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    A nation’s growth is reflected in the quality of life of its people. Development of a nation depends on the quality of growth: its composition, distribution and sustainability. High rates of economic growth do contribute to a nation’s economic and social development. However mere high growth rates alone do not contribute in building a nation’s economy. A long run sustainable growth rate is equally essential to a nation to move from growth path to development. Employment generation, innovation, well distributed economic activity across population, sectors, geography along with good governance lead to inclusive growth, bridging various divides in a nation thus fostering quality life. Self-employed, micro, small, medium and large enterprises and multinational companies form different types of market players. Micro Small and Medium Enterprises (MSMEs) are heterogeneous group encompassing a wide range of business activities, from the single artisan producing for the needs of a village market, the restaurant in a corner, the paan shop in a small town to a small sophisticated manufacturing or software firm selling exporting to overseas market and a medium-sized bulk drug units selling to multinational pharmaceutical companies in the domestic and foreign markets. The firms operate in very different markets rural, semi-urban, metro cities, local, national, regional as well international. They operate at different levels of skill sets, investment, intricacies and growth orientation. MSMEs account for a large share of all firms, constitute a major source of employment and generate significant domestic and export earnings in the OECD, transition and developing countries. MSMEs nurture entrepreneurial talent, in addition to creating employment and fostering industrial development in an economy. SMEs are alleviating poverty around the world as well as increasing the social and economic participation of women, youth and minorities3. MSMEs, by number, dominate the world business stage. Estimates suggest that more than 95% of enterprises across the world are MSMEs, accounting for approximately 60% of private sector employment. The contribution of MSMEs to economic fundamentals varies substantially across countries: from 16% of GDP in low-income countries (where the sector is typically large but informal) to 51% of GDP in high-income countries. Japan has the highest proportion of SMEs among the industrialized countries, accounting for more than 99% of total enterprises. In South Africa, it is estimated that 91% of the formal business entities are MSMEs. Worldwide MSMEs account for 52% of private sector value added, which provides a reasonable estimate for the sector’s global economic contribution Thus they become important players in developing countries and economies with high unemployment MSMEs are generally more common in rural areas than larger businesses especially in developing countries like India, thus providing much-needed employment in rural areas. In India Manufacturing SMEs accounted for around 40% of industrial output, and 40% of all exports along with large employment generation. Service sectors are by far the most important contributors, accounting for 79% of SMEs’ contribution to GDP in United States. India is a growing service economy and thus provides an opportunity for SMEs growth and achieve balanced growth. SMEs can in fact become the engines that sustain growth for long-term development for India. When growth becomes stronger, SMEs gradually assume a key role in industrial development and restructuring. They can satisfy the increasing local demand for services, which allows increasing specialization, and furthermore support larger enterprises with services and inputs. India will have to take lessons from global phenomenon wherein increase in contribution of MSMEs is clearly visible for growth in developed countries than that for growth in developing countries. It is a clear and one of the time tested paths for

