A Study of The Role Played By SMEs in

Indian Economy and Its Future Prospects

A PROJECT REPORT Submitted by

JAYKISHAN JOSHI

[BATCH 2008-10]

[08024]

To
Director (PGDM)

In partial fulfillment of the requirements of

Tolani Institute of Management Studies, Adipur

For the award of the degree of

Post Graduate Diploma in Management

Tolani Institute of Management Studies

Adipur – 370205

January 2010

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1.1 Introduction:
This project is an endeavor towards understanding the contribution of SMEs in the
growth of our economy and to understand the ecosystem in which SMEs work. The study
will draw attention towards the opportunities and challenges for SMEs along with the
current role played by Government in SME sector.

India has been home to SMEs since prehistoric times. The earliest mention of them was
found at the time of first Indian Emperor “Chandragupta Maurya”. At that time small
enterprises were built by trading classes who were known as “Vaishya”.1

Since Independence India has moved from a moderate growth path of the first three
decades (1950 to 1980) to a higher growth trajectory since 1980s. Over the last two and a
half decades, India has emerged as one of the fastest growing economies of the world;
averaging about 6 percent growth rate per annum and ranking of the country in terms of
size of the economy, especially Purchasing Power Parity (PPP) Terms have improved in
the last three years. We have averaged a growth rate of 8 percent and the yearly variation
in growth in is low.

With the advent of planned economy from 1951 and the subsequent industrial policy
followed by Government of India, both planners and Government earmarked a special
role for small-scale industries and medium scale industries in the Indian economy. The
process of liberalization since 1991 has brought challenges as well as bouquet of
opportunities. The challenges include intense competition which makes imperative for
the enterprises to maintain, improve and sustain competitiveness through lower cost,
improved quality, making available wider choice. The opportunities include expansion of
business by entering into new markets both in terms of products and geography.

The Indian Industrial economy is characterized by a dynamic and versatile set of

enterprise actors, who are small and medium in terms of scale of operations. This SME
category has been leading a typical competitive advantage to Indian industry in terms of
controlling sufficient markets globally. It is because of their ability to make available

2
low-volume customized products, flexible response and lower fixed overhead costs. The
other typical behavior of these SMEs is that in most of the cases depending upon their
specialization, they have evolved as clusters.

1.2 Definition of Micro, Small and Medium Enterprises:

In India the industries are defined into broadly two categories:
(i) Manufacturing
(ii) Services
Both have been further classified into micro, small and medium enterprises based on
investment in plant and machinery (manufacturing) or on equipments (services)
excluding cost of land and building.

TABLE 1: CLASSIFICATION BASED ON INVESTMENT

MANUFACTURING SERVICES
MICRO <Rs. 25 LACS < Rs. 10 LACS
SMALL 25 LACS TO 5 CRORES 10 LACS TO 2 CRORE
MEDIUM 5 CRORE TO 10 CRORE 2 CRORE TO 5 CRORE
Source: MSMED Act 2006, vide notification: RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated April
4, 2007.

SME SNAPSHOT:
Indian SME Sector
No. of units: 133.68 lacs (2007-08)
Employment generated: 322.28 lacs (2007-08)
Percentage share in GDP: 5.94 (2006-07)
Production by registered & unregistered units: Rs 700000 crore(2007-08)
Exports: Rs 150242 (2005-06)
Source: Annual Report, 2008-09, Ministry of Micro, Small and Medium Enterprises, www.msme.gov.in
Handbook of Statistics on Indian Economy (2009), Reserve Bank of India

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 TABLE 2: SME CLASSIFICATION:
CLASSIFICATION
1)LOCATION RURAL AREAS
URBAN AREAS
METROPOLITAN AREAS
BACKWARD AREAS

2) ORGANIZATION PROPRIETORY
PARTNERSHIP
LIMITED

3) INDUSTRY STATUS SMALL SCALE

ANCILLIARY
SMALL SERVICE ESTABLISHMENTS

4) ACTIVITY STATUS MANUFACTURING

PROCESSING

5)OWNERSHIP STATUS S.C ENTREPRENEUR

S.T ENTREPRENEUR
WOMEN ENTREPRENEUR
Source: http://www.dcmsme.gov.in/ssiindia/statistics/statusSSI.htm

1.3 Significance of SMEs:

Provides low cost employment since the unit cost of persons employed is lower for
SMEs than for Large Scale Enterprises (LSEs).

Assists in regional and local development since SMEs accelerate rural
industrialization by linking it with more organized urban sector.

4

Help achieve fair and equitable distribution of wealth by regional dispersion of
economic activities.

Contribute significantly to export revenues because of the low cost labour intensive
nature of its products.

Have a positive effect on the trade balance since SMEs generally use indigenous
raw materials, reducing dependence on imported machinery, raw material or labour.

Assist in fostering self-help and entrepreneurial culture by bringing together skills
and capital through various lending and skill enhancement schemes.

Converts the raw material within the country into semi-finished items and later pass
it on the LSEs that have capital, skill and equipment to process these into finished
goods.

Provide rural people an opportunity for income generation and personal growth
since they can work at home. This helps to achieve fair and equitable distribution of
wealth by creating nationwide non-discriminatory job opportunities.2

1.3.1 SME: The power of being small

Being small gives them the greater flexibility in operations to respond quickly to
changing customer needs.

They can create new market space rather than competing in an existing industry which
makes the competition irrelevant. They can also seek greater value to customers and low
cost simultaneously. Hence they can align the whole system of a firm’s activities in
pursuit of differentiation and low cost.

In SMEs the proprietor is the decision maker whereas in big companies go through
multi layer operation before arriving at a decision. Hence decision making is faster in
SMEs as compared to big corporates.

Low budgets make them crave for innovation and cost effectiveness.

The small businesses are remarkably flexible because they operate near the customer,
thus it has the ability to adapt according to the ever changing needs of the customer3

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2. Research methodology:

Objectives:
Primary
1. To recognize the contribution of SMEs in the growth of Indian Economy

Secondary:
1. Role played by Government in promoting SME currently and analysis of the same
with suggestions for future
2. Challenges and Opportunities for SMEs

The project is carried out by collecting secondary data from various sources. The research
has been carried out in the following steps:

Step 1: Data regarding the contribution of SMEs in the economy was collected
Step 2: Literature Review
Step 3: Composition of data collected from various sources into a synchronized manner
Step 4: Analysis of data collected
Step 5: Review of current situation and future prospectus
Step 6: Suggested policy measures for the government and for the SMEs
Step 7: Conclusion

Sources of data: The various sources of data used are:

News Papers: Economic Times
Magazines: SME White book 2009-10, SME World Magazine
Books:

Management of Small Scale Industries, Prof. I S Malhotra & Dr. S L Gupta, Galgotia
publishing Company, 2000

Small Business Management, Leon C. Megginson Mary Byrd & William Megginson,
McGraw Hill Irwin, 2003

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Websites:
www.rbi.ind.org
www.msme.gov.in
www.laghuudhyog.com
www.imsme.org and various other websites
Others:
Various research papers, Reports published by Government and other agencies.

The case studies included in the report are selected on convenience basis as well as their
relevance in the context of the report was analyzed before their inclusion in the report.
The review of sectors was based upon availability of data.

Limitations of study:
The study is limited only to manufacturing sector relating to SMEs and does not cover
the service sector operated by the SMEs. Uniform time frame to analyze data was not
possible to maintain due to non availability of data. The opinions provided may not hold
true in all cases as they are given on the basis of observations during the study and
detailed analysis relating to each suggestion has not been carried out.

Time period of the study:

The time frame to analyze data has been taken from 1999 to 2010.

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3. Literature review:
SMEs are the proactive agents for sustainable development and industrial prosperity.
Since SMEs are less capital intensive, the ratio of investment to production value of
goods and services is high. While the manufacturing sector will be the flag bearer of
SME growth, many sunrise industries such as IT, Bio-Technology, Pharmaceuticals, and
Nanotechnologies will play a significant role in growth and development of SMEs.

The sustainability of SMEs will depend on the competitiveness they possess. At present
many SMEs in IT/ITES have made indelible mark in global market is due to knowledge
pool in the country available at low cost as compared to others. Quality and cost are the
two important criteria for success. The future will be bright if they are able to innovate
and they get support from the government.4

According to Mr. Dinsha Patel MSMEs promote balanced and equitable growth in the
country so to enhance their competitiveness the government aims at taking effective
measures to operationalize all the components of National Manufacturing
Competitiveness Programme. Also from the information received from MSME
Associations, the Ministry of MSME has proposed to exempt MSEs from purview of
Fringe Benefit Tax, enhancement of exemption limit for small service providers,
exemption from Service tax to MSEs providing Business Ancillary Services, etc.5

SMEs have been in the agenda of all political parties as well as policy makers since
independence. In India, the clusters of SMEs play a vital role in providing ancillary
services to cater the needs of large industries.

Horizontal clusters include units which process the raw material to marketing the final
product themselves. Large unit based clusters means developing small units nearby the
large units for supply of critical inputs. But such clusters are small in number since most
of clusters are formed on basis of location and availability of skilled labor. Whereas
vertically based clusters involve operations where the operations required in producing

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finished products are divided and carried out separately by different units. Clusters are
formed naturally and also they are created.6

According to Ghosh in a country like India, the state initiatives for eradication of poverty
have never lived up to the expectations. There are a lot of bureaucratic controls on the
utilization of funds and in the end the beneficiary receives a negligible amount as
compared to the allocated funds. At the same time SMEs have played the role of
“MESSIAH” by generating employment. They have helped in evolving an alternative
pathway of for poverty alleviation through income generation. SMEs are creative leaders
who have potential to eradicate poverty through profits. They have the capacity to
generate income for the people at the bottom of the pyramid. 7

As per NASSCOM DELOITTE study in the last two decades the Indian IT/ITES industry
has contributed significantly to Indian economic growth in terms of GDP, foreign
exchange earnings and employment generation. One notable feature of this growth is that
the sector gave opportunities to the SMEs in India. In most of the sectors the Corporate
Houses or MNCs have a hold since they have access to capital and economies of scale.
But in case of IT/ITES the focus shifted from physical capital to intellectual capital.
According to Software Technology Parks of India 1,905 units were registered during
2001 to 2005 most of which were set up by the first generation entrepreneurs.

The practice of Employee stock option was first started by the IT/ITES before it was
adopted by other industries. This lead to wealth generation not only of the founders but
also of the salaried people who were earlier treated only as a factor of production. Even
the services provided by the sector are of world class quality which has helped our
country move out of “mediocrity” and raised the bar for other industries also.8

According to Ghatak IT is perceived to play a crucial role in transforming the SMEs. The
IT environment helps in fast and accurate decision making along with mobility to access
information. IT solutions help SMEs in multitasking, expanding customer base, raising
productivity and cost controlling. Accounting softwares, Supply Chain Management

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Softwares, Knowledge Management Systems and Customer Relationship Management
are some of the IT solutions enabling SMEs to technologically upgrade their businesses.3

According to Kharbanda (2001) in today’s global environment, the awareness and

application of technological advances are vital for the SMEs. In order to position
themselves in global markets with their peers they need to adapt the latest technology.
Also it is the need of the hour to develop inimitable capabilities through innovation and
experience to cater the market with either unique products or low cost products. In India
most of the SMEs are building up Indigenous Technological Capacity (ITC) through the
process of “learning by doing”. This is related to incremental innovation and
technological change.

The concept of Industrial Parks offers new insights into the role of SMEs. The sector
specific or geographically bound clusters help SMEs to access new technologies. They
also reap the advantage of location and information sharing. For instance Ludhiana
clusters make 95% of country’s woolen knitwear.10

According to Anindita it is estimated that annual benefits from carbon markets for one
SME wooden handicraft unit will be about $ 1,525. The Clean Development Mechanism
(CDM) project secured 91% of the carbon market globally in value terms in the category
of project based transactions. There is indication that there is high potential for CDM
benefits from carbon markets if the handicraft units shift from diesel to non conventional
energy sources. Hence there is a need to develop an integrated project to fulfill the
requirements of carbon markets in enabling SMEs leverage the opportunities in carbon
markets.11

A huge network of financial, academic and training institutes functioning in both public
and private institutes has been created in the country to ensure an impressive growth of
SME sector. But to meet the current changing environment there is need to address to
challenges in technical competency and IT as well as management skills of the
workforce. International studies have shown SME focus is more on short term goals of

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profitability instead of developing a long term prospective. It may not be an exaggeration
to say that the training provided to SME workers is not flexible and those who design the
course do not keep in mind the flexibility that need to be provided to the SME workers.

So for sustainability and growth in a dynamic environment SMEs must possess the
capability to constantly modify their long term business development strategy. Many
training institutes provide business improvement programs like Six Sigma, Lean Systems,
Balanced Scorecard, etc. These programs can be customized for SMEs in meeting their
needs and providing them effective solutions.3

According to Aryan in the development of an economy, the financial markets play an

important role relative with banks. Wider share ownership is beneficial as it spreads
wealth and will enable inclusive growth. So the aspect of growth in equity culture
through the platform of SMEs will explore new avenues for shareholders.13

According to Santigo the ability of firms to optimally exploit the business opportunities
crucially depend on the financial services available to them. There is limited scope for
SMEs to finance their projects internally they have to depend on external sources for
meeting regular or expansion needs. Loans and trade credit are identified as main sources
of funding for SMEs. The financing constrains arise for SMEs from investment-cash flow
sensitivity as observed by banks. But studies have shown that correlation between
investment and cash flow may not be a good indicator for decision relating to SME
lending.14

Since risks are inherent to any business the SMEs also face them. So to avoid disruptions
in business, insurance is one of the keys. Business interruption coverage risk should also
be covered under insurance since indirect losses are more severe in the eventual loss as
compared to direct losses. Small business owners need to protect themselves not only
against major crimes but also against trespassing, vandalism, workplace violence and
harassment.15

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According to Richard an important message emanating from the strategic management
literature is that not all SME owner-managers have the desire, or indeed the capability in
terms of resources and expertise, to grow their business Marginal to comfortable survival
at the present enterprise size, rather than growth, is most often the overriding strategic
objective. The reasons for this are many, ranging from personal wishes regarding life-
style to a disinclination to surrender control and/or be accountable to others within and
without the business in order that it may grow.16

As per Reserve Bank of India at the end of March, (1996) 2, 62,376 SME units identified
by banks were sick. Some major internal causes were faulty planning, management
deficiencies, inefficient financial control, diversion of resources, inadequate attention to
R&D, delay in sanction of working capital and time gap between sanction of term loan.
Heavy reliance on borrowing makes a unit vulnerable to environment pressures and
affects the operation on the unit. Small scale units generally start with low equity base
which makes them dependent on others for their financial needs.17

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4.1 History of SMEs in India:
Industries are an integral part of the Indian Economy since the Harappan Era. Until the
advent of British rule and modern industry, it had perforce, to be small scale. The
entrepreneurial spirit was stifled during the long colonial rule as also reflected in the GDP
growth rate of 0.9% during the first half of the 20th century. The Europeans were
expanding their colonial rule all over the world in search of raw material for their
factories and markets for the products of these factories. It was during this period that the
Industrial Revolution was sweeping the European continent. India missed the Industrial
Revolution as the foreign rulers did not allow the Indian Entrepreneurship to flourish. We
have only to recall the Swadeshi Movement and boycott of foreign goods in the first
quarter of the last century, to realize the place of entrepreneurs and small industry in the
developing consciousness of modern and free India.

The importance of SMEs in our country has its root from the Gandhian Model of
economic self reliance. Mahatma Gandhi’s vision for economic model was aimed at
providing employment to large numbers of people to address the issue of poverty.

Controlled policy:
Post independence, India adopted the Industrial Policy Resolution of 1948 that defined
the dual role of Government – that of the entrepreneur and the regulatory authority.
Centralized planning was a strong feature of the first few decades and several controls
were kept on private trade, investment, land ownership and foreign exchange.

Independent India’s economic planning gave a place of pride to the small scale sector,
especially, with the objective of fostering entrepreneurship and promoting employment.
The small scale sector flourished notably as ancillary to large industries, as a robust
export sector and under the policy of reservation of some products for small scale

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TIME LINE OF INDIAN PLANNING (with special reference to MSMEs)
FIRST PLAN

Top priority to agriculture

Gave village and small scale industries a place in rural development plan

Village industries got government attention
SECOND PLAN

Karve Committee shaped the government thinking

Small Industrial Policy emphasized small industrial capital and employment
THIRD PLAN & FOURTH PLAN

Industrial Policy Resolution began

Promotions of SSI based welfare oriented employment programmes
FIFTH PLAN

Industrial Policy Statement, 1977

Wider dispersal of cottage industries and SSIs in rural areas

Tiny sector concept introduced
SIXTH & SEVENTH PLAN

Industrial Policy Statement, 1980 focus on integrated industrial development

Nucleus plants setup in backwards districts

SSI defined

Shift from overall planning to sectoral or project planning
EIGHT, NINETH & TENTH PLAN

Labor law rationalization

Vision to create employment for 50 million

Formulation of National Competitiveness Programme to support SMEs
ELEVENTH PLAN

Recognizing the continuous need to facilitate the graduation of SMEs to higher level

Stress on enhancing competitiveness of SMEs
Source: THE SME WHITEBOOK 2009-10, BUSINESSWORLD, 2009

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4.2 Sectoral Review
4.2.1 Food processing:
The food processing industry is one of the most promising sectors in India and has gained
tremendous importance during the post-reform period. The sector recorded a growth rate
of 13.14 per cent during 2006-07. The industry grew at 18 per cent during 2007-08,
according to Mr. Subodh Kant Sahai, Minister of Food Processing, scoring a 10 per cent
jump over 2004. The Minister further added that the sector is expected to grow at the rate
of 20 per cent by the year 2015

Structure:
The food processing industry is fragmented and most of the players are small in size and
primarily concentrated in the unorganized sector, which accounts for over 50 per cent of
the sector’s output in value, and 70 per cent in volume. According to 2007 estimates, the
food processing industry employs – directly or indirectly – more than 12 million people
across the country and has the potential to absorb many more

Figure 1: Market composition of food processing industry

100
90
80
70
60 Unorganize d Sector
50
Organized Se ctor
40
30
20
10
0
ry

es
s

ry

s
od

od
le
ai

ta

ag
Fo
ab
D

Fo
lu

er
et

Po

ev

le
ge
g
Ve

ap
B
t&

ka

St
&

ea

ac
is

P
ut
Fr

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Food%20Processing&FolderID=27

15
 Food processing industry at a glance:

The organized small scale enterprises received investments worth $8.46 billion in
2007

The sector experienced a growth rate of 13.14 percent in 2006-07 and it is expected
to touch 20 percent by 2015

The unorganized sector made up of SSIs contributes over 50 percent of output in
terms of value and 70 percent in terms of volume
Source: THE SME WHITE BOOK 2009-10, BUSINESSWORLD, 2009

Policy initiatives:

FDI up to 100 per cent is permitted under the automatic route in the food infrastructure
(food park, cold chain/warehousing).

