CHAPTER-1

INTRODUCTION

Micro, Small and Medium Enterprise sector has emerged as a highly vibrant and dynamic sector
in the recent years. They play a very crucial role in the industrial development of the country. It
contributes to a country’s employment, manufacturing outputs, exports. They are credited with
generating the highest employment growth in a country. The MSME foster entrepreneurship and
stimulate its growth. These industries are very flexible due to their size. They focus on relatively
small markets, they have comparatively high labour-capital ratio, they need lower investments,
theyfacilitate the mobilization of resources of capital and skills which might otherwise remain
unutilised. It contributes to the socioeconomic development of a country. It is also referred to as
Small and medium Enterprise or SMEs and small and medium sized business or SMBs in some
countries.

MSMEs are to be found in every economy, in advanced industrialized as well as in developing

countries. In other words, MSMEs have also their existence even in developed countries.
According to the industrial pyramid, in every economy there are only few large enterprises
followed by a larger number of medium enterprises, and at the bottom there is a very large
number of micro and small-scale enterprises (MSEs). This basic industrial scale structure
remains even if an economically backward country develops into an economically advanced
country. Only there is more dynamism in terms of entries and exits among the group of MSEs. In
general many MSEs go easily bankrupt, but instead a large number of new MSEs springs up.
Since there will be always a large number of MSEs in any economy at all times, hence
promoting and assisting MSEs is a necessity and will be a never ending uphill battle. Unfortunate
there is no standard definition.1

In India, MSME is very important for the economy as it provides for a vast network of around 30
million units and create around employment of 70 million. 2 The sector includes 2.2 million
women-led enterprises (~7.4 percent3) and ~15.4 million rural enterprises (51.8 percent4). In all,

1
Lepi.T.Taarmidi, “The Imporatnce of MSME in Economic development and Developing Apex Countries”,p.1.
2
Sanjeeb Kumar Dey, “MSMEs in India: It’s Growth and Prospects”,p.26.
3
MSME Census, Ministry of MSME, Annual Report, 2009-10.
4
MSME Census, Ministry of MSME, Annual Report, 2009-10.

1
the MSME sector accounts for 45 percent of Indian industrial output and 40 percent of exports.
Although 94 percent of MSMEs are unregistered.5

The growth of this sector is hindered mainly because of the poor infrastructure and insufficient
market ties. One of the biggest challenges that is face by MSMEs is adequate access to finance.
The financing needs of the sector depend on the size of operation, industry, customer segment,
and stage of development. There is a high risk perception in this sector and also MSMEs have
limited access to immovable collateral and that is the reason their financing suffers as the
financial institutions have therefore limited their exposure.

Aim

The aim of the research is to understand the significance of MSME in India and figure out the
various challenges faced by MSME in India.

Objectives

 To understand the significance of MSME in India

 To analyse the key challenges faced by MSME in India
 To find out the various government policies to support the MSME sector.

Scope and Limitations

The Scope of the present study has been confined to the study of significance of the MSMEs. It
also includes the challenges faced by this sector.

Literature Review

 P.M.Matthew, “MSME Definition in India: The Present state and the Perspectives”,
FICCI-CMSME and ISED, 2014

This study has clearly shown the present state of MSMEs in India and has compared that
to other developing countries. It has shown the reasons for the failure of MSMEs and
how do they manage with these issues.

5
“Micro, Small and Medium Enterprise Sector in India”, p.13

2
  Export-Import Bank of India, 2012
It studied and documented the current situation of MSMEs and support systems setup for
them in India along with select countries of Europe, Asia, Latin America etc. It studies
MSMEs in the Indian as well as global context. It explains the evolution of Indian MSME
policies over time. It also stated the challenges faced by the Indian MSMEs and the
strategies for their Development based on past experiences of India and other countries
such as China, Japan, Malaysia, Thailand, Mexico, Philippines etc . It suggests that
Indian MSMEs must have access to alternative sources of capital like angel funds/risk
capital etc, the existing legislatures need to be toned up to handle insolvencies and
bankruptcies; the ceiling limits need to be redefined to encourage MSMEs to move up the
value chain; the policies need a cluster development approach to increase the level of
competitiveness; emulating Japan, Korea and Malaysia technological innovation and
R&D must be encouraged among MSMEs and entrepreneurship must be encouraged via
skill formation and learning mechanisms.

Research Questions

1. What is the significance of MSME in India?

2. What are the various challenges that are faced by MSME in India?
3. Which government policies work as a support structure for MSME?

