MSME

[PROJECT FILE ON MICRO, SMALL AND MEDIUM ENTERPRISE: OPPORTUNITIES & CHALLANGES ] 2012

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Introduction To Micro, Small and Medium Enterprise Worldwide, the micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of the large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession. As per available statistics (4th Census of MSME Sector), this sector employs an estimated 59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country.


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An MSME (Micro, Small and Medium Enterprise) is defined by RBI/GOI differently for the Manufacturing and the Services Sector, as follows: Manufacturing Sector: Manufacturing sector refers to enterprises engaged in manufacture or production, processing or preservation of goods. The definition of Micro, Small and Medium Enterprises under the manufacturing sector is based on the Investment in plant and machinery [original cost excluding land and building] and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006


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Services Sector Services sector refers to enterprises engaged in providing or rendering of services. These will include small road & water transport operators (owning a fleet of vehicles not exceeding ten vehicles), small business (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lakh) and professional & self-employed persons (whose borrowing limits do not exceed Rs.10 lakh of which not more than Rs.2 lakh should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lakh with a sub-ceiling of Rs.3 lakh for working capital requirements). The definition of Micro, Small and Medium Enterprises under the services sector is based on the enterprise’s investment in equipment’s.


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Rs10lakh

Rs2Crore

Rs5Crore

THE MICRO, SMALL & MEDIUM ENTERPRISES DEVELOPMENT (MSMED) ACT, 2006 Heralding the commencement of renewed efforts for facilitating promotion and development and enhancing the competitiveness of micro, small and medium enterprises:

NEW NOMENCLATURE AND CLASSIFICATION OF MSME

ENTERPRISES

Manufacturing Enterprises (Ceiling on investment in

Plant & Machinery)

Service Enterprises

(Ceiling on investment in Equipment)

Rs25lakh

Rs 5 Crore

Rs 10 Crore

� Micro �

� Small �

� Medium �

Salient Features

Definitions Memorandum Statutory Frame

1. Provides statutory basis (legally of enforceable) to Procurement Preference Policies of Central & State Government for goods & Services provided by micro & small enterprises. 2. Strengthens the legal provisions to check delayed payment to micro and small enterprises. 3. Representatives of enterprises Associations included in the MSE Facilitation Councils for adjudicating on cases of delayed payment. 4. Provision for ensuring timely and smooth flow of credit to MSMEs.

1. Defines "Enterprise" instead "Industry" to give due recognition to the Service Sector. 2. Pride of place to Micro Enterprises. 3. Investment ceiling for Manufacturing Small Enterprises raised to Rs 5 Crore. 4. Defines "Medium Enterprises" to facilitate technology up gradation and graduation

1. Two-stage registration process of SSI substituted with optional filing of memorandum with District Industries Centers (DICs) by all micro and small enterprises. 2. Filing of memorandum by Medium enterprises rendering services also optional. 3. Filing of memorandum by manufacturing medium enterprises with District Industries Centers (instead of the Central Government)


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MSME- Indian Scenario & Scale of Operations

At present India having 12.50 million micro small and medium enterprises which facilitate: Employ 30 million people, Contribute approx. 50% Industrial Production Contribute approx. 45% of Exports

Scale of operation (2009-10) MSE MSME Exports $ 33 Billion $ 56 Billion Production $ 130 Billion $ 160 Billion Reserve Items ----------------------------- $ 114 Billion TRENDS IN GROWTH Year GDP% Industrial Sector % SSI Sector% 2000-01 4.40 4.90 8.09 2001-02 5.60 2.70 6.08 2002-03 4.40 5.30 7.41 2003-04 8.50 7.00 8.59 2004-05 6.90 8.40 9.96 2005-06 9.00 11.50 13.00 2006-07 10.01 12.00 14.00 2007-08 10.05 12.50 14.05 2008-09 10.00 13.30 15.70 2009-10 11.05 14.00 16.40


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Some Important Schemes of Ministry of MSME, Govt. of India are as under: To enhance the competitive strength of the MSEs, the Government introduced a scheme to incentives technological up gradation, quality improvement and better environment management by the MSEs. The objective of these schemes is to popularize the Bar code registration and motivate the small and micro manufacturing enterprises to adopt the Bar Code Certification on large scale and to sell their value added products worldwide and enable higher export price realization, It also helps in domestic marketing (wholesale & retail) Some Important Schemes of Ministry of MSME, Govt. of India are as under: i. Credit Guarantee Scheme

ii. ISO 9000/14001 Certification Fee Reimbursement Scheme iii. Micro & Small Enterprises Cluster Development Programme iv. Credit Linked Capital Subsidy Scheme v. Intellectual Property Rights for MSMEs

vi. Incubator Scheme vii. Quality Management Standards/Quality Technology Tools

viii. Mini Tool Room ix. Marketing Assistance (Bar Code) x. Lean Manufacturing Competitiveness programme

xi. Technology Up gradation xii. Skill Development

xiii. Marketing & procurement xiv. Export Promotion xv. Infrastructural Development

xvi. National Awards


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Problems & Challenges Faced by MSME Despite its commendable contribution to the Nation's economy, MSME Sector does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap in becoming more competitive in the National and International Markets. MSMEs faces a number of problems - absence of adequate and timely banking finance, limited capital and knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy, identification of new markets, constraints on modernisation & expansions, non-availability of highly skilled labour at affordable cost, follow up with various government agencies to resolve problems etc. Despite the fact that MSMEs are very potential for building a stable economic growth, developing MSMEs is a difficult issue.

