MSRIT

M.S.RAMAIAH INSTITUTE OF TECHNOLOGY
Autonomous Institution affiliated to VTU Vidhya Soudha, M.S.R.Nagar,M.S.R.I.T post, Bangalore – 560054 Department of Management Studies

SEMINAR ON “PROBLEMS IN SMEs” Submitted By Prasanna C.U USN: 1MS08MBA34

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Under the guidance of ordination with Mr. Vijay N. Rao RIZWANA.M

in coMrs.

CONTENTS
 Introduction

 Scope of the study

Features of Small and Medium enterprises Significance of Small and Medium enterprises
 

Problems of Small and Medium enterprises o Teething troubles o Financial problems o Production problems

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o Marketing problems o Technology problems o Infrastructure problems

 Learning Experience  Conclusion  Literature Cited

OVERVIEW

The small and medium manufacturing enterprises (SMEs) sector, the heterogeneous group of enterprises, constitute a vibrant and dynamic sector of the Indian economy. This sector has recorded consistently rising growth in terms of production, investment, creation of employment and phenomenal growth in exports over the years. The post liberalization era in the Indian economy has enhanced the opportunities and challenges for this sector. With their dynamism, flexibility and innovative drive they are increasingly focusing on improved production methods, penetrative marketing strategies and management capabilities to sustain and strengthen their operations. In most developing countries, as also in India,
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Small Enterprises have been viewed as an engine of employment generation. SME Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture.

DEFINITION OF SMALL AND MEDIUM INDUSTRIES:

Units in Small and Medium Enterprises (SME) Sector include all units in tiny and Small Scale industrial (SSI) sector and also those industrial units whose investment in plant and machinery is up to INR 100 million. as per definition of RBI (defined in RPCD Circular No. RPCD.PLFNS.BC. 31/ 06.02.31/ 2005-06 dated August 19, 2005)

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Type

Mfg.Enterprise

Service Enterprise

Micro Small Medium

Up to Rs.25 lakh Rs.25 lakh to Rs.5.0 cr. Rs.5.0 cr. to Rs.10.0 cr.

Up to Rs.10 lakh Rs.10 lakh to Rs.2.0 cr. Rs.2.0 cr. To Rs.5.0 cr.

FEATURES OF SMALL AND MEDIUM INDUSTRIES:

(a) Born out of individual initiatives & skills SME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set up purely as a means of earning livelihood. These includes many trading and retail establishments while most countries continue SMEs to manufacturing services, others adopt a broader definition and include retailing as well. (b) Greater operational flexibility

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The direct involvement of owner(s), coupled with flat hierarchical structures and less number of people ensure that there is greater operational flexibility. Decision making such as changes in price mix or product mix in response to market conditions is faster. (c) Low cost of production SMEs have lower overheads. This translates to lower cost of production, at least upto limited volumes. (d) High propensity to adopt technology Traditionally SMEs have shown a propensity of being able to adopt and internalize the technology being used by them. (e) High capacity to innovate export SMEs skill in innovation, improvisation and reverse engineering are legendary. By being able to meet niche requirements, they are also able to capture export markets where volumes are not huge. (f) High employment orientation SMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs tend to be labor intensive per se and are able to generate more jobs for every unit of investment, compared to their bigger counterparts. (g) Utilization of locally available human & material resources SMEs provide jobs locally and hence utilise manpower available locally. Since it is available for them to transport materials over long distances, they often improvise with materials which are available locally. (h) Reduction of regional imbalances Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the flexibility of location. Thus, any country, SMEs can be found spread virtually right across, even through some specific location s emerge as ‘clusters’ for units of a similar kind.
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Nevertheless, the spread of SMEs is a fact which enhances their attraction from a national or regional policy.

SIGNIFICANCE OF SMEs:
Wide spread reaches: There are around 12.34 million (1) MSMEs, including 1.9 million registered one which are spread out across the length and breadth of India. They may be touching the lives of 123.4 million directly or indirectly which is roughly 10% of India’s population. • Major share in GDP: MSMEs combined output is roughly 7% of country’s Gross Domestic Production (GDP). • Big employment generator: MSME sector is the second largest manpower employer in the country next only to agriculture sector. It provides employment to more than 20 million people which is roughly 2 % of country’s population. Looked from social angle, it helps in solving the unemployment and under-employment problem in the society. • Facilitates balanced regional development: Dispersion of MSMEs in all parts of the country helps in removing regional imbalances by promoting decentralized development of industries. MSMEs can be found every where, which may be rural, urban, coastal, desert, mountains, forest, backward/ forward areas. This decentralized concept also helps in reducing the other problems like pollution, congestion, housing, sanitations etc. • Helps in equitable distribution of wealth/ income: When the entrepreneurial talent is allowed to grow in different regions and areas, the income is also distributed instead of being concentrated in the hands of few. This help in solving a big social issue of bridging the gap between rich and poor.

