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enterprises that play a pivotal role in the overall industrial development of the country. They have been the significant contributor to the national income through industrial production and exports. It is a well known fact that after agriculture, the MSMEs provide maximum opportunities for self employment and jobs. They not only provide employment opportunities to millions of unskilled and semiskilled people across the country, mainly village artisans and rural people, but also support large enterprises by supplying raw materials, components, finished parts etc. They also help in building entrepreneurial base in the country by developing and nurturing talents and skills of small and medium scale entrepreneurs. They check the problem of economic concentration in the hands of few. The labour intensity in MSME sector is considerably high, almost four times, as compared to larger enterprises. Thus, the MSME sector has been given a priority sector status by both central and state governments. The following statistics reveal the contribution of this sector. This statistics is based on the third all-India census conducted during 2001-2002, when the old definition was in vogue. The statistics related to new definition is based on unofficial sources. Old definition Number of micro and small enterprises Employment Production (at current prices) Exports Share in GDP Share in manufacturing output Share in exports 12.8 million 31.0 million $ 140 billion $ 33 billion• 6% 39 % 33 % New definition 13 million 41.0 million N.A N.A 8-9 % 45 % 40 %
•Exchange rate used for conversion- Rs. 40 = 1 US dollar (Source- Ministry of micro, small and medium enterprise, Third All-India census) Recognizing the contribution and scope of this sector the definition and coverage of MSE sector were significantly broadened under micro, small and medium enterprises development (MSMED) act, 2006. It gave recognition to the concept of ‘enterprise’, replacing the term industries, to include both manufacturing and service sectors. With the passing of this act various components of this sector got a clear cut definition. Micro
enterprises which were earlier known as tiny enterprises got a formal definition for the first time. For the first time, medium enterprises got official recognition and definition. The investment ceiling of medium enterprises in plant and machinery was also raised to Rs. 5 crore as against Rs. 1 crore earlier. In accordance with the provisions of MSMED act, 2006 the micro small and medium enterprises can be classified into manufacturing enterprises and service enterprises. The manufacturing enterprises are defined in terms of investment in plant and machinery while the service enterprises are defined in terms of investment in equipments. Any enterprise that is engaged in manufacture or production of goods pertaining to any industry specified in first schedule of industries (development and regulation) act, 1951 comes under manufacturing enterprises where as any enterprise engaged in providing and rendering services comes under service enterprises. Both categories of enterprises are further classified as micro, small and medium enterprises. Type enterprise of Manufacturing Investment in plant and machinery equipment Micro Small Does not exceed 25 lakh rupees Does not rupees Services Investment in exceed 10 lakh
More than 25 lakh rupees but does More than 10 lakh rupees but not exceed 5 crore rupees. does not exceed 2 crore rupees. More than 5 crore rupees but does More than 2 crore rupees but not exceed 10 crore rupees. does not exceed 5 crore rupees.
To capture the data of MSME sector, the fourth all-India census of MSMEs for the reference year 2006-2007 is being conducted in the country. It was launched in May 2008 and its field work was completed in March 2009. This will be the first database after the enactment of MSMED act, 2006. The quick estimates of the fourth census (2006-2007) are as follows. No. Of MSMEs No. Of Manufacturing enterprises No. of service enterprises No. of women enterprises 26.1 million 7.3 million 18.8.million 2.1 million (8%)
No. Of rural enterprises Employment Per unit employment Per unit fixed investment
14.2 million (54.4 %) 59.7 million 6.24 Rs. 33.78 lakh
Per unit original value of plant and Rs. 9.66 lakh machinery Per unit gross output Employment investment per one lakh Rs. 46.13 lakh fixed 0.19
(Source- Ministry of micro, small and medium enterprise, Fourth All-India census) In India the MSMEs manufacture more than 6000 types of products ranging from traditional to hi-tech items. Reservation of Items for small scale sector has always been an important feature of industrial policy. As a result of favourable balance of payment India was under obligation to remove quantitative restrictions by 1st April 2001. After the quantitative restrictions were removed the government adopted a policy of dereservation. For the last twenty years the de-reservation has been a topic of debate within the government. The approach to eleventh five year plan recommends progressive de-reservation of items to facilitate further investments for technological up gradation and higher productivity in micro and small enterprises. About 654 items have been removed off from the list of reserved items for exclusive manufacturing by micro and small enterprises in the last few years thus
(Source- Ministry of micro, small and medium enterprises) reducing it to 21 at present. Bread, wooden furniture, steel chair, pickles, safety matches, stainless steel utensils, aluminium utensils etc. are in the list of reserved items. Non-MSEs can also produce these reserved items as long as they export 50 % of additional production within maximum three years and will also have to obtain the industrial licence. Press note-6 has clarified that all the non- MSEs producing reserved items will have to take prior approval of the foreign investment promotion board before raising the FDI above 24 %. This de-reservation has paved the way for larger enterprises for manufacture of these products in keeping with the global standards.