Research Methodology

Types of Research

The researcher conducted Doctrinal type of research to collect proper data and to gather
appropriate information. The use of library sources and internet sources has greatly
supplemented the research. Various books, articles and journals pertaining to the subject have
been immensely helpful in guiding the research.To ensures a quality study of the subject matter,
the researcher collected the Secondary type of data. Though primary data is very valuable and
precious; still the importance of the secondary data cannot be overlooked. So, the researcher
collected secondary data through various books, articles, journals and other sources.

CHAPTER-2

3
 MICRO, SMALL AND MEDIUM INDUSTRIES IN INDIA: DEFINING THE SECTOR

Micro, Small and Medium Enterprises are generally defined in terms of the investment in the
plant, machinery and/or equipment, the number of people employed and annual turnover. In
India the MSMEs are defined just according to the amount of investment ceiling for Plant,
Machinery or Equipment:-

Manufacturing enterprise Service Enterprise

Micro Upto 25 lakhs Upto 10 lakh
Small Above 25 lakhs and upto 5 Above 10 lakh and Upto 2
Crore crore
Medium Above 5 crore and upto 10 Above 2 crore and Upto 10
crore crore

The employment criterion was dropped because the employment trends keep changing
seasonally; hence it is difficult to base the definition on them. m. Also, classification according
to number of people employed gives owners the incentive to limit employment to remain within
Small and Medium Enterprises. Another reason for dropping this criterion is the possible
discrimination between labour intensive and techno sophistication 6. The Indian definition does
not consider the annual turnover or variable cost but it solely bases its definition on fixed costs.
So, the micro industry which has invested 20 lakhs and had a turnover of 10 crore would still be
a micro industry if it does not choose to reinvest in the machinery or the plant. ‘The cap on plant
and machinery for the purpose of classifying the units as MSMEs does not encourage Indian
MSMEs to move up the value chain. With such low level of investment ceiling, Indian MSMEs
are either expanding laterally or engaging themselves in low-tech/low-value products. Since the
manufacturing operations are capital intensive, investment ceiling for treatment of medium
enterprises may be raised at least in the capital intensive sectors, benchmarking with such ceiling
on investment in other countries’.7

Significance

6
Princy Saini, “Study of Micro, Small and Medium Enterprise”, p.8
7
(EXIM Bank, Strategic Development of MSMEs, 2012).

4
Micro, Small and medium enterprises are an integral part of the economy. This sector is
beneficial to the poor strata of the society as it provides employment opportunity for them. SME
tap into the raw, latent entrepreneurial potential of the country acting as seedbeds of innovation.
In the pre independence period organised industrialisation did not gain much attraction but after
independence ‘in all the Policy Resolutions from 1948 to 1991, recognition was given to the
micro and small enterprises. They were termed as an effective tool to expand employment
opportunities, help ensure equitable distribution of the national income and facilitate effective
mobilization of private sector resources of capital and skills 8 Currently, there are 44.7 million
Enterprises spread across the country employing 40% of the total population. 10.6 million People
were working in this sector during 2001-02 whereas the number grew to 101 million people in
2012-13. More and more people are getting employed through new MSMEs every year,
currently making up for largest workforce after the agricultural sector.9

Micro, Small and Medium industries produces over 6000 products and services. The range of
their products vary from conventional to high tech products and thus they are able to cater the
needs of various kinds of consumers. The leading industry in the MSME Sector is Retail trade
constituting 39.85% of industries followed by Manufacture of Wearing Apparel (8.75%),
Manufacture of Food Products and Beverages (6.94%) etc. These industries are spread
throughout the country

These enterprises are spread across the country with 55% of the enterprises being located in
urban areas and the rest 45% in the rural areas in states like Uttar Pradesh, Maharashtra, Tamil
Nadu, West Bengal, Andhra Pradesh, Karnataka etc. Uttar Pradesh has about 4.4 million MSMEs
providing employment to 9.2 million people whereas West Bengal and Tamil Nadu have 3.4
million and 3.3 million MSMEs respectively. This even geographical distribution leads to
regional uniformity and inclusive growth.10

Developing countries have a large number of micro enterprises and some larger firm but far
fewer small and medium enterprises. In high income countries, small and medium
enterprises(SMEs) are responsible for over 50% of GDP and over 60% of employment, but in
low income countries they are less than half of that. This SME gap is called the missing middle.
8
(MSME Ministry Overview, 2009).
9
Princy Saini, “Study of Micro, Small and Medium Enterprise”, p.9.
10
Ibid.

