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The Road ahead for the MSMEs

 

U. Punitha

Assistant Professor,

Department of Business Administration,

SSM College of Arts and Science, Komarapalayam

 

Overview of the Indian MSMEs

              

The Micro, Small and Medium Enterprises (MSMEs) are a vital part of the Indian economy contributing to over 45% of industrial production and around 40% of the total exports. There are about thirteen million MSMEs in India employing around 31 million people, easily the single largest contributor in terms employment generation in the manufacturing sector. MSMEs are present as part of the value chain in almost all distinguished industry sectors like automotive industry, gems and jewellery, IT hardware industry, garments and textile industry, leather industry and drug and pharmaceutical industry.

 

The sector has recorded consistently good growth in terms of production and exports over the years as can be seen in the following table:

 

Year

Number of Units (in lakh)

Production

(Rs. Crore)

Employment

(in lakh)

Exports

(Rs. Crore)

2002-03

109.49

3,06,771

263.68

86,013

2003-04

113.95

3,36,344

275.30

97,644

2004-05

118.59

3,72,938

287.55

1,24,417

2005-06

123.42

4,18,884

299.85

1,50,242

2006-07

128.44

4,71,663

312.52

N.A.

Source: Office of the Development Commissioner (MSME)

 

The small and medium enterprises (SMEs) have often been commonly been used to describe a wide range of enterprises without clear definitions of the exact constituents in the category. With the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), the definitions and coverage of the sector have been broadened significantly.

 

As per MSMED Act, a Micro enterprise engaged in the manufacture or production of goods will be the one, where the investment in plant and machinery does not exceed Rs. 25 Lakhs, a Small enterprise engaged in manufacturing or production will be the one, where the investment in plant and machinery is greater than Rs. 25 Lakhs but does not exceed Rs. 5 Crores, while a medium enterprise will be one having plant and machinery investments more than Rs.5 Crores but not exceeding Rs. 10 Crores.

 

In case of service industries, a Micro enterprise will be the one where plant and machinery does not exceed Rs. 10 Lakh, a Small enterprise will be the one where plant and machinery investment is more than Rs. 10 Lakh but does not exceed Rs. 2 Crores, while a medium enterprise providing or rendering services will be the one, where the investment is more than Rs. 2 Crores but does not exceed Rs. 5Crores.

 

Realizing the tremendous contribution of the MSMEs in industrial production, employment generation and exports, the Government of India has introduced several policies to increase business and promote growth among the MSMEs over the past few decades. While the earlier policies were directed towards providing protection in a controlled economy like reserving production of 873 items for SSIs, introducing high tariff barriers to protect local units and having equity and foreign investment restrictions, there has been a change of direction in policy making in the post liberalized economy from protection to increase competitiveness. Some of the major initiatives taken by the Government in the recent years include:

 

• Implementation of the Micro, Small and Medium Enterprises Development Act (MSMED Act), 2006.

• A “Package for Promotion of Micro and Small Enterprises” was announced in February 2007. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing. Capacity building of MSME Associations and support to women entrepreneurs are the other important features of this package.

• To make the Credit Guarantee Scheme more attractive, the following modifications have been made:

 

Ø  Enhancing eligible loan limit from Rs. 25 lakh to Rs. 50 lakh

Ø  Raising the extent of guarantee cover from 75 per cent to 80 per cent for micro enterprises forloans up to Rs. 5 lakh, MSEs operated or owned by women and all loans in the North-East Region and

Ø  Reducing one-time guarantee fee from 1.5 per cent to 0.75 per cent for all loans in the North-East Region.

 

• The phased deletion of products from the list of items reserved for exclusive manufacture by micro and small enterprises is being continued. 125 items were teraserver on March 13, 2007, reducing the number of items reserved for exclusive manufacture in micro and small enterprise sector to 114. Further, 79 items were de-reserved through a notification dated February 5, 2008.

