Chapter 2

Micro, Small and Medium Enterprises in India

2.1

Introduction
MSMEs in India are an important contributor to the Indian economy

and are drivers of growth. By its less capital intensive and high labour absorption nature, MSME sector has made significant contributions to the manufacturing output, employment generation, rural industrialization and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. Over 6000 products ranging from traditional to high-tech items are manufactured by MSMEs in India. The sector creates largest employment opportunities next only to agriculture. The sector is estimated to employ about 595 lakh persons in over 261 lakh enterprises throughout the country (Ministry of MSME, 2012). It is estimated that 95 per cent of all industrial units are in the MSME sector (Singh et al., 2010). The sector has consistently showed growth in production, fixed investment, employment and total exports over the years. One of the strengths of Indian MSMEs is that of cost advantage in comparison to their global counterparts (Singh et al., 2010). It has been a vibrant sector in spite of inadequacies. In recent years, the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. The MSME sectors performance and growth data during the period 2001-2011 are included in Appendix 1. Growth in demand in the domestic market size due to overall economic growth, increasing export potential for Indian products and growth in requirements for ancillary units due to the increase in number of units coming up in the large scale sector has led to several opportunities for this sector. The promotional and protective policies of the Govt. have ensured the presence of this sector in wide range of products, particularly in consumer goods.
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MSME sector plays a major role in India's present export performance. According to the Ministry of MSME (2011b), around 45-50 per cent of the Indian exports is contributed by this sector. Direct exports from the sector account for nearly 35 per cent of total exports. Besides direct exports, it is estimated that small-scale industrial units indirectly contribute about 15 per cent to exports. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts use in finished exportable goods. It would surprise many to know that non-traditional products account for more than 95 per cent of the MSME exports. In the last decade, the export performance has been further fuelled by the growth of garments, leather and gems & jewelry units of this sector. The product groups where the sector dominates in exports are sports items, readymade garments, woolen garments & knitwear, plastic products, processed food and leather products (Ministry of MSME, 2011b). According to the fourth census of MSME, 67 per cent of the enterprises in the registered MSMEs sector were engaged in manufacturing, whereas 17 per cent of the enterprises were engaged in the services activities. The remaining 16 per cent of the enterprises were engaged in repairing and maintenance. About 90 per cent of the firms were proprietary owned firms (Ministry of MSME, 2011a). The manufacturing sector is an important segment and considered to be a key growth driver of the Indian economy like in several developing countries. Government of India has made several efforts to enhance the competitiveness of the Indian manufacturing industry. National Manufacturing Competitiveness Council (NMCC) was set up to undertake initiatives to enhance competitiveness of the sector. According to a report by NMCC and NASSCOM (2010), the Indian manufacturing sector has over 53 lakh manufacturing units with 99 per cent of the units employing less than 10 workers. Food & beverages, textiles, non-metallic mineral products, chemical products and machinery & equipment are the top 5 verticals in terms of number of units and they account for nearly 75 per cent of the total number of units in the manufacturing sector.
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Small scale sector is the backbone of Indian manufacturing sector with 90 per cent of the total industrial units. However, according to the report by NMCC and NASSCOM (2010), the contribution of Indian manufacturing to the national GDP has stagnated over the last few years by about 15 per cent in spite of the growth in the manufacturing sector. The contribution level is found to be much lower when benchmarked with comparable economies such as China (39.3 per cent), Thailand (35.2 per cent), Malaysia (31.1 per cent), Indonesia (24.7 per cent) and Vietnam (20.8 per cent) (NMCC & NASSCOM, 2010). The small sale sector is an important component of the foundation layer of manufacturing sector and entrepreneurial activities in India. As the productivity and performance of large manufacturing firms would be influenced by the competitiveness of their suppliers, i.e., mainly MSMEs, it is important to improve productivity levels of MSME to improve the manufacturing sector as a whole.

