Paper: 09, Entrepreneurship Development and Project Management

Module: 15, MSME Policy in India

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof.Yoginder S. Verma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh.Kangra.H.P.

Dr. Vishal Kumar

Paper Coordinator School of Management
Maharaja Agrasen University, Baddi

Mr. Chaman Lal

Content Writer School of Business and Management Studies
Central University of Himachal Pradesh.Kangra.H.P.
 Items Description of Module
Subject Name Management
Paper Name Entrepreneurship Development and Project Management
Module Title MSME Policy in India
Module Id Module no.-15
Pre- Requisites Basic knowledge of Business and Entrepreneurship
Objectives To know the policy initiatives of govt. for the
Promotion of MSME sector
Keywords MSME, MSMEDA, Entrepreneurs, PMEGY, NMCP

QUADRANT-I

Module 15:MSME Policy in India

1. Learning Outcome
2. Introduction
3. Overview of MSMEs
4. MSME Development Act
5. National Manufacturing Competitiveness Programme(NMCP)
6. Prime Minister Task Force on MSME
7. RGUMY
8. Public Procurement Policy
9. CGFS for MSME
10. Quality Upgradation
11. Credit Linked Capital Subsidy Scheme
12. Other Measures
13. Summary

In the earlier modules, you have studied about entrepreneurship, factors affecting entrepreneurship,
different entrepreneurship development programme, and entrepreneurial competencies. In this
module, you will know about the various policy initiatives of government for the overall development
and promotion of micro, small, and medium enterprises (MSMEs). You will further discuss about the
various protective measures of government to protect and promote this sector.

1. Learning Outcome:

After studying this module the learners will be able to:

 Understand the government approach towards the promotion and development of MSMEs;
 Explain the various policies of the government for the development of MSME sector;
 Evaluate each policy of government on various parameters/components; and
 Choose the relevant policy for the establishment of enterprise.

2. Introduction

Industries have played an important role in the economic development of India during pre and post-
independence era. Within the Industrial sector, Micro, Small and Medium Enterprises (MSMEs) holds
one of the most important places in the Indian Economy. These enterprises contribute significantly to
the economy via generation of employment, national income, foreign exchange, exports, and other
measures. This sector accounts for 40 per cent of total manufacturing output and approximate 40 per
cent of total exports. MSMEs contribute around 8 % of GDP. MSMEs are significantly contributing
 in the economic development of the rural areas as well and are providing largest employment to the
ruralites. These enterprises are more labour intensive and an important tool for rural industrialization.
This sector is reducing regional imbalances and widespread income and wealth inequalities. Due to
these invaluable contribution of MSME sector, government of India has initiated various programmes
and policy measures for the promotion and development of this sector. During the last few years,
government of India has initiated many innovative and protective policy measures for this micro,
small, and medium enterprises. Due to liberal approach of government towards this sector,
academicians say “India has as much industrial policies as it has industries”. With this view, let us
discuss the various policy initiatives of the government for the promotion of micro, small, and
medium enterprises.

3. Overview of MSMEs

Micro, Small and Medium Enterprises (MSMEs) consist of those enterprises which are engaged in
production of goods which pertains to any industry and are specified in the first schedule of Industry
Development &Regulation Act, 1951. These enterprises can be further classified as registered and
unregistered Enterprises.

Registered Enterprises and Unregistered Enterprises

Registered enterprises are those enterprises which are registered with some government department or
board. Fourth All India Census on MSMEs defines registered enterprises as; those enterprises which
are registered permanently with the state directorate of Industries/ District Industries Centres (DIC)
and Unregistered enterprises are those enterprises which are not registered with directorate of
Industries or DIC.Further these registered and unregistered MSMEs are subdivided in to those
enterprises which are engaged in manufacturing activities and service providing activities on the basis
of the amount of Investment. Investment amount means;amount invested in the plant and machinery
in case of manufacturing sector and investment in equipments in case of service sector.

3.1 Definition of MSMEs

As per MSME Development Act, 2006, following are the classification of MSMEs on the basis of
their investment in plant & machinery and equipments:

Manufacturing Sector

A. Micro enterprise: An enterprise is classified as micro enterprise under manufacturing sector

where Investment in plant and machinery is up to Rs 25 lakhs.

B. Small enterprise: An enterprise is classified as small enterprise under manufacturing sector

if investment in plant and machinery is more than Rs 25 lakhs but less than Rs 5 crore.

