International Conference on Technology and Business Management March 18-20, 2013 Problems affecting the growth of small and

Medium Enterprises (SMEs) in India Small and Medium Enterprises (SMEs) play a pivotal role in the development of the country. It has made significant contribution to industrial production, export and employment generation. In developing countries as well as developed countries they are important from the point of view of employment generations, which is very important in countries like India with huge backlog of unemployment in the urban sections of the economy. It has been observed that their composition depends upon the way the production is being organized in the economy .However in India Government deliberately planned the growth of SMEs to achieve certain economic and non-economic objectives. India has registered a consistent high economic growth (6-9%) over the last decade and was able to survive and sustain world recession triggered in 2008. For the sustainability of this kind of growth proper nurturing of SME sector is imperative. This paper will detail various challenges being faced by Indian SMEs, the role of government in upliftment of staggering Indian SMEs as well as the impact of government initiatives and policies on the upliftment of Indian SMEs. This paper also highlights the recommended solutions so that SME sector is empowered to perform better and prosper in domestic and international arena. However there are certain distinctions to be made regarding providing protection as the same time not hampering their growth pattern by providing extra shield or subsides, tax evasions for these SMES. It further discusses the stand taken by the World Bank and International Finance Corporation in regard to the market oriented strategy directedfor SMEs. 1. Introduction SMEs are vital and of paramount importance in the development of any country especially developing country like India.Small and Medium Enterprises (SMEs) play a pivotal role and can be considered as a back bone of national economy (Peters and Waterman, 1982; Amini, 2004;Radam et al., 2008). SMEs in emerging markets rely on more labor-intensive production processes than large enterprises, boosting employment and leading to more equitable income distribution (Luetkenhorst, 2004).It is evident that nurturing the SMEs in any country would have fruitful results on the income generation and employment in aneconomy. The degrees to which the SMEs can flourish by overcoming obstacles are important for the expansion and upliftment of the economy. According toWorld Bank,SMEs account to 50 % of GDP and to quote EU, it highlights the role of SMEs as two-third of employment.In India, SMEs has made significant contribution to the economy:

-40% to the GDP and account for more than 90% of all industrial enterprises in India.

SMEs are able to make their presence felt mostly because of the simple structure of an they can respond quickly to changing economic conditions and meet local customers needs, growing at times into large and powerful corporations or failing within a short time of the firms inception. To manage, recognize, and mitigate the credit risks at the earlier stages can be beneficial for financial institutions in identifying possible defaults of the enterprise and reduce losses incurred by the financial institutions.RoopaKundra, CEO Crisil, foresees Indian SMES as SME will be a very big growth engine in Indiaand adequate measures like proper rating assigned to them which willaid them to get access to bank loans . Similar views are shared by Small and Medium Business DevelopmentkjChamber of India(SMBDCI) which states that Indian SMEs also play a significant role for nation development through high contribution to Domestic Production, Significant Export Earnings, Low Investment Requirements, Operational Flexibility, Location Wise Mobility, Low Intensive Imports, Capacities to Develop Appropriate Indigenous Technology, Import Substitution, Contribution towards Defense Production, Technology Oriented Industries, Competitiveness in Domestic and Export Markets and Generate new entrepreneurs by providing knowledge and training. Rapid development and recent financial crisis in international financial markets lead regulatory bodies to establish some common supervisory standards for both financial institutions, providing credits to the firms, and International Conference on Technology and Business Management March 18-20, 2013 non-financial companies, operating in a highly competitive environment, to accomplish the market discipline and effective global risk management all over the world. On this respect, Basel-II capital adequacy standards, was developed by the Basel Banking Committee on June 2004. The overarching goal for the Basel II Framework is to promote the adequate capitalization of banks and to encourage improvements in risk management, thereby strengthening the stability of the financial system. At the same time, they also forced the SMEs to establish a sound corporate structure for financing their operations, reporting the financial results and managing their risks so as to install a healthy relationship with their creditors.SMEs in fact do have the potential and momentum to inculcate innovations,competition-both domestic and international,job creation and stability in an economy.From time to time Indian Government have realized the importance as wellas the potential these SMEs can unfold and therefore has been quite proactive in protection and nurturing of these budding SMEs. 2. Definition of SMEs in India According to the SME Whitebook 2011-2012, the MSMEs (Micro, Small, and Medium Enterprises) sector has consistently registered higher growth than the rest of the industrial sector. A significant number of the MSMEs depend on the agriculture, horticultural, forest andnon-forestproduce. They do generate much required employment and thus prevent mass migration from the rural to urban areas thus reducing the clutters and burdenon Tier 1 and Tier 2 cities in India.According to the SME Times News Bureau (August 2012), In India, SME definition is based not on number of employees but on amount of investment. Most Indian SMEs are labor-intensive and employ more than the prescribed workers as defined by European countries. Although European Union offers abundant fee concession to SMEs, but as the definitions of what constitutes an SME differs in India and Europe; most Indian SMEs do not fall under the SME category as defined by European countries.