Regarding food retail, the FDI policy does not permit FDI into Retail sector except for
Single Brand Product Retailing. This policy is uniform for all retailing activity.

FDI policy for manufacture of items reserved for the SSI sector is uniform for all items
so reserved and a separate dispensation for items in the food processing sector is not
contemplated.

The policy for distillation of alcohol has been announced vide Press Note 4 (2006)
according to which FDI up to 100 per cent is permitted through the automatic route for
distillation and brewing of alcohol subject to licensing by the appropriate authority.

Automatic approval of 100 per cent equity is available for most processed food items.

Most of the processed food segments have been exempted from industrial licensing,
with the exception of beer and alcoholic drinks and items reserved for Small Scale
Sector, like bakery, bread and vinegar among others.3

4.2.2 Apparel & Textiles:

The textile sector has been thriving in India for decades. The traditional textile industry
of India had virtually decayed during the colonial regime. However, in the nineteenth
century, the industry was revived with the establishment of textile mills in Calcutta in
1818. The Indian apparel and textile industry is a thriving sector within the Indian

16
economy with an annual growth rate of 9 to 10 per cent. Over the years, the industry has
made a significant contribution to national output, employment and exports.

Composition:
It consists of cotton sector, jute sector, sericulture industry, woolen sector, manmade
fibers and technical textiles.

Figure 2: Percentage wise production in Textile Sector

100%

80%

HOSIERY
60%
POWERLOOM
HANDLOOM
40%
MILL

20%

0%
2003-04 2004-05 2005-06 2006-07 2007-08

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Apparels_%26_Textiles&FolderID=25

Textile Industry at a glance:

Annual growth between 9 to 10 percent

Important clusters at Bhilwara, Sanganer, Panipat, Palli, Jetpur, Jodhpur, Surat,
Sambalpur, Mysore and Bhiwadi

Current size is $52 billion, to increase to $155 billion by 2012

The country is the largest exporter of yarn in the world with a share of 25 percent

Accounts for 12 percent of world textile fibres and yarn production, 23 percent of
world’s spindle capacity

Employs around 35 million directly and additional 56 million indirectly

Largest jute producer in the world

India is only country to produce all four kinds of silk (mulberry, tusar, eri and
muga)

Carpet exports increased from $654.32 million in 2004-05 to $806.71 million in
2007-08

Apparel accounts for 10 percent of the Indian retail market
Source: THE SME WHITE BOOK 2009-10, BUSINESSWORLD, 2009

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Policy Initiatives:

100 per cent FDI allowed through the automatic route.

Technology up-gradation Fund Scheme (TUFS) which was launched to facilitate the
modernization and up-gradation of the textiles industry in 1999 has been given further
extension till 2011–12.

Scheme for Integrated Textile Park (SITP) has been started to provide world class
infrastructure facilities for setting up textile units through the Public Private Partnership
model.

50 textile parks are being established to enhance manufacturing capacity and increase
the industry's cost competitiveness.

2 percent interest subvention till March 2011 for pre and post shipment export credit

About 40 textile parks being set up under the scheme for Integrated Textile Parks and
10 jute parks are planned to be set up by 2012.

Technology Up gradation Fund Scheme extended till 2011-12.3

4.2.3 Auto Component Industry:

The Indian auto components industry has evolved over a period of time from being a
domestic supplier of low-value auto components to a sought-after hub for a variety of
critical and high-end auto parts. Today, India has the potential to manufacture nearly
20,000 kinds of auto components ranging from engine parts, fasteners to brakes.
According to the Auto Component Manufacturers Association of India (ACMA), the
Indian auto components industry, currently worth US$ 10 billion, has the potential to
grow to a US$ 40 billion industry over the next decade.

Production:
The SMEs no longer have an India-centric approach, adopted in the early years of
liberalization, but have started collaborating with foreign players for technology and
skills, while also looking for potential overseas markets.

North India is emerging as an important hub for SMEs and accounts for almost 35 per
cent of exports of this sector.

18

The Pune Auto cluster, in particular, is projected to export goods worth US$ 8 billion
by 2015.
According to the Commerce Ministry, almost 50 per cent companies in this sector have
achieved a 95 per cent increase in inventory turnover ratio, aided by Kaizen driven cost-
effective measures

Figure 3: Production by SMEs sector in Auto Component Industry

Source:http://www.imsme.org/ViewFolder.aspx?FolderName=Automotive%20Components&FolderID=21

Figure 4: Product Segmentation

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Automotive%20Components&FolderID=21

19
 Auto Components Industry at a glance:

By 2016, GDP contribution of automotives sector to jump to 10 percent, creating
additional employment for 25 million people and output to increase by $145 billion
in the same period

Auto components clusters based in Indore, Jamshedpur, Kolkata, Pune, Manesar
and Chennai

Pune auto cluster to export worth $8 billion by 2015

Growth of exports by SMEs in the sector to go up to a CAGR of 34 percent
between 2006 and 2014

Indian Auto Components industry accounts for 0.4 percent of global trade in the
segment.
Source: SME WHITE BOOK 2009-10

Policy initiatives:

The National Strategy for Manufacturing, drawn by NMCC, has identified the
automobiles and auto components sector as one of the areas for priority action. The
Department of Heavy Industries and Public Enterprise of the Government of India aims
to make India a preferred destination for the design and manufacture of automotives and
auto components. ‘Automotive Mission Plan 2006-16’ seeks to double the contribution
of the automotives sector in the GDP from 5 per cent in 2006 to 10 per cent by 2016;
offer additional employment to 25 million people and take the output of this sector to
US$ 145 billion by 2016.
The government allows 100 per cent foreign direct investment (FDI) through the
automatic route.

Apart from this, the government’s Industrial Infrastructure Up gradation Scheme

offers a grant of up to 75 per cent of the total project cost or a maximum of US$ 12
million (whichever is lesser) on a one-time basis to chosen clusters for improving
industrial infrastructure through private-public partnership. Special Purpose Vehicle
(SPV), formed by the industry/cluster association at the specific cluster level has the
authority to implement the scheme.

One of the first to benefit from this scheme was the Pune Auto cluster, which was granted
a total project cost of around US$ 14.41 million during 2004-5, of which the centre was
scheduled to contribute nearly US$ 12.02 million.

20
Recognizing the growing importance of clusters in the Indian auto component industry,
the Department of Heavy Industries and Public Enterprises of Government of India plans
to:

Strengthen the export, communication and transportation infrastructure in and around
important clusters.

Set up relevant governmental Institutes, research and educational facilities to serve the
growing requirements of the auto components sector.

Create a National Level Specialized Education and Training Institute for Automotive

Sector during the Eleventh Five-Year Plan period.3

4.2.4 Leather:
The Indian leather industry comprises of a large number of artisan, cottage, small and
medium enterprises. The industry has an unorganized and an organized sector, and
according to a 2008 estimate, around 80 per cent of leather footwear units are in the
unorganized sector.

India has the highest livestock numbers in the world, providing a huge supply of raw
materials – as skins and hides – to this industry. As converting leather into value-added
products is a purely skill-based, labor-intensive process, the industry has the potential to
play a big role in creating employment- and income-generating opportunities in the
country.

The leather industry has huge potential in India. The footwear segment, for instance, is
poised to grow manifold with the rise in disposable income of the middle class, as will
the demand for leather goods. Export prospects have also brightened considerably,
especially since China’s leather exports have been stagnating and production has fallen in
Western Europe.

The industry has set a trade target of US$ 12 billion by 2012, including exports worth
US$ 7 billion and domestic sales worth US$ 5 billion. During Aril-December 2007,
exports of leather and leather items touched US$ 2485.58 million as opposed to US$

21
2258.81 million during the same period in 2006, registering a growth of 10.04 per cent,
according to the Council for Leather Exports (CLE) estimates.

Some of the constraints slowing down the progress of this industry are lack of FDI – the
industry accounted for a meager 0.15 per cent of the total FDI inflow in 2006; lack of
technical expertise and competition from the Chinese leather industry. In recent times, the
unprecedented appreciation of the Indian rupee against the US dollar has put the sector
under tremendous strain. This has slowed down investments and led to a loss in
employment. The industry has also been dogged by environmental issues. In the leather
tanning and finishing stages, various chemicals that are used are polluting and have been
banned by some importing counties, thereby adversely affecting exports to those
countries.

Leather Industry at a glance:

Employs around 2.5 million people, expected to provide employment to 1 million
more by 2010

92 percent of people into skin collection, tanning, finished leather and products, rest
in secondary and tertiary sectors

Exports grew from $2216.45 million in 2003-04 to $3477.52 million in 2007-08

Annual growth rate of 20 percent needed to export goods worth $ 7 billion by 2010-
11

Capacity to fulfill 10 percent of the global leather requirement

Industry size approximately Rs. 250 billion
Source: SME WHITE BOOK 2009-10

Policy Initiatives:
Recognizing the potential of the leather industry and keen to take the industry’s share to 4
per cent of the world trade by 2010, the Government of India has taken certain policy
initiatives.

Foreign equity up to 100 per cent is allowed, subject to certain conditions.

Foreign equity up to 51per cent is accorded automatic approval in several key areas.

Investments over 51per cent equity participation are approved on a case-to-case basis
by the Foreign Investment Promotion Board (FIPB). Clearance of proposals by the FIPB
takes around six weeks on an average.

Foreign investors need not have a local partner.

22

Free repatriation of profits and capital investment is permitted, except for a shortlist of
specified consumer goods industries.

Apart from these steps, the Union government commissioned a Tannery Modernization
Scheme and another scheme for footwear and leather products. The scheme is expected to
be implemented at a cost of US$ 71.21 million. The government is also encouraging the
setting up of footwear parks/complexes to enhance production capacity. During the 10th
Plan, the government provided financial assistance to build a Footwear Component Park
and a Footwear Complex at Chennai, and provided marketing and training assistance to
artisans and primary workers. The government also proposes to build a footwear park, a
tanning complex, a leather goods park and two footwear component parks for the leather
industry, all by 2010.3

4.2.5 Gems and Jewellary:

India is one of the fastest growing jewellary markets in the world and is the largest
consumer of gold (around 20 percent of global consumption) and also the largest
diamond processor (around 90 percent by pieces and 55 percent by value of the global
market).

The industry is highly unorganized and fragmented with around 96 per cent of the total
players being family-owned businesses. It is estimated that the country has around
450000 goldsmiths, 100000 gold jewelers, 6000 diamond processing players and 8000
diamond jewelers. Although, India is not a major miner of precious metals and stones, the
country’s inexpensive and skilled workforce is one of the best in the world for processing
of diamonds. Further, the retail sector has also seen an impetus in the recent past with
end-users buying branded jewellary, due to increase in quality consciousness.

Consumption:
India accounts for 20 per cent of the world gold consumption, the largest in the world.
The country consumes nearly 800 tonnes of gold, of which nearly 600 tonnes go into

23
making jewellary. Further, India is also emerging as the world's largest trading centre for
gold targeting US$ 16 billion by 2010.

The Indian diamond jewellary industry is the third largest consumer of polished
diamonds after US and Japan. Diamond jewellary consumption is likely to jump to nearly
80 per cent in 2010 and over 95 per cent between 2010 and 2015.

According to the Investment Commission of India and the industry is expected to have a
65 per cent share of the global market by 2010. In terms of domestic sales, branded
jewellary is likely to become the fastest growing segment and is expected to witness a
growth of 40 per cent per annum to US$ 2.2 billion by 2010, as per McKinsey.

Export:
The export industry mainly comprises of small-to-large units based in various special
economic zones (SEZs), export processing zones (EPZs) in Chennai and Noida and
Santacruz Electronics Exports Processing Zone (SEEPZ) in Mumbai, supplying primarily
diamond-studded jewellary.

Figure 5: Exports of Gems and Jewellary

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Gems_%26_Jewellery&FolderID=22

As per the latest Gems & Jewellary Export Promotion Council (GJEPC) release, the
industry registered exports worth US$ 15 billion in April-December 2008 (Provisional),

24
compared to US$ 14.9 billion in the corresponding period of 2007, registering a growth
of .59 per cent.

Further, the total gems and jewellary exports from India stood at US$ 20.8 billion in the
financial year 2007-08, against US$ 17.1 billion in the previous year, witnessing a growth
of 22.27 per cent. The sector accounted for 13.41 per cent of India's total merchandise
exports.

Out of the total US$ 20.88 billion exports generated by the Indian gems and jewellary
sector, the United States and Hong Kong accounted for the largest import, with a share of
26 per cent each, followed by UAE at 21 per cent.

Gold jewellary exports increased from US$ 5.2 billion in 2006-07 to US$ 5.6 billion
2007-08.

Export of cut and polished diamonds grew from US$ 10.9 billion in 2006-07 to US$
14.2 billion in 2007-08, witnessing a growth of nearly 68 per cent.

Export of colored gemstones increased from US$ 246.4 million in 2006-07 to US$

276.42 million in 2007-08.3

Policy Initiatives:

Allow 100 per cent FDI in the gems and jewellary sector through the automatic route.

Abolish duty on polished diamonds in May 2007.

Setting up Gems and Jewellary Parks and SEZs to promote Sectoral investments

Fiscal stimulus package: In order to revive the Indian economy from the current global
economic downturn, the government announced a stimulus package on December 7,
2008. Some of the measures announced include:

Increasing the Post Shipment Rupee Export Credit Period from 90 days to 180 days
with effect from November 28, 2008

Increasing the Pre-Shipment Rupee Export Credit Period from 180 days to 270 days
with effect from November 15, 2008

Providing an interest subvention of 2 percent up to March 31, 2009 subject to minimum
rate of interest of 7 percent per annum, to make pre and Post-shipment export credit for
labor intensive exports, such as gems & jewellary, more attractive

25

Allowing exporters to avail refund of service tax on foreign agent commissions of up to
10 percent of FOB value of exports. They will also be allowed refund of service tax on
output services while availing of benefits under Duty Drawback Scheme.

4.2.6 Pharmaceuticals:
The Indian pharmaceuticals industry has been growing over the years in terms of product
profiles, technology and infrastructure development.

India has the potential to emerge as a global pharmaceutical hub by positioning itself as
an off shoring destination for pre-clinical and clinical research and exporting
indigenously manufactured generic products. According to A.T. Kearney, India ranks
second only to China as a preferred destination for clinical trials and an Ernst & Young
study says the market for clinical research-related activities in the country is expected to
touch US$ 1.5-2 billion by the year 2010.

The industry has the potential to attain the target of US$ 24 billion in formulations, with
bulk drug manufacturing going up to US$ 6 billion, by the year 2010. According to the
estimate of National Manufacturing Competitiveness Council (NMCC), the Indian drugs
and pharmaceuticals industry consists of over 20,000 companies, out of which around
8000 are operational. The formulation segment of Indian pharmaceuticals industry
consists of around 7,000 small scale units, a large number of which undertake contract
manufacturing on behalf of large companies.

The research and development (R&D) spend in India is around 4 per cent of sales
compared to 12-16 per cent in global scale. This has adversely affected the introductions
of new molecules, drug discovery and developments of new chemical entity (NCEs).

Exports:

India exports drugs and related items to over 200 countries across the globe including
US, Japan, Europe and Australia. In the last few years before 2007, 50 per cent of the
sector’s revenue came from overseas trade. Out of the country’s total pharmaceuticals

26
exports, 55 per cent is in the form of formulations and 45 per cent in the form of bulk
drugs.

