely to attain a level of

Rs. 33,540 as compared to the Quick Estimate for the year 2008-09 of Rs. 31,821. The

growth rate in per capita income is estimated at 5.4 per cent during 2009-10, as against

the previous year's estimate of 5.0 per cent

The above factors show a positive outlook in the economy. Even during the recessionary

trends India did not suffer as much as the developed countries as one of the main reasons

was that our country is a consumption oriented nation. The exports form a small

percentage of the GDP and majority of goods produced are consumed indigenously.

There is growth in every aspect be it the GDP, National Income, Per Capita Income.

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Capital formation shows the movement of funds from the households and government to

the business sector which results in increased output as well as growth of economy. The

table below shows capital formation

TABLE 19: Sector wise gross capital formation

(Figures in Rs. Crores)

Household sector Private Corporate

Sector Public sector

Gross Capital

Formation Year

Current

Prices

Constant

Prices

Current

Prices

Constant

Prices

Current

Prices

Constant

Prices

Current

Prices

Constant

Prices

2003-04 350804 302895 188266 163091 174579 145578 738221 633105

2004-05 399328 306630 338755 274130 216962 166989 996099 781622

2005-06 443679 321498 491983 373165 271835 202935 1248889 930738

2006-07 512076 347307 611044 441866 329679 232844 1502508 1060108

2007-08 596846 378052 749894 513210 429014 290032 1829346 1220412

Source: RBI

The above table shows that gross capital formation at constant prices has increased at

CAGR of 14 percent whereas same for household sector has been only 4.5 percent. The

growth for private sector stood at 25.76 percent and for public sector it was 14.78

percent. This shows that capital formation from households is 3 times less than the

average growth. This may be attributed to variety of reasons like more spending on

consumption or savings not being transformed into capital formation. Whereas the private

sector shows a healthy growth of 25 percent which may be that the profits of business are

ploughed back into the business. The public sector shows a satisfactory growth as it is

near to the average growth rate achieved.

Prime Lending Rate:

As per the current situation the PLR is 11 – 12 percent. RBI, the Regulator of Banks

reviews the rates as and when the need arises and tries to adjust the economic situation

with the tool of interest rates. SMEs have been included in the priority sector lending and

eligible to rates lower than the PLR. The financial institutions offer them rate about 0% to

1% lower than the PLR. But this may not be the case always. Since the loans offered to

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SMEs bear more risk of default the financial institutions may also charge a rate higher

than the PLR.

Business Confidence Index:

The business confidence index shows the confidence the business community has relating

to the economic progress in the current time as well as future expectations relating to the

economy of the country.

MasterCard in association with NCAER conducts Index of Business Confidence surveys.

The Quarterly Index is based on a survey which measures business confidence on four

indicators relating to ‘Overall economic conditions six months from now’, ‘Financial

position of the firm six months from now’, ‘Investment climate’ and ‘Level of capacity

utilization’. All four indicators carry equal weight

Figure 13: Business Confidence Index of India

Source: NCAER Survey January, 2010.

The Business Confidence Index (BCI) for January has exceeded the October 2009 figure

by 7.03 per cent. Also, the BCI figure of 153.8 in the current round is the highest since

the 154 recorded in January 2008. The BCI reported a sharp rise of 21 per cent, with a

rating of 143.7 points in October 2009, compared to 118.6 points in July 2009. BCI

ratings in April 2009 were at their lowest, at 81.6 points, after the global financial crisis

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hit world economies. Previous data reflects a trend of BCI ratings rising in October, a

period of increased sales due to the festive season in India. In the October survey of 2008,

this pattern was broken for the first time due to the effects of the global financial crisis on

Indian markets.

Political Confidence Index:

The Political Confidence Index shows the confidence of the business community on the

government in the centre since the policies relating to the trade and commerce are

undertaken by the central government.

The PCI survey is based on eight indicators relating to 1) Managing overall economic, 2)

Growth Managing Government Finance, 3) Managing Inflation 4) Managing

Unemployment 5) Managing Exchange Rate 6) Managing Conducive Political Climate 7)

External Trade Negotiations (Both Bilateral/ Multilateral) and 8) Pushing the Economic

Reforms Forward.

Figure 14: Political Confidence Index

Source: NCAER Survey January, 2010.

The 71st round of the BES has witnessed a drop of 16.48 per cent in the PCI as compared

to October 2009. This follows the 3.96 per cent drop seen in the PCI during the 70th

round from a record high of July 2009, which appeared to be a result of the installation of

a stable coalition government after the general election. The downward correction

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witnessed since may be natural. However, an interesting point to note about the current

round is that the PCI has fallen despite an increase in the BCI – a tendency observed in

the previous round as well.

The sustained high levels of PCI ratings are representative of enhanced levels of

confidence of the business sector in economic policies. Given the continuing weakness in

global markets, strong business confidence in national economic policies implies that

commercial policies will be much more aligned with domestic economic policy

directions.

Thus, the link between the two indices, BCI and PCI, may not be rigid. In fact, across all

parameters of the PCI the current round points to greater dissatisfaction with policies

while the improvement in economic conditions is perhaps attributed to other factors. One

source of dissatisfaction may lie in the high price rise of food items which has been seen

over the past months leading to lower demand and higher wages, and perhaps the fear

that a monetary tightening might follow.

The details relating to the sample used for the survey is given in Annexure II.

Global Economic Scenerio: TABLE 20: GDP of Global Economies

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Source: World Economic Outlook 2010, World Bank

The world GDP projection for the next year is 3.2 percent whereas the growth in GDP of

developing countries is much higher. So for the SMEs, they now need to focus on finding

new export markets for their products. These developing countries offer potential market

which is untapped by Indian SMEs. The products may find acceptance in these markets

easily and the exporters can increase their exports. In case of SMEs, there is not much

import trade carried on by them. But even for importers they can explore opportunities of

securing raw materials from these countries.

