Evaluation Study of Medium Enterprises in Manufacturing Sector

Final Report

Dr. M. S Chhikara

&

Dr. A Sahay

Management Development Institute Gurgaon 122001

January 2008

Table of Contents

S.No I II III IV Directors Message Acknowledgement Introduction Summary Chapters 1 2 Study Approach Estimation Of The Size Of Manufacturing Medium Enterprises Sector Across The States & Products Analysis Of Growth Pattern Of Manufacturing Medium Sector Identification Of Factors For Locational Preference Factors Influencing Performance Evaluation Of Assistance Programmes, Schemes Global Scenario Of Manufacturing Medium Sector Specific Policy & Programme Interventions. &

Pages iii iv v x

1 5

3 4 5 6 7 8

17 31 40 49 57 68

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Directors Message

At the outset I thank Development Commissioner, Small Scale Industries, Ministry of Micro, Small and Medium Enterprises, (GOI), for showing confidence in Management Development Institute by entrusting this assignment and thus giving an opportunity to our faculty to prepare the baseline for medium manufacturing enterprises and thereby suggest measures for their growth. Undoubtedly, it is the modern medium manufacturing sector which, with heterogeneous group of enterprises, has been the backbone of all developed and developing nations; where R & D starts, where new technologies are born, where scientists and engineers are challenged to develop new and better processes, products and technologies. I am happy to share that your concerted efforts made through various development measures are proving boons for medium manufacturing enterprises. The roadmap suggested in this study would definitely provide smooth growing pattern to them.

I expect that the cooperation between the DCCSSI (Min. of MEMEs, GOI) and our Institute will get strengthened further for evolving and evaluating different policies and programmes.

Dr. Sujit K. Vasu - Director, Management Development Institute Gurgaon 122001. January 28, 2008

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Acknowledgement

The Development Commissioner, Small Scale Industries, Ministry of Micro, Small and Medium Enterprises, (GOI), entrusted the evaluation of Medium Manufacturing Enterprises to Management Development Institute.

The medium manufacturing enterprises (MMEs) sector, the heterogeneous group of enterprises, a vibrant and dynamic sector of the Indian economy has been defined very first time through the MEMED Act 2006. So getting required data was a big problem. Therefore, in this regard our special thanks are due to Sh Praveen Mahto, Additional Economic Advisor, DCSSI for providing timely assistance.

Primary as well as secondary information was collected from different sets of respondents and we got constructive cooperation from them. So on behalf of the consulting team it is my privilege and pleasure to extend gratitude to all respondents. Special thanks are due to the Director (DIPP) and his staff for making available the requisite information. I am also thankful to the owners of medium enterprises who provided information to our field investigators. I will be failing in my duty if I do not thank the research investigators for assisting in collecting field data. Above all I can not forget the cooperation extended by my learned colleagues at various stages of the study. The experience of working on the assignment was highly exciting and useful.

M.S. Chhikara Project Leader Study Team Dr. M. Chhikara Dr. A. Sahay Shri Phool Singh Shri Abhishek Yadav

January 28, 2008

(Project Leader) (Co-project Leader) (Team Member) (Team Member)

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Introduction

Manufacturing sector has been the backbone of all developed and developing nations. It is rightly said that Industrial Revolution started with manufacturing. Even now it is called the real economy. It is where R & D starts, where new technologies are born, where scientists and engineers are challenged to develop new and better processes, products and technologies. It takes an important position in most fast moving economies of the world, with a share of between 30 to 50 % of the economy. The medium manufacturing enterprises (MMEs) sector, the heterogeneous group of enterprises, constitute a vibrant and dynamic sector of the Indian economy. This sector has recorded consistently rising growth in terms of production, investment, creation of employment and phenomenal growth in exports over the years. The post liberalization era in the Indian economy has enhanced the opportunities and challenges for this sector. With their dynamism, flexibility and innovative drive they are increasingly focusing on improved production methods, penetrative marketing strategies and management capabilities to sustain and strengthen their operations. They are, thus, poised for global partnership to adopt, adapt and absorb latest technologies in diverse fields. Being generally less capital intensive and more employment intensive in comparison to large firms, MMEs suit the Indian economic environment with scarce financial resources and large population base. Besides, they promote regional and interpersonal equalization and thus have a scope for building upon the traditional as well as emerging skills and knowledge. Further, unlike micro and small enterprises MMEs do not concentrate on domestic market for inputs as well as output. It is because they have greater potential for competitive advantage and hence internationalization of business. They are less worried about uncertainties and inherent unknowns of competing in foreign markets. Their tendency of graduating to large enterprise is higher. They do not have greater fear from liberalization of trade and fall of protective walls like micro and small enterprises. Thus the process of economic liberalization and market reforms, while exposing the Indian MMEs to increasing levels of domestic and global competition, has also

opened up attractive possibilities of access to larger markets and of stronger and deeper linkages with larger enterprises. Improved manufacturing techniques and

management processes can be sourced and adopted with greater ease. A robust and vibrant MME segment can drive the benefits of these new opportunities provided appropriate enabling policies are put in place and measures for capacity building in public mode are also initiated. Competition, cooperation and interaction between SMEs and with large firms may generate collective efficiency, technical upgrading and pooling of resources and enhancement in scope and scale of economies especially in agglomerations or clusters The MMEs, in addition to freer access to capital, technology and markets, are now in a better position to get information from across the globe, use appropriate technology and produce goods as per customers needs. In the liberalized economic atmosphere they can concentrate on utilization of better technology, production of quality products, and improvement in management efficiency, diversification of product lines etc. Since the emerging liberal environment has thrown open them to highly competitive environment they will have to survive in the new climate, which was not known to them over the last four decades. Therefore, improving quality of products, offering competitive prices, upgrading managerial skills and producing goods and services as per customers needs, that too through aggressive marketing are not their pleasant choice. These are compulsions for survival, especially the healthy one.

Medium manufacturing enterprises produce a wide range of products, from simple consumer goods to highly prcised and sophisticated end products. The spectacular expansion of the MMEs sector is as much a result of the policies and programmes of the government as of the initiatives and endeavors of the entrepreneurs themselves. These achievements are particularly creditable against the backdrop of a number of constraints faced by them like inadequate flow of incidental credit, higher cost of credit and growing competition arising out of economic liberalization and reforms. Even during the period of liberalization and globalization this sector has not only shown constant growth in all the spheres mentioned above but has also out-performed the large-scale sector.

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However, the growth pattern in terms of products-lines and locations, has not been uniform. The economic liberalization as a consequence of the new policy regime is likely to pose major challenges further for remote areas particularly in backward states which are already trapped in vicious circle of poverty. Even in the presence of numerous area specific concessions, incentives, inducements, grants and subsidies, the backward areas could not attract the desired industrial investment. In the

emerging environment there may not only be lesser fresh investment of investors but also there is a likelihood of plight / division of the existing investors from slow growth area to the fast growth area.

For long, small and medium scale enterprises were clubbed together loosely, with no clear definition of what constituted medium scale units. By enacting MSMED Act 2006 the government has now provided clarity on this issue for the first time. The new policy developments are likely to change significantly the concept, philosophy and development environment of MMEs in the country. The new measures introduced in industry, trade and financial sectors may provide new challenges and opportunities for operating MMEs. The competitive environment may prove boon to some units and curse to others. It is likely to accelerate their overall growth by weeding out weaker units and consolidating and strengthening healthy ones. The easy and adequate access to capital, technology and markets may bring qualitative as well as quantitative improvements in the MME sector. Deregulation and de-bureaucratization will reduce fetters on its growth potential. Administrative reforms as a sequel to the new policy measures will remove licensing restrictions and minimize location restrictions. Bringing industry related services under MSME Ministry and simplifying registration procedure will give greater encouragement to MMEs. Further transforming the

enforcement of labour laws for MMEs from an area of regulation to an area of selfdiscipline and voluntary compliance, rationalizing environmental clearance

procedures and excise duty administration may provide additional impetus to the growth potential of this sector. The new definition fixing investment ceilings for MMEs will consolidate their competitive position further as it has focused the scope for entrepreneurs to invest more and graduate to large sector for reaping the fruit of economies of scale and modern technology.

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The changes made in the policy, especially the definition of MMEs clearly reflect the determination of the government to help the healthy sustenance of this sector. These changes undoubtedly would expand the scope and significance of assistance programmes. With the introduction of new definition medium units have become eligible to facilities and concessions. It also shows intention of government to direct MMEs policy towards the up-building of the modern MMEs by (a) encouraging gradual transformation of the traditional industry sector and (b) by establishing new, modern types of MMEs. The modern MMEs imply to fulfill the requirements of emerging modern economy, have a progressive outlook, are ready to adapt to changing conditions and are willing to use those processes that modern science and technology have offered and are willing to apply modern organization and management concepts. The new policy may broaden their outlook for: Continued search for improved ways and ready adaptability. Up-dating their products and designs to suit the modern needs of the economy that is in transition from developing to developed. Greater utilization of physical and technological advancements. Familiarizing entrepreneurs with organizational and management skills. Increasing awareness of benefits of training for skill development. However, considering the strategic role played by MMEs, it is essential to examine how they can improve their performance in international markets and how they can enhance their export competitiveness. It is also necessary because in changing economic scenario, they cannot expect sympathy or support in the form of gifts or grants. Even subsidies and concessions are going to be the talk of history. The commercially viable projects will be required for only one time benefit. Ultimately they have to be self-sustaining. Thus, there is a need for continuous monitoring of the impact of policy changes and taking up corrective measures to meet the need of the medium enterprises. There is also a need to develop data banks on industries to guide the potential entrepreneurs, including investors from abroad, to provide support for technology, infrastructure support, to bring about attitudinal change among the officers of banks and financial institutions as well as officers of other concerned organizations for improving the flow of credit and other services. Also, the MME sector must realize that in the emerging economic scenario of liberalization, structural reforms and globalization
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their easy and smooth sailing has been replaced by uneven tides. They will have to stand on their own to face competition from within the country and abroad, which is likely to grow in the next few years. The emerging challenges and opportunities may make or mar their progress depending on their own capacity and capability.

In this regard this study has special importance to provide baseline for medium manufacturing sector. This study is focused on ( i ) Estimation of the size of Manufacturing Medium Enterprises Sector ; ( ii ) Assessment of the contribution of Manufacturing Medium Enterprises Sector; ( iii ) Study of Regional Dispersal; ( iv ) Identification of factors for Location Preference; ( v ) Analysis of growth pattern of manufacturing medium enterprise sector including the vertical growth of small enterprises to the medium enterprises, and the comparative global trend in the last 10 years; ( vi ) Evaluation of assistance programmes, schemes undertaken by different central and state governments for the promotion of manufacturing medium enterprise; and ( vii ) Identification and suggesting specific policy/ programme interventions required for accelerating the growth of manufacturing medium enterprises.

It is an All-India study and the findings reflect a general scenario of medium enterprises in the country as a whole. It is based on both the primary and secondary information that involved intensive desk work as well as field survey. Secondary information has been collected from records of Ministry of MSMEs (GOI), State Directorate of Industries, District Industries Centre, CMIE, All India Annual Economic Surveys, Annual Survey of industries, CSO Internet/website, Industrial Associations etc. The observations revealed by the secondary data have been substantiated through primary information collected through field survey of 246 enterprises selected randomly, spread over urban and rural areas in backward and non-backward districts/areas, was undertaken..

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Summary

Introduction: The medium manufacturing enterprises is a vibrant and dynamic sector of the Indian economy consisting of heterogeneous groups of enterprises. Their investment, technology and production patterns at local level are determined by national and international factors. They are characterized with the techno-economic merits of both small and large enterprises.

The enactment of the MSMED Act, 2006 has created the first-ever legal framework for the medium manufacturing enterprises (MMEs) sector. The new policy developments are changing significantly the concept, philosophy and development environment of MMEs in the country.

But there is lack of information in regard to their number, investment, output, exports, spatial distribution, techno-economic requirements etc. This study attempts to provide a baseline pertaining to their size, spread, strengths etc. which may help for evolving new policy measures.

The study is based on secondary data for 12, 760 units, supplemented by primary data collected from a random sample of 246 medium enterprises, belonging to different product lines and spread-over across the country. The sample enterprises were selected from the list of medium enterprises provided by the state directorate of industries using stratified random sampling technique and taking product-lines and location as the basic parameters for stratification. Thus it is based on both the desk research and field survey. A wide range of tools and methods, like, review of

secondary information, focused discussions, semi-structured questionnaires, personal intuition etc were used for collecting and analyzing information

Aim & Objectives The study aims at compiling the information related with medium manufacturing enterprises (MMEs) and present their current status. The specific Objectives include: Estimation of the size of MMEs Sector Assessment of the contribution of this Sector
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Study of its Regional Dispersal Identification of factors for Locational Preference Analysis of growth pattern, Comparative global trend Evaluation of assistance programmes undertaken by central and different state governments for the promotion of MMEs

Identifying and suggesting specific policy / programme interventions required for accelerating the growth of MMEs

Typical Findings Secondary Data-based Observations Size of Medium Manufacturing Enterprises Sector: There is no authentic source stating the size of medium sector. Different sources convey different views. The rough estimate about the size varies from 10,000 units to 70,000 units. We have based this study on the most reliable sources i.e. the data available from the department of Industrial Policy and Promotion [DIPP (GOI)]. It shows that there are 12, 760 medium enterprises with investment of rupees 87, 949 crores and 2009557 employees. Theses are the manufacturing enterprises falling in the investment slab of rupees five to ten crores in plant & machinery.

Contribution: The contribution of medium enterprises is about 18 % in the number of enterprises, 3.5% in investment and 2% in employment for all manufacturing enterprises having investment above one crore rupees. The figures for average investment and employment per unit are rupees 7 crores and 157 employees respectively. The employmentinvestment ratio, showing investment intensity in relation to employment in medium enterprises, is 22.85. That is, investment of rupees one crore provides employment to about 23 persons in medium sector.

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Regional Distribution (State-wise) Number: State-wise size varies drastically in terms of all parameters, namely number of enterprises, investment and employment. In terms of number of medium enterprises the dominating states are Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu and West Bengal. These seven states alone accounted for 66 % units. Only two states alone, namely, Maharashtra and Gujarat accounted for 32 percent units. On the other extreme 15 states have less than one percent units. State-wise average number of enterprises is 387.67

Investment: In terms of investment also the leading states are Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu and West Bengal. These seven states alone accounted for 65.78 percent of the investment. Only two states alone, namely, Maharashtra and Gujarat account for 31 percent of investment. On the other extreme 16 states had less than one percent share in investment. In terms of average investment the position of medium enterprises across the different states was almost similar. Average investment per unit was rupees 7 crore State-wise average investment in medium enterprises is 2665.12 crores of rupees.

Employment In terms of Employment also the dominating states are Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu, West Bengal and Rajasthan. These eight states taken together accounted for 78.5 percent of the employment. Only three states alone, namely, Maharashtra, Tamil Nadu account for about 30 percent of total employment provided.
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and Gujarat

On the other extreme, 16 states had less than one percent share. In terms of average employment per unit the position of medium enterprises across the different states was quite dissimilar. Average employment per unit was 157 employees. Location-wise it varies form 368 persons in Chandigarh to 83 persons in Tripura.

Employment/Investment ratio varies from 12.78 in DADAR & NAGAR HAVELI to 36.24 in Punjab and 37.11 in Arunachal Pradesh.

State-wise average number of employees in medium enterprises is 60895.67

Regional Distribution - Product-wise Number Product-wise (NIC Two digit level classification) size in terms of number of medium enterprises shows that metallurgical industries, chemicals than fertilizers), and textiles dominate the scene. These three industry groups alone account for 43 % share. Eighteen industry groups have less than one percent share. The other six industry groups have less than two percent share (other

Investment Product-wise size in terms of investment of medium enterprises also varies drastically. Again the dominating industries are metallurgical industries, chemicals (other than fertilizers), and textiles. These three industries alone accounted for 43.03 percent investment. On the other extreme 18 industries have less than one percent share. In terms of average investment the position of different industry groups in medium sector enterprises was almost similar. Average investment per unit varies form 5.7 crores in Sugar units to 7.7 crores in Dye-Stuffs.

Employment Product-wise distribution of employment in medium enterprises also concentrated in metallurgical industries, chemicals and textiles. These three products alone taken together accounted for 43 % of employment.

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Only two product groups alone, namely, metallurgical industries, and textiles account for about 34 % of total employment.

On the other extreme, 16 product groups had less than one percent share in employment.

In terms of average employment the position of medium enterprises across the different product groups was quite dissimilar. Average employment per unit varies form 418 persons in Rubber goods to 56 persons in Glue & Gelatin industries.

Employment intensity in different industry groups in relation to investment varies to great extent. Employment/Investment ratio varies from 8.82 in Glue & Gelatin to 58.92 in Rubber goods.

The three highest employment intensive industries are Rubber goods, Fuels and Industrial instruments.

The three lowest employment intensive industries are Glue & gelatin, DyeStuffs (10.33) and Miscellaneous mechanical & engineering industries (14.44)

Growth Pattern All India Basis Graphic presentation of Yearly Growth Patten of Number of medium enterprises, Investment and Employment given below clearly reveals how uneven has been the growth pattern over the last 17 years.
Units Units 1600 1400 1200 1000 800 600 400 200 0
19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

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Investment Investment 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2005

Employment Employment 250000 200000 150000 100000 50000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006

Number The Growth Pattern measured in terms of annual growth rates of medium enterprises over the last 10 years, i.e. since 1995 has been quite uneven. The absolute number of medium enterprises has been increasing consistently over the years. The cumulative figure was 3252 units at the end of the year 1995, and increased to 7441 in the year 2000, to 10701 in the year 2005 and 12760 in the year 2007 The overall average growth rate was 11.99 percent.

Investment The investment in medium enterprises has increased about four times. But the annual growth rate has come down.

2006
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The average level of investment rose by 3.9% from 1995 to 2001 and by 2.2% during 2001 2007.

Employment Employment in absolute terms has increased by three times but the rate of growth has come down. The average level of employment per unit rose by 10.8% during 1995-2001 and by 5.2 % during 2001 2007. The status of medium enterprises in terms of Average Investment & Employment has been rising over the last ten years.

Inter-state Growth Pattern Between 1995-2007 The state-wise rate of growth pattern in terms of number of units, investment and employment across the states as well across the products varies to a great extent. There was 76 % increase in rate of growth in terms of number in Meghalaya, followed by 50 % in Sikkim and 47 % increase in Uttra Khand. These are the three states in which there has been maximum growth rate. The states having growth below 10% are Bihar. MP, Punjab, Rajasthan, Chandigarh and Delhi. Maximum rate of growth of investment is again in Meghalaya that is of 92 % followed by Sikkim, and Uttrakhand. The states with less than 10% annual growth rate are Bihar, Madhya Pradesh, Punjab, Rajasthan, Delhi and Chandigarh. The highest increase in the rate of employment is in Meghalaya. The lowest growth rate of employment is in Chandigarh. The other states having employment rate below 10 % are Bihar, Gujarat, Kerela, Haryana, Madhya Pradesh, Rajasthan, Uttar Pradesh, Andman & Nicobar, Delhi and Daman & Diu.

Product-wise: Product-wise growth pattern of number of enterprises also shows great variation. Highest growth rate (65%) is for miscellaneous mechanical & engineering industries, followed by Fermentation industries. Lowest growth rate (2%) Sugar industry closely followed by Telecommunications.
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Product-wise growth pattern in terms of Investment also shows great variation. Highest growth rate of investment is for Miscellaneous mechanical & engineering industries, followed by Fermentation industries.

Lowest growth rate (4%) is in Sugar industry closely followed by Telecommunications.

Product-wise growth pattern in terms of Employment also shows great variation. Highest growth rate of investment (59.5%) is for Miscellaneous mechanical & engineering industries, followed by Fermentation industries.

Lowest growth rate (2.7%) is in Sugar industry closely followed by Telecommunications

Growth Pattern of MMEs across Population and Area It is said rightly that there are lies, white lies and statistics. Sometimes averages and growth rates convey somewhat misleading picture. Average is influenced by extreme values while the growth rate (%) is greatly influenced by base or denominator. For example, in this case also state-wise average of number of enterprises, investment and employment do not provide very meaningful picture. Therefore we have related the number of enterprises, investment and employment in medium enterprises with the area and population of the respective states. The emerging picture is presented below. Number Across Population and Area In the country as a whole the density - number of medium enterprises per thousand kilometers and per lakh population - is just 3.8 and 1.1 units respectively. State-wise highest density of medium enterprises measured in terms of units in relation to area and population is in Dadra & Nagar Haveli and Daman & Diu. In 18 states it is lower than one unit per lakh of population. In terms of area also nine states have less than one unit per thousand of square kilometers. Investment Across Population and Area Position of investment per thousand square kilometers and per lakh population is satisfactory. Across the country rupees 13.9 crores have been invested per lakh of population.
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In terms of area rupees 47.7 crore have been invested per thousand square kilometers.