Figure 6: Exports from Indian Pharmaceutical Industry

Source: http://www.imsme.org/ViewFolder.aspx?FolderName=Pharmaceuticals&FolderID=24

Pharmaceuticals Industry at a glance:

Pegged at $17 billion

Clusters in Andhra Pradesh, Gujarat and Maharashtra

Employment to over 3 million people(both direct and indirect)

India stands 4th (8 percent) in terms of volume and 13th (1.5 percent)in terms of value
in the world

Annual growth rate of 14 percent

Production of 20 – 24 percent of the generic drugs in world in terms of value

Of the 1000 bulk drugs units in the country, 750 are SMEs

SMEs account for over 50 percent of India’s drug production and export
Source: SME WHITE BOOK 2009-10

Policy Initiatives:
The Government of India has recognized the importance of SMEs in the pharmaceuticals
sector and chalked out several policy initiatives in this direction. In the Draft National
Pharmaceuticals Policy-2006, the government has reinforced the country’s position as
one of the key global players in the manufacturing of pharmaceuticals, owing to its rich
human capital base and low cost of production. Some of the initiatives include:

It plans to offer a subsidy on interest to SMEs to help them upgrade their facilities so
that these units can meet stringent quality norms. Once implemented, the scheme is
expected to benefit nearly 2,000 drug-making SMEs.

27

The Pharmaceutical Policy 2006 makes provision for more National Institute of
Pharmaceutical Education and Research (NIPER) that will come up in Bangalore,
Kolkata, Hyderabad, Ahmedabad and Guwahati. This will help meet the industry’s
demand for 1,000 highly-skilled personnel per annum up to the year 2010.

SMEs in the pharmaceuticals sector are likely to be allowed to give a higher trade
margin to chemists in comparison to their larger counterparts. This would help SMEs to
compete with industry majors who employ a vast number of salesmen to push their
products.

In March-2008, Indian Minister for Science & Technology and Earth Sciences, Kapil
Sibal announced availability of financial assistance up to US$ 240042 with 15 per cent
capital subsidy, to small scale drug and pharmaceutical companies. The aim of this
initiative is to assist in technical up gradation of these units under the credit linked capital
subsidy scheme of Ministry of Micro, Small and Medium Enterprises .3

28
4.3 Performance of SMEs
4.3.1 Growth Rate of SME sector:
For sustainable development of the economy, different sections of the economy should
grow. One such section is industrial production. The corporate sector is in the news day
in and day out with regards to its current happening and future plans. But in comparison
by no of firms, they form only a small percent of total units. In business turnover the
corporate houses lead the race but the vital ancillary inputs are provided by the SMEs. So
the growth of SMEs is also vital for the overall growth of the sector.

TABLE 3: Growth rate (%) of SMEs

YEAR SSI INDUSTRIAL
96-97 11.3 7.10
97-98 8.43 5.80
98-99 7.70 4.00
99-00 8.16 6.50
00-01 8.23 4.97
01-02 6.08 2.71
02-03 8.68 5.75
03-04 9.64 7.02
04-05 10.88 8.36
05-06 12.32 8.15
06-07 13.00 11.51
Source: http://eaindustry.nic.in/handbook_200607/Chapter%207.pdf

The table shows that there has been a continuous growth in the SSI from the year 2000
onwards. Also the growth of SSI has been more than the overall industrial growth. So for
future prospects of SSI it may be assumed that it will continue to have double digit
growth. This will increase the share of SSI as a percentage of GDP.

29
India is an emerging country and for fostering this growth the employment generation
will play a vital role. This is important for a country like India which also heads the list in
population. Due to over population the growth will be hampered when they become
dependent and increase the burden on government expenditure. So employment
generation is pivotal in changing dependent population to independent population which
will also contribute to growth of the nation.

4.3.2 Employment Generation

SMEs are a source of employment to most of the people. The SMEs are spread across the
country and they are one of the biggest employers in the country. The table below shows
employment generation by the SMEs which has shown a continuous increase. So growth
of SMEs also means increased employment which ultimately completes the circle of flow
of money and services.

TABLE 4: Employment generation (Figures in Rs. Lacs)

2000-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08*
238.73 249.33 260.21 271.42 282.57 299.85 312.52 322.28
*provisional
Source: www.msme.nic.in/AR2008-09-Eng-Chapter-2.pdf

30
4.3.3 EXPORTS by SMEs:
In recent years the SMEs have played a greater role in the world economy due to
reduction in trade barriers in international trade by the active intervention of government.
SMEs in India contribute to about one third of total manufactured exports.

Exporting is considered to be one way of stimulating growth of SMEs, gradually

improving the quality standards of SME products, and capturing more global shares.
Boosting the contribution of small and medium enterprises in total exports of India is
vital to India’s future economic growth.

Promoting the export competitiveness of SMEs needs the active involvement of various
stakeholders – governments, the private sector and the international community.

Export competitiveness of SMEs in India can be promoted in the following manner:

1) Independent SMEs specializing in specific niches and highly profiled productions;
2) SMEs that link up with Trans National Corporations or large domestic exporting firms
3) SMEs that are part of clusters and networks in order to reinforce their external
competitiveness

Table 5: Export by SMEs: (FIGURES IN Rs. CRORES)

2000-01 01-02 02-03 03-04 04-05 05-06

TOTAL 202510 207769 252137 291582 375340 456418
EXPORTS
SSI 69797 71244 86013 97644 124417 150242
EXPORT
SHARE 34.47 % 34.29 % 34.11 % 33.49 % 33.14 % 32.92 %
GROWTH N.A 2.07 % 20.73 % 13.5 % 27.4 % 20.8 %
RATE
Source: http://www.dcmsme.gov.in/ssiindia/statistics/export_gr.htm

31
The table shows that growth in SSI export has not been consistent during the past years.
A steady increase in growth is expected from this sector on the back of recovering
economy in the country as well as the initiatives of government to foster the growth and
development of SMEs in the country.

As per the NCAER survey of Business Confidence Index for the quarter ended on 31st
December, 2009 the majority of exporting firms expected improvement in the coming six
months. About 62 per cent of the respondents believed that their exports are likely to
improve in the next six months; 33 per cent expect it to remain at the present level, while
only 5 per cent are expecting decline. Among those expecting growth in exports over the
next six months, the majority falls in the category expecting 5 per cent improvement.

Indian SMEs have harnessed the opportunities presented by the opening up of the
markets after the establishment of the World Trade Organization (WTO) and contribute a
sizeable percentage to India’s export basket. However, the proportional growth in exports
by SMEs that was expected to follow the reduction in tariffs and the dismantling of
quantitative restrictions has not really happened.

As tariffs have been lowered over time, non-tariff barriers to trade (NTBs) have become
prominent, negating the gains which were supposed to be accrued. NTBs refer to the
wide and heterogeneous range of policy interventions other than border tariffs that affect
and distort trade of goods, services and factors of production. By increasing the
transaction cost of doing business, NTBs render exports less competitive. For several
reasons, SMEs are more vulnerable than larger companies to the effects of trade barriers
in the form of NTBs. SMEs are largely unorganized, work with limited resources and
enjoy very low profit margins. This reduces their ability to successfully meet the
challenges arising from NTBs. The lack of financial resources means that SMEs cannot
respond adequately to product safety and other technical requirements imposed by
importing countries. In most cases, SMEs fail to raise sufficient capital to carry out the
necessary adjustments in their production processes to meet the ever-changing standards

32
and requirements. Those who can do so are forced to pass on the costs to the customers,
which in turn decreases their cost competitiveness.

As observed from the experience of India SMEs in the export market, the Indian SMEs
need special tailor made programs to overcome the NTBs with adequate support from the
government in various forms. Some of them are highlighted from the case study
mentioned below.

Lessons from international success:

Case: Brazil18
Brazil is one of the successes in realizing the export potential of its SME sector. The
country successfully overcame its export barriers and introduced multi-level initiative and
provided adequate support system in the form of export promotion policies and necessary
regulation.

1. EXPORT PROMOTION FINANCE PROGRAMS:

This program finances the exporters of goods produced by SMEs, in the phase pre-
embankment, through credential financial institutions. Under this scheme credit can go
up to 100% of FOB value and will be related to long term rate plus remuneration to the
credential financial institution (not more than 4%)

2. TECHNOLOGY SUPPORT PROGRAMME:

The main aim of introducing this program was to realize the full potential on Internet
based instruments. The program includes
a) Program of technology support to exporters: PROGEX which provides
technological assistance to the micro and small enterprises which want to become
exporters.
b) Creating trade platforms: the government has created a foreign trade platform
which allows online export operation and responds to the demands of small firms
willing to start exports.

33
3. Other programs:
PROJECT NATIONAL NETWORK OF TRADE AGENTS: REDEAGENTES: This
project involves training agents of international trade, entrepreneurs and employees of
diverse institutions such as cooperative, trade associations, etc. Then the agents are
integrated in a network based in the internet, the REDEAGENTES. In this way the agents
start to contribute in the process of spreading the export culture and to give orientations
to other small businesses on how to export.

34
4.4 SICK UNITS:
After nationalization of banks in 1969, the banking sector became a key source of support
for small and medium industry. Technical consultancy support and various financial
institutions formed a framework for supporting SMEs. Within this framework, in 1987
and in 1989, Reserve Bank of India announced schemes for rehabilitation of small and
medium industries. These schemes entailed restructuring of debt of sick companies with
relief and concessions. The rehabilitation schemes worked selectively and were effective
where markets were available for the units’ products and where entrepreneurs were
skilled and serious. This was a period of economic growth ranging between 3% & 5%.

Growth of internal & international competition and technological changes continued to

erode the financial strength and viability of SMEs, putting them in need of rehabilitation
measures. The protection available to the industry has been gradually coming down since
1991 with integration of Indian economy with global economy. IRAC norms were
introduced in 1992, making the banks hesitant to lend to small enterprises as it is
perceived as risky lending.

Growth of MSME Sector:

The high rate of NPAs in small enterprises sector has created risk aversion among
lenders, which has hindered increase in flow of credit to the sector. The non credit related
factors responsible for slow growth rate of small enterprises sector are non-availability of
power and other infrastructural facilities, delay in getting clearance from different
agencies, prevailing condition of the economy, lack of entrepreneurship development
infrastructure and historical/social factors etc. Still, states that give due importance to this
sector and have provided adequate infrastructure and enabling environment have seen
good growth in small enterprises sector. However, there is tremendous potential for
growth of MSME due to its inherent strength to contribute to the economy of the nation.

It is observed that the banks consider marketing problems, inadequate infrastructure, and
technology related issues as major hindrances to growth. Besides these reasons, RRBs
consider lack of managerial competence as another important factor for poor growth.

35
MSME Associations have stated that delayed availability / shortage of funds, non-
responsiveness of the government departments, and high cost of funds, inadequate
infrastructure and marketing problems are the major reasons for poor growth of MSMEs.
Directors of Industries and EDIs have also opined on the same lines.
Source: Report of working group on rehabilitation of sick units, K C Chakrabarty, 20083

Credit related issues:

There is lack of transparency in accounts of small enterprises and their accounts are not
based on accounting standards and generally accepted accounting principles. Non-
maintenance of proper records by MSMEs is also a problem indicated by the banks
during interactions. It is indeed difficult for the banks to assess the capacity of the
enterprise to repay.

A banker’s risk perception towards SMEs is heightened by the poor historical

performance of SME loan portfolios, particularly loans extended by the public sector
banks, which account for more than 90 per cent of all lending to SMEs.

TABLE 6: Incidence of NPA in advances of public sector banks to small enterprise

(Figures in Rs Crores)
Year SME SME Net Bank Total SME Total NPA: Net
advances NPA Credit NPA NPA:ADVANCE Bank Credit
2001 48400 10339 341291 53174 21.36 15.58
2002 49743 10584 396954 56506 21.28 14.23
2003 52988 10162 477899 52806 19.18 11.05
2004 58278 8838 558849 50148 15.17 8.97
2005 67634 7835 717304 47696 11.58 6.65
2006 82434 6917 1017604 41378 8.39 4.07
2007 104703 5843 1317705 38602 5.58 2.93
Source: RBI

While public banks have large SME portfolios, the non-performing assets (NPAs) have
been extremely high. These NPAs have been gradually coming down from 21.36% in
2001 to 5.58% in 2007 but the level of gross NPA has reduced from 15.58% to 2.93%

36
during this period. Thus despite reduction of NPA in small enterprises by 75%, they still
stand at double the NPA level in total advances as on 31- 03-2007.In absolute terms
almost Rs 6000 crores of public banks are blocked in small enterprises NPAs. Hence
these banks are risk averse to expanding their small enterprises portfolio. A few of the
new banks report very low NPAs in their total SME portfolio. However, the NPAs of the
public and new private sector banks are not directly comparable as the private sector
banks have newer portfolios and losses may not yet be recognizable

Incidence of Sickness in the MSME Sector:

In a dynamic set up, industrial units which are non-competitive, uneconomical and
inefficient become sick and die out and new and more efficient units come up to take
their place. This process takes place in a cycle as a sequence of economic restructuring.
Re-allocation of resources, both material and human, from less efficient to more efficient
areas is expected to increase production and productivity. It is also likely to lead to higher
employment generation in the long run. However all failures cannot be attributed to
irreparable weaknesses. Failure of enterprises will deter the objectives of economic
development. It is in this context that the high incidence of NPAs and sickness in MSME
sector must be viewed. Thus failure is a hard fact and has to be accepted by all but the
corrective actions wherever feasible and warranted must be taken expeditiously.
TABLE 7: Incidence of Sickness in SME Sector (Figures in Rs Crores)

Year No. of A/c’s Amt O/S Amt O/S per A/c

1999 306221 4313.48 0.014
2000 304235 4608.43 0.015
2001 249630 4505.54 0.018
2002 177336 4818.92 0.027
2003 167980 5707.35 0.034
2004 143366 5772.64 0.040
2005 138041 5380.13 0.039
2006 126824 4981.13 0.044
2007 114132 5266.65 0.046
Source: RBI

37
Existing RBI Guidelines for Rehabilitation of sick units:
Definition of Sick Small Enterprises
A Small Enterprise should be considered 'Sick' if
a) Any of the borrowal accounts of the unit remains substandard for more than six
months i.e. principal or interest, in respect of any of its borrowal accounts has remained
overdue for a period exceeding one year. The requirement of overdue period exceeding
one year will remain unchanged even if the present period for classification of an account
as sub-standard, is reduced in due course; or
b) There is erosion in the net worth due to accumulated cash losses to the extent of 50 per
cent of its net worth during the previous accounting year; and
c) The unit has been in commercial production for at least two years.

Viability of Sick Small Enterprises:

A unit may be regarded as potentially viable if it would be in a position, after
implementing a relief package spread over a period not exceeding five years from the
commencement of the package from banks, financial institutions, Government (Central /
State) and other concerned agencies, as may be necessary, to continue to service its
repayment obligations as agreed upon including those forming part of the package,
without the help of the concessions after the aforesaid period. The repayment period for
restructured (past) debts should not exceed seven years from the date of implementation
of the package. In the case of tiny sector units, the period of relief/concessions and
repayment period of restructured debts not to exceed five and seven years respectively, as
in the case of other small enterprises.

Based on the norms specified above, it will be for the banks/financial institutions to
decide whether a sick Small Enterprise is potentially viable or not. Viability of a unit
identified as sick should be decided quickly and made known to the unit and others
concerned at the earliest. The rehabilitation package should be fully implemented within
six months from the date the unit is declared as 'potentially viable' / 'viable'. While
identifying and implementing the rehabilitation package, banks/FIs are advised to do
‘holding operation' for a period of six months. This will allow small-scale units to draw

38
funds from the cash credit account at least to the extent of their deposit of sale proceeds
during the period of such ‘holding operation'.

The data compiled by Reserve Bank of India on sickness in small and medium enterprises
as on 31-03-2006 and 31-03-2007 is given below:

TABLE 8: Bank-Wise Viability Position of Sick Small Enterprises

(Figures in Rs crores)

Source: Report of Working Group on Rehabilitation of Sick Units

TABLE 9: Bank-Wise Viability Position of Sick Medium Enterprises

(Figures in Rs crores)

Source: Report of Working Group on Rehabilitation of Sick Units

The above data reveals that

There was a perceptible decline of 10% in the number of sick SSI units in year 2007 but
the amount outstanding against them went up by almost 6% as compared with 2006
(126824 a/c’s in 2006 to 114132 a/c’s in 2007 with aggregate exposure of Rs 4981.13
crores in 2006 to Rs 5266.65 crores in 2007).

39

In Small Enterprises Sector out of 114132 sick units, only 3.76% units were found
viable by the banks and out of the same only 13.72% units were put under nursing. Thus
only 0.52% of the sick SSI units were put under nursing.

Among the sick medium enterprises, out of 17949 sick units, only 10.77% units were
found viable by the banks and out of the same only 6.05% units were put under nursing.
Thus only

0.65% of the sick units were put under nursing.

For the SME sector as a whole, out of total 132081 sick units, the total units found
viable are only 4.71%, of which 11.33% were put under nursing i.e. only 0.53% of the
sick units were put under nursing.

It is difficult to assess as to how many units were really studied for their viability out of
the 95-

97% units not found viable.

40
4.5 Surveys relating to SMEs
4.5.1 Milagrow Survey
The second edition of Milagrow’s annual survey on the “Effectiveness of Government
Policies for the MSME Sector in India” has thrown up certain startling facts. The study
aims to understand the effectiveness with which the needs have been addressed by the
provisions of the MSME Development Act, 2006 at the grass root level. It analyzes and
evaluates the degree of implementation, with reasons for success or failure across the
span of stakeholders, and suggests means for maximizing the benefits that can accrue
from the MSME Act.

The survey was conducted among the MSMEs which were distributed across the
geography of the nation. 26 percent MSMEs were contacted from the west, 22 percent
from east, 29 percent from south and 23 percent from north. Firms of several sizes were
approached and representation was taken varied industries to get a wide spectrum for
evaluation and analyze the details at a macroscopic level.