The positive outlook for the developing countries as well as recovery of developed

economies will increase the trading opportunities and for the SMEs they now need to

make their presence felt in these countries with their quality products.

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Provisions of General SSI exemption from Excise Duty

Various concessions are given to small scale industries to encourage their growth and

also on account of administrative convenience. Since Excise is a duty on manufacture, it

is payable even by a small unit manufacturing the goods. However, it is Government’s

policy to encourage growth of small units. Moreover, it is administratively inconvenient

and costly to collect revenue from numerous small units. Applying ABC principle, the

revenue collected from small units would be negligible compared to the efforts and

administrative costs involved. The Govt. has therefore, given various concessions to

small scale industries (SSI). SSI units whose turnover is less than Rs. 4 crores are eligible

for the concessions.

Goods not Eligible for SSI concession

Broadly, items generally manufactured by SSI (except in tobacco, matches and textile

sector) are eligible for SSI exemption. Some items like pan masala, matches, watches,

some textile products, tobacco products, etc. are specifically excluded, even when these

can be manufactured by SSI. Some items like automobiles, primary iron and steel etc. are

not eligible, but anyway, these are beyond capacity of SSI unit to manufacture.

Goods with other’s brand name not eligible - Goods manufactured by an SSI unit with

brand name of others are not eligible for SSI concession, unless goods are manufactured

in a rural area.

Duty payable on goods manufactured for captive consumption, if not eligible for SSI

concession - If goods which are not eligible for SSI concession are manufactured by SSI

unit for captive consumption, duty will be payable, even if final product is eligible for

SSI concession.

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SSI units eligible for SSI concession

All industries irrespective of their investment or number of employees are eligible for

concession. In fact, even a large industry will be eligible for the concession if its annual

turnover is less than Rs. 4 crores. The SSI unit need not be registered with any authority.

EXEMPTION AVAILABLE ONLY IF TURNOVER IN PREVIOUS YEAR WAS

LESS THAN RS 4 CRORES - A unit is entitled for exemption only if its turnover in

previous year was less than Rs. 4 crores. Units whose turnover was over Rs. 4 crores in

2004-05 are not eligible to any SSI concession in 2005-06. They have to pay full normal

duty from 1st April, 2005.

CHOICE OF VARIOUS TYPES OF EXEMPTION - SSI units have been given two

types of exemptions -

(a) Unit can avail full exemption up to Rs 150 lakhs and pay normal duty thereafter. Such

units can avail Cenvat credit on inputs only after reaching turnover of Rs 150 lakhs in the

financial year.

(b) Unit intending to avail Cenvat credit on inputs on its entire turnover has to pay normal

duty without any concession.

When Second Option Suitable:

Option of payment of duty may be suitable in following cases - (a) When buyer intends to

claim Cenvat credit. In such cases, the effective cost will be lower as SSI unit can claim

Cenvat on inputs (b) When SSI unit intends to export the products and has huge balance

in Cenvat credit account. In such cases, he can pay duty and claim rebate after export of

goods. Otherwise, the balance may remain unutilized. There is provision to get refund of

balance lying in credit in Cenvat Credit account. However, such refund can be only of

Cenvat on inputs and not of capital goods.

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Cenvat to be reversed if unit decides to opt for exemption

If the unit was availing Cenvat credit prior to 31st March, it will have to pay an amount

equivalent to Cenvat credit allowed to him on the inputs lying in stock or used in finished

excisable goods lying in stock as on 1st April. If any Cenvat credit on inputs is balance

on 31st March, it will lapse on 1st April [Rule 9(2) of Cenvat Credit Rules]. The

‘amount’ is not ‘duty’ and hence, strictly, Cenvat credit of such ‘amount’ paid will not be

available.

Board has confirmed that Cenvat credit will be available in respect of duty on inputs

contained in on stock of raw material, WIP and finished goods when SSI unit crosses the

turnover limit and starts paying duty. SSI unit should keep proper records.

Slabs in SSI excise exemption: Following are slabs in SSI excise exemption.

First slab of 150 lakhs - There is full exemption from excise up to the first clearances of

Rs. 150 lakhs, starting from 1st April every year, if the SSI unit does not avail Cenvat

credit on inputs. If an SSI unit manufactures goods of different varieties, falling under

different Chapter heads and/or in different factories, total exemption considering

clearances of all Chapters together and all factories of same manufacturer together, will

be Rs. 150 lakhs. An SSI unit can opt for paying full normal duty also.

Second slab after initial 150 lakhs - After the turnover crosses Rs. 150 lakhs, full normal

duty is payable. The SSI unit can avail Cenvat credit on inputs in respect of inputs used

after turnover crosses Rs 150 lakhs. Even if an assessee crosses turnover of Rs. 4 crores,

he has to only pay duty at normal rate. The SSI manufacturer does not have to pay duty

on earlier turnover for which he had availed concession. However, in next year, he will

not be able to avail any concession and he has to pay normal rate of duty from 1st April

itself.

No concession if previous year’s turnover was over four crores - SSI exemption is

available only to those units whose turnover was less than Rs. 4 crores in previous

financial year (i.e. April to March). If turnover had exceeded Rs. 4 crores in previous

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year, there is no excise exemption at all and full excise is payable right from the

beginning. If turnover exceeds four crores in current year, concession availed during

current year need not be refunded, but next year, there will be no SSI concession.

Other Exemptions to small sector

� Goods manufactured without aid of power - Some goods are exempt if no process in

or in relation to manufacture of these goods is ordinarily carried on with aid of power.

Some of these are mentioned in CETA itself and some in a Notification No. 167/86 dated

1-3-86.