5
SMEs are the foundation of advanced economy and motors of development, however they are
'underrepresented, smothered by unreasonable administrative atmospheres and poor access to
information sources'11. 'SMEs assume a noteworthy part in financial development in the OECD
(Association for Economic Cooperation and Development) region, giving the source to most new
employments. More than 95% of OECD undertakings are SMEs, which represent 60%-70% of
business in many nations. As bigger firms cut back and outsource more capacities, the heaviness
of SMEs in the economy is expanding.' 12The World Bank indicates positive connection between
the monetary development of the nation and the extent of the SME segment. In spite of the fact
that this fundamentally does not infer causation but rather it says a considerable measure in
regards to the need to concentrate on their advancement. Be that as it may, as appropriately
brought up by Muhammad Yusuf, Micro undertakings being the ones possessed by minimum
ingenious individuals acquire footing by the legislature as contrasted with their bigger, more
dynamic and profitable cousins, the SMEs. Since the vast majority of the issues confronted by
Small and Medium Enterprises are unique in relation to those confronted by Micro Ventures,
fitting arrangements are required to oblige the necessities of SMEs

Case studies

 Delhi based restaurant- Sattviko

Sattviko is a Delhi based Food Chain which serves ‘sattvik’ food which, according to
Ayurveda, is easily digestible and helps the soul. It has 5 branches across Delhi. The
founder Mr. Prasoon Gupta started Sattviko in 2013 with the help of private investors. He

11
David de Ferranti and Anthony J. Ody, 2007.
12
OECD Policy Brief, 2000.

6
 states that his previous company was shut down due to marketing and scaling problems
but finance for expansion does not continue to be a problem due to his investor relations
One problem according to Prasoon is the licensing system and the corruption that comes
with it. To start a Food industry in Delhi three licenses are required, namely ‘Food,
Safety and Security License’, ‘Health Trade License’ and ‘Police License’. He states that
it took him a lot of effort, money and 4-5 months to get these licenses. The ‘Health Trade
License’ officially costs Rs.5000 but normally, including all the bribes the amount rises
up to Rs.60000. He had to directly approach the mayor to get the license without paying
any bribe.
Another external problem he point out is the attitude of middle class society towards
young entrepreneurs in India. This, he says, is one of the biggest hurdles that the youth
faces. The middle class wants that the children be financially stable and deems
entrepreneurship risky and unpredictable. But goes on to say that, this problem cannot be
solved by external remedies, it requires change in attitudes.13

 Start up- CTAC

Xeopia CTAC is an institution which provides appropriate techno-managerial training to
students and professionals. Xeopia CTAC is an integral unit of global IT solutions
provider company Xeopia Solutions which was founded in 2012 by Abhishek Mishra
though there were financial problems due to the reluctance of banks to provide start ups
with loans, it wasn’t difficult to establish the company; but registration of the company
became a problem because if one does not get the company registered, it does not gain
credibility and if they get it registered and are unable to keep it floating, they have to go
through a tedious procedure to shut it down. They have to file for bankruptcy and go to
the Court of Law irrespective of the size and annual turnover of the firm. He also
describes how difficult it was for them to do the annual filing in March which cost them
Rs. 10-15000, because they had started the company only in January and had made no
profits
Another problem is the lack of infrastructure in the industrial areas of Delhi considering
the owner can only get his manufacturing unit registered if it is in an industrial

13
Princy Saini, ‘study of Micro, Small and Medium enterprise”, p.14.

7
(approved) area. He bought property in Faridabad Industrial area and had a really hard
time due to poor roads, lack of electricity and backup etc.

CHAPTER-3

PROBLEMS FACED BY MSMES

8
From above case studies, the researcher has come across problems that are faced by these
enterprises. Some of them are:

Finance

All the companies require capital to meet their fixed as well as variable costs but most of the
MSME owners lack required capital to establish and operate the firm, thus they have to resort to
borrowing. ‘The reliance on debt for finance depends greatly on the size of the firm. Smaller the
entity greater is the reliance on debt as a primary source of finance. Micro enterprises depend on
debt as a primary source for both early and growth stage while small and services primarily
transact in cash and tend to keep minimal records. Manufacturing enterprises and the ones with
order-driven services tend to need more finance because of longer working capital cycle and
higher capital expenditure’14