C. Medium enterprise: An enterprise is classified as medium enterprise under manufacturing

sector, if investment in plant and machinery is more than Rs 5 Crore but is less than Rs 10
crore.

Service Sector

A. Micro enterprise: An enterprise is classified as micro enterprise under service sector if

investment in equipment does not exceed Rs 10 lakhs.

B. Small enterprise: An enterprise is classified as small enterprise under service sector, if

investment in equipment is more than Rs 10 lakhs but less than Rs 2 crore.

C. Medium enterprise: An enterprise is classified as Medium enterprise under service sector, if

investment in equipment is more than Rs 2 crore but less than Rs 5 crore.
4. Policy Initiatives by Government of India for MSMEs

MSMEs which play such a pertinent role in the economic development have been plagued with
number of problems and challenges. Majorities of enterprises under MSMEs are tiny and micro
enterprises and these enterprises face problems of labour, credit, shortage of market, low remunerative
prices for the products, etc. These enterprises are prone to internal and external challenges like
competition from big industries both domestic and International. Poor Quality and low standard of the
product are another weak area apart from various threat posed by policies of liberalisation and
Globalisation. In light of the above, Government of India have initiated plethora of reforms and
policies for the growth and development of these enterprises and entrepreneurs. Some of the major
policies and reforms are as follow:

4.1 MSME Development Act 2006 (MSMEDA 2006)

Before the MSME Development Act 2006 (MSMEDA, 2006), micro, small and, medium enterprises
were considered as individual enterprises and there were different rules and regulation for
them.Though the need of all three were same but they did not get appropriate attention from the
policy makers .These enterprises were in lacklustre, only limited to rural areas, and were on verge of
extinction. In order to promote, to enhance competitiveness, to provide market and to integrate these
three tiers of enterprises, MSME DevelopmentAct 2006 was enacted. The MSME Development Act
2006 came into effect on 2nd October 2006. Since the enactment of law, both the Central and State
Governments have taken effective steps towards implementation of the Act. Government has also set
up a separate Ministry of Micro, Small, and Medium Enterprises.

Objective of the Act: MSMEDA, 2006 was enacted with the objective of promotion and
development of MSMEs along with promoting competitiveness.

The Important features of MSME act are as follow:

1. The term „Enterprise‟ was suggested to be used in place of the term „Industry‟.

2. Definitions of Micro, Small & Medium Enterprises in manufacturing and service category on
the basis of investment in plant & machinery and equipment (Definition is already discussed
in above section).

3. Providing the credit support for prospective entrepreneurs through various credit schemes.

4. Treatment of each category of enterprise on the basis of their requirements.

4.2 National Board for MSME

Under MSME Development Act 2006, it was suggested to constitute a National Board for Micro,
Small and Medium Enterprises .The important functions of this board will be:

i) Critically review the various policies and programmes of the government.

ii) Examine the various factors which hinder the promotion and development of MSMEs.
iii) Suggest the measures which can lead the promotion and development of these enterprises
along with enhancing their competitiveness.
iv) Provide suggestions to the central government to use the fund or different funds which are
constituted under section 12 of MSME act, 2006

4.3 Reservation of Products

To provide assured market for the products produced by MSME enterprises and to counter the
challenges and competition offered by the process of liberalization and globalization, government
framed the policy for reservation of products which are exclusively manufactured by Micro, Small
and Medium Enterprises (MSMEs). The policy of reservation of products for micro and small
enterprise sector started in 1967. The main consideration behind the this policy was to counter the
 challenges of regional industrial imbalances, employment generation through self-employment
ventures, etc. Initially 821 items were reserved under the reservation policy.Subsequently the number
was reduced to 799 items in 2001-02, and then the list was further reduced to 20 items and in year
2015, remaining 20 items reserved exclusively for MSMEs were de-reserved.

4.4 National Manufacturing Competitiveness Programme (NMCP)

For the long term survival of MSMEs in global competitive environment and for the better adjustment
of MSMEs in the competitive era of LPG, government of India in the Budget of 2005-06, announced
formulation of a National Manufacturing Competitiveness Programme (NMCP). There are eight
components under NMCP, which are given below:

i) Support for Entrepreneurial and Managerial Development of Small and Medium Enterprises
(SMEs) through Incubator (INCUBATOR).

ii) Building Awareness on Intellectual Property Rights (IPRs).

iii) National Programme for Application of Lean Manufacturing (LEAN).

iv) Enabling Manufacturing Sector to be Competitive through Quality Management Standards

and Quality Technology Tools (QMS/QTT).

v) Technology Upgradation and Quality Certification Support to SMEs (TEQUP).

vi) Marketing Assistance for SMEs and Technology Up gradation Activities (MARKETING).

vii) Design Clinic Scheme to bring Design expertise to the Manufacturing Sector (DESIGN)

viii) Promotion of ICT in Indian Manufacturing Sector (ICT).

