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A STUDY ON INCREASING ROLE OF SMES IN INDIAN ECONOMY

Research Report
Submitted to
Uttar Pradesh Technical University, Lucknow
In Partial Fulfillment of the Requirements of Degree of
Master of Business Administration
Prepared by:
Akanksha Singh
MBA.4th Semester
Roll No.1304070002

2014- 2015

Department of Business Administration


Technical Education & Research Institute
Post-Graduate College, Ghazipur 233001 (U.P.)

Certificate
This is to certify that Akanksha Singh, pursuing MBA 3rd Semester
from this institute, has prepared the summer training project report
entitled A STUDY ON INCREASING ROLE OF SMES IN INDIAN
ECONOMY in partial fulfillment of the requirements of the degree of

Master of Business Administration from Uttar Pradesh Technical


University, Lucknow, for the session 2014-2015.
This report is based on Research project undertaken By Akanksha
Singh.
I recommend that this project report may be sent for evaluation.

Rahul Anand Singh


Head, Dept. of Business Administration

Declaration
I, Akanksha Singh, hereby declare that this summer training
project report entitled A STUDY ON INCREASING ROLE OF SMES IN
INDIAN ECONOMY has been prepared by me on the basis of summer

training done at Havells India Ltd. at Patna during the period Two
Month under the supervision of S.K. Poddar.

This project report is

my bona fide work and has not been submitted in any form to any
University or Institute for the award of any degree or diploma prior to
the under mentioned date. I bear the entire responsibility of submission
of this project report.

15th May 2015

Akanksha Singh
MBA 4th Semester
Department of Business Administration
Technical Education & Research Institute
P. G. College, Ghazipur

PREFACE
Someone has rightly said that practical experience is far better and closer to the real world than
mere theoretical exposure. The practical experience helps the student to view the real business
world closely, which in turn widely influences his/her perceptions and understanding of the real
situation. Research work constitutes the backbone of any management education program. A
management student has to do research work quite frequently during his entire life span.
The research work entitled A Study on Brand Awareness and Customer Preference
Regarding Green CFL in Patna aims to know customer awareness regarding Havells and the
products offered by it. The present report is a part of the project that contains the work done by
me during the training period at Havells India Ltd. Patna.
True to the core, a properly and executed industrial training helps a lot in providing linkage
between the student and the industry. It develops the awareness of industrial approach to problem
solving based on a board understanding of the mode of operation of industrial organization.
This project has offered me an opportunity to put all my efforts and the theoretical knowledge to
practice and enhance my knowledge, and at the same time, given me practical experience in the
field of marketing. It is surely going to help me in my future projects too. In the preparation of
this report, I have made every effort to ensure that all steps involved in development of this
project are adequately covered and the report be completed in it. Any suggestions for
improvement, if rendered, will be gratefully accepted.
I sincerely hope that this project will prove pure knowledge imparting, through provoking and
thus stimulating future research work on these guideline.

ACKNOWLEDGEMENT

A formal statement of acknowledgement will hardly meet the ends of justice in the matter of
expressing my deep sense of gratitude and obligation to all those who helped me in the
completion of this project report.
The past six weeks working on this project under the guidance of my Project Leader and Guide
has greatly influenced my way of thinking towards facing the challenges during day-to-day
development of this project. This will help me a lot in future as I move further ahead in my
professional life in the days to come.
I am especially indebted to my Project Manager, S.K. Poddar, without whose precious time &
expert guidance, the project would not have taken the current shape. His guidance and in depth
knowledge of Marketing concepts have boosted my confidence to complete this project
successfully. He made the intricacies of the existing project clear to me. He deserves special
thanks for his technical guidance throughout the project. He was highly supportive to develop
this project.
Last but not the least I would also like to express my gratitude to Havells employees and all my
friends who helped me a lot throughout this project.

Akanksha Singh

ROLE OF SME IN INDIAN ECONOMY


ABSTRACT- Small and medium enterprises play a very important role in the economy of any
country and it is more so in a developing country like India. They play a role in boosting the
economy of a country. The role of small and medium enterprises in the economic and social
development of the country is well established. SME s emerges leaders during the period of
recession, restoring jobs and business activity lost during the time despite a slow and fragile
economy. The small-scale industries 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.
The small-scale sector has grown rapidly over the years. The growth rates during the various
plan periods have been very impressive. The number of small-scale units has increased from an
estimated 0.87 million units in the year 1980-81 to over 3 million in the year. When the
performance of this sector is viewed against the growth in the manufacturing and the industry
sector as a whole, it instills confidence in the resilience of the small-scale sector. This paper
would study the role of SME s in Indian Economy and its contribution to the economic
development of the country as a whole.
Keywords- SME, Indian economy, performance.
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INTRODUCTION The small and medium enterprises today constitute a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our late
Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting
sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant
sector of the economy. The Indian economy is expected to grow by over 8 per cent per annum
until 2020 and can become the second largest in the world, ahead of the United States, by 2050,
and the third largest after China and the United States by 2032. The turnaround in manufacturing
and other sectors, which has occurred in the face of increased global competition, is due to
improved efficiency following the various policy reforms in recent years. Small and medium
enterprises (SMEs) constitute 6 per cent of GDP, 34 per cent of national exports and account for
the employment of more than 30 million people. This paper is divided into three sections- the
first section deals with the definition aspect of the SME s and Indian economy s general
aspects, the second section deals with the challenges faced by SME s and the third on their
impact on the Indian Economy.
SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly
called as the backbone of the GDP of India. The SME sector in India is growing at an
exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy.
Following are some of the current figures related to the SME sector in India:
The contribution of the SME sector to the entire output of the country is 40%.
Currently, there are over 11 million SME units in India that produces more than 8000
products.
90% of the Industrial Units in India belong to the SME sector.

These SME units contribute 35% to the Indian Industrial Export.


Following are some of the factors that have contributed to the growth of SME sector in
India.
SME units in India are being funded by foreign and local fund providers.
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The advancement in technology has also contributed highly to the SME sector.
There are numerous business directories and trade portals available online that
contains a rich database of manufacturers, sellers and buyers.
To start and maintain these units, minimal investment is required.
These SME units are now being funded by many government and private banks.
The SME sector is one of the greatest contributors of domestic production as well
as the export earnings. Many major mergers have taken place recently.
Though the SME sector is flourishing and expected to grow further in the near future, there are
however certain challenges that the SME sector will have to face.
DEFINATION OF SMESME
s are the engines of growth of any countrys economy. They are an essential source of a
countrys jobs, create entrepreneurial spirit and jobs in a country and are crucial for fostering
competitiveness and employment.
According to the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the
Micro, Small and Medium Enterprises (MSME) are classified as:
1. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of

goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation Act, 1951). The Manufacturing Enterprises are defined in
terms of investment in Plant & Machinery.
2. Service Enterprises: The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment.
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro less than Rs 25 lakhs
Small over Rs 25 lakhs but not exceeding Rs 5 Crores
Medium over Rs 5 Crores but less than Rs 10 Crores
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Service Sector
Enterprises Investment in equipments
Micro less than Rs. 10 lakhs
Small over Rs. 10 lakh but not exceeding Rs. 2 crores
Medium over Rs. 2 crore but not exceeding Rs. 5 crores
With the recent pronouncement of the MSMED Act, 2006, the Indian government
has explicitly recognized the dynamic role to be played by the MSMEs in an
increasingly globalised world.
The clear thrust of the recent policy initiatives has been three-fold:
i) enhance competitiveness through encouraging an innovative ethos

amongst firms and being quality conscious;


ii) increase links with multiple stakeholders
with a view to benefit from networks both nationally and globally; and
iii) strive for a larger market presence beyond the domestic.
The policy attaches importance to networking with stakeholders both upstream
and downstream in the entire global value chain, from raw material procurement
to processing/manufacturing to marketing to customer services. For one thing,
the Act has identified the category of medium enterprises as a vital
section in the manufacturing stream and, for the other, it has taken special
note of distinct roles to be played by what are termed business service
enterprises .
CLASSIFICATION OF SME ( Source :MSME online Govt. of Tamil Nadu) :The SME can be classified into two types: Manufacturing enterprises and Service
Enterprises. Which can be further classified as follows:
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MANUFACTURING ENTERPRISES
(i) Micro Manufacturing Enterprises:
The investment in plant and machinery does not exceed Rs.25 lakhs
(Rupees twenty five lakhs only)
(ii) Small Manufacturing Enterprises:
The investment in plant and machinery is more than twenty five lakh rupees

but does not exceed rupees 5 crores (Rupees five crores only).
(iii) Medium Manufacturing Enterprises:
The investment in plant and machinery is more than rupees 5 crores but not exceeding Rs.10
crores (Rupees ten crores only).
(B) SERVICE ENTERPRISES
(i) Micro Service Enterprises:
The investment in equipment does not exceed rupees 10 lakhs.
(ii) Small Service Industries:
The investment in equipment is more than 10 (Ten lakh rupees) but does not exceeds rupees 2
crores.
(iii) Medium Service Enterprises:
The investment in equipment is more than rupees 2 crores but does not exceed rupees 5 crores.
BASIC ISSUES OF SME s , PAST, PRESENT AND FUTURE:
Today, small and medium industry occupies a position of strategic importance in the Indian
economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition and
50% of total manufacturing exports. More than 3.2 million units are spread all over the country
producing about 8000 items, from very basic to highly sophisticated products. The SMEs are the
biggest employment-providing sectors after agriculture, providing employment to 29.4 million
people. However SMEs, which constitute more than 90% of total number of industrial
enterprises, are now facing a tough competition from their global counterparts due to
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liberalization, change in manufacturing strategies, technological changes, and turbulent and
uncertain market scenario.
This contribution is despite the sector being exposed to intensified competition since
liberalization of Indian economy in 1991. Small industry in India has been confronted with an
increasingly competitive environment due to:
(1) Liberalization of the investment regime in the 1990s, favoring foreign direct investment
(FDI);
(2) The formation of the World Trade Organisation (WTO) in 1995, forcing its membercountries
(including India) to drastically scale down quantitative and non-quantitative restrictions
on imports, and
(3) Domestic economic reforms. The cumulative impact of all these developments is a
remarkable transformation of the economic environment in which small industry operates,
implying that the sector has no option but to 'compete or perish'.
THE SMEs IN INDIA: PRESENT SCENARIO
In the recent past, small companies have performed better than their larger counterpart. Between
2001-06, net companies with net turnover of Rs. 1 crore 50 crore had a higher growth rate of
701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000
crore (Business World Jan. 2007). The total SSI production, which had reached the all time high
of Rs. 1,89,200 crores in 1989-90 dropped dramatically in the next 10 years and only in 2001-02
the level of production was surpassed. But after 2002, the production has risen at a faster rate.
Since 2000, there is a continuous growth in number of units, production, employment and in
exports. The average annual growth in the number of units was around 4.1%.