� Goods in rural area by cooperatives - Some goods manufactured by registered

cooperatives or institutions recognized by Khadi and Village Commission or Board are

exempt. These are: preparations of vegetable or fruits, sauces, laundry soap, foot-wears,

calculators, cassettes, radios, black and white TV sets, electric iron and toaster, electronic

clocks and watches, synthetic detergents, jute yarn and fabrics. This exemption is

available to un-branded goods. If the goods are branded, the exemption is available only

if the brand or trade name belongs to (a) the manufacturer producing the goods himself or

(b) if it belongs to Khadi & Village Industries Commission or Board, (c) National Small

Industries Corporation or State Industries Development Corporation or (d) a State Small

Industries Development Corporation. In other words, the exemption is not available if the

brand name belongs to a private trader who is not manufacturing those goods

� Genuine specified products of village industry - Certain items produced by village

industry and marketed by or with assistance of Khadi & Village Industries Commission

are exempt from duty. The products include - lac, gum, vegetable products, fireworks,

resin acids, articles of vulcanized rubber, articles of leather, articles of wood, ceramic

products, furniture etc.

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Procedural concessions to SSI

� Quarterly Return - The SSI unit availing SSI concession need not submit monthly

ER-1 return. They have to submit a quarterly ER-1 return, by 20th of following month.

� Payment By 15th Of Following Month - SSI units have to pay duty by 15th of

following month, while large units have to pay duty by 5th of following month. Both

have to pay duty in March by end of the month.

� Export Procedures For SSI - The SSI units not covered under excise provisions have

to follow simplified export procedures. They do not have to prepare ARE-1 form etc. The

procedure has been discussed in a previous chapter.

� Sending material for job work by exempt SSI unit - SSI unit can send his raw

materials or semi-finished material to another unit for job work. Such another unit can

carry out job work and return to SSI unit without payment of duty. The SSI unit can do

further processing on these inputs and clear his final product without duty if his total

turnover is below Rs. 150 lakhs.

� Exempted small units Exempt from registration - Exempted small units, having

turnover below Rs. 150 lakhs, which are exempt from duty, are also exempt from

provisions of registering their unit with excise authorities.

These small units, which are exempt from registration, do not have to follow any other

excise formality. However, they have to maintain their own records of manufacture and

clearance, to prove that their turnover is less than Rs. 150 lakhs per year.

� Visit of officers only with prior approval - Excise inspectors, preventive parties and

audit parties can visit SSI unit only with specific permission of Assistant Commissioner

and for a specific purpose. They have to enter relevant particulars in Visitors book

maintained by registered person.

� Audit of SSI unit once in two to five years - Audit of SSI units should be done only as

per following frequency - (a) Units paying duty of Rs one crore or above in financial year

should be audited every year. (b) Audit of units paying duty of Rs 10 lakhs and above but

less than Rs one crore in financial year, should be normally audited once in two years. (c)

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Not more than 20% of units paying duty less than Rs 10 lakhs in a financial year shall be

audited every year. Selection will be based on risk pattern as above.

Income tax:

In direct taxes code the exemption limit for tax free income has been raised by Rs 10000

for individuals. But the relief came in form of presumptive taxes where now the business

under the turnover of Rs. 40 lakhs are not required to maintain any books and pay 8

percent taxes on their turnover. This rule was first applicable only for construction

business.

SMEs to get relief from New Tax Code:

Enterprise with a turnover of up to Rs. One crore could see a substantial reduction in their

tax liability and compliance costs once the recently unveiled direct tax code comes into

effect. The new code has a proposal to enhance the limit for availing presumptive

taxation option to businesses with a turnover of up to Rs.1 crore from the present Rs.40

lakhs.

Under a presumptive taxation regime, SMEs can opt for a flat tax on their turnover

instead of paying taxes based on a detailed assessment as per the tax laws. In the July’09

budget, finance minister Pranab Mukherjee had expanded the scope of presumptive

taxation to all small business with a turnover of Rs.40 lakhs from the fiscal 2009-10.

Under the new direct tax code, any business having a turnover of up to Rs. 1 crore can

pay tax at the rate of 8 percent of total turnover or gross receipts. Businesses that opt for a

presumptive tax regime are not required to maintain books of accounts, thereby bringing

down their cost of compliance significantly. Moreover they can pay their entire tax

liability at the time of filing returns i.e. they do not have to pay periodic advance tax.

With a higher limit, more businesses can take advantage of this regime.

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5.3 SOCIAL FACTORS:

Lifestyle Trends:

The affluent Indian consumer has evolved – luxury cars, customized holidays, automated

homes, eating out, foreign vacations, music and entertainment are essentials. The great

Indian middle class is a huge consumer market, which few can ignore. The retail boom,

well traveled Indians, growing number of expatriates in India and young executives with

significant disposable incomes – all add to a perfect mix for a burgeoning market focused

on fashion and lifestyle.

Thus, the average Indian is no more attracted towards savings for the old age and believes

in spending income to satisfy comfort and luxury needs. This has opened a host of new

opportunities for the SMEs in India since now there is greater demand for products which

are either provided directly by them or they are supporting units in production of other

products.

Demographic factors:

Demographic variables of a population, such as age, education level, income level, etc.

have their own impact on the SME sector.

The age of people in India is a favorable factor affecting SME sector since most of our

population is young and in areas where craftsmanship is required even the old aged

skilled labor are handy in producing things. The education levels in our country vary in

huge proportion as compared between states. There are states with handsome number of

literate population whereas there are states where even primary education is a dream.

Low level of literacy in rural areas is also a disappointing factor. But the major issues of

concern are the inadequate availability of vocational training centers across the country

and knowledge about their existence to the rural people.

The per capita income was Rs 38,084 in 2008-09 without adjusting for inflation, which is

fairly low. This is one of the major reasons of failure of SMEs as they do not have

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enough disposable income to continue their business with own funds and borrowing

funds is not easy for them

Consumer Attitude and Opinion:

Consumer attitude and opinion are well reflected by the consumer confidence index.

India ranks second with 117 points in consumer confidence in the fourth quarter of 2009,

according to the Nielsen Global Consumer Confidence survey. The survey results

indicate that the recovery from the global economic downturn is faster in India as

compared with other countries in the world.