4.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

The Government of India constituted a Prime Minister‟s Task Force on Micro, Small &Medium
Enterprises (MSME) on 2ndSeptember, 2009, which subsequently submitted its report on 30th
January, 2010. The task force was constituted to discuss and reflect on the various issues which were
raised by various associations and other stakeholders involved in these enterprises. The report made
recommendations related to policy/programme support, institutional matters and legal/regulatory
measures for the growth of MSMEs in the country. The areas on which recommendation were made
include credit, marketing, labour issues, rehabilitation, exit policy, infrastructure/technology/skill
development, taxation and special measures for North-Eastern Region and Jammu & Kashmir. The
Task Force in its report recommended for expanding the coverage and for strengthening the
schemes/programmes of the Ministry of MSME.

4.6 Rajiv Gandhi UdyamiMitraYojana (RGUMY)

With the objective of providing support and guidance to the entrepreneurs, government launched
Rajiv Gandhi UdyamiMitraYojana (RGUMY) in 2008. Under this scheme, financial assistance is
provided to selected lead agencies called UdyamiMitras. This scheme provides assistance and support
to the first generation entrepreneurs. First generation entrepreneur are those entrepreneurs who have
ventured into business for the first time. A toll free helpline „Udyami Helpline‟ (1800-180-6763) is
created to provide support, guidance, and assistance to first generation entrepreneurs as well as other
existing entrepreneurs regarding various promotional schemes which are run by the Government.
Government also providesinformationwhich is necessary for running enterprises through Udyami
Helpline.

4.7 Public Procurement Policy

To provide government support, government of India notified Public Procurement Policy for Micro
 &Small Enterprises (MSEs) which is applicable for every Central Ministry, department, andPSU. This
scheme came into force from 1st April, 2012. Under Public Procurement Policy for MSEs, out of total
procurement of every Central Ministry, department, and PSU, they should procure minimum 20 per
cent fromMicro and Small Enterprises (MSEs). In order to provide further leverage to MSEsrun by
SC/ST people, under the above policy out of 20% target of annual procurement from MSEs, a sub-
target of 4% is earmarked for procurement from MSEs owned by Scheduled Caste (SC)/ Scheduled
Tribe (ST) entrepreneurs. Further to support MSEs and to reduce transaction cost of doing business,
MSEs are facilitated by providing them tender sets free of cost, exempting them from payment of
earnest money, adopting e-procurement to bring in transparency in tendering process.

4.8 Credit Guarantee Fund Scheme (CGFS) for Micro and Small Enterprises

One of the major problems faced by these enterprisesis lack of credit. Non availability of credit at
reasonable rate has been a main hurdle in the path of success of these enterprises. To solve this
problem, Government of India launched Credit Guarantee Fund Scheme on August 30, 2000. This
scheme aims to provide credit without the need of keeping collateral to the micro and small
enterprises. To facilitate this scheme,Ministry of MSME and Small Industries Bank of India
established a trust called Credit Guarantee Trust for Micro and Small Enterprises. Under this scheme,
the eligible candidates can borrow for both term loans and working capital facility up to Rs.100 lakhs
per borrowing unit, which is extended further without any collateral security or third party guarantee,
to a new or existing micro and small enterprise.

4.9 Quality Upgradation

MSME are often criticized for not having good quality products, this is one of the main obstacle for
the marketing of the products. Realising the given facts and to give boost to quality improvement and
for technology up gradation, government launched a scheme to provide incentive to those enterprises
which have acquired ISO 9000/ISO 14001/HACCP certifications. The scheme envisages
reimbursement of charges of acquiring ISO-9000/ISO - 14001/HACCP certifications to the extent of
75% of the expenditure, which is subject to a maximum of Rs. 75,000/ in each case. This scheme is to
encourage these enterprises to go for certification. Earlier, main problem for certification was a bit
expensive process of certification in terms of cost. So, with this policy, these enterprises are motivated
to get certification and that to at a subsidized price.