2.2

Challenges faced by MSME sector in India

Despite the huge potential, the small scale sector faces several

challenges and there have been the inadequacies in capital, technology and marketing. While SME sector in India did well in terms of the absolute numbers, its relative performance was on the verge of stagnation. Even the employment level remained stagnant on a per unit basis, but has improved substantially in relation to the organized sector employment. The number of unregistered units is much higher than the number of registered units (NMCC, 2010). A study on MSMEs in western India, Singh et al. (2010) found that cost, quality and delivery time are the main pressures on the small industries. According to the study, SSIs opine that the major constraints are lack of growth conducive and environment, inadequate for government SSIs support have and incentives poor infrastructure training. highest

competitiveness at local level and lowest competitiveness at international

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level. Use of information to optimize decisions, to define quality standards, and optimization of working environment are the main areas of competency development (Singh et al., 2010). According to the fourth all India census 2006-2007, conducted by Ministry of Micro, Small and Medium enterprises, Govt. of India, it was revealed that about 29.40 per cent of the total units were suffering from sickness and about 3.73 per cent of enterprises suffered from incipient sickness. Major problem for the sickness was found to be lack of demand, shortage of working capital and marketing problems as mentioned in Table 2.1 (Ministry of Micro, Small and Medium enterprises, 2011a). Table 2.1: Reasons for sickness in small scale industries in India Sl. No. 1 2 3 4 5 6 7 8 Reason for sickness / incipient sickness Lack of demand Shortage of working capital Non-availability of raw material Power shortage Labour problems Marketing problems Equipment problems Management problems Proportion of sick/ incipient sick units (per cent) 41.94 20 5.11 5.71 5.64 11.48 3.17 6.46

Source: Ministry of Micro, Small and Medium Enterprises (2011a), Government of India, Fourth All-India census 2006-2007

Food products and beverages (17.73 per cent), apparel (10.23 per cent), textiles (9.11 per cent) were the top three industries that suffered from sickness. Percentage share of closed enterprises at national level was about 22 per cent of the total registered enterprises.

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According Confederation of Indian Industry (CII), Indian MSMEs face several challenges for growth. Some of the problems are high cost of credit, limited access to equity capital, problems in supply to government departments and agencies, procurement of raw materials at a competitive cost, inadequate infrastructure facilities such as power, road, low technology levels and lack of access to modern technology, lack of skilled manpower, problems of storage, designing, packaging and product display, absence of suitable mechanism to revive/close sick enterprises quickly and lack of resources for branding and marketing, lack of access to global markets (CII, 2010). Infusing competitiveness, infrastructure development and bringing vast population of MSMEs in the unregistered sector to the mainstream is the main challenge before the GoI at present.

2.3

Governance and Institutional support for MSMEs

The Ministry of Micro, Small and Medium Enterprises is the

administrative Ministry in the Government of India for all matters relating to Micro, Small and Medium Enterprises. It designs and implements policies and programmes through its field organisations and attached offices for promotion and growth of MSME sector. The office of the Development Commissioner is an attached office of the Ministry of MSME, and is the apex body to advise, coordinate and formulate policies and programmes for the development and promotion of the MSME sector. The office also maintains liaison with Central Ministries and other Central/State Government agencies/ organisations/ financial institutions (www.dcmsme.gov.in).