Micro, small and medium enterprises as per MSME Act, 2006 are defined based on their investment in plant and machinery (for manufacturing enterprise) and on equipment for enterprises providingor rendering services. The defined limit on investment for enterprises to be classified as micro,small and medium enterprises is as follows: Classification Manufacturing Enterprises Service Enterprises Micro Rs. 2.5 million / Rs. 25 lakh Rs. 1 million / Rs. 10 lakh Small Rs.50 million / Rs. 5 crore Rs. 20 million / Rs 2 crore Medium Rs 100 million / Rs 10 crore Rs. 50 million / Rs 5 crore 3. Role of SMEs in Indian Economy In order understand the impact of SMEs on the Indian economy; one must study the trend and pattern that have been prevalent in the preceding years. It gives us the vivid picture of what follows next. Following graphics help us to understand the present scenario and their contributions of MSMEs in India (graphs from MSME Annual Report 2011-2012). As evident by the information depicted by the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07 in the following graph the food products and wearing apparel constitute the major production of India SMEs. As quoted by prominent SME magazine SME Mentor (Mar 14 2012) The food processing industry has emerged as one of the sunrise sectors in India where small and medium enterprises (SMEs) could play a vital role in fulfilling various socio-economic objectives, such as employment generation and export promotion, besides fostering entrepreneurship. Despite several factors ranging from unrealistic government approach to dearth of skilled manpower marring the growth prospects of SMEs, entrepreneurs are showing their mettle by changing their business strategies. The sector serves the vital function of linking the agricultural and industrial segments of the economy. There

are certain measures taken by the government to promote as it calls for attention as this sector has the potential to transform the rural landscape of India by improving the value of agricultural produce, ensuring better remuneration to farmers, and at the same time, creating favorable demand for Indian agri-products in the world market. International Conference on Technology and Business Management March 18-20, 2013 415 Source: Final Report of the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07: Registered Sector.

As projected above we observe that the SMEs or MSMEs in India continues to grow a growth trajectory from the last decade. It rose considerably in 2006-2007 from 261.12 points to 311.52 in 2010-2011. This is a remarkable jump in the number of MSME or SMEs in India. * Projected data for the year 2009-10 to 2010-11. Source: Government of India, MSME Annual Report 2011-2012International Conference on Technology and Business Management March 18-20, 2013 416

analysis of SMEs in India 4. Challenges of SMEs in India Despite their high enthusiasm and inherent capabilities to grow, SMEs in India are also facing a number of problems like sub-optimal scale of operation, technological obsolescence, supply chain inefficiencies, increasing domestic and global competition, fund shortages, change in manufacturing strategies and turbulent and uncertain market scenario. To survive with such issues and compete with large and global enterprises, SMEs need to adopt

innovative approaches in their operations. There are a certain setbacks which continue to hamper the growth of SMEs in India. To list a few: eceive timely and adequate finance at the agreeable conditions is a tedious and cumbersome exercise for both established as well as budding SMEs. According to the Indian government survey, 90%of the total Micro units in India procure funds from friends, lenders and private lenders only. The occurrence of financial barriers, such as difficulty in acquiring the necessary funds to initiate or finance the project is a prime hurdle. As per Weaver and Pak, 1990; Kaleka and Katsikeas, 1995; Dicle and Dicle, 1992, Credit unworthiness and transaction costs are reported as major factors that reduce access to credit. There are certain measures taken to combat this problem.To quote the SME world, a prominent magazine for the Indian SMEs (January 2013),.Ignoring the past, now SMEs will be getting collateral free loan under CGFTMSE Scheme upto Rs One Hundred Crores in all deserving cases and that loan procedures are now put on fast track unlike earlier cases.The loans are now available as subsidized credit and the terms of loans are equally made favorable for the promising as well as budding SMEs in India. Basel IIrecommendation (which is been followed by RBI in Indian banks) creates a favorable condition for SMEs to flourish as it advocates modeling credit risk specifically for SMEs and International Conference on Technology and Business Management March 18-20, 2013 417 encourages the bank to increase the percentage of SMEs managed as retail assets as much as possible, considering the regulatory limit. One of the main results of Basel II will be to motivate banks to update their internal systems and procedures in order to be able to manage SMEs on a pooled basis through the use of a scoring, rating or some other automatic decision system. These procedures will be important in managing SMEs as retail accounts and aid them in getting favorable credit from banks. According to survey by India Mart knowledge services, liquidly alone accounts for major hurdle for the

