Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SME's Contribution towards GDP in 2009 was 17% which is expected to increase to 22% by 2012. There are 26.1 million MSME Units in India and 12 million persons are expected to join the workforce in the next 3 years. SMEs are the fountain head of several innovations in manufacturing and service sectors, the major link in the supply chain to corporate and the PSUs. By promoting SMEs, the rural areas of India will be developed.
SMEs are now exposed to greater opportunities than ever for expansion and diversification across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making remarkable progress in various Industries like Manufacturing, Precision Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service sector
The Indian market is growing rapidly and Indian industry is making remarkable progress in various Industries like Manufacturing, Precision Engineering, Food Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are finding increasing opportunities to enhance their business activities in core sectors.
There is also a more favourable environment now with the Govt. committed to give fillip to this sector through infrastructure development, skill set development/entrepreneurship development, technology upgradation etc,. SMEs have been quite enthusiastic after the dismantling of the textiles quota. Other sectors like IT and IT-enabled services, bio-tech, footwear etc,. have also shown promising potential. With the deregulation of the financial sector, the general ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banks generally to focus on credit and finance requirements of SMEs. Although the banks are allowed to fix their own targets for funding SMEs in order to achieve a minimum 20% year-on-year growth, the Government's objective is to double the flow of credit to the SME sector from Rs.67,600 crore in 2004-05 to Rs.1,35,200 crore by 2009-10 i.e. within a period of 5 years. Also, Credit risk in the SME sector is widely dispersed and Banks get better yield from SME advances as against the traditional advances where the spread is getting gradually reduced. The SME clientele base could also be utilised by the Branches to step-up “cross selling” of various other products including technology-enabled products.
SME Role Critical For Indian Economy
The Union Government has decided to implement a National Strategy for Manufacturing, drawn up by the National Manufacturing Competitiveness Council (NMCC), which will enable SMEs to achieve competitiveness. The Strategy has identified various priority areas for action viz., textiles & garments, food processing, IT hardware & electronics, leather & footwear, automobiles & auto-components and chemicals & petrochemicals and pharma sectors.
The Cluster Concept clearly seems to be India's answer to global competition. Last year the government had proposed to increase financial assistance to existing clusters of Micro, Small and Medium Enterprises (MSME) up to as high as 80 per cent of their financial requirements under the 11th Plan. This apart, the government proposes to build a pool of consultants under its National Manufacturing Competitiveness Programme to enable MSMEs to become competitive. The consultants would be deployed to a cluster of 8-10 companies for about one year to a year-and-a-half, with their cost being borne by the government.
In the focus on SMEs, the government is supported by the United Nations Industrial Development Organisation (UNIDO), which has proposed a five-year country strategy for India. Cluster development is one integral part of this strategy along with programmes aimed at upgrading technological capability and building social capital in the country's industrial sector. UNIDO is also exploring a new experiment of Twinning of Clusters as is seen in the India-Italy Cluster Development Cooperation. In addition, it is exploring new applications of Industrial cluster-based approaches focusing on Corporate Social Responsibility and poverty alleviation in micro enterprises.more information
From SSI to SME:
Defining the New Paradigm2.1 Government policy as well as credit policy has so far concentrated on manufacturing units in the small-scale sector. The lowering of trade barriers across the globe has increased the minimum viable scale of enterprises. The size of the unit and technology employed for firms to be globally competitive is now of a higher order. The definition of small-scale sector needs to be revisited and the policy should consider inclusion of services and trade sectors within its ambit. In keeping with global practice,. there is also a need to broaden the current concept of the sector and include the medium enterprises in a composite sector of Small and Medium Enterprises (SMEs). A comprehensive legislation, which would enable the paradigm shift from small-scale industry to small and medium enterprises under consideration of Parliament. The Reserve Bank of India, had meanwhile set up an Internal Group which has recommended:"Current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). The definition may be reviewed after enactment of the Small and Medium Enterprises Development Bill. It is proposed to accept the recommendation with regard to the credit facilities being offered by the banking sector and accordingly request the Reserve Bank of India to advise the banks to frame a policy for enhancing the flow of credit to both small and medium enterprises, within the overall framework of credit policy of banks to small and medium enterprises.
Issues related to SME
1. The problems faced by MSMEs (access to bank credit, access to capital, technology, skill, market, etc.) are quite unique to the nature of the sector. These concern several institutions and departments of the Government. There is, therefore, a need for an MSME perspective in the functioning of such institutions and departments. Some of the major bottlenecks impeding the growth of the MSME sector are briefly discussed in the subsequent paragraphs.
2. Access to adequate and timely credit at a reasonable cost is the most critical problems faced by this sector. The major reason for this has been the high risk perception among the banks about this sector and the high transaction costs for loan appraisal. While the quantum of advances from the public sector banks (PSBs) to the MSEs has increased over the years in absolute terms, from Rs.46, 045 crore in March 2000 to Rs.1, 85,208 crore in March 2009, the share of the credit to the MSE sector in the Net Bank Credit (NBC) has declined from 12.5 percent to 10.9 per cent during the same period. Similarly, there has been a decline in the share of micro sector as a percentage of NBC from 7.8 per cent in March 2000 to 4.9% in March 2009.
3. Access to Equity capital is a genuine problem. At present, there is almost negligible
flow of equity capital into this sector, despite the fact that overall capital inflows have
witnessed significant increase in the recent years. Absence of equity capital may pose a
serious challenge to development of knowledge-based industries, particularly those that are sought to be promoted by the first-generation entrepreneurs with the requisite expertise and knowledge.
4. In the present global environment, the MSMEs have to be competitive to survive and thrive. To ensure competitiveness of the MSMEs, it is essential that the availability of infrastructure, technology and skilled manpower are in tune with the global trends. MSMEs are either located in industrial estates set up many decades ago or are functioning within urban areas or have come up in an unorganised manner in rural areas. The state of infrastructure, including power, water, roads, etc. in such areas is poor and unreliable. Further, the MSE sector in India, with some exceptions, is characterised by low technology levels, which acts as a handicap in the emerging global market. As a result, the sustainability of a large number of MSEs will be in jeopardy in the face of competition from imports. Although India has the advantage of a large pool of human resources, the industry continues to face deficit in manpower with the right skill set for specific areas like, manufacturing, service, marketing, etc. The HR problem is further exacerbated by the low retention rate.
5. While India continues to be a growing market cheap imported goods have a direct
impact on the MSEs and their survival. Given the globalisation, governments across the world are providing supportive measures to the MSEs through targeted benefits and facilities. In line with the practice internationally, a Public Procurement Policy for MSEs is vital to ensure a stable market for the MSEs.
6. Worldwide, MSMEs are credited with high level of innovation and creativity, which also leads to higher level of failures. Keeping this in view, most of the countries have put in place mechanisms to handle insolvencies and bankruptcies. The present mechanism available in India for MSMEs is archaic. It does not focus on revival. Hence, business failure in India is viewed as a stigma, which adversely impacts individual creativity and development in the country. An enabling policy environment, which helps viable enterprises facing temporary disruptions to continue while allowing others to close down speedily, with an appropriately structured social security base, is essential for the promotion of MSMEs in India.
7. Although the government has provided an overarching legislation in the form of
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 for the MSME sector, there are a large number of regulatory issues which impact on the development of entrepreneurship generally and on the efficiency of MSMEs in particular. The regulatory aspects concern compliance with labour, environment, urban and various taxation laws (both state and central). An understanding of the concerns from all perspectives, including regulatory, labour and MSMEs, will help in formulating a friendlier regulatory environment which would facilitate promotion and ensure better compliance.