Dadra & Nagar Haveli and Daman & Diu are exceptionally excellent in terms of both the population and area. It is also better than other states in Poducherry.

In seven states investment in medium enterprises is more than rupees 20 crores per lakh population. But in 14 states it is less than 5 crores.

In terms of area in 16 states investment per thousand kilometers exceeds rupees 20 crores. Only in six states/UTs it is less than rupees five crores per thousand kilometers.

Employment over population and Area Employment creation per thousand kilometers of area and per lakh population across the country is 1713 and 498 persons respectively. In five states/UTs employment generation exceeds 500 persons per lakh population. In terms of area employment creation per thousand kilometers of area is more 1000 persons in 13 states/UTs. But position is poor in seven states.

Primary Data (Field Survey) based Observations

Following observations have been derived from the field survey of 246 medium scale enterprises selected randomly from different states.

Location-wise Distribution of Enterprises Location Particulars Urban Area Semi-Urban Area Rural Area Total Industrial Area/Estate Non- Industrial Area/ Estate Total Backward Areas 57.14 28.57 14.29 100.00 84.62 15.38 100.00

(% of units) Non-Backward Areas 54.84 43.23 3.23 100.00 88.39 11.61 100.00 Total 55.69 37.80 6.51 100.00 87.81 12.19 100.00

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Product-wise distribution of Enterprises Product Lines Chemicals & Chemical Products Machinery & Equipment Basic Metal & Alloy Industries Transport equipment & Parts Non-Metallic Mineral Products Beverages, tobacco & Related Products Rubber b& plastic Products Paper & Printing Textile & Garments Leather Products Wood Products Food products Other Manufacturing Industries Total % of Units 7.72 7.31 14.65 10.97 3.25 3.65 12.19 9.75 11.38 2.03 2.45 12.20 2.45 1.00.00

Size of enterprises Average investment per unit in Plant & Machinery is 7.53 crore rupees. Average Employment per unit is 118.59 persons

Factors for Locational Preference The enterprises have visible preference for developed industrial areas/estates (87.8%). Though there are number of incentives and subsidies for locating enterprises in backward districts most of the promoters have distinct choice for nonbackward districts. Power (electricity), transport and communication facilities are the life line of manufacturing enterprises. Own urge/desire played major role for choosing a particular location (73.6%), followed by the advice from friends/family members (59.3%), availability of better infrastructure facilities (50.8%) and future prospects (48.4%). The moderate category of pull or push factors for choosing location includes easy availability of financial assistance (37.4%), peaceful socio-industrial environment (33.3%), and availability of incentives and subsidies (27.6%). Very few medium enterprises are dependent on local resources and skills. Neither local availability of Techno-Economic Services/Consultancy is big attraction.
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Thus the entrepreneurs have preference for locations which are:o Nearer to the industrial centres o Have close linkages with outside economy in terms of supply of inputs and sale of output , and o Have adequate infrastructure facilities o Have adequate institutional support system

Growth Pattern Factors influencing performance Performance of an enterprise is directly related with enabling environment. There is one to one positive relationship between the two. About 66 per cent units made profits constantly for 3 years while only 3.2 per cent units incurred losses continuously for 3 years. Factors limiting the size of enterprise Promoters own resources are limited (37.4%), Limitations of raising loans from external sources (48%), Marketing limitations for the product (43.9%) Other important inhibiting factors were the entrepreneur unwillingness to take greater risks and his techno- managerial limitations. About one-fourth entrepreneurs stated that the current size of their enterprise was optimum.

Future Prospects Only about 15% promoters stated the future prospects of their enterprises very bright while 31.7% and 32.5% stated them to be bright and moderate. On the other hand about 17% promoters were uncertain. The extreme cases stating the future of their enterprises very dark were only 4 percent.

Capacity Utilization: Only 3.1% units were operating at full capacity. None of the unit was utilising more than 80% capacity in backward areas. About 8 per cent units were operating at less than 40 % capacity and all of those were in backward areas.
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Target Achievement: About 19% units were achieving their profit /targets but 68.7% failed to achieve the set targets. Only 12.5 per cent units were fortunate to cross their targets

Contributory Factors: No doubt better management is the most important contributory factor(73%) closely followed by, better infrastructure facilities (68%), the availability of easy financial assistance (63%), location in industrial area (55%), and Government policy (46.%). Incentives and subsidies do contribute but they are not rated very high. Similar is the position of Techno-economic services and Cluster of similar units. They are rated at medium scale.

Rating of current Position of Contributory factors Rating of current Position of Contributory factors is just of average level. Rather percentage of responses regarding poor and very poor position are higher than the percentage of responses for excellent and very good.

Rating of current Position of Impeding factors Impeding factors were shortage of power, inadequacy of working capital, too many procedures and formalities to be completed for availing any type of assistance and lack of coordination among various programmes of assistance and the institutions implementing those programmes. The other problems mentioned by the entrepreneurs included lack of general day to day support facilities, scarcity of raw materials, inadequate facilities for technical know how, marketing problems and labour problems.

Global Scenario Manufacturing sector Manufacturing sector has been the backbone of all developed and developing nations. It is rightly said that Industrial Revolution started with manufacturing. Even now it is called the real economy. It is where R & D starts, where new technologies are born, where scientists and engineers are challenged to develop new and better processes,
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products and technologies. It takes an important position in most fast moving economies of the world, with a share of between 30 to 50 % of the economy. Even the economies of Asian countries such as Thailand, Indonesia, Malaysia, Singapore, Hong Kong, Taiwan, Philippines, Korea, and China are driven by manufacturing accounting for 30 50 % of their GDP. Chinas manufacturing is 50% of GDP. But India is lagging behind with 25 % share of GDP. The present conditions do not promote manufacturing in India, especially preference for high labour intensive technologies, unfriendly employee and labour policies and reservations in the SSI sector. It is only in the last few years that the beginning has been made. Now foreign firms have also started realizing that India is the right place to locate manufacturing to outsource for world markets. Medium Enterprises There is no specific definition for medium enterprises across the world. They are considered as transitional phase between the small and large enterprises. Mostly they are clubbed together with small enterprises and most of policies and programmes are common for both. Thus the available secondary information relates to SMEs and not exclusively to medium enterprises. The review of secondary information reveals following important observations.

Economic Environment The modern small and medium enterprises are facing cost pushed inflation The demand for inputs is rising Market opportunities are growing; Demand for labour in general is falling New capacities are created by medium enterprises There is a great need to encourage the entry of new medium enterprises/ entrepreneurs and to help them grow to achieve an overall higher rate of economic growth. Status & Contribution of SMEs a) make up over 80-90% of all enterprises; b) provide over 60% of the private sector jobs c) generate over 30-40% of total employment d) contribute about 50% of sales or value added e) share about 30% of direct total exports.
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Country-wise Features On an average, it was about 80% in respect of the LDCs in Asian region. SMEs in Asia are mostly proprietary or partnership (90% of the total) with exception of Malaysia where about 72% operate as private limited companies. The share of SMEs in the total employment ranged between 56 and 98% (except Malaysia and Philippines with less than 50 %). Generally, in all Asian countries, MSME sector has been the second largest employer after agriculture. The ability of SMEs to contribute to exports varies widely in Asia- between 10 and 60 per cent. Asian countries generally compared well with those in the developed economies such as, Austria (99.5%), Canada (99.7%), U.K. (99%) and USA (99.7%) and by employment to total industrial employment, such as, 72%-Austria, 60%-Canada, 66%-UK and 50%-USA. The percentage share of MSME contribution to GDP in the Asian countries was lower than those in the developed economies which generally ranged between 30%- Australia to 40%-Finland. Latin America (particularly Bolivia, Chile, Costa Rica, El Salvador, Paraguay) recorded lower percentage shares than Asian countries in relation to all the three components. Incidentally, in Asia well above 60% of the total workforce is employed by the MSME sector compared to Botswana (17%), Kenya (18%), Lesotho (17%), Malawi (23%), Swaziland (26%) and Zimbabwe (27%). Following are the Global competitiveness index (GCI) that reflects productivity and competitiveness and the business competitiveness index (BCI) which ranks MMEs by their macroeconomic competitiveness, identifies competitive strength and weakness, of selected Asian Economies. Country (GCI Ranking Bangladesh 99 India 43 Indonesia 50 Malaysia 26 Nepal 110 Pakistan 91 Philippines 71 Vietnam 77 Source: Global Competitiveness Report - 2006-07 BCI Ranking 108 27 35 20 111 67 72 82

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Major Constraints for growth External constraints1 Policy Related Taxations laws / high taxes are major constraints faced by SMEs of India, Mauritius and Malaysia Bureaucracy of the Governments in the countries like India, Mauritius and China are posing major constraints for the SMEs. Unfavorable legislation in India and Hong Kong is indeed a constraint for the SMEs. Poor property right enforcement in Malaysia and India.

ii) Infrastructure Availability China followed by India has observed high growth on account of availability of Roads, Industrial Estates, and Power & Transport facilities while other developing countries are facing big constraints.

iii) Major Financial Constraints 71.43% SMEs in China, 71% of SMEs in Sri Lanka and 42% of Indian SMEs have experienced difficulty in getting easy access to finance. Getting collateral security is the bottleneck for the SMEs of Sri Lanka, China and India to obtain loans Mauritius SMEs are facing lot of problems in obtaining working capital loan. The least difficulty is experienced by New Zealand SMEs

Technological Constraints Locating sources of appropriate technology, financial resources to acquire technology, product design are together added woes to the SMEs of Mauritius, Thailand and China. The respondents have attributed them as major constraints towards achieving growth.

v) Application of ICT tools Usage of ICT tools in business communication is very high in India (80%) followed by Hong Kong, Thailand

Source: SMEs in Asian Region; AAMO, Global Projects 2007. xxiv

Use of ICT tools in marketing and sourcing information is also noticed highest amongst the SMEs of India as compared to other countries under study.

vi) Relative strength of Certified SMEs (ISO or Equivalent) In India 32% of SMEs have obtained ISO to remain competitive and take advantage of globalization. Indian Government is partly funding SMEs to motivate them to obtain ISO, by providing incentives. SMEs of China and Hong Kong have also shown relatively high percentage (25%) of ISO certification.

vii) Marketing Constraints Competition in the global market for exports is mostly experienced by India, China and Mauritius Lowering of Import duties resulting in free movement of imported goods has posed major constraints to SMEs of India, Malaysia and Mauritius Cut in subsidies and reduction in the extent of protection, which are not WTO compatible have by and large affected the Indian SMEs.

viii) Business Environment Technology change is one of the major threats as experienced by the SMEs of the countries like Mauritius, Hong Kong, India, and New Zealand. Competition from imports -a major threat as per 74% SMEs of India o High cost of production -a phenomena of concern for all countries Threats of having more competitors in the domestic market are being experienced by almost all the countries under study.

Internal Constraints Shortage of working capita/ to finance exports Identifying foreign business opportunities Limited information to locate / analyze markets Inability to contact potential/ overseas customers Obtaining reliable foreign representations Lack of managerial time to deal with internationalization Inadequate availability and poor skills of personnel
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Difficulty in matching competitors' price Lack of government assistance / incentives Excessive transportation / insurance costs

Development Requirements across the globe Pro-active Government support Resilient private sector participation. Simplified procedures Openness to changes and shaking of rigid mind-set Developing competitiveness by falling in line with the latest changes. Keeping an eye on capturing the global market Treating large industries as partners and not as competitors- for increasing outsourcing and sub-contracting, ancillarisation, and strategic alliance Growing public private sector partnership

Policy & Programmes Evaluation India Policy The need for the government intervention stems from the failure of the market mechanism to equitably distribute the economic benefits amongst different regions of the country and different sections of population In regard to de-regulation when compared to 174 other countries Indias position is at the median. India also compares poorly with other countries on the measure of governance, regulatory effectiveness and the quality and quantity of infrastructure and the percentage of management time spent to deal with government officials on regulatory and other administrative issues. Even the ranking of Global Competitiveness index (GCI) and Business Competitiveness index (BCI) 2006 among selected Asian Economies are at low level. The government is well aware of the situation and the periodical changes in policy clearly reflect the determination of the government to help the healthy sustenance of MME sector. The new policy seems to be founded on a proper understanding of the fundamental problems of medium sector and the measures proposed by it are well directed to mitigate the handicaps that face this sector.
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The industry associations provide the common platform to voice the needs of MMEs and to initiate co-operative efforts for their promotion. They are working in line with changing environment.

There are various national level Autonomous institutions, which help support the MMEs in various ways.

However it is observed that the current industrial policy promotes survival of the fittest. Further, based on capital intensive techniques, it promotes replacement of labour by machines.

Incentives and inducements In order to create level playing an elaborate network of institutions has been established to provide various types of assistance at different development stages of medium enterprises. But monitoring & coordination need special attention. There are numerous financial or non-financial Incentives and inducements that motivate and attract new entrepreneurs and improve productivity of enterprises. But a mere increase in the number of institutions for various types of assistance does not by itself assure successful growth and viability of industries. Monitoring of promotional programs is not effective and efficient. An integrated functional approach with in-built checks & balances on the part of these institutions is even more important. Outlook The outlook of the medium sector is broader and there is continued search for improved ways and ready adaptability. Their up-to-date products and designs suit the modern needs of the economy that is in transition from developing to developed. There is greater utilization of physical and technological advancements. Machines, materials and processes are used optimally. Entrepreneurs are aware of organizational and management planning, budgeting, market and grievances handing. There is also awareness of benefits of training for skill development

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Suggestions The promoters of medium enterprises facing functional constraints suggested measures for developing enabling environment which included: Easy & Adequate Finance Infrastructure & Support Facilities Attitudinal change in administrators Developing Economic Zone More market promotion schemes (65.45%), (59.76%), (34.96%), (31.30%), (26.42%),

Special Institutional arrangements for providing stimulatory, support and sustaining services (18.29%),

Providing Progressive performance Oriented Incentives and subsidies (17.07%) (12.60%).

Developing Clusters

Specific Policies for MMEs Development. Suggestions for Government Reform regulations and legal framework Place MME sector high in development agenda, national development plans, etc. Consult private sector while designing policies & programmes for MMEs Foster international cooperation in MMEs sector for better investments and trade Encourage bi-lateral and multi-lateral agencies to collaborate with the MME sector Network foreign aid and technical assistance

Suggestions for Public-Private Partnerships: Develop cross border trade Transfer skills and knowledge with technology and R&D support. Increase investments Ensure basic in-puts to MMEs

Suggestions for Private sector Play more pro-active entrepreneurial role through Associations and Chambers. Bring awareness to entrepreneurs & MMEs on opportunities for growth, technology etc. and responsiveness to society.
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Develop more linkages with MNCs and TNCs. Set quality standards Pursue good governance & self audit system

Suggested Road Map In order to create enabling environment, a package of Government policies is needed covering institutional framework in regard to fiscal, financial, infrastructural, marketing, export-import, technology development / modernization, R&D and venture capital, capital market with suitable listing, insulating the sector from dumping external goods and exit route policy, equity support, women development, TQM and environment management policies, harassment from inspectors & bureaucracy etc. Governments and public sector organizations should take following actions: 1. Government Policy Programming Reforms Policies, Regulation, and Legal Frame work for MMEs: Policy design and regulation for new star-ups, registration of firms, the tax system, Labour laws, financial markets and access to formal source of finance, bankruptcy laws, and regulation of intellectual property rights should be enacted or simplified so as to attract new and existing entrepreneurs to enter the formal market and the benefit from a systemized approach to operating a business. Involve the Private Sector in the Policy Process: Government needs to establish permanent councils/partnership/collaboration arrangements through chamber of commerce and industry with the representative of MMEs, to serve platform where MMEs views can be discussed and deliberated before finalization of any policy and implementation of changes.

Promote an Entrepreneurial Culture: Government both central state need to promote their vision for entrepreneurship development, innovation, and competitiveness of the enterprises at the state level, national and international level by introducing entrepreneurship awards, financial products and schemes, Web-based portals for marketing and information, entrepreneurship training and technological innovation etc

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2. Identification of Investment Opportunities & Benchmarking of Information: In today's world, knowledge is power hence information process must be in place. Paucity of authentic information on investment opportunities and gaps for the guidance of prospective entrepreneurs and data on number of industrial units, manufacturing lines, sales/exports, export opportunities, etc. is one of the major bottleneck of MMEs. Country-wise/region-wise mapping of investment opportunities, identification of growth centers, markets, export potential, project profiles for taking quick investment decisions by the promoters, census, developing electronic data base for dissemination of latest information are some of the areas to be taken care of.

Realizing the skill and resource constraints of both the new and existing entrepreneurs for gathering the required information, a three-tier information network is needed to be built up at local, regional and national level. It will strengthen business advisory services. The manufacturers individually as well as their associations, associations of traders and private consultants must be involved in collecting and disseminating market information. They may help in identifying projects and markets best suited for the entrepreneurs and geographical regions. In the rapidly changing economic and commercial environment, after building such a network there is need for a constant monitoring and upgradation to provide relevant and up to date information. Further, expertise from government, public and private sources should be utilized to make market information more purposeful and professional. The local associations of industrialists can play an important role by scanning through the various commercial websites and disseminating the relevant information to their members.

3. Infrastructure, Marketing infrastructure Development Programme State-of-the art infrastructure is a prerequisite for any development programme. Similarly well-developed marketing infrastructure both tangible and intangible (such as advertising, brand equity, trade-fairs & exhibitions, fashion shows) is also very critical input. For these types of support, Government policies and financial support will be needed.
xxx

4. Marketing Specific marketing assistance should be provided to MMEs in the following areas: Market intelligence Standardization, brand equity building and brand positioning strategy Dissemination of information in the form of bulletins and journals on the emerging market opportunities. Supply chain management. Subcontracting exchange Strategic alliances with large national and Multinational Corporation.

5. Technology Technology plays a key role in MME growth. Therefore there is need to adopt suitable technology to harness the resources available. As on date, no specific data is available on the technology levels of various products and services. To draw a longterm technology map, it is necessary to carry out technology missions to: Bring awareness and promote introduction of new and emerging technologies for MMEs, Assess the present level of technology in the various sectors and to forecast technology level to be achieved, Set up an IT portal for information dissemination and creating awareness, Coordinate the efforts of various agencies, technical centers and institutions engaged in Technology studies & audit Encourage R&D of indigenous technologies to assist MMEs, Create incubator infrastructure facilities in various technical and management institutions, Motivate MMEs to obtain BIS/ ISO certification, Organize awareness campaigns among MMEs pertaining to quality, standardization and customer satisfaction, Focus on selected sectors contributing to the economyby developing five year plan and ,
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Promote environment friendly technologies and address issues relating to pollution control. 6. Finance & Credit Schemes Availability of timely and adequate credit is the lifeline for the MMEs sector. Mismatch of the short term with long term loan, delayed working capital decisions give birth to sick units from day one. It is, therefore, essential to have a package of credit assistance programme starting from equity/seed capital support, followed by support for augmenting promoter's contribution, long-term loan and working capital, marketing including export-import support, bills marketing for quick realization of sale proceeds, venture capital, etc. This requires sound central banking policies, well conceived development financing institutions schemes and commercial banks credit schemes. Based on credit worthiness, sales volume, area of sales and other important indicators, the credibility and performance of more and more companies should be rated periodically by some independent agency. Such rating if widely publicized will be useful for the stake holders. 7. HRD, Training, Institutional Development, Capacity building For comprehensive development on a sustained basis, programmes for HRD and skill development, entrepreneurial development programmes, training of Government officials, bank officers and extension agencies for sensitizing them towards assisting MMEs sector are essential. In order to get good results, opening up of more regional institutes for enterprise development may be considered. Else, the existing technical institutes may be encouraged in this direction.