Highlights of the survey:

Though the awareness level of Government MSME policies have improved from 25
percent to 35 percent over last one year, but still 65 percent of the MSMEs on an all India
basis are not even aware about the MSME Development Act.

95 percent respondents across the country say that corruption levels are very high or
high. The figure has not changed over the last one year.

The efficacy index of the Government MSME policies and ecosystem is as low as 35
percent.

Findings:
The two issues that exist in the MSME policies can be categorized at two levels. The first
is the effectiveness and usability of the several schemes and policies. The second and
more important issue is the awareness of these policies and schemes among the MSMEs.

41
Figure 7: Unawareness levels of MSME Act at the grass root levels
90%
80%
80% 74%
70% 65%
60%
60%
49%
50%
40%
30%
20%
10%
0%
EAST WEST NORTH SOUTH OVERALL

It was revealed that 65 percent of the MSMEs are not even aware that an entire act with
several policies and schemes exist specifically for the MSMEs. The irony was that 90
percent of the respondents were actually registered MSMEs. The figure has improved as
compared to last year but it clearly indicates that there is still a long distance which needs
to be covered.

Figure 8: Availing of the benefits of the MSME Development Act

60%
50%
50%

40% 35%
31%
30% 24% 22% 21%
20%

10%

0%
Recognition

Procurement

Payment

Settlement
facilitation

Marketing
promotion
"Enterprise"

and other
enablers

Delay

Dispute
Credit

Support
as

In terms of awareness of benefits of provisions in MSME Development Act, 2006 the

graph clearly reflects that inspite of funding and financing being the major concern for
the MSMEs, only 50 percent of the respondents had applied for the credit facilitation
provision that exist for the MSMEs. The availing of benefits of the other aspects is much

42
lower that credit facilitation. Considering the fact that the benefits can percolate to the
end users only if the end user is aware of them, the overall picture is very dismal. This
indicates there is a missing link between the policy makers and executive part of the
governance.

Figure 9: MSMEs who availed the schemes of Government of India

60% 57% 56%

50%
43%

40%
33% 33% 32% 31% 31%
30%

20%
12%
10%

0%
NCEUS & Apex
ISO 9000/14001

and Credit Rating

Development

Competitiveness
Certification Fee

Programme
reimbursement

body initiatives

Manufacturing
Performance

Programme
MSME
Scheme

National
Scheme
The ISO Certification Free Reimbursement Scheme and the Credit Guarantee Scheme
have been utilized the most and about 57 percent respondents have taken benefit of the
same. In south and east more than 75 percent respondents have availed the scheme. The
Credit Guarantee Scheme also has been availed by 56 percent of the respondents. MSME
Cluster Development Programme ranks next in the levels of being availed by 43 percent
of the respondents.

Perceptual mapping in attitudinal improvement for various stakeholders paint a thorny

picture especially for the law authorities as they have gone on the negative side of the
performance. One out of every two respondents feels that the attitude of law authorities
towards the MSMEs has degraded over the last three years.

43
Figure 10: Effectiveness of Government Schemes

More than expected

effectiveness, 4%
Very Effective, 0%
Average
Effectiveness, 16%

Not at all Effective,

45%

Slightly Effective,
35%

A whopping 80 percent MSMEs felt that the government policies are ineffective or less
effective than expected. The zone wise analysis indicates that except a couple of
respondents in the north, none of the respondents said that the Government policies for
MSMEs are more effective than expected.

Figure 11: Corruption Levels

CORRUPTION LEVELS
1%
1%
3%

Very High
40%
High
Medium
Low
55% Very Low

Corruption levels are found to be perceptually very high for the country. 95 percent of the
respondents rated the corruption levels to be very high or high. When asked about the
impact of corruption on MSMEs, 82 percent said that it is higher than the moderate

44
levels. According to the study “Government backed initiatives and MSME progress in
India”, conducted by Milagrow in 2008, 97 percent of the respondents choose to avoid
giving any direct answer on corruption and bribery. In comparison to the same 98 percent
respondents feel corruption is not low. This clearly indicates that no improvements have
been witnessed in the last one year.

Figure 12: Adverse Impact of Corruption Levels

3%
15%

Very High

9% 44% High
Medium
Low
Very Low

29%

Nearly 75 percent of the respondents felt that corruption has high or very high impact on
their business. 9 percent felt that the impact is medium. A small percentage of 3 percent
said that the impact is very low. This signifies that the reason for MSME Development
Act, 2006 has not being received well is also due to corruption.

The overall efficacy index was calculated for the MSME policies of the Government of
India and the MSME ecosystem. Weights were assigned to the several needs of the
MSMEs along with the other aspects of the MSME Ecosystem and based on the
responses from the MSMEs; the efficacy was calculated as 34.90 percent which is very
low.

45
4.5.2 FICCI Survey:

A survey was conducted by FICCI among 116 SMEs manufacturing a diverse range of
products from 20 locations across the country, mostly catering to the export market. The
results reveal that 94% of SMEs catering to export market have been “severely to
moderately” hit by the economic slowdown.

However, units are showing some resilience and are hopeful of recovery; their single
point demand is for better financial accommodation by banks at low interest rates. It has
been reported that the interest subvention announced for SME exporters is not reaching
the intended beneficiaries at the ground level. The survey finds out that a major chunk of
the enterprises have been found to be unaware of the incentive schemes announced by the
government. This calls for an action programme for better communication of government
initiatives for the SME sector.

According to the survey, global economic slowdown and flagging demand in both the
domestic and global markets have affected Indian companies severely. SMEs in
particular have received a hard knock. These enterprises are struggling to stay afloat.

The majority of the respondents said that they were not really aware of the steps being
taken by the government to help SME weather the crisis. Out of the total participating
companies 73 percent of the respondents said that they do not know of any steps that
have been announced under the stimulus packages to support their sector. Further those
who were aware of the incentives announced; a majority of them indicated that these
measures have not really enabled them to regain the business momentum. This is a cause
of real concern as it seems the benefits of the stimulus packages are not percolating and
these enterprises are receiving only limited benefit from the government.

What was more disturbing that 87 percent of the participants reported that they were in
general not aware of the different schemes run by the government for the SME sector.
This indicated a serious problem with information dissemination at ground level.

46
With regards to the factors adversely affecting the business performance, 59 percent of
the respondents indicated that high cost of financing persists to be a problem. This is
particularly bothersome as 90 percent of the participants reported that they were
dependent on banks for funding their operations. Further 62 percent of the participants
felt that banks do not encourage financing in the SME sector and 97 percent of the
respondents said that the cost of finance has gone up over the last one year. Amidst the
existing situation which is already difficult, the support from banks is most crucial.

Among other factors, rising cost of raw materials and lack of buyers for products were
reported to be areas of botheration. The reporting companies also indicated that they were
witnessing stiff product competition from Chinese goods as they were being dumped into
India. This further reaffirmed the results of an earlier survey done by FICCI on “Imports
from China and its impact on SME sector”, which indicated that a majority of the SMEs
are facing heat in the domestic market due to imports of Chinese goods.

Nonetheless, the companies showed some optimism with regard to the expected market
conditions six months hence. 66 percent of the respondents said that they foresee an
improvement in the market condition, while 21 percent felt that the situation would
worsen. The remaining 13 percent expected no change in the situation.

47
4.6 FOREIGN DIRECT INVESTMENT IN SME:
Diaspora contribution to their state of origin has been made in various ways, through
remittances, foreign direct investment, transfer of knowledge and entrepreneurial
networks. India has the world’s second largest Diaspora next to China with a substantive
presence in all the six continents.

While the contribution of the Indian Diaspora to India’s economy and society is a matter
of great pride and achievement for Indian’s the world over, however the Indian Diaspora
has not come forward as investors for the Indian SME sector, in the scale that was
expected post-liberalization in the early 1990’s.

Diasporic FDI, especially in comparison with China, has been very modest in India. Only
4% of India’s FDI comes from the Diaspora. This is due to the certain policies and
procedures that restrict FDI in the SME sector. According to the present status an
industrial undertaking, i.e., a company with interests in industry can invest upto 24%
equity in a SSI unit, however, if the equity goes beyond 24%, the industrial unit loses its
SSI status. Consequently, manufacture of items reserved for SSI would require an
Industrial License and export obligation of 50%. This applies to an industrial undertaking
with foreign (including NRI) investment

Current Scenario of NRI Investment in India:

India has been growing rapidly in the last decade and a half and with the opening up of
the economy there has been a huge flow of FDI into the economy. According to reports
for the financial year ending 2007 the total FDI inflow in the country has been about $16
billion from just $5.5 billion a year earlier. Foreign direct investment flows now account
for 6.8 percent of total investment, compared with just 0.5 percent three years ago. This
doesn’t include the FDI coming into stock market and bond market.

48
TABLE 10: The country wise flow of FDI into India for the period Apr.’00 – Nov.’
07

Source: http://www.dipp.nic.in/fdi_statistics/india_fdi_Nov2007.pdf

The table shows that the NRI investments in India are only 3.43 % of total FDI Flow in
India. While the 60 million Chinese Diaspora accounts for more than 50% of FDI flow in
China, 20 million NRIs contribute less than 5% of the total FDI flow in the country. With
the opening up of the economy and change in Govt. of India’s attitude towards Indian
Diaspora there is a tremendous scope for increasing NRI investment in the country
TABLE 11: Sector wise FDI inflow for the period April 2000 to November 2007

Source: http://www.dipp.nic.in/fdi_statistics/india_fdi_Nov2007.pdf

49
The table shows that the FDI investment has been primarily in service and computer
hardware and software sector. Labor intensive sectors like textile and garments,
agricultural services, leather etc have received low FDI in comparison to sectors which
are capital intensive. Need of the hour is to increase the FDI investment in the labor
intensive sectors so that marginalized section of the society also benefits from the growth
story of India.

While a common policy level strategy can be developed to woo NRIs to invest in India,
operational level strategies have to be different for attracting investments. Strategies
which have been successful to attract investment for large scale industries would not
work for small and medium scale industry owing to the differences in the nature of
operations. Again different sectors would require different strategy. Strategy for
attracting FDI for MSMEs IT sector and in leather sector cannot and should not be the
same.

50
4.7 Rating Agencies:
Need of rating agencies for SMEs:
Over the years, the Indian financial system has come to regard credit ratings as an
integral part of the framework for credit and investment decisions relating to larger
enterprises. But, as the banking sector increasingly focuses on lending and providing
other financial services to the SME sector, ratings can play the same pivotal role as they
do for larger enterprises. Ratings can make SMEs’ access to financial services more
efficient by providing benchmarks and improving transparency. Independent agency
ratings for SMEs, based on high standards of analytical rigor, can provide greater
confidence to lenders, and consequently broaden the range of financial resources
available to SMEs.

Benefits of Performance and Credit Rating

An independent, trusted third party opinion on capabilities and credit-worthiness of
SSIs

Availability of credit at attractive interest

Recognition in global trade

Prompt sanctions of Credit from Banks and Financial Institutions

Subsidized rating fee structure for SSIs

Facilitate vendors/buyers in capability and capacity assessment of SSIs

Enable SSIs to ascertain the strengths and weaknesses of their existing operations and
take corrective measures.

Benefits to the SME sector:

Ratings can provide an important impetus in raising standards through better financial
discipline, disclosure and governance practices. Surveys among larger enterprises clearly
show that managements feel ratings have provided value that goes well beyond the rating
symbol. In the SME sector too, ratings can be an important feedback tool for
managements. An interactive rating process helps managements gain unique perspectives
on business and financial issues and on best practices, from rating experts who have in-
depth sector knowledge and understanding of risk. A rating exercise can help SMEs

51
better understand what initiatives they need to take to improve their operating and
financial positions. Additionally, as the number of rated players in the SME sector
increases, there will be greater transparency, as more and more information is demanded
and made available.

Benefits to lenders:
The financial institutions will be in a better position to lend to SME sector with the SME
units getting ratings from the rating agencies. This will help them in deciding the
feasibility of extending loans to the units as they can rely on the ratings achieved by the
SME units. This will reduce the cost of assessing individual applications on various
financial and non financial parameters since such will already be done by the rating
agency.

Recognizing the SME rating need:

Need of a Performance and Credit Rating Mechanism for SSIs was highlighted in Union
Budget’04-05. Then The Performance and Credit Rating Scheme for SSIs was formulated
in consultation with Indian Banks’ Association (IBA) and Rating Agencies. For
implementing this scheme NSIC is the nodal agency.

Background of NSIC:
National Small Industries Corporation Ltd. since its establishment in 1955 has been
working to fulfill its mission of promoting, aiding and fostering the growth of SSIs 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, up gradation of technology, quality
consciousness, strengthening linkages with large medium enterprises and enhancing
exports, projects and products from small industries. NSIC acts as the nodal agency to
enable the SSI firms to get rated by leading credit rating agencies like CRISIL, ICRA,
CARE, SMERA, Fitch, ONICRA.

52
TABLE 12: Reimbursement of Performance and Rating Fee
Turn Over of SSI Reimbursement of Fee through NSIC
Up to Rs 50 Lacs 75% of the fee or Rs 25000/- (Whichever is less)
Above Rs 50 to 200 lacs 75% of the fee or Rs 30000/- (Whichever is less)
More than Rs 200 lacs 75% of the fee or Rs 40000/- (Whichever is less)
Source: http://www.nsic.co.in/creditrating.asp

The ratings given to the SME units help them not only in easy availability of finance but
a higher rating also allows them a subsidy of 0.5 to 1 percent of the prescribed rates by
the institutions. Thus ratings create a win-win situation for the SME units by providing
easy accessibility for their financial needs and the lenders get the confidence to give loans
to the units based on the ratings.

The Performance and Credit Rating Scheme also encourages the units to get rated as
some part of the rating cost is borne by NSIC. The rating not only helps in securing
access to finance but also helps in other avenues of business like vendor confidence and
large orders.

53
4.8 Financing the SMEs:
The SMEs market in India, though growing at a fast pace is highly fragmented. Despite
the fact that the sector contributes around 7 percent to the GDP of the economy, it
remains a largely neglected and under serviced sector from the banking and formal
funding point of view.

The credit challenge

Most SMEs in India are promoted by enterprising technocrats. They are ingenious in
seizing new opportunities and adapting to environmental changes, provided that the
growth opportunities are supported by good infrastructure and financing requirements are
being met. However, like anywhere else in the world, India SMEs too face challenges in
assessing adequate funds on time from banks and financial institutions. Only 17% of the
SME units are able to assess institutional finance and most of them depend more on
internally generated funds and /or informal financing channels for their expansion and
modernization requirements and are deprived of cheaper institutional credit.

SMEs with assess to institutional credit at competitive rates are more likely to
significantly increase their contribution to the GDP and would be in a better position to
take on global competitive pressure. The issue also needs to be assesses from macro
prospective.

Inherent issues in SME lending:

Banks find it difficult to provide SME adequate and timely credit due to these reasons:

Highly fragmented nature of SMEs

Information asymmetry

Multiple segments, multiple needs

Lack of transparence and limited financial disclosures in financial statements of SME

NPA and their legacy effects

Banks in India lend mainly against collateral. SMEs, by nature, are short on the same.
Even in schemes like Credit Guarantee Funds the cover is only up to Rs. 25 lakhs. There

54
is a need to assess a proposal sans collateral so that there can be independent appraisal of
the viability of the proposal.

Information asymmetry:
A proper assessment of the SMEs credit needs and of SMEs analysis of their balance
sheets and inter firm and inter size comparisons is not possible in a cost effective manner
in the absence of information. The multiple segments and multiple needs nature of SMEs
and the fine granularities arising due to the various types of ownerships, regions,
industries, products and processes, etc. further pose limitations on the lending banks.
Often, the low ticket size of an individual deal does not justify a detailed assessment on
the part of lender. Assessments take up a substantial part of the time of a banker. Bankers
have a tendency to concentrate on the larger ticket size. SMEs are hit both ways by
information asymmetry. While on one hand the lenders have little knowledge about them,
on the other hand SMEs are themselves not abreast with the latest happenings in the
finance world.

The government has made many efforts to provide finance to SME through the traditional
modes. But the following case study highlights the role of government as a facilitator for
meeting the needs of SMEs in their countries.

Case study on Government efforts to boost SMEs in Singapore19

The government plays a key role in supporting local business and their financing
requirements by providing various forms of financial assistance to help business at
different stages of growth. Below are two schemes provided by the Government of
Singapore to boost the SMEs which are the backbone to any economy of the world.

1. Debt Financing Schemes

2. Startup Enterprise Development Scheme (SEEDS)

55
1.Debt Financing Schemes:
Internationalization Finance Scheme (IFS)
This is an asset based loan or structured loan on value of sales order/ contract amount/
project value, up to a maximum loan amount of S$ 15 million.

The eligible persons for the scheme

Singapore based companies who wish to expand overseas. The Singapore based company
or its overseas subsidiary can apply directly for the loans.
But the overseas expansion must:

Complement or be related to Singapore business

Result in economic spin offs to Singapore (eg. Jobs or R&D in Singapore) the
company group turnover cannot exceed the maximum amounts mentioned below:

TABLE 13: MAXIMUM PERMISSIBLE LIMITS FOR LOANS

TYPE OF COMPANY MAX. GROUP TURNOVER

Trading Company* Non listed <S$ 500 million

Listed <S$ 200 million
Non Trading Company Non listed <S$ 200 million
Listed <S$ 100 million
* If more than 50 percent of turnover comes from comes from buying and selling goods

The eligible employment of funds:

The loan can be used to buy fixed assets that will be used overseas, raise working capital
for secured overseas projects, raise working capital for confirmed overseas sales orders.