Indian SMEs.

marketing and promotions.Internet has in fact rendered a positive role and impact on Indian SMES as it has opened new ventures and expanded the horizons for SMEs. Online business to business (B2B) marketplaces could perhaps provide a viable solution to problem of creating of abundant market access as they promote instant access to global markets, market and industry knowledge in terms of the kind of products and services in demand. In recognition of the need for making finance available to Small and Medium Enterprises (SME) to tap/access capital markets, SEBI had decided to encourage promotion of dedicated exchanges and/or dedicated platforms of the exchanges for listing and trading of securities issued by SME. In continuation of the same and to facilitate listing of specified securities in the SME exchange, SEBI has specified the Model Equity Listing Agreement for execution between the issuer and the Stock Exchange, to list/migrate the specified securities on SME exchange, vide its circular dated May 17, 2010. Sales growth of SMEs vs. Expected growth in 2011 in Textile SMEs Source: India MART knowledge services e prime most component in competing in domestic markets as well as the international market.Though Indian government has set up a technology up gradationfund to help the SMEs lagging behind. It is imperative for SMEs to adopt information and communication technology applications. Lack of IT Support is big hurdle which hinders the SMEs in upgrading themselves to complete the global and domestic markets. It is expensive affair and SMEs are unaware of the latest soft wares and up gradations .There is also strong shortage of skilled IT and management personnel who can help SMEs to tide over problems. 0.28 0.52

0.2 0 0.2 0.4 0.6 Liquidity Crunch Low response from customers Lack of infrastructure Key Challenges faced by SMEs (Source: IndiaMART knowledge services) 0 20 40 60 80 Growth of more than 20% Growth of between 0-20% Decreased in Sales 30.77 38.46 30.77 61.54 30.77 7.69

Sales growth in 2010International Conference on Technology and Business Management March 18-20, 2013 418 Barriers to technology adoption in auto-component SMES Source: D&B Research ty, proper location of the SME setup. These all factors help in reduce cost of procurement of resources and thus lowering the production cost for the SMEs. The true responsibility in fact does rely on government for better development of infrastructure and amenities in the states. Healthcare SMEs Most find lack of physical infrastructure as the main challenge Source: India MARTknowledge service

is a global market.SMEs have in fact helped to earn certain foreign exchange via exports and for that they have to take proactive view on the prevailing opportunities and demand in international market. Proper marketing knowledge and information are two of export problems which revolve around lack of knowledge of foreign markets, business practices, competitions and lack of management to generate foreign sales. Lack of knowledge to locate foreign opportunities and promising markets is perceived to be a major barrier in exporting of SMEs in developing countries (Dymsza, 1983; Bodur, 1986; Karafakioglu, 1986; Weaver and Pak, 1990; Li, 2004). Furthermore, several publications show that experienced and inexperienced SME exporters in developing countries believe that poor knowledge of potential marketshinders their export activities (Brooks and Frances, 1991; Kaleka and Katiskeas, 1995; Weaver andPak, 1990; Burgess and Oldenboom, 1997).Information about exporting and more specifically market information were mentionedas the most serious problem of manufacturing firms in developing countries (Weaver and Pak, 1990;Figueiredo and Almeida, 1988; Brooks and Frances, 1991; Kaleka and Katsikeas, 1995).International Conference on Technology and Business Management March 18-20, 2013

419 n as a barrier: A few of researchers who found that competition is a barriers for company are Burgess and Oldenboom (1997), Fluery (1986), Kaleka and Katsikeas (1995), Karafakioglu (1986), Hasan (1998). Price competition (Fluery, 1986), lack of competitive prices and fierce competition in export markets (Kaleka and Katsikeas, 1995; Karafakioglu, 1986; Hasan, 1998) were reported as export barriers. Especially small firms are vulnerable because their limited financial and human resources hamper the collection of adequate information (Burgess and Oldenboom, 1997). According to R Narayan, CEO of Power2sme, limited size and inefficient negotiation capability hamper ability to get optimum procurement prices. Also there is lack of automation as the software tools required to automate non-coreprocesses (HR, Admin, Purchasing etc.)are either too expensive or do not cater to the unique requirements of the SMEs.(source: SME World ,Jan2013). Hallberg, Kristin in his report A Market Oriented Strategy for Small and Medium Scale Enterprises by World bank, talks about various hurdles which rock the SMEs in developing countries like barriers to entry and non-competitive behavior in markets where SMEs are potentially competitive butexpensive and time consuming regulatory requirements levied on SMEs like licensing, registration etc...,legal framework for various commercial transactions as well as government procurement procedures discourages successful bidding by SMEs. These are the issues that Indian Government needs to focus to evolve a better, balanced approach and policies for the development and enrichment of Indian SMEs. SMBDCI shares the same concern over the problems faced by Indian SMEs. It states that despite its commendable contribution to the nation's economy, SME Sector has indeed failed to get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap

and hindrance in becoming more competitive in the National and International Markets . SMEs continue to fight against many odds like- absence of adequate and timely banking finance, limited capital and knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy, identification of new markets, constraints on modernization & expansions, non - availability of highly skilled labor at affordable cost, follow-up with various government agencies to resolve problems etc. Initiatives which are taken by Indian Government in order promote SMEs in India One of the prominent steps in this regard is indeed setting up of MSME Act 2006.As a result of the globalization and liberalization of the economy, the units in the sector were increasingly called upon to face new and bigger challenges not only from MNCs etc. but also from bigger domestic players. Recognizing the dynamics of the new environment in which these units were operating, MSME now focuses on providing support in the fields of skill development, credit, marketing, technology and infrastructure. The emerging global trends and national developments have transformed the role of the organization into that of catalyst of growth of small enterprises in the country. Certain measures like Loan subsides for SMEs, Listing of SMEs on national stock exchange like NSE (titled EMERGE) and BSE were taken by Indian Government and SEBI in order to promote and safeguard the SMEs against staggering growth. According to the latest data quoted by SME World (January 2013),listings of SMEs on stock exchange is a step in the right direction for the SMEs who are looking to raise financial resources but have to struggle with apathy of the Indian Financial system as there is huge number of regulatory

approvals. SEBI has ensured that the regulations to ensure smooth listing of SMEs on the exchange. There are major benefits that SMEs enjoy on SME exchange listing like minimum paid up capital, minimum subscription and no minimum years profit track record required for listing. There is a need for the listing of SMEs through over the counter exchange in India(OTCEI) as advocated by Banerjee , Ayan12, The efforts of reviving OTCEI is a robust equity program for SMEs and goes far into making India a strong capital market center and a global power to reckon with.SEBI has finalized and specified the Model Equity Listing Agreement for execution between the Small and Medium Enterprise (SME) issuer and the Stock Exchange 13. The Ministry of Micro, Small and Medium Enterprises (MSME) is operating a Scheme namely Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Up gradation of Micro and Small Enterprises. The Scheme aims at facilitating Technology Up-gradation of Micro and Small Enterprises (earlier known as Small Scale Industries). The revised scheme aims at facilitating Technology Up gradation of Micro and Small Enterprises by providing 15% Capital Subsidy (limited to maximum 15.00 lakh) for purchase of Plant & Machinery. Presently, 884 technologies under 48 products/ sub-sectors have been approved under the scheme. Credit Guarantee Fund Scheme was setup for Micro and Small Enterprises with the objective of making available credit to SMEs. Loans up to Rs. 100 lakh without Collateral/third party guarantees were provided to International Conference on Technology and Business Management March 18-20, 2013 420 SMEs. The scheme is being operated by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up jointly by the Government of India and SIDBI.

The Micro and Small Enterprises Cluster Development Programme (MSE-CDP) is being implemented for holisticand integrated development of micro and small enterprises in clusters through Soft Interventions (such as diagnostic study, capacity building, market development, export promotion, skill development, technology up gradation, organizing workshops, seminars, training, study visits, exposure visits, etc.), Hard Interventions (setting up of Common Facility Centers) and Infrastructure up gradation rate/upgrade infrastructural facilities in the new/existing industrial areas/ clusters of MSEs). 5. Facts versus Myths SMES have tough time rolling through the processes and circumstances is indeed a fact and that the government has taken many measures and actions to safeguard them. But the concern that Is the over protection, leverage, extra subsides entrusted by the Government of India on Indian SMEs has really helped them to develop or in fact hampered their growth as in order to avail huge benefits,some of the SMEs make deliberated , calculated attempt to not to come out oftheir SME status. Perhaps they become more contended in their cocoon of shields bestowed on them by the government. There are indeed many contradictory reports which highlighted the other aspect of the growth hindrance in SMEs. The World Bank report by International Finance Corporation A market Oriented Strategy for the Small and Medium Scale Enterprises by KristinHallberg in fact highlighted that despite the success of SME strategies in a few countries, the majority of developing countries have found that the impact of their SME development programs on enterprise performance has been less satisfactory. Certain importance questions like