8. Chambers of Commerce and Associations Chambers must serve as' Eyes and Ears' of the MSME sector because this sector is not in a position to develop the network unlike their Big brothers, on their own. Thus, informatics network at national, provincial and regional levels must be put in place and used for all types of communications, information dissemination, creating awareness, telemarketing, providing economic and market intelligence data, market forecast, future demand pattern

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sector-wise, etc. The Chambers can successfully run this activity on commercial lines. Chambers may, with the support of the Government, launch region/nationwide survey of MMEs sector as the benchmark information for effective policy planning by the Government Chambers may take up industrial potential surveys in their own regions for informing entrepreneurs about the scope of embarking upon private ventures. Thereafter, Chambers may come out in regional languages/English Project Profiles for prima facie assisting entrepreneurs in taking investment decisions. These may be put on both electronic and print media. Chambers may organize a number of workshops to create awareness of these projects. Training in all its comprehensive sense i.e. entrepreneurship creation, enterprise growth of the existing units, skill upgradation programmes in technology, marketing including exports, financial system and its

requirements, sensitizing banks and private sector to each others problems etc. Chambers may create core of volunteers consisting of executives and professionals to provide expert advisory services to MMEs in specific disciplines and serve as mentors to them. A token fee can be charged for the service. Chambers should play effective Advocacy Role for MME sector, Government and international agencies like WTO, WIPO, and UNO etc. They should be represented in the Policy making Council of the Government at the national as well as international level. Chambers can play very effective role by organizing Trade Fair /Exhibition providing facilities for permanent displays, organize exhibitions, and hold buyers-sellers national and international meets. This must be run on commercial lines. 9. Role of the International Agencies Multilateral Development Institutions contribute significantly on developing financial markets, providing business development services to medium
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enterprises and special funds, improving corporate governance and corporate social responsibility, and enhancing the focus of sustainability. They can : Bring different recommendations to various Governments through UNESCAP, Asian Development Bank, IFC and the World Bank Support investments and extend lines of credit along with Technical Assistance Programmes Develop Regional Fund for MME Development for countries to draw assistance Develop a second-tier capital market for MMEs to feel encouraged to corporatise, and enter open market borrowing programmes rather than only depending on the institutional loans. Supporting Associations in setting up Risk Mitigation programmes for the financial system Develop exchange and networking for market intelligence, technology transfers and exchange of R&D activates at the international level.

10. Public-Private Partnership Public private partnership (PPP) should make concerted efforts to deliver the State-ofthe-Art infrastructure, support services, entrepreneurship training and education, access to broader financing operations, and market access through viable partnership models like, Build Operate and Transfer . The government should take a lead in introducing special funds/grants schemes for technology development, market development, research and development, professional education and training, and mentoring programs for entrepreneurs etc. through larger alliances and linkages with business schools, universities, and NGOs. The above Road Map is based on following pragmatic factors:Human capital is the most important resource. India has a large pool of skilled manpower available at low cost and can use it. Indias manufacturing sector, though small in size in relation to its GDP, has great potential for growth. Though Indias manufacturing is fairly advanced but modernization, diversification and expansion would continue to have competitive edge internationally.
xxxiv

It is large employment generator, more labour intensive than IT and so planners, central and state governments and business community would pay more attention to it. Other costs in India are low, e.g. rail transport, administrative and other overheads, design and development, prototype manufacture, production of small batches, human capital etc. This cost advantage would be used to exploit a large number of untapped opportunities. The central and state government finances are in poor shape. The question of pumping additional funds has little scope. So looking outwards would be speeded up. Exports of manufactured products would be given further boost by using the advantage of India as a lower cost economy and emphasizing on high quality of products. India would control exports of its valuable iron and aluminum ores / bauxite ores, as the earnings are not very high and make finished metal and add value to finished products as Japan, Korea and China, the main buyers, convert the same into finished products and sell back. Manufacturing costs are pushing up in the developed countries. India would explore possibilities to enter into joint ventures with suitable partners in those countries. India prepares a holistic plan with the participation of politicians, administrators, financial institutions, entrepreneurs and customers such that it is understood by all and implemented easily.

Conclusion The outlook of the medium sector is broader and there is continued search for improved ways and ready adaptability. Their up-to-date products and designs suit the modern needs of the economy in transition from developing to develop. There is greater utilization of physical and technological advancements. Machines, materials and processes are used optimally. Entrepreneurs are well versed with organizational and management planning, budgeting, market and grievances handing. There is awareness of benefits of training for skill development However, the process of privatization, liberalization and globalization of economic activities has affected the whole economy in one way or the other. It has increased the
xxxv

sphere of competition both horizontally and vertically in national as well as international markets and created an environment where fittest will survive and inefficient will be weeded out. It has underlined the concepts of productivity, quality, effectiveness and efficiency. Therefore the suggested policy interventions when implemented in letter and spirit are expected to make MMEs more competitive nationally as well as globally. It will add new vibration and impetus to harness growth potential with a view to stimulate socioeconomic transformation through production of quality goods and provide services for customer satisfaction, contribution to export development & national wealth. Above all it will inculcate entrepreneurial culture and generate employment opportunities for youth and instill a sense of pride amongst them. Limitations: In the history of industrial development medium enterprises have defined first time through the MSMED Act 2006. Therefore this study, first of its kind, faced numerous limitations. Even the Central Statistical Organization, National Sample survey, Annual Survey of Industries, Economic Census (CSO), National Income Accounts (CSO) could not provide relevant / required information. Thus the major limitations include: Non-availability of Secondary Data. Reluctance on the part of medium enterprises to respond to the questionnaire. Secrecy of information and hesitation of entrepreneurs to part with data. Authenticity of the data gathered and used could not be re-checked. Un-matching Data from different sources.

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Chapter-1

STUDY APPROACH

1.1

Introduction:

The medium manufacturing enterprises (MMEs), defined first time in the history of industrial development, constitute an important and progressive segment of economy. Today their investment, technology and production patterns at local level are determined by national and international factors. They are characterized with the techno-economic merits of both small and large enterprises. They enjoy easy access to capital, technology and markets production, distribution and consumption of their products across the globe.

But at the same time the new policy measures introduced in industry, trade and financial sectors have provided new challenges and opportunities for operating MMEs internally and externally from both within and outside the country. The Indian economy is now opened up for global competition, so they will have to face stiff competition from global players. Therefore they have to upgrade their management styles to survive and grow in the changed economy, and to become global leader. There is also need for new types of policies and programmes on behalf of the central and state governments In the emerging business environment their sustenance is possible only if they have competitive edge in terms of cost, quality, techniques, processes etc. and their customers are fully aware of their product/services and have easy access to them.

In this regard the government, with a well envisaged institutional framework is endeavoring to help medium enterprises by providing new ideas, approaches, processes and techniques to consolidate and strengthen their operational efficiency. But there is lack of information in regard to their number, investment, output, exports, spatial distribution, techno-economic requirements etc. is lacking. This study attempts to provide a baseline pertaining to their size, spread, strengths etc. which may help for evolving new policy measures.

1.2

Objective:

The study aims at compiling the information related with medium manufacturing enterprises regarding:1: Estimation of the size of Manufacturing Medium Enterprises Sector 2: Assessment of the contribution of Manufacturing Medium Enterprises Sector 3: Study of Regional Dispersal 4: Identification of factors for Locational Preference 5: Analysis of growth pattern of manufacturing medium enterprise sector including the vertical growth of small enterprises to the medium enterprises, and the comparative global trend in the last 10 years 6: Evaluation of assistance programmes, schemes undertaken by different central and state governments for the promotion of manufacturing medium enterprise 7: Identification and suggesting specific policy/ programme interventions required for accelerating the growth of manufacturing medium enterprises

1.3 Scope & Methodology: Major part of the study is based on secondary information collected from Ministry of Industries (GOI), State Directorate of Industries, District Industries Centre, CMIE, All India Annual Economic Surveys, Annual Survey of industries, CSO Internet/website, Industrial Associations etc. It has been supplemented by primary information collected through field survey. Therefore besides reviewing and analyzing secondary information a sample of 246 enterprises has been taken randomly. The sample enterprises were selected from the list of medium enterprises provided by the state directorate of industries. For selection of the sample units stratified random sampling technique was used. Product-lines and location were the basic parameters for stratification. Thus they belonged to different product lines spread over across the country. The distribution of sample enterprises is presented below.

1.4 Sample Size Table-1: Product-wise sample distribution Product Lines Chemicals & Chemical Products Machinery & Equipment Basic Metal & Alloy Industries Transport equipment & Parts Non-Metallic Mineral Products Beverages, tobacco & Related Products Rubber b& plastic Products Paper & Printing Textile & Garments Leather Products Wood Products Food products Other Manufacturing Industries Total No of Units 19 18 36 27 8 9 30 24 28 5 6 30 6 246 % 7.72 7.31 14.65 10.97 3.25 3.65 12.19 9.75 11.38 2.03 2.45 12.20 2.45 1.00.00

1.5: Tools & Techniques Used We have used a wide range of tools and methods, like, review of secondary information, focused discussions, semi-structured questionnaires, personal intuition etc. We have concentrated on examining problems, opportunities, constraints, resources and abilities and taking decisions about general priorities and courses of action. In this regard, though not in a set sequence, following broad tools have been our coverage. Tools & Techniques: Data Collection Semi-structured Questionnaires, Group Discussions and Personal Observations For each category of Respondents Data Analysis Presentation Report of Measures of Mean and presentation and interpretation of Text through Tables, Graphs and Diagrams Text, Tables, Graphs and Diagrams

1.6 Limitations: In the history of industrial development medium enterprises have defined first time through the MSMED Act 2006. Therefore this study, first of its kind, faced numerous limitations. Even the Central Statistical Organization, National Sample survey, Annual Survey of Industries, Economic Census (CSO), National Income Accounts (CSO) could not provide relevant / required information. Thus the major limitations include: Non-availability of Secondary Data. Reluctance on the part of medium enterprises to respond to the questionnaire. Secrecy of information and hesitation of entrepreneurs to part with data. Authenticity of the data gathered and used could not be re-checked. Un-matching Data from different sources.

1.7

Brief Outline of the Report

This report broadly consists of data analysis collected from secondary sources as well as through interviews and discussions, findings thereof, conclusions and recommendations. For the sake of simplicity the report, besides the Summary and Introduction, has been divided in nine chapters describing ( i ) The Study Approach, ( ii ) Estimation Of the Size of Manufacturing Medium Enterprises Sector Across the states and Products; (iii) Growth Pattern of Manufacturing Medium Enterprises Sector; (iv) Identification of Factors for Locational Preference; (v) Factors

Influencing Performance; (vi) Evaluation of Policies & Assistance Programmes,; (vii) Global Scenario of Manufacturing Medium Sector and (viii) Specific Policy & Programme Interventions.

Chapter-2

Estimation of the size of Manufacturing Medium Enterprises Sector across the States and Products

2.1 Introduction: The medium manufacturing sector, the heterogeneous group of enterprises, constitute a vibrant and dynamic sector of the Indian economy. This sector has recorded consistently rising growth in terms of production, investment, creation of employment and phenomenal growth in exports over the years. The post liberalization era in the Indian economy has enhanced the opportunities and challenges for this sector. With their dynamism, flexibility and innovative drive they are increasingly focusing on improved production methods, penetrative marketing strategies and management capabilities to sustain and strengthen their operations. They are, thus, poised for global partnership to adopt, adapt and absorb latest technologies in diverse fields.

The basic accent of Indias policy for MME sector has been indifferent. Strictly speaking they were not identified and recognized as an independent sector of the economy. They were considered just as a transitional phase between small and large sector. Broadly the policy remained to be step-motherly. They were clubbed together with large sector with whom they were not having equal level playing as their position in terms of management, technology and R & D was quite weak. They were unable to enjoy economies of scale. Most of them operated at under-equilibrium point on both input and output sides. But they were given same treatment (Incentives & Inducements) as given to large scale enterprises. Therefore, it is surprising that despite all these unfavorable circumstances they not only survived and sustained but proved them as the most dynamic segment of the economy. They continued to maintain rising trend in terms of all economic parameters, like, the number, investment, employment, output and exports. Thus it is only through the MSME Act 2006 that the medium enterprises have been recognized as an independent segment and clubbed together with micro and small enterprises. There has been evolved a specific definition and they are eligible for similar incentives, subsidies and concessions as the micro and small enterprises to cope with changing environment. Government has taken cognizance of the
5

institutional context and complementary infrastructure facilities for MMEs. The new impetus may prove a big push for the growth of medium manufacturing enterprises.

Therefore this chapter is an attempt to analyze the product-wise (2 digit level, NIC Classification) and location-wise the status of MME sector measured in terms of Number of Medium enterprises, Investment in Plant & Machinery, and Persons

employed. The analysis is in terms of relative status of medium enterprises across the different states and product-lines.

Size of Manufacturing Medium Enterprises Sector Size of medium manufacturing enterprises sector could be measured either in absolute terms like: Number of Medium enterprises Investment in Plant & Machinery Annual Turnover Persons employed

Or in relative terms like: Number of Medium enterprises as a percentage of total enterprises Investment in Plant & Machinery in Medium enterprises as a percentage of total enterprises Annual Turnover in Medium enterprises as a percentage of the turnover of total enterprises Persons employed in Medium enterprises as a percentage of total employment in all enterprises Number of Medium enterprises in relation to Area Investment in Plant & Machinery in Medium enterprises in relation to Area Employment in Medium enterprises in relation to Area Number of Medium enterprises in relation to Population Investment in Plant & Machinery in Medium enterprises in relation to Population Employment in Medium enterprises in relation to Area Population

In regard to the parameters described above the study faced number of data limitations. Firstly, the concept, though very old and popular in usage across the world, but has been defined precisely very first time in India. So there is no exclusive availability of data neither nationally nor internationally. We explored all the possibilities and probed all the potential sources. But most of the sources differed in one way or the other and could not provide meaningful data. Ultimately we based our study on data available from Department of Industrial Policy and Promotion Division of Ministry of Industry. From there we extracted basic data and analysed it to serve our purpose. The available data is related with Number of Medium enterprises, investment and employment. Employment intensity per unit of investment has also been calculated. Further, information regarding Number of Medium enterprises, investment and employment has been related to the area nad population. Position of State-wise size varies drastically in terms of all parameters, namely number of enterprises, investment and employment.

Table-1: Distribution of All Enterprises Registered with DIIP (GOI) and share of Medium Enterprises Below 5 Crore 30884 (44.25) 78293 (3.05) 5-10 Crore 12760 (18.28) 87949 (3.42) Above 10 Crore 26155 (37.47) 2403695 (93.53) Average Total Per state 386.67 69799 2569937 2665.12

Units Investment

Employment 3370154 (3.62) 2009557 (2.16) 87782342 (94.23) 93162053 60895.67 Size-wise Share
U n it s

3 7 .4 7

4 4.25

B e lo w 5 c r o r e 5 -1 0 c ro re A b o ve 1 0 c r o r e

1 8 .2 8

Investment

3.05 3.42 Below 5 Crore 5-10 Crore 93.53 Above 10 Crore

Employment 3.62 2.16 Below 5 Crore 5-10 Crore Above 10 Crore 94.23

State-wise Size: A. Size in terms of Number of Medium enterprises The available data as on 31.12. 2006, shows that there are 12, 760 medium enterprises with investment of rupees 87, 949 crores and 2009557 employees. The figures for average investment and employment per unit are rupees 6.89 crores and 157 employees respectively. The employmentinvestment ratio, showing investment intensity in medium enterprises, is 22.85. State-wise size varies drastically in terms of all parameters, namely number of enterprises, investment and employment. The dominating states are Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu and West Bengal. These seven states alone accounted for 66.16 percent units. Only two states alone, namely, Maharashtra and Gujarat

accounted for 31.66 percent units. On the other extreme 15 states have less than one percent units.

B. Size in terms of Investment The total investment in medium enterprises was rupees 87,949 crores. State-wise distribution of investment in medium enterprises shows that it also concentrated in Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu and West Bengal. These seven states alone accounted for 65.78 percent of the investment. Only two states alone, namely, Maharashtra and Gujarat account for 30.97 percent of investment. On the other extreme 16 states had less than one percent share. In terms of average investment the position of medium enterprises across the different states was also almost similar. Average investment per unit was rupees 6.89 crore. State-wise it varies form 5.50 crores in Andaman & Nicobar to nine crores in Sikkim. Employment/Investment ratio varies from 12.78 in DADAR & NAGAR HAVELI to 36.24 in Punjab. While there has been absolute increase in the production, productivity, employment and investment in industrial sector of the backward areas, the disparities between the backward and non-backward areas have widened. However, the industrial structure of the backward areas is changing but at a very slow rate. In terms of average investment and employment as well as the ratio of employment to investment the position of medium enterprises across the different states was also almost similar. Average investment per unit varies form 5.50 crores in Andaman & Nicobar to nine crores in Sikkim. C. Size in terms of Employment Total employment in medium sector is 2009557 employees. State-wise distribution of employment in medium enterprises shows that it also concentrated in Maharashtra and Gujarat, followed by Uttar Pradesh, Andhra Pradesh, Haryana, Tamil Nadu, West Bengal and Rajasthan. These eight states taken together accounted for 78.44 percent of the employment. Only three states alone, namely, Maharashtra, Tamil Nadu and Gujarat account for about 30 percent of total employment provided by medium enterprises. On the other extreme, 16 states had less than one percent share. In terms of average employment the position of medium enterprises across the different states was also almost similar. Average employment per unit was 157.49

employees. Location-wise it varies form 368.00 persons in Chandigarh to 82.67 persons in Tripura. D. Employment Intensity Employment/Investment ratio varies from 12.78 in DADAR & NAGAR HAVELI to 36.24 in Punjab and 37.11 in Arunachal Pradesh. Thus medium enterprises in Punjab and Arunachal Pradesh were three times more employment intensive. While there has been absolute increase in the production, productivity, employment and investment in industrial sector of the backward areas, the disparities between the backward and nonbackward areas have widened. However, the industrial structure of the backward areas is changing but at a very slow rate. As stated earlier the wide variation may be firstly due to great difference in the size of states and secondly due to the difference in the enabling environment. Table-2: State-wise distribution of Medium Enterprises showing share in total number, investment & employment as on 31-10-2007. (Figures in %) State % units % Investment % Employment. Andhra Pradesh 6.75 6.82 7.68 Assam 0.58 0.56 0.39 Bihar 0.34 0.37 0.31 Gujarat 11.46 11.21 10.39 Haryana 5.72 5.7 6.79 Himachal Pradesh 1.51 1.51 1.43 Jammu & Kashmir 0.67 0.65 0.66 Karnatka 3.57 3.7 3.48 Kerla 0.67 0.67 0.75 Madhya Pradesh 3.7 3.69 3.86 Maharashtra 20.2 19.76 18.91 Manipur 0.02 0.02 0.02 Meghalaya 0.38 0.39 0.32 Nagaland 0.02 0.03 0.03 Orissa 1.64 1.69 1.23 Punjab 3.69 3.66 5.8 Rajasthan 4.45 4.44 5.45 Tamil Nadu 8.49 8.63 10.27 Tripura 0.02 0.02 0.01 Uttar Pradesh 7.34 7.34 7.35 West Bengal 6.2 6.32 5.8 Sikkim 0.03 0.04 0.02 Chattisgarh 2.08 2.23 1.52 Jharkhand 1.15 1.17 0.96 Uttrananchal 2.59 2.64 2.15 Andaman & Nicobar 0.05 0.04 0.05
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Arunachal Pradesh Chandigarh Dadar & Nagar Haveli Delhi Goa Pondhicherry Daman & Diu Toatal

0.05 0.04 3.22 0.28 0.75 0.96 1.37 100.00

0.05 0.04 3.27 0.28 0.74 0.95 1.35 100.00

0.09 0.09 1.83 0.26 0.43 0.65 1.02 100.00

E. Average Size of Medium Enterprises The average size of medium enterprises in terms of investment is rupees 6.89 crores. There is little variation in terms of average investment across the states. It varies from rupees 5.50 crores in Andaman & Nicobar to nine crores in Sikkim. In terms of employment the average size is 157.49 persons. But state-wise there is big variation. It varies from 104.95 persons in Assam to 368 persons in Chandigarh. The average employment intensity per crore of investment is 22.85. Minimum employment intensity is in Sikkim and the maximum is in Chandigarh. Details are shown below. Table-3: State-wise distribution of Medium Enterprises showing the position of average investment, employment & capital employment ratio as on 31.10.2007 (Figures in %) State Average Investment Average Employment Employment/ Investment Andhra Pradesh 6.96 179.22 25.74 Assam 6.69 104.95 15.69 Bihar 7.56 143.12 18.94 Gujarat 6.75 142.87 21.18 Haryana 6.87 186.85 27.21 Himachal Pradesh 6.86 149.25 21.76 Jammu & Kashmir 6.60 154.22 23.35 Karnatka 7.14 153.41 21.50 Kerla 6.98 177.47 25.44 Madhya Pradesh 6.87 164.24 23.90 Maharashtra 6.75 147.45 21.86 Manipur 8.50 213.50 25.12 Meghalaya 7.02 130.45 18.58 Nagaland 8.00 191.67 23.96 Orissa 7.10 118.11 16.63 Punjab 6.83 247.55 36.24 Rajasthan 6.88 192.68 28.00 Tamil Nadu 7.01 190.52 27.17 Tripura 6.00 82.67 13.78 Uttar Pradesh 6.90 157.89 22.88 West Bengal 7.03 147.44 20.98 Sikkim 9.00 124.25 13.81 Chattisgarh 7.38 114.94 15.57
11

Jharkhand Uttrananchal Andaman & Nicobar Arunachal Pradesh Chandigarh Dadar & Nagar Haveli Delhi Goa Pondhicherry Daman & Diu Total Size Product-wise:

7.00 7.03 5.50 6.71 7.60 7.00 6.94 6.78 6.79 6.79 6.89

131.19 131.18 152.50 249.14 368.00 89.49 142.39 89.64 106.70 117.48 157.49

18.74 18.67 27.73 37.11 48.42 12.78 20.50 13.22 15.72 17.31 22.85

Data compiled and disseminated by industry division is based on NIC classification. The information in this way is spread over 37 product lines. A. Product-wise Size in terms of Number of Medium enterprises The available data, as on 31.10. 2007, shows that for 12, 760 medium enterprises three industries, namely Metallurgical industries, Chemicals (other than fertilizers), and Textiles dominate in the share in numbers. These three industry groups alone account for 42.63 percent share. Eighteen industry groups have less than one percent share. The other six industry groups have less than two percent share.