Types of loans:
Asset Based financing (Fixed Asset Loan) & Structured Loan (Working Capital Loan)

56
Interest rates and re-payment:
Interest rates are tailored to borrowers need. They may be fixed or floating. Even
repayment period is tailored as per the needs.

Things to note:

If the overseas subsidiary is applying for the scheme, the Singapore based parent must
be willing to put up a corporate guarantee.

The maximum loan amount of S$ 15 million is computed on the group basis, i.e. S$ 15
million is the maximum amount the parent company and its entire subsidiary can obtain
under the scheme.

2.Startup Enterprise Development Scheme

Targeted at the non technology based business, SPRING Singapore will match S$ 1
raised from private investors, up to a maximum of S$ 300000 for this scheme. The
minimum investment by private investors must be at least S$ 75000. So for every S$ 1 an
investor puts into the business, Spring SEEDS Capital Pvt. Ltd. will invest S$ 2.

The eligible persons for the scheme:

For start ups in Singapore involved in developing new or better products, processes or
applications.
The start up enterprise must be:

A private limited company incorporated 0-5 years in Singapore

Has a paid up capital of S$ 50000 – S$ 1 million

Carries out its core activities in Singapore

The eligible employment of funds:

To encourage private sector investments in innovative seed or early stage start up
companies developing innovative products or processes that can be marketed and sold
globally.

57
Points to note:

Both SPRING SEEDS Capital and the business angel group will take equity stakes in
the company proportion to their investments. Corporate or individual investors must not
have prior interest in the company at the point of application.

Corporate investors must be legal entities with minimum paid up capital of S$ 500000

The individual should possess management experience, business contacts or technical
expertise that can add value to the start up.

58
4.9 Enterprise Social Responsibility (ESR) in SMEs:
The term ESR refers to socially responsible nature and behavior of individual business or
group of enterprises. ESR’s agenda refers to the theory and practice of attempts to
maximize the positive contributions of businesses to sustainable development, while
minimizing their negative impact. A balanced approach will eradicate socially
irresponsible behavior and encourage responsible practices which will succeed through a
combination of market driven and regulatory interventions.

The literature available suggests that MSMEs have not proved to be responsible citizens
or at best ignore their contribution to the society. In fact most radical literature actually
highlights the comparative more polluting nature of SMEs which skip compliance of
genuine welfare laws and at worst employ child labor.

Some instances of SMEs following ESP:

ESR activities are loosely organized and are primarily owner oriented.

Religion, social conditions, social capital, personal Indian values, financial condition of
the cluster ect dominate ESR behavior

ESR activities of MSMEs are more personal in nature which the owner of MSMEs
hesitates to share with the world.

The biggest issue with MSMEs in India is that not much is known about to what extend
and how they take care of their responsible citizen issues like employee well being,
workplace issues, environment quality enhancement, community development and
stakeholder involvement for social responsibility issues.

Issues of concern for SMEs because of not being socially responsible:

• Poor Management system
• Environmental Degradation
• Polluting nature
• Child labor
• Low wages to labor community

59
• Long working hours
• Do not follow the minimum standard of labor welfare
• Working environment
• Non compliance of regulatory norms
• Poor Health & safety at work place
• Lack of skilled manpower
• Poverty

60
4.10 SMEs and the need for innovation:

Innovation has always been the hallmark of small and medium enterprises. MSMEs that
integrate innovation can reap significant benefits. Notwithstanding their large share in all
enterprises and the overall employment generated, MSMEs continue to remain weak on
the revenue front when compared with their large counterparts. At the same time, the
increasing globalization is bringing in more competition in the home market, the
traditional stronghold of many MSMEs.

Providing innovative products with enhanced utility may help firms strengthen their
competitive position in home as well as international markets. This necessitates
innovation efforts to bring new and/or better products into the market while developing
organizational and manufacturing processes that enable more efficient and cost-effective
production, distribution and after-sales services.

MSMEs frequently operate in niches and have direct contact to customers thereby
potentially gaining valuable impulses in the form of customer feedback. Acting often in a
more informal manner and confronted with fewer intra-firm hierarchy levels than large
firms, MSMEs seem to be, in many respects, better placed for innovations than their large
counterparts. This potential edge, in normal course, should enable them to develop
products better suited to market demands and thus bring more success.

Barriers to Innovation for Indian MSMEs:

The most important external barrier to Innovation, as perceived by MSMEs, is skill
shortages due to the lack of emphasis on industrial Innovation, problem-solving, design,
experimentation, etc. in the education curricula. Other prominent external barriers are
lack of effective collaboration with research in universities and R&D institutions,
excessive government regulation, lack of collaboration with TNCs as well as insufficient
pricing power to derive value from Innovations.

For MSMEs, prominent internal barriers are skill shortages due to lack of effective in-
house training programmes; inability to move beyond the first successful Innovation and

61
develop a sustainable model for continuous Innovation; as well as poor understanding of
customer needs and market dynamics.

Innovation has to be adopted favorably by the managers at the helm of affairs as without
their commitment innovation cannot become an integral part of the unit.
Managerial barriers to innovation can be classified as:

Adopting an innovation is risky by definition. It is possible for most MSMEs to deal
with perceived risk – if they have enough time and resources. Unfortunately, today both
time and resources are in short supply.

Most of the MSMEs do not have access to well researched database whether it
pertains to market intelligence or technology

Information regarding the latest development and competency understanding is much

less. Work sharing is not seen in the local and national clusters, as it is a fight for the
same customer, in the same market. Even though the product and technology used by the
entrepreneurs are similar, the tendency to share is less among the cluster participants.

MSMEs find it difficult to match the wage rate, job security and career development
opportunities, available in larger organizations and therefore are not in a position to hire
skilled and competent manpower.

MSMEs find it difficult to match the wage rate, job security and career development
opportunities, available in larger organizations and therefore are not in a position to hire
skilled and competent manpower.

Current Status of innovation in SMEs:

Innovation can take place in the basic three forms viz. Product Innovation, Process
Innovation and People. Here the product innovation refers to either incremental
innovation i.e. a new feature in existing product or it may be a new differentiated product
designed as per the market needs. Process innovation includes use of new processes to

62
enhance the production processes or making innovative, redesigning the existing
processes by eliminating waste activities. Whereas the heart of innovation lies in creating
an innovative culture where people in organization are willing to try and innovate backed
by the support of management.

SMEs are recognized for their innovation but in the current conditions innovation is only
practiced as either incremental innovation or product innovation on basis of latent market
needs. Majority of SMEs have still not accepted management practices related to making
innovation as a part of their organization. There are examples of big companies
innovating like 3M and Google but to find such examples of SMEs is not an easy job.

63
4.11 Role of Clusters:
Across the globe in at least fifty developed and transition economies; MSMEs producing
same or similar range of products; have often been found to naturally co-exist in typical
geographical locations - "clusters". While clusters have benefited from natural external
economies; only those have excelled, where firms have gone for promotion of selective
"active cooperation" or "targeted joint action" and also taken the benefits of linking to
winner value chains within and outside the cluster. As a result clusters worldwide are
being acknowledged as a strategic mechanism through which regions and nations can
attain higher level of industrial development.

For the development of MSMEs the development of clusters in the SME eco system is
vital. Such clusters help in the growth of the units as the clusters are generally formed
naturally based on demographic factors. Therefore to facilitate the development of
clusters the government has developed artificial clusters i.e. clusters created by the policy
of government instead of natural formation of clusters.

The definitions of clusters in India are different for different clusters as defined by their
respective agencies according to the minimum number of units operating in the cluster.
The details of which are given in Annexure I.

In India, as per 2007 estimates, there are over 6400 clusters. Agencies have come up with
a range of definition of clusters by specifying a minimum number of units in a given
measured location. However, from a policy perspective it makes sense to typify cluster
by their broad challenges relevant for policy intervention. Accordingly, clusters in India
can be classified into three broad categories, namely, high-tech clusters targeting
innovation for existence, traditional manufacturing clusters targeting competitiveness and
consequent employment responsibility and low-tech micro enterprise 'poverty intensive'
clusters that have both employment as well as poverty implication.

64
TABLE 14: Various Clusters and their importance to the National Economy

Source: Policy and Status Paper on Cluster Development in India, 2007.

In a cluster, MSMEs derive advantages that large firms usually get due to their size,
through agglomeration economies that attract transporters, raw material and machinery
suppliers, etc. to the cluster and also through knowledge spillovers and increased
specialization. Clusters also gain due to motivational effects that arise due to demanding
customers, inter-firm rivalries and complementarities. Firms also gain due to low
transaction cost because of the level of trust that is found in a cluster in general.
However, these are all passive economies of scale and are omnipresent in a cluster.

The problems faced by the SMEs, particularly in accessing technology and maintaining
competitiveness have been formidable. The reasons for the inability of SMEs to identify
their technology needs are:
1) Poor financial situations and low levels of R&D;
2) Poor adaptability to changing trade trends;
3) Desire to avoid risk;
4) Non-availability of technically trained human resources;
5) Emphasis on production and not on production costs;
6) Lack of management skills;
7) Lack of access to technological information and consultancy services;
8) Isolation from technology hubs.

65
Policy recognition for clusters was first made in the Abid Hussain Committee Report
(1997). This was followed up in several Budget Statements and recognition in the 11th
Five Year Plan Approach document and culminated in the creation of the Expert Group
of Ministers. During the last decade 24 schemes/ programmes have supported around
1358 clusters. The resource allocated for cluster development under the listed schemes of
assistance is estimated at a cumulative of Rs 700 crores till 2006-07. It is estimated that
91.4% has been contributed by the Central Government, 2.4 per cent by the State and the
remaining 6.2 per cent by the technofinancial institutes and international organizations.

The support has been highly driven by promotion of infrastructure (94 per cent). It is
estimated that during the next 5 years resources worth Rs 4500 crores are likely to be
invested for cluster development. 80 percent of this amount will be for cluster
infrastructure. A subjective evaluation of the Schemes based on stated areas of support
shows that there is hardly any support for promotion of local institutional capacity and
promotion of private sector led development. 86 per cent of the implementing agencies
belong to the experience group of 1-2 cluster-years and 0.57 per cent has more than 50
cluster-years of experience. Similarly, 65.39 per cent of resource organizations have
cluster experience of less than equal to 5 cluster-years.

66
5. PESTEL ANALYSIS:
5.1 POLITICAL ENVIRONMENT:
Government Policies:
1. Gujarat Industrial Policy 2009, scheme for assistance to Micro, Small and Medium
Enterprises

Interest subsidy
a) Graded interest subsidy for micro, small and medium enterprises, interest Subsidy @
7% for micro enterprises and @ 5% for small and medium enterprises.
b) 1% additional interest subsidy to youth having less than 35 years of age in case of
first project
c) Maximum amount of interest subsidy will be Rs. 25 lakhs per annum, for a period of
five years.

Venture capital assistance

To promote Venture Capital Funding for MSMEs, for projects adopting innovative
technologies such as Technical Textiles, Nano Technology, Information Technology,
Bio-Technology etc., the Government would provide funds to Financial
Institutions/Banks who have the necessary expertise in operating Venture Capital Funds.
The maximum amount to be given to any such funds would be Rs. 10 Crores during the
operative period of the scheme.

Quality certification
Assistance will be granted to the eligible MSMEs for maximum 3quality certifications, at
the rate of 50% of cost of quality certification within overall ceiling of Rs. 6 lakhs in 5
years.

Skill enhancement:
50% of fees, subject to maximum Rs. 5000 per person for a minimum one week duration
training of skill up gradation in MSMEs in a programme conducted in institutions

67
suggested by an Anchor Institute or specialized institution in specific sector will be
reimbursed

2. Trading policies:
Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and
Ancillary Industrial Undertakings, penal provisions have been incorporated to take care
of delayed payments to MSME units given as under:

1) Agreement between seller and buyer shall not exceed more than 120 days
2) Payment of interest by the buyers at the rate of one and a half times the prime lending
rate of SBI for any delay beyond the agreed period not exceeding 120 days.
3) In case the buyer to make payment on or before the date agreed on between him and
the supplier in writing or, in case of no agreement before the appointed day. The
agreement between seller and buyer shall not exceed more than 45 days.
4) In case the buyer fails to make payment of the amount to the supplier, he shall be
liable to pay compound interest with monthly rests to the supplier on the amount from the
appointed day or, on the date agreed on, at three times of the Bank Rate notified by
Reserve Bank.
5) For any goods supplied or services rendered by the supplier, the buyer shall be liable
to pay the interest as advised at (2) above.
6) In case of dispute with regard to any amount due, a reference shall be made to the
Micro and Small Enterprises Facilitation Council, constituted by the respective State
Government.

3. MONITERING CREDIT SUPPORT20

In line with the Policy Package for Stepping up Credit to Small and Medium Enterprises
(SME), the Reserve Bank of India (RBI) has already issued guidelines to the public
sector banks to ensure 20 per cent year-on-year growth in credit to the SME. Action has
also been initiated to operationalise other elements of the said Policy Package. The RBI
and the Government will closely monitor implementation of these measures.

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4. Schemes for Technology/Knowledge based start ups
TABLE 15: Schemes for Technology/Knowledge based start ups
Ministry Schemes

Source: Report of Working Group on Science and Technology for SMEs

5. Scheme for Manufacturers of consumer products

TABLE 16: Scheme for Manufacturers of consumer products
Ministry Schemes

Source: Report of Working Group on Science and Technology for SMEs

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6. PORTFOLIO RISK FUND
The Small Industries Development Bank of India (SIDBI) will scale up and strengthen its
credit operations for micro enterprises and cover 50 lakhs additional beneficiaries over
five years beginning 2006-07. Government will provide grant to SIDBI to augment
SIDBI’s portfolio Risk Fund for this purpose.

7. RISK CAPITAL FUND

Government will also provide grant to SIDBI to enable it to create a Risk Capital Fund
(as a pilot scheme in 2006-07) so as to provide, directly or through intermediaries,
demand-based small loans to micro enterprises

8. PROGRAM FOR CLUSTER DEVELOPMENT INSTITUTES IN INDIA

TABLE 17: Program for Cluster Development Institutes in India

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Source: Policy and Status Paper on Cluster Development in India

71
9. Credit Guarantee Scheme for MSMEs to cover loans up to Rs. 100
lakhs21
A robust and vibrant MSME sector is the backbone of a developing economy like India.
Amongst the myriad problems faced by startups and young entrepreneur, credit remains
the single most pertinent issue.

The common hurdle faced in accessing credit comes from the obligation to provide a
collateral security or a third party guarantee. In order to address this overbearing concern
for credit, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
was setup by the GOI and SIBDI in August 2000. This is the only credit guarantee
institution in the country exclusively set up for the benefit of entrepreneurs in the MSME
sector.

Objective of CGTMSE:
The main objective is that the lender should give importance to project viability and
secure the credit facility purely on the primary security of the assets financed. The other
objective is that the lender availing guarantee facility should endeavor to give composite
credit to the borrowers so that the borrowers obtain both term loan and working capital
facilities from a single agency. The Credit Guarantee scheme (CGS) seeks to reassure the
lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails
to discharge its liabilities to the lender, the Guarantee Trust would make good the loss
incurred by the lender up to 75 / 80/ 85 per cent of the credit facility

The Credit Guarantee Trust Fund promises collateral free credit for SMEs. Under the
scheme, CGTMSE extends guarantee for credit facility up to Rs. 1 crore sanctioned to its
Member Lending Institutions (MLI), both in the manufacturing and services sector,
excluding retail trade. Entrepreneurs in the MSME sector can contact any of the member
lending institutions of CGTMSE. All public sector banks, major private sector banks,
selected Regional Rural Banks and financial institutions are registered as MLI of
CGTMSE.

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Under the scheme the CGTMSE shall cover credit facilities extended by MLI into a
single eligible borrower in the Micro and Small Enterprises Sector for credit up to Rs. 50
lakh (Regional Rural Banks) and up to Rs. 1 crore(Scheduled Commercial Banks and
selected Financial Institutions). The credit extended will be by the way of term loan
and/or working capital facilities.

The lender should extend credit without any third party guarantee or a collateral security.
The credit facility thus extended will carry zero percent risk weight for the MLIs for the
guaranteed portion.

TABLE 18: CGTMSE Scheme details

Category Maximum extent of Guarantee where credit facility is
Up to Rs. 5 lakh Rs. 5 lakh – Rs.50 lakh Rs. 50 lakh – Rs. 1 crore
Micro 85 percent of 75 percent / Rs. 37.5 Rs. 37.5 lakh plus 50% of
Enterprises the amount in lakh amount in default above
default subject Rs. 50 lakh subject to
to a maximum overall ceiling of Rs. 62.5
of Rs. 4.25 lakh lakh

Women Rs. 40 lakh plus 50 percent

entrepreneurs/ of amount in default above
Units located Rs. 50 lakh subject to
in North East 80 percent of the amount in default overall ceiling of Rs. 65
Region other subject to a maximum of Rs. 40 lakh lakh
than credit
facility up to
Rs 5 lakh to
micro
enterprises
All other 75 percent/ Rs. 37.5 lakh Rs. 37.5 lakh plus 50% of
category of amount in default above
borrowers Rs. 50 lakh subject to
overall ceiling of Rs. 62.5
lakh

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Regulatory bodies:
MSMEs are regulated under the Ministry of Micro, Small and Medium Enterprises under
the Government of India. This separate ministry was set up to address the needs to the
MSME sector. The Commissionerate of Industries and Commerce is the nodal agency for
the development of Micro, Small and Medium enterprises in the State.