The survey highlights that eight of the top 10 most confident markets were from Asia

Pacific in the fourth quarter of 2009. The survey also revealed that Indians are most

optimistic about job prospects in 2010. 83 percent of the Indian consumers expect things

to improve in 2010. India is followed by Indonesia at 70 percent.

Media Views:

In our country Media has got enormous powers as we have the Freedom of Speech as one

of the basic rights for our citizens. Media in our country has been a source which has

been giving its frank opinions on various burning issues of the country. Even in case of

promotion of SMEs, Media has come to rescue. Time and again they highlighted the

plight of the SME sectors through various platforms and they have even supported the

entrepreneurs. One such platform on CNBC TV18 was the IDBI SME Forum in

association with IDBI Bank and other was Business Bazigaar.

Brand Image:

The SME sector has earned the reputation of being the backbone of the economy by

being the second largest employer. But the sector has not been able to transform this

image to their advantage. The pity is that the largest employment is provided by

Agriculture which also is not in a healthy state. It is a fact that both of these sectors are

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the largest employment providers and they themselves are searching for a way to survive

in the country.

Role Models:

Indians are known to be emotional by nature and this influences their attitude. The people

are very enthusiastic about following their role models and trying to be like them. As far

as the SME sector is concerned they are also influenced by the personalities like Late

Shri Dhirubhai Ambani who have risen from rags to riches.

Advertising and Publicity:

The SME sector has now recognized the importance of exposing their products to the

world through various vehicles like advertising, publicity, trade fairs, internet, etc. The

reach of SME products has increased due to their efforts of getting recognition at various

events.

But still many SMEs are averse to advertising or publicity regarding them as a waste of

resources. They have had unpleasant experiences in the past which has lead them to this

belief. But they do not analyze the reason of failure. Most of the times they do not

formulate any strategy for advertising or publicity and they end up with only wasted

efforts. For SMEs operating on low expenditure budget it is vital to spend every rupee in

a planned manner for advertising. This is one of the things not followed by them and

instead of planning they just spend their resources on experience basis or judgmental

basis which does not prove many times.

Even when it comes to branding, they think that Brand names are only for MNCs

whereby they do not understand that branding does not differentiate between sizes of the

organization. Brand gives an identity to the product ad so it should not be seen as a tool

for only established companies.

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5.4 TECHNOLOGICAL FACTORS:

This section has been dealt differently from the traditional approach of analyzing the

technological factors.

In the first part the usage of technology by the SMEs has been dealt with and in the

second section the use of Information and Communication Technology by SME has been

described.

Section I:

While we look into new approaches to strengthen SMEs, we have to understand the

limitations of SMEs, which include low capital base, concentration of management

functions in one/ two persons, inadequate exposure to international environment,

inadequate R&D and lack of professionalism. Besides these, the most formidable

problem faced by the SMEs has been in accessing technology and maintaining

competitiveness.

The reasons for the inability of SMEs to identify their technology needs are:

a) Poor financial situations and low levels of R&D;

b) Poor adaptability to changing trade trends;

c) Desire to avoid risk;

d) Non-availability of technically trained human resources;

e) Emphasis on production and not on production costs;

f) Lack of management skills;

g) Lack of access to technological information and consultancy services;

h) Isolation from technology hubs.

In the recent decade the use of technology has grown manifold times in the world.

Technological competence gives firm an edge over their competitors. So instead of

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adopting technology only as a facilitator, the firms have recognized the need to develop

technical excellence to differentiate themselves from the crowd.

In case of SMEs the use of technology is low due to various reasons mentioned above.

But slowly and gradually the usage has increased on account of the reduced cost of

accessing technology.

Technology relating to particular sectors operated by SMEs has developed a lot. Most of

those sectors are ones which provide ancillary support to large industries. This is because

of the fact that the corporates have realized that in order to develop their organization,

parallel development of their supply chain partners is necessary to reduce transaction

costs and improve the quality of inputs.

There is a strong need for spreading awareness of Intellectual Property Rights amongst

the SMEs. Patenting has to be encouraged by offering financial support/ subsidies.

Likewise, quality assurance, labeling, bar-coding etc. of products should be encouraged

in a big way.

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Section II

Information and Communication Technology and MSMEs:

In the current era of global industrial restructuring, Information and Communication

Technology (ICT) is playing a crucial role in interlining enterprises across the internal as

well as external value chains. ICT is perhaps the single most important intervention

which facilitates integration of global supply chains and enhancing their competitiveness.

In fact, ICT is creating a disruptive impact on companies and markets, driving rapid

innovations and changing the traditional market equations through emergence of new

software and service architectures.

Few examples of successful ICT adoption in India:

1. ITC’s e-Chaupal initiative has brought ICT interventions at the grass root levels

integrating the hundreds of thousand of farmers which form a part of the company’s

fulfillment system.

2. The Corporate Internet Banking portals of some of the leading banks in the country

which has integrated the larger manufacturing organization to their supply chains in the

MSME segments through facilitating financial management through internet.

3. Manufacturing cluster portals for various industries aimed at promoting exports and

collaboration.

Current ICT adoption levels:

There have been several studies providing substantial evidence of the positive ICT effects

on MSME performance and competitiveness. However the MSMEs lack the capital and

investment strengths when compared to the large organizations. There is a predictable

gap in the levels of adoption of ICT between the larger companies and the MSMEs. The

Indian MSMEs are currently at various levels of ICT adoption and maturity. The sector

has witnessed a flurry of activities in recent years with many of the organizations

transitioning to next levels of ICT maturity from their current capability levels. The ICT

penetration levels are different across different industry sectors and also differ in different

geographical regions.

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The IT adoption is reasonably high for some of the MSMEs which are a part of matured

industry value chain with higher levels automation e.g. auto components industry. On the

other hand of the spectrum are the cottage and small scale sectors of the traditional

industries and clusters specializing in handicrafts and natural products.