B. Product-wise Size in terms of Investment of Medium enterprises Product-wise size in terms investment also varies drastically. The dominating industries are Metallurgical industries, Chemicals (other than fertilizers), and Textiles. These three industries alone accounted for 43.03 percent investment. On the other

extreme 18 industries have less than one percent share. In terms of average investment the position of different industry groups in medium sector enterprises was also almost similar. Average investment per unit varies form 5.70 crores in Sugar units to 7.67 crores in Dye-Stuffs.

C. Product-wise Size in terms of Employment Total employment in medium sector, as stated earlier, is 2009557 employees. Product-wise distribution of employment in medium enterprises shows that it also concentrated in Metallurgical industries, Chemicals (other than fertilizers), and Textiles. These three product groups alone taken together accounted for 42.55 percent of the employment. Only two product groups alone, namely, Metallurgical industries,
12

and Textiles account for about 33.45 percent of total employment provided by medium enterprises. On the other extreme, 16 product groups had less than one percent share in employment.

In terms of average employment the position of medium enterprises across the different product groups was also almost similar. Average employment per unit varies form 417.84 persons in Rubber goods to 55.89 persons in Glue & gelatin industries.

D. Product-wise Employment Intensity Employment intensity in different industry groups in relation to investment varies to great extent. Employment/Investment ratio varies from 8.82 in Glue & gelatin to 58.92 in Rubber goods. Thus medium enterprises in Rubber goods were seven times more employment intensive than Glue & gelatin enterprises. The three highest employment intensive industries were Rubber goods (58.92), Fuels (40.17) and Industrial instruments (35.14). The three lowest employment intensive industries were Glue & gelatin (8.82), Dye-Stuffs (10.33) and Miscellaneous mechanical & engineering industries (14.44). Table-4: Product-wise distribution of Medium Enterprises showing share in total number, investment & employment as on 31-10-2007 SCHEDULED INDUSTRY Enterprises Mettellurgical industries 16.21 Fuels 0.58 Boilers & steam generating plant 0.03 Prime movers other than electrical generators 1.69 Electricals equipment 4.87 Telecommunications 1.72 Transportation industry 1.71 Industrial machinery 1.94 Machine tools 0.27 Agricultural machinery 0.15 Earth-Moving Machinery 0.09 Miscellaneous mechanical & engineering industries 4.26 Commercial, office and household equipments 0.29 Medical and surgical appliances 0.09 Industrial instruments 0.02 Scientific instruments 0.48 Fertilizers 0.92 (Figures in %) Investment Employment 16.57 15.63 0.63 1.11 0.03 0.03 1.72 1.69 4.89 5.51 1.78 2.19 1.7 2.16 1.9 1.66 0.28 0.33 0.14 0.12 0.09 0.13 4025 0.3 0.09 0.02 0.45 0.95 2.68 0.3 0.1 0.02 0.55 1.01
13

Chemicals ( other than fertilizers) Photographic raw film and paper Dye-Stuffs Drugs & pharmaceuticals Textiles Paper & pulp including paper products Sugar Fermentation industries Food processing industries Vegetable oil& vanspati Soaps, cosmetics & toilet preparations Rubber goods Leather, Leather goods & Pickers Glue & gelatin Glass Ceramics Cement & Gypsum products Timber products Miscellaneous industries Others Total

13.19 0.16 0.05 2.56 13.03 3.53 3.68 2.05 5.49 5.33 0.84 1.11 0.47 0.07 0.49 0.67 2.05 0.019 1.06 8.66 100

13.25 0.14 0.05 2.65 13.21 3.51 3.05 2.07 5.45 5.3 0.83 1.14 0.47 0.06 0.52 0.67 2.01 0.19 1.06 8.61 100

9.1 0.12 0.02 1.96 17.82 2.93 3.97 1.52 6.85 4.4 1.28 2.93 0.77 0.03 0.39 0.51 1.64 0.18 0.85 7.5 100

Table- 5: Product-wise distribution of Medium Enterprises. Showing the Position of average investment, employment & capital employment ratio as on 31.10.2007 State Avg. Inv. Mettellurgical industries 7.05 Fuels 7.47 Boilers & steam generating plant 7.00 Prime movers other than electrical generators 6.99 Electricals equipment 6.93 Telecommunications 7.13 Transportation industry 6.85 Industrial machinery 6.76 Machine tools 7.03 Agricultural machinery 6.68 Earth-Moving Machinery 6.42 Miscellaneous mechanical & engineering industries 6.87 Commercial, office and household equipments 7.16 Medical and surgical appliances 6.50 Industrial instruments 7.00 Scientific instruments 6.44 Fertilizers 7.07 Chemicals ( other than fertilizers) 6.92 Photographic raw film and paper 5.81 Dye-Stuffs 7.67 Drugs & pharmaceuticals 7.10 Textiles 6.99 (Figures in %) Avg. Emp. Emp/ Inv 151.89 21.55 300.18 40.17 172.50 24.64 156.77 22.43 178.40 25.76 200.62 28.13 199.25 29.07 135.45 20.04 187.23 26.64 123.89 18.54 217.67 33.92 99.18 14.44 160.78 22.45 175.42 26.99 246.00 35.14 182.28 28.29 172.65 24.43 108.68 15.70 115.67 19.91 79.17 10.33 120.61 16.98 215.34 30.82
14

Paper & pulp including paper products Sugar Fermentation industries Food processing industries Vegetable oil& vanspati Soaps, cosmetics & toilet preparations Rubber goods Leather, Leather goods & Pickers Glue & gelatin Glass Ceramics Cement & Gypsum products Timber products Miscellaneous industries Others TOTAL

6.85 5.70 6.95 6.85 6.85 6.81 7.09 6.87 6.33 7.32 6.86 6.77 6.79 6.90 6.85 6.89

130.46 169.62 116.43 196.51 129.92 241.03 417.84 256.27 55.89 127.10 120.08 126.13 149.46 127.10 136.44 157.49

19.05 29.75 16.74 28.68 18.95 35.38 58.92 37.32 8.82 17.36 17.50 18.63 22.01 18.43 19.92 22.85

State-wise distribution in terms of number of medium enterprises is quite uneven. The reasons could be many. The first most important factor is the size of the state. But the distribution is uneven even in the states which are equal or comparable in size. In some cases the state is smaller in size but has more number of medium enterprises. It is because of the difference in enabling environment in different states. It is reflected by Bihar and Haryana. The leading states are Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, Uttar Pradesh, and West Bengal. But if the number of medium enterprises is related with area and population of the state Haryana and Punjab would come in the list of top states. In terms of average investment and employment as well as the ratio of employment to investment the position of medium enterprises across the different states is almost similar. Average investment per unit varies form 5.50 crores in Andaman & Nicobar to nine crores in Sikkim. Employment/Investment ration varies from 12.78 in

DADAR & NAGAR HAVELI to 36.24 in Punjab. While there has been absolute increase in the production, productivity, employment and investment in industrial sector of the backward areas, the disparities between the backward and non-backward areas have widened. However, the industrial structure of the backward areas is

changing but at a very slow rate. Thus there has been absolute increase in the production, productivity, employment and investment in medium enterprises in all states and across all product lines. But there have been great disparities between the different states and different product lines. As stated earlier the wide variation may be firstly due to great difference in the
15

size of states and secondly due to the difference in the enabling environment. The entrepreneurs have preferred locations which (1) are nearer to the industrial centres (2) have close linkages with outside economy in terms of supply of inputs and sale of output , and (3) have adequate infrastructure facilities. The inter linkages between the backward and developed areas are also limited and hence call for the reorientation of the policy in selecting such sites and industries which offer maximum of backward and forward linkages.

However, the industrial structure of the states is changing though at a very slow rate. This changing scenario may reduce the inter state and inter product variations.

16

Chapter-3

Analysis of Growth Pattern of Medium Manufacturing Sector

Introduction: This chapter describes the growth pattern of medium enterprises over the last 17 years i.e. since 1990 - 91. Based on secondary information it presents growth pattern over the years, across the state and over the product-lines. In terms of all the three variables, namely, year-wise, State-wise and Product-wise growth pattern of number of enterprises, investment and employment has been quite uneven. While there has been absolute increase in the number of enterprises, employment and investment in medium sector across the country as well as across the productlines, the disparities between the states and between the product categories have widened. Thus it shows that the industrial structure of all the states is changing but in some of the states progress is at a very slow rate.

Growth Patten of medium enterprises across the country - Number of Enterprises The absolute number of medium enterprises has been increasing consistently over the years. It was 3252 units in the year 1995, and increased to 7441 in the year 2000, to 10701 in the year 2005 and 12584 in the year 2006 (positions as on 31st January).

Graphic presentation of Yearly Growth Patten of Number of medium enterprises is given below.
Units Units 1600 1400 1200 1000 800 600 400 200 0
19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

17

Table 1: Yearly Addition, Cumulative figures and Growth Patten of Number of medium enterprises Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Yearly Addition 1405 671 823 1378 915 681 791 622 542 501 503 668 925 1022 1313 Cumulative Figures 1405 2076 2899 4277 5192 5873 6664 7286 7828 8329 8832 9500 10425 11447 12760 47.76 39.64 47.53 21.39 13.12 13.47 9.33 7.44 6.40 6.04 7.56 9.74 9.80 10.13 Rate of Growth

Investment & Employment The investment in medium enterprises has increased about four times. But the annual growth rate has come down. Overall growth rate has been 14.37 percent. It was about 25% during 1995-2000 and came down to 8.91 during 2000-05 and rose to 9.02 % during 2005 -07. Similar has been the position of employment. In absolute terms it has increased by three times but the rate of growth has come down from 20.37% during 1995-2000 to 6.24% during 2000-05 and to 7.85% during 2005-07. The overall growth rate was 11.49 percent. The graphs given below show long term growth pattern in the number of enterprises, employment and investment in medium sector across the country

18

Graphic presentation of Yearly Growth Patten of Investment is given below.

Investment Investment 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
19

Table 2: Yearly Addition, Cumulative figures and Growth Patten of Investment Cumulative Figures 9637 14293 20044 29399 35756 40462 45480 49746 53497 56971 60367 64956 71430 78557 87949 Rate of Growth 48.31 40.24 46.67 21.62 13.16 12.40 9.38 7.54 6.49 5.96 7.60 9.97 9.98 11.95

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Yearly Addition 9637 4656 5751 9355 6357 4706 5018 4266 3751 3474 3396 4589 6474 7127
9392

Table 3: Yearly Addition, Cumulative figures and Growth Patten of Employment Cumulative Figures 158924 326419 441664 594209 818308 946957 1047017 Rate of Growth 105.39 35.31 34.54 37.71 15.72 10.57

Year Yearly Addition Units 158924 1991 167495 1992 115245 1993 152545 1994 224099 1995 128649 1996 100060 1997

1998 1999 2000 2001 2002 2003 2004 2005 2006

107114 87793 77766 67159 57970 92960 115277 148763 207738

1154131 1241924 1319690 1386849 1444819 1537779 1653056 1801819 2009607

10.23 7.61 6.26 5.09 4.18 6.43 7.50 9.00 11.53

Note: DIPP started maintaining data base only after 1991. Thus the base year is 1990-91 for calculating the growth rates in the number of enterprises, investment and employment. Graphic presentation of Yearly Growth Patten of Employment is given below.
Employment Employment 250000 200000 150000 100000 50000 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Average Investment & Employment The status of medium enterprises in terms of Average Investment & Employment has been rising over the last ten years. The average level of investment per unit rose from rupees 6.48 crore in 1995 to rupees 6.73 crore in 2001 to rupees 6.88 crore in 2007. The average level of employment per unit rose from 134.67 persons in 1995 to 149.25 persons in 2001 and to156.94 persons in 2007. Table - 4: Distribution of Average Level of Investment & Employment Sr. No. 1 2 Particulars Average investment Average Employment 1995 6.48 134.67 Years 2001 6.73 149.25 2007 6.88 156.94

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Growth Patten in Number of Medium Enterprises: The state-wise rate of growth in terms units varies to a great extent. Even within the state there were high variations over different periods. Across the states there was 76.38 % increase in rate of growth in Meghalaya, followed by 50 % in Sikkim and 47.12 % increase in UttraKhand. These are the three states in which there is maximum growth rate in 1995-2000.

Table- 5:Five yearly State-wise Growth Pattern of Medium Enterprises in Terms of Units S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 State 1995 to 2000 2000-05 2005 -07 Andhra Pradesh 26.04 9.08 12.80 Assam 11.67 28.42 29.35 Bihar 15.29 5.33 6.58 Gujarat 23.32 6.84 8.12 Haryana 21.72 6.26 6.19 Himachal Pradesh 20.57 18.59 19.34 Jammu & Kashmir 12.50 36.92 66.22 Karnatka 24.70 9.81 8.09 Kerla 24.80 5.36 9.86 Madhya Pradesh 18.46 3.60 7.02 Maharashtra 34.18 7.42 5.32 Manipur Meghalaya 100.00 123.33 5.81 Nagaland 0.00 Orissa 22.86 50.67 11.32 Punjab 15.68 5.19 4.33 Rajasthan 14.94 4.13 5.81 Tamil Nadu 31.80 6.12 11.14 Tripura 0.00 Uttar Pradesh 17.96 6.36 5.70 West Bengal 44.22 24.57 10.25 Sikkim 0.00 0.00 150.00 Chattisgarh 32.38 50.91 16.67 Jharkhand 36.00 34.29 14.47 Uttrananchal 32.22 36.60 72.56 Andaman & Nicobar 40.00 0.00 0.00 Arunachal Pradesh 37.50 Chandigarh 10.00 13.33 0.00 Dadar & Nagar Haveli 49.32 10.43 3.38 Delhi 3.81 3.20 10.34 Goa 62.67 8.06 4.60 Pondhicherry 33.10 8.57 5.91 Daman & Diu 32.73 7.59 2.81 Total 25.76 8.76 8.80 Total 15.97 23.15 9.07 12.76 11.39 19.50 38.55 14.20 13.34 9.69 15.64 0.00 76.38 0.00 28.28 8.40 8.29 16.35 0.00 10.01 26.35 50.00 33.32 28.25 47.13 13.33 12.50 7.78 21.04 5.78 25.11 15.86 14.38 14.44

21

The rate of growth from the period 2000 to 2005 the maximum rate of growth is again in Meghalaya that is of 123.33% but followed by Chattisgarh and Orissa with the growth rate of 50.91% & 50.67% respectively. The other states having annual growth rate above 20% are Assam, Jammu & Kashmir, West Bengal, Dadar & Nagar Haveli, and Goa. On the other hand the lowest rate of growth was only 5.78 % in Delhi. The other states with lower than 10% annual growth rate are Bihar, Madhya Pradesh, Punjab, Rajasthan, Chandigarh, and Delhi. Details are shown in the table.

Growth in Investment The investment in absolute terms has been increasing over the years. State wise

analysis reveals that there is significant increase in the rate of growth in Meghalaya, Goa, Dadar & Nagar Haveli, Chhatishgarh and Orissa. On the other hand, lowest rate of growth during 2005-07 was in Dana & Diu. Details are shown below.

Table- 6: Growth Pattern of Medium Enterprises in terms of investment S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 State Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnatka Kerla Madhya Pradesh Maharashtra Manipur Meghalaya Nagaland Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Sikkim Chattisgarh Jharkhand Uttrananchal Andaman & Nicobar Arunachal Pradesh 1995 to 2000 26.01 9.17 13.68 23.39 22.26 22.39 13.88 24.18 22.91 17.90 31.98 152.00 23.54 15.47 14.22 31.79 17.29 40.91 0.00 29.47 35.41 32.28 46.00 2000-05 8.94 25.43 5.68 6.83 6.29 18.50 37.83 10.06 5.83 3.55 7.62 118.14 51.06 5.20 3.95 6.22 6.41 25.01 0.00 56.91 33.38 35.66 0.00 2005 -07 13.01 26.73 5.27 8.31 6.41 20.61 68.33 8.33 9.78 7.27 5.59 6.57 0.00 10.95 4.83 5.55 11.66 0.00 5.63 10.13 150.00 16.25 13.83 73.65 0.00 33.93 Total 15.99 20.44 8.21 12.84 11.65 20.50 40.01 14.19 12.84 9.57 15.06 0.00 92.24 0.00 28.52 8.50 7.91 16.56 0.00 9.78 25.35 50.00 34.21 27.54 47.20 15.33 11.31
22

28 29 30 31 32 33

Chandigarh Dadar & Nagar Haveli Delhi Goa Pondhicherry Daman & Diu Total

14.29 49.53 4.29 63.56 33.58 38.48 25.17

11.67 10.48 2.94 8.01 8.55 6.74 8.91

0.00 3.47 11.79 4.57 6.57 2.83 9.02

8.65 21.16 6.34 25.38 16.23 16.02 14.37

Growth Pattern in Employment Similar is the position of employment. In absolute terms it has been increasing but the rate has been decreasing. The highest increase in the rate of employment is in Meghalaya. The other states having growth rate above 20% are Assam, Orissa, West Bengal, Sikkim, Chhattisgarh and Jharkhand. The lowest growth rate of employment was in Chandigarh. The other states having employment rate below 10 % are Bihar, Gujarat, Kerela, Madhya Pradesh, Rajasthan, Uttar Pradesh, Andaman & Nicobar, Delhi and Daman & Diu. Details are shown below.

Table- 7: Growth Pattern of Medium Enterprises in terms Employment State Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnatka Kerela Madhya Pradesh Maharashtra Manipur Meghalaya Nagaland Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Sikkim Chattisgarh Jharkhand Uttrananchal 1995 to 2000 2000-05 2005 - 07 Total 14.47 5.56 23.40 14.48 16.00 39.70 27.62 27.77 20.05 5.60 3.38 9.68 19.32 5.90 4.55 9.92 18.94 4.77 5.27 9.66 21.99 15.36 14.87 17.41 3.41 10.59 27.16 13.72 23.83 9.57 9.32 14.24 13.54 5.32 4.48 7.78 11.76 3.16 6.39 7.10 51.13 -0.51 2.94 17.85 0.00 164.80 227.10 5.51 132.47 0.00 0.00 20.65 33.52 19.47 24.55 -8.59 41.53 2.64 11.86 14.81 4.87 2.89 7.52 23.03 6.02 15.14 14.73 0.00 0.00 9.41 4.00 4.88 6.10 35.56 25.54 7.69 22.93 0.00 0.00 62.95 20.98 19.23 44.92 13.93 26.03 40.01 19.26 10.59 23.29 24.15 33.23 67.95 41.78
23

Andaman & Nicobar Arunachal Pradesh Chandigarh Dadar & Nagar Haveli Delhi Goa Pondhicherry Daman & Diu Total

14.86 4.00 36.25 1.17 47.90 38.02 18.37 20.37

0.00 1.15 9.90 1.59 8.29 4.95 6.21 6.24

0.00 35.66 0.00 2.46 9.96 4.03 4.95 1.72 7.85

4.95 11.89 1.72 16.20 4.24 20.07 15.97 8.77 11.49

Measuring the growth pattern through rate of growth is not very meaningful, if not quite mis-leading. It is because there is big difference in the denominators (Figures in base years). This is clearly shown in this case also. So we have related the number of units, investment and employment in medium enterprises with the population and area of the states. This gives somewhat a realistic picture.