But banks are not the primary source of finance for most of the enterprises as owners find the
application process cumbersome and tedious. Also, they do not qualify for loans due to lack of
both collateral and positive balance sheets. According to IFC, the dominant source of finance is
the informal sector 95% of which constitute the non institutional sources like family, friends,
relatives etc. Institutional channels like trade credit, chit funds and moneylenders tend to be
expensive, charging interest rates ranging from 25% to 60% per annum. So their always tends to
be a debt gap which works as a huge barrier in establishment as well as operation of MSMEs.15

Marketing

Being a little substance and having a never-ending deficiency of fund, the MSMEs can't
showcase their item and in addition the huge undertakings which attempts to their drawback.
They don't concentrate on bundling techniques or deals and publicizing. The majority of the
organizations experience misfortunes amid initial five to six years only because of absence of
buyer request. In any case, in the long run they make a place in the market construct basically in
light of the nature of their item and contacts that they accumulate amid business exchanges. They
likewise utilize various types of showcasing procedures, for example, Campus Ambassador
Programs and persuasive advertising. They tie up with exchanging organizations to take in the

14
International Finance Corporation).
15
Princy saini, ‘study of Micro, Small and Medium enterprise”, p.16

9
most recent patterns in the market and contact specialists to get beginning contracts. Showcasing
additionally enormously contrasts from business to business. For instance to market sustenance
items media battles are utilized and to market middle of the road items merchants are doled out
that offer the item in various ranges. Government has propelled many plans and has different
instruments set up to help little firms in the promoting space however it keeps on being a
noteworthy issue.

Government Regulations

To enter the market or get registered as a Private Limited company one has to get various
licenses such as Service Tax Registration, PAN Card,. For the food industry there are other
licenses such as Food Safety and Security License, Health Care License and Police License.
Most of the people hire Chartered accountants and Lawyers to get registered. Even after
registration and licensing there are problems such as trade barriers. Some state governments do
not allow transportation of particular manufactured products into their states without registration
(eg. Uttar Pradesh).

Managerial Incompetence

In most of the MSMEs, the owners are managers. They do not have enough funds to hire
professional managers. Therefore, they are sometimes not able to make informed decisions
regarding technology and capital. They tend to underestimate the required capital amount, install
poor production technology or make wrong management decisions. Thus managerial
incompetence makes for a very significant factor hindering the growth of MSMEs in India.

Infrastructure

Lack of Infrastructure highly affects exporting companies as the Indian railway freight and
handling charges are very high and services very slow as compared to other countries which puts
Indian MSMEs at a competitive disadvantage.

Competition

10
SMEs are generally facing low competitiveness in terms of knowledge, innovation, prudent
investment, business operation, and good management, which are important factors required to
elevate the quality level. 16

The large enterprises have the capability of realising economies of scale and therefore reduce the
prices of their products. They also spend a formidable amount in marketing their brand either via
advertising campaigns, distributors or other means. The MSMEs are unable to do such extensive
marketing due to shortage of finance which renders them less competitive. MSMEs also face
competition from other developing countries due to globalisation and increased international
trade such as Vietnam, China, Thailand that produce the similar low cost, low value added labour
intensive products. But most of the companies do not see competition as major factor slowing
down the growth of the company. They tend to compete in quality rather than prices.

Macroeconomic Instability

MSMEs are contended to be more defenseless against financial emergency when contrasted with
whatever is left of the mechanical area because of their little size, constrained assets, fund,
learning and innovation It is a two sided hit as the credit stream stops on one hand and buyer
request diminishes on the other. Yet, all the partners concur that the impact of a financial
emergency relies on upon the foreknowledge of the business people. The ones ready to anticipate
the emergency prepare themselves fittingly to adapt to it. Its impacts likewise vary contingent
upon the field of the undertaking. For instance, as per Prasoon-the proprietor of Sattviko
restaurantspeople don't quit eating sustenance amid an emergency in this way a large portion of
the nourishment business stays safe from the emergency.

Lack of Skilled Labour

Even though MSMEs employ 40% of nation’s population, according to the entrepreneurs lack of
skilled labour is a perpetual problem for MSMEs. Educated and skilled people prefer jobs in
Large Enterprises due to higher wages and job security as compared to small industries that
cannot afford to pay very high wages. So, they have to hire unskilled people and conduct on the

16
OSMEP, 2007 a

11
job training programs. Eventually the labour tends to perform better giving better results. It is
also a challenge to retain labour as in the micro and small enterprises they generally are not
bound by formal contracts.17

Corruption

According to a report by United Nations Industrial Development Organisation, smaller the firm,
more likely it is to be affected by corruption. Further as the report pointed out and the
stakeholders agree is that more SMEs than larger firms believe that corruption is “part of the way
things work in the country”. They pay much higher percentages of annual revenues in bribes to
public officials, and make additional payments to get things done much more frequently than
large companies18. It leads to ineffective policies, inefficient bureaucracy and exploitation of the
smaller firms. But it is worth mentioning that bribery also makes things faster and easier for
many firms struggling with the registration and licensing systems.

