Micro, Small and Medium Enterprises: Article Analysis

Definition

• The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

• Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

• A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

• A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;

• A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

• In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide

MSME at a Glance

• MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

• MSME accounts for more than 45% of total manufacturing output of the country, contributes around 9% to GDP and accounts for more than 40% of total exports of the country.

• There are total around more than 40 million such enterprises in India (which is 2nd largest after China) it employs over 11 Crore people in India.

Importance of MSME sector in the development of India

1. Creates large scale employment

• Since the enterprises falling in this sector require low capital to start the business, it creates huge employment opportunities for many unemployed youth. India produces about 1.2 million graduates per year, of the total number about 0.8 million are engineers. And, there is no economy in the world that can provide jobs to so many fresh graduates in one year. MSME is the boon for many of these fresh manpower.

2. Economic stability in terms of Growth and leverage Exports

• MSME is a significant growth driver in India, with it contributing to the tune of 8% to GDP. As mentioned in the table, Exports sector in India constitutes about 40% of contribution from MSME alone. Looking at the kind of contribution of MSME to manufacturing, exports and employment, other sectors are also benefitting from MSME.
• MNCs today are buying semi-finished, and auxiliary products from small enterprises, for example, buying of clutches, and brakes by automobile companies. It helps create a linkage between MSME and big companies.even after the implementation of the GST 40% msme sector also applied GST Registration which increase the government revenue by 11%.

3. Encourages Inclusive Growth

• About 50% of wealth in India in owned by just 100 people which is due to unequal distribution of wealth. Inclusive growth is on top of the agenda of Ministry for Medium, and Small, and Medium sized enterprises for several years. While poverty and deprivation are a deterrent to the development of India, including marginalized sections of society is a key challenge lying before the Ministry of MSME.

4. Cheap Labor and minimum overhead

• In large scale organizations, one of the key challenges is to retain the human resource through an effective human resource management professional manager. But in case of an MSME, the requirement of labor is less, and it does not need a highly skilled laborer. Hence, the indirect expenses incurred by the owner is also low.

5. Simple Management Structure for Enterprises

• MSMEs do not require a huge capital to start. With limited resources available within the control of the owner, decision-making becomes easy and efficient.
• As in case of a large corporation wherein a specialist is required for every departmental functioning because of complex organizational structure, a small enterprise does not need to hire an external specialist for its management. The owner himself/herself can manage it. Therefore, it can be run single-handedly.

6. Plays an important role in making “Make in India” possible

• Post the inception of ‘Make in India’, a signature initiative by the prime minister of India, the process of incorporating a new business has been made easy. Since the MSME is the backbone in making this dream a possibility, the government has directed the financial institution to lend more credit to enterprises in MSME sector.

Government Policies:

• Public Procurement Policy 2012: Each Ministry/PSU shall set an annual goal and procure minimum 20% from MSME within 3 years.
• In many FDI proposals such as FDI in Retail, there is clause that 20-30% inputs shall be procured only from MSME.
• Labour Reforms: Introduction of Shram Suvidha Portal to compliance with labour laws, flexible & time bound labour inspection scheme and Unique Labour identification number (LIN) to every unit.
• Mudra Scheme: This is the first ever credit scheme designed for micro entrepreneurs or household enterprises. Lesser documents formality, no collateral and cheap interest rate are some of the major features of this scheme. Connecting last mile financer with Mudra bank is another remarkable feature of the scheme to provide credit facility to each household enterprise.
• Udyog Aadhaar Memorandum (UAM): This is a path breaking step to promote ease-of-doing-business for MSMEs in India as the UAM replaces the filing of manual Entrepreneurs’ Memorandum (EM part-I & II) with online facility of filing EM and each MSME to instantly get a unique Udyog Aadhaar Number (UAN). The information sought is on self-certification basis and no supporting documents are required at the time of online filing of UAM.
• A Scheme for Promotion of Innovation, Rural Industry and Entrepreneurship (ASPIRE): ASPIRE has been launched with an objective to set up a network of technology centers, incubation centers to accelerate entrepreneurship and also to promote start-ups for innovation and entrepreneurship in rural and agriculture based industry with a fund of Rs 210 Cr.
• Scheme of Fund for Regeneration of Traditional Industries (SFURTI): The objectives of SFURTI is to organize the traditional industries and artisans into clusters to make them competitive and provide support for their long term sustainability by way of enhancing the marketability of products, improving the skills of artisans, making provision for common facilities and strengthening the cluster governance systems.
• Stand Up India: Recently government approved “Stand-Up India Scheme” to promote entrepreneurship among SC/ST and Women entrepreneurs. The Scheme is intended to facilitate at least two such projects per bank branch, on an average one for each category of entrepreneur. It is expected to benefit at least 2.5 Lakh borrowers in time limit of 36 months from the launch of the Scheme.
• Credit Linked Capital Subsidy Scheme: it has been implemented by the government for up-gradation of technology. Under this 15% (subject to maximum of Rs.15.00 lakhs) upfront subsidy on capital investment for technology upgradation is provided to micro and small enterprises for modernization of their production equipment(plant and machinery).