        

How are the MSMEs coping with the changes? Some of the traditional strengths of the MSMEs have been relatively low investment requirements, effective utilization of resources of capital and skills, greater operational flexibility and mobility, and higher innovativeness. At the same time, MSMEs are still grappling with critical business challenges such as access to finance and resources, access to markets along with operational and productivity challenges. The situation can be improved by providing innovative financing options like equity based financing and receivables financing e.g. factoring besides the traditional debt based financing instruments, facilitating technology upgrade which will improve the quality of products and increased focus in human resource and skill development. MSMEs have to adhere to industry best practices and harness the power of information and communication technology (ICT). The future of the

MSMEs will depend on overcoming the challenges thrown in a liberalized world and by enhancing their competitive in an increasingly global economy.

 

Importance of MSME sector for the growth of India

 

The SME sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points.

 

By its less capital intensive and high labour absorption nature, SME sector has made significant contributions to employment generation and also to rural industrialization. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices.

 

Hurdles faced by MSMEs & steps needed to be taken to overcome them

 

Apart from issues such as timely & adequate availability of finance/credit, technological innovation, trained manpower, the key challenges, are to ensure the 12 % rate of growth in real terms and enhance its contribution to the national GDP. Perhaps key steps needed to overcome these include ensuring of an enabling policy environment for such sustained, high growth rate …. Promote measures to accelerate the opening–up of SME sector to the globalised (WTO) environment…. changing role of the states in the development of a National policy for the Small industry…. and to integrate economic development of the Indian Small industry with the global economy in a truly multilateral trade regime.

 

How can Indian MSME sector be more competitive?

 

Global competition is the name of the game today. Across countries, across regions there is a drive to enhance competitiveness. Competitiveness of nations, industry sectors and individual units. The pressure of competition is being felt with increasing intensity as the world opens up to trade and commerce in the post WTO regime. No where is the impact being felt as hard and as harsh as the SMEs sector. I reiterate that it is imperative that in order to attain the desired growth rate of 12 %, and increase the GDP contribution (to 7%+) of this sector to the national economy, future focus has to be in areas of Cluster development,  Finance, Technology, Operating Environment & the implementation of the

Micro, Small & Medium Enterprises Development (MSMED) Act 2006.

 

Exports performance of SMEs

 

                     SME Sector plays a major role in India's present export performance. 45%-

50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. It would surprise many to know that non-traditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jewellery units from this sector. The product groups where the SSI sector dominates in exports are sports goods, readymade garments, woollen garments and knitwear, plastic products, processed food and leather products. CII too has been proactive with the Ministry of SSI in fuelling the growth of exports from this sector, by actively engaging with its overseas counterparts by way of Enterprise series of Trade fairs, Buyer-Seller meets and overseas delegations. To cap this all CII has institutionalized the India Global Summit on MSMEs, that is due to be held during 30 –31 October 2007.

 

Steps need to be taken to make MSMEs strong in terms of efficiency, quality and technology

 

The present era of tough competition has necessciated two key tools – ICT (Information and Communication Technology) & IPRs (Intellectual Property Rights) – to be appropriately adapted and implemented. The role of Venture capital is equally important in promoting their usage among the MSMEs. While both ICT (Information and Communication Technology) & IPRs (Intellectual Property Rights) are gradually beginning to capture the imagination of global MSMEs, however, this image has to be made more endearing.

 

Specific steps with regards to the following may be initiated:

 

What are the possibilities for integration and the support needed from the Venture capitalists? How do the Global SMEs move up the value chain without compromising on cost? Are manufacturing outfits doing enough to adapt ICT & IPRs, while leveraging their engineering capabilities? How can any entrepreneur allocate budgetary resources for both ICT & IPRs and finally? What are the ways in which systemic obstacles can be overcome to ensure deliveries on these two fronts the ICT & the IPRs?