Table I : Performance of Micro and Small Enterprises


Year
No. of Units (In Lakh) Production (Rs. Crore)
Employment
(In Lakh)
Exports
Reg (Rs.Crore)
d.
Unreg
d. Total
(At
Current
Prices)
(At
Constant
Prices)
20022003
15.
91 93.58 109.49
(4.1)
3,11,99
3

(10.5)
2,10,636
(7.7)
260.21
(4.4)
86013
(20.7)
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20032004
16.
97 96.98 113.95
(4.1)
3,57,73
3
(14.7)
2,28,730
(8.6)
271.42
(4.3)
97644

(13.5)
20042005
17.
53 101.06 118.59
(4.1)
4,18,26
3
6(16.9)
2,51,511
(10.0)
282,57
(4.1)
1,24,41
7
(27.4)
20052006
18.
71 104.71 123.42
(4.1)
4,76,20
1

(13.9)
2,77,668
(10.4)
294.91
(4.4) N.A.
Note : Figures in parenthesis Indicate percentage growth over previous years
Source: Development Commissioner (SSI)
Today, some of the SMEs are acquiring companies abroad as part of the globalization process.
Mostly, these units are ancillaries and are export oriented. The SME sector have transformed to
the need of large local manufacturers and suppliers to global manufacturers like Auto Industry.
Today some SMEs are investing in R&D in order to compete globally. Outsourcing from
multinational
companies has played a vital role in the emergence of Indian SMEs as world leaders in
specified products. The advantages in labour-intensive manufacturing units, lower transport costs
and lose labour policies of the small scale sector have led to major outsourcing in manufacturing
and services.
IMPORTANCE OF SME
The opportunities of growth in the SMEs sector are enormous due to the following factors:
1. Less Capital Intensive
2. Extensive Promotion & Support by Government
3. Reservation for Exclusive Manufacture by small scale sector
4. Project Profiles
5. Funding - Finance & Subsidies

6. Machinery Procurement
7. Raw Material Procurement
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8. Manpower Training
9. Technical & Managerial skills
10. Tooling & Testing support
11. Reservation for Exclusive Purchase by Government
12. Export Promotion
13. Growth in demand in the domestic market size due to overall economic growth
14. Increasing Export Potential for Indian products
15. Growth in requirements for ancillary units due to the increase in number of green-field units
coming up in the large scale sector.
CHALLENGES FACED BY SME:
Despite its commendable contribution to the Nation's economy, SME Sector does not get the
required support from the concerned Government Departments, Banks, Financial Institutions and
Corporate, which is a handicap in becoming more competitive in the National and International
Markets.
SMEs faces a number of problems
absence of adequate and timely banking finance,
limited capital and knowledge, non-availability of suitable technology,
low production capacity,

Ineffective marketing strategy,


Identification of new markets,
Constraints on modernization & expansions,
Non availability of highly skilled labor at affordable cost,
Follow-up with various government agencies to resolve problems etc.
SME s contribution to ExportsSMEs Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is contributed by the sector. Direct exports from the sector account for nearly 35% of
total exports. Besides direct exports, it is estimated that small-scale industrial units contribute
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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. The exports from
SMEs sector have shown excellent growth rates in this decade. The product groups which
dominate the exports from SMEs sector include sports goods, readymade garments, woollen
garments and knitwear, plastic products, processed food and leather products. The SMEs sector
is reorienting its export strategy towards the new trade regime being ushered in by the WTO.
Looking AheadThis sector is ideally suited to build on the strengths of the traditional skills and knowledge, by
infusion of technologies, capital and innovative marketing practices. This is the opportune time
to set up projects in the sector. It may be said that the outlook is positive, indeed promising,

given some safeguards. This expectation is based on an essential feature of the Indian industry
and the demand structures. The diversity in production systems and demand structures will
ensure long term co-existence of many layers of demand for consumer products / technologies /
processes. There will be flourishing and well grounded markets for the same product/process,
differentiated by quality, value added and sophistication. This characteristic of the Indian
economy will allow complementary existence for various diverse types of units. The promotional
and protective policies of the Government of India have ensured the presence of this sector in an
astonishing range of products, particularly in consumer goods. However, the bottleneck of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization coupled with Government support will therefore, attract the infusion of these in this
sector.
The capability of Indian MSME products to compete in international markets is reflected in its
share of about 34% in national exports. In case of items like readymade garments, leather goods,
processed foods, engineering items, the performance has been commendable both in terms of
value and their share within the MSME sector while in some cases like sports goods they account
for 100% share to the total exports of the sector. In view of this, export promotion from the small
scale sector has been accorded high priority in India's export promotion strategy which includes
simplification of procedures, incentives for higher production of exports, preferential treatments
to MSMEs in the market development fund, simplification of duty drawback rules, etc. Products
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of MSME exporters are displayed in international exhibitions free of cost under SIDO Umbrella

abroad.
Performance of Small Scale Industries can be determined in terms of the following criteria:
1. Employment Generation
2. Production
3. Exports
4. Opportunities
5. Economic Indicators
1) Employment Generation
SSI Sector in India creates largest employment opportunities for the Indian populace, next only
to Agriculture. It has been estimated that a lakh rupees of investment in fixed assets in the small
scale sector generates employment for four persons. Some of the interesting observations related
to employment in the small scale sector are related to generation of employment according to the
industry. It is found that the food products industry ranked first in generating employment. The
next two industries are non-metallic mineral products and metal products. Apart from this
Chemicals & chemical products, Machinery parts and except Electrical parts, Wood products,
Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and
Rubber & plastic products also contributed to generate employment.
Per unit employment
Per unit employment was the highest (20) in units engaged in Beverages, tobacco & tobacco
products mainly due to the high employment potential of this industry particularly in
Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu.
Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal
industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in

Repair services line.


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Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas.
However, in Chemicals & chemical products, Non-metallic mineral products and Basic metal
industries per unit employment was higher in rural areas as compared to metropolitan
areas/urban areas.
In urban areas highest employment per unit was in Beverages, tobacco products (31 persons)
followed by Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral
products (12).
Rural
Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products
accounted for 21.1%, Wood Products and Chemicals and chemical products shared between
them 17.5%.
Urban
As for urban areas, Food Products and Metal Products almost equally shared 22.8% of
employment. Machinery and parts except electrical, Non-metallic mineral products, and
Chemicals & chemical products between them accounted for 26.2% of employment.
In metropolitan areas the leading industries were Metal products, Machinery and parts except
electrical and Paper products & printing (total share being 33.6%).
State-wise Employment Distribution
Tamil Nadu (14.5%) made the maximum contribution to employment.

This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the
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total share being 27.7%.
Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%), and Punjab (5.6%) together
accounted for another 27.4%.
Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra &
Nagar Haveli.
It was 12 in Maharashtra, Tripura and Delhi.
Madhya Pradesh had the figure of 2. In all other cases it was around the average of 6.
2) Production
The small scale industries sector plays a vital role for the growth of the country. It contributes
40% of the gross manufacture to the Indian economy.
It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector
produces 4.62 lakhs worth of goods or services with an approximate value addition of ten
percentage points.
The small scale sector has grown rapidly over the years. The growth rates during the various plan
periods have been very impressive. The number of small scale units has increased from an
estimated 8.74 lakhs units in the year 1980-81 to an estimated 31.21 lakhs in the year 1999.
The transition period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand recession, high
interest rates, shortage of raw material etc.

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When the performance of this sector is viewed against the growth in the manufacturing and the
industry sector as a whole, it instills confidence in the resilience of the small scale sector.
The estimates of growth for the year 1995-96 have shown an upswing. The growth of SSI sector
has surpassed overall industrial growth from 1991 onwards. The positive trend is likely to
strengthen in the coming years. This trend augurs a bright future for the small scale industry.
3) Export contribution
SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is being contributed by SSI Sector. Direct exports from the SSI Sector account for nearly
35% of total exports. The number of small scale units that undertake direct exports would be
more than 5000.
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 has been clocking excellent growth rates in this decade. It has been
mostly fuelled by the performance of garment, leather and gems and jewellery units from this
sector.
The lucrative 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.
4) Opportunities
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Small industry sector has performed exceedingly well and enabled our country to achieve a wide
measure of industrial growth and diversification.
By its less capital intensive and high labor absorption nature, SSI 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.
The opportunities in the small scale sector are enormous due to the following factors :
- Less Capital Intensive
- Extensive Promotion & Support by the Government
- Reservation for Exclusive Manufacture by small scale sector
- Project Profiles
- Funding
- Finance & Subsidies
- Machinery Procurement
- Raw Material Procurement
- Manpower Training
- Technical & Managerial skills

- Tools & Tools utilization support


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- Reservation for Exclusive Purchase by Government
- Export Promotion
- Growth in demand in the domestic market size due to overall economic growth
- Increasing Export Potential for Indian products
- Growth in Requirements for ancillary units due to the increase in number of greenfield units
coming up in the large scale sector.
So this is the opportune time to set up projects in the small scale sector. It may be said that the
outlook is positive, indeed promising, given some safeguards. This expectation is based on an
essential feature of the Indian industry and the demand structures. The diversity in production
systems and demand structures will ensure long term co-existence of many layers of demand for
consumer products / technologies / processes. There will be flourishing and well grounded
markets for the same product/process, differentiated by quality, value added and sophistication.
This characteristic of the Indian economy will allow complementary existence for various
diverse types of units.
The promotional and protective policies of the Govt. have ensured the presence of this sector in
an astonishing range of products, particularly in consumer goods. However, the bug bear of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization will therefore, attract the infusion of just these things in the sector.
5) Economic Indicators