The level of IT maturity across firms can be evaluated using a framework comprising of

four distinctive levels of IT maturity

Infrastructure Level

These firms would be having very basic level of computerization like office automation

and connectivity. They will be restricted in their use of IT beyond using basic

communication and data processing.

Utility level

Firms at this level would be having several point applications aimed to automate selective

functions. There will be islands of information with little or no integration between the

applications.

Enhancement level

This will include firms which have integrated transaction processing environments with

automation of core business processes and functions. The firms will be using an

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enterprise level resource planning application (ERP) which integrates various business

processes across functional departments.

Frontier level

The highest level of IT maturity would be organizations which have analytical and

decision support applications along with an integrated IT environment. They will also be

using IT innovatively and be integrated across the industry value chain.

It has been observed that over the years the use of ICT has increased in business carried

on by the SMEs. But the level reached by them is just the first or second level where the

use of ICT is limited just as an enabler which facilitates the functioning of the

organization. The investment in technology to reach the third level is seen as a risk. Since

most of the units feel that their competitors have not reached that level so they hesitate to

upgrade to that level due to fear of failure. Also the cost is high not only to implement the

technology but also in form of shortage of skilled manpower to operate those systems.

Training has to be provided to them in order to successfully implement the system but

retaining trained employees is a matter of concern for the business units.

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5.5 ENVIRONMENTAL ANALYSIS:

By any benchmark, India has an extensive environmental management system

with a comprehensive set of environmental laws, specific statutory mandates, regulatory

instruments, and institutional frameworks to implement and enforce environmental policy

objectives. Environmental legislation is on the national list. However, it involves a shared

responsibility between the Center and the States, with the central government having

responsibility for policy and regulatory formulations and the State governments for

ensuring implementation. At the central level, the Ministry of Environment and Forests

(MoEF) and the Central Pollution Control Board (CPCB) are the nodal agencies

responsible for environmental compliance and enforcement. Similarly at the State level,

the State Government Departments of Environment and Forest (DoE/DoF) and the State

Pollution Control Boards (SPCB) are the designated agencies to perform these functions.

Another key institutional actor for environmental enforcement in India is the

judiciary that many would argue have filled a vacuum left by the regulatory agencies.

Over the past decade, the courts have stepped in and developed a system of

environmental jurisprudence, resulting in significant new policy mandates for both the

public and private sectors. The legislation also requires updating to address new

environmental risks.

Environmental problems, particularly in the “brown” sector, such as industry,

energy and infrastructure, and urban development, have received increased public

attention. The regulatory focus has been on controlling the large and visible polluters.

However, SMEs totaling to more than 4.5 million units, account for about 40 percent of

industrial output in terms of value and estimated to contribute approximately 70 percent

of the total industrial pollution load.

The pollution generated from small scale industries is generally higher per unit of

production than that of the corresponding large units partly because of the use of obsolete

technologies and poor management practices, and partly because they do not come under

the orbit of regulatory authorities. In the past, many SMEs, particularly those set up

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before the start of deregulation in the 1990s, fell outside the jurisdiction of either the local

industrial authority or the SPCB and continues to be a problem today

The State governments and SPCBs have generally not paid much attention to the

pollution generated by these because: (i) the difficulties in monitoring these units; (ii) the

relatively high costs of pollution abatement for small units compared with large units (iii)

the possible adverse impact of enforcing the standards on the output and employment of

these industries, which are, cumulatively, the second largest employer in the country after

agriculture.

CASE STUDY: INDIAN COAL POWER PLANTS

Source emission standards for Suspended Particulate Matter (SPM) from coal power

plants in India --150 µg/Nm3 for generation capacity over 210 MW and 300 µg/Nm3 for

generation capacity under 210 MW -- are consistent with international benchmarks.

However, seven years after the notification introducing these standards (1998), over one-

third of coal power plants are yet to comply with the national emissions standards (and 27

are yet to comply with the effluent standards). These plants are old, in poor shape and

typically owned by cash-strapped state government utilities. Meeting the standards is not

possible without a major and expensive Renovation and Modernization (R&M).

Government of India has been implementing the R&M program for about 20 years;

however, progress has slowed down in the past years, due to severe power shortages

making it impossible to shutdown a plant generating cheap power for renovation.

Source: http://kharagpur.in/Strengthening-Institutions-for-Sustainable-Growth-Country-Environmental-Analysis-for-India.pdf

India has seen the most significant reforms in industrial policy triggering its

economic growth but integration of environmental objectives in this process has lagged

behind. Also to promote and attract investments in the State, Industrial Development

Associations (IDAs) tend to offer attractive concessions and tax holidays to the project

proponents in many cases without considering the environmental sensitivities of investments.

For example, Gujarat has attracted significant investments for the production of dyes, dye

intermediates, and textile processing in the small scale sector, which reportedly has led to

significant contamination in the surface and ground waters and land environment.

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The industrial associations, such as the Federation of Indian Chambers of Commerce

(FICCI) and Confederation of Indian Industries (CII), have developed important

initiatives to share best practices, provide compliance assistance and promote voluntary

initiatives. For example, the Association of Chambers of Commerce and Industry

(ASSOCHAM) and FICCI have organized workshops on ISO 14000, developed courses

in internal auditing of environmental management systems, and provided technical

assistance on pollution prevention and waste minimization. Both CII and FICCI have

developed such programs targeting SMEs.

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5.6 Legislative Factors:

MSME ACT, 2006 The enactment of the Micro, Small and Medium Enterprises Act, 2006 was a landmark

initiative taken by the Government of India to enable the SMEs gain competitive

strength, address the issues and challenges and reap benefits of the global market.

Subsequent to enactment of the “Micro, Small and Medium Enterprises Development

Act, 2006” by the Parliament, the Honorable President vide Notification dated 9th May

2007 amended the Government of India (Allocation of Business) Rules, 1961. Pursuant

thereto the then, Ministry of Agro & Rural Industries and Ministry of Small Scale

Industries were merged into a single Ministry, namely, “Ministry of Micro, Small and

Medium Enterprises.”

