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MSMES IN INDIA A PERSPECTIVE

What is MSME?
The Micro, Small and Medium Enterprises (MSMEs) play a pivotal role in the economic and
social development of the country, often acting as a nursery of entrepreneurship. They also
play a key role in the development of the economy with their effective, efficient, flexible and
innovative entrepreneurial spirit. The MSME sector contributes significantly to the countrys
manufacturing output, employment and exports and is credited with generating the highest
employment growth as well as accounting for a major share of industrial production and
exports. MSMEs have been globally considered as an engine of economic growth and as key
instruments for promoting equitable development. The major advantage of the sector is its
employment potential at low capital cost. The labor intensity of the MSME sector is much
higher than that of large enterprises. MSMEs constitute more than 90% of total enterprises in
most of the economies and are credited with generating the highest rates of employment
growth and account for a major share of industrial production and exports. In India too,
MSMEs play an essential role in the overall industrial economy of the country. In recent
years, the MSME sector has consistently registered higher growth rate compared with the
overall industrial sector. With its agility and dynamism, the sector has shown admirable
innovativeness and adaptability to survive the recent economic downturn and recession.
The MSME sector in India is highly heterogeneous in terms of the size of the enterprises,
variety of product and services, and levels of technology. The sector not only plays a critical
role in providing employment opportunities at comparatively lower capital cost than large
industries but also helps in industrialization of rural and backward areas, reducing regional
imbalances and assuring more equitable distribution of national income and wealth. MSMEs
complement large industries as ancillary units and contribute enormously to the
socioeconomic development of the country.
MSMEs account for about 45% of Indias manufacturing output. MSMEs account for about
40% of Indias total exports. The sector is projected to employ about 73 million people in
more than 31 million units spread across the country. MSMEs manufacture more than 6,000
products ranging from traditional to high tech items.
Brief History of MSMEs in India
In India, the National Governments policy was concretized in the Industrial Policy
Resolution (IPR), 1956, and associated institutional structures that came into being during the
First Five Year Plan. The First Five Year Plan which gave top priority for agricultural growth
gave village and small scale industries a central place in the rural development programs.
The Second Five Year Plan came out with a clear statement on the respective roles of small
and large industry in the policy and strategy of development in the country. While
recognizing this imperative the planners also gave due importance to traditional and rural
industries.
The policy frame and the promotional measures in India so far are intended to enable the
small scale units to withstand competition from large scale enterprises. The objective of the
MSME policy, from time to time, were one or more of the following: a) creation of wage
employment with growth; b) generation of self-employment; c) creation of productive assets
for the poor; and d) welfare oriented employment programs of the Keynesian type. However
since 1960s, a more target group oriented approach has come into existence.

The Industrial Policy Statement (1977) stressed the wider dispersal of cottage and small
industries into rural areas and small towns.
The Industrial Policy Statement, 1980 focused on integrated industrial development, and
suggested the setting up of nucleus plants in those districts which were identified as
industrially backward, with the expectation that these would help the spatial dispersal of
small ancillary units and the existing network of SSIs would grow faster.
The era of economic reforms that was kick started in 1990, brought in a new policy approach
to the development of this sector. De-reservation and deregulation became the rule.
A new thrust on a level playing ground for the MSMEs, was operationalized through a
comprehensive legislation for the sector, the MSME Development Act, 2006.
The Eleventh Plan, under its inclusive growth agenda, recognized the continuing need to
facilitate the graduation of these enterprises to higher levels, particularly from small to
medium. Beyond this, the Twelfth Five Year Plan recognized the debilities of the country on
the manufacturing front, outlined the need for a National Manufacturing Policy. The Policy
was announced in 2011.
The implications of MSME policy should be understood in terms of four key areas:
a) Macroeconomic policy;
b) Labor market policy;
c) Regulatory framework;
d) Promotion and development.
Unlike in many other countries, a synergic role of the government and the private sector has
resulted in the molding of the MSME sector into an engine of growth, employment, and
balanced regional development in the country.
Measures for Promotion, Development and Enhancement of competitiveness of Micro,
Small and Medium Enterprises
Ministry of Small Scale Industries is primarily responsible for promotion and development of
SMEs in India, and has evolved several policies, institutional and support measures, spread
all over the country, in order to enable SMEs to meet their changing needs. Small Industries
Development Bank of India (SIDBI) has developed various financing schemes. Ministry of
Science and Technology (DST, DBT, DSIR) has evolved several measures and programs for
technological assistance and development and transfer of technologies for SMEs. Some of the
economic ministries such as Ministry of Textiles, Department of Food Processing and
Department of Handicrafts etc. have also recently announced initiatives for technical
assistance in various firms. Some of the measures and new initiatives to promote SMEs
include:

SME development fund


A specialized stock exchange for SMEs
Encouragement for patenting and ISO Certification
SME venture capital fund

National Commission for Small Industries (informal sectors)


Credit Rating Agency
Promoting special venture capital companies and risk financing companies for
SMEs
Improve the working of credit guarantee and export promotion institutions
Progressively reduce protection measures and simplify implementation
policies and control mechanisms
SME Development Centres at SIDBI and IIFT
Considering liberalizing FDI in SMEs and encouraging their linkages with
Transnational Corporations (TNCs) and large companies
Promoting industrial growth centres/clusters, EOUs, district industry centres,
business incubators and business parks
Market assistance and export promotion
National Small Industries Corporation
Small Industries Development Organization
Limited Liability Partnership Act.

Opportunities for MSMEs in India


Special roles for SMEs were earmarked in the Indian economy with the advent of planned
economy from 1951 and the subsequent industrial policy followed by government. By and
large, SMEs developed in a manner, which made it possible for them to achieve the desired
objectives. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is
provided for facilitating the promotion and development and enhancing the competitiveness
of micro, small and medium enterprises and for matters connected therewith or incidental
thereto, emphasized on the following:

Remove impediments due to multiple laws


Introduce statutory consultative and recommendatory bodies on MSME policies
Improve registration procedures of MSMEs
Statutory basis for purchase preference and credit policies
Improve realization of payments of MSMEs

Key challenges faced by Indian MSME sector:


Despite its strategic importance in any industrialization strategy, the opportunities that the
Indian landscape presents and its immense potential for employment generation the MSME
sector confronts several challenges. They face problems at every stage of their operation,
whether it is buying of raw materials, manufacture of products, marketing of goods or raising
of finance. Some of the challenges Indian MSMEs face have been briefly discussed below:
High cost of credit: Access to adequate and timely credit at a reasonable cost is the
most critical problem 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.
Collateral requirements: Players in MSME sector are not in a position to provide
collateral in order to avail loans from banks and hence denied access to credit.
Limited access to equity capital: This is common challenge faced by this sector in
spite of 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.
Problems in supply to government departments and agencies: Majority of
government tenders prescribe high eligibility criteria such as annual turnover, past
experience etc. which deters entity to MSME sector
Procurement of raw materials at a competitive cost: This is a growing challenge
faced by this sector as procurement for raw materials is carried out within local
territory due to their financial constraints and procurements are much smaller in scale
as compared to industry at large.
Problems of storage, designing, packaging and product display: MSMEs face
problems of storage, display and designs for their products. Non availability of selling
outlets for their products is a serious constraint. In addition, MSEs also face problem
of inadequate infrastructure for marketing of their products to interior/ remote parts of
the country.
Lack of access to global markets: With the liberalization and globalization of the
Indian economy, the small enterprises in India have unprecedented opportunities on
the one hand, and face serious challenges, on the other. While access to global market
has offered a host of business opportunities in the form of new target markets,
possibilities to exploit technological advantage, etc., the challenges in this process
have flowed mainly from their scale of operation, technological obsolescence, and
inability to access institutional credit and intense competition in marketing.
Inadequate infrastructure facilities, including power, water, roads, etc: 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 unorganized manner in rural areas. The state of
infrastructure, including power, water, roads, etc. in such areas is poor and unreliable.
Low technology levels and lack of access to modern technology: The MSME
sector in India, with some exceptions, is characterized by low technology levels,
which acts as a handicap in the emerging global market. As a result, the sustainability
of a large number of MSMEs will be in jeopardy in the face of competition from
imports.
Lack of skilled manpower for manufacturing, services, marketing, etc.: Although
India has the advantage of a large pool of human resources, the industry continues to
face deficit in manpower with skills set required for manufacturing, marketing,
servicing, etc.
Absence of a suitable mechanism which enables the quick revival of viable sick
enterprises and allows unviable entities to close down speedily.
Branding and Marketing: Due to very high cost of business acquisition, Low media
budget, non-participation in International events, the MSME branding and visibility is
extremely poor.