Growth Pattern of Units across Population and Area: In the country as a whole the density - number of medium enterprises per thousand kilometers and per lakh population - is just 3.83 and 1.11 units respectively. Statewise highest density of medium enterprises measured in terms of units in relation to area and population is in Dadra & Nagar Haveli and Daman & Diu. In 18 states it is lower than one unit per lakh of population. In terms of area also nine states have less than one unit per thousand of square kilometers. Details are shown below. Table 87: Total units over population & Area Population per lakh and area (in 000 sq. km.) States Units/ Population Andaman & Nicobar Islands 1.49 Andhra Pradesh 1.04 Arunachal Pradesh 0.59 Assam 0.25 Bihar 0.05 Chandigarh 0.48 Chhattisgarh 1.12 Dadra & Nagar Haveli 161.18 Daman & Diu 92.35 Delhi 0.21 Goa 6.01 Gujarat 2.60 Haryana 3.06 Himachal Pradesh 2.93 Jammu & Kashmir 0.72 Jharkhand 0.50 Units/area 0.73 3.08 0.08 0.93 0.46 43.86 1.92 837.07 1508.93 23.60 25.66 7.38 16.22 3.41 0.39 1.84
24

Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Nagaland Orissa Pondicherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal Total

0.78 0.25 0.69 2.42 0.08 1.92 0.14 0.49 11.63 1.76 0.89 0.68 1.60 0.09 0.50 3.48 0.89 1.11

2.32 2.19 1.52 8.31 0.09 2.14 0.18 1.25 256.78 9.19 1.66 0.56 8.10 0.29 3.85 6.10 8.73 3.83

Distribution Pattern of Investment across Population and Area: Position of investment per thousand square kilometers and per lakh population is satisfactory. Across the country rupees 13.87 crores have been invested per lakh of population. In terms of area rupees 47.73 crore have been invested per thousand square kilometers. Dadra & Nagar Haveli and Daman & Diu is exceptionally excellent in terms of both the population and area. It is also better than other states in Pondicherry. In seven states investment in medium enterprises is more than rupees 20 crores per lakh population. But in 14 states it is less than 5 crores. In terms of area in 16 states investment per thousand kilometers exceeds rupees 20 crores. Only in six states/UTs it is less than rupees five crores per thousand kilometers. Details are shown below. Table 9: Distribution of Total Investment over Population & Area states Investment/ Population Investment/ area Andaman & Nicobar Islands 8.19 4.00 Andhra Pradesh 7.23 21.38 Arunachal Pradesh 3.97 0.56 Assam 1.66 6.22 Bihar 0.35 3.45 Chandigarh 3.66 333.33 Chhattisgarh 8.24 14.17 Dadra & Nagar Haveli 1128.63 5861.51 Daman & Diu 622.95 10178.57 Delhi 1.46 162.51 Goa 40.80 174.23
25

Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Nagaland Orissa Pondicherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal Total

17.53 20.99 20.07 4.74 3.48 5.59 1.75 4.75 16.31 0.66 13.42 1.11 3.51 78.92 12.02 6.14 6.13 11.17 0.52 3.41 24.42 6.28 13.87

49.74 111.12 23.39 2.56 12.91 16.54 15.26 10.48 55.94 0.76 14.98 1.45 8.90 1743.22 62.77 11.41 5.07 56.52 1.72 26.53 42.72 61.41 47.73

Distribution of Employment over population and Area Employment creation per thousand kilometers of area and per lakh population across the country is 497.87 and 1713.02 persons respectively. In five states/UTs

employment generation exceeds 500 persons per lakh population. In terms of area employment creation per thousand kilometers of area is more 1000 persons in 13 states/UTs. But position is poor in seven states. Details are shown below.

Table 10: Distribution of Employment over population and Area States Employment / Population Employment/ Area Andaman & Nicobar Islands 227.05 110.92 Andhra Pradesh 188.83 558.26 Arunachal Pradesh 147.17 20.83 Assam 26.15 98.24 Bihar 6.66 65.35 Chandigarh 177.43 16140.35 Chhattisgarh 123.90 213.14 Dadra & Nagar Haveli 14423.14 74906.31 Daman & Diu 9971.58 162928.57 Delhi 29.77 3325.02
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Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Nagaland Orissa Pondicherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal Total

535.67 374.39 570.00 439.46 110.76 65.16 112.92 44.50 113.92 356.95 16.46 253.08 26.62 53.99 1240.45 439.27 172.17 84.67 303.82 7.16 78.54 456.49 129.20 497.87

2287.68 1062.25 3018.14 512.13 59.68 241.93 334.26 388.16 251.49 1223.94 19.12 282.54 34.68 136.90 27398.75 2292.90 319.69 70.04 1537.98 23.65 610.84 798.72 1264.11 1713.02

Product-wise growth rate in number of enterprises Product-wise growth pattern of number of enterprise also shows great variation. Highest growth rate (64.77%) is for Miscellaneous mechanical & engineering industries, followed by Fermentation industries. Lowest growth rate (2.17%) Sugar industry closely followed by Telecommunications. Details are shown in table. Table-11: Distribution of Product-wise Units growth rate S.No. 1 2 3 4 5 6 7 8 9 10 11 Scheduled Industry Mettellurgical industries Fuels Boilers & steam generating plant Prime movers other than electrical generators Electricals equipment Telecommunications Transportation industry Industrial machinery Machine tools Agricultural machinery Earth-Moving Machinery 1995- 2000 20.71 24.29 -19.33 34.14 10.00 44.71 34.12 11.43 25.00 (Figures in %) 2000-05 2005 -07 14.88 10.01 21.94 6.15 20.00 25.00 17.32 17.97 8.34 7.26 2.47 2.15 11.27 12.21 8.70 10.86 8.18 6.45 8.00 17.86 0.00 16.67 Total 15.20 17.46 8.56 11.76 16.58 4.87 22.73 17.89 8.69 8.62 13.89

27

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Miscellaneous mechanical & engineering industries Commercial, office and household equipments Medical and surgical appliances Industrial instruments Scientific instruments Fertilizers Chemicals ( other than fertilizers) Photographic raw film and paper Dye-Stuffs Drugs & pharmaceuticals Textiles Paper & pulp including paper products Sugar Fermentation industries Food processing industries Vegetable oil& vanspati Soaps, cosmetics & toilet preparations Rubber goods Leather, Leather goods & Pickers Glue & gelatin Glass Ceramics Cement & Gypsum products Timber products Miscellaneous industries Others Total Product-wise Investment growth rate

157.39 31.11 20.00 30.00 26.00 19.75 6.25 59.00 24.17 34.56

15.15 8.24 18.89 16.17 35.00 40.00 25.45 13.64 28.89 40.00 33.68 40.77 25.76

17.94 4.35 12.00 0.00 12.00 10.14 4.02 0.00 20.00 9.11 7.35 5.02 4.16 170.77 6.13 3.80 21.14 6.82 20.91 26.67 18.40 14.59 3.64 12.00 17.65 11.87 8.78

18.99 16.07 18.75 0.00 2.68 6.73 3.71 0.00 0.00 20.43 11.67 7.58 2.35 2.62 7.96 4.60 22.22 10.09 14.44 14.29 13.54 14.84 4.91 0.00 19.79 10.89 8.81

64.77 17.18 10.25 6.67 14.89 14.29 9.16 2.08 6.67 29.51 14.40 15.72 2.17 57.80 9.75 5.55 20.75 11.03 23.45 26.99 19.13 14.36 12.48 17.33 23.71 21.18 14.45

Product-wise growth pattern in terms of Investment also shows great variation. Highest growth rate of investment (65.14%) is for Miscellaneous mechanical & engineering industries, followed by Fermentation industries. Lowest growth rate (3.80%) is in Sugar industry closely followed by Telecommunications. Details are shown in table. Table-12: Distribution of Product-wise Investment growth rate S.No. 1 2 3 4 5 6 7 8 9 SCHEDULED INDUSTRY Mettellurgical industries Fuels Boilers & steam generating plant Prime movers other than electrical generators Electricals equipment Telecommunications Transportation industry Industrial machinery Machine tools (Figures in %) 95-2000 2000-05 2005-07 21.04 15.48 10.05 26.67 26.00 6.63 -19.17 15.00 25.00 19.01 18.27 34.72 8.05 6.98 10.46 2.56 2.15 45.60 10.91 12.07 34.75 8.68 11.56 11.83 9.32 5.99
28

Total 15.52 19.77 6.94 12.43 16.58 5.06 22.86 18.33 9.05

Agricultural machinery Earth-Moving Machinery Miscellaneous mechanical & engineering industries Commercial, office and household equipments Medical and surgical appliances Industrial instruments Scientific instruments Fertilizers Chemicals ( other than fertilizers) Photographic raw film and paper Dye-Stuffs Drugs & pharmaceuticals Textiles Paper & pulp including paper products Sugar Fermentation industries Food processing industries Vegetable oil& vanspati Soaps, cosmetics & toilet preparations Rubber goods Leather, Leather goods & Pickers Glue & gelatin Glass Ceramics Cement & Gypsum products Timber products Miscellaneous industries Others Total Product-wise Employment growth rate

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

24.00 158.73 27.32 26.67 31.40 24.50 19.26 6.52 68.13 23.96 36.07

14.35 8.30 17.01 19.13 31.33 32.50 25.85 14.76 26.99 46.25 34.09 37.59 25.17

7.81 0.00 17.46 3.81 10.00 0.00 12.22 10.00 4.10 0.00 20.00 8.93 7.42 4.99 4.71 162.34 5.91 3.60 18.63 7.07 20.26 24.76 17.55 14.68 3.78 10.75 17.98 11.78 8.91

21.35 20.00 19.24 16.25 21.57 0.00 2.53 6.28 3.64 0.00 0.00 22.03 12.02 8.01 2.89 2.86 7.90 4.64 24.22 11.41 14.03 10.64 13.31 15.45 5.46 0.00 17.92 11.13 9.02

9.72 14.67 65.14 15.79 10.52 8.89 15.38 13.59 9.00 2.17 6.67 33.03 14.47 16.36 2.53 55.07 9.39 5.51 19.95 12.54 21.87 22.63 18.90 14.96 12.08 19.00 23.33 20.17 14.37

Product-wise growth pattern in terms of Employment also shows great variation. Highest growth rate of investment (65.14%) is for Miscellaneous mechanical & engineering industries, followed by Fermentation industries. Lowest growth rate (3.80%) is in Sugar industry closely followed by Telecommunications. Details are shown in table. Table-13: Employment growth rate S.No. 1 2 3 4 5 6 7 8 9 SCHEDULED INDUSTRY Mettellurgical industries Fuels Boilers & steam generating plant Prime movers other than electrical generators Electricals equipment Telecommunications Transportation industry Industrial machinery Machine tools (Figures in %) 95- 2000 2000-05 05 -07 Total 16.52 8.18 6.47 10.39 14.69 131.51 1.24 49.15 -19.19 2.73 83.00 22.18 17.47 16.27 11.25 22.45 5.18 5.43 11.02 8.79 1.39 1.05 3.74 23.27 5.06 3.82 10.72 29.37 6.46 13.68 16.50 5.66 3.52 2.13 3.77
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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Agricultural machinery Earth-Moving Machinery Miscellaneous mechanical & engineering industries Commercial, office and household equipments Medical and surgical appliances Industrial instruments Scientific instruments Fertilizers Chemicals ( other than fertilizers) Photographic raw film and paper Dye-Stuffs Drugs & pharmaceuticals Textiles Paper & pulp including paper products Sugar Fermentation industries Food processing industries Vegetable oil& vanspati Soaps, cosmetics & toilet preparations Rubber goods Leather, Leather goods & Pickers Glue & gelatin Glass Ceramics Cement & Gypsum products Timber products Miscellaneous industries Others Total

51.49 145.61 31.75 6.59 19.16 6.71 14.59 1.94 30.93 19.41 28.03

8.99 5.39 8.13 16.91 55.60 32.00 8.01 6.22 25.72 43.06 26.38 31.25 19.13

5.30 0.00 13.88 1.70 13.76 0.00 7.21 3.37 3.47 0.00 15.06 6.60 8.55 3.37 5.74 130.19 3.52 2.36 16.40 11.86 7.87 8.89 16.89 11.04 2.12 20.06 7.99 10.91 7.07

7.50 4.53 19.13 24.57 26.11 0.00 0.87 6.15 3.02 0.00 0.00 15.14 13.45 6.53 2.26 1.84 4.79 2.98 7.99 57.45 7.03 24.41 12.24 13.32 2.81 0.00 9.52 6.16 7.86

4.27 18.67 59.54 19.34 13.29 2.20 9.08 5.41 7.03 0.65 5.02 17.56 13.80 12.64 2.67 44.01 5.77 3.58 10.84 28.74 23.50 21.77 12.38 10.19 10.22 21.04 14.63 16.11 11.35

Conclusion The analysis given above clearly reveals that in terms of all the three variables, namely, year-wise, State-wise and Product-wise growth pattern of number of enterprises, investment and employment has been quite uneven. While there has been absolute increase in the number of enterprises, employment and investment in medium sector across the country as well as across the product-lines, the disparities between the states and between the product categories have widened. Thus it shows that the industrial structure of all the states is changing but in some of the states progress is at a very slow rate.

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Chapter-4

Identification of factors for Locational Preference

Introduction: Balanced development is essential for creating harmonious living conditions of a federal state such as India. However, present picture is dominated by acute inter and intra regional variations The just five leading industrial states account for 40% of all large industries, 55% of employment, 60% of value of output, 58% of value added. All other states and union territories taken together share the rest. This is mainly due to the availability of external economies generated by the infrastructure facilities, which induce the promoters (private investors) as well as the development and financial institutions to go to developed areas.

Further, in all states, particularly in advanced states there is a marked pull of already developed and urban and metropolitan areas for attracting new enterprises. For

example, in West Bengal, 70% of new industrial capacity has been located in the Hoogly District. Nearly 86% of registered factories in Maharashtra were in Poona, Bombay and Thane belt. Delhi, Ghaziabad, Faridabad and Gurugaon belt have

cornered a major chunk of small scale enterprises. Thus, a very large number of medium enterprises have been located in the already developed areas. This pattern of concentration has not changed substantially over the last six decades Despite numerous attempts, the two states of Maharashtra and Tamil Nadu account for more than 1/4th of factory employment and fixed capital as well as more than 1/3 rd of gross output and value added by manufacturing. If four industrially advanced states are taken together then about half of the total output, value added, employment and fixed capital in factory sector is found in them alone and the remaining states and union territories together account for the rest.

However, the economic liberalization as a consequence of the new policy regime is likely to pose major challenges for backward states/regions/areas. Due to multiple factors limitations they are already trapped in vicious circle of poverty. Even in the presence of numerous area specific concessions, incentives, inducements, grants and subsidies, the backward areas could not attract the desired industrial investment. In the emerging environment there may not only be lesser fresh investment of investors
31

but also there is a likelihood of plight / division of the existing investors from slow growth area to the fast growth area. It will develop a new pattern of dualism, more social polarization and territorial inequalities. The spatial industrial development induced by institutional assistance has been grossly uneven. The growth momentum has confined to a few regions. The just five leading industrial states account for 40% of all large industries, 55% of employment, 60% of value of output, 58% of value added. All other states and union territories taken together share the rest. There has been substantial concentration of medium enterprises in the advanced states. This is mainly due to the availability of external economies generated by the infrastructure facilities, which induce the promoters (private investors) and financial institutions to go to developed areas.

Further, in all states, particularly in advanced states there is a marked pull of already developed and urban and metropolitan areas for attracting new enterprises. For

example, in West Bengal, 70% of new industrial capacity has been located in the Hoogly District. Nearly 86% of registered factories in Maharashtra are in Poona, Bombay and Thane belt. Delhi, Ghaziabad, Faridabad and Gurugaon belt have

cornered a major chunk of small scale enterprises. Thus, a very large number of medium enterprises have been located in the already developed areas. If industrial growth, measured in terms of any indicator like, number of units, volume of investment, volume of output or persons employed, is taken as a measure of regional disparities, it shows that most of the industries got concentrated in few states and at few centres. Despite numerous attempts, the two states of Maharashtra and Tamil Nadu account for more than 1/4th of factory employment and fixed capital as well as more than 1/3 rd of gross output and value added by manufacturing. If four industrially advanced states are taken together then about half of the total output, value added, employment and fixed capital in factory sector is found in them alone and the remaining states and union territories together account for the rest.

Factors for locational preference are many. This chapter, based on field survey of 246 medium enterprises, examines the role of pull and push factors for locating medium enterprises in a particular state/area. An attempt has also been made to compare and contrast the position of backward and non-backward areas, particularly while analyzing the information.
32

Locational Distribution: Locational distribution of medium enterprises is quite uneven in terms of Urban Area, Semi-Urban Area and Rural Area. Urban areas are the main attraction for establishing industrial units. Their distribution across urban, semi-urban and rural areas is 55.69, 37.80 and 6.51 percent respectively. These enterprises have visible preference for industrial areas/estates (87.81%). Further, though there are number of incentives and subsidies for locating enterprises in backward districts most of the promoters have distinct choice for non-backward districts. This uneven distribution is due to the difference in the availability of infrastructure and support facilities. Details are shown in the table. Table-1: Locational Distribution of Enterprises Location Particulars Urban Area Semi-Urban Area Rural Area Total Industrial Area/Estate Non- Industrial Area/ Estate Total Backward Areas 57.14 28.57 14.29 100.00 84.62 15.38 100.00 (Figures in %) Non-Backward Areas 54.84 43.23 3.23 100.00 88.39 11.61 100.00 % 55.69 37.80 6.51 100.00 87.81 12.19 100.00

Factors Influencing/ governing choice of Location The most important factor for governing the location of the enterprise is the availability of plot in developed industrial area/estate. But there are significant

differences in stating factors for governing location in backward and non-backward areas. In case of backward areas it is the availability of incentives and subsidies whereas in case of non-backward areas it is the availability of infrastructure and support facilities that play major role for attracting and establishing medium enterprises. Power (electricity), transport and communication facilities are the life line of manufacturing enterprises. Own urge/desire played major role for choosing a particular location (73.57%). It is followed by the advice from friends/family members (59.34%), availability of better infrastructure facilities (50.81%) and future prospects (48.37%). The moderate category of pull or push factors for choosing
33

location includes easy availability of financial assistance (37.39%), peaceful socioindustrial environment (33.33%), plot/shed in industrial area (30.89%) and availability of incentives and subsidies (27.64%). Thus availability financial incentives and capital subsidy does not show encouraging results. stimulate the level of production Training They hardly for

facilities

workers/supervisors/managers/entrepreneurs, climatic/weather conditions, availability of raw materials, workers and market are not given much weight for choosing the location.

Table- 2: Consideration of pull or push factors for setting up enterprise in particular area / location (Figures in %) Factors My native place Own Urge/Desire Advice from family members/friends Future prospects Availability of easy financial assistance Incentives/Subsidies Training facilities Easy availability of manpower Easy availability of Raw Materials Nearness to market Availability of Techno-economic services Cluster of similar units/ Easy availability of plot/shed in Industrial area Better infrastructure facilities Peaceful Industrial /Social environment Climatic/weather conditions Responses 19.51 73.57 59.34 48.37 28.04 27.64 5.69 22.35 18.69 24.39 15.85 21.13 30.89 50.81 33.00 14.63

Others 8.94 Total 100.00 Note: Sum of percentages exceeds 100.00 due to multiple choices/responses.

Role of Local Human Resources and Skills The development of MMEs is assumed to promote and utilize local resources and skills and thereby lead to economic development. In other way-round, the local
34

resources attract industrial enterprises. In case of medium enterprises this statement is not substantiated by the information gathered. Very few medium enterprises are dependent on local resources. The table given below shows percentage of local human and material resources used. Though almost all the units employed some local persons in different working categories but majority of human resources was attracted from different districts/ states. In case of using human resources, share of local skills in different categories is very small. Table-3: Distribution of Units showing Utilization of Human Resources (Figures in % ) Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Particulars Promoters Managers Supervisors Workers -Skilled workers -Unskilled workers Total Employees

Local 15.04 17.41 19.69 24.70 21.00 83.02 25.17

Others 8 4.96 82.59 80.31 75.30 79.00 16.98 74.83

Role of Infrastructure / Support Facilities Infrastructure and support facilities provide external economies to an enterprise. They facilitate production and movement of goods and services and provide safety and security. Nearer such services better it is. Such services consist of rail, roads, bank, railway station, telecommunication, workers colony, source of raw material, fire station, post office, market place etc. A major impediment to the development of MSMEs is their inability to command, on their own the facilities mentioned above. In this context following schemes have been formulated. Industrial Areas / Estate Programmes Integrated Infrastructural Development Scheme Industrial Clusters Industrial Growth Centres Export Promotion Zones Industrial Parks No doubt, theses are the first preference for medium enterprises. These are composite areas consisting of basic infrastructure and support facilities. In this regard to distance of enterprise from National/State Highway, Bank, Railway Station, Fire station, Post Office, Market city Bazaar, etc., as shown in the table, medium enterprises are at
35

satisfactory position. For most of the medium enterprises these facilities are available within a radius of ten kilometers. Details are shown below.