1. The most common problems for MSMEs are lack of access to market information, technology, low quality of human resources and lack of access to capital. Most MSMEs do not understand what kind of products needed by market, how big the market and when the products needed and how to deliver the products. MSMEs also have weakness in bargaining power especially in dealing with big buyers. Even if they understand the market, they sometimes find difficulties in raw material supply, both in the availability and price

2. Access to capital is not the only constraint for MSMEs to grow, but it is considered an important problem in developing MSMEs. There is a common misunderstanding that banks are reluctant to lend money to MSME as the banks never believe that lending to MSMEs are commercially viable for them. MSMEs that are essential to sustainable


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growth and poverty reduction will never get enough of the capital they need to build and expand the business.

3. There is also legal issue in enforcing contract or business issue to obtain and enforce loan collateral. Furthermore, banks usually regard lending to MSMEs is a high risk and unprofitable business due to:

i. Unavailability of accurate, reliable information on enterprises’

financial condition and performance ii. Unconvinced and weak business plan

iii. Weakness in MSME’s management, market links, governance, and information technology.

iv. Weakness in banks staff including loan officers are not sufficiently trained in lending to MSMEs

v. Banks’ weakness in identifying the characteristics of MSMEs vi. Weaknesses of the banks in adopting appropriate lending

technologies and operation system that will enable them to realize this market potential and to lend profitably to small business

vii. The availability of other investing tools which give opportunity to the banks to have lower risk investment such as holding government paper

viii. Higher overhead cost due to a high number of customers with smaller loan size.


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How government can help MSME sector grow The micro, small and medium enterprise (MSME) sector is vital for the development of any economy. While Indian MSMEs have, in past years, grown thanks to Indian entrepreneurs known for their dedication and innovation, it may need more than that for the sector to make a real impact on the industrial coming-of-age in the country. A recent study by Milagrow in collaboration with IMT faculty outlines the various challenges Indian MSMEs faces, highlights practices of countries across the globe and comes up with a list of recommendations for policymakers to help the sector. Indian MSMEs, the study finds, face challenges from various fronts. Here are the issues:

• Inadequate financial support, • Inability to promote their products and services in domestic and

international markets, • Lack of support from government organisations, large enterprises, etc. • Lack of appropriate need-based training and development programmes • Lack of knowledge about low-cost brand communication solutions • Unavailability of latest news, trends and technologies • Lack of adequate networking opportunities • Poor knowledge management

"After analyzing the challenges of the Indian MSME sector, 12 countries were studied from Europe, North America and Latin America: Germany, Finland, Italy, Spain, Sweden, United Kingdom, Canada, Mexico, USA, Argentina, Brazil


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and Venezuela," the study says. "The European Union, through its several initiatives, has enhanced the productivity and competence levels of the MSMEs in its member countries." Here are the key recommendations for Indian policymakers at a glance:

• Reserve 20% as priority sector lending to MSMEs • Provide 20% reservation for procurement from the MSME sector • Collateral free loans of up to Rs 1 crore for highest credit-rated MSMEs • Loans from the Credit Guarantee Fund Trust For Micro And Small

Enterprises (CGTMSE) must incentivise lending institutions by faster feedback mechanism

• The CGTMSE must facilitate access to international capital bond markets • Involve large enterprises in development of MSMEs clusters on private-

public partnerships (PPPs) • Develop integrated cluster competitiveness programmes • Promote low-cost information and communication technologies (ICT)

solutions for MSMEs • Provide best in-class training and have an industry and 'management

function' wise plan through PPP • Mentor and hand-hold MSMEs with PPP model • Facilitate international partnerships for MSMEs • Incentivise innovation and R&D culture in MSMEs • Encourage incubation with best in-class practices • Encourage environmental compliance at an early stage


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Case Study

Bangalore - Machine Tools UNIDO Cluster Development Programme started interventions in the cluster at a time when the industry was facing stiff competition from cheaper, better made imported machine tools. Effects of liberalization of the economy had started to set in. UNIDO tackled these problems by creating awareness and networks of small machine tool manufacturers and vendor units, providing training and institutional linkages and increasing the usage of BDS providers. A full time cluster development agent stationed in the cluster for this purpose handled these issues. The result was that the firms involved made savings through energy audits, started implementing world class shop floor practices, lowered production cycle time and got engaged in common procurement of material and other inputs. Moreover with joint efforts firms generated additional business and upgraded their manufacturing facilities. New international markets were explored and gaps in skills were addressed through new training programmes.