Role of Company Secretaries


The Company Secretaries as advisors are key players in the MSME Sector. They can play an
important role in educating the promoters and management of the MSMEs. Few of important
Roles that a CS can perform:

Advisor to public Issue by SME.

Advisor/consultant for SMEs on listing at SME Exchange.


Acting as Compliance officer under SME listing Agreement.
Certifications under various clauses of SME Listing Agreement.
Maintaining the Statutory Registers.
Monitoring changes in the share ownership of the company.
Assisting MSME companies to file statutory information properly.
Monitoring changes in relevant legislation and the regulatory environment and
helping the managements to take appropriate action.
Developing and overseeing the systems that ensures that the company complies with
all applicable codes as well as its legal and statutory requirement.
Liasoning with banks and financial institutions and help MSMEs to obtain project
financing and term loans.
Co-coordinating the process of obtaining funds from Angel Investors/Venture Capital
Funds/Private Equity.
Conducting Secretarial Audit/Due Diligence which will be of great help before
approaching for the funds.
Providing Compliance Certificate and ensure compliance of various regulatory
prescriptions in case of an IPO.
Helping in converting sole proprietary or partnerships in to Companies.

Suggestions and Conclusion


SMEs are going through a transition phase and are generally restructuring their strategies and
capabilities to remain competitive and grow in the emerging world trade environment. The
government is also evolving policies, strategies and modes of implementation to encourage
and support SMEs for their growth, capacity building and international competitiveness. The
issues and strategies vary with the level of development and priorities in national economies.
Innovation, technology, productivity and quality, though inter-related, are assuming greater
significance for competitiveness in manufacturing and businesses. Foreign Direct
Investments (FDI), networking and technical tie ups are being encouraged to facilitate access
to newer technologies, strengthening technological and management capabilities, and access
to market information. Creation of training and skill up gradation facilities, ICT applications,
and sharing of risks in financing and development, are the thrust areas. In India, effective
implementation of policies and delivery of results to the satisfaction of the SMEs, remain
much below than desired, though there are a large number of institutional mechanisms and
support measures available and concerns shown by the government. There is a need to
critically review the existing policies and mechanisms, to assess the constraints and gaps in
delivering the desired outputs. For example, there are overlapping agencies and programs for
development of technologies and technological assistance to the SMEs, but the SMEs
continue to be weak in R&D, technology development, acquisition and induction of new
technologies, productivity and quality among other factors. The technology support programs
are largely implemented from Delhi or the capitals of the states and the awareness about
programs and fiscal incentives available is limited among SMEs. Most SMEs, need easier
access to new or modern technologies abroad, technology support facilities and easier access
to finance, including technology finance, besides marketing information and incentives for
training and skills development. Further, differentiated policies and mechanisms are needed
for SMEs in different sectors, stages of their development, nature of operations. For example,
the technological needs of SMEs in traditional sectors such as food processing, leather
textiles, toys etc. would be different than those in new and advanced technological areas such

as micro-electrical, pharma, precision instruments and so on. Perhaps, there is a need to have
short term and long term strategies for enhancing competitiveness of SMEs in one broad
based strategy. The R&D expenditure and technological capacities of most of the SMEs
would continue to be limited because of their inherent constraints in the resources and vision.
The support structures should recognize this fact. However, the SMEs have enormous
potential for innovations and incremental development, which need to be nurtured for
production of new goods and services at competitive costs. The IT and auto-component
SMEs are examples of the successes through innovations. Such policies should lead to wider
dispersal of economic benefits, capacity building, and utilization of resources, creating
employment, etc. across the society. Economic, education, trade, technology and society need
to be interdependent. The SMEs development project should recognize the needs of
internationalizing companies or those who have the potential to internationalize, differently
than those of domestic oriented companies or stagnating companies.