A press note 18 issued in the year 1997 had capped foreign investments in small scale industries at 24 %. The MSMED act 2006, which was cleared by UPA govt. during its first innings expanded the definition of small units but was silent on the FDI so, the cap of 24% FDI continued. This meant that a micro unit the capex of which cannot exceed Rs 25 lakh could get a meagre $13,000 in FDI, and a small-scale unit with a maximum capex of Rs 5 crore could gather just about $0.4 million in FDI. Because of this, Indian MSEs were not able to attract foreign investors and left starved of capital and technological know-how. Recently, a fresh press note-6 has been issued by Department of Industrial Policy and Promotion (DIPP). The present policy on FDI in MSEs permits FDI subject only to the sectoral equity caps, entry routes and other relevant regulations. The press note 18 stands modified by press note 6, which allows FDI in MSEs as per sectoral equity caps and other sectoral regulations. This modification will be able to double the credit flow in the small scale sector over the next five years and will be able to attract more investments from large corporates and foreign investors as the clubbing of FDI rules and the definition is made redundant. This act can also be seen as an effort to bring the economy back on growth trajectory which cannot be done without the healthy growth of MSME sector. The Eleventh Five Year Plan document rightly recognises this sector as one that needs infrastructure, credit and policy support yet in successive Five Year Plans, this sector has not received its due. MSMEs still continue to face problems in their operations. Inadequate infrastructural and credit facilities are the major problems. MSMEs are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials. They find it difficult to sell their output at remunerative prices and cannot spend much on advertising, marketing research, etc. They also face tough competition from large firms. There is lack of trained managerial and technical personnel as they cannot afford to pay higher salaries to employees and cannot spend much on training. MSMEs are still reluctant to adopt new technologies and methods of management. The primary responsibility for promotion and development of MSMEs is in the hands of the concerned State and Union Territory Governments. But, the Central Government has always shown its interest in supplementing the efforts of State/UT Governments through its various regulations. The Ministry of micro, small and medium enterprises (formed after the merger of Ministry of Agro and Rural Industries (Krishi Evam Gramin Udyog Mantralaya) and Ministry of Small Scale Industries (Laghu Udyog Mantralaya)) is the main central authority in India which assists the States/UTs in their efforts to promote growth and development of MSMEs.