There are many bodies that help MSMEs in various aspects. They are:
National Manufacturing Competitiveness Council (NMCC), Small Industries
Development Organization (SIDO), Small Scale Industries Board (SSIB), National Small
Industries Corporation Ltd. (NSIC), Confederation of Indian Industry (CII), Federation of
Indian Chamber of Commerce and Industry (FICCI), PHD Chamber of Commerce and
Industry (PHDCCI), Associated Chamber of Commerce and Industry of India
(ASSOCHAM), Federation of Indian Exporters Organization (FIEO), World Association
for Small and Medium Enterprises (WASME), Federation of Associations of Small
Industries of India (FASII), Consortium of Women Entrepreneurs of India (CWEI),
Laghu Udyog Bharti (LUB), Indian Council of Small Industries (ICSI), Indian Institute of
Entrepreneurship (IIE), National Institute of Small-Industry Extension Training
(NISIET), National Backward Caste Finance Development Corporation, National
Institute for Entrepreneurship and Small Business Development (NIESBUD), Small
Entrepreneurs Promotion and Training Institute (SEPTI), Small Industries Development
Bank of India (SIDBI).

The non government promotion structure:

There are three national associations representing all type of industries, small and large.
These are 'Federation of Indian Chambers of Commerce and Industries' (FICCI),
Confederation of Indian Industries (CII) and 'Association of Chambers of Commerce and
Industries' (ASSOCHAM). These associations represent mainly the interests of large
scale industries. However, these associations have membership of small sector as well
and represent mainly the policy related interests of SSI sector.

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The exclusively small industry related associations are diversified geographically and
sectorally and are supposed to have been linked with 'Federation of All India Small Scale
Industries' (FASSI), 'Federation of Small and Medium Industries' (FOSMI) and also
Indian Council of Small Industries (ICSI).

Union budget 2009-10 and SMEs:

The government has announced hike in allocation of funds to Market Development
Scheme and introduced special funds of Rs.4000 crore to be operated by banks for SMEs
to revive from the recessionary trends.

The economists say that the budget proposed by the UPA government has very little for
the SMEs reeling under tough times as a result of recessionary trends. More importantly
no worthwhile steps are taken to support the needier micro and small enterprises. Apart
from the special fund scheme no special package was announced by the Government to
heal the wounds of SMEs.

Government term and Manifestos of Parties for 2009 Lok Sabha Elections:
The Congress lead United Progressive Alliance has been ruling the country since 2004.
Thus there is political stability since the UPA government was able to maintain its
position even in the 2009 Lok Sabha elections.

1) Congress party manifesto:

“We will give special focus to the small entrepreneur and to small and medium
enterprises”
“Small and medium enterprises and the self-employed are the backbone of our industrial
and service economy. They are the major generators of productive employment for our
youth. The Indian National Congress pledges a “new deal” for SMEs and for first-
generation entrepreneurs by assuring them greater access to collateral-free credit,
liberating them from the multiplicity of laws and forms, and freeing them from the
clutches of inspectors. The Indian National Congress pledges a targeted cluster-based
approach to the growth of SMEs. There are a very large number of such clusters already

75
in different areas like textiles, food processing, handlooms and handicrafts, consumer
goods, khadi, coir and other traditional industries, and engineering. These clusters, mostly
in small and medium towns, will be given access to finance, technology and marketing
and will be provided vastly improved infrastructure.”

2) BJP Manifesto:
“The slowing down of India’s growth has had an adverse impact on people across the
country. To control inflation, the UPA Government drained liquidity out of the system,
which, in turn, hobbled both the organized and unorganized sectors. It is now desperately
trying to reverse that flawed policy, but clearly such half-hearted measures are not
sufficient. The situation calls for determined, direct and visible Government intervention.
The BJP plans to do so through robust policies aimed at revitalizing the economy and
placing India on the path of employment-generating growth coupled with rapid
development.”

“Promote SMEs and the retail sector which can generate a large number of jobs and make
a meaningful contribution to the national economy. The criteria for classifying SMEs will
be reviewed.”

3) Communist Party of India Manifesto:

The manifesto talks about implementing encouraging policies for SMEs in the labor
intensive sectors. The Left promises relief packages for sectors affected by recession like
textile and garments, gems and jewellary, leather, handicrafts, coir, cashew, marine
products, software and IT, particularly the SMEs. Providing adequate incentives,
infrastructure, support and ensuring sufficient credit from banks and financial institutions
are the major thrust areas.

The CPI (M) believes that SMEs cannot survive all on their own. There has to be specific
intervention by the government for this sector to survive. It intends to reverse the new
liberal paradigm of the past few years and have a renewed focus on the growth of public
sector and SMEs.

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Banks will be made more competitive. However, reforms will not mean more
privatization or FDI, especially in retail. As far as employment is concerned, the Left
wants employment guarantee to be extended to all adults. The Left wants taxation to
increase including on capital goods.

Lobbying by the MSMEs:

In a democratic set up it has been observed that the policies of government are influenced
by the lobbying of the influential people belonging to giant corporate business groups.
But in case of MSMEs, lobbying is a far thought since they are even not able to represent
themselves before the government in the way the large corporates. So for them first step
to climb is to have their voice recognized.

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5.2 ECONOMIC ANALYSIS:

Macro economic variables relating to the country have their impact on the operation of
SME units. So any change in these factors will have a resulting impact on the SME units
as well.

India's Gross Domestic Product is likely to grow by 7.2 per cent in 2009-10 as compared
to the growth rate of 6.7 per cent achieved in 2008-09 as per data released by the Central
Statistical Organization (CSO). This favorable growth rate shows that the recessionary
trends are now slowly being replaced by increase in demand.

Advance Estimates for 2009-10, for GDP at factor cost at constant (2004-05) prices is Rs
44,53,064 crore in 2009-10 as against the Quick Estimates of GDP for 2008-09 of Rs
41,54,973 crore.

The National Income at factor cost at 2004-05 prices is likely to be Rs. 39,24,183 crore
during 2009-10, as against the previous year's Quick Estimate of Rs. 36,72,192 crore. In
terms of growth rates, the national income is expected to rise by 6.9 per cent during 2009-
10 in comparison to the growth rate of 6.4 per cent in 2008-09.

The Per Capita Income (at 2004-05 prices) during 2009-10 is likely to attain a level of
Rs. 33,540 as compared to the Quick Estimate for the year 2008-09 of Rs. 31,821. The
growth rate in per capita income is estimated at 5.4 per cent during 2009-10, as against
the previous year's estimate of 5.0 per cent

The above factors show a positive outlook in the economy. Even during the recessionary
trends India did not suffer as much as the developed countries as one of the main reasons
was that our country is a consumption oriented nation. The exports form a small
percentage of the GDP and majority of goods produced are consumed indigenously.
There is growth in every aspect be it the GDP, National Income, Per Capita Income.

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Capital formation shows the movement of funds from the households and government to
the business sector which results in increased output as well as growth of economy. The
table below shows capital formation

TABLE 19: Sector wise gross capital formation

(Figures in Rs. Crores)
Private Corporate Gross Capital
Household sector Public sector
Sector Formation
Year
Current Constant Current Constant Current Constant Current Constant
Prices Prices Prices Prices Prices Prices Prices Prices
2003-04 350804 302895 188266 163091 174579 145578 738221 633105
2004-05 399328 306630 338755 274130 216962 166989 996099 781622
2005-06 443679 321498 491983 373165 271835 202935 1248889 930738
2006-07 512076 347307 611044 441866 329679 232844 1502508 1060108
2007-08 596846 378052 749894 513210 429014 290032 1829346 1220412
Source: RBI

The above table shows that gross capital formation at constant prices has increased at
CAGR of 14 percent whereas same for household sector has been only 4.5 percent. The
growth for private sector stood at 25.76 percent and for public sector it was 14.78
percent. This shows that capital formation from households is 3 times less than the
average growth. This may be attributed to variety of reasons like more spending on
consumption or savings not being transformed into capital formation. Whereas the private
sector shows a healthy growth of 25 percent which may be that the profits of business are
ploughed back into the business. The public sector shows a satisfactory growth as it is
near to the average growth rate achieved.

Prime Lending Rate:

As per the current situation the PLR is 11 – 12 percent. RBI, the Regulator of Banks
reviews the rates as and when the need arises and tries to adjust the economic situation
with the tool of interest rates. SMEs have been included in the priority sector lending and
eligible to rates lower than the PLR. The financial institutions offer them rate about 0% to
1% lower than the PLR. But this may not be the case always. Since the loans offered to

79
SMEs bear more risk of default the financial institutions may also charge a rate higher
than the PLR.

Business Confidence Index:

The business confidence index shows the confidence the business community has relating
to the economic progress in the current time as well as future expectations relating to the
economy of the country.

MasterCard in association with NCAER conducts Index of Business Confidence surveys.

The Quarterly Index is based on a survey which measures business confidence on four
indicators relating to ‘Overall economic conditions six months from now’, ‘Financial
position of the firm six months from now’, ‘Investment climate’ and ‘Level of capacity
utilization’. All four indicators carry equal weight

Figure 13: Business Confidence Index of India

Source: NCAER Survey January, 2010.

The Business Confidence Index (BCI) for January has exceeded the October 2009 figure
by 7.03 per cent. Also, the BCI figure of 153.8 in the current round is the highest since
the 154 recorded in January 2008. The BCI reported a sharp rise of 21 per cent, with a
rating of 143.7 points in October 2009, compared to 118.6 points in July 2009. BCI
ratings in April 2009 were at their lowest, at 81.6 points, after the global financial crisis

80
hit world economies. Previous data reflects a trend of BCI ratings rising in October, a
period of increased sales due to the festive season in India. In the October survey of 2008,
this pattern was broken for the first time due to the effects of the global financial crisis on
Indian markets.

Political Confidence Index:

The Political Confidence Index shows the confidence of the business community on the
government in the centre since the policies relating to the trade and commerce are
undertaken by the central government.

The PCI survey is based on eight indicators relating to 1) Managing overall economic, 2)
Growth Managing Government Finance, 3) Managing Inflation 4) Managing
Unemployment 5) Managing Exchange Rate 6) Managing Conducive Political Climate 7)
External Trade Negotiations (Both Bilateral/ Multilateral) and 8) Pushing the Economic
Reforms Forward.

Figure 14: Political Confidence Index

Source: NCAER Survey January, 2010.

The 71st round of the BES has witnessed a drop of 16.48 per cent in the PCI as compared
to October 2009. This follows the 3.96 per cent drop seen in the PCI during the 70th
round from a record high of July 2009, which appeared to be a result of the installation of
a stable coalition government after the general election. The downward correction

81
witnessed since may be natural. However, an interesting point to note about the current
round is that the PCI has fallen despite an increase in the BCI – a tendency observed in
the previous round as well.

The sustained high levels of PCI ratings are representative of enhanced levels of
confidence of the business sector in economic policies. Given the continuing weakness in
global markets, strong business confidence in national economic policies implies that
commercial policies will be much more aligned with domestic economic policy
directions.

Thus, the link between the two indices, BCI and PCI, may not be rigid. In fact, across all
parameters of the PCI the current round points to greater dissatisfaction with policies
while the improvement in economic conditions is perhaps attributed to other factors. One
source of dissatisfaction may lie in the high price rise of food items which has been seen
over the past months leading to lower demand and higher wages, and perhaps the fear
that a monetary tightening might follow.
The details relating to the sample used for the survey is given in Annexure II.

Global Economic Scenerio:

TABLE 20: GDP of Global Economies

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Source: World Economic Outlook 2010, World Bank

The world GDP projection for the next year is 3.2 percent whereas the growth in GDP of
developing countries is much higher. So for the SMEs, they now need to focus on finding
new export markets for their products. These developing countries offer potential market
which is untapped by Indian SMEs. The products may find acceptance in these markets
easily and the exporters can increase their exports. In case of SMEs, there is not much
import trade carried on by them. But even for importers they can explore opportunities of
securing raw materials from these countries.

The positive outlook for the developing countries as well as recovery of developed
economies will increase the trading opportunities and for the SMEs they now need to
make their presence felt in these countries with their quality products.

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Provisions of General SSI exemption from Excise Duty

Various concessions are given to small scale industries to encourage their growth and
also on account of administrative convenience. Since Excise is a duty on manufacture, it
is payable even by a small unit manufacturing the goods. However, it is Government’s
policy to encourage growth of small units. Moreover, it is administratively inconvenient
and costly to collect revenue from numerous small units. Applying ABC principle, the
revenue collected from small units would be negligible compared to the efforts and
administrative costs involved. The Govt. has therefore, given various concessions to
small scale industries (SSI). SSI units whose turnover is less than Rs. 4 crores are eligible
for the concessions.

Goods not Eligible for SSI concession

Broadly, items generally manufactured by SSI (except in tobacco, matches and textile
sector) are eligible for SSI exemption. Some items like pan masala, matches, watches,
some textile products, tobacco products, etc. are specifically excluded, even when these
can be manufactured by SSI. Some items like automobiles, primary iron and steel etc. are
not eligible, but anyway, these are beyond capacity of SSI unit to manufacture.

Goods with other’s brand name not eligible - Goods manufactured by an SSI unit with
brand name of others are not eligible for SSI concession, unless goods are manufactured
in a rural area.

Duty payable on goods manufactured for captive consumption, if not eligible for SSI
concession - If goods which are not eligible for SSI concession are manufactured by SSI
unit for captive consumption, duty will be payable, even if final product is eligible for
SSI concession.

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SSI units eligible for SSI concession

All industries irrespective of their investment or number of employees are eligible for
concession. In fact, even a large industry will be eligible for the concession if its annual
turnover is less than Rs. 4 crores. The SSI unit need not be registered with any authority.

EXEMPTION AVAILABLE ONLY IF TURNOVER IN PREVIOUS YEAR WAS

LESS THAN RS 4 CRORES - A unit is entitled for exemption only if its turnover in
previous year was less than Rs. 4 crores. Units whose turnover was over Rs. 4 crores in
2004-05 are not eligible to any SSI concession in 2005-06. They have to pay full normal
duty from 1st April, 2005.

CHOICE OF VARIOUS TYPES OF EXEMPTION - SSI units have been given two
types of exemptions -

(a) Unit can avail full exemption up to Rs 150 lakhs and pay normal duty thereafter. Such
units can avail Cenvat credit on inputs only after reaching turnover of Rs 150 lakhs in the
financial year.

(b) Unit intending to avail Cenvat credit on inputs on its entire turnover has to pay normal
duty without any concession.

When Second Option Suitable:

Option of payment of duty may be suitable in following cases - (a) When buyer intends to
claim Cenvat credit. In such cases, the effective cost will be lower as SSI unit can claim
Cenvat on inputs (b) When SSI unit intends to export the products and has huge balance
in Cenvat credit account. In such cases, he can pay duty and claim rebate after export of
goods. Otherwise, the balance may remain unutilized. There is provision to get refund of
balance lying in credit in Cenvat Credit account. However, such refund can be only of
Cenvat on inputs and not of capital goods.

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Cenvat to be reversed if unit decides to opt for exemption

If the unit was availing Cenvat credit prior to 31st March, it will have to pay an amount
equivalent to Cenvat credit allowed to him on the inputs lying in stock or used in finished
excisable goods lying in stock as on 1st April. If any Cenvat credit on inputs is balance
on 31st March, it will lapse on 1st April [Rule 9(2) of Cenvat Credit Rules]. The
‘amount’ is not ‘duty’ and hence, strictly, Cenvat credit of such ‘amount’ paid will not be
available.

Board has confirmed that Cenvat credit will be available in respect of duty on inputs
contained in on stock of raw material, WIP and finished goods when SSI unit crosses the
turnover limit and starts paying duty. SSI unit should keep proper records.

Slabs in SSI excise exemption: Following are slabs in SSI excise exemption.

First slab of 150 lakhs - There is full exemption from excise up to the first clearances of
Rs. 150 lakhs, starting from 1st April every year, if the SSI unit does not avail Cenvat
credit on inputs. If an SSI unit manufactures goods of different varieties, falling under
different Chapter heads and/or in different factories, total exemption considering
clearances of all Chapters together and all factories of same manufacturer together, will
be Rs. 150 lakhs. An SSI unit can opt for paying full normal duty also.

Second slab after initial 150 lakhs - After the turnover crosses Rs. 150 lakhs, full normal
duty is payable. The SSI unit can avail Cenvat credit on inputs in respect of inputs used
after turnover crosses Rs 150 lakhs. Even if an assessee crosses turnover of Rs. 4 crores,
he has to only pay duty at normal rate. The SSI manufacturer does not have to pay duty
on earlier turnover for which he had availed concession. However, in next year, he will
not be able to avail any concession and he has to pay normal rate of duty from 1st April
itself.

No concession if previous year’s turnover was over four crores - SSI exemption is
available only to those units whose turnover was less than Rs. 4 crores in previous
financial year (i.e. April to March). If turnover had exceeded Rs. 4 crores in previous

86
year, there is no excise exemption at all and full excise is payable right from the
beginning. If turnover exceeds four crores in current year, concession availed during
current year need not be refunded, but next year, there will be no SSI concession.

Other Exemptions to small sector

Goods manufactured without aid of power - Some goods are exempt if no process in
or in relation to manufacture of these goods is ordinarily carried on with aid of power.
Some of these are mentioned in CETA itself and some in a Notification No. 167/86 dated
1-3-86.

