Thursday, 28 July 2011


Micro, Small and Medium Enterprises (MSMEs)

The role of MSMEs in the economic and social development of a country is well recognized. They meet the country’s objectives of balanced growth, poverty alleviation, equity and inclusion. They are nurseries of entrepreneurship.

-       contribute 8% of India’s GDP
-       contribute 45% of manufactured output
-       contributes 40% of total exports
-       employs nearly 7 crore people – about 10% of India’s working population  [employment generation in MSME was higher in 1970s when small units were sheltered from competition, and more items were reserved for exclusive production in MSME. Thus some analysts suggest that these policies should be continued] 4
-       55% of MSME enterprises are in 6 States- Uttar Pradesh, Maharashtra, Tamil Nadu,  West Bengal, Andhra Pradesh and Karnataka. [Nonetheless the geographic distribution of the MSMEs is more even than bigger industries.]
-       about 7% of MSMEs are owned by women
-       MSMEs in the country manufacture over 6,000 products. Some of the major subsectors in terms of manufacturing output are food products (18.97%), textiles and readymade garments (14.05%), basic metal (8.81%), chemical and chemical products (7.55%), metal products (7.52%), machinery and equipments (6.35%), transport equipments (4.5%), rubber and plastic products (3.9%), furniture (2.62%), paper and paper products (2.03%) and leather and leather products (1.98%).
[Info from: PMs Taskforce on MSME Report, Jan 2010]

There is considerable segmentation among the MSMEs in terms of their size, and needs tailor made policies for each class. The MSME sector can be divided into the organized sector (6%) and the unorganized sector (94%).

Highly innovative and high growth enterprises: These include MSMEs in sectors like textiles and garments, leather and leather products, auto components, drugs and pharmaceuticals, food processing, IT hardware and electronics, paper, chemicals and petrochemicals, telecom equipment, etc. Such enterprises not only have high potential for growth but could also contribute significantly in enhancing country’s exports. Important Constraints they face:
1.    Negligible access to equity capital- Suitable incentives to MSME need to be provided like focused angel/venture capital funds, and SME Exchanges/platforms. 
2.    Difficulties in investing in research and acquiring latest technologies due to high costs. The Government has launched the National Manufacturing Competitiveness Programme with the objective of enhancing the competitiveness of MSMEs- through imparting knowledge and skill about quality management standards, quality technology tools, design clinics.

At the other end of the MSME spectrum is the unorganized sector. Herein:
-        enterprises are typically established through own funds or funds obtained through non-institutional sources (moneylenders).
-       lack managerial bandwidth,
-       do not have established channels for marketing and
-       are centered around a single traditional technology. 
The policies and programmes for the micro and small enterprises in the unorganized sector would need to address their survival strategies and should be in the direction of providing livelihood alternatives such as social security, skill formation and credit. Further MSMEs in the unorganised sector should be facilitated to progressively integrate with the organized sector.
-       Shortage of capital, particularly working capital, is the major problem faced by the enterprises in the unorganized sector. This is because banks do not have enough information about the various sectors and its potential, and the loan-seekers lack reliable credit history.
-       Seasonality of markets is another major problem faced by them.
-       Lack of technology upgradation: market uncertainties and lack of information have resulted in poor adoption of even the available technologies

GOI has been deliberating over problems of MSME sector [Prime Minister’s MSME Taskforce Report 2010] and has proposed the following measures to address the above constraints:
-       Credit:
o   MFIs: Government should encourage Micro Finance Institutions (MFIs) to form self-help groups and finance micro enterprises in unbanked rural/semiurban areas.
o   MSMEs declared priority sector for lending.  A Credit Guarantee Trust Fund for Micro and Small Enterprises Scheme has been launched by GOI to provide adequate safety net to the Banks who lend to MSME.
o   Banks may also formulate schemes for refinancing loans taken by the MSEs from non-institutional sources/moneylenders.
o   Financial outreach is likely to prove an effective means to formalize the unorganized sector.
-       Skill Building and Technology upgradation:
o   National Skill Development Mission
o   Encourage partnership between the industry and academic institutions for research and development.
o   Promotion of sub-contracting:  has helped in providing marketing linkages, and also resulted in technological linkages through provision of product specification and design.
-       Social Security: The social security aspects relating to the unorganized sector have been sought to be addressed by the Unorganised Workers Social Security Act, 2008 (UWSSA).
-       Infrastructure: New clusters for MSEs should be created to meet the requirements of planned development and growth,
-       Incentivize the transition of MSMEs from the unorganized to the organized sector as well as for their corporatization as entities.
-      Proposed Direct Tax Code and GST should work to facilitate growth of MSMEs- by graded corporate tax structure, tax rebates for venture capital funds and incentives for R&D.


  1. SME Exchange: The Bombay Stock Exchange (BSE) is setting up a dedicated SME Exchange in Sep'11. Small companies can float IPOs and generate equity capital, improve their debt-equity ratio, gain visibility among potential investors.

  2. Recent reports have highlighted labour shortage in engineering SMEs of Rajkot and Bhavnagar. Workforce is believed to have moved to more remunerative sectors like construction. Migrant workers have returned as situation in hometowns has improved.
    Normally automation is the solution to labour shortage, but this too is proving costly for the entrepreneurs. "Automation will increase cost of production for small units who lack scale. Also avenues of govt financial assistance lack transparency and accessibility".

    Ref: Business Standard, "Labour is scarce, automation costly', 9/8/2011.

  3. RBI has issued guidelines to banks to make available necessary credit to msme sector

  4. SFURTI- Scheme of Fund for Regeneration of Traditional Industries in khadi, village and coir industry.
    To promote Khadi Village Industries Commission (KVIC) - has been granted Export Promotion Council status.

  5. The National Skill Development Mission consisting of following three institutions:

    1. Prime Minister’s National Council on Skill Development-under the chairmanship of Hon’ble Prime Minister, for policy direction and review of spectrum of skill development efforts in country.
    2. National Skill Development Coordination Board-under the chairmanship of Dy. Chairman Planning Commission to enumerate strategies to implement the decisions of PM’s council.
    3. National Skill Development Corporation (NSDC), a non-profit company under the Companies Act, 1956. The corporation is being funded by trust “National Skill Development Fund” to which the Government has contributed a sum of Rs.995.10 crores. The corporation is expected to mobilize about Rs.15, 000 crores from other governments, public sector entities, private sector, bilateral and multilateral sources. The corporation is expected to meet the skill training requirements of the labour market including that of unorganized sector.

    National Policy on Skill Development (NPSD) approved by the Government has set a target for skilling 500 million persons by the year 2022. Concerned central Ministries will involve respective departments of state Governments and other stake holders to achieve the target. Private sector will also be involved in this effort.


  6. 20 items are reserved for small and medium enterprises (as on July 2010):
    Pickles and chutneys, Bread, wooden furniture and fixtures, esercise books and registers, wax candles, safety matches, agarbatti, glass bangles, steel almirah, padlocks, stainless steel utensils.