Table-4: Distribution of Units showing Distance of Support Facilities (Figures in %) Infrastructure / Support Facilities National/State Highway Bank Railway Station Fire station Post Office Market city Bazaar Distance Less than 10 91 (36.93) 117(47.56) 72(29.27) 65(26.42) 118(47.97) 157(63.82) 11 15 64(26.01) 73(29.67) 89(36.18) 82(33.33) 91(36.99) 60(24.39) 16 20 57(23.17) 43(17.48) 56(22.76) 76(30.90) 32(13.01) 29(11.79) More than 20 34(13.89) 13(5.29) 29(11.79) 23(9.35) 05(2.03) -

Techno-Economic Facilities (Distance) Availability of techno-economic facilities not only accelerates production but also helps improve quality of products. Therefore it does not appear feasible to locate a new venture deep in the interior where the necessary infrastructure does not exist. A MME unit needs an environment where there is a good communication system, availability of power, raw material, lending, loading and unloading facilities and an accessible market. A manufacturing enterprise, most vulnerable to risk like an infant child does not have enough resilience to absorb economic shocks of even small intensity. But the study reveals a different picture. In this regard very small fraction of medium enterprises has such services in the near by vicinity. Most of the units have to cover a long distance for seeking tool-room facility, techno- economic diagnosis, quality marking / testing and making bulk purchases of raw materials. Even skill upgradation centres, marketing assistance centres and raw material depots were not in their close vicinity. However, weighing facilities are available nearby to their enterprises.

Details are shown in the table.

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Table-5: Distribution Services/Consultancy

of

Units

showing

Distance

of

Techno-Economic (Figures in %)

Distance Facilities Techno-economic diagnosis Quality marking / testing Provision of bulk purchase Skills upgradation centre Tool room facility Weighing Raw material deport < 50 KM 6.90 16.26 9.35 7.34 4.08 65.85 10.97 50-100 4.70 12.60 8.95 8.56 5.29 17.88 12.60 101-150 3.60 10.97 8.13 6.09 6.50 6.09 151 -200 15.40 8.95 6.09 8.13 4.88 16.26 More than No 200 KM Response 23.12 46.28 11.38 39.84 4.88 62.60 3.60 66.28 3.25 66.66 16.27 13.03 41.05

Role of Incentives and Inducements Incentives and Inducements are motivational forces which attract new entrepreneurs and improve productivity of enterprises. These could be financial or non-financial. They include concessions, subsidies and bounties (bonus or financial assistance. They help balanced regional development, removal of economic constraints and provide competitive strength and growth. But if they are not monitored judiciously, fail to meet the desired objectives developing bogus units, encouraging inefficiencies, promoting unviable entrepreneurs and use of resources, breeding corruption and blocking graduation of micro to small to medium to large unit. Further, theses are related to investment, export/import, R & D, taxes/excises, technology upgradation etc. Table-6: Distribution of units availing Incentives / Inducements for Setting up / Operating Enterprises (Figures in %) % Incentives and Inducements Total Central / State capital subsidy 63 25.60 Sales tax loan 37 15.04 Seed money 40 16.26 Power subsidy/concession 96 39.02 Raw material supply 16 6.50 Land/shed 164 66.67 Feasibility study grant 46 30.89 Entrepreneurial training 14 5.69 Workers training 6 2.43 Incentives and Inducements play important role for choosing a particular location. For example almost all the entrepreneurs locating their enterprises in backward areas availed of central or state capital subsidy. The other important inducement in this
37

regard was the availability of industrial plot/shed in the area developed by government and which were supported by other support facilities. About two-third promoters have their enterprises in industrial areas. The third important incentive was in the form of subsidized or concessional power. More than 39 % promoters availed of this. Details of incentives in background and non-background areas over time are given in the table.

Conclusion Unlike micro and small enterprises the locational decisions for medium enterprises are hardly based on the chance. They are not taken arbitrarily and at the last moment and under socio-economic compulsions. They are based on systematic and precise calculations of costs and revenue. Though in some cases the promoters establish their enterprises at the sites which are nearby their native places, easily accessible and easily available yet majority of entrepreneurs choose the location that is the best one in terms of commercial parameters. In other words, they go for best sites, even at a long distance, which could give minimum costs, maximum revenue and profit. Minimization of costs is eroding in importance as the guiding force for location of enterprises. The maximization of revenue and profits are gaining ground in this respect. Thus, neither the freely selected sites nor the sites selected and developed by the government in backward areas are the optimum. It is revealed by the concentration of MMEs in the metropolitan centres is a national corollary of the market forces according to which entrepreneurs invariably prefer those locations, which offer more external economies. The economic liberalization as a consequence of the new policy regime is likely to pose major challenges for backward states/regions/areas. Due to multiple factors limitations they are already trapped in vicious circle of poverty. Even in the presence of numerous area specific concessions, incentives, inducements, grants and subsidies, the backward areas could not attract the desired industrial investment. In the

emerging environment there may not only be lesser fresh investment of investors but also there is a likelihood of plight / division of the existing investors from slow growth area to the fast growth area. It will develop a new pattern of dualism, more social polarization and territorial inequalities.

38

Minimization of costs is eroding in importance as the guiding force for location of enterprises whereas maximization of revenue and profits are gaining ground in this respect. Thus, neither the freely selected sites nor the sites selected and developed by the government in backward areas are the optimum.

The entrepreneurs have preferred locations which (1) are nearer to the industrial centres (2) have close linkages with outside economy in terms of supply of inputs and sale of output (3) have adequate infrastructure facilities. Further, in case of credit supply the entrepreneurs, instead of subsidized/cheap credit, desired adequate supply of credit.

39

Chapter-5

Factors influencing performance

Performance of an enterprise is directly related with enabling environment. There is one to one positive relationship between the two. Enabling environment is a comprehensive concept composed of various factors of development. The major factors include national policies governing Government schemes, legal framework, finance and fiscal issues, employment, technology education and the like. Logically, Government policies and legal framework are expected to provide enabling environment to MMEs and play positive role in shaping effectiveness of the sector.

Size of Enterprises Table-1: 8(a) Composition of Assets (Per Unit Investment - Book Value Rs. in Crores) Sr. No. Equipments 1 Land & Building 2 Plant & Machinery 3 Furniture & Fixtures 4 Others (Please specify) Total Table-2: 8(b) Employment (Other Than Promoters) Sr. No. Particulars 1 Total No of Employees 2 Managers 3 Supervisors 4 4.1 4.2 Table-3: 8(c) Exports (Rs.. in crores) Year 2004-05 2005-06 2006-07 126.87 243.97 Exports 78. 54 Workers total Skilled unskilled Employment 29172 1476 2214 25482 23498 1984 Average Employment 118.59 6.00 9.00 103.59 95.52 8.07 Investment 3312.46 1852.38 206.64 137.76 5509.24 Average Investment 13.47 7.53 0.84 0.56 22.40

40

4.1 Reasons for limiting the size of Enterprise Growth is a natural phenomenon. However, there are numerous inhibiting factors like own resources, borrowed resources, market capturing capacity, high technical knowledge and skills, his managerial ability, availability of inputs etc. The study reveals that current size of enterprise is limited to present level because

promoters own resources are limited (37.39%), limitations of raising loans from external sources (47.96%), selling the product (43.90%) and government policies (34.55%). Other important inhibiting factors were the entrepreneur unwillingness to take greater risks and his techno- managerial limitations. About one-fourth entrepreneurs stated that the current size of their enterprise was optimum. .Table-4: Reasons for Limiting the Size of enterprises at present level Factors Responses % Limited own resources 92 Limitation in raising funds 118 Market limitations 108 Inadequate technical knowledge 43 Managerial limitations 45 Unwillingness to take greater risks 46 It is an ideal size 63 Shortage of suitable manpower 49 37.39 47.96 43.90 17.47 18.29 18.69 26.60 19.91

Shortage of Raw Materials 52 21.13 Others 12 04.87 Total 246 100.00 Note: Sum of percentages exceeds 100.00 due to multiple choices/responses.

The initial size of project depended on various factors. Less than 40% promoters stated that the initial size of their project was the optimum size. However, the reasons for keeping a particular size varied in degree in backward and non-backward areas as well as over time. Details are shown above. Impact on Performance The performance of an enterprise can be measured through financial like sales, profits and physical output - data. Promoters hesitate to provide financial information. So the performance of an enterprise was measured in general terms. As they hesitated to provide balance sheets and profit and loss accounts of their units the main promoters were asked whether their units were making profits or losses. Units making profits continuously during the last 3 years were taken as healthy. While units incurring
41

losses constantly for three years were categorized as sick units. Thus based on above parameters the units were categorized in four groups namely making profits in the last 3 years, two years and one year, or making losses continuously for 3 years on the day of field survey. The study in this regard revealed that 65.86 per cent units made profits constantly for 3 years while only 3.25 per cent units incurred losses continuously for 3 years. Details are shown in the Pie-gram given below. Table- 5: Performance Status Performance Status Making profit for 3 years Making profit for 2 years Making profit for 1 years Incurring Losses for 3 yrs. Total Responses 162 49 27 8 246 % 65.86 19.92 10.97 3.25 100.00 Details are shown below in Table.

Future prospects Only about 15% promoters stated the future prospects of their enterprises very bright while 31.70% and 32.52% stated them to be bright and moderate. On the other hand about 17% promoters were uncertain. The extreme cases stating the future of their enterprises very dark were only 4 percent. Details are shown below. Table-6: Future prospects Particulars Very Bright Bright Moderate Doubtful Dark Total Capacity Utilization Level of production is one the most important indicator of the performance of an enterprise. It is because more than half of the capital as also labour force in most of the small-scale units was involved in production directly. Capacity Utilisation is directly related with production. Or production has linear relation with capacity utilisation. Hence capacity utilization has been taken as one of the measures for assessing the performance of the enterprise. The availability of finance, power, raw
42

Responses 36 78 80 41 11 246

% 14.65 31.70 32.52 16.67 4.46 100.00

materials, labour and demand of the product directly affected capacity utilization. It was also affected by the availability of numerous other support facilities in a particular area. Table-7: Distribution of Units showing levels of capacity utilisation Level of Utilization Responses % Full capacity 30 12.19 More than 80% 78 31.71 More than 70% 65 26.42 More than 60% 41 16.66 More than 50% 22 8.95 More than 40% 10 4.07 Less than 40% Total 246 100.00 Only 3.13% units were operating at full capacity and those were located in nonbackward areas. None of the unit was utilising more than 80% capacity in backward areas. Less than 5% units in backward areas were utilising 60 to 80 per cent capacity. About 8 per cent units were operating at less than 40 % capacity and all of those were in backward areas. About 44% and 87% units were utilising more than 50% capacity in backward and non-backward areas respectively. Return on Investment Making profit is the most important factor for any enterprise. All enterprises make efforts to maximize their profits. They set targets and try to achieve. About 19% units were achieving their profit /targets but 68.7% failed to achieve the set targets. Only 12.50 per cent units were fortunate to cross their targets. Further, most of the units achieving and crossing their targets were located in non-backward areas. On the other hand, 85.19% units in backward areas were in soup as they were unable to achieve their profit targets.

Table-8: Distribution of Units showing Returns on Investment (Figures in %) level of return Equal to target More than target Less than target Total Backward (62.64) 57 (24.18) 22 (13.18) 12 91 NonBackward (53.55) 83 (35.48) 55 (10.97) 17 155 Total 140 77 29 246

43

However, in their anxiety to systematically control the MSME sector for over three decades, most of the Asian countries ended up in operating draconian laws full of controls and approvals. In the process, Governments were perceived as "Controllers" rather than "Facilitators". The control regime generally worked as barriers to growth resulting in emergence of non-enabling and unfriendly environment for MSMEs. Barring a few countries where systemic reform process was underway, in the rest of the region these factors continued to work as barriers to growth and inhibit smooth functioning of the sector. This chapter presents an analysis of the contributory and impeding factor on performance of medium enterprises. Factors Influencing Performance Performance of an enterprise depends on internal as well as external factors. Internally managerial capability/capacity is positively correlated with the success of an enterprise. Actually management in an enterprise means effective and efficient utilization of men, material, money and machine (4 Ms) in such a way that the best results are produced with minimum cost. Thus, it basically includes management of production, personnel, marketing, finance , and materials/inventories. Managerial skills are dynamic and can be updated through tailored short duration training. But the promoters of enterprises hardly admit internal/managerial limitations. Rather they claim good performance and blame external factors for poor performance. The external factors that compensate external diseconomies generally consist of infrastructure and support facilities, industrial policy both central & state government, and incentives and inducements. These not only motivate potential entrepreneurs to opt for self-employment but also attract them to establish their units. The major inducements and incentives availed by the entrepreneurs are the availability of developed land / shed and power / capital subsidy. The other

incentives/inducements include central capital subsidy, sales tax loan, seed money, raw material supply, feasibility study grant, liberal assistance for modernization, state capital subsidy, workers/entrepreneurial training etc. Some of these are available exclusively in backward areas only, where general infrastructure facilities are relatively less developed and entrepreneurs would not have gone and survived there in the absence of additional incentives/inducements. But the availability, utilization and hence their impact on performance of enterprises vary greatly. The proceeding paragraphs highlight these contributory and inhibiting factors.

44

Contributory Factors No doubt better management is the most important contributory factor closely followed by the availability of easy financial assistance, better infrastructure facilities, availability of plot/shed in industrial area, and Government policy. Incentives and subsidies do contribute they are not rated very high. Similar is the position of Technoeconomic services and Cluster of similar units. They are rated at medium scale. Details are shown in the table.

Table-9: Contributory factors for better performance Particulars Government policy Better management Technology up gradation / modernization Availability of skilled manpower Availability of easy financial assistance Better infrastructure facilities Availability of plot/shed in industrial area Incentives/subsidies Availability of Techno-economic services Cluster of similar units Others Responses 114 179 82 61 154 167 136 57 76 83 19 % 46.34 72.76 33.33 24.80 62.60 67.87 55.28 23.17 30.89 33.74 07.72

Ranking of current Position of Contributory factors The promoters have measured the current Position of Contributory factors on a five point scale varying from excellent to very poor. The factors considered include better management, availability of easy financial assistance, infrastructure facilities, availability of plot/shed in industrial area, Government policy, incentives and subsidies, techno-economic services and Cluster of similar units in a particular location. Most of the responses reveal just average level in regard to most of the above factors. Further percentage of responses regarding poor and very poor position are higher than the percentage of responses for excellent and very good. Details are shown below.

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Table-10: Ranking of current Position of Contributory factors Available locally (Figures in %) Particulars Ranking Responses Percentage 5 No Response 6.10 16.26 27.64 27.64 7.72 16.26 4.07 15.04 27.24 23.58 25.20 4.88 7.32 12.20 25.20 26.02 26.42 8.94 16.26 24.80 21.14 18.70 6.50 15.45 21.95 24.39 28.05 14.23 21.95 26.83 18.70 12.60 8.13 13.41 23.17 28.46 21.54 10.98 10.16 3.66 5.69 5.28 8.94 8.13 31.71 1 2 3 4

Government policy Management Services Technology up gradation / modernization Facilities Availability of skilled manpower Availability of easy financial assistance Better infrastructure facilities Incentives/subsidies

Availability of Technoeconomic services 11.79 16.67 29.67 17.48 15.45 Cluster of similar units 15.45 16.26 25.20 18.70 16.26 Others 4.07 5.28 7.72 6.50 4.07 Note: 1 is excellent, 2, is very good, 3 is good, 4 is poor and 5 is very poor. Impeding factors:

Entrepreneurs were requested to specify the major operational problems and the impeding factors thereof.. The responses showed that the main difficulties which affected their performance and hindered their progress were shortage of power, inadequacy of working capital, too many procedures and formalities to be completed for availing any type of assistance and lack of coordination among various programmes of assistance and the institutions implementing those programmes. The other problems mentioned by the entrepreneurs included lack of general day to day support facilities, scarcity of raw materials, inadequate facilities for technical know how, marketing problems and labour problems. The interest rate was also stated to be high.

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Table-11: Distribution of units stating operational Problems Problems Inadequacy of working capital Scarcity of raw materials Inadequate facilities for technical know how Marketing problems Lack of coordination among various programmes and institutions Too many procedures & formalities Shortage of power Labour problems Transport problems Lack of support facilities High Interest Rates Others Ranking of problems Problems faced by entrepreneurs in the functioning of their enterprises were ranked in order of importance on the basis of their responses. The picture emerged from the analysis showed that shortage/irregular power was the most important problem. The other problems in the descending sequence were inadequacy of working capital, too many procedural formalities, and lack of coordination among programmes/ institutions, lack of general support facilities, marketing problems, high interest rate, labour problems, transport and communication problems, inadequate technical facilities and scarcity of raw materials. However, the incidence of those problems varied in backward and non-backward areas. (Figures in % ) Responses % 132 53.65 43 17.47 82 33.33 127 51.62 72 29.26 113 185 57 96 103 80 22 45.93 75.20 23.17 39.02 41.86 32.52 8.94

Table-12: Distribution of units stating ranks for different problems (Ranks) Nature of Problems Shortage of Power Inadequacy of Working Capital Too many procedural formalities Lack of support facilities Lack of coordination in programs/institutions Marketing problems Transport & Communication Facilities High interest rate Labour problems Inadequate technical facilities Scarcity of raw materials Backward 1 2 3 4 5 6 7 8 9 10 11 Non-Backward 1 2 3 5 4 6 11 7 8 9 10 Total 1 2 3 5 4 6 9 7 10 8 11

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Conclusions Most of medium enterprises are doing well. The share of units making profits constantly for the last three years was significantly higher. On the other extreme, in the group of units incurring losses constantly for the last three years the share of enterprises was much lower. Further, position in terms of capacity utilization was satisfactory. And hence the share of enterprises stating returns on investment equal to target or more than target was significantly higher. Thus in the emerging environment of privatization, liberalization and globalization, has favorable impact on medium enterprises. However, project financing needs special attention. As in case of credit supply the entrepreneurs, instead of subsidized/cheap credit, desired adequate supply of credit.

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Chapter-6

Evaluation of Assistance Programmes, & Schemes

Introduction: The central as well the state governments have evolved their industrial policies consisting of many assistance programmes, & schemes for the promotion of medium enterprises. These are related with Promoters background, Investment/size of enterprises, nature of product, geographic area, activities (Marketing, Finance etc.), and nature of inputs or output. Further, these assistance programmes, & schemes are related to promotion of investment, export/import, R & D, taxes/excises, technology upgradation etc. This chapter presents critical review of industrial policy, assistance programmes, & schemes and incentives & subsidies which create enabling environment for developing medium enterprises. It is divided in three parts, namely, Policy Evaluation, Institutional Support System and Incentives and Inducements. Analysis in first part is based on secondary information while the second part consists of findings revealed by field survey.

Policy Evaluation: The history of industrial development reveals that the basic infrastructure and the foundation of key industries were laid down before Independence. However the endeavor was inadequate, inadvertent and irregular with short term objective of protecting growth objectives of foreign rulers. The systematic efforts to protect national interest and achieve growth goals started only after independence. India pursued a modal of planned economic development and the federal government crafted a series of industrial development policies consistence with the changing socio-economic concerns of the country..