Challenges faced by MSMEs

• Problem of Raw Material: A major problem that the micro and small enterprises have to contend with is the procurement of raw material. The problem of raw material has assumed the shape of: An absolute scarcity, A poor quality of raw materials, and A high cost.
• Keeping in view the raw material problem of micro and small enterprises, the Government makes provisions for making raw material available to these units. Nonetheless, micro and small enterprises with no special staff to liaise with the official agencies, these units are left with inadequate supplies of raw material. As a result, they have to resort to open market purchases at very high prices. This, in turn, increases their cost of production, and, thus, puts them in an adverse position vis-a-vis their larger rivals.
• Problem of Finance: An important problem faced by micro and small enterprises in the country is that of finance. The problem of finance in micro and small sector is mainly due to two reasons. Firstly, it is partly due to scarcity of capital in the country as a whole.
• Secondly, it is partly due to weak credit worthiness of micro and small enterprises in the country. Due to their weak economic base, they find it difficult to take financial assistance from the commercial banks and financial institutions.
• As such, they are bound to obtain credit from the money lenders on a very high rate of interest and are, thus, exploitative in character. It is a happy augury that ever since the nationalisation of banks in 1969, the credit situation has improved still further.it appears that the availability of institutional credit to micro and small enterprises is certainly increasing.
• Nevertheless, the fact remains that the criterion of ‘credit worthiness’ still weights heavily with the nationalised commercial banks. This would be clear from this fact that of the units assisted by commercial banks up to June 1976, about 69 per cent of the total credit was availed of by 11 per cent of the (bigger) units in the small-scale industries sector, which accounted for 55 per cent of the total production.
• This underlines the need to change the outlook of the banks towards MSEs. For this, it is necessary to further liberalise the rules and practices of banking in the country.
• Problem of Marketing: One of the main problems faced by the micro and small enterprises is in the field of marketing. These units often do not possess any marketing organisation. In consequence, their products compare unfavourably with the quality of the products of the large-scale industries. Therefore, they suffer from competitive disadvantages vis-a-vis large-scale units.
• In order to protect micro and small enterprises from this competitive disadvantage, the Government of India has reserved certain items for the small- scale sector. The list of reserved items has continuously expanded over the period and at present stands at 824 items.
• Besides, the Trade Fair Authority of India and the State Trading Corporation (STC) help the small-scale industries in organising their sales. The National Small Industries Corporation (NSIC) set up in 1955 is also helping the small units in obtaining the government orders and locating export markets.
• Ancillary units face the problems of their own types like delayed payment by parent units, inadequacy of technological support extended by parent units, non- adherence to quality and delivery schedules, thus, disturbing the programmes of the parent units and absence of a well-defined pricing system and regulatory laws.
• Problem of Under-Utilization of Capacity: There are studies that clearly bring out the gross under-utilization of installed capacities in micro and small enterprises
• The very integral to the problems of under-utilization of capacity is power problem faced by micro and small enterprises. In short, there are two aspects to the problem: One, power supply is not always available to the small units on the mere asking, and whenever it is available, it rationed out, limited to a few hours in a day.
• Second, unlike large-scale industries, the micro and small enterprises cannot afford to go in for alternatives; like installing own thermal units, because these involve heavy costs. Since micro and small units are weak in economic front, they have to manage as best as it can within their available meager means.
• Other Problems:
• In addition to the problems enumerated above, the micro and small enterprises have been constrained by a number of other problems also. these include technological obsolescence, inadequate and irregular supply of raw materials, lack of organised market channels, imperfect knowledge of market conditions, unorganised nature of operations, inadequate availability of credit facility, constraint of infrastructure facilities including power, and deficient managerial and technical skills.
• There has been lack of effective co-ordination among the various support organisations set up over the period for the promotion and development of these industries. Quality consciousness has not been generated to the desired level despite various measures taken in this regard.
• Some of the fiscal policies pursued have resulted in unintended splitting up of these capacities into uneconomic operations and have inhibited their smooth transfer to the medium sector. All these constraints have resulted in a skewed cost structure placing this sector at a disadvantage vis-a-vis the large industries, both in the domestic and export markets.

Way Ahead

• Tax reforms: There is need to roll out GST to simplify tax structure and to reduce tax spending of MSME’s. Further there is need to provide tax incentives to MSME sector such as increase tax exemption limit to avoid tax evasion.
• Industrial Training Institutes and management schools: There is need to establish new industrial schools or upgrade previous ones to include modules on management, labour laws, accounting, financial markets, and procurement and marketing skills.
• Promote R&D: To comply with rapidly growing and changing world, there is need to promote R&D in MSME sector so that new products can be developed such as Phulkari of Punjab, bamboo works of Assam, etc.
• E-Commerce and Marketing:  Rather than depending on private e-commerce companies only, government shall endeavour to create a dedicated e-commerce platform for marketing of MSME sector.
• Bankruptcy code to make insolvency procedure is also need of the hour to reduce exit time and capital of entrepreneurs.

Conclusion

• Micro, Small and Medium-sized Enterprises (MSME) are one among the most important sectors, forming the backbone of the Indian economy. This sector has been instrumental in the growth of the nation, leveraging exports, creating huge employment opportunities for the unskilled, fresh graduates, and the underemployed, also extending the opportunities to banks for giving more credit to enterprises in this sector.
• The government should take utmost care of this sector in terms of providing more and more MSME Registration benefits through better regulations, Government simply , and enabling financial institutions to lend more credit at less interest rate for sustainability of this sector.

Model Mains Question: MSME sector has immense economic significance for India. Comment

Source: iamwire, yojana, Hindu Business line