The Small Scale Industry today constitutes a very important segment of the Indian economy. The
development of this sector came about primarily due to the vision of our late Prime Minister
Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form
of small scale enterprises.
Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.
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- Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and
over 40% of the total exports from the country.
- In terms of value added this sector accounts for about 40% of the value added in the
manufacturing sector.
- The sector's contribution to employment is next only to agriculture in India. It is therefore an
excellent sector of economy for investment.
SME s CONTRIBUTION TO INDIAN ECONOMY:
Growth of the Indian economy has accelerated to 8% and efforts are on to further propel it to
10%. Undoubtedly, all the segments of the economy, viz. agriculture, industry and services have
to improve their contribution to the economy. Growth of small and medium enterprises (SMEs)
is a sine qua non for the growth of industry, exports and other segments of the economy.
Furthermore, promotion of entrepreneurship is also vital for sustenance and upward movement
of the current growth trajectory of the economy. The SME sector acts as a catalyst in upholding
and encouraging the creation of the innovative spirit and entrepreneurship in the economy,
thereby helping in laying the foundation for rapid industrial development. Moreover, the sector

Also serves the vital objectives of employment generation and balanced regional development.
Globalization and liberalization of the Indian economy have also brought a host of opportunities
for the industrial sector, particularly the SME segment. While SMEs have responded to
competition reasonably satisfactorily, there is scope for increasing their export potential,
domestic market share and developing them as serious players in the global value chain. SME s
represents the largest proportion of the manufacturing sector in every country. In India, 95
percent of the industrial units are in small- scale sector with 40 percent addition in the
manufacturing sector and 6.29 percent contribution to the Indian Gross Domestic Product
( Times of India, 2002) .
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Current Issues
i. Lending Facilities to SMEsThe mind set of banks towards SMEs have somewhat changed in the recent past. With the entry
of private banks, increased competition has led to a rush for lending to prime customers. The
multiple financial options from the capital market have also compelled banks to take more risks
in the case of SMEs. The increased lending to SMEs is propelled by the compulsion of the
market as well as by the rapid expansion of these companies. The lending to the SME sector
grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs sector.
Loans to bigger companies are growing at a faster pace than loans to the SSI sector. By the end
of 2006, the proportion of SSI loans to total loans has remained small at 6.4%.The Small

Industries Development Bank of India (SIDBI) was set up in 1990 under the Act of Indian
Parliament as the principal financial institution for promotion, financing, development of
industry in the small sector and coordinating the financial activities of other institutions engaged
in similar activities.
ii. Marketing
Next to finance, marketing is the big problem area for small entrepreneurs. The survival of small
entrepreneurs very much depends on sound marketing techniques. One of the most important
tools in the hands of small entrepreneurs for promoting their sales is low prices coupled with
credit to buyers, which give rise to number of problems at a later stage.
Marketing as a profession has not yet developed in the SME sector. Professional agencies are not
engaged by small entrepreneurs on account of paucity of funds. The concept of marketing is not
known to the majority of small entrepreneurs. For majority, marketing means advertisement or
personal contacts. There are many ad-hoc initiatives taken by the Government to promote
marketing of products/services of small units but no concrete action plan has been chalked out or
targets made.
iii. Technological Up gradation
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Modernization, technological and quality up gradation have assumed great significance in
the present day context. With the inflow of latest technology reducing the cost of production
and the increasing competition from within and outside, the small scale sector will have to
attach more importance and pay attention to the areas of technology up gradation and

modernization. However, due to lack of information on the areas of technology up gradation,


entrepreneurs who have plans for technical up gradation are not to go ahead.
iv Sickness in SSI Sector
A host of developmental schemes launched by the Government for solving the problems of small
scale industries have yet to achieve their goals to arrest sickness in SSI sector. The plight of
existing small scale industries is visible in many industrial complexes wherein the industrial
sheds have been converted into allied activities like showrooms, banquet halls,
Restaurants, etc. There seems to be some lacuna in the implementation part of the developmental
schemes.
v. Removal of Inspector Regime and Simplification of Procedures
One of the major grievances of the small scale sector is that the frequent inspections by multiple
government agencies are a source of harassment. At present, 55 inspectors of different levels are
visiting the small scale units, which is a cause of major concern to the small scale units. It is
suggested that the government should stream line the inspection
procedure. It should also include repeal of laws and regulations applicable to the sector that has
become redundant.
Future Policy Frame Work
i. Priority Sector Lending
The target fixed for priority sector lending by domestic and foreign banks is 40% and 32% of
their net bank credit (NBC) respectively. The declining share of the SSI sector in the outstanding
priority sector advances of public and private sector banks since 1999-2000 is a cause for
concern. The share of SSI advances in the NBC declined from 16% at the end of March 2000 to
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11% at the end of March 2003 in respect of public sector banks. For the private sector banks, the
share declined from 19% to about 8% in the same period. The limited access of SSI sector to
funds needs to be addressed on a priority basis. Large corporate are able to access bank loans at
below PLR besides accessing international markets. But, for the SSI sector, the cost of funds
continues to remain high despite falling deposit rates.
ii Reformation of Labor Laws
Multiplicity of labor laws is responsible to a large extent for slow growth of industry in our
country. Labor laws provide too much protection to labor force by the provision of
minimum wages, PF, bonus, gratuity and ESI etc. On the other hand, the employers are
required to seek prior permission even for getting overtime work from labor, on payment
and in spite of mutual consent. There has to be performance or productivity linked wage
structure. The more efficient and hard workers may be suitably rewarded, and there should
be a provision to deduct the wages for shirking and laziness. Supportive labor laws are an
important pre-requisite for Indian industry to face the international competition.
iii The Opportunity
Globalization and liberalization need not affect Indian small industry only adversely. It
would have created beneficial opportunities as well. The removal of the quantitative restrictions
and the reduction of import duties, particularly after the setting up of WTO in 1995, have opened
up foreign markets to Indian small industry as much as the Indian market has
opened up to foreign goods. Many efficient and export-oriented small firms would have
gained out of this development. Such opportunities should act as an incentive to many a

small firm in India to enhance their competitiveness to penetrate the global market. This
could also be achieved by small firms becoming vendors or subcontractors to foreign large scale
industries. The trend is outsourcing of supplies by TNCs and they are always on the
lookout for firms that could supply reliable and quality products.
iv. Networking of SMEs for Competitiveness
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The promotion of inter-firm linkages is another issue deserving more recognition. The
increasing presence of transnational corporations (TNCs) in the country would open up new
opportunities for subcontracting / outsourcing. This is because FDI has flowed into
industries such as telecommunications, transportation, electrical equipment (including
computer software), metallurgical industries and automobiles, among others, where
opportunities for obtaining subcontracting / outsourcing are high for small industry. The
potential of such outsourcing opportunities must be tapped to the maximum possible extent to the
advantage of small and medium industry. Infrastructure of SME is the route to growth of world
economy.
CONCLUSION:
MSME is an important sector and plays a critical role and has an important place in the Indian
economy, in terms of employment generation, exports and economic empowerment. As per 4 th
Census of MSME sector , this sector employs an estimated 59.7 million persons spread over 26.1
million enterprises. It accounts for about 45 % of the manufacturing output and around 40% of
the total export of the country which is next only to the agricultural sector. Therefore high

priority has been given to this sector in order to achieve balanced, sustainable, more equitable
and inclusive growth in the country. MSMEs will continue to play a very important and vital
role in our economy where the twin problems of unemployment and poverty constitute a major
developmental challenge. In fact, if India were to have a growth rate of 8-10 percent for the next
couple of decades, it needs a strong micro, small and medium sector. MSMEs are the best
vehicle for inclusive growth, to create local demand and consumption. The MSMEs of yesterday
are the large corporates of today and could be MNCs of tomorrow. Thus, the banks and other
agencies should take pride while servicing the MSMEs as they are playing an instrumental role
in the formation of MNCs of tomorrow. MSMEs themselves have to be on their toes, in this
rapidly changing business environment, and keep evolving to stay clear of all the potential
pitfalls that confront them in their progress from small enterprises to large corporations.
Bibliography
Gilmore, A et.al. (1999), Added value : a qualitative assessment of SME marketing , Irish
Marketing Review , Vol. 12 No. 1 ., pp.27-35.
Role of Sme in Indian Economy
National Conference on Emerging Challenges for Sustainable Business 2012
310 Kulkarni, P R (2008), A New Deal for Small and Medium Enterprises in India, The ICFAI
Journal of Entrepreneurship Development, Vol. V, No. 1
Vadera,Shaili and Kulshreshtha, Nimisha ( 2010) Role of SMEs Sector in the Emerging Indian
Economy SME world, Venkataramanaiah , S.; Parashar, S. P Enhancing the competitiveness
of SME s through industrial clusters: The Indian Experience. International Journal of
Technology Management & Sustainable Development, 2007, Vol. 6 Issue 3, p227-243.
Singh K. Rajesh, Garg K. Suresh, Deshmukh S.G. (2005) Development of Flexible Strategies

by Indian SME s in Electronics Sector in Emerging Economy. Global Journal of Flexible


Systems of Management 2005, vol.6, No. 2pp.15-26.

ISBN - 978-93-81583-46-3
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Role of SME in Indian Economy
Ruchika Jeswal
Institute of Management Studies, Ghaziabad
ruchikajeswal@yahoo.com
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ROLE OF SME IN INDIAN ECONOMY
ABSTRACT- Small and medium enterprises play a very important role in the economy of any
country and it is more so in a developing country like India. They play a role in boosting the
economy of a country. The role of small and medium enterprises in the economic and social
development of the country is well established. SME s emerges leaders during the period of
recession, restoring jobs and business activity lost during the time despite a slow and fragile
economy. The small-scale industries 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.