It has been implementing several schemes/programmes and policies so as to enhance the global competitiveness of the MSMEs. Finance is one of the critical inputs for growth and development of the micro, small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification, up gradation of facilities, capacity expansion, etc. Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises have a tight budget. Whenever a difficult situation like rejection of consignment, inordinate delay in payments etc. comes the problem of credit becomes serious. Sometimes they have to close their operations due to shortage of funds. Provision of finance to this sector is a part of the priority sector lending policy of the banks. For the public and private sector banks 40% of the net bank credit is embarked for the priority sector and for the foreign banks it is 32 %, of which 10 % is earmarked for the small scale sector. A study by a small business and solution firm Milagrow says that MSMEs must have at least 20% quota out of the total 40% quota of priority sector lending because MSMEs contribute about 40 % of the total industrial output. MSMEs have now started to move to more specialized financial services and options. The more advanced MSMEs have now started to realize the importance of these alternative sources of funding. In the CII (confederation of Indian industries) 10-point agenda a lot of stress has been given on the need for an SME Exchange, to create an effective markets for raising of equity funds by the SME sector located in remote parts of the country, especially by those which are excellent in performance, but need infusion of fresh capital (mainly in the range of Rs. 4-40 crore and upwards) for expansion of business. Also, the new Limited Liability Partnership (LLP) Bill passed recently by Parliament will prove very handy for MSMEs in protecting them against market risks. Out of several problems faced by SMEs, one is the absence of adequate marketing facilities. They lack in expertise, knowledge and experience of various marketing concepts and strategies and thus are unable to face the stiff competition posed by larger firms in terms of cost, quality, promotion etc. They find it difficult to sell their output at remunerative prices because of higher cost of production and non-standardised quality of products. Under Government Stores Purchase Programme, various facilities are provided to enterprises registered with National Small Industries Corporation (NSIC) in order to assist them for marketing their products in competitive environment. These facilities are issue of Tender Sets free of cost, exemption from payment of Earnest Money Deposit, waiver of Security Deposit up to the Monetary Limit for which the unit is registered; and price preference up to 15% over the quotation of large-
scale units. There are about 358 items that have been reserved for exclusive purchase from the MSE Sector. However, as these guidelines are not of a mandatory nature, the same has failed to achieve the desired results. It is to be noted that the US procurement targets ranges from 20% to 30%, whereas in the EU and Japan it is 5-7%. In India, the public procurement is less than 1%. As promised through the MSMED Act, there is a need to set-aside 20% of all public procurement for micro and small enterprises. To assist the MSEs in marketing of their products, Section 12 of the new MSMED Act enjoins the formulation of a scheme of preferential procurement of goods/services produced/rendered by MSEs both at the Central and State/UT levels. Once formulated, the procurement scheme may be more effective in providing the much-needed marketing support that MSEs seek so desperately. Each Ministry/Department, CPSU, etc., would have to make specific mention of the compliance of the preference policy in its Annual Report to be tabled in Parliament. MSME sector accounts for about 40 % of the exports in India. There has been a prominent growth in the exports of both traditional and non traditional goods. About 95 % of the total goods exported by SSIs are non traditional goods. The bulk of the share of items exported by SSIs are garments, engineering goods, chemicals, pharmaceuticals, leather, plastic products, processed food, gems and jewellery. Potential export destinations for products of SMEs are the USA, EU and Japan. It has been identified that the US could provide a market for textiles, leather item, electrical and electronic items. Japan is a potential market for exporting chemicals, agricultural, marine and allied products. The European Union can be a target for enhancing SSI exports of engineering, electrical, textiles, and electronic items. But, there is still lot of problems in exporting the products by small and medium entrepreneurs to other countries. They are not very familiar with the formalities and steps involved in exporting goods like registration of exporters, selection of export market and buyers, receipt of enquiries, letter of intent, letter of credit, bill of lading, insurance coverage, obtaining shipping order, certificate of origin; sending documents to importers etc. Export promotion from the MSE sector has been given a high priority. To help MSEs in exporting their products, the facilities being provided are, Products of MSE exporters are displayed in international exhibitions and the expenditure incurred is reimbursed by the Government, To acquaint MSE exporters with latest packaging standards, techniques, etc., training programme on packaging for exporters are organised in various parts of the country in association with the Indian Institute of Packaging, Under the MSE Marketing Development Assistance (MDA) Scheme, assistance is provided to individuals for participation in overseas fairs/ exhibitions,