Although, the primary responsibility of promotion and development of MSMEs is that of

the State Governments, the Government of India, in recognition of potential of these

enterprises, has always taken proactive steps towards supplementing the efforts of the

State Governments through different initiatives. The role of the Ministry of Micro, Small

and Medium Enterprises (M/o MSME) is mainly to assist the States in their efforts aimed

at promoting growth and development of MSMEs, for enhancing their competitiveness.

Some of the schemes by The Ministry of MSME:

Scheme of Surveys, Studies and Policy research

Entrepreneurship Development Institutional Scheme

Scheme of Fund for Regeneration of Traditional Industries

Rajiv Gandhi Udyami Mitra Yojana

Marketing Assistance Scheme

Performance and Credit Rating Scheme

Prime Minister’s Employment Generation Programme

Product Development, Design Intervention and Packaging

Khadi Karigar Janashree Bima Yojana

Interest Subsidy Eligibility Certification

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The specific programmes undertaken by the Ministry of MSME

Adequate flow of credit from financial institutions/banks

Support for technology up gradation and modernization

Integrated infrastructural facilities

Modern testing facilities and quality certification

Access to modern management practices

Entrepreneurship development and skill up gradation through appropriate training

facilities

Support for product development, design intervention and packaging

Welfare of artisans and workers

Assistance for better access to domestic and export markets

Cluster-wide measures to promote capacity-building and empowerment of the units

and their collectives

Source: Annual Report 2008-09, Ministry of MSME

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MSMED ACT 2006: PRE ENACTMENT V/S POST ENACTMENT: A

COMPARATIVE ANALYSIS

PRE ENACTMENT POST ENACTMENT Apex statutory

body SSI Board is the apex non-statutory advisory body constituted by the Government of India

Clause 3 of the MSMED Act provides for the establishment of National MSME Board.

As an ‘entity’

Existing concept of only the ‘Industries’. i.e. the Small Scale Industries (SSI)

Clause 7(1) introduces the concept of ‘Enterprises’ as against ‘Industries’. Broadly classified into enterprises as engaged in manufacture of goods & engaged in rendering services

Establishment

procedure Two -stage registration process of Micro & Small industry in place.

Two-stage registration process of Micro & Small industry is dispensed with & replaced by filing of memoranda, as per Clause 8.

Procurement

Policies Non statutory Clause 11 provides for the

notification of preference policies, by the Central or a State Govt. in respect of procurement of goods & services, produced and provided by the MSEs.

Delayed

Payments-

Repayment,

Penalty

Period of repayment by the supplier – 120 days. Penal interest rate is 150% (or 2 ½ times) of the PLR.

Clause 15 Period of repayment by the supplier – 45 days. Clause 16 Penal interest rate is 200% (or three times) of the PLR.

Delayed

Payments –

Dispute

Resolution

No stipulated time period for a decision on a reference made to a Industry Facilitation Council.

Reference made to the MSE Facilitation council to be decided within 90 days from the date of reference, as per the Clause 18(5)

Deduction

under the

Income Tax

Act, 1961

Amount of interest payable or paid by any buyer is allowable as expense.

Clause 23 Provides to disallow the amount of interest payable or paid by any buyer

Closure of

Business Non existent as a statutory requirement

Clause 25 provides that the Central Govt. may notify a scheme for facilitating closure of business

Provisions for

facilitating

Credit

Non existent as a statutory requirement

Clause10 provides that the policies & practices in respect of credit to the MSMEs shall be progressive and such as may be specified in the guidelines or instructions issued by the RBI.

Source: Published by the SME Division, Confederation of Indian Industry, 249 F, Sector 18, Udyog Vihar, Phase IV, Gurgaon - 122 015.

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Limited Liability Partnership Act, 2009

Generally the firms started by entrepreneurs are either on Micro scale or Small scale.

With the passage of time as the entrepreneur weathers the storms faced in the initial years

the business starts to grow. Growth brings changing needs to handle business and the way

business activities are carried out also have to be in according to the needs. With this new

needs arise. One such is expansion of form in which business is carried on. The form may

be sole proprietorship or partnership establishment of the business unit which needs up

gradation. This change in Indian context for any SME will be a Herculean task to fulfill

all the procedures and the company form will result into higher taxes which the owner

will not wish. In this case the enactment of the Limited Liability Partnership Act, 2009

has come as a welcome step from the government. Such a LLP unit gets taxed as a

partnership firm but it has the characteristics of a company.

Objectives for formation of LLP Act, 2009:

Important vehicle to cater to the needs of professionals, small-scale sector and venture

capital funds as well as innovative business models which would lead to setting up of

multi-disciplinary partnerships.

Some important aspects of the Act:

Conversion to LLP

� A firm, a private company and unlisted public company may convert itself into LLP.

� RoC shall issue certificate of registration, on satisfying that all the provisions of the Act

and related Schedules have been complied with. Such LLP shall inform the Registrar of

Firms or Registrar of Companies about such conversion within 15 days of the date of

registration.

� All property of firm or company shall vest in LLP.

Liability of LLP and partners

� Every partner of LLP is agent of LLP but not of other partners.

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� LLP will be liable if a partner of LLP is liable to any person as a result of wrongful act

in the ordinary course of business.

� Obligations of LLP shall be solely the obligation of LLP and shall be met out of the

property of LLP.

� Partner will be personally liable only for his wrongful act and not of other partners.

� Holding Out - If a person represents himself as partner of LLP, he will be liable to

person who acts in good faith on basis of such representation.

� In case of an act by LLP or its partner with intent to defraud creditors or other person or

any fraudulent purpose, liability of LLP and concerned partner shall be unlimited.

LLP is a hybrid form of Partnership Firm and Company. The following differences

highlight the major differences between LLP, Partnership Firm and Company.