 

Benefits of Cluster Approach

 

Industrial clusters are very common in India and all over the world. They enjoy certain advantages arising out of co-location and sponsorships by Government and Funding agencies. Their focus has been to build a competitive advantage through clustering of resources, providing common infrastructure such as tool rooms etc and also cluster marketing. By its’character, a cluster is designed to create a synergy for a purpose.

 

 

The probable benefits that accrue as a result of Cluster interventions, include the addressal of issues such as Non- availability of low Cost Finance, Delays in availability of Finance., Lack of Cost Competitiveness, Lack of appropriate Technology, Worker skill enhancement, Product Quality, Quality Management, Old equipment and machinery, Marketing Linkages, Marketing Tools, Competition amongst the MSMEs', focus on preservation of narrow profit margins and lack of a poor shared national vision.

 

The more recent high growth in the manufacturing sector can be attributed to improvement initiatives over the last five to six years. Today in some of the large, medium and small sized industries there is a Quality consciousness and attitudinal change in both management and unions, that boost the economic development in general, and the MSME sector, in particular.

 

Future Scenario

 

While the Manufacturing sector would continue to be the flag bearer of the SME growth, however many of sunrise industries such as Information technology (IT), Biotechnology (BT), Pharmaceuticals and Nanotechnologies along with IT enabled services that are in the service sector will also play a significant role in the growth and development of SMEs. Though the challenges confronting them are quite different from those faced by traditional manufacturing industries, however issues such as IPR protection and managing rapid up scaling of operations would be equally important.

 

Some of the recent policy reforms for the MSME sector in India are as Follows:

 

• A single comprehensive legislation for the promotion, development and enhancement of the competitiveness of the MSME sector - Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 came into effect from October 2006.

• National Manufacturing Competitiveness Council (NMCC) was set up to energise and sustain the growth of the manufacturing industry. New Promotional Package for MSMEs, and focus on accelerating development of clusters.

• Revised strategy of lending and introduction of newer measures, such as the scheme to establish Small Enterprises Financial Centres (SEFC) for strategic alliance between branches of banks and SIDBI located in 388 clusters identified by ministry of SSI.

• The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been set up as an advisory body and a watchdog for the informal sector to bring about improvement in the productivity of these enterprises for generation of large scale employment opportunities on a sustainable basis, particularly in the rural areas.

• Facilitation of technology transfer through the Technology Bureau for Small Enterprises (TBSE)

• Accelerating initiatives to address various developmental needs for MSMEs in the 11th Five Year Plan.

• “Scheme of Fund for Regeneration of Traditional Industries” [“SFURTI”]

• Guarantee coverage under Credit Guarantee Fund for Small Enterprises expanded substantially

• Credit Linked Capital Subsidy Scheme for Technological Upgradation.

• New legislation on Limited Liability Partnerships being worked on.

Emphasis on bi-lateral/ multi-lateral partnerships at multiple levels.

Merger of the Ministry of SSI with the Ministry of ARI.

 

Conclusion

 

India has over 3 million MSMEs producing a diverse range of products from very basic to highly sophisticated products. Despite some of their inherent strengths in uniqueness and cost competitiveness and MSMEs are facing tough challenges in the present scenario of liberalization and globalization.

 

MSMEs have a significant role in the Indian economy accounting for nearly 40 % of the total GDP of India and around 35 % of the total exports. Hence it is imperative that SMEs become globally competitive and usher Indian into double digit growth figures.

 

The MSME sector should not be visualized in isolation as the wherewithal for individual enterprise growth but a meaningful, nationwide effort to sustain industrial development and economic growth with justice and equity in our country. Developing world class SMEs can materialize through thematic interventions in technology ICT interventions, cluster development, quality and product innovations, financing and human resource development. The future will depend on facilitating increased collaboration and networking throughout the industry value chain. It is important that we empower the entrepreneurship in the common man to reach the Goldman Sachs prognosis of the BRICS economic order of 2020.