Goods in rural area by cooperatives - Some goods manufactured by registered

cooperatives or institutions recognized by Khadi and Village Commission or Board are
exempt. These are: preparations of vegetable or fruits, sauces, laundry soap, foot-wears,
calculators, cassettes, radios, black and white TV sets, electric iron and toaster, electronic
clocks and watches, synthetic detergents, jute yarn and fabrics. This exemption is
available to un-branded goods. If the goods are branded, the exemption is available only
if the brand or trade name belongs to (a) the manufacturer producing the goods himself or
(b) if it belongs to Khadi & Village Industries Commission or Board, (c) National Small
Industries Corporation or State Industries Development Corporation or (d) a State Small
Industries Development Corporation. In other words, the exemption is not available if the
brand name belongs to a private trader who is not manufacturing those goods

Genuine specified products of village industry - Certain items produced by village
industry and marketed by or with assistance of Khadi & Village Industries Commission
are exempt from duty. The products include - lac, gum, vegetable products, fireworks,
resin acids, articles of vulcanized rubber, articles of leather, articles of wood, ceramic
products, furniture etc.

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Procedural concessions to SSI

Quarterly Return - The SSI unit availing SSI concession need not submit monthly
ER-1 return. They have to submit a quarterly ER-1 return, by 20th of following month.

Payment By 15th Of Following Month - SSI units have to pay duty by 15th of
following month, while large units have to pay duty by 5th of following month. Both
have to pay duty in March by end of the month.

Export Procedures For SSI - The SSI units not covered under excise provisions have
to follow simplified export procedures. They do not have to prepare ARE-1 form etc. The
procedure has been discussed in a previous chapter.

Sending material for job work by exempt SSI unit - SSI unit can send his raw
materials or semi-finished material to another unit for job work. Such another unit can
carry out job work and return to SSI unit without payment of duty. The SSI unit can do
further processing on these inputs and clear his final product without duty if his total
turnover is below Rs. 150 lakhs.

Exempted small units Exempt from registration - Exempted small units, having
turnover below Rs. 150 lakhs, which are exempt from duty, are also exempt from
provisions of registering their unit with excise authorities.

These small units, which are exempt from registration, do not have to follow any other
excise formality. However, they have to maintain their own records of manufacture and
clearance, to prove that their turnover is less than Rs. 150 lakhs per year.

Visit of officers only with prior approval - Excise inspectors, preventive parties and
audit parties can visit SSI unit only with specific permission of Assistant Commissioner
and for a specific purpose. They have to enter relevant particulars in Visitors book
maintained by registered person.

Audit of SSI unit once in two to five years - Audit of SSI units should be done only as
per following frequency - (a) Units paying duty of Rs one crore or above in financial year
should be audited every year. (b) Audit of units paying duty of Rs 10 lakhs and above but
less than Rs one crore in financial year, should be normally audited once in two years. (c)

88
Not more than 20% of units paying duty less than Rs 10 lakhs in a financial year shall be
audited every year. Selection will be based on risk pattern as above.

Income tax:

In direct taxes code the exemption limit for tax free income has been raised by Rs 10000
for individuals. But the relief came in form of presumptive taxes where now the business
under the turnover of Rs. 40 lakhs are not required to maintain any books and pay 8
percent taxes on their turnover. This rule was first applicable only for construction
business.

SMEs to get relief from New Tax Code:

Enterprise with a turnover of up to Rs. One crore could see a substantial reduction in their
tax liability and compliance costs once the recently unveiled direct tax code comes into
effect. The new code has a proposal to enhance the limit for availing presumptive
taxation option to businesses with a turnover of up to Rs.1 crore from the present Rs.40
lakhs.

Under a presumptive taxation regime, SMEs can opt for a flat tax on their turnover
instead of paying taxes based on a detailed assessment as per the tax laws. In the July’09
budget, finance minister Pranab Mukherjee had expanded the scope of presumptive
taxation to all small business with a turnover of Rs.40 lakhs from the fiscal 2009-10.
Under the new direct tax code, any business having a turnover of up to Rs. 1 crore can
pay tax at the rate of 8 percent of total turnover or gross receipts. Businesses that opt for a
presumptive tax regime are not required to maintain books of accounts, thereby bringing
down their cost of compliance significantly. Moreover they can pay their entire tax
liability at the time of filing returns i.e. they do not have to pay periodic advance tax.
With a higher limit, more businesses can take advantage of this regime.

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5.3 SOCIAL FACTORS:

Lifestyle Trends:

The affluent Indian consumer has evolved – luxury cars, customized holidays, automated
homes, eating out, foreign vacations, music and entertainment are essentials. The great
Indian middle class is a huge consumer market, which few can ignore. The retail boom,
well traveled Indians, growing number of expatriates in India and young executives with
significant disposable incomes – all add to a perfect mix for a burgeoning market focused
on fashion and lifestyle.

Thus, the average Indian is no more attracted towards savings for the old age and believes
in spending income to satisfy comfort and luxury needs. This has opened a host of new
opportunities for the SMEs in India since now there is greater demand for products which
are either provided directly by them or they are supporting units in production of other
products.

Demographic factors:

Demographic variables of a population, such as age, education level, income level, etc.
have their own impact on the SME sector.

The age of people in India is a favorable factor affecting SME sector since most of our
population is young and in areas where craftsmanship is required even the old aged
skilled labor are handy in producing things. The education levels in our country vary in
huge proportion as compared between states. There are states with handsome number of
literate population whereas there are states where even primary education is a dream.
Low level of literacy in rural areas is also a disappointing factor. But the major issues of
concern are the inadequate availability of vocational training centers across the country
and knowledge about their existence to the rural people.

The per capita income was Rs 38,084 in 2008-09 without adjusting for inflation, which is
fairly low. This is one of the major reasons of failure of SMEs as they do not have

90
enough disposable income to continue their business with own funds and borrowing
funds is not easy for them

Consumer Attitude and Opinion:

Consumer attitude and opinion are well reflected by the consumer confidence index.
India ranks second with 117 points in consumer confidence in the fourth quarter of 2009,
according to the Nielsen Global Consumer Confidence survey. The survey results
indicate that the recovery from the global economic downturn is faster in India as
compared with other countries in the world.

The survey highlights that eight of the top 10 most confident markets were from Asia
Pacific in the fourth quarter of 2009. The survey also revealed that Indians are most
optimistic about job prospects in 2010. 83 percent of the Indian consumers expect things
to improve in 2010. India is followed by Indonesia at 70 percent.

Media Views:

In our country Media has got enormous powers as we have the Freedom of Speech as one
of the basic rights for our citizens. Media in our country has been a source which has
been giving its frank opinions on various burning issues of the country. Even in case of
promotion of SMEs, Media has come to rescue. Time and again they highlighted the
plight of the SME sectors through various platforms and they have even supported the
entrepreneurs. One such platform on CNBC TV18 was the IDBI SME Forum in
association with IDBI Bank and other was Business Bazigaar.

Brand Image:

The SME sector has earned the reputation of being the backbone of the economy by
being the second largest employer. But the sector has not been able to transform this
image to their advantage. The pity is that the largest employment is provided by
Agriculture which also is not in a healthy state. It is a fact that both of these sectors are

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the largest employment providers and they themselves are searching for a way to survive
in the country.

Role Models:

Indians are known to be emotional by nature and this influences their attitude. The people
are very enthusiastic about following their role models and trying to be like them. As far
as the SME sector is concerned they are also influenced by the personalities like Late
Shri Dhirubhai Ambani who have risen from rags to riches.

Advertising and Publicity:

The SME sector has now recognized the importance of exposing their products to the
world through various vehicles like advertising, publicity, trade fairs, internet, etc. The
reach of SME products has increased due to their efforts of getting recognition at various
events.

But still many SMEs are averse to advertising or publicity regarding them as a waste of
resources. They have had unpleasant experiences in the past which has lead them to this
belief. But they do not analyze the reason of failure. Most of the times they do not
formulate any strategy for advertising or publicity and they end up with only wasted
efforts. For SMEs operating on low expenditure budget it is vital to spend every rupee in
a planned manner for advertising. This is one of the things not followed by them and
instead of planning they just spend their resources on experience basis or judgmental
basis which does not prove many times.

Even when it comes to branding, they think that Brand names are only for MNCs
whereby they do not understand that branding does not differentiate between sizes of the
organization. Brand gives an identity to the product ad so it should not be seen as a tool
for only established companies.

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5.4 TECHNOLOGICAL FACTORS:

This section has been dealt differently from the traditional approach of analyzing the
technological factors.

In the first part the usage of technology by the SMEs has been dealt with and in the
second section the use of Information and Communication Technology by SME has been
described.

Section I:

While we look into new approaches to strengthen SMEs, we have to understand the
limitations of SMEs, which include low capital base, concentration of management
functions in one/ two persons, inadequate exposure to international environment,
inadequate R&D and lack of professionalism. Besides these, the most formidable
problem faced by the SMEs has been in accessing technology and maintaining
competitiveness.

The reasons for the inability of SMEs to identify their technology needs are:
a) Poor financial situations and low levels of R&D;
b) Poor adaptability to changing trade trends;
c) Desire to avoid risk;
d) Non-availability of technically trained human resources;
e) Emphasis on production and not on production costs;
f) Lack of management skills;
g) Lack of access to technological information and consultancy services;
h) Isolation from technology hubs.

In the recent decade the use of technology has grown manifold times in the world.
Technological competence gives firm an edge over their competitors. So instead of

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adopting technology only as a facilitator, the firms have recognized the need to develop
technical excellence to differentiate themselves from the crowd.

In case of SMEs the use of technology is low due to various reasons mentioned above.
But slowly and gradually the usage has increased on account of the reduced cost of
accessing technology.

Technology relating to particular sectors operated by SMEs has developed a lot. Most of
those sectors are ones which provide ancillary support to large industries. This is because
of the fact that the corporates have realized that in order to develop their organization,
parallel development of their supply chain partners is necessary to reduce transaction
costs and improve the quality of inputs.

There is a strong need for spreading awareness of Intellectual Property Rights amongst
the SMEs. Patenting has to be encouraged by offering financial support/ subsidies.
Likewise, quality assurance, labeling, bar-coding etc. of products should be encouraged
in a big way.

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Section II

Information and Communication Technology and MSMEs:

In the current era of global industrial restructuring, Information and Communication
Technology (ICT) is playing a crucial role in interlining enterprises across the internal as
well as external value chains. ICT is perhaps the single most important intervention
which facilitates integration of global supply chains and enhancing their competitiveness.
In fact, ICT is creating a disruptive impact on companies and markets, driving rapid
innovations and changing the traditional market equations through emergence of new
software and service architectures.

Few examples of successful ICT adoption in India:

1. ITC’s e-Chaupal initiative has brought ICT interventions at the grass root levels
integrating the hundreds of thousand of farmers which form a part of the company’s
fulfillment system.
2. The Corporate Internet Banking portals of some of the leading banks in the country
which has integrated the larger manufacturing organization to their supply chains in the
MSME segments through facilitating financial management through internet.
3. Manufacturing cluster portals for various industries aimed at promoting exports and
collaboration.

Current ICT adoption levels:

There have been several studies providing substantial evidence of the positive ICT effects
on MSME performance and competitiveness. However the MSMEs lack the capital and
investment strengths when compared to the large organizations. There is a predictable
gap in the levels of adoption of ICT between the larger companies and the MSMEs. The
Indian MSMEs are currently at various levels of ICT adoption and maturity. The sector
has witnessed a flurry of activities in recent years with many of the organizations
transitioning to next levels of ICT maturity from their current capability levels. The ICT
penetration levels are different across different industry sectors and also differ in different
geographical regions.

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The IT adoption is reasonably high for some of the MSMEs which are a part of matured
industry value chain with higher levels automation e.g. auto components industry. On the
other hand of the spectrum are the cottage and small scale sectors of the traditional
industries and clusters specializing in handicrafts and natural products.

The level of IT maturity across firms can be evaluated using a framework comprising of
four distinctive levels of IT maturity

Infrastructure Level
These firms would be having very basic level of computerization like office automation
and connectivity. They will be restricted in their use of IT beyond using basic
communication and data processing.

Utility level
Firms at this level would be having several point applications aimed to automate selective
functions. There will be islands of information with little or no integration between the
applications.

Enhancement level
This will include firms which have integrated transaction processing environments with
automation of core business processes and functions. The firms will be using an

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enterprise level resource planning application (ERP) which integrates various business
processes across functional departments.

Frontier level
The highest level of IT maturity would be organizations which have analytical and
decision support applications along with an integrated IT environment. They will also be
using IT innovatively and be integrated across the industry value chain.

It has been observed that over the years the use of ICT has increased in business carried
on by the SMEs. But the level reached by them is just the first or second level where the
use of ICT is limited just as an enabler which facilitates the functioning of the
organization. The investment in technology to reach the third level is seen as a risk. Since
most of the units feel that their competitors have not reached that level so they hesitate to
upgrade to that level due to fear of failure. Also the cost is high not only to implement the
technology but also in form of shortage of skilled manpower to operate those systems.
Training has to be provided to them in order to successfully implement the system but
retaining trained employees is a matter of concern for the business units.

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5.5 ENVIRONMENTAL ANALYSIS:

By any benchmark, India has an extensive environmental management system

with a comprehensive set of environmental laws, specific statutory mandates, regulatory
instruments, and institutional frameworks to implement and enforce environmental policy
objectives. Environmental legislation is on the national list. However, it involves a shared
responsibility between the Center and the States, with the central government having
responsibility for policy and regulatory formulations and the State governments for
ensuring implementation. At the central level, the Ministry of Environment and Forests
(MoEF) and the Central Pollution Control Board (CPCB) are the nodal agencies
responsible for environmental compliance and enforcement. Similarly at the State level,
the State Government Departments of Environment and Forest (DoE/DoF) and the State
Pollution Control Boards (SPCB) are the designated agencies to perform these functions.

Another key institutional actor for environmental enforcement in India is the

judiciary that many would argue have filled a vacuum left by the regulatory agencies.
Over the past decade, the courts have stepped in and developed a system of
environmental jurisprudence, resulting in significant new policy mandates for both the
public and private sectors. The legislation also requires updating to address new
environmental risks.

Environmental problems, particularly in the “brown” sector, such as industry,

energy and infrastructure, and urban development, have received increased public
attention. The regulatory focus has been on controlling the large and visible polluters.
However, SMEs totaling to more than 4.5 million units, account for about 40 percent of
industrial output in terms of value and estimated to contribute approximately 70 percent
of the total industrial pollution load.

The pollution generated from small scale industries is generally higher per unit of
production than that of the corresponding large units partly because of the use of obsolete
technologies and poor management practices, and partly because they do not come under
the orbit of regulatory authorities. In the past, many SMEs, particularly those set up

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before the start of deregulation in the 1990s, fell outside the jurisdiction of either the local
industrial authority or the SPCB and continues to be a problem today

The State governments and SPCBs have generally not paid much attention to the
pollution generated by these because: (i) the difficulties in monitoring these units; (ii) the
relatively high costs of pollution abatement for small units compared with large units (iii)
the possible adverse impact of enforcing the standards on the output and employment of
these industries, which are, cumulatively, the second largest employer in the country after
agriculture.

CASE STUDY: INDIAN COAL POWER PLANTS

Source emission standards for Suspended Particulate Matter (SPM) from coal power
plants in India --150 µg/Nm3 for generation capacity over 210 MW and 300 µg/Nm3 for
generation capacity under 210 MW -- are consistent with international benchmarks.
However, seven years after the notification introducing these standards (1998), over one-
third of coal power plants are yet to comply with the national emissions standards (and 27
are yet to comply with the effluent standards). These plants are old, in poor shape and
typically owned by cash-strapped state government utilities. Meeting the standards is not
possible without a major and expensive Renovation and Modernization (R&M).
Government of India has been implementing the R&M program for about 20 years;
however, progress has slowed down in the past years, due to severe power shortages
making it impossible to shutdown a plant generating cheap power for renovation.

Source: http://kharagpur.in/Strengthening-Institutions-for-Sustainable-Growth-Country-Environmental-
Analysis-for-India.pdf

India has seen the most significant reforms in industrial policy triggering its
economic growth but integration of environmental objectives in this process has lagged
behind. Also to promote and attract investments in the State, Industrial Development
Associations (IDAs) tend to offer attractive concessions and tax holidays to the project
proponents in many cases without considering the environmental sensitivities of investments.
For example, Gujarat has attracted significant investments for the production of dyes, dye
intermediates, and textile processing in the small scale sector, which reportedly has led to
significant contamination in the surface and ground waters and land environment.

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The industrial associations, such as the Federation of Indian Chambers of Commerce
(FICCI) and Confederation of Indian Industries (CII), have developed important
initiatives to share best practices, provide compliance assistance and promote voluntary
initiatives. For example, the Association of Chambers of Commerce and Industry
(ASSOCHAM) and FICCI have organized workshops on ISO 14000, developed courses
in internal auditing of environmental management systems, and provided technical
assistance on pollution prevention and waste minimization. Both CII and FICCI have
developed such programs targeting SMEs.

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5.6 Legislative Factors:

MSME ACT, 2006

The enactment of the Micro, Small and Medium Enterprises Act, 2006 was a landmark
initiative taken by the Government of India to enable the SMEs gain competitive
strength, address the issues and challenges and reap benefits of the global market.

Subsequent to enactment of the “Micro, Small and Medium Enterprises Development

Act, 2006” by the Parliament, the Honorable President vide Notification dated 9th May
2007 amended the Government of India (Allocation of Business) Rules, 1961. Pursuant
thereto the then, Ministry of Agro & Rural Industries and Ministry of Small Scale
Industries were merged into a single Ministry, namely, “Ministry of Micro, Small and
Medium Enterprises.”