2.3.1 Ministry of MSME and its network of organisations The Development Commissioners office of MSME, have a network of Development Institutes, Testing Centres, autonomous bodies which include Tool Rooms and Tool Design Institutes, Technology Development Centers and Training Institutes. Other associated agencies of this office are National
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Small Industries Corporation (NSIC), Small Industries Development Bank of India (SIDBI) and Khadi & Village Industries Commission (KVIC). National Small Industries Corporation (NSIC) Ltd. was established in 1955 by the GoI with a view to promote, aid and foster the growth of small industries in the country. NSIC continues to remain at the forefront of industrial development throughout the country with its various programmes and projects to assist the MSME in the country. The main functions of the corporation are to promote, aid and foster the growth of micro and small enterprises in the country, generally on a commercial basis. It provides a variety of support services to micro and small enterprises by catering to their requirements in the areas of raw material procurement, product marketing, credit rating, acquisition of technologies, and adoption of modern management practices. The NSIC is directly operating different programmes by a dedicated team of professionals at all levels and operates through 142 offices located all over India and one office located at Johannesburg, South Africa (Ministry of MSME, 2012). Small Industries Development Bank of India (SIDBI) is an apex bank set up to provide direct/indirect financial assistance under different schemes to meet credit needs of the small-scale sector and to coordinate the functions of other institutions in similar activities. Its major operations are in the areas of refinance assistance, direct lending, and development & support services. Khadi & Village Industries Commission (KVIC), established under the Khadi and Village Industries Commission Act, 1956, is a statutory organization engaged in promoting and developing Khadi and Village Industries for providing employment opportunities in rural areas, thereby strengthening the rural economy. The KVIC has been identified as one of the major organizations in the decentralized sector for generating sustainable rural nonfarm employment opportunities. This also helps in checking migration of rural population to urban areas in search of the employment opportunities. (Ministry of MSME, 2012)
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2.3.2 Divisions of Ministry of MSME The Ministry of MSME has two Divisions called Small & Medium Enterprises (SME) Division and Agro & Rural Industry (ARI) Division. The SME Division is allocated the work of administration, vigilance and administrative supervision of the National Small Industries Corporation (NSIC) Ltd. and the three autonomous national level entrepreneurship development/training organisations. The division is also responsible for implementation of the schemes relating to marketing and export promotion. The ARI division looks after the administration of two statutory bodies viz. the Khadi & Village Industries Commission (KVIC) and the Coir Board. It also looks after a newly created organization called Mahatma Gandhi Institute for Rural Industrialisation (MGIRI). It supervises the implementation of the Prime Ministers Employment Generation Programme (PMEGP). The Coir Board is a statutory body established under the Coir Industry Act, 1953 for promoting overall development of the coir industry and improving the living conditions of the workers engaged in this traditional industry. Coir Industry is one of the major agro based rural industries in the country. The activities of the Board for development of coir industries include undertaking scientific, technological and economic research and development activities; developing new products & designs; and marketing of coir and coir products in India and abroad. It also promotes co-operative organisations among producers of husks, coir fibre, coir yarn and manufacturers of coir products, ensuring remunerative returns to producers and manufacturers. The Board has promoted two research institutes namely; Central Coir Research Institute (CCRI), Kalavoor, Alleppey and Central Institute of Coir Technology (CICT), Bengaluru for undertaking research activities on different aspects of coir industry (Ministry of MSME, 2012). The national level institute namely Mahatma Gandhi Institute for Rural Industrialization (MGIRI) , has been established as a society under Societies (Registration) Act, 1860 at Wardha, Maharashtra, to strengthen the R&D activities in khadi and village industry sector. The main functions of the
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Institute are to improve the R&D activities in the rural industrial sector through encouraging research, extension of R&D, quality control, training and dissemination of technology related information. 2.3.3 State Government support for MSMEs The primary responsibility of promotion and development of MSMEs is of the state Governments. However, the GoI, supplements the efforts of the State Governments through various initiatives. The role of the Ministry of MSME and its organisations is to assist the states in their efforts to encourage entrepreneurship, employment and livelihood opportunities and enhance the competitiveness of MSMEs in the changed economic scenario. State Government executes different promotional and developmental projects/schemes and provide a number of supporting incentives for development and promotion of MSME sector in their respective states. These are executed through State Directorate of Industries, who have District Industries Centers (DICs) under them to implement central/state level schemes (www.dcmmsme.gov.in). Apart from commercial banks, at state level, State Financial Corporations (SFC) and twin function State Industrial Development Corporations are the main sources of long term finance to MSMEs. In Karnataka state, the Department of Industries and Commerce under Government of Karnataka, acts as a catalyst for the overall development of the industrial sector through effective discharge of developmental and facilitation roles. It looks after both large scale projects and MSMEs with a view to promote industrialization, investment and trade. It formulates policies, schemes and programmes to promote industrialization in the state. The department functions through the Districts Industries Centers, various Boards Corporations and special purpose vehicles. There are 17 boards/corporations/societies operating under the Department of Industries and Commerce. The Department has established the Single Window Mechanism (Karnataka Udyog Mitra) for faster, single point clearances to be
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given to projects seeking infrastructure facilities/incentives/concessions and help in establishing industries and businesses in Karnataka (www.karnatakaindustry.gov.in).