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    A nation’s growth is reflected in the quality of life of its people. Development of a nation depends on the quality of growth: its composition, distribution and sustainability. High rates of economic growth do contribute to a nation’s economic and social development. However mere high growth rates alone do not contribute in building a nation’s economy. A long run sustainable growth rate is equally essential to a nation to move from growth path to development. Employment generation, innovation, well distributed economic activity across population, sectors, geography along with good governance lead to inclusive growth, bridging various divides in a nation thus fostering quality life. Self-employed, micro, small, medium and large enterprises and multinational companies form different types of market players. Micro Small and Medium Enterprises (MSMEs) are heterogeneous group encompassing a wide range of business activities, from the single artisan producing for the needs of a village market, the restaurant in a corner, the paan shop in a small town to a small sophisticated manufacturing or software firm selling exporting to overseas market and a medium-sized bulk drug units selling to multinational pharmaceutical companies in the domestic and foreign markets. The firms operate in very different markets rural, semi-urban, metro cities, local, national, regional as well international. They operate at different levels of skill sets, investment, intricacies and growth orientation. MSMEs account for a large share of all firms, constitute a major source of employment and generate significant domestic and export earnings in the OECD, transition and developing countries. MSMEs nurture entrepreneurial talent, in addition to creating employment and fostering industrial development in an economy. SMEs are alleviating poverty around the world as well as increasing the social and economic participation of women, youth and minorities3. MSMEs, by number, dominate the world business stage. Estimates suggest that more than 95% of enterprises across the world are MSMEs, accounting for approximately 60% of private sector employment. The contribution of MSMEs to economic fundamentals varies substantially across countries: from 16% of GDP in low-income countries (where the sector is typically large but informal) to 51% of GDP in high-income countries. Japan has the highest proportion of SMEs among the industrialized countries, accounting for more than 99% of total enterprises. In South Africa, it is estimated that 91% of the formal business entities are MSMEs. Worldwide MSMEs account for 52% of private sector value added, which provides a reasonable estimate for the sector’s global economic contribution Thus they become important players in developing countries and economies with high unemployment MSMEs are generally more common in rural areas than larger businesses especially in developing countries like India, thus providing much-needed employment in rural areas. In India Manufacturing SMEs accounted for around 40% of industrial output, and 40% of all exports along with large employment generation. Service sectors are by far the most important contributors, accounting for 79% of SMEs’ contribution to GDP in United States. India is a growing service economy and thus provides an opportunity for SMEs growth and achieve balanced growth. SMEs can in fact become the engines that sustain growth for long-term development for India. When growth becomes stronger, SMEs gradually assume a key role in industrial development and restructuring. They can satisfy the increasing local demand for services, which allows increasing specialization, and furthermore support larger enterprises with services and inputs. India will have to take lessons from global phenomenon wherein increase in contribution of MSMEs is clearly visible for growth in developed countries than that for growth in developing countries. It is a clear and one of the time tested paths for

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    42 views8 pages

    417

    Uploaded by

    Karthik Abhi
    A nation’s growth is reflected in the quality of life of its people. Development of a nation depends on the quality of growth: its composition, distribution and sustainability. High rates of economic growth do contribute to a nation’s economic and social development. However mere high growth rates alone do not contribute in building a nation’s economy. A long run sustainable growth rate is equally essential to a nation to move from growth path to development. Employment generation, innovation, well distributed economic activity across population, sectors, geography along with good governance lead to inclusive growth, bridging various divides in a nation thus fostering quality life. Self-employed, micro, small, medium and large enterprises and multinational companies form different types of market players. Micro Small and Medium Enterprises (MSMEs) are heterogeneous group encompassing a wide range of business activities, from the single artisan producing for the needs of a village market, the restaurant in a corner, the paan shop in a small town to a small sophisticated manufacturing or software firm selling exporting to overseas market and a medium-sized bulk drug units selling to multinational pharmaceutical companies in the domestic and foreign markets. The firms operate in very different markets rural, semi-urban, metro cities, local, national, regional as well international. They operate at different levels of skill sets, investment, intricacies and growth orientation. MSMEs account for a large share of all firms, constitute a major source of employment and generate significant domestic and export earnings in the OECD, transition and developing countries. MSMEs nurture entrepreneurial talent, in addition to creating employment and fostering industrial development in an economy. SMEs are alleviating poverty around the world as well as increasing the social and economic participation of women, youth and minorities3. MSMEs, by number, dominate the world business stage. Estimates suggest that more than 95% of enterprises across the world are MSMEs, accounting for approximately 60% of private sector employment. The contribution of MSMEs to economic fundamentals varies substantially across countries: from 16% of GDP in low-income countries (where the sector is typically large but informal) to 51% of GDP in high-income countries. Japan has the highest proportion of SMEs among the industrialized countries, accounting for more than 99% of total enterprises. In South Africa, it is estimated that 91% of the formal business entities are MSMEs. Worldwide MSMEs account for 52% of private sector value added, which provides a reasonable estimate for the sector’s global economic contribution Thus they become important players in developing countries and economies with high unemployment MSMEs are generally more common in rural areas than larger businesses especially in developing countries like India, thus providing much-needed employment in rural areas. In India Manufacturing SMEs accounted for around 40% of industrial output, and 40% of all exports along with large employment generation. Service sectors are by far the most important contributors, accounting for 79% of SMEs’ contribution to GDP in United States. India is a growing service economy and thus provides an opportunity for SMEs growth and achieve balanced growth. SMEs can in fact become the engines that sustain growth for long-term development for India. When growth becomes stronger, SMEs gradually assume a key role in industrial development and restructuring. They can satisfy the increasing local demand for services, which allows increasing specialization, and furthermore support larger enterprises with services and inputs. India will have to take lessons from global phenomenon wherein increase in contribution of MSMEs is clearly visible for growth in developed countries than that for growth in developing countries. It is a clear and one of the time tested paths for