CHAPTER-4
17
Princy saini, ‘study of Micro, Small and Medium enterprise”, p.16
18
(UNIDO Vienna, 2007)

12
 POLICIES FOR THEIR SUPPORT

The Government realises the importance of MSMEs as the seedbeds of latent entrepreneurial
talent, its significance in employment generation and its contribution in the inclusive growth of
the country. Therefore there are various policies, support measures and institutions established
for promotion and development of MSMEs. Some of them have been listed below

Financial Support

Small Industries Development Bank of India (SIDBI) provides refinance (against the loans
granted to small-sc.ale sector) to:

 State Financial Corporation (SFCs)

 State Industrial Development Corporations (SIDCs)
 Commercial Banks
 Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
 Credit Linked Capital Subsidy Scheme (Technology Upgradation)
 SIDBI Venture Capital Fund Ltd (SVCL)
 SME Rating Agency of India Ltd (SMERA)
 Indian SME Asset Reconstruction Company Ltd
 National Small Industries Corporation (NSIC) o raw material assistance scheme o NSIC
has entered into strategic alliances with commercial banks to facilitate long term
/working capital financing of the small enterprises across the country o Arrangement with
Export Credit Guarantee Corporation of India, through which it facilitates export credit
insurance for SMEs
 State Finance Corporations (SFCs)
 Exchange platforms by o National Stock Exchange (NSE) o and Bombay Stock
Exchange (BSE)
 The Securities and Exchange Board of India (SEBI) had permitted setting up of a stock
exchange trading platform for SMEs by a recognized stock exchange having nationwide
trading terminals and had also issued guidelines and necessary amendments to the SEBI
Regulations.19
19
National institute for micro, small and medium enterprise, “MSME Schemes”, p.1-5.

13
Technological Support

Delhi Commissioner MSME (DCMSME), MSME Ministry, GOI, serves as an umbrella

organisation for the support provided to MSME sector.

Institutions under DCMSME:-

 30 MSME Development Institute (DIs)

 28 Branch MSME- DIs o 4 MSME Testing Centres
 7 Field Testing Stations o 18 Autonomous Bodies- 10 MSME Tool Rooms
 6 MSME Technology Development Centres
 2 MSME Footwear Institute
 2 Dept. Training institutes

Policy guidelines have been issued by MSME ministry for technological support of MSMEs
through:-

 programmes like National Manufacturing Competitiveness Programme (NMCP)

 organisations like KVIC (Khadi Village Industries Commission) and NSIC

CHAPTER-5

CONCLUSION

14
Small and Medium Enterprises (SMEs) contribute to economic development in various ways
such as creating employment opportunities for rural and urban population, providing goods &
services at affordable costs by offering innovative solutions and sustainable development to the
economy as a whole. SMEs in India face a number of problems - absence of adequate and timely
banking finance, non-availability of suitable technology, ineffective marketing due to limited
resources and non-availability of skilled manpower. The Micro, Small and Medium Enterprises
(MSME) sector contributes significantly to manufacturing output, employment and exports of
the country. It is estimated that in terms of value, the sector accounts for about 45 % of the
manufacturing output and 40% of total exports of the country. To make this sector to become
more vibrant and significant player in development of the Indian economy the Government of
India has taken various initiatives. The definition and coverage of the MSME sector was
broadened MSME Development Act 2006 which recognized concept of 'enterprise' to include
both manufacturing and service sector besides defining medium enterprises setting up a Board
for developing policy frameworks and indicating procurement policy.

BIBLIOGRAPHY

Books

15
 P.M.Matthew, “MSME Definition in India: The Present state and the Perspectives”,
FICCI-CMSME and ISED, 2014
Articles

 National institute for micro, small and medium enterprise, “MSME Schemes”, p.1-5.
 Princy saini, ‘study of Micro, Small and Medium enterprise”, p.16
 David de Ferranti and Anthony J. Ody, 2007
 MSME Policy Brief, 2000

16