But the basic accent of Indias policy for MME sector has been indifferent. Strictly speaking they were not identified and recognized as an independent sector of the economy. They were considered just as a transitional phase between small and large sector. Broadly the policy remained to be step-motherly. They were clubbed together

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with large sector with whom they were not having equal level playing as their position in terms of management, technology and R & D was quite weak. They were unable to enjoy economies of scale. Most of them operated at under-equilibrium point on both input and output sides. It is surprising that despite all these unfavorable circumstances they not only survived and sustained but proved them as the most dynamic segment of the economy. They continued to maintain rising trend in terms of all economic parameters, namely, the number, investment, employment, output and exports. Therefore new MSMED Act 2006 has been evolved to cope with changing environment. It is only now (After the introduction of MSMED Act 2006) that a new impetus has been provided for the growth of medium manufacturing enterprises. In the wave of economic reforms and the emerging economic environment, the government has taken cognizance of the institutional context and complementary infrastructure facilities for MMEs. Salient points are listed below: Salient Features of The Micro, Small and Medium Enterprises Development Act, 2006 It provides the first-ever legal framework for recognition of the concept of enterprise (comprising both manufacturing and services) and integrating the three tiers of these enterprises, viz, micro, small, and medium. Under the Act, enterprises have been categorized broadly into those engaged in (i) manufacturing and (ii) providing/rendering of services. Both categories have been further classified into micro, small and medium enterprises, based on their investment in plant and machinery (for manufacturing enterprises) or in equipment (in case of enterprises providing or rendering services)as under:

Manufacturing Enterprises: Micro Enterprises investment up to Rs.25 lakh. Small Enterprises-investment above Rs.25 lakh and up to Rs.5 crore. Medium Enterprises-investment above Rs.5 crore and up to Rs. 10 crore.

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Typical Observations: The policy states that its primary objective is to impart greater vitality and growth to the sector. In furtherance of this objective, the sector would be deregulated and de-bureaucratized to remove all fetters on its growth potential. Modifications in all statements, regulations and procedures would be made to ensure that they do not militate against the interest of MMEs. A separate package for the promotion of MMEs would be developed. There would be a shift in emphasis from subsidized / cheap credit except for specified target groups to adequate flow of credit on normative basis to MMEs sector. Access to capital markets will be facilitated for MMEs and equity participation by other industrial undertakings would be allowed. Legislation to ensure prompt payment MMEs by large companies. New impetus to the scheme of Integrated Infrastructural Development to provide industrialization in rural and backward areas. Significant stress on technology upgradation by setting up of Technology Development Cell and strengthening the existing facilities available with SIDO. Promotion of marketing of MME products through institutions, other agencies and consortia approach. Strengthening of exports through setting up of Export Development Centres. Enforcement of quality control and support to modernization and technology upgradation of MSME sector. Change in definition of women enterprises and support to women entrepreneurs. Significant expansion in programmes for entrepreneurship development. Simplification of rules and procedures to provide easy and adequate access to physical financial and techno-economic facilities.

Appraisal of the policy The need for the government intervention stems from the failure of the market mechanism to equitably distribute the economic benefits amongst different regions of the country. It is also desired because of sharp divergence between social and private costs as well as benefits. The social costs/benefit analysis is not taken into account at all by the entrepreneurs operating under market forces. Temptation of profit earning seems to be the sole criteria of entrepreneurs for setting up their enterprises. Therefore
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it is difficult to judge the impact of such a major policy changes against performance indicators. In regard to enabling environment the new policy is founded on a proper understanding of the fundamental problems of medium sector and the measures proposed by it are well directed to mitigate the handicaps that face this sector.

Some analysts argue that the periodical changes in policy itself are an achievement which clearly reflect the determination of the government to help the healthy sustenance of MME sector. These changes would undoubtedly expand the scope and significance of assistance programmes.

Reducing protection would force to compete and impart a new dynamism to innovate and improve quality to reach international levels. The new policy also shows intention of government to direct MMEs policy towards the up-building of the modern medium industry. The concept of modern enterprises implies to units which fulfill the requirements of emerging modern economy, have a progressive outlook, are ready to adapt to changing conditions and are willing to use those processes that modern science and technology have offered and are willing to apply modern organization and management concepts. In regard to enabling environment the new policy is founded on a proper understanding of the fundamental problems of medium sector and the measures proposed by it are well directed to mitigate the handicaps that face this sector.

Some analysts argue that the periodical changes in policy itself are an achievement which clearly reflect the determination of the government to help the healthy sustenance of MME sector. These changes would undoubtedly expand the scope and significance of assistance programmes.

Reducing protection would force to compete and impart a new dynamism to innovate and improve quality to reach international levels. The new policy also shows intention of government to direct MMEs policy towards the up-building of the modern medium industry. The concept of modern enterprises implies to units which fulfill the requirements of emerging modern economy, have a progressive outlook, are ready to
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adapt to changing conditions and are willing to use those processes that modern science and technology have offered and are willing to apply modern organization and management concepts.

However, in regard to de-regulation when compared to other countries the World Bank compared India with 174 countries and found Indias position at the median position in the regulation measure. India also compares poorly with other countries on the measure of governance, regulatory effectiveness and the quality and quantity of infrastructure and the percentage of management time spent to deal with government officials on regulatory and other administrative issues. Therefore it is good that regulation burden in its widest meaning has been reduced. Further, it is observed that the current industrial policy promotes survival of the fittest based on capital intensive techniques.

Institutional Support System An elaborate network of institutions has been established to provide various types of assistance to small enterprises. While some of them are activity specific (like market, finance, raw material supply, technology, etc.) others are area specific (backward area, hill area or District level, State level etc.). Some of the organizations undertake multiple functions and provide assistance at different stages of a project cycle. Most of the All India level institutions frame policies, design programmes and provide indirect assistance for SSI development and play the role of a coordinator. On the other hand state level institutions implement those policies and programmes. Then there are other autonomous institutions and industrial associations extending support to MMEs. Thus, there is well envisaged institutional framework extending

stimulatory, support and sustenance services and helping small enterprises at preinvestment as well as post investment stages. Though the Government both Central and State, have made considerable efforts to formulate comprehensive and consistent industrial development policies and programmes but the institutional framework has not achieved the desired objectives due to many reasons. Firstly, it is well known that a mere increase in the number of institutions for various types of assistance does not by itself assure successful growth and viability of

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industries. An integrated functional approach on the part of these institutions is even more important. A proper balance between different types of activity is necessary. For example, credit may not be utilised, industrial areas/shed may remain unoccupied if adequate measures are not taken to stimulate entrepreneurship. Similarly, productivity may remain low if due importance is not given to modernisation. Modernisation will not be undertaken without adequate provision of finance and techno-economic services to improve managerial skills and technology. The

matching arrangement for different types of facilities, needed at different stages of development of industrial units, seems missing.

Secondly, bureaucratic approach and lengthy and cumbersome procedures also seem to constitute impediments to the utilisation of institutional resources as reflected by the preference of entrepreneurs not for government institutions, but for the private sources of physical, financial inputs and techno-economic services. They even prefer to pay higher prices/interest to private sources to avoid institutional formalities.

Thirdly, the multiplicity of organisations, with duplication of functions reduces accountability and responsibility of the organisations in poor performance in a particular area or activity. Instead of competing, they shirk their responsibility as the career of the staff is not linked with the performance. Entrepreneurial spirit and selfinitiative are almost missing in development agencies. Mounting socio-political

pressures and deteriorating moral values, very often, do not allow fair working. Redtapism has not reduced and delay in the work is unabated.

Fourthly, many organisations work individually, in isolation, with their own rules and regulations. This feature of lack of co-ordination is being observed not only among various institutions, but in the different cells/wings of the same institution also. Very often, the different institutions, individually, demand for same types of information/documents from the small entrepreneurs, resulting in wastage of productive time, money and energy. In some of the organisations, the formats are quite old, asking for routine information which has no relevance for current policy, except increasing the file-load.

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Fifthly, some of the agencies deal with fiscal measures to raise revenue for the Central/State Governments and/or local administrative bodies as well as to give specific direction to industrial development. But, sometimes, these fiscal measures have uneven/impeding impact on the performance of industrial units located quite nearby but in different administrative areas. They have adverse effect on the

industrial units of one area and thus erode their viability.

Though the institutions and the policies and programmes have emerged as a result of considerable thought and planning, there is a need to critically examine the procedures and practices adopted for helping, guiding and regulating the small manufacturing enterprises.

Incentives and Inducements Incentives and inducements are motivational forces which attract new entrepreneurs and improve productivity of enterprises. These could be financial or non-financial. They include concessions, subsidies and bounties (bonus or financial assistance. They help balanced regional development, removal of economic constraints and provide competitive strength and growth. But if they are not monitored judiciously, fail to meet the desired objectives developing bogus units, encouraging inefficiencies, promoting unviable entrepreneurs and use of resources, breeding corruption and blocking graduation of micro to small to medium to large unit.

The incentives and inducements also tend to discourage the beneficiaries from graduating to large enterprises. They also have achieved limited success in motivating local population of the backward areas to adopt industrial careers.

Thirdly, the inter linkages between the backward and developed areas are limited and hence call for the reorientation of the policy in selecting such sites and industries which offer maximum of backward and forward linkages. The incentives and inducements should take care of such issues.

Fourthly, the policy of the incentives and inducements has received limited success in the provision of non-financial assistance concerned with both the inputs and output, except the provision of the readymade sheds and plots.
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Therefore, while monitoring the new policy focus should remain at competition, cooperation and interaction between MMEs that generates collective efficiency, technical upgrading and pooling of resources and enhances scope and scale of economies especially in agglomeration or cluster. There is a need for continuous monitoring of the impact of policy changes and taking up corrective measures to meet the need of the enterprises. There is also a need to develop data banks on industries to guide the potential entrepreneurs, including investors from abroad, to provide support for technology, infrastructure support, to bring about attitudinal change among the officers of banks and financial institutions as well as officers of other concerned organizations for improving the flow of credit and other services. Also, the MME sector must realize that in the emerging economic scenario of liberalization, structural reforms and globalization their easy and smooth sailing has been replaced by uneven tides. They will have to stand on their own to face competition from within the

country and abroad, which is likely to grow in the next few years. The emerging challenges and opportunities may make or mar their progress depending on their own capacity and capability

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Chapter-7

Global Scenario Of Manufacturing Medium Sector

Introduction: At the dawn of the 21st century there is globally great change in the business environment. In contrast to the earlier highly protective and self-reliant period this can be called a period of de-licensing, deregulation and decontrol for industrialization. The process of privatization, liberalization and globalization of economic activities has affected all economies across the world in one way or the other. Almost all individual enterprises growing under protective umbrella have been left open to the invisible hands of market forces. The compulsions of changing economic scenario have made their operations more transparent, accountable and responsive. It has increased the sphere of competition both horizontally and vertically in national as well as international markets and created an environment where fittest will survive and inefficient will be weeded out. It has underlined the concepts of productivity, quality, effectiveness and efficiency. Even the MMEs, like large firms, are subjected to increased competition in foreign markets due to decline in tariff barriers as adopted by the Uruguay Round of Negotiations. Thus, it can be said quite safely that the emerging socio-economic scenario has changed the macro-economic scene for MMEs. They are facing:Cost pushed inflation Increasing market opportunities for inputs and output; Rising demand for skilled labour Increasing capital intensive techniques Increasing application of innovations Increasing professional management Therefore, MMEs are moving towards the healthy sustenance and the potential benefits may be realized in the emerging business environment. Socio-economic globalization has become the necessity as well as compulsion. Development experience sharing remains no more a sweet choice of different nations but urgency for maintaining a competitive edge. This chapter attempts to present critical examination of the status of medium enterprises across the countries.

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Information available in this regard is quite limited. It is mainly because the medium enterprises are not defined properly. They are considered just a transitional phase between the small and large enterprises. Perhaps it is only in India for the time that a specific definition has been evolved through its MESME Act 2006. In this definition medium enterprises are taken as a part and parcel of small enterprises and they are looked-after by the MSME Ministry. Therefore, due to data limitations, this study endeavors to assess the position of medium enterprises with the help of information/data available for small and medium enterprises(SMEs) taken together that occupy special status in all economies across the world. This chapter is based on secondary information collected from different studies, papers and articles2.

Status & Contribution of SMEs Among various sectors of the economy contributing to the economic growth, SME sector requiring least investments has emerged as a major contributor and potential force to fight against poverty. SMEs in Asia may be well characterized as the engines of growth, backbone of national economies, second highest employment generating sector next to agriculture, a potential tool of poverty alleviation by offering selfemployment avenues, and a significant contributor to country's industrial production, exports, national income and the GDP. In developing Asia, SMEs have made significant contributions over the years measured in terms of their share in the (i) number of enterprises; (ii) employment; (iii) production and value added; (iv) GDP, (v) enterprises set up by women entrepreneurs; (vi) regional dispersal of industry, etc. SMEs contribution to the economy is very vital in as much as they, by and large: a) make up over 80-90% of all enterprises; b) provide over 60% of the private sector jobs c) generate over 30-40% of total employment d) contribute about 50% of sales or value added e) Share about 30% of direct total exports.
2

Major Sources: 1. SMEs in Asian Region: Harnessing the Growth Potential, AAMO 2007 2. Entrepreneurship Development for Competitive Small & Medium Enterprises; Asian Productivity Organization - 2007 3. OECD/APEC project; Key Note Paper, Nov. 2006 4. Global Competitive Report 2007 5. World Development Report - 2002 58

Typical Observations: However, there is a wide disparity in the status of SMEs as between countries of Asia. SMEs in the LDCs do not appear to have reaped the benefits of globalization and technological developments happening around them. SMEs need to be exposed to the advancements and global markets through 'open-door' intensive support policy. The share of SME enterprises in the total number of industrial enterprises ranges between 79 percent and 99.7%. On an average, it is about 80% in respect of the LDCs in Asian region. SMEs in Asia are mostly proprietary or partnership (90% of the total) with exception of Malaysia where about 72% operate as private limited companies. Their presence in the corporate sector is quite negligible. This ownership pattern has significantly influenced the pace and flow of institutional support and in particular access to institutional finance and credit. Generally, rigid mind set, lukewarm approach to change, fear of losing trade secrets, reluctance to share financial information for fear of regulators are some of the factors contributing to continuance of proprietary pattern of ownerships and hinder their process of graduating into corporate sector.

The share of SMEs in the total employment ranged between 56 and 98% (except Malaysia and Philippines, where the percentage share was less than 50 %. Generally, in all Asian countries. Among them, smaller firms exhibit higher net job creation rates as compared to the large firms. Incidentally, in Asia well above 60% of the total workforce is employed by the SME sector compared to Botswana (17%), Kenya (18%), Lesotho (17%), Malawi (23%), Swaziland (26%) and Zimbabwe (27%).

The ability of SMEs to contribute to exports varies widely in Asia- between 10 and 60 per cent. Asian countries generally compared well with those in the developed economies such as, Austria (99.5%), Canada (99.7%), U.K. (99%) and USA (99.7%) and by employment to total industrial employment, such as, 72%-Austria, 60%Canada, 66%-UK and 50%-USA, the percentage share of SMEs contribution to GDP in the Asian countries was lower than those in the developed economies which generally ranged between 30%- Australia to 40%-Finland. However almost all countries in Latin America (particularly Bolivia, Chile, Costa Rica, El Salvador, Paraguay) recorded lower percentage shares than Asian countries in relation to all the three components.
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Major Constraints for growth External i) Policy Related Taxations laws / high taxes are major constraints faced by SMEs of India, Mauritius and Malaysia Bureaucracy of the Governments in the countries like India, Mauritius and China are posing major constraints for the SMEs. Unfavorable legislation in India and Hong Kong and it is indeed a constraint for the SMEs. Poor property right enforcement in Malaysia and India.

ii) Infrastructure Availability China followed by India has observed high growth on account of availability of Roads, Industrial Estates, and Power & Transport facilities.

iii) Major Financial Constraints 71.43% SMEs in China, 71.11% of SMEs in Sri Lanka and 42% of Indian SMEs have experienced difficulty in getting easy access to finance. Getting collateral security is the bottleneck for the SMEs of Sri Lanka, China and India to obtain loans Mauritius SMEs are facing lot of problems in obtaining working capital loan. The least difficulty is experienced by New Zealand and SMEs iv) Technological Constraints Locating sources of appropriate technology, financial resources to acquire technology, product design are together added woes to the SMEs of Mauritius, Thailand and China. The respondents have attributed them as major constraints towards achieving growth. v) Application of ICT tools Usage of ICT tools in business communication is very high in India (80%) followed by Hong Kong, Thailand

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Use of ICT tools in marketing and sourcing information is also noticed highest amongst the SMEs of India as compared to other countries under study.

vi) Relative strength of Certified SMEs (ISO or Equivalent) In India 32% of SMEs have obtained ISO to remain competitive and take advantage of globalization. Indian Government is partly funding SMEs to motivate them to obtain ISO, by providing incentives. SMEs of China and Hong Kong have also shown relatively high percentage (25%) of ISO certification.

vii) Marketing Constraints Competition in the global market for exports is mostly experienced by India, China and Mauritius Lowering of Import duties resulting in free movement of imported goods has posed major constraints to SMEs of India, Malaysia and Mauritius Cut in subsidies and reduction in the extent of protection, which are not WTO compatible have by and large affected the Indian SMEs. viii) Business Environment Technology change is one of the major threats as experienced by the SMEs of the countries like Mauritius, Hong Kong, India, and New Zealand. Competition from imports -a major threat as per 74.21% SMEs of India o High cost of production -a phenomena of concern for all countries Threats of having more competitors in the domestic market are being experienced by almost all the countries under study.

Internal Constraints 1. Shortage of working capita/ to finance exports 2. Identifying foreign business opportunities 3. Limited information to locate / analyze markets 4. Inability to contact potential/ overseas customers 5. Obtaining reliable foreign representations
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6. Lack of managerial time to deal with internationalization 7. Inadequate availability and poor skills of personnel 8. Difficulty in matching competitors' price 9. Lack of government assistance / incentives 10. Excessive transportation / insurance costs

Enabling Environment Enabling environment, a comprehensive concept is composed of various factors of development. The major factors include national policies, programmes and schemes, legal framework, finance and fiscal issues, employment, technology education and the like. Logically, Government policies and legal framework are expected to provide enabling environment but over the decades, most of the Asian countries ended up in operating draconian laws full of controls and approvals. In the process, Governments were perceived as "Controllers" rather than "Facilitators". Barring a few countries where systemic reform process was underway, in the rest of the region these factors continued to work as barriers to growth and inhibit smooth functioning of the sector. Though there is equal need for promoting MMEs, the enabling environment is different in different countries. Table 1 given below shows the ranking of SMEs in 11 Asian countries. In the Study of 53 countries on "Most and Least Friendly Countries the top four countries, namely New Zealand, USA, Canada and Australia find the environment conducive and face a few hurdles for starting and operating businesses. Undoubtedly, SMEs contribute significantly to the economic development of Asian Countries, and are emerging as engines of growth for these economies. But their growth potential is not fully realized. Some of the major barriers to MSME growth are identified as finance, credit, access to information, bureaucracy, taxation, legislation and lack of business and management skills. These factors are in fact characteristics of the environment in which SMEs grow. AAMO study assigned to Global Projects & Services to identify variables that act as barriers to MSME creation & growth in Asian Countries, conducted recently (2007) also corroborates the ranking given in table -1.

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Table 1. Ranking of SMEs in 11 Asian countries. Rank 5 6 13 15 28 34 37 42 46 51 53 Country Singapore Hong Kong, China Japan Thailand Malaysia South Korea Taiwan, China China India Philippines Indonesia Fortune Small Business Score 1.88 1.86 1.64 1.60 1.31 1.25 1.15 1.05 0.94 0.90 0.61

Source: Study of 53 countries on "Most and Least Friendly Countries; conducted by Fortune Small Business and London Business School and Babson College. The common emerging scenario is that, in many countries of the region, there is still inadequate recognition of the dynamic potential of SMEs. While they are viewed as necessary for job creation in the short run, the fact that their development can play an important role' in the growth process is insufficiently appreciated. As a result, a coherent policy framework at macro-level is lacking in many cases, although programmes for micro-level assistance to SMEs exist in all countries. The regulatory framework for the operation of SMEs is either non-existent or inappropriate, skill development programmes scarcely address their specific problems and very little effort has been made to promote their linkages with large enterprises. Unless these problems are addressed, SMEs will remain precarious providers of low-quality jobs rather than become dynamic agents of economic growth. Asian Competitiveness The World Economic Forum in its annual series of research project viz., "G/oba/ Competitiveness Index, identifies key factors affecting growth. The Table below shows ranking of some of the Asian countries.