Comparative Analysis:

Company

Limited Liability Partnership

Memorandum is to be filed with RoC Incorporation document is required to be

filed

Memorandum should contain the name of

State where registered office is situated

Incorporation document is not required to

contain name of the State

Name to contain 'Limited or 'Private

Limited' at the end

Name to contain 'Limited Liability

Partnership or 'LLP' at the end

Articles are to be filed at the time of

incorporation

LLP Agreement is to be filed later on. In its

absence, provisions of First Schedule shall

apply

Managing Director to look after day to day

administration

Designated Partner to look after statutory

compliances. All partners can look into

affairs of LLP

Restriction on remuneration payable to the

Directors

No restriction on remuneration to partner.

It should be provided in LLP Agreement

Source: CA. R G Sarda, B.Com (Hons), FCA, PGDADR, DISA (ICAI), CA, 2009.

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Traditional Partnership

Limited Liability Partnership

Unlimited personal liability of each partner

for dues of the partnership firm

Limited liability. No personal liability of

partner, except in case of fraud

Partnership is registered under partnership

Act. Registration is not mandatory

LLP is incorporated under LLP Bill.

Incorporation is mandatory

Not a legal entity separate from its partners It is a legal entity separate from its partners

Partnership deed is executed 'Incorporation Document' is required to be

executed. LLP Agreement is required in

almost all cases, though it is not mandatory

Minimum 2 and maximum 20 partners

Minimum 2 and no limit on maximum

number of partners

Documents are required to be filed with

registrar of firms

ROC is the administrating authority

All partners are liable for statutory

compliances

Only Designated Partners are liable for

statutory compliances

Partner can not enter into business with

firm

Partner of LLP can enter into business with

LLP

Every partner of firm is agent of firm and

also of other partners

Every partner of LLP is only agent of firm

Source: CA. R G Sarda, B.Com (Hons), FCA, PGDADR, DISA (ICAI), CA, 2009.

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6. Findings and suggestions:

From Small and Medium Enterprises to Smartly Managed Enterprises

SMEs are the unsung heroes of the economy as they contribute substantially to the

economy but they still are not able to avail the basic amenities like credit. When it comes

to recognizing the contribution of SMEs in the country there is much to share. Recent

progress in recognizing the SMEs has gained importance and they have been

acknowledged at various platforms organized by the government as well as the other

reputed bodies.

The government carries out SSI census every 10 years which gives important information

relating to the operation of SME units in the country. But still the number of unregistered

units far exceeds the registered units. So the census report provides with the number of

registered units and an approximation of unregistered units.

The majority of contribution by SMEs is observed in the micro enterprise clusters. They

provide about 80 percent of the total employment provided by the sector. These clusters

are formed naturally and operating since many years. The government has also

recognized the need of developing clusters for growth of SME sector by creating

software parks, technology parks, etc. The success of these clusters depends upon the

facilities provided to them in that locality. The units must ensure that inputs in form of

materials and workforce both skilled and unskilled are available at the created clusters to

ensure stable growth of the units.

There is a need for up gradation of the SME sector in various forms like production

processes, technology adaptation, quality certifications, management training, etc. They

also need to adopt innovation as a core process. Innovation does not always mean

development of new products. The need is to recognize the consciousness in the business

units relating to innovation by understanding that being innovative will enable them to

grasp the changes in the external environment ahead of others.

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The SME sector is faced with shortage of funds since many years. The solution to this

problem in the current scenario lies with them only. The government has devised

schemes for providing loans to the SMEs. The problems faced by the SMEs are the lack

of awareness regarding the schemes, non availability of funds on time, confidence on self

to avail the benefits entitled to SMEs.

So in order to avail credit they need to get registered as it entitles the unit to avail many

benefits conferred to them by the government. They also need to recognize the need to

avail credit ratings from the nominated government agencies at concessional rates. Credit

rating will not only facilitate in procuring timely credit but also they will be entitled to

avail loans at a lower rate based on their credit rating.

The need of the hour is increased use of ICT in business processes. The adoption of ICT

not only reduces the cost in long term but also helps to reduce chances of errors. One of

the options available to adopt technology is SaaS. This is the acronym of Software as a

Service. SaaS is model of software where the company does not own the software. It pays

one time the license fees to the service provider and then yearly charges. The data is

stored in the server of the service providing company and the internet acts as a platform

through which the service availing company uses the services.

The awareness relating to reducing carbon emissions is also gaining importance in

today’s business arena. It has not gained much importance in the SME eco system but the

SMEs need to recognize their responsibility towards environment protection. They need

to adopt cleaner and greener technologies. By adopting greener technologies and earning

carbon credits they can also sell them in the carbon credits market thus earning profits

which will recover part of their expenses to adopt cleaner technologies.

The SME exports forms about one third of the total exports of the country. This does not

mean that they are not facing problems in this sphere. Even here they have to firstly bear

the exchange rate risk as well as quality certification issues related to their goods because

in foreign countries the norms of quality of goods. Especially in pharma and food

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industry there are regulations which get updated regularly whereas the capability of units

to adhere to those standards is not present many times. So in order to overcome these

barriers the exporters need to correctly identify the quality of their goods and find the

countries were the quality standards achieved by them are approved. This again gives

them to discover new markets for their products.

Government efforts: Transform SMEs into a new era

The government has pioneered its mission to empower the SMEs with a bundle of

policies as well as legislation. The government has also setup a dedicated Ministry in

order to ensure the problems faced by the SMEs are reduced as well as for promotion of

SMEs. Indian Government is very well known for formulation of outstanding policies.

Our legal rules are considered one of the best in the world. The problem with the

government comes not in the Planning phase but the Implementation phase. The reports

show that not only implementation of policies but even the awareness in SMEs relating to

the various schemes specially designed to meet their needs is also missing. Very few

SMEs have been able to benefit from the schemes of government which is not good news

for the government. Ample of resources are dedicated only for the promotion of SMEs

but lack of commitment on part of implementers has lead to the current situation.