Should SMEs be singled out for assistance? And if there is a justification for the government intervention, then what form should that intervention take?. It discusses the various Myths versus the reality in terms of government intervention to promote SMEs. According to the report, Government initiatives to promote SMEs are often result to social and political considerations and not on economic grounds. The growth of the small firms is seen as part of the process of democratization, regional upliftment or to achieve social stability. There is less empirical evidence supporting the claims that growth of SMEs and poverty reduction are wholly depended on each other. Perhaps they are the justification to promote the policies and subsidies in favor of SMEs.The real reason that the developing country government should be interested in micro enterprises and SMEs is because they account for alarge share of firms and employment in other words they are there(Little, Mazumdar , and page(1987). The report advocates the evolvement ofa market oriented strategy for improving SMEs which would include better accessible financial services like Interest rate ceilings, regulations governing leasing, venture capital etc which are aimed at reducing the risks and transactions cost, and promote financial institutions that find lending to SMEs to be profitable and therefore sustainable. However focus is also drawn on various directed and subsidized credit programs who have done little to achieve their fundamental objective i.e to increase the access of small enterprises to financial services but they have in process inhibited the development of sustainable financial institutions and promote a non- repayment culture among the SMEs. In fact credit subsides often result in creating distortions in the financial markets as they discourage firms from

using noncredit forms of financing. The report states that for a fruitful business environment which includes better competition policy, flexibility in the implementation of regulations as this promotes open access to markets and accelerate market development. The role of business development services which includes a variety of non-financial services like labor and management training, consultancy and counseling, marketing and information services and technology development programs these all focus on developing markets for services that are appropriate to and demanded by SMEs. 6. References 1. Government of India: MSME Annual Report 2011-2012 2. Hallberg, Kristin (2012): A Market-oriented strategy for Small and Medium scale enterprises (International Finance Corporation) The World Bank Washington,D.C 3. The SME Whitebook 2011-2012 (Businessworld),New Delhi. 4. Raju, Dr. B. Yerram and Nataraj, P.R. Mohan (2008): Small and Medium Enterprises in India (Indian Institute of Banking and Finance) 5. Khalique, Muhammad, Abu Hassan Md. Isa Challenges faced by the small and medium enterprises in Malaysia: Intellectual Capital perspective. International Journal of Current Research Vol. 33, Issue, 6, pp.398-401, June, 2011.International Conference on Technology and Business Management March 1820, 2013 421 6. Siringoringo, Hotniar , Hotniar Problems faced by small and medium business in exporting products Delhi Business Review X Vol. 10, No. 2 (July - December 2009) 7. SME World Magazine: Singular voice of MSMEs (www.smeworld.org) 8. Siringoringo, Hotniar and Prihandoko and Tintri, Dharma and Kowanda, Anacostia (2009): Problems

faced by Small and Medium business in exporting products (Delhi Business Review Jul Dec 2009) 9. Javalgi, Raj and Todd, Patricia and Granot, Elad (2011): The internationalization of Indian SMEs in BtoB markets (Journal of Business & Industrial Marketing) 10. Khaliquem Muhammad and Isa, Abu Hasan Md. and Shaari, Jamal and Ageel, Adel (Jun 2011): Challenges faced by the SMEs in Malaysia: An Intellectual capital perspective (International Journal of Current Research) 11. Live Mint and Wall street journal, (Dec 17 2012).SME segment will be Indias growth engine: RoopaKudva. Available at http://www.livemint.com/Companies/HYnYwDfgtU5yEDvx6ercOL/ SME-segment-will-be-Indias-growth-engine.html. 12. Small medium business development chamber of India , available at http://www.smechamberofindia.com/About_MSMEs.aspx 13. SME Times magazine ,India asks EU to change SME definitionSME Times News Bureau( 16 Aug, 2012) Available at http://www.smetimes.in/smetimes/news/top-stories/2012/Aug/16/india-asks-eutochange-sme-definition74273.html 14. Banerjee,Ayan.Capital market access to SMEs in India http://ssrn.com/abstract=962033. 15. SMEs Access to Capital Market, 16 AUGUST 2010, Afro Asian business chronicle, available at http://www.aabc.co.in/india/580-smes-access-to-capital-market.html. 16. Edward I. Altman ,The Impact of Basel II on SME Risk Management Small Business Banking and Financing: a global prospective,25-26 May 2007,Cagliari - Italy 17. Morris, Sebastian and Basant, Rakesh, Small and Medium Enterpriese in India Today Overcoming policy constraints to achieving rapid growth in a Globalising economy Jul 2006, IIM Ahmedabad