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Submitted By: Ravi Kant Khandelwal

MSME: An MSME (Micro, Small and Medium Enterprise) is defined by RBI/GOI differently for the Manufacturing and the Services Sector, as follows: MANUFACTURING SECTOR: Manufacturing sector refers to enterprises engaged in manufacture or production, processing or preservation of goods. The definition of Micro, Small and Medium Enterprises under the manufacturing sector is based on the Investment in plant and machinery [original cost
excluding land and building] and the items specified by the Ministry of Small Scale Industries.

Services sector refers to enterprises engaged in providing or rendering of services. These will include small road & water transport operators (owning a fleet of vehicles not exceeding ten vehicles), small business (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lakh) and professional & self-employed persons (whose borrowing limits do not exceed Rs.10 lakh of which not more than Rs.2 lakh should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lakh with a sub-ceiling of Rs.3 lakh for working capital requirements). The definition of Micro, Small and Medium Enterprises under the services sector is based on the enterprise s investment in equipment s. Service sector is having the highest contribution in the GDP of the country around 52% and it is one of the fastest growing sectors, so creation of more and more opportunities in this sector is very important task for Indian government.

The President under Notification dated 9th May 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, namely, MINISTRY OF MICRO, SMALL AND MEDIUM INDUSTRIES.


MSMEs have an important role to play in the present context given their greater resource use efficiency, capacity for employment generation, technological innovation, promoting intersectorial linkages, raising exports and developing entrepreneurial skills. Their location flexibility is an important advantage in reducing regional imbalances. Small and Medium Enterprises play a vital role for the growth of Indian economy by contributing 45% of the industrial output, 40% of exports, 59 million in employment in over 26 million units, create one million jobs every year and produces more than 6000 quality products for the Indian and international markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors.

PRODUCTS: The Indian market is growing rapidly and Indian industry is making remarkable progress in various Industries like Manufacturing, Precision Engineering, Food Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are finding increasing opportunities to enhance their business activities in core sectors.

As it is clear from the above pie chart almost 36% are the products of the category which includes medical, hygienic products, marine products etc. Almost all the products produced in MSME s are of day to day utility and since we are the world s second largest population so reach of the products in every household is still not there. There are large number of employment opportunities in this sector.
INVESTMENTMENTS AND EXPORTS: As the investments in the agriculture and industrial sector have seen a growing trend so the investments in MSME have also been increasing and reached Rs. 621753 Crore in FY ending 2009 showing a 11.39 percent increase. As MSME largely relates to the manufacturing and agriculture it plays a very important role in exports of the country. MSME s have been showing a growing trend in the amount of exports made. In year 2008 the amount of exports made was Rs. 202017 crore showing a growth of 10.67 percent.

EMPLOYMENT: As per the 4th census with respect to year 2006-2007, there were about 261 lakh enterprises providing employment to 595 lakh people. The projected corresponding figure for year 2008-09 was 285 lakh enterprises providing employment to 659 lakh people. The following chart depicts the trends of employment shown by MSME s.

The contribution made my MSME s show the importance of such enterprise for the economy. The following points can be derived: y MSMEs play a major role in the country's economic development through their contribution in the following: rural industrialization; rural development and decentralization of industries; creation of employment opportunities and more equitable income distribution; use of indigenous resources; earning of foreign exchange (forex) resources; creation of backward and forward linkages with existing industries; and entrepreneurial development. They are vital in dispersing new industries to the countryside and stimulating gainful employment. A country like the India where labor is abundant has much to gain from entrepreneurial activities. MSMEs are more likely to be labor-intensive. Thus, they generate jobs in the locality where they are situated. In this sense, they bring about a more balanced economic growth and equity in income distribution. MSMEs are quick in assimilating new design trends, developing contemporary products, and bringing them to the marketplace ahead of the competition. MSMEs tend to be far more innovative in developing indigenous or appropriate technology, which may be grown later into pioneering technological breakthroughs.

They are able to effectively increase the local content or the value added in final goods that are processed and marketed by large manufacturing firms. MSMEs are notably skillful in maximizing the use of scarce capital resources and are able to partner with large firms by supplying locally available raw materials in unprocessed or semiprocessed forms. MSMEs can act as the seedbed for the development of entrepreneurial skills and innovation. They play an important part in the provision of services in the community. They can make an important contribution to regional development programs.


MSME possess various strengths and weaknesses give below. STRENGTHS: y The MSME sector is often driven by individual creativity. A major strength of the sector is its potential for greater innovation both in terms of products and processes. An inherent strength of the sector is that these enterprises can be set up with very small amounts of investments and have the locational flexibility to be located anywhere in the country. Their employment potential is higher compared to large enterprises and are presently estimated to employ 6 crore persons. They are amenable to ancilliarisation and thus have natural linkages with large enterprises. There exists a strong institutional structure at the State and Central level for the promotion and development of the sector. There is a well-spread network at the National, State and the local level for providing a comprehensive range of support services under marketing, technology, finance, and infrastructure and skill development. The existing schemes/programs of the Central and State Governments span across major areas of operations of MSMEs. These are administered by a workforce who are qualified but can be upgraded with additional inputs. An apex consultative body has been set up at the national level, namely, National Board for MSMEs, comprising of representatives of all sections of stakeholders for providing guidance/inputs in policy formulation and program implementation.

At every district level they have set up DIC s(District

WEAKNESSES: y Of the 2.6 crore enterprises, a predominant number is in the unorganized sector, often located in non-conforming urban zones. The sector is heterogeneous with pockets of high technology enterprises but majority suffering from low technology base resulting in low productivity and poor quality of products. The units being small in size also have poor access to equity and credit. Most of the time, the equity is coming from savings and loans from friends and relatives rather than through banking systems. Very often, the credit is coming from operations or domestic savings rather than established systems of cheap banking credit for working capital. This problem is particularly acute for the village industries as well as the lower end of micro industries. While we have large pool of human resources, this sector continues to face shortage of skilled manpower due to lack of paying capacity and poor managerial capabilities. Another major weakness is absence of marketing channels and brand building capacity. The present structure also suffers from poor delivery of services at the field level. The schemes and program have limited outreach with a large number of very small schemes. There is a lack of coordination among the various organizations involved in the promotion of MSMEs, including organizations of the State/UT Governments and poor linkages with the institutional stakeholders in the private sector. Absence of a suitable exit mechanism is a major constraint for the higher end entrepreneurs of the MSME sector. A major weakness is a heritage weakness. Due to the protectionist, subsidy- driven, reservation based regime, the mindset of the sector continues to demand similar legacy treatments.

Despite its commendable contribution to the Nation's economy, SME Sector does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap in becoming more competitive in the National and International Markets. The MSMEs face problems at every stage of their operation. These industries are therefore not in a position to secure the internal and external economies of scale. The major problems confronting the sector have been identified as:


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.

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-today 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.


There is lack of trained and experienced employees because small firms cannot pay high salaries and cannot spend much on training their employees. Small scale firms find it difficult to recruit and motivate skilled managerial and technical personnel as they look for better opportunities in the large scale industries. Therefore, they get the second rate talent or have to depend on family members who do not have diversified skills.


Small scale units have to face several difficulties in the marketing and distribution of their products. Most of them do not have their own marketing network. They find it difficult to sell their output at remunerative prices due to higher cost of production and non-standardized quality of products. They cannot afford to spend much on advertising, sales, promotion, marketing research, etc. They have to sell their products at throwaway prices due to weak bargaining power and immediate need for money. They also face stiff competition from large firms.


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 equipment and are therefore not in a position to use the latest techniques of production. 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.