Although, the primary responsibility of promotion and development of MSMEs is that of

the State Governments, the Government of India, in recognition of potential of these
enterprises, has always taken proactive steps towards supplementing the efforts of the
State Governments through different initiatives. The role of the Ministry of Micro, Small
and Medium Enterprises (M/o MSME) is mainly to assist the States in their efforts aimed
at promoting growth and development of MSMEs, for enhancing their competitiveness.

Some of the schemes by The Ministry of MSME:

Scheme of Surveys, Studies and Policy research
Entrepreneurship Development Institutional Scheme
Scheme of Fund for Regeneration of Traditional Industries
Rajiv Gandhi Udyami Mitra Yojana
Marketing Assistance Scheme
Performance and Credit Rating Scheme
Prime Minister’s Employment Generation Programme
Product Development, Design Intervention and Packaging
Khadi Karigar Janashree Bima Yojana
Interest Subsidy Eligibility Certification

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 The specific programmes undertaken by the Ministry of MSME
Adequate flow of credit from financial institutions/banks
Support for technology up gradation and modernization
Integrated infrastructural facilities
Modern testing facilities and quality certification
Access to modern management practices
Entrepreneurship development and skill up gradation through appropriate training
facilities
Support for product development, design intervention and packaging
Welfare of artisans and workers
Assistance for better access to domestic and export markets
Cluster-wide measures to promote capacity-building and empowerment of the units
and their collectives
Source: Annual Report 2008-09, Ministry of MSME

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MSMED ACT 2006: PRE ENACTMENT V/S POST ENACTMENT: A
COMPARATIVE ANALYSIS

PRE ENACTMENT POST ENACTMENT

Apex statutory SSI Board is the apex non- Clause 3 of the MSMED Act
body statutory advisory body provides for the establishment of
constituted by the Government National MSME Board.
of India
As an ‘entity’ Existing concept of only the Clause 7(1) introduces the concept of
‘Industries’. i.e. the Small Scale ‘Enterprises’ as against ‘Industries’.
Industries (SSI) Broadly classified into enterprises as
engaged in manufacture of goods &
engaged in rendering services
Establishment Two -stage registration process Two-stage registration process of
procedure of Micro & Small industry in Micro & Small industry is dispensed
place. with & replaced by filing of
memoranda, as per Clause 8.
Procurement Non statutory Clause 11 provides for the
Policies notification of preference policies, by
the Central or a State Govt. in respect
of procurement of goods & services,
produced and provided by the MSEs.
Delayed Period of repayment by the Clause 15 Period of repayment by the
Payments- supplier – 120 days. Penal supplier – 45 days. Clause 16 Penal
Repayment, interest rate is 150% (or 2 ½ interest rate is 200% (or three times)
Penalty times) of the PLR. of the PLR.
Delayed No stipulated time period for a Reference made to the MSE
Payments – decision on a reference made to Facilitation council to be decided
Dispute a Industry Facilitation Council. within 90 days from the date of
Resolution reference, as per the Clause 18(5)
Deduction Amount of interest payable or Clause 23 Provides to disallow the
under the paid by any buyer is allowable amount of interest payable or paid by
Income Tax as expense. any buyer
Act, 1961
Closure of Non existent as a statutory Clause 25 provides that the Central
Business requirement Govt. may notify a scheme for
facilitating closure of business
Provisions for Non existent as a statutory Clause10 provides that the policies &
facilitating requirement practices in respect of credit to the
Credit MSMEs shall be progressive and
such as may be specified in the
guidelines or instructions issued by
the RBI.
Source: Published by the SME Division, Confederation of Indian Industry, 249 F, Sector 18, Udyog Vihar,
Phase IV, Gurgaon - 122 015.

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Limited Liability Partnership Act, 2009
Generally the firms started by entrepreneurs are either on Micro scale or Small scale.
With the passage of time as the entrepreneur weathers the storms faced in the initial years
the business starts to grow. Growth brings changing needs to handle business and the way
business activities are carried out also have to be in according to the needs. With this new
needs arise. One such is expansion of form in which business is carried on. The form may
be sole proprietorship or partnership establishment of the business unit which needs up
gradation. This change in Indian context for any SME will be a Herculean task to fulfill
all the procedures and the company form will result into higher taxes which the owner
will not wish. In this case the enactment of the Limited Liability Partnership Act, 2009
has come as a welcome step from the government. Such a LLP unit gets taxed as a
partnership firm but it has the characteristics of a company.

Objectives for formation of LLP Act, 2009:

Important vehicle to cater to the needs of professionals, small-scale sector and venture
capital funds as well as innovative business models which would lead to setting up of
multi-disciplinary partnerships.

Some important aspects of the Act:

Conversion to LLP

A firm, a private company and unlisted public company may convert itself into LLP.

RoC shall issue certificate of registration, on satisfying that all the provisions of the Act
and related Schedules have been complied with. Such LLP shall inform the Registrar of
Firms or Registrar of Companies about such conversion within 15 days of the date of
registration.

All property of firm or company shall vest in LLP.

Liability of LLP and partners

Every partner of LLP is agent of LLP but not of other partners.

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LLP will be liable if a partner of LLP is liable to any person as a result of wrongful act
in the ordinary course of business.

Obligations of LLP shall be solely the obligation of LLP and shall be met out of the
property of LLP.

Partner will be personally liable only for his wrongful act and not of other partners.

Holding Out - If a person represents himself as partner of LLP, he will be liable to
person who acts in good faith on basis of such representation.

In case of an act by LLP or its partner with intent to defraud creditors or other person or
any fraudulent purpose, liability of LLP and concerned partner shall be unlimited.
LLP is a hybrid form of Partnership Firm and Company. The following differences
highlight the major differences between LLP, Partnership Firm and Company.

Comparative Analysis:
Company Limited Liability Partnership

Memorandum is to be filed with RoC Incorporation document is required to be

filed
Memorandum should contain the name of Incorporation document is not required to
State where registered office is situated contain name of the State

Name to contain 'Limited or 'Private Name to contain 'Limited Liability

Limited' at the end Partnership or 'LLP' at the end
Articles are to be filed at the time of LLP Agreement is to be filed later on. In its
incorporation absence, provisions of First Schedule shall
apply
Managing Director to look after day to day Designated Partner to look after statutory
administration compliances. All partners can look into
affairs of LLP
Restriction on remuneration payable to the No restriction on remuneration to partner.
Directors It should be provided in LLP Agreement
Source: CA. R G Sarda, B.Com (Hons), FCA, PGDADR, DISA (ICAI), CA, 2009.

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 Traditional Partnership Limited Liability Partnership

Unlimited personal liability of each partner Limited liability. No personal liability of

for dues of the partnership firm partner, except in case of fraud
Partnership is registered under partnership LLP is incorporated under LLP Bill.
Act. Registration is not mandatory Incorporation is mandatory
Not a legal entity separate from its partners It is a legal entity separate from its partners
Partnership deed is executed 'Incorporation Document' is required to be
executed. LLP Agreement is required in
almost all cases, though it is not mandatory
Minimum 2 and maximum 20 partners Minimum 2 and no limit on maximum
number of partners

Documents are required to be filed with ROC is the administrating authority

registrar of firms
All partners are liable for statutory Only Designated Partners are liable for
compliances statutory compliances
Partner can not enter into business with Partner of LLP can enter into business with
firm LLP
Every partner of firm is agent of firm and Every partner of LLP is only agent of firm
also of other partners
Source: CA. R G Sarda, B.Com (Hons), FCA, PGDADR, DISA (ICAI), CA, 2009.

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6. Findings and suggestions:

From Small and Medium Enterprises to Smartly Managed Enterprises

SMEs are the unsung heroes of the economy as they contribute substantially to the
economy but they still are not able to avail the basic amenities like credit. When it comes
to recognizing the contribution of SMEs in the country there is much to share. Recent
progress in recognizing the SMEs has gained importance and they have been
acknowledged at various platforms organized by the government as well as the other
reputed bodies.

The government carries out SSI census every 10 years which gives important information
relating to the operation of SME units in the country. But still the number of unregistered
units far exceeds the registered units. So the census report provides with the number of
registered units and an approximation of unregistered units.

The majority of contribution by SMEs is observed in the micro enterprise clusters. They
provide about 80 percent of the total employment provided by the sector. These clusters
are formed naturally and operating since many years. The government has also
recognized the need of developing clusters for growth of SME sector by creating
software parks, technology parks, etc. The success of these clusters depends upon the
facilities provided to them in that locality. The units must ensure that inputs in form of
materials and workforce both skilled and unskilled are available at the created clusters to
ensure stable growth of the units.

There is a need for up gradation of the SME sector in various forms like production
processes, technology adaptation, quality certifications, management training, etc. They
also need to adopt innovation as a core process. Innovation does not always mean
development of new products. The need is to recognize the consciousness in the business
units relating to innovation by understanding that being innovative will enable them to
grasp the changes in the external environment ahead of others.

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The SME sector is faced with shortage of funds since many years. The solution to this
problem in the current scenario lies with them only. The government has devised
schemes for providing loans to the SMEs. The problems faced by the SMEs are the lack
of awareness regarding the schemes, non availability of funds on time, confidence on self
to avail the benefits entitled to SMEs.

So in order to avail credit they need to get registered as it entitles the unit to avail many
benefits conferred to them by the government. They also need to recognize the need to
avail credit ratings from the nominated government agencies at concessional rates. Credit
rating will not only facilitate in procuring timely credit but also they will be entitled to
avail loans at a lower rate based on their credit rating.

The need of the hour is increased use of ICT in business processes. The adoption of ICT
not only reduces the cost in long term but also helps to reduce chances of errors. One of
the options available to adopt technology is SaaS. This is the acronym of Software as a
Service. SaaS is model of software where the company does not own the software. It pays
one time the license fees to the service provider and then yearly charges. The data is
stored in the server of the service providing company and the internet acts as a platform
through which the service availing company uses the services.

The awareness relating to reducing carbon emissions is also gaining importance in

today’s business arena. It has not gained much importance in the SME eco system but the
SMEs need to recognize their responsibility towards environment protection. They need
to adopt cleaner and greener technologies. By adopting greener technologies and earning
carbon credits they can also sell them in the carbon credits market thus earning profits
which will recover part of their expenses to adopt cleaner technologies.

The SME exports forms about one third of the total exports of the country. This does not
mean that they are not facing problems in this sphere. Even here they have to firstly bear
the exchange rate risk as well as quality certification issues related to their goods because
in foreign countries the norms of quality of goods. Especially in pharma and food

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industry there are regulations which get updated regularly whereas the capability of units
to adhere to those standards is not present many times. So in order to overcome these
barriers the exporters need to correctly identify the quality of their goods and find the
countries were the quality standards achieved by them are approved. This again gives
them to discover new markets for their products.

Government efforts: Transform SMEs into a new era

The government has pioneered its mission to empower the SMEs with a bundle of
policies as well as legislation. The government has also setup a dedicated Ministry in
order to ensure the problems faced by the SMEs are reduced as well as for promotion of
SMEs. Indian Government is very well known for formulation of outstanding policies.
Our legal rules are considered one of the best in the world. The problem with the
government comes not in the Planning phase but the Implementation phase. The reports
show that not only implementation of policies but even the awareness in SMEs relating to
the various schemes specially designed to meet their needs is also missing. Very few
SMEs have been able to benefit from the schemes of government which is not good news
for the government. Ample of resources are dedicated only for the promotion of SMEs
but lack of commitment on part of implementers has lead to the current situation.

The government has to ensure that the policies and programmes aimed at SMEs reach not
only to a bundle of entrepreneurs but to the grassroots. The Ministry of MSME should try
and create synergy between different agencies setup for the SMEs. The first job on hand
is to create awareness among the SMEs about the stand of government towards the
betterment of the SMEs. The government bodies are observed to be lethargic and to
change this picture there is need of commitment from the government employees as well
as policy makers for ensuring that work is carried out in a smooth manner.

One of the burning issues related to SMEs is accessibility towards finance. The
government has played a significant role in designing and implementing policies and
schemes to fund the needs of SMEs. But the government should not be restricted to
helping SMEs by providing loans from financial institutions.

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The government has tried to balance the supply side by its policies. This alone will not
suffice as the needs for finance differs from one to another individual. The government
should also encourage innovative finance options as well as modern day finance options.
The setup of SME exchange has been in the news since a while. The Venture Capital
funding as well as FDI inflows in the sector should also be encouraged. As far as
innovative financing options are concerned a few lessons can be learned from
international experience. The same options may not be readily applicable in the Indian
context but even studying them may bring out few new opinions.

India has a huge rural workforce which till date remains untapped. This force can be
trained and the integrated into the mainstream economy to bridge the skills gap. This skill
shortage problem if not addressed at the right time can assume huge proportion of a
crisis.

Skill development can be the most potent tool for tapping into the country’s enormous
reservoir of knowledge, mobilizing national talent and creating an empowered generation
with access to opportunities. Skill development initiatives also entail building a truly
inclusive and qualitatively significant knowledge society. Knowledge should be strongly
integrated into the development strategy and innovation should be made an integral part
of knowledge systems.

Skill development assumes special significance in India in the present time as there is a
gradual change taking place in the employment scenario with entrepreneurship becoming
more and more popular and acceptable to the youth.

One more measure to increase the growth of SME sector is to increase the percentage of
goods procured from SMEs units during the year by various government agencies
through contracts. It has been observed that the government in itself is a big consumer of
various products needed by various agencies. So a healthy increase percentage of goods
procured from the SME units will do a world of good for the sector.

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7. Conclusion:

“Success is a state of mind; if you believe in yourself then you will be successful”.
This thought defines the success formula for the SMEs. It is the belief they need to have
on themselves which will determine their future success or otherwise. The government is
making efforts for growth of the sector and also the economy has given positive signals
for the near future. So now it all depends on the SMEs how they go about doing their
business.

SMEs have globally being recognized as being the backbone of economy. They are small
in size and even in terms of turnover they are on the lower side as compared to the
gigantic corporations. The law of large numbers holds true for the SMEs. They though
being individually small but the combined efforts of SMEs make them one of the largest
employers in the world.

The contribution they make is not only in form of output or employment but the real
contribution lies in the social upliftment of people in the rural and backward areas and
they also help in reducing the income inequality.

SMEs face problems in almost all spheres of their work still their determination to work
is not shattered due to these set backs. They have learned to survive in adversities and
stay afloat even in the tough times.

The government has also recognized the importance of SMEs in the country. The role of
government for promoting the SMEs needs to be pro active by addressing the needs of
the sector and providing not only financial support but the need is to build an
infrastructure where the SMEs can grow. The need of imparting vocational training and
skill development centers has to be addressed. Though there are several centers for the
said things but they have not been able to reach to the masses.

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The formal education system also been challenged on the grounds that it does not impart
much of practical knowledge. In light of recent developments in the education sector,
reforms in this sphere are also expected to be observed soon.

The banks also play a lead role in implementing the policies of government relating to
financing to the SMEs. They need to understand that the profits on loans provided to
SMEs may be low but as a matter of national importance they need to increase their
lending to the sector.

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Annexure I

113
Annexure II
NCAER Business Confidence Index sample distribution:

Out of the 542 responses used in the present round of survey, 16 questionnaires were
received directly by mail and 526 were personally canvassed to respondents.

Survey work was carried out in the month of December 2009.

The sample was spread over regions, sectors, ownership and size class of firms.
Sector wise sample distribution

Ownership wise sample distribution

Region wise sample distribution

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BIBLIOGRAPHY:
Internet Addresses:
1. www.theceoinsights.com/joomla/index.php?option=com_content&view=article&id
4. www.imsme.org/Uploads/MediaTypes/.../India_At_60_Beyond.pdf
6. www.ifmr.ac.in/sefc/UNIDO%20Review.pdf
21. www.cgtmse.in/schemes.aspx

Books:
15. Small Businesses Management, Leon C. Megginson Mary Byrd & William
Megginson, McGraw Hill Irwin, 2003
17. Management of Small Scale Industries, Prof. I S Malhotra & Dr. S L Gupta,
Galgotia publishing Company, 2000

Magazines:
3. SME WORLD, SEPTEMBER 2009
19. SME WORLD, JUNE 2009

Others:
Reports, Research Papers and Articles:
2. Prospects and Challenges of SME’s in India, Bharath.P Naveen Rajesh Moras
7. SMEs – The creative leaders of India: In search of an enabling environment, Duke
Ghosh
8. Indian IT/ITES industry: Impacting economy and society 2007-08, NASSCOM –
DELOITTE study
10. Facilitating innovation in Indian small and medium enterprises – The role of clusters,
V P Kharbanda
11.Benefits of carbon markets to harvested wood products: A case study from
Saharanpur, Anindita Bhattacharya Sarkar and T R Manoharan
13 Capital market access to SMEs in India, Mr. Aryan Banerjee
14 Bank Lending, Financial constrains and SME investment, Santigo Carbo Valverde
16. SME Growth Reconsidered, Professor Richard G.P. McMahon

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18. How can Indian SMEs become more export competitive, Divya Sampat
20. Master Circular for Lending to Micro, Small and Medium Enterprises vide
RPCD.SME & NFS. BC. No.10/ 06.02.31/ 2009-10

Interviews:
5. Interview of Mr. Dinsha Patel, MOS, MSMEs in SME World, Financial Express, AUG
– OCT, 2009

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