4.10. Credit Linked Capital Subsidy Scheme

The shortage of capital is another hurdle in the growth and development of MSMEs. The credit linked
capital subsidy scheme try to remove this hurdle by providing capital subsidy to these enterprises.
Under this scheme, capital subsidy is provided to entrepreneurs for modernisation of their production
equipments and techniques.Further under this scheme, a capital subsidy of 12 % is provided on the
institutional finance availed by them for introduction of upgraded/modern technology in the selected
sub-sectors or products which are approved under the scheme. Under this scheme, actual loan amount
should not exceed Rs 40 lakhs. Since 2004-05, this scheme is revised and now the ceiling for loan is
raised to Rs. 1 crore from Rs 40 lakhs and rate of subsidy now stand 15 %.

4.11. Fiscal Support

Government of India (GOI) provides various fiscal supports to small, medium, and large enterprises
considering the different factors and unique nature of this sector. These fiscal measures include:

i. Increase in General Excise Exemption (GEE) limit as well as eligibility limit for
GEE.
ii. Liberal time for payment of statutory due like excise duty by extending the time.
 iii. Extension of GEE benefits upon upgradation of small enterprise into medium
enterprise up to a fixed time period.

4.12. Cluster Development Programme

Due to globalization, it is difficult for small type enterprises to survive in isolation in this competitive
environment. Government of India, taking lead from UNIDO‟s cluster development programme had
launched Small Industries Cluster Development Programme (SICDP). This programme is now
renamed considering the relevance of this sector as Micro and Small Enterprises Cluster Development
Programme (MSECDP). The basic aim of this programme is overall development of cluster,
development of Common Facility Centres (CFC), developing plot/sites for enterprises, upgrading
industrial infrastructure, arrangement of exhibition halls, and creation of need based infrastructure.

4.13. Technology Related Support

Government at various levels tries to provide technological supports to micro, small, and medium
enterprises to enable this sector to compete in the global economy. Technology is a sound measure of
competitiveness and survival in the competitive world. Government made various provisions for the
upgradation of technologies of small enterprises:

i. Development of four Training-cum-Product Development Centres (TPDC) for agro

and food processing units at Small Industries Service Institutes (SISIs) to facilitate
the promotion of MSEs in the food processing sector.
ii. Establishment of Central Footwear Training Institute (CFTIs) to strengthen, expand,
and assist micro and small enterprises.
iii. Extension and promotion of eco friendly technology for bricks manufacturing and
electric pumps manufacturing enterprises to make them energy efficient and eco
friendly.
iv. Establishment of Technology Mission to assist Micro, Small, and Medium
Enterprises (MSMEs).

4.14. Enterprising and Management Support

Government also provide entrepreneurial and managerial support to MSMEs through the following
policy measures:

i. Organising Entrepreneurial Development Programmes (EDPs) for entrepreneurs

from socially deprived classes and physically challenged persons.
ii. Special training to entrepreneurs in the area of information technology, catering,
food processing, and other emerging fields like biotechnologies, etc.
iii. Financial assistance to business schools and other selected institutes to run special
need based courses for entrepreneurs.
iv. Special scheme launching capacity building programme, strengthening data base of
MSME sector.
v. Need assessment of enterprises to enhance the competitiveness of micro, small, and
medium enterprises.

4.15. Other Measures

 Government is also providing support to MSME sector through other policy measures:

i) Marketing support.
ii) Empowerment of women owned enterprises.
iii) Strengthening of Prime Minister‟s RozgarYojna (PMRY), etc.

5. Summary

Micro, Small, and Medium Enterprises have emerged as an important segment of Indian economy
over a period of time. These enterprises have potential solutions to the growing problems in rural and
industrial sectors. On the one hand, they are important source of generating employment in rural areas
and on the other hand, they are acting as major check on the problem of migration of people from
rural to urban areas. Low cost, labour intensive nature, production& manufacturing techniques, and
uniqueness of product produced in MSMEs gives these enterprises niche over the other enterprises.
Despite of such immense contribution and important role, these enterprises have to face many
challenges and problems like lack of credit, problem of labour, out-dated technology, and various
marketing and financial constraints. To solve these problems and safeguard MSME sector,
Government of India have drafted and implemented many schemes and policies for the welfare of
these enterprises and entrepreneurs. Government of India is supporting this sector through various
policy measures due to various advantages of these enterprises. Entrepreneurs can get the benefit of
the government initiatives to run their entrepreneurial activities successfully. Government is trying to
boost this potential sector through various means but it is up to entrepreneurs that how effectively
they exploit this opportunity. Entrepreneurs can get assistance from various departments, offices and
even from Ministry to set up and successfully manage an enterprise.