Evolution of the Cluster Manufacture of machine tools in India developed in three

geographical clusters—in and around Bombay/ Pune, in Bangalore and in the Punjab. While local factors played an


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important role in their growth, the growth of the entire industry was influenced to a large extent by government policy changes. The presence of ordnance factories and repair workshops provided the initial stimulus for the machine tool industry in Bangalore, during and immediately after World War II, as Bangalore was then the Southern Headquarters of the Armed Forces. Growth became widespread after the establishment of public sector enterprises, Hindustan Machine Tools (HMT) founded in 1953, being the most dominant. HMT created a demand for a large number of ancillary and support firms through inflow of capital and supply of technocrats, who created their spin-off enterprises. The ban on import of machine tools (1951-66) that could be produced indigenously encouraged national manufacturers to venture into newer areas while foreign manufacturers had an incentive to

set up local subsidiaries or licensees. In 1973, the Foreign Exchange Regulation Act (FERA) made it compulsory for foreign companies to reduce their holdings to less than 40 percent. A number of foreign manufacturers exited from the Indian scenario. This, along with high tariffs on more advanced machine tools, probably blocked the progress of the Indian industry along the path of the international industry (e.g. numerically controlled machine tools). In the absence of competition, the cluster continued to grow, but through integrated firms with a minimum of subcontracting. The collapse of the Soviet Union as an export market in 1990 dried up a significant flow of exports. The process of liberalisation forced machine tool firms to restructure to become more competitive. It is at this time that the first few firms started to outsource. While the industry was trying to cope with liberalisation, recession swept this industry from


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1994-96 as Taiwanese machine tools were making significant inroads in the Indian market and the automotive industry experienced its first downturn between 1997-99. Bangalore was no exception to this national trend. The Cluster and its Major Stakeholders Machine tool manufacturers (MTMs) are at the core of the cluster. These include medium and small manufacturers. At the start of the intervention, the cluster had 125 units of which forty-five were MTMs. Six were medium-sized units and the rest were small. Seventy to eighty vendor units, consisting of ten heat theaters, eight abrasive units, four foundries, ten precision machining units and ten fabrication units provided backward linkages to the MTMs. During end- 1999, the cluster had a turnover of Rs. Rs. 250 crores (USD 56million), approximately 40 per cent of India’s total

production. The domestic market consumed 90 per cent of this output, while only 10 per cent was exported. The cluster mainly produced metal cutting machines and its share in metal forming machines was very low. Dealers, Original Equipment Manufacturers (OEMs), auto component manufacturers and other equipment manufacturers provided the forward linkages on the domestic front. A few units exported directly to OEMs. Technical support institutions such as the Nettur Technical Training Foundation (NTTF), the Indian Institute of Science (IISc) and the Central Manufacturing Technology Institute (CMTI) were present but did not interact much with the industry. The Indian Machine Tool Manufacturer’s Association (IMTMA) was involved in organising the Indian Machine Tool Exhibition (IMTEX) every three years, carrying out census of the cluster and organising events for disseminating knowledge.


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CONCLUSION

With a fast growing economy and vast opportunities, MSMEs are poised to raise the bar and challenges international competition. In the future, we may see many of the MSMEs grow and challenge the larger industries in terms of growth as well as manufacturing excellence. The natural process of growth would see many of the industries in the MSMEs sector graduating to the large industry sector and many more enthusiastic new entrepreneurs entering the MSMEs sector. We could also expect more encouraging schemes and assistance from the Government to make the MSMEs more competitive.


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References

• Charantimath Poornima, 2006. Entrepreneur Development Small Business • Enterprise. Darling Kindersley (India) Pvt.Ltd, New Delhi.

• Gupta C.B, Khanka S.S. 2003. Entrepreneurship and Small Business • Management. Sultan Chand & Sons, New Delhi, 4th Edition.

• Hatten S Timothy, 1997. Small Business Entrepreneurship and Beyond. • Prentice Hall, New Jersey. • Laghu Udyog Samachar, 50 Years of SIDO, Commemorative Issue on

Golden Jubilee of Small Industries Development Organisation [1954-2004], A Publication of Development Commissioner [SSI], Ministry of SSI, Government of India.

• Report of the Expert Committee on Small Scale Enterprises, [Abid Hussain • Committee], Ministry of Industries, Government of India, 1997.

• Report of the Study Group on Development of Small Scale Enterprises, Planning Commission, Government of India, New Delhi March 2001.

• SIDBI 13th Annual Report 2002—2003 Small Industries Development Bank of India.

• SIDBI Report on Small Scale Industries 2000, Small Industries Development Bank of India.

Education

MSME