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• Act as nursery for entrepreneurship: MSMEs provide a natural habitat for entrepreneurs. Through this platform, the latent/ raw talent available locally can hone their skills and talents, to experiments, to innovate and transform their ideas into goods and services needed by the society.

PROBLEMS FACED BY SMEs: Small and Medium Enterprises (SMEs) are often confronted with problems that is uncommon to the larger companies and multi-national corporations. These problems include the following:

TEETHING TROUBLES: The first step viz the preparation of project report, calls for the collection of data on the marketability of the product chosen, the availability of raw materials, the manufacturing techniques involved the choice of machinery and location. While large unit can afford to pay a fat fee to a consultant for the preparation of the project report, the small industrialist has to generally rely on himself. FINANCIAL PROBLEMS: All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro,small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification, modernization/upgradation of facilities, capacity expansion, etc.

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Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result, they have to depend largely on internal resources. In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes, they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available. Recognising the importance of easy and adequate availability of credit for ensuring sustainable growth of the MSME sector, the government has undertaken several measures: Priority Sector Lending Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of the banks (both domestic and foreign banks operating in India. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is earmarked for the small scale sector. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum.

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Small Industries Development Bank of India (SIDBI) SIDBI has been set up with the mission to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. It is the principal financial institution responsible for promotion, financing and development of the sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the small scale sector are:
   

Financing Promotion Development Co-ordination

SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services. Taking into account the fact that a majority of such enterprises which are at the lower-end of the sector are outside the ambit of institutional finance. Hence, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs.1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries. At the State level, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the
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sector. State Financial Corporations, the state-level institutions have played an important role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry. Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was launched with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the policy package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year.

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PRODUCTION PROBLEMS: Non-availability of quality raw materials on a timely basis in an adequate quantity is one of the main problems faced by micro, small and medium enterprises. There is acute shortage of even the basic raw materials required by small scale units. These units are under a handicap in obtaining raw materials of requisite quality at reasonable prices. They do not get the benefits of bulk buying. For instance, the handloom industry is facing shortage of yarn. Small scale industries also face shortage of power due to which they are unable to make full utilization of plant capacity. Majority of them cannot afford to install their own power generating plants to ensure uninterrupted operations. National Small Industries Corporation (NSIC) and State Small Scale Industries Development Corporations are involved in making efforts for providing some raw materials to MSME sector. NSIC aims to help small scale units by financing purchase of raw material (both indigenous and imported), thus allowing them to focus on manufacturing quality products. It facilitates availability of scarce raw material either through the domestic market or by importing. State Directorate of Industries distributes scarce raw materials to small units. They have set up depots for distribution of raw materials to small scale industries (SSIs). The Central Government has introduced a buffer stock scheme to ensure availability of scarce raw materials to this sector. Raw Material Assistance Scheme of NSIC aims at helping small scale industries by way of
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financing the purchase of raw material (both indigenous & imported). This gives an opportunity to SSIs to focus better on manufacturing quality products. Benefits of the Scheme
 

Financial Assistance for procurement of Raw Material upto 90 days. SSI helped to avail Economics of Purchases like bulk purchase; cash discount etc. NSIC takes care of all the procedures, documentation & issue of Letter of credit in case

of imports. MARKETING PROBLEMS: Out of several problems faced by small and medium scale entrepreneurs, the absence of adequate marketing and export facilities is one of their main concerns. Almost all types of business enterprises face marketing problems, but the small and medium scale enterprises face greater difficulty in the marketing and distribution of their products. Some of these are:

Small and medium entrepreneurs tend to face tough competition from the products and sales/ marketing strategies of large scale firm's entrepreneurs. They, at times, find it very difficult to cope with large scale entrepreneurs in terms of cost, quality, standards, popularity, meeting ever-changing demands/ preferences of consumers, etc. Most of them do not have their own marketing network. So, they ultimately have to rely on outside sources for distributing their products. This also tends to raise the cost of their products and services. Most of them do not have good knowledge and/ or experience of various marketing concepts and strategies. As a result, they are unable to understand quickly and accurately the prevailing as well as constantly changing market trends. Furthermore,

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inspite of having huge potentialities of extensive market for their products, they are mainly unwilling to opt for efficient marketing techniques.

They also lack the resources and funds needed for effective sales promotion. Many of such enterprises cannot afford to spend much on advertising, sales promotion, market research, etc. They find it difficult to sell their output at remunerative prices because of higher cost of production and non-standardised quality of products. They also have to sell their products at throwaway prices due to their weak bargaining power (especially in dealing with big buyers) and urgent needs of funds.