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    of 8

    Researchjournalis Journal of Entrepreneurship

    Vol. 2 | No. 2 February | 2014

    Role Of MSMEs In
    Economic
    Development
    Bhoomika Garg

    Assistant Professor
    Rajdhani College, University of Delhi, BK-52 (West)
    Shalimar Bagh, New Delhi 110088

    www.researchjournali.com

    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    Abstract
    It is well known that the MSME sector constitutes the spine of the nation, small Industry has been one of the
    major pillars of Indias economic development strategy since Independence. India accorded high priority to
    Small and Medium Enterprises (SMEs) from the very beginning and pursued support policies to make these
    enterprises viable, vibrant and over time, these have become major contributors to the GDP. Moreover, the
    MSME sector has weathered and overcome stiff competition in the post liberalization period in the domestic
    and International arena.

    Keywords: MSME, Economic Growth, Multinational Companies, SIDBI, MFI, Self Help Group (SHG).

    1. Introduction
    MSEs have been regarded as the engine of economic growth and development all over the world. Today,
    MSEs are constituting nearly about 90% of the total enterprises in most of the economies (especially in
    developing economies) which creates marvelous employment opportunities and is accounting major share of
    exports & industrial production. In India, MSE is generally referred to as MSME i.e. Micro, Small and
    Medium Enterprises. Multinational companies have played a pivotal role in the emergence of Indian MSMEs
    as world leaders in specific products. This sector plays an important role in the growth of GDP in the
    economy as it creates employment opportunities at low capital cost.

    1.1 What Is MSME In India


    The Govt. of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006,
    in terms of which the definition of micro, small and medium enterprises is as under:

    a) Enterprises engaged in the manufacturing or production, processing or preservation of goods as


    specified below:
    -

    A micro is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakhs

    A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakhs
    but does not exceed Rs. 5 crores.

    A medium Enterprise is an enterprise where the investment in plant & machinery is more than Rs. 5
    crores but does not exceed Rs. 10 crores.

    b) Enterprises engaged in providing or rendering of services (original cost excluding land &
    building, furniture, fittings and other items) not directly related to the services rendered or as
    may be notified under the MSMED Act, 2006 are specified below:

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    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    A micro enterprise is an Enterprise where the investment in equipment does not exceed Rs. 10
    lakhs.

    A small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakhs but does
    not exceed Rs. 2 crores.

    A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crores but
    does not exceed Rs. 5 crores.

    2. Objective Of The Study


    The objective of this study is to know the growth trend in MSME sector, challenges being faced and to study
    the future of MSME in India.

    3. Current Status Of MSME In India


    As per data released by the Ministry of MSME, Govt. of India, at present, there are about 26.1 million
    enterprises in this sector. The sector has a share of 45 percent in the manufactured output and 8% in the GDP.
    MSMEs contributed close to 40 percent of all exports from the country and employed nearly 59.7 million
    people, which is next only to agricultural sector. As on March 2013 there are 2032 specialized MSME
    branches (Source: RBI).

    Figure1: Growth trend in MSME sector. All India Growth rate (%)
    25

    20

    15

    10

    0
    2007-08 to 2008-09 2008-09 to 2009-10 2009-10 to 2010-11 2010-11 to 2011-12

    Source: Ministry of MSME

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    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    The above graph depicts the growth trend in MSME sector which indicates an upward moving growth trend.
    Though in initial few years, there was steady growth rate of around 10-11% which shot up to 19% during the
    period 2010-11 to 2011-12.

    Challenges to MSME Sector


    No doubt, MSME sector is contributing a lot to the Nations economy but it is not getting enough support
    from the concerned Govt. departments, Banks, Financial institutions and Big Corporate houses. It affects the
    growth of the sector to become more competitive in the National and International markets.