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Table 2: Ranking in terms of key factors affecting growth

Country Weak Technology 3 1 9 27 62 63 87 MacroEco. Enviro. 3 15 35 20 24 52 67 Public Institutions 3 21 41 38 55 53 102 Business competition 2 11 24 23 47 30 73 Global Comp. Index 2 1 26 23 32 37 87 Skilled Persons Availability 2 8 52 43 67 1 61 Competitive Growth Index 1 2 29 31 46 55 91

Finland USA Korea Malasiya China India Pakistan

Source: Global Competitive Index 2005; World Economic Forum The above situation is indicative of the fact that countries develop and compete only if the enabling environment is favorable. Finland is able to attain growth competitiveness index at number one mainly because it could arrest the adverse impact of factors affecting growth. On the contrary, others in Asia could not be so successful in containing the negative role of hindering factors. Global competitiveness index (GCI) that reflects productivity and competitiveness includes critical factors like institutions, infrastructure, macro economy, health and primary education, higher education and training, market efficiency, technological readiness, business sophistication, and innovation. Competitiveness finds its ultimate expression in the prosperity that countries can sustain over time. Prosperity is sustainable if it is based on the level of productivity that MMEs can reach given the condition they face in an economy. While competitiveness remains focused on macroeconomic, political, legal and social circumstances that strengthen a successful economy, progress in these area is necessary but not sufficient. Hence the business competitiveness index (BCI) has been developed, which ranks MMEs by their macroeconomic competitiveness, identifies competitive strength and weakness in term of countries business environment conditions, operation and strategies, and provides an assessment of the sustainability of countries current level of prosperity. GCI and BCI Ranks of selected Asian Economies is given below. Table 3. GCI and BCI Ranks of selected Asian Economies
Country GCI BC Bangladesh 99 108 India 43 27 Indonesia 50 35 Malaysia 26 20 Nepal 110 111 Pakistan 91 67 Philippines 71 72 Vietnam 77 82 Source: Global Competitiveness Report - 2006-07, World Economy Reforum September 26, 2006

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The enabling environment is central to the development process of any country. To harness and sustain development, a healthy enabling environment is a must. Technology & Innovations Governments have, therefore, come to realize that for national and regional balanced development, SMEs competitiveness must be strengthened. This can be achieved by making the sector technologically robust on the solid base of R&D, innovations and adoption of latest technology through technology transfer and adoption of ICT enabled services. Most of the developing economies in Asia do not have this strength. Generally, the following road- blocks are responsible for low technology base. a) Rigid mind-set with resistance to change. b) Low human capital: Many Asian countries suffer from low level of technology due to low level of investment in human capital and aggravated by large scale of outward migration of highly professional skills. c) Apathy to skill upgrading of the employees: While, the MSME sector in Mauritius, Singapore and India have definitely benefited from continuous skill upgrading programmes, in many other countries, issues such as cost, paucity of funds, absence of such programmes, etc. come in the way. d) Cost: Benefit looming large: SMEs are generally not appreciative of the gains out of upgrading the technology or modernization, when viewed on the basis of cost: benefit analysis. High value added technological development is emerging very fast and in order to keep pace with the speed, it is highly desirable for SMEs to acquire differentiated knowledge and new technology to survive and retain their positions in the market. This will lead to regional balanced development, narrow the growing the developed and the least developed divide, and above all create a skilled band of labour / managerial force in the region.

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Project Financing Both 'availability' and 'easy access' to "timely and adequate credit" have been the major problems for SMEs. In their joint research project on "Removing Barriers to MSME Access to International Markets (November 2006) OECD &APEC, have found that SMEs rate "Shortage of Working Capital" as number one constraint out of major ten. Banks perceive SMEs as Risky due to insufficient assets and low capitalization, vulnerability to market fluctuations resulting in high mortality rates, lack of accounting records, inadequate financial statements or business plans. Further, high administrative I transaction costs of lending or investing small amounts do not make SMEs loan portfolio a profitable business. SMEs view Banks as Hostile due to inadequate and delayed availability of credit especially the short term I working capital, wide time gap in the dispensation of working capital and term loan, banks insistence on more than 100% collaterals and third party/personal guarantees, higher promoters' contribution.

Conclusions The SMEs globally have carved out a niche of their own and have proved their mettle in boosting any national or regional economy. It is mainly due to pro-active government support, resilient private sector participation, simplified procedures, openness to changes and shaking of rigid mind-set, developing competitiveness by falling in line with the latest changes keeping an eye on capturing the global market, treating large industries as partners and not as competitors- for increasing outsourcing and sub-contracting, ancillarisation, and strategic alliance, and growing public private sector partnership They are, however, constrained due to various inhibiting factors in growing fast so as to keep pace with the changes taking place in the world market. The major roadblocks are unresponsive enabling environment, lack of modern technology, R&D, innovations and environment management, paucity of timely and adequate finance and innovative finance with no risk mitigation, old infrastructure and no cluster development, lack of market information, and marketing support, no knowledge of
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global value chain and supply chain management, shy entrepreneurship with limited sustaining power in adverse situations, and irrelevant institutional network, which are heavy and overlapping without poor delivery mechanism.

Therefore taking an overall view relating to the criticality of SME sector and its current status there is need for having a comprehensive plan for development of S&T, innovative finance, developing state-of-the art infrastructure, and support facilities and evolving and implementing training, institutional development, capacity building programmes.

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Chapter-8

Specific Policy & Programme Interventions

With the improvements in information system the MMEs in India are facing changes in the internal pattern of work, in corporate links and business expansion. The HiTech information system has changed the way of working, simplified decision making process, made the relationships more open and closer, and facilitated direct contact with an unspecified number of customers over a wide area through dissemination and collection of information. The modern MME units know how to fulfill customer orders fix prices, reduce costs, maintain inventories and increase profits.

However, the business environment has become more complex, competitive and challenging. Pattern of consumer demand is becoming increasingly diverse with the adoption of more varied values and life styles, growing insistence on high quality products and the publics increasing concern about health and safety, environmental concerns. These forces working on consumer and firm level demand continued improved technology, product quality, distribution channels and suppliers operations along the growing reliance on information systems. So there is need for Identification and suggesting specific policy/ programme interventions required for accelerating the growth of manufacturing medium enterprises In this regard this chapter presents suggestions for policy/ programme interventions required for accelerating the growth of manufacturing medium enterprises to cope with the emerging environment. These are based on field survey, interactions with concerned officials, discussions with industrial associations, review of secondary information and have been supplement with personal observations of consultants.

The promoters of medium enterprises facing functional constraints

suggested

measures for developing enabling environment which included, Easy & Adequate Finance (65.45%), Infrastructure & Support Facilities (59.76%), Attitudinal change in administrators (34.96%), Developing Economic Zone (31.30%), More market

promotion schemes (26.42%), Special Institutional arrangements (18.29%), Providing Progressive performance Oriented Incentives and subsidies (17.07%) and Developing Clusters (12.60%). Details are given below.

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Table -1: Suggest Policy Measures for promoting and accelerating the growth of Medium Manufacturing Enterprises Measures Developing Clusters Developing Economic Zone Providing Progressive performance Oriented Incentives and subsidies Special Institutional arrangements More market promotion schemes Attitudinal change in administrators Infrastructure & Support Facilities Easy & Adequate Finance Responses 31 77 42 45 65 86 147 161 % 12.60 31.30 17.07 18.29 26.42 34.96 59.76 65.45

Thus, adequate supply of credit, technology assistance, infrastructure and low transaction costs are the hallmarks for promoting MMEs which may be achieved by developing a variety of linkages between enterprises and their support institutions, partnership between the private sector and the government, greater information flows and by streamlining the legal and institutional framework. Emphasis should be on promoting clusters of small scale enterprises with adequate institutional facilities, abundant provision of services and infrastructure development. In this regard the centre-piece of the new approach should be an increasingly public private partnership (PPP) for setting up support systems. New Policy Directions Undoubtedly Indian Industrial Policy has remained in tune with the ground realities. From the very early stages of industrial development the government judiciously fostered an elaborate structure of institutions that met a wide array of needs of this sector operating in scarcity-ridden economy. However, due to excessive licenses, quotas and permissions to be sought from government entry into industry and successes subsequent to entry became heavily dependent on entrepreneurs ability to deal with officials and inspectors. Further much of the policy regime became protective in nature. Fiscal benefits discouraged the beneficiaries from graduating into medium and large scale companies and thus limited the social benefit. A variety of government agencies providing a gamut of professional services proved to be inadequate, ineffective and inefficient.

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Therefore the new policy (MSMED Act 2006) has sought to reinforce the impulse for accelerated expansion. Its emphasis is on promoting interdependence between the small, medium and large segments of industry as is existing in Japan, Italy and other Developed countries, such that the small, medium and large sectors are mutually reinforcing and not competitively erosive. It aims to promote collective action by business associations, local governments and support organizations for acquiring knowledge and skills to renew production and marketing methods of individual enterprises. Special attention is paid towards industrial clusters which can lower transaction costs, help realize external economies and lower the cost of credit. Private companies are promoted to supply a host of business services which were earlier delivered by state owned institutions. On equity considerations government has sought geographical dispersion of growth by investing in infrastructure of backward areas.

However, enabling environment is a comprehensive concept composed of various factors of development. The major factors include national governing policies, Government schemes, legal framework, finance and fiscal issues, employment, technology education and the like. Logically, Government policies and legal framework are expected to provide enabling environment to MMEs and play positive role in shaping effectiveness of the sector. Therefore in this regard following suggestions should be taken care of:Suggestions for Government Reform regulations and legal framework Place MME sector high in development agenda, national development plans, etc. Consult private sector while designing policies & programmes for MMEs Foster international cooperation in MMEs sector for better investments and trade Encourage bi-lateral and multi-lateral agencies to collaborate with the MME sector Network foreign aid and technical assistance

Suggestions for Public-Private Partnerships: Develop cross border trade Transfer skills and knowledge with technology and R&D support.
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Increase investments Ensure basic in-puts to MMEs

Suggestions for Private sector Play more pro-active entrepreneurial role through Associations and Chambers. Bring awareness to entrepreneurs & MMEs on opportunities for growth, technology etc. and responsiveness to society. Develop more linkages with MNCs and TNCs. Set quality standards Pursue good governance & self audit system

Suggested Road Map In order to create enabling environment, a package of Government policies is needed covering institutional framework in regard to fiscal, financial, infrastructural, marketing, export-import, technology development / modernization, R&D and venture capital, capital market with suitable listing, insulating the sector from dumping external goods and exit route policy, equity support, women development, TQM and environment management policies, harassment from inspectors & bureaucracy etc. Governments and public sector organizations should take following actions: 1. Government Policy Programming Reforms Policies, Regulation, and Legal Frame work for MMEs: Policy design and regulation for new star-ups, registration of firms, the tax system, Labour laws, financial markets and access to formal source of finance, bankruptcy laws, and regulation of intellectual property rights should be enacted or simplified so as to attract new and existing entrepreneurs to enter the formal market and the benefit from a systemized approach to operating a business. Involve the Private Sector in the Policy Process: Government needs to establish permanent councils/partnership/collaboration arrangements through chamber of commerce and industry with the representative of MMEs, to serve platform where MMEs views can be discussed and deliberated before finalization of any policy and implementation of changes.

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Promote an Entrepreneurial Culture: Government both central state need to promote their vision for entrepreneurship development, innovation, and competitiveness of the enterprises at the state level, national and international level by introducing entrepreneurship awards, financial products and schemes, Web-based portals for marketing and information, entrepreneurship training and technological innovation etc

2. Identification of Investment Opportunities & Benchmarking of Information: In today's world, knowledge is power hence information process must be in place. Paucity of authentic information on investment opportunities and gaps for the guidance of prospective entrepreneurs and data on number of industrial units, manufacturing lines, sales/exports, export opportunities, etc. is one of the major bottleneck of MMEs. Country-wise/region-wise mapping of investment opportunities, identification of growth centers, markets, export potential, project profiles for taking quick investment decisions by the promoters, census, developing electronic data base for dissemination of latest information are some of the areas to be taken care of. Realizing the skill and resource constraints of both the new and existing enterprises for gathering the required information, a three-tier information network is needed to be built up at local, regional and national level. It will strengthen business advisory services. The manufacturers individually as well as their associations, associations of traders and private consultants must be involved in collecting and disseminating market information. They may help in identifying projects and markets best suited for the entrepreneurs and geographical regions. In the rapidly changing economic and commercial environment, after building such a network there is need for a constant monitoring and upgradation to provide relevant and up to date information. Further, expertise from government, public and private sources should be utilized to make market information more purposeful and professional. The local associations of industrialists can play an important role by scanning through the various commercial websites and disseminating the relevant information to their members.

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3. Infrastructure, Marketing infrastructure Development Programme State-of-the art infrastructure is a prerequisite for any development programme. Similarly well-developed marketing infrastructure both tangible and intangible (such as advertising, brand equity, trade-fairs & exhibitions, fashion shows) is also very critical input. For these types of infrastructure & support facilities though Government policies and financial support is essential but public private partnership is ideal. 4. Marketing Specific marketing assistance should be provided to MMEs in the following areas: Market intelligence Standardization, brand equity building and brand positioning strategy Dissemination of information in the form of bulletins and journals on the emerging market opportunities. Supply chain management. Subcontracting exchange Strategic alliances with large national and Multinational Corporation.

5. Technology Technology plays a key role in MME growth. Therefore there need to adopt suitable technology to harness the resources available. As on date, no specific data is available on the technology levels of various products and services. To draw a long-term technology map, it is necessary to carry out technology missions. The objectives of such mission could be: To bring awareness and promote introduction of new and emerging technologies for MMEs, To assess the present level of technology in the various sectors and to forecast technology level to be achieved, To set up an IT portal for information dissemination and creating awareness, To coordinate the efforts of various agencies, technical centers and institutions engaged in Technology studies & audit To encourage R&D of indigenous technologies to assist MMEs,
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To create incubator infrastructure facilities in various technical and management institutions, To motivate MMEs to obtain BIS/ ISO certification, To organize awareness campaigns among MMEs pertaining to quality, standardization and customer satisfaction, The technology mission should focus on selected sectors contributing to the economy. A detailed five year plan can be worked out for these sectors and To promote environment friendly technologies and address issues relating to pollution control.

6. Finance & Credit Schemes Availability of timely and adequate credit is the lifeline for the MMEs sector. Mismatch of the short term with long term loan, delayed working capital decisions give birth to sick units from day one. It is, therefore, essential to have a package of credit assistance programme starting from equity/seed capital support, followed by support for augmenting promoter's contribution, long-term loan and working capital, marketing including export-import support, bills marketing for quick realization of sale proceeds, venture capital, etc. This requires sound central banking policies, well conceived development financing institutions schemes and commercial banks credit schemes. Based on credit worthiness, sales volume, area of sales and other important indicators, the credibility and performance of more and more companies should be rated periodically by some independent agency. Such rating if widely publicized will be useful for the stake holders. 7. HRD, Training, Institutional Development, Capacity building For comprehensive development on a sustained basis, programmes for HRD and skill development, entrepreneurial development programmes, training of Government officials, bank officers and extension agencies for sensitizing them towards assisting MMEs sector are essential. In order to get good results, opening up of more regional institutes for enterprise development may be considered. Else, the existing technical institutes may be developed in this direction.
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8. Chambers of Commerce and Associations Chambers must serve as' Eyes and Ears' of the MSME sector because this sector is not in a position to develop the network unlike their Big brothers, on their own. Thus, informatics network at national, provincial and regional levels must be put in place. Today, knowledge is most effective power. This network may be used for all types of communications, information dissemination, creating awareness, telemarketing, providing economic and market intelligence data, market forecast, future demand pattern sector-wise, etc. The Chambers can successfully run this activity on commercial lines. Chambers may, with the support of the Government, launch region/nationwide survey of MSMEs sector as the benchmark information for effective policy planning by the Government Chambers may take up industrial potential surveys in their own regions for informing entrepreneurs about the scope of embarking upon private ventures. Thereafter, Chambers may come out in regional languages/English Project Profiles for prima facie assisting entrepreneurs in taking investment decisions. This type of document is much needed by the sector and budding entrepreneurs. Compendia of Project Profiles may be industry specific, location specific or for special types of Knowledge-based industry, like IT, Medico care, Biotechnology, etc. and will give in brief details of technology, plants and machinery with addresses of suppliers, cost, market of the product, total project cost, return on investment, profitability, etc. These may be put on both electronic and print media. Chambers may organize a number of workshops to create awareness of these projects. Training in all its comprehensive sense i.e. entrepreneurship creation, enterprise growth of the existing units, skill upgradation programmes in technology, marketing including exports, financial system and its

requirements, sensitizing banks and private sector to each others problems etc. Chambers may create core of volunteers consisting of executives and professionals to provide expert advisory services to MMEs in specific disciplines and serve as mentors to them. A token fee can be charged for the service.
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Chambers should play effective Advocacy Role for MME sector before the Government and international agencies like WTO, WIPO, and UNO etc. They should be represented in the Policy making Council of the Government at the national level.

Chambers can play very effective role by setting up Trade Fair /Exhibition infrastructure with the assistance of Government, private sector and institutional finance including international agencies like ITC, Geneva. It can provide facilities for permanent displays, organize exhibitions, and hold buyers-sellers national and international meets. This must be run on commercial lines.

9 Role of the International Agencies Multilateral Development Institutions contribute significantly on developing financial markets, providing business development services to medium enterprises and special funds, improving corporate governance and corporate social responsibility, and enhancing the focus of sustainability. They can : Bring different recommendations to various Governments through UNESCAP, Asian Development Bank, IFC and the World Bank Support investments and extend lines of credit along with Technical Assistance Programmes Develop Regional Fund for MME Development for countries to draw assistance Develop a second-tier capital market for MMEs to feel encouraged to corporatise, and enter open market borrowing programmes rather than only depending on the institutional loans. Supporting Associations in setting up Risk Mitigation programmes for the financial system Develop exchange and networking for market intelligence, technology transfers and exchange of R&D activates at the international level.

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10. Public-Private Partnership Public private partnership (PPP) should make concerted efforts to deliver the State-of-the art infrastructure, support services, entrepreneurship training and education, access to broader financing operations, and market access through viable partnership models like, Build Operate and Transfer .Specific initiatives under PPP could be through larger alliances and linkages with business schools, universities, and NGOs, public-private collaboration in professional education and training, and multinational and local companies. Here, the government should take the lead in developing models of private sector collaboration, keeping in mind the appropriate business environment. Example of such models are development of clusters, knowledge and industry parks/village, subcontracting arrangements with large companies and multinationals, supply chain networks and e-marketing portals etc.

Broadening Financing Options providing availability of specialized credit products from public and private financial institutions, along with risk capital and venture capital avenues. The government should take a lead in introducing special funds/grants schemes for technology development, market development, research and development, etc.

The above suggestions and the road map are based on following pragmatic factors:Human capital is the most important resource. India has a large pool of skilled manpower available at low cost and can use it. Indias manufacturing sector, though small in size in relation to its GDP, has great potential for growth. Though Indias manufacturing is fairly advanced but modernization, diversification and expansion would continue to have competitive edge internationally. It is large employment generator, more labour intensive than IT and so planners, central and state governments and business community would pay more attention to it. Other costs in India are low, e.g. rail transport, administrative and other overheads, design and development, prototype manufacture, production of
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small batches, human capital etc. This cost advantage would be used to exploit a large number of untapped opportunities. The central and state government finances are in poor shape. The question of pumping additional funds has little scope. So looking outwards would be speeded up. Exports of manufactured products would be given further boost by using the advantage of India as a lower cost economy and emphasizing on high quality of products. India would control exports of its valuable iron and aluminum ores / bauxite ores, as the earnings are not very high and make finished metal and add value to finished products as Japan, Korea and China, the main buyers, convert the same into finished products and sell back. Manufacturing costs are pushing up in the developed countries. India would explore possibilities to enter into joint ventures with suitable partners in those countries. India prepares a holistic plan with the participation of politicians, administrators, financial institutions, entrepreneurs and customers such that it is understood by all and implemented easily.

Conclusion The outlook of the medium sector is broader and there is continued search for improved ways and ready adaptability. Their up-to-date products and designs suit the modern needs of the economy in transition from developing to developed. There is greater utilization of physical and technological advancements. Machines, materials and processes are used optimally. Entrepreneurs are well versed with organizational and management planning, budgeting, market and grievances handing. There is awareness of benefits of training for skill development.

However, the process of privatization, liberalization and globalization of economic activities has affected the whole economy in one way or the other. It has increased the sphere of competition both horizontally and vertically in national as well as international markets and created an environment where fittest will survive and inefficient will be weeded out. It has underlined the concepts of productivity, quality, effectiveness and efficiency.
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The suggested policy intervention when implemented in letter and spirit are expected to make MMEs more competitive nationally as well as globally. It will add new vibration and impetus to harness growth potential with a view to stimulate socioeconomic transformation through production of quality goods and provide services for customer satisfaction, contribution to export development & national wealth. Above all it will inculcate entrepreneurial culture and generate employment opportunities for youth and instill a sense of pride amongst them.

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