2.4

Government policies and support measures for MSMEs

Since independence, GoI has given importance to the MSME sector,

as it creates employment opportunities and facilitates mobilization of private sector resources. GoI has taken supportive measures such as reservation of items for exclusive manufacture by MSMEs, access to credit through priority sector lending programme for commercial banks, excise exemption, reservation under Government purchase programme and 15 per cent price preferences in purchases, infrastructure development and establishment of institutes of entrepreneurial and skill development. MSME Development Institutes, formerly known as Small Industries Service Institute (SISI), were set up all over India to train youths and tool rooms were set up with German and Danish assistance to provide skill training and provide technical assistance. At the state level, District Industrial Centres were setup throughout the country. Over a period of time, with liberalization, government policies have moved from protective measures to infusing growth and competitiveness in the sector. Supportive measures focused on infrastructure development, technology and quality. In 1999, Ministry of MSME (earlier known as Ministry of Small Scale Industries and Agro and Rural Industries SSI & ARI) came into being to provide focused attention to the sector. Policy package announced in August 2000, addressed persistent problems on credit, infrastructure, technology and marketing. Credit linked capital subsidy scheme to encourage technology upgradation, credit guarantee scheme to provide collateral-free loans particularly first time entrepreneurs and exemption limit for central excise duty was raised to one crore rupees and list of products for exclusive manufacture was gradually decreased. To facilitate further investments for technological upgradation and higher productivity in the micro and small enterprises, 654
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items have been taken off the list of items reserved for exclusive manufacture by the manufacturing micro and small enterprises in the last few years, reducing it to 21 at present. In 2006, Micro Small and Medium Enterprises Act was passed to improve competitiveness of this sector and it defined medium enterprises for the first time. It provided a legal framework for the concept of enterprise, both manufacturing and service industries. The Act provides statutory consulting mechanism at the national level with a wide range of advisory functions and defines three levels of enterprises i.e., micro, small and medium. With the MSMED ACT Ministry of Agro and Rural Industries and Ministry of Small Scale Industries were merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises. Some of the salient features of the MSMED Act (Ministry of MSME, 2012) are: Setting up of a National Board for MSMEs, an apex advisory body constituted to render advice to the Government on all issues pertaining to the MSME sector. It brings together the representatives of different sub-sectors of MSMEs, along with policy-makers, bankers, trade unions and others in order to move towards cohesive development of the sector. Classification of enterprises Advisory Committees to support MSMEs Measures for promotion, development and enhancement of MSMEs Schemes to control delayed payments to MSMEs Enactment of rules by State Governments to implement the MSMED Act, 2006 in their respective states Some of the important policies and schemes related to finance, technology, marketing & procurement, skill development, and rural development & inclusiveness for MSMEs are compiled from the various publications of Ministry of MSME and are discussed in the following sections:

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2.4.1 Finance The Government has initiated several measures to facilitate easy access of funds to MSME sector. One such initiative is priority sector lending. For public and private sector banks, 40 per cent of the Net Bank Credit (NBC) is earmarked for the priority sector. Credit to MSMEs is through the priority sector lending policy of the bank. For the foreign banks, 35 per cent is for priority sector of which 10 per cent is reserved for MSMEs. Any shortfall in lending by foreign banks has to be deposited in Small Enterprise Development Fund (SEDF) setup by SIDBI. The Government has also announced policy package for stepping up credit to small and medium enterprises with the objective of doubling the credit flow to the sector in the next five years. In recent years, the sector has shown interest in alternative sources of funding such as primary/secondary securities market, venture capital and private equity, external commercial borrowings, factoring services etc. Efforts are being put for Limited Liability Partnership Act to provide thrust to MSMEs in their move towards corporatization. The Government has introduced a Credit Guarantee Scheme which provides collateral free credit facility by eligible lending institutions to new and existing MSMEs for loans upto 100 lakh per borrowing unit. Performance and Credit Rating Scheme was launched in April 2005 with an objective of improving their performance and access bank credits if the rating is high. Under the scheme, 75 per cent of the fees charged by the rating agencies are reimbursed by the Government to a maximum of 40,000.

2.4.2 Technology To facilitate technology upgradation and quality improvement, several measures have been initiated by the GoI. The Government has set up ten state of the art Tool Rooms and Training centres. These tool rooms are
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proficient in mould and die making technology and abreast with latest technology such as CAD/CAM, CNC machining for tooling, Vacuum Heat Treatment, Rapid Prototyping etc. Tool Rooms offer training programmes on technical skills required for the manufacturing sector. The Government has introduced ISO 9000/14001 Certification Fee Reimbursement Scheme and reimburses 75 per cent of the certification fees subject to maximum of 75,000. To facilitate replacement of old machinery with new ones, Government introduced Credit Linked Capital Subsidy Scheme with state assistance of 15 per cent of the bank credit required to finance the new purchases. Micro and Small Enterprise Cluster Development Programme

(MSECDP) has been implemented to develop MSME clusters. It aims at a focused programme of upgrading skills and technologies that exist in these clusters and exposing entrepreneurs/workers to better products, processes and practices and creation of common facility centres (CFC). These CFCs are in the form of processing facilities, finishing or packaging centres, tool rooms, testing or certifying laboratories, training centres and so on. Integrated Infrastructure Development Scheme started in 1994 has been now subsumed under MSECDP. It was started to establish industrial estates and develop infrastructure facilities such as power distribution network, roads, drainage and pollution control, telecommunication, banks, raw materials, storage and marketing outlets, water, technological backup facilities etc. The scheme cover rural as well urban areas with 50 per cent of the area reserved in rural areas and 50 per cent of the industrial plots to be reserved for micro enterprises. National Manufacturing Competitiveness Programme (NMCP) aimed at technology, marketing and skill upgradation mainly in public-private partnership mode was initiated by National Manufacturing Competitiveness Council in 2007-2008. Some initiatives such as application of Lean Manufacturing to reduce wastage of resources, Design Clinic to address design problems, attaining Quality certification, improving use of ICT,
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enhancing familiarity with Intellectual Property Rights and Intellectual Property Facilitation Cell (IPFC). The Ministry is also under the process of establishing Technology Mission to promote appropriate technologies for the MSME sector. The NMCP introduced 'Marketing Assistance/ Support to MSMEs' scheme is to popularise the bar code registration and motivate the manufacturing MSMEs 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). 75 per cent of annual fee (recurring) of bar code certification for the first three years are reimbursed to Micro & Small Entrepreneurs, under the Scheme. To promote use of Information and Communication Technologies (ICT) in the Indian MSME sector, GoI has initiated a programme with some clusters of MSMEs. The GoI has stipulated as 160 crore (approx.) for this scheme. Under this scheme, clusters that have quality production and export potential are identified for ICT intervention. E-readiness infrastructure, web portals and e-catalogues for the clusters are set up, skill development of MSME staff in ICT applications and preparation of local software solutions for MSMEs are undertaken to enhance their competitiveness. Networking MSME cluster portals on the National Level Portals in order to outreach MSMEs into global markets is also initiated. One such initiative called Project Vikas was undertaken by National Manufacturing Competitive Council (NMCC) in association with Microsoft India in Textile cluster Tirupur. Design Clinics Scheme was undertaken to provide expert advice to MSMEs and solutions on real time design problems, resulting in continuous improvement and value-addition for existing products. Marketing Assistance and Technology Upgradation Scheme for MSMEs was started to identify and encourage those clusters of MSMEs, which have quality production and export potential and assist them to achieve competitiveness in the national and international markets. The scheme aims at improving the marketing competitiveness of MSME sector by improving
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their techniques and technology for promotion of exports. The broad activities planned under the scheme include technology upgradation in packaging, development of modern marketing techniques, competition studies, etc. Technology and Quality Upgradation Support scheme to sensitize the manufacturing (MSME) sector in India to upgrade their technologies, usage of energy efficient technologies to reduce emissions of greenhouse gases, adoption of other technologies mandated as per the global standards, improve their quality and reduce cost of production, etc., towards becoming globally competitive. The major activities planned under the scheme include capacity building of MSMEs clusters for energy efficiency/clean development interventions, implementation of energy efficient technologies in MSME sector, Setting up of carbon credit aggregation centres and encouraging MSMEs to acquire product certification licenses from National/International bodies.