overseas study tours, or tours of individuals as member of a trade delegation going abroad etc. Majority of the small scale units use old techniques of production and outdated machinery and equipment. With liberalization of the economy, the MSMEs are facing stiff competition from imports and need technological up gradation in order to produce better quality products at cheap rates. As far as sourcing technology is concerned, small businesses face the following three essential problems. Obtaining information about technology is the first important issue; actual procurement of the technology is the next important issue because even if information is obtained, there are barriers to import of technology and other problems relating to technology transfer, acquiring finance for technology up gradation is also a problem. With a view to speed up the growth of MSME sector in the country, government has taken up several initiatives. ISO 9000/14001 Certification Fee Reimbursement Scheme was introduced in order to incentivise technological up gradation, quality improvement and better environment management by the MSEs. The scheme reimburses 75% of the fees, subject to a maximum of Rs.75, 000, for acquiring Quality Management System (QMS)/ISO 9000 certification and/or Environment Management System (EMS)/ISO 14001 certification by the MSEs. National manufacturing competitiveness program (NMCP) has been launched by the government in order to help MSMEs improve their competitiveness. The schemes under this Programme are aimed at technology and quality up gradation needs of the sector, mainly in the public-private partnership mode. Government has also set up ten state-of-the-art Tool Rooms and Training Centres. These Tool Rooms provide invaluable service to the Indian industry by way of precision tooling and providing well trained craftsmen in the area of tool and die making. The Tool Rooms are not only equipped with the best technology but are also abreast with the latest advancements like CAD/CAM, CNC machining for tooling, Vacuum Heat Treatment, Rapid Prototyping, etc. In the CII’s ten point agenda emphasis is given on climate friendly energy technologies to enhance the self reliance on energy. A need is felt to create Central Climate Friendly Technology Fund to help MSMEs to adopt technologies, such as Wind Energy turbines & systems, Hydro energy turbines & systems, solar photovoltaic and thermal systems and Geothermal energy system. For the overall development of every sector of the economy, adequate infrastructure facilities are necessary. In the wake of liberalisation and globalisation, its presence and importance for the proper growth of small and medium enterprises cannot be underestimated. For setting up of industrial estates and to develop infrastructure facilities like power distribution network, water, telecommunication, drainage and pollution
control facilities, roads, banks, raw materials, storage and marketing outlets, common service facilities and technological back up services, etc., for MSMEs, the Integrated Infrastructural Development (IID) Scheme was launched in 1994. The scheme covers both, rural as well as urban areas with a provision of 50 percent reservation for rural areas and 50 per cent industrial plots are to be reserved for the micro enterprises. The Scheme also has provision for up gradation of the infrastructural facilities in the existing industrial estates. The estimated cost (excluding cost of land) to set up an IID Centre is Rs.5 crore. Central Government provides 40 per cent in case of general States and upto 80% for North East Region, J&K, H.P. and Uttarakhand, as grant and remaining amount could be loan from SIDBI,Banks,Financial Institutions or the State Funds. The IID Scheme has been subsumed under the Micro and Small Enterprise Cluster Development Programme (MSECDP). All the features of the IID Scheme have been retained and will be covered as “New Clusters” under MSECDP. The government has taken several measures to solve the problems faced by micro, small and medium enterprises and enable them to play an effective role in the country's economy. There are Protective Measures to protect small scale industries from the competition of large firms, promotional measures to promote the growth of the small scale sector, institutional measures in the form of setting up of several institutions or agencies to provide assistance to small scale industries. In a recent development, after MSME Associations raised issues facing the sector in August 2009, The Prime minister had set up a Task Force of 11 members headed by his Principal Secretary, with Member Planning Commission, Finance Secretary, Secretary MSME, Secretary Labour, Deputy Governor RBI, CMD SIDBI, and Development Commissioner MSME, and five representatives of MSME Associations as Members. The Task Force addresses the issues raised by MSME bodies, including stepping up credit, simplifying laws for conducting company affairs, skill up gradation, and infrastructure improvement. The MSME associations include Association of Lady Entrepreneurs of Andhra Pradesh, Indian Industries Association, Federation of Tiny & Small Industries of India, Federation of Industries and Commerce of North Eastern Region, and Industrial and Financial Reconstruction Association for Small and Tiny Enterprises. The Task Force has set up seven sub-groups in the areas of credit, marketing, labour relations, Insolvency and Exit Policy, taxation issues, infrastructure including technology and skill development and special issues of NE/J&K. The seven sub-groups have just submitted the report and soon the government may announce more packages and schemes for the MSME sector.