    Credit to MSMEs
    Receiving timely and adequate finance is a tedious exercise for both established as well as emerging MSMEs
    in India. According to the Indian Govt. survey, 90% of the total Micro units in India procure funds from
    friends, relatives and private lenders only. Though the Banks finance to MSME has shown an upward trend in
    India, yet the lenders do not feel secure about lending to this sector for number of reasons. The borrowers of
    this segment are considered as high risk borrowers because of insufficient assets, low capital, vulnerability to
    market fluctuations and high mortality rates. Further, access to equity capital is a genuine problem. At
    present, there is almost negligible flow of equity capital into this sector.

    Access to Markets
    Due to lack of finance, this sector has failed to create market access through marketing and promotions. Use
    of Information Technology can play a pivotal role in opening new ventures and expanding the scope for
    MSMEs.

    Lack of Technological Knowledge


    With the increasing competition, globalization and uncertainty in the global market, it is essential for MSMEs
    to be technologically literate. Moreover lack of IT support, poor internet facility, and improper information
    and communication technology applications impedes the growth of this sector.

    Lack of proper Infrastructure


    Raw material is the basic necessity of every enterprise whether it is small scale or large scale. Lack of
    infrastructure results in shortage of basic raw material, especially which are to be imported from other
    countries. Lack of waterways and airways facilities also moderate the growth of those MSMEs whose target
    customers are located abroad. As most of the MSMEs are located in rural area of our country, non-existence
    of proper telecom network makes it difficult to communicate with people residing in urban areas.

    www.researchjournali.com

    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    Inadequacy of Managerial Personnel


    There is lack of experienced and trained employees as MSMEs cannot afford to have high salaried personals
    and at the same time they cannot spend on training and development of their employees. Therefore, they have
    to depend mainly upon their family members who do not have diversified skills.

    Inadequate Market Information


    One of the factors which is limiting the growth of this sector is the lack of adequate information. Once
    MSMEs start the business they may be interested in knowing about the suppliers of specific machinery, raw
    material, technical information and marketing trends which suits their needs for their products.

    This

    information is rarely available at grass root level.

    Initiatives taken by Govt. of India and RBI


    Keeping in view the important role played by MSMEs in Economic Development and its vital contribution in
    the Indian Economy and Employment. The Govt. and RBI are proactively supporting the growth of MSMEs
    in every possible manner. Some of the Govt. measures include:

    1. The Ministry of Micro, Small and Medium Enterprises have been implementing schemes of
    survey, study and policy research with a view to collect data on various aspects of MSMEs
    engaged in manufacturing and services. The purpose of this survey is to design appropriate
    strategies, measures to assist and enable these enterprises in facing the challenges to make use of
    opportunities with a view to enhancing their efficiency and competitiveness.
    2. Micro, Small and Medium Enterprises Development Act, 2006 has been enacted to facilitate the
    promotion and development of these enterprises. Under this Act, three types of enterprises i.e. Micro,
    Small and Medium have been defined for the very first time.
    3. Credit is one of the crucial aspect for the promotion of MSMEs. Thus, various schemes have been
    undertaken to provide sufficient credit to these enterprises such as Credit Linked Capital Subsidy
    Scheme (CLCSS) which was launched to facilitate technology improvement in MSMEs including khadi,
    tiny and village units. Moreover finance to this sector by commercial banks has been classified under
    priority sector lending of the banks.

    RBI Guidelines for MSMEs


    1. In view of suggestions of the Prime Ministers task force on MSMEs formed by Government. Banks are
    advised to achieve 20% year-on-year growth in credit to micro and small enterprises, with allotment of
    60% of the MSMEs advances to Micro Enterprises which helps to make credit available to this sector.

    www.researchjournali.com

    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    2. RBI closely monitors the achievement of targets by banks on a quarterly basis and the non-achievers are
    advised to devise strategies to gear up the credit mechanism for this sector.
    3. New Generation Entrepreneurs who do not have sufficient collateral securities to provide to the bank for
    availing the finance. To overcome this problem Govt has formed Credit Guarantee Fund Trust for Micro
    and Small Enterprises (CGTMSE) to facilitate this sector which will provide guarantees to the banks and
    banks are instructed to provide collateral free loans to this sector up to Rs 1 crore.
    4. RBI also made it compulsory to acknowledge all loan applications which are submitted manually or
    online, by MSME borrowers.
    5. To address the problems such as absence of financial literacy, working skills, business planning etc.
    which shows alarming situation to MSME borrowers. RBI advised commercial banks to play proactive
    role to supports MSME clients by providing them banking literacy and consultancy support in addition to
    Financial services.