The small-scale sector has grown rapidly over the years. The growth rates during the various
plan periods have been very impressive. The number of small-scale units has increased from an
estimated 0.87 million units in the year 1980-81 to over 3 million in the year. When the
performance of this sector is viewed against the growth in the manufacturing and the industry
sector as a whole, it instills confidence in the resilience of the small-scale sector. This paper
would study the role of SME s in Indian Economy and its contribution to the economic
development of the country as a whole.
Keywords- SME, Indian economy, performance.
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INTRODUCTION The small and medium enterprises today constitute a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our late
Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting
sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant
sector of the economy. The Indian economy is expected to grow by over 8 per cent per annum
until 2020 and can become the second largest in the world, ahead of the United States, by 2050,
and the third largest after China and the United States by 2032. The turnaround in manufacturing
and other sectors, which has occurred in the face of increased global competition, is due to
improved efficiency following the various policy reforms in recent years. Small and medium
enterprises (SMEs) constitute 6 per cent of GDP, 34 per cent of national exports and account for
the employment of more than 30 million people. This paper is divided into three sections- the

first section deals with the definition aspect of the SME s and Indian economy s general
aspects, the second section deals with the challenges faced by SME s and the third on their
impact on the Indian Economy.
SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly
called as the backbone of the GDP of India. The SME sector in India is growing at an
exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy.
Following are some of the current figures related to the SME sector in India:
The contribution of the SME sector to the entire output of the country is 40%.
Currently, there are over 11 million SME units in India that produces more than 8000
products.
90% of the Industrial Units in India belong to the SME sector.
These SME units contribute 35% to the Indian Industrial Export.
Following are some of the factors that have contributed to the growth of SME sector in
India.
SME units in India are being funded by foreign and local fund providers.
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The advancement in technology has also contributed highly to the SME sector.
There are numerous business directories and trade portals available online that
contains a rich database of manufacturers, sellers and buyers.
To start and maintain these units, minimal investment is required.
These SME units are now being funded by many government and private banks.

The SME sector is one of the greatest contributors of domestic production as well
as the export earnings. Many major mergers have taken place recently.
Though the SME sector is flourishing and expected to grow further in the near future, there are
however certain challenges that the SME sector will have to face.
DEFINATION OF SMESME
s are the engines of growth of any countrys economy. They are an essential source of a
countrys jobs, create entrepreneurial spirit and jobs in a country and are crucial for fostering
competitiveness and employment.
According to the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the
Micro, Small and Medium Enterprises (MSME) are classified as:
1. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation Act, 1951). The Manufacturing Enterprises are defined in
terms of investment in Plant & Machinery.
2. Service Enterprises: The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment.
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro less than Rs 25 lakhs
Small over Rs 25 lakhs but not exceeding Rs 5 Crores
Medium over Rs 5 Crores but less than Rs 10 Crores
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Service Sector
Enterprises Investment in equipments
Micro less than Rs. 10 lakhs
Small over Rs. 10 lakh but not exceeding Rs. 2 crores
Medium over Rs. 2 crore but not exceeding Rs. 5 crores
With the recent pronouncement of the MSMED Act, 2006, the Indian government
has explicitly recognized the dynamic role to be played by the MSMEs in an
increasingly globalised world.
The clear thrust of the recent policy initiatives has been three-fold:
i) enhance competitiveness through encouraging an innovative ethos
amongst firms and being quality conscious;
ii) increase links with multiple stakeholders
with a view to benefit from networks both nationally and globally; and
iii) strive for a larger market presence beyond the domestic.
The policy attaches importance to networking with stakeholders both upstream
and downstream in the entire global value chain, from raw material procurement
to processing/manufacturing to marketing to customer services. For one thing,
the Act has identified the category of medium enterprises as a vital
section in the manufacturing stream and, for the other, it has taken special
note of distinct roles to be played by what are termed business service
enterprises .
CLASSIFICATION OF SME ( Source :MSME online Govt. of Tamil Nadu) :-

The SME can be classified into two types: Manufacturing enterprises and Service
Enterprises. Which can be further classified as follows:
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MANUFACTURING ENTERPRISES
(i) Micro Manufacturing Enterprises:
The investment in plant and machinery does not exceed Rs.25 lakhs
(Rupees twenty five lakhs only)
(ii) Small Manufacturing Enterprises:
The investment in plant and machinery is more than twenty five lakh rupees
but does not exceed rupees 5 crores (Rupees five crores only).
(iii) Medium Manufacturing Enterprises:
The investment in plant and machinery is more than rupees 5 crores but not exceeding Rs.10
crores (Rupees ten crores only).
(B) SERVICE ENTERPRISES
(i) Micro Service Enterprises:
The investment in equipment does not exceed rupees 10 lakhs.
(ii) Small Service Industries:
The investment in equipment is more than 10 (Ten lakh rupees) but does not exceeds rupees 2
crores.
(iii) Medium Service Enterprises:
The investment in equipment is more than rupees 2 crores but does not exceed rupees 5 crores.

BASIC ISSUES OF SME s , PAST, PRESENT AND FUTURE:


Today, small and medium industry occupies a position of strategic importance in the Indian
economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition and
50% of total manufacturing exports. More than 3.2 million units are spread all over the country
producing about 8000 items, from very basic to highly sophisticated products. The SMEs are the
biggest employment-providing sectors after agriculture, providing employment to 29.4 million
people. However SMEs, which constitute more than 90% of total number of industrial
enterprises, are now facing a tough competition from their global counterparts due to
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liberalization, change in manufacturing strategies, technological changes, and turbulent and
uncertain market scenario.
This contribution is despite the sector being exposed to intensified competition since
liberalization of Indian economy in 1991. Small industry in India has been confronted with an
increasingly competitive environment due to:
(1) Liberalization of the investment regime in the 1990s, favoring foreign direct investment
(FDI);
(2) The formation of the World Trade Organisation (WTO) in 1995, forcing its membercountries
(including India) to drastically scale down quantitative and non-quantitative restrictions
on imports, and
(3) Domestic economic reforms. The cumulative impact of all these developments is a

remarkable transformation of the economic environment in which small industry operates,


implying that the sector has no option but to 'compete or perish'.
THE SMEs IN INDIA: PRESENT SCENARIO
In the recent past, small companies have performed better than their larger counterpart. Between
2001-06, net companies with net turnover of Rs. 1 crore 50 crore had a higher growth rate of
701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000
crore (Business World Jan. 2007). The total SSI production, which had reached the all time high
of Rs. 1,89,200 crores in 1989-90 dropped dramatically in the next 10 years and only in 2001-02
the level of production was surpassed. But after 2002, the production has risen at a faster rate.
Since 2000, there is a continuous growth in number of units, production, employment and in
exports. The average annual growth in the number of units was around 4.1%.
Table I : Performance of Micro and Small Enterprises
Year
No. of Units (In Lakh) Production (Rs. Crore)
Employment
(In Lakh)
Exports
Reg (Rs.Crore)
d.
Unreg
d. Total
(At
Current

Prices)
(At
Constant
Prices)
20022003
15.
91 93.58 109.49
(4.1)
3,11,99
3
(10.5)
2,10,636
(7.7)
260.21
(4.4)
86013
(20.7)
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20032004

16.
97 96.98 113.95
(4.1)
3,57,73
3
(14.7)
2,28,730
(8.6)
271.42
(4.3)
97644
(13.5)
20042005
17.
53 101.06 118.59
(4.1)
4,18,26
3
6(16.9)
2,51,511
(10.0)
282,57

(4.1)
1,24,41
7
(27.4)
20052006
18.
71 104.71 123.42
(4.1)
4,76,20
1
(13.9)
2,77,668
(10.4)
294.91
(4.4) N.A.
Note : Figures in parenthesis Indicate percentage growth over previous years
Source: Development Commissioner (SSI)
Today, some of the SMEs are acquiring companies abroad as part of the globalization process.
Mostly, these units are ancillaries and are export oriented. The SME sector have transformed to
the need of large local manufacturers and suppliers to global manufacturers like Auto Industry.
Today some SMEs are investing in R&D in order to compete globally. Outsourcing from
multinational

companies has played a vital role in the emergence of Indian SMEs as world leaders in
specified products. The advantages in labour-intensive manufacturing units, lower transport costs
and lose labour policies of the small scale sector have led to major outsourcing in manufacturing
and services.
IMPORTANCE OF SME
The opportunities of growth in the SMEs sector are enormous due to the following factors:
1. Less Capital Intensive
2. Extensive Promotion & Support by Government
3. Reservation for Exclusive Manufacture by small scale sector
4. Project Profiles
5. Funding - Finance & Subsidies
6. Machinery Procurement
7. Raw Material Procurement
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8. Manpower Training
9. Technical & Managerial skills
10. Tooling & Testing support
11. Reservation for Exclusive Purchase by Government
12. Export Promotion
13. Growth in demand in the domestic market size due to overall economic growth
14. Increasing Export Potential for Indian products