2.4.3 Marketing and Procurement National Small Industries Corporation has launched a B2B Web portal www.msmemart.com / www.nsicindia.com in 2009 to provide B2B marketing facilities. The portal provides the services such as tender & trade information, banner display on NSIC website, business leads, joint venture access to national and international opportunities and trade information,

comprehensive information on Government policies, rules and regulations, schemes and incentives, access to industrial databases and member's directory, various value added, specialized services for members of infomediary Service. The portal would enable MSMEs to showcase their products in global markets and to weave strategic and networking alliances. NSIC has also initiated performance and credit rating service for the MSMEs to provide trusted third party ratings for the MSMEs (NSIC, 2011). Further, NSIC has established a Marketing Intelligence Cell in May 2010, which shall provide database and information support to the MSMEs on

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marketing of their products/services. Many of these initiatives are recently launched and yet to reach the masses. Under Government Stores Purchase Programme, various facilities are provided to enterprises registered with National Small Industries Corporation (NSIC) in order to assist them for marketing their products in competitive environment. These facilities are: (i) issue of tender sets free of cost; (ii) exemption from payment of Earnest Money Deposit; (iii) waiver of security deposit up to the monetary Limit for which the unit is registered; and (iv) price preference up to 15% over the quotation of large-scale units. In addition to these facilities/benefits, 358 items have also been reserved for exclusive purchase from the MSE Sector. However, as these guidelines were/are not of a mandatory nature, the same has failed to achieve the desired results. To help MSEs in exporting their products, the following

facilities/incentives are provided: (i) Products of MSE exporters are displayed in international exhibitions and the expenditure incurred is reimbursed by the Government; (ii) To acquaint MSE exporters with latest packaging standards, techniques, etc., training programme on packaging for exporters are organised in various parts of the country in association with the Indian Institute of Packaging; (iii) Under the MSE Marketing Development Assistance (MDA) Scheme, assistance is provided to individuals for participation in overseas fairs/ exhibitions, overseas study tours, or tours of individuals as member of a trade delegation going abroad. The scheme also offers assistance for (i) sector specific market study by MSE associations/Export Promotion Councils/Federation of Indian Export Organisation (ii) initiating/contesting anti-dumping cases by MSE associations.

2.4.4 Skill development The Ministry of Micro, Small & Medium Enterprises promotes the development of micro and small enterprises in the country with the objective of creating self-employment opportunities and upgrading the relevant skills of existing and potential entrepreneurs. The entrepreneurship and skill
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development scheme is implemented by Office of the DC (MSME) through its network of 58 MSME-DIs and their branches. The programmes conducted include Entrepreneurship Development, Entrepreneurship and Skill Development, Management Development and Business Skill Development. These