    4. Way Forward
    Globalization brings new business opportunities which MSME sector needs to grab. This sector has to
    redesign their strategies and innovate themselves. To successfully to do so major aspects need to be kept in
    mind.
    1. This sector needs innovation to create new business and sense the changes that have already occurred in
    the business, technology and demographics.
    2. There should be adequate attention to be given to cash flow. Entrepreneurs of this sector looks into the
    profit for the success of the enterprise but cash flow matters more than the profit.
    3. In order to cater the needs of growing business, there should be efficient and skilled management team. It
    is therefore, necessary to recognize the talent of the people working with them, so that business can grab
    the new opportunities.
    4. As business passes through stiff competition. The entrepreneurs should evaluate the business demands
    and continuously strive to cater them. For successful enterprises one should learn from their mistakes and
    make sure not to repeat again.

    Some of the major steps which should be taken in this regard is given as under:
    Segmentation: Banks should conduct sector specific studies and the problem of different industries should be
    noted. This way, bank will be able to connect with the specific problems of the particular industry and devise
    strategy accordingly.

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    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    Assistance in Marketing: There should be an adequate finance for the MSMEs so that these enterprises can
    focus more on brand building and should be given chance to advertise their products and participate in trade
    fairs.
    Becoming More Technologically Advanced: MSMEs are required to continuously update and use latest
    technology into their production process, management function and marketing to reduce cost, increase
    productivity & efficiency.
    Skill Development and Trained Manpower: There should be an allotment of more funds to set up resource
    development and growth centers. Skilled manpower is required for the small enterprises which will enhance
    MSMEs competitiveness.
    Need for Infrastructure Development: The MSMEs need to have an adequate infrastructural set up which
    includes development of MSME clusters near highways, rail corridors, proper channels of
    telecommunication, adequate supply of power and other supporting facilities.
    Approach to Equity Capital: The ability of MSMEs should be enhanced by expanding their reach to access
    equity market.

    For this purpose, regulatory and fiscal barriers should be removed.

    Based on the

    recommendations of the PMs task force on MSMEs, the Bombay Stock Exchange and National Stock
    Exchange have also set up separate exchange for listing and trading of shares of MSMEs making it easier for
    them to raise equity capital.
    Innovative Financing: MSMEs are dependent mainly upon banks and informal modes of financing like
    family, friends and private money lenders. Self Help Groups (SHG) and Micro Finance Institutions (MFI) are
    only on its initial stage of financing. The possibility of linking MSMEs with secondary market i.e. capital
    market needs to be considered. Institutions like SIDBI need to design instruments to link MSMEs with
    capital market.

    5. Conclusion
    The Micro, Small and Medium Enterprises (MSMEs) are one of the major segments of the Indian economy. It
    plays an important role in the economic development of the Nation. It is the major constituent sector in
    employment generation, production system, enhancing exports and GDP. But, there is a need to carefully
    nurture and support this sector. Joint effort is needed from the Govt. and MSMEs to acquire technological
    effectiveness.

    Financial support needs to be ensured taking into consideration the growing investment

    demand, including the requirements of technological transformation. This sector needs to adopt a proactive
    approach where the Govt. should propose a long term strategy to sustain themselves in the changing
    economic scenario and progress beyond the current GDP growth.

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    Researchjournalis Journal of Entrepreneurship


    Vol. 2 | No. 2 February | 2014

    6. References
    1. RAVI, S. (2009). Entrepreneurship Development in the Micro, Small and Medium Enterprises sector in India,
    Indian School of Business P2.
    2. GUPTA, R. (2006), Scope of cottage and Small Scale Industry in West Bengal in the early 2000, IBS Research
    Centers, Kolkata.
    3. DAS, B. Shil, N.C., Pramanik, A. (2007). Strengthening SMEs to make export competitive, Munich Personal RePEC Archieve (MPRA).

    www.researchjournali.com

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