Thus, it is right to say that most of small and medium entrepreneurs do not correctly understand as to what kind of products are actually needed by the market, how big/small is the market, when the products are needed and how to deliver such products. All these problems keeps them mainly isolated from the market trends and conditions and, thus, tend to restrict their operations. Besides, small and medium scale enterprises are the most significant contributor in the field of India's exports. There has been a prominent increase in the exports from this sector of both traditional and non-traditional goods including jewellery, garments, leather, hand tools, engineering goods, software, etc. Also, the enterprises with good export performance have greater stability in the economy. But, there is still lot of problems in exporting the products by small and medium entrepreneurs to other regions/ countries/ areas. They are not very familiar with the steps and formalities involved in exporting goods from India. They need to be made aware of all the steps involved in the process, such as, registration of exporters; selection of export market and buyers; receipt of enquiries, letter of intent, letter of credit, bill of lading, etc; insurance coverage; obtaining shipping order; certificate of origin; sending documents to importers; etc.
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MANAGERIAL PROBLEMS: Small scale firms are generally managed by the owners who very often does not possess the skills required for the efficient management of the enterprise. There is lack of proper division of work and benefits of specialization are not available. some owner-managers are reluctant to adopt modern methods of organisation and management. There is instability in business because the sickness and dearth of the owner manager directly affects the survival and growth of the small firm. Initiatives undertaken by the government include: Management Training Programmes with the basic objective of improving the productivity/profitability of existing entrepreneurs by upgrading their managerial decision making capabilities and providing them an insight in the latest developments in the area of industrial management, marketing management, financial management, inventory control,

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human resource development, information technology, and e- commerce, etc. Also, it aims to make them aware about emerging practices in the field of industrial management. National Institute for Micro, small and Medium Enterprises (ni-msme) has taken gigantic strides to become the premier institution for the promotion, development and modernization of the Small and Medium Enterprise sector. An autonomous arm of the Ministry of Micro, Small and Medium Enterprises (MSMEs), the institute strives to achieve its avowed objectives through a gamut of operations ranging from training, consultancy, research and education, to extension and information services

TECHNOLOGY PROBLEMS: Majority of the small scale units use old techniques of production and outdated machinery and equipment. Upgradation of the technology and achieving economies of scale is one of the major problems facing the sector. They cannot afford new machines and equipments and are therefore not in a position to use the latest techniques of production. They do not find it possible to conduct research and development on a continuing basis. Therefore, productivity and quality in small scale firms tends to be low while unit cost of production is generally high.

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But with liberalization of the economy, the MSMEs are facing stiff competition from imports and need technological upgradation in order to produce better quality products at cheap rates. As far as sourcing technology is concerned, small businesses face the following three essential problems:

Obtaining information about technology is the first important issue. For most of them, information about available technology options is through word of mouth or from a visit to an advanced unit. Few have access to technical literature, professional journals or information about new product launches. But with the advent of internet, new vistas are opening up through electronic journals, catalogue downloads and advanced search facilities. Actual procurement of the technology is the next important issue because even if information is obtained, there are barriers to import of technology and other problems relating to technology transfer, vendor capability, after sales support, import procedures, etc which impede procurement. Acquiring finance for technology upgradation is also a problem. Small enterprises generally look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs.

With a view to foster the growth of MSME sector in the country, government has taken up several initiatives: ISO 9000/14001 Certification Fee Reimbursement Scheme was introduced in order to incentivise technological upgradation, quality improvement and better environment management by the MSEs. The scheme provides incentive to those small scale/ ancillary undertaking who have acquired ISO 9000/ISO 14001/HACCP certifications.
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In order to reduce the cost of funds, a scheme called Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation in Small Scale Industries has been put into place. It aims at facilitating technology upgradation by providing upfront capital subsidy to small scale industry units, including tiny, khadi, village and coir industrial units, on institutional finance (credit) availed of by them for modernisation of their production equipment (plant and machinery) and techniques. National Manufacturing Competitiveness Programme (NMCP) has been launched by the government in order to help MSMEs improve their competitiveness. The schemes under this Programme are aimed at addressing the technology/quality upgradation needs of the sector, mainly in the public-private partnership mode. Small Industries Development Bank of India (SIDBI) in collaboration with United NationsAsian Pacific Centre for Transfer of Technology (UN-APCTT) had established Technology Bureau for Small Enterprises (TBSE) to bring synergy between Technology and Finance for Small and Medium Enterprise (SME) sector. The objectives of the company are to:

provide professional services for technology transfer in order to enhance market competitiveness of small and medium enterprises and promote sustainable development. maintain and provide data base on technology options available from different countries. provide micro small & medium enterprises information on sources of technology and means of accessing them. provide background information on technology seeking enterprises to technology suppliers and collaborators.

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identify business partners willing to collaborate and extend support to tie up financial assistance and other requirements such as drafting agreements, obtaining various approvals and preparation of business plans required for transfer of technology. provides financial syndication through banks and financial institutions.

Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to enhance technology options for small scale industries. An ISO 9001 certified company, it has been working to fulfill its mission of promoting, aiding and fostering the growth of small scale industries and industry related small scale services/business enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports - projects and products from small industries. Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and Training Centres in the country in order to assist small scale units in their technical upgradation by providing good quality toolings.

Further, in order to facilitate investments for technological upgradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture by such enterprises is being provides financial syndication through banks and financial institutions.

Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to enhance technology options for small scale industries. An ISO 9001 certified company, it has been working to fulfill its mission of promoting, aiding and fostering the growth of small scale industries and industry related small scale services/business enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has
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proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports - projects and products from small industries. Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and Training Centres in the country in order to assist small scale units in their technical upgradation by providing good quality toolings. Further, in order to facilitate investments for technological upgradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture undertaken.

INFRASTRUCTURE PROBLEMS:
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Adequate infrastructure facilities are necessary for the overall development of every sector of the economy. In the wake of liberalisation and globalisation, its presence and importance for the proper growth of small and medium enterprises cannot be underestimated. Both the Central and the State Governments are making continuous efforts to upgrade the infrastructural set up of the various States/ Union Territories (UTs)/ Districts of the country. Inspite of all this, the small and medium scale entrepreneurs are constantly facing the problem of infrastructural bottlenecks, which restricts their day-to-day business operations as well as their future growth prospects. Infrastructure needed by entrepreneurs include all types of transportation facilities like railways, waterways, roadways and airways (depending on the type of small and medium scale firm running by these entrepreneurs) as per the suitability of the business, as well as proper established channels of telecommunication and adequate supply of power. Lack of any of these facility can cause serious damages to the firm's value chain process, that is, to the production, consumption and distribution of the products of small and medium entrepreneurs, who already face problems of lack of finance, inadequate marketing facilities, technological obsolescence, etc. Some of the major problems faced by small scale entrepreneurs with respect to infrastructure are:

Inadequate infrastructural facilities creates the problem of acute shortage of basic raw materials, especially those which are scarce and need to be imported from distant places, needed by small and medium scale enterprises. Small and medium scale entrepreneurs find it difficult to distribute their products to the markets which are located at far off places because of incomplete construction or non-existence of basic roads/ highways.

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Lack of proper airways and waterways facilities also restricts the growth prospects of those medium/small scale firms whose target market is located abroad. Small and Medium scale enterprises face shortage of power supply, due to which they are unable to make full utilization of plant capacity. Most of them find it difficult to install their own power generating plants, so as to ensure their uninterrupted operations, due to lack of required funds. Most of them are located in rural areas or remote areas of the country, due to which they find it difficult to communicate with people outside the region. This is because of non-existence of proper telecom network.

Hence, small and medium scale entrepreneurs continued to face the problem of infrastructure bottlenecks in terms of presence of inadequate transportation facilities, low/ no access to sound power supply, lack of proper communications channels, inadequate marketing facilities, lack of funds, etc. All this affects the long run profit earning capacity of such entrepreneurs as well as inhibits the chances of survival of enterprises run by the

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LEARNING EXPERIENCE: The process of privatization, liberalization and globalization has affected the whole economy. It has increased the sphere of competition in national as well as international markets and has created the environment where fittest will survive and inefficient will be weeded out. Therefore the policies when implemented in letter and spirit are expected to make SMEs more competitive nationally and globally as well. Above all, it will inculcate entrepreneurial culture and generate employment for youth and instill a sense of pride among them.

CONCLUSION AND SUGGESTIONS: • Arrangements may be made by the government to ensure the supply of trained and professional managers for the small scale sector. • It would be necessary to consider policy initiatives to incentivise MSMEs to achieve economies of scale by expanding production. • To facilitate the MSME sector to garner resources, it is imperative that a separate trading exchange be set up exclusively for the MSMEs. • Provide special incentives for encouraging larger flow of Venture Capital & Private Equity funds into the sector. • There is an urgent need to devise measures to tackle the problem of loss of fiscal benefits when the micro and small-scale units graduate into larger units, etc.

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BIBILOGRAPHY  Books: • Entrepreneurship development Small Business Enterprises- Poornima Charantimath • Small Scale Industries- Vasanth Desai • Indian Economy- A.N. Agrawal • Dynamics of entrepreneurial development and management- Vasant Desai  Journals: • Indian Management, Journal pf AIMA, Aug 09, vol 48, issue 8. • The Analyst, Chartered Financial Analyst, June 09 • SME World May- July 2007
• • 

SME World Feb- April 2008

Websites:

• www.business.gov.in • www.smallindustryindia.com • www.dcmsme.gov.in
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www.lubindia.org/ssi/

• www.wikipedia.org • www.smeworldonline.com

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