15. Growth in requirements for ancillary units due to the increase in number of green-field units
coming up in the large scale sector.
CHALLENGES FACED BY SME:
Despite its commendable contribution to the Nation's economy, SME Sector does not get the
required support from the concerned Government Departments, Banks, Financial Institutions and
Corporate, which is a handicap in becoming more competitive in the National and International
Markets.
SMEs faces a number of problems
absence of adequate and timely banking finance,
limited capital and knowledge, non-availability of suitable technology,
low production capacity,
Ineffective marketing strategy,
Identification of new markets,
Constraints on modernization & expansions,
Non availability of highly skilled labor at affordable cost,
Follow-up with various government agencies to resolve problems etc.
SME s contribution to ExportsSMEs Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is contributed by the sector. Direct exports from the sector account for nearly 35% of
total exports. Besides direct exports, it is estimated that small-scale industrial units contribute
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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. The exports from
SMEs sector have shown excellent growth rates in this decade. The product groups which
dominate the exports from SMEs sector include sports goods, readymade garments, woollen
garments and knitwear, plastic products, processed food and leather products. The SMEs sector
is reorienting its export strategy towards the new trade regime being ushered in by the WTO.
Looking AheadThis sector is ideally suited to build on the strengths of the traditional skills and knowledge, by
infusion of technologies, capital and innovative marketing practices. This is the opportune time
to set up projects in the sector. It may be said that the outlook is positive, indeed promising,
given some safeguards. This expectation is based on an essential feature of the Indian industry
and the demand structures. The diversity in production systems and demand structures will
ensure long term co-existence of many layers of demand for consumer products / technologies /
processes. There will be flourishing and well grounded markets for the same product/process,
differentiated by quality, value added and sophistication. This characteristic of the Indian
economy will allow complementary existence for various diverse types of units. The promotional
and protective policies of the Government of India have ensured the presence of this sector in an
astonishing range of products, particularly in consumer goods. However, the bottleneck of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization coupled with Government support will therefore, attract the infusion of these in this
sector.
The capability of Indian MSME products to compete in international markets is reflected in its

share of about 34% in national exports. In case of items like readymade garments, leather goods,
processed foods, engineering items, the performance has been commendable both in terms of
value and their share within the MSME sector while in some cases like sports goods they account
for 100% share to the total exports of the sector. In view of this, export promotion from the small
scale sector has been accorded high priority in India's export promotion strategy which includes
simplification of procedures, incentives for higher production of exports, preferential treatments
to MSMEs in the market development fund, simplification of duty drawback rules, etc. Products
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of MSME exporters are displayed in international exhibitions free of cost under SIDO Umbrella
abroad.
Performance of Small Scale Industries can be determined in terms of the following criteria:
1. Employment Generation
2. Production
3. Exports
4. Opportunities
5. Economic Indicators
1) Employment Generation
SSI Sector in India creates largest employment opportunities for the Indian populace, next only
to Agriculture. It has been estimated that a lakh rupees of investment in fixed assets in the small
scale sector generates employment for four persons. Some of the interesting observations related
to employment in the small scale sector are related to generation of employment according to the

industry. It is found that the food products industry ranked first in generating employment. The
next two industries are non-metallic mineral products and metal products. Apart from this
Chemicals & chemical products, Machinery parts and except Electrical parts, Wood products,
Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and
Rubber & plastic products also contributed to generate employment.
Per unit employment
Per unit employment was the highest (20) in units engaged in Beverages, tobacco & tobacco
products mainly due to the high employment potential of this industry particularly in
Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu.
Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal
industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in
Repair services line.
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Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas.
However, in Chemicals & chemical products, Non-metallic mineral products and Basic metal
industries per unit employment was higher in rural areas as compared to metropolitan
areas/urban areas.
In urban areas highest employment per unit was in Beverages, tobacco products (31 persons)
followed by Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral
products (12).
Rural

Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products
accounted for 21.1%, Wood Products and Chemicals and chemical products shared between
them 17.5%.
Urban
As for urban areas, Food Products and Metal Products almost equally shared 22.8% of
employment. Machinery and parts except electrical, Non-metallic mineral products, and
Chemicals & chemical products between them accounted for 26.2% of employment.
In metropolitan areas the leading industries were Metal products, Machinery and parts except
electrical and Paper products & printing (total share being 33.6%).
State-wise Employment Distribution
Tamil Nadu (14.5%) made the maximum contribution to employment.
This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the
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total share being 27.7%.
Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%), and Punjab (5.6%) together
accounted for another 27.4%.
Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra &
Nagar Haveli.
It was 12 in Maharashtra, Tripura and Delhi.
Madhya Pradesh had the figure of 2. In all other cases it was around the average of 6.
2) Production

The small scale industries sector plays a vital role for the growth of the country. It contributes
40% of the gross manufacture to the Indian economy.
It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector
produces 4.62 lakhs worth of goods or services with an approximate value addition of ten
percentage points.
The small scale sector has grown rapidly over the years. The growth rates during the various plan
periods have been very impressive. The number of small scale units has increased from an
estimated 8.74 lakhs units in the year 1980-81 to an estimated 31.21 lakhs in the year 1999.
The transition period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand recession, high
interest rates, shortage of raw material etc.
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When the performance of this sector is viewed against the growth in the manufacturing and the
industry sector as a whole, it instills confidence in the resilience of the small scale sector.
The estimates of growth for the year 1995-96 have shown an upswing. The growth of SSI sector
has surpassed overall industrial growth from 1991 onwards. The positive trend is likely to
strengthen in the coming years. This trend augurs a bright future for the small scale industry.
3) Export contribution
SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is being contributed by SSI Sector. Direct exports from the SSI Sector account for nearly
35% of total exports. The number of small scale units that undertake direct exports would be

more than 5000.


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 has been clocking excellent growth rates in this decade. It has been
mostly fuelled by the performance of garment, leather and gems and jewellery units from this
sector.
The lucrative 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.
4) Opportunities
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Small industry sector has performed exceedingly well and enabled our country to achieve a wide
measure of industrial growth and diversification.
By its less capital intensive and high labor absorption nature, SSI 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.

The opportunities in the small scale sector are enormous due to the following factors :
- Less Capital Intensive
- Extensive Promotion & Support by the Government
- Reservation for Exclusive Manufacture by small scale sector
- Project Profiles
- Funding
- Finance & Subsidies
- Machinery Procurement
- Raw Material Procurement
- Manpower Training
- Technical & Managerial skills
- Tools & Tools utilization support
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- Reservation for Exclusive Purchase by Government
- Export Promotion
- Growth in demand in the domestic market size due to overall economic growth
- Increasing Export Potential for Indian products
- Growth in Requirements for ancillary units due to the increase in number of greenfield units
coming up in the large scale sector.
So this is the opportune time to set up projects in the small scale sector. It may be said that the
outlook is positive, indeed promising, given some safeguards. This expectation is based on an

essential feature of the Indian industry and the demand structures. The diversity in production
systems and demand structures will ensure long term co-existence of many layers of demand for
consumer products / technologies / processes. There will be flourishing and well grounded
markets for the same product/process, differentiated by quality, value added and sophistication.
This characteristic of the Indian economy will allow complementary existence for various
diverse types of units.
The promotional and protective policies of the Govt. have ensured the presence of this sector in
an astonishing range of products, particularly in consumer goods. However, the bug bear of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization will therefore, attract the infusion of just these things in the sector.
5) Economic Indicators
The Small Scale Industry today constitutes a very important segment of the Indian economy. The
development of this sector came about primarily due to the vision of our late Prime Minister
Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form
of small scale enterprises.
Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.
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- Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and
over 40% of the total exports from the country.
- In terms of value added this sector accounts for about 40% of the value added in the
manufacturing sector.

- The sector's contribution to employment is next only to agriculture in India. It is therefore an


excellent sector of economy for investment.
SME s CONTRIBUTION TO INDIAN ECONOMY:
Growth of the Indian economy has accelerated to 8% and efforts are on to further propel it to
10%. Undoubtedly, all the segments of the economy, viz. agriculture, industry and services have
to improve their contribution to the economy. Growth of small and medium enterprises (SMEs)
is a sine qua non for the growth of industry, exports and other segments of the economy.
Furthermore, promotion of entrepreneurship is also vital for sustenance and upward movement
of the current growth trajectory of the economy. The SME sector acts as a catalyst in upholding
and encouraging the creation of the innovative spirit and entrepreneurship in the economy,
thereby helping in laying the foundation for rapid industrial development. Moreover, the sector
also serves the vital objectives of employment generation and balanced regional development.
Globalization and liberalization of the Indian economy have also brought a host of opportunities
for the industrial sector, particularly the SME segment. While SMEs have responded to
competition reasonably satisfactorily, there is scope for increasing their export potential,
domestic market share and developing them as serious players in the global value chain. SME s
represents the largest proportion of the manufacturing sector in every country. In India, 95
percent of the industrial units are in small- scale sector with 40 percent addition in the
manufacturing sector and 6.29 percent contribution to the Indian Gross Domestic Product
( Times of India, 2002) .
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Current Issues
i. Lending Facilities to SMEsThe mind set of banks towards SMEs have somewhat changed in the recent past. With the entry
of private banks, increased competition has led to a rush for lending to prime customers. The
multiple financial options from the capital market have also compelled banks to take more risks
in the case of SMEs. The increased lending to SMEs is propelled by the compulsion of the
market as well as by the rapid expansion of these companies. The lending to the SME sector
grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs sector.
Loans to bigger companies are growing at a faster pace than loans to the SSI sector. By the end
of 2006, the proportion of SSI loans to total loans has remained small at 6.4%.The Small
Industries Development Bank of India (SIDBI) was set up in 1990 under the Act of Indian
Parliament as the principal financial institution for promotion, financing, development of
industry in the small sector and coordinating the financial activities of other institutions engaged
in similar activities.
ii. Marketing
Next to finance, marketing is the big problem area for small entrepreneurs. The survival of small
entrepreneurs very much depends on sound marketing techniques. One of the most important
tools in the hands of small entrepreneurs for promoting their sales is low prices coupled with
credit to buyers, which give rise to number of problems at a later stage.
Marketing as a profession has not yet developed in the SME sector. Professional agencies are not
engaged by small entrepreneurs on account of paucity of funds. The concept of marketing is not
known to the majority of small entrepreneurs. For majority, marketing means advertisement or

personal contacts. There are many ad-hoc initiatives taken by the Government to promote
marketing of products/services of small units but no concrete action plan has been chalked out or
targets made.
iii. Technological Up gradation
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Modernization, technological and quality up gradation have assumed great significance in
the present day context. With the inflow of latest technology reducing the cost of production
and the increasing competition from within and outside, the small scale sector will have to
attach more importance and pay attention to the areas of technology up gradation and
modernization. However, due to lack of information on the areas of technology up gradation,
entrepreneurs who have plans for technical up gradation are not to go ahead.
iv Sickness in SSI Sector
A host of developmental schemes launched by the Government for solving the problems of small
scale industries have yet to achieve their goals to arrest sickness in SSI sector. The plight of
existing small scale industries is visible in many industrial complexes wherein the industrial
sheds have been converted into allied activities like showrooms, banquet halls,
Restaurants, etc. There seems to be some lacuna in the implementation part of the developmental
schemes.
v. Removal of Inspector Regime and Simplification of Procedures
One of the major grievances of the small scale sector is that the frequent inspections by multiple
government agencies are a source of harassment. At present, 55 inspectors of different levels are

visiting the small scale units, which is a cause of major concern to the small scale units. It is
suggested that the government should stream line the inspection
procedure. It should also include repeal of laws and regulations applicable to the sector that has
become redundant.
Future Policy Frame Work
i. Priority Sector Lending
The target fixed for priority sector lending by domestic and foreign banks is 40% and 32% of
their net bank credit (NBC) respectively. The declining share of the SSI sector in the outstanding
priority sector advances of public and private sector banks since 1999-2000 is a cause for
concern. The share of SSI advances in the NBC declined from 16% at the end of March 2000 to
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11% at the end of March 2003 in respect of public sector banks. For the private sector banks, the
share declined from 19% to about 8% in the same period. The limited access of SSI sector to
funds needs to be addressed on a priority basis. Large corporate are able to access bank loans at
below PLR besides accessing international markets. But, for the SSI sector, the cost of funds
continues to remain high despite falling deposit rates.
ii Reformation of Labor Laws
Multiplicity of labor laws is responsible to a large extent for slow growth of industry in our
country. Labor laws provide too much protection to labor force by the provision of
minimum wages, PF, bonus, gratuity and ESI etc. On the other hand, the employers are
required to seek prior permission even for getting overtime work from labor, on payment

and in spite of mutual consent. There has to be performance or productivity linked wage
structure. The more efficient and hard workers may be suitably rewarded, and there should
be a provision to deduct the wages for shirking and laziness. Supportive labor laws are an
important pre-requisite for Indian industry to face the international competition.
iii The Opportunity
Globalization and liberalization need not affect Indian small industry only adversely. It
would have created beneficial opportunities as well. The removal of the quantitative restrictions
and the reduction of import duties, particularly after the setting up of WTO in 1995, have opened
up foreign markets to Indian small industry as much as the Indian market has
opened up to foreign goods. Many efficient and export-oriented small firms would have
gained out of this development. Such opportunities should act as an incentive to many a
small firm in India to enhance their competitiveness to penetrate the global market. This
could also be achieved by small firms becoming vendors or subcontractors to foreign large scale
industries. The trend is outsourcing of supplies by TNCs and they are always on the
lookout for firms that could supply reliable and quality products.
iv. Networking of SMEs for Competitiveness
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The promotion of inter-firm linkages is another issue deserving more recognition. The
increasing presence of transnational corporations (TNCs) in the country would open up new
opportunities for subcontracting / outsourcing. This is because FDI has flowed into
industries such as telecommunications, transportation, electrical equipment (including

computer software), metallurgical industries and automobiles, among others, where


opportunities for obtaining subcontracting / outsourcing are high for small industry. The
potential of such outsourcing opportunities must be tapped to the maximum possible extent to the
advantage of small and medium industry. Infrastructure of SME is the route to growth of world
economy.
CONCLUSION:
MSME is an important sector and plays a critical role and has an important place in the Indian
economy, in terms of employment generation, exports and economic empowerment. As per 4 th
Census of MSME sector , this sector employs an estimated 59.7 million persons spread over 26.1
million enterprises. It accounts for about 45 % of the manufacturing output and around 40% of
the total export of the country which is next only to the agricultural sector. Therefore high
priority has been given to this sector in order to achieve balanced, sustainable, more equitable
and inclusive growth in the country. MSMEs will continue to play a very important and vital
role in our economy where the twin problems of unemployment and poverty constitute a major
developmental challenge. In fact, if India were to have a growth rate of 8-10 percent for the next
couple of decades, it needs a strong micro, small and medium sector. MSMEs are the best
vehicle for inclusive growth, to create local demand and consumption. The MSMEs of yesterday
are the large corporates of today and could be MNCs of tomorrow. Thus, the banks and other
agencies should take pride while servicing the MSMEs as they are playing an instrumental role
in the formation of MNCs of tomorrow. MSMEs themselves have to be on their toes, in this
rapidly changing business environment, and keep evolving to stay clear of all the potential
pitfalls that confront them in their progress from small enterprises to large corporations.
Bibliography

Gilmore, A et.al. (1999), Added value : a qualitative assessment of SME marketing , Irish
Marketing Review , Vol. 12 No. 1 ., pp.27-35.
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310
Kulkarni, P R (2008), A New Deal for Small and Medium Enterprises in India, The ICFAI
Journal of Entrepreneurship Development, Vol. V, No. 1
Vadera,Shaili and Kulshreshtha, Nimisha ( 2010) Role of SMEs Sector in the Emerging Indian
Economy SME world, Venkataramanaiah , S.; Parashar, S. P Enhancing the competitiveness
of SME s through industrial clusters: The Indian Experience. International Journal of
Technology Management & Sustainable Development, 2007, Vol. 6 Issue 3, p227-243.
Singh K. Rajesh, Garg K. Suresh, Deshmukh S.G. (2005) Development of Flexible Strategies
by Indian SME s in Electronics Sector in Emerging Economy. Global Journal of Flexible
Systems of Management 2005, vol.6, No. 2pp.15-26.
KD Raju, Small and Medium Enterprises (SMEs): Past, Present and Future in IndiaISBN - 97893-81583-46-3
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Role of SME in Indian Economy
Ruchika Jeswal
Institute of Management Studies, Ghaziabad
ruchikajeswal@yahoo.com
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ROLE OF SME IN INDIAN ECONOMY
ABSTRACT- Small and medium enterprises play a very important role in the economy of any
country and it is more so in a developing country like India. They play a role in boosting the
economy of a country. The role of small and medium enterprises in the economic and social
development of the country is well established. SME s emerges leaders during the period of
recession, restoring jobs and business activity lost during the time despite a slow and fragile
economy. The small-scale industries 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.
The small-scale sector has grown rapidly over the years. The growth rates during the various
plan periods have been very impressive. The number of small-scale units has increased from an
estimated 0.87 million units in the year 1980-81 to over 3 million in the year. When the
performance of this sector is viewed against the growth in the manufacturing and the industry
sector as a whole, it instills confidence in the resilience of the small-scale sector. This paper
would study the role of SME s in Indian Economy and its contribution to the economic
development of the country as a whole.
Keywords- SME, Indian economy, performance.
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INTRODUCTION The small and medium enterprises today constitute a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our late
Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting
sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant
sector of the economy. The Indian economy is expected to grow by over 8 per cent per annum
until 2020 and can become the second largest in the world, ahead of the United States, by 2050,
and the third largest after China and the United States by 2032. The turnaround in manufacturing
and other sectors, which has occurred in the face of increased global competition, is due to
improved efficiency following the various policy reforms in recent years. Small and medium
enterprises (SMEs) constitute 6 per cent of GDP, 34 per cent of national exports and account for
the employment of more than 30 million people. This paper is divided into three sections- the
first section deals with the definition aspect of the SME s and Indian economy s general
aspects, the second section deals with the challenges faced by SME s and the third on their
impact on the Indian Economy.
SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly
called as the backbone of the GDP of India. The SME sector in India is growing at an
exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy.
Following are some of the current figures related to the SME sector in India:
The contribution of the SME sector to the entire output of the country is 40%.
Currently, there are over 11 million SME units in India that produces more than 8000
products.

90% of the Industrial Units in India belong to the SME sector.


These SME units contribute 35% to the Indian Industrial Export.
Following are some of the factors that have contributed to the growth of SME sector in
India.
SME units in India are being funded by foreign and local fund providers.
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The advancement in technology has also contributed highly to the SME sector.
There are numerous business directories and trade portals available online that
contains a rich database of manufacturers, sellers and buyers.
To start and maintain these units, minimal investment is required.
These SME units are now being funded by many government and private banks.
The SME sector is one of the greatest contributors of domestic production as well
as the export earnings. Many major mergers have taken place recently.
Though the SME sector is flourishing and expected to grow further in the near future, there are
however certain challenges that the SME sector will have to face.
DEFINATION OF SMESME
s are the engines of growth of any countrys economy. They are an essential source of a
countrys jobs, create entrepreneurial spirit and jobs in a country and are crucial for fostering
competitiveness and employment.
According to the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the
Micro, Small and Medium Enterprises (MSME) are classified as:

1. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of


goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation Act, 1951). The Manufacturing Enterprises are defined in
terms of investment in Plant & Machinery.
2. Service Enterprises: The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment.
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro less than Rs 25 lakhs
Small over Rs 25 lakhs but not exceeding Rs 5 Crores
Medium over Rs 5 Crores but less than Rs 10 Crores
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Service Sector
Enterprises Investment in equipments
Micro less than Rs. 10 lakhs
Small over Rs. 10 lakh but not exceeding Rs. 2 crores
Medium over Rs. 2 crore but not exceeding Rs. 5 crores
With the recent pronouncement of the MSMED Act, 2006, the Indian government
has explicitly recognized the dynamic role to be played by the MSMEs in an
increasingly globalised world.
The clear thrust of the recent policy initiatives has been three-fold:

i) enhance competitiveness through encouraging an innovative ethos


amongst firms and being quality conscious;
ii) increase links with multiple stakeholders
with a view to benefit from networks both nationally and globally; and
iii) strive for a larger market presence beyond the domestic.
The policy attaches importance to networking with stakeholders both upstream
and downstream in the entire global value chain, from raw material procurement
to processing/manufacturing to marketing to customer services. For one thing,
the Act has identified the category of medium enterprises as a vital
section in the manufacturing stream and, for the other, it has taken special
note of distinct roles to be played by what are termed business service
enterprises .
CLASSIFICATION OF SME ( Source :MSME online Govt. of Tamil Nadu) :The SME can be classified into two types: Manufacturing enterprises and Service
Enterprises. Which can be further classified as follows:
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MANUFACTURING ENTERPRISES
(i) Micro Manufacturing Enterprises:
The investment in plant and machinery does not exceed Rs.25 lakhs
(Rupees twenty five lakhs only)
(ii) Small Manufacturing Enterprises:

The investment in plant and machinery is more than twenty five lakh rupees
but does not exceed rupees 5 crores (Rupees five crores only).
(iii) Medium Manufacturing Enterprises:
The investment in plant and machinery is more than rupees 5 crores but not exceeding Rs.10
crores (Rupees ten crores only).
(B) SERVICE ENTERPRISES
(i) Micro Service Enterprises:
The investment in equipment does not exceed rupees 10 lakhs.
(ii) Small Service Industries:
The investment in equipment is more than 10 (Ten lakh rupees) but does not exceeds rupees 2
crores.
(iii) Medium Service Enterprises:
The investment in equipment is more than rupees 2 crores but does not exceed rupees 5 crores.
BASIC ISSUES OF SME s , PAST, PRESENT AND FUTURE:
Today, small and medium industry occupies a position of strategic importance in the Indian
economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition and
50% of total manufacturing exports. More than 3.2 million units are spread all over the country
producing about 8000 items, from very basic to highly sophisticated products. The SMEs are the
biggest employment-providing sectors after agriculture, providing employment to 29.4 million
people. However SMEs, which constitute more than 90% of total number of industrial
enterprises, are now facing a tough competition from their global counterparts due to
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liberalization, change in manufacturing strategies, technological changes, and turbulent and
uncertain market scenario.
This contribution is despite the sector being exposed to intensified competition since
liberalization of Indian economy in 1991. Small industry in India has been confronted with an
increasingly competitive environment due to:
(1) Liberalization of the investment regime in the 1990s, favoring foreign direct investment
(FDI);
(2) The formation of the World Trade Organisation (WTO) in 1995, forcing its membercountries
(including India) to drastically scale down quantitative and non-quantitative restrictions
on imports, and
(3) Domestic economic reforms. The cumulative impact of all these developments is a
remarkable transformation of the economic environment in which small industry operates,
implying that the sector has no option but to 'compete or perish'.
THE SMEs IN INDIA: PRESENT SCENARIO
In the recent past, small companies have performed better than their larger counterpart. Between
2001-06, net companies with net turnover of Rs. 1 crore 50 crore had a higher growth rate of
701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000
crore (Business World Jan. 2007). The total SSI production, which had reached the all time high
of Rs. 1,89,200 crores in 1989-90 dropped dramatically in the next 10 years and only in 2001-02
the level of production was surpassed. But after 2002, the production has risen at a faster rate.
Since 2000, there is a continuous growth in number of units, production, employment and in

exports. The average annual growth in the number of units was around 4.1%.
Table I : Performance of Micro and Small Enterprises
Year
No. of Units (In Lakh) Production (Rs. Crore)
Employment
(In Lakh)
Exports
Reg (Rs.Crore)
d.
Unreg
d. Total
(At
Current
Prices)
(At
Constant
Prices)
20022003
15.
91 93.58 109.49
(4.1)
3,11,99

3
(10.5)
2,10,636
(7.7)
260.21
(4.4)
86013
(20.7)
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20032004
16.
97 96.98 113.95
(4.1)
3,57,73
3
(14.7)
2,28,730
(8.6)
271.42
(4.3)

97644
(13.5)
20042005
17.
53 101.06 118.59
(4.1)
4,18,26
3
6(16.9)
2,51,511
(10.0)
282,57
(4.1)
1,24,41
7
(27.4)
20052006
18.
71 104.71 123.42
(4.1)
4,76,20

1
(13.9)
2,77,668
(10.4)
294.91
(4.4) N.A.
Note : Figures in parenthesis Indicate percentage growth over previous years
Source: Development Commissioner (SSI)
Today, some of the SMEs are acquiring companies abroad as part of the globalization process.
Mostly, these units are ancillaries and are export oriented. The SME sector have transformed to
the need of large local manufacturers and suppliers to global manufacturers like Auto Industry.
Today some SMEs are investing in R&D in order to compete globally. Outsourcing from
multinational
companies has played a vital role in the emergence of Indian SMEs as world leaders in
specified products. The advantages in labour-intensive manufacturing units, lower transport costs
and lose labour policies of the small scale sector have led to major outsourcing in manufacturing
and services.
IMPORTANCE OF SME
The opportunities of growth in the SMEs sector are enormous due to the following factors:
1. Less Capital Intensive
2. Extensive Promotion & Support by Government
3. Reservation for Exclusive Manufacture by small scale sector
4. Project Profiles

5. Funding - Finance & Subsidies


6. Machinery Procurement
7. Raw Material Procurement
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8. Manpower Training
9. Technical & Managerial skills
10. Tooling & Testing support
11. Reservation for Exclusive Purchase by Government
12. Export Promotion
13. Growth in demand in the domestic market size due to overall economic growth
14. Increasing Export Potential for Indian products
15. Growth in requirements for ancillary units due to the increase in number of green-field units
coming up in the large scale sector.
CHALLENGES FACED BY SME:
Despite its commendable contribution to the Nation's economy, SME Sector does not get the
required support from the concerned Government Departments, Banks, Financial Institutions and
Corporate, which is a handicap in becoming more competitive in the National and International
Markets.
SMEs faces a number of problems
absence of adequate and timely banking finance,
limited capital and knowledge, non-availability of suitable technology,

low production capacity,


Ineffective marketing strategy,
Identification of new markets,
Constraints on modernization & expansions,
Non availability of highly skilled labor at affordable cost,
Follow-up with various government agencies to resolve problems etc.
SME s contribution to ExportsSMEs Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is contributed by the sector. Direct exports from the sector account for nearly 35% of
total exports. Besides direct exports, it is estimated that small-scale industrial units contribute
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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. The exports from
SMEs sector have shown excellent growth rates in this decade. The product groups which
dominate the exports from SMEs sector include sports goods, readymade garments, woollen
garments and knitwear, plastic products, processed food and leather products. The SMEs sector
is reorienting its export strategy towards the new trade regime being ushered in by the WTO.
Looking AheadThis sector is ideally suited to build on the strengths of the traditional skills and knowledge, by
infusion of technologies, capital and innovative marketing practices. This is the opportune time

to set up projects in the sector. It may be said that the outlook is positive, indeed promising,
given some safeguards. This expectation is based on an essential feature of the Indian industry
and the demand structures. The diversity in production systems and demand structures will
ensure long term co-existence of many layers of demand for consumer products / technologies /
processes. There will be flourishing and well grounded markets for the same product/process,
differentiated by quality, value added and sophistication. This characteristic of the Indian
economy will allow complementary existence for various diverse types of units. The promotional
and protective policies of the Government of India have ensured the presence of this sector in an
astonishing range of products, particularly in consumer goods. However, the bottleneck of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization coupled with Government support will therefore, attract the infusion of these in this
sector.
The capability of Indian MSME products to compete in international markets is reflected in its
share of about 34% in national exports. In case of items like readymade garments, leather goods,
processed foods, engineering items, the performance has been commendable both in terms of
value and their share within the MSME sector while in some cases like sports goods they account
for 100% share to the total exports of the sector. In view of this, export promotion from the small
scale sector has been accorded high priority in India's export promotion strategy which includes
simplification of procedures, incentives for higher production of exports, preferential treatments
to MSMEs in the market development fund, simplification of duty drawback rules, etc. Products
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of MSME exporters are displayed in international exhibitions free of cost under SIDO Umbrella
abroad.
Performance of Small Scale Industries can be determined in terms of the following criteria:
1. Employment Generation
2. Production
3. Exports
4. Opportunities
5. Economic Indicators
1) Employment Generation
SSI Sector in India creates largest employment opportunities for the Indian populace, next only
to Agriculture. It has been estimated that a lakh rupees of investment in fixed assets in the small
scale sector generates employment for four persons. Some of the interesting observations related
to employment in the small scale sector are related to generation of employment according to the
industry. It is found that the food products industry ranked first in generating employment. The
next two industries are non-metallic mineral products and metal products. Apart from this
Chemicals & chemical products, Machinery parts and except Electrical parts, Wood products,
Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and
Rubber & plastic products also contributed to generate employment.
Per unit employment
Per unit employment was the highest (20) in units engaged in Beverages, tobacco & tobacco
products mainly due to the high employment potential of this industry particularly in
Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu.
Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal

industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in
Repair services line.
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Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas.
However, in Chemicals & chemical products, Non-metallic mineral products and Basic metal
industries per unit employment was higher in rural areas as compared to metropolitan
areas/urban areas.
In urban areas highest employment per unit was in Beverages, tobacco products (31 persons)
followed by Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral
products (12).
Rural
Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products
accounted for 21.1%, Wood Products and Chemicals and chemical products shared between
them 17.5%.
Urban
As for urban areas, Food Products and Metal Products almost equally shared 22.8% of
employment. Machinery and parts except electrical, Non-metallic mineral products, and
Chemicals & chemical products between them accounted for 26.2% of employment.
In metropolitan areas the leading industries were Metal products, Machinery and parts except
electrical and Paper products & printing (total share being 33.6%).
State-wise Employment Distribution

Tamil Nadu (14.5%) made the maximum contribution to employment.


This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the
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total share being 27.7%.
Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%), and Punjab (5.6%) together
accounted for another 27.4%.
Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra &
Nagar Haveli.
It was 12 in Maharashtra, Tripura and Delhi.
Madhya Pradesh had the figure of 2. In all other cases it was around the average of 6.
2) Production
The small scale industries sector plays a vital role for the growth of the country. It contributes
40% of the gross manufacture to the Indian economy.
It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector
produces 4.62 lakhs worth of goods or services with an approximate value addition of ten
percentage points.
The small scale sector has grown rapidly over the years. The growth rates during the various plan
periods have been very impressive. The number of small scale units has increased from an
estimated 8.74 lakhs units in the year 1980-81 to an estimated 31.21 lakhs in the year 1999.
The transition period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand recession, high

interest rates, shortage of raw material etc.


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When the performance of this sector is viewed against the growth in the manufacturing and the
industry sector as a whole, it instills confidence in the resilience of the small scale sector.
The estimates of growth for the year 1995-96 have shown an upswing. The growth of SSI sector
has surpassed overall industrial growth from 1991 onwards. The positive trend is likely to
strengthen in the coming years. This trend augurs a bright future for the small scale industry.
3) Export contribution
SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian
Exports is being contributed by SSI Sector. Direct exports from the SSI Sector account for nearly
35% of total exports. The number of small scale units that undertake direct exports would be
more than 5000.
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 has been clocking excellent growth rates in this decade. It has been
mostly fuelled by the performance of garment, leather and gems and jewellery units from this
sector.

The lucrative 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.
4) Opportunities
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Small industry sector has performed exceedingly well and enabled our country to achieve a wide
measure of industrial growth and diversification.
By its less capital intensive and high labor absorption nature, SSI 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.
The opportunities in the small scale sector are enormous due to the following factors :
- Less Capital Intensive
- Extensive Promotion & Support by the Government
- Reservation for Exclusive Manufacture by small scale sector
- Project Profiles
- Funding
- Finance & Subsidies
- Machinery Procurement
- Raw Material Procurement
- Manpower Training

- Technical & Managerial skills


- Tools & Tools utilization support
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- Reservation for Exclusive Purchase by Government
- Export Promotion
- Growth in demand in the domestic market size due to overall economic growth
- Increasing Export Potential for Indian products
- Growth in Requirements for ancillary units due to the increase in number of greenfield units
coming up in the large scale sector.
So this is the opportune time to set up projects in the small scale sector. It may be said that the
outlook is positive, indeed promising, given some safeguards. This expectation is based on an
essential feature of the Indian industry and the demand structures. The diversity in production
systems and demand structures will ensure long term co-existence of many layers of demand for
consumer products / technologies / processes. There will be flourishing and well grounded
markets for the same product/process, differentiated by quality, value added and sophistication.
This characteristic of the Indian economy will allow complementary existence for various
diverse types of units.
The promotional and protective policies of the Govt. have ensured the presence of this sector in
an astonishing range of products, particularly in consumer goods. However, the bug bear of the
sector has been the inadequacies in capital, technology and marketing. The process of
liberalization will therefore, attract the infusion of just these things in the sector.

5) Economic Indicators
The Small Scale Industry today constitutes a very important segment of the Indian economy. The
development of this sector came about primarily due to the vision of our late Prime Minister
Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form
of small scale enterprises.
Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.
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- Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and
over 40% of the total exports from the country.
- In terms of value added this sector accounts for about 40% of the value added in the
manufacturing sector.
- The sector's contribution to employment is next only to agriculture in India. It is therefore an
excellent sector of economy for investment.
SME s CONTRIBUTION TO INDIAN ECONOMY:
Growth of the Indian economy has accelerated to 8% and efforts are on to further propel it to
10%. Undoubtedly, all the segments of the economy, viz. agriculture, industry and services have
to improve their contribution to the economy. Growth of small and medium enterprises (SMEs)
is a sine qua non for the growth of industry, exports and other segments of the economy.
Furthermore, promotion of entrepreneurship is also vital for sustenance and upward movement
of the current growth trajectory of the economy. The SME sector acts as a catalyst in upholding
and encouraging the creation of the innovative spirit and entrepreneurship in the economy,

thereby helping in laying the foundation for rapid industrial development. Moreover, the sector
also serves the vital objectives of employment generation and balanced regional development.
Globalization and liberalization of the Indian economy have also brought a host of opportunities
for the industrial sector, particularly the SME segment. While SMEs have responded to
competition reasonably satisfactorily, there is scope for increasing their export potential,
domestic market share and developing them as serious players in the global value chain. SME s
represents the largest proportion of the manufacturing sector in every country. In India, 95
percent of the industrial units are in small- scale sector with 40 percent addition in the
manufacturing sector and 6.29 percent contribution to the Indian Gross Domestic Product
( Times of India, 2002) .
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Current Issues
i. Lending Facilities to SMEsThe mind set of banks towards SMEs have somewhat changed in the recent past. With the entry
of private banks, increased competition has led to a rush for lending to prime customers. The
multiple financial options from the capital market have also compelled banks to take more risks
in the case of SMEs. The increased lending to SMEs is propelled by the compulsion of the
market as well as by the rapid expansion of these companies. The lending to the SME sector
grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs sector.
Loans to bigger companies are growing at a faster pace than loans to the SSI sector. By the end

of 2006, the proportion of SSI loans to total loans has remained small at 6.4%.The Small
Industries Development Bank of India (SIDBI) was set up in 1990 under the Act of Indian
Parliament as the principal financial institution for promotion, financing, development of
industry in the small sector and coordinating the financial activities of other institutions engaged
in similar activities.
ii. Marketing
Next to finance, marketing is the big problem area for small entrepreneurs. The survival of small
entrepreneurs very much depends on sound marketing techniques. One of the most important
tools in the hands of small entrepreneurs for promoting their sales is low prices coupled with
credit to buyers, which give rise to number of problems at a later stage.
Marketing as a profession has not yet developed in the SME sector. Professional agencies are not
engaged by small entrepreneurs on account of paucity of funds. The concept of marketing is not
known to the majority of small entrepreneurs. For majority, marketing means advertisement or
personal contacts. There are many ad-hoc initiatives taken by the Government to promote
marketing of products/services of small units but no concrete action plan has been chalked out or
targets made.
iii. Technological Up gradation
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Modernization, technological and quality up gradation have assumed great significance in
the present day context. With the inflow of latest technology reducing the cost of production
and the increasing competition from within and outside, the small scale sector will have to

attach more importance and pay attention to the areas of technology up gradation and
modernization. However, due to lack of information on the areas of technology up gradation,
entrepreneurs who have plans for technical up gradation are not to go ahead.
iv Sickness in SSI Sector
A host of developmental schemes launched by the Government for solving the problems of small
scale industries have yet to achieve their goals to arrest sickness in SSI sector. The plight of
existing small scale industries is visible in many industrial complexes wherein the industrial
sheds have been converted into allied activities like showrooms, banquet halls,
Restaurants, etc. There seems to be some lacuna in the implementation part of the developmental
schemes.
v. Removal of Inspector Regime and Simplification of Procedures
One of the major grievances of the small scale sector is that the frequent inspections by multiple
government agencies are a source of harassment. At present, 55 inspectors of different levels are
visiting the small scale units, which is a cause of major concern to the small scale units. It is
suggested that the government should stream line the inspection
procedure. It should also include repeal of laws and regulations applicable to the sector that has
become redundant.
Future Policy Frame Work
i. Priority Sector Lending
The target fixed for priority sector lending by domestic and foreign banks is 40% and 32% of
their net bank credit (NBC) respectively. The declining share of the SSI sector in the outstanding
priority sector advances of public and private sector banks since 1999-2000 is a cause for
concern. The share of SSI advances in the NBC declined from 16% at the end of March 2000 to

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11% at the end of March 2003 in respect of public sector banks. For the private sector banks, the
share declined from 19% to about 8% in the same period. The limited access of SSI sector to
funds needs to be addressed on a priority basis. Large corporate are able to access bank loans at
below PLR besides accessing international markets. But, for the SSI sector, the cost of funds
continues to remain high despite falling deposit rates.
ii Reformation of Labor Laws
Multiplicity of labor laws is responsible to a large extent for slow growth of industry in our
country. Labor laws provide too much protection to labor force by the provision of
minimum wages, PF, bonus, gratuity and ESI etc. On the other hand, the employers are
required to seek prior permission even for getting overtime work from labor, on payment
and in spite of mutual consent. There has to be performance or productivity linked wage
structure. The more efficient and hard workers may be suitably rewarded, and there should
be a provision to deduct the wages for shirking and laziness. Supportive labor laws are an
important pre-requisite for Indian industry to face the international competition.
iii The Opportunity
Globalization and liberalization need not affect Indian small industry only adversely. It
would have created beneficial opportunities as well. The removal of the quantitative restrictions
and the reduction of import duties, particularly after the setting up of WTO in 1995, have opened
up foreign markets to Indian small industry as much as the Indian market has
opened up to foreign goods. Many efficient and export-oriented small firms would have

gained out of this development. Such opportunities should act as an incentive to many a
small firm in India to enhance their competitiveness to penetrate the global market. This
could also be achieved by small firms becoming vendors or subcontractors to foreign large scale
industries. The trend is outsourcing of supplies by TNCs and they are always on the
lookout for firms that could supply reliable and quality products.
iv. Networking of SMEs for Competitiveness
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The promotion of inter-firm linkages is another issue deserving more recognition. The
increasing presence of transnational corporations (TNCs) in the country would open up new
opportunities for subcontracting / outsourcing. This is because FDI has flowed into
industries such as telecommunications, transportation, electrical equipment (including
computer software), metallurgical industries and automobiles, among others, where
opportunities for obtaining subcontracting / outsourcing are high for small industry. The
potential of such outsourcing opportunities must be tapped to the maximum possible extent to the
advantage of small and medium industry. Infrastructure of SME is the route to growth of world
economy.
CONCLUSION:
MSME is an important sector and plays a critical role and has an important place in the Indian
economy, in terms of employment generation, exports and economic empowerment. As per 4 th
Census of MSME sector , this sector employs an estimated 59.7 million persons spread over 26.1
million enterprises. It accounts for about 45 % of the manufacturing output and around 40% of

the total export of the country which is next only to the agricultural sector. Therefore high
priority has been given to this sector in order to achieve balanced, sustainable, more equitable
and inclusive growth in the country. MSMEs will continue to play a very important and vital
role in our economy where the twin problems of unemployment and poverty constitute a major
developmental challenge. In fact, if India were to have a growth rate of 8-10 percent for the next
couple of decades, it needs a strong micro, small and medium sector. MSMEs are the best
vehicle for inclusive growth, to create local demand and consumption. The MSMEs of yesterday
are the large corporates of today and could be MNCs of tomorrow. Thus, the banks and other
agencies should take pride while servicing the MSMEs as they are playing an instrumental role
in the formation of MNCs of tomorrow. MSMEs themselves have to be on their toes, in this
rapidly changing business environment, and keep evolving to stay clear of all the potential
pitfalls that confront them in their progress from small enterprises to large corporations.
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