The government has to ensure that the policies and programmes aimed at SMEs reach not

only to a bundle of entrepreneurs but to the grassroots. The Ministry of MSME should try

and create synergy between different agencies setup for the SMEs. The first job on hand

is to create awareness among the SMEs about the stand of government towards the

betterment of the SMEs. The government bodies are observed to be lethargic and to

change this picture there is need of commitment from the government employees as well

as policy makers for ensuring that work is carried out in a smooth manner.

One of the burning issues related to SMEs is accessibility towards finance. The

government has played a significant role in designing and implementing policies and

schemes to fund the needs of SMEs. But the government should not be restricted to

helping SMEs by providing loans from financial institutions.

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The government has tried to balance the supply side by its policies. This alone will not

suffice as the needs for finance differs from one to another individual. The government

should also encourage innovative finance options as well as modern day finance options.

The setup of SME exchange has been in the news since a while. The Venture Capital

funding as well as FDI inflows in the sector should also be encouraged. As far as

innovative financing options are concerned a few lessons can be learned from

international experience. The same options may not be readily applicable in the Indian

context but even studying them may bring out few new opinions.

India has a huge rural workforce which till date remains untapped. This force can be

trained and the integrated into the mainstream economy to bridge the skills gap. This skill

shortage problem if not addressed at the right time can assume huge proportion of a

crisis.

Skill development can be the most potent tool for tapping into the country’s enormous

reservoir of knowledge, mobilizing national talent and creating an empowered generation

with access to opportunities. Skill development initiatives also entail building a truly

inclusive and qualitatively significant knowledge society. Knowledge should be strongly

integrated into the development strategy and innovation should be made an integral part

of knowledge systems.

Skill development assumes special significance in India in the present time as there is a

gradual change taking place in the employment scenario with entrepreneurship becoming

more and more popular and acceptable to the youth.

One more measure to increase the growth of SME sector is to increase the percentage of

goods procured from SMEs units during the year by various government agencies

through contracts. It has been observed that the government in itself is a big consumer of

various products needed by various agencies. So a healthy increase percentage of goods

procured from the SME units will do a world of good for the sector.

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7. Conclusion:

“Success is a state of mind; if you believe in yourself then you will be successful”.

This thought defines the success formula for the SMEs. It is the belief they need to have

on themselves which will determine their future success or otherwise. The government is

making efforts for growth of the sector and also the economy has given positive signals

for the near future. So now it all depends on the SMEs how they go about doing their

business.

SMEs have globally being recognized as being the backbone of economy. They are small

in size and even in terms of turnover they are on the lower side as compared to the

gigantic corporations. The law of large numbers holds true for the SMEs. They though

being individually small but the combined efforts of SMEs make them one of the largest

employers in the world.

The contribution they make is not only in form of output or employment but the real

contribution lies in the social upliftment of people in the rural and backward areas and

they also help in reducing the income inequality.

SMEs face problems in almost all spheres of their work still their determination to work

is not shattered due to these set backs. They have learned to survive in adversities and

stay afloat even in the tough times.

The government has also recognized the importance of SMEs in the country. The role of

government for promoting the SMEs needs to be pro active by addressing the needs of

the sector and providing not only financial support but the need is to build an

infrastructure where the SMEs can grow. The need of imparting vocational training and

skill development centers has to be addressed. Though there are several centers for the

said things but they have not been able to reach to the masses.

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The formal education system also been challenged on the grounds that it does not impart

much of practical knowledge. In light of recent developments in the education sector,

reforms in this sphere are also expected to be observed soon.

The banks also play a lead role in implementing the policies of government relating to

financing to the SMEs. They need to understand that the profits on loans provided to

SMEs may be low but as a matter of national importance they need to increase their

lending to the sector.

113

Annexure I

114

Annexure II NCAER Business Confidence Index sample distribution:

� Out of the 542 responses used in the present round of survey, 16 questionnaires were

received directly by mail and 526 were personally canvassed to respondents.

� Survey work was carried out in the month of December 2009.

� The sample was spread over regions, sectors, ownership and size class of firms.

Sector wise sample distribution

Ownership wise sample distribution

Region wise sample distribution

115

BIBLIOGRAPHY:

Internet Addresses:

1. www.theceoinsights.com/joomla/index.php?option=com_content&view=article&id

4. www.imsme.org/Uploads/MediaTypes/.../India_At_60_Beyond.pdf

6. www.ifmr.ac.in/sefc/UNIDO%20Review.pdf

21. www.cgtmse.in/schemes.aspx

Books:

15. Small Businesses Management, Leon C. Megginson Mary Byrd & William

Megginson, McGraw Hill Irwin, 2003

17. Management of Small Scale Industries, Prof. I S Malhotra & Dr. S L Gupta,

Galgotia publishing Company, 2000

Magazines:

3. SME WORLD, SEPTEMBER 2009

19. SME WORLD, JUNE 2009

Others:

Reports, Research Papers and Articles:

2. Prospects and Challenges of SME’s in India, Bharath.P Naveen Rajesh Moras

7. SMEs – The creative leaders of India: In search of an enabling environment, Duke

Ghosh

8. Indian IT/ITES industry: Impacting economy and society 2007-08, NASSCOM –

DELOITTE study

10. Facilitating innovation in Indian small and medium enterprises – The role of clusters,

V P Kharbanda

11.Benefits of carbon markets to harvested wood products: A case study from

Saharanpur, Anindita Bhattacharya Sarkar and T R Manoharan

13 Capital market access to SMEs in India, Mr. Aryan Banerjee

14 Bank Lending, Financial constrains and SME investment, Santigo Carbo Valverde

16. SME Growth Reconsidered, Professor Richard G.P. McMahon

116

18. How can Indian SMEs become more export competitive, Divya Sampat

20. Master Circular for Lending to Micro, Small and Medium Enterprises vide

RPCD.SME & NFS. BC. No.10/ 06.02.31/ 2009-10

Interviews:

5. Interview of Mr. Dinsha Patel, MOS, MSMEs in SME World, Financial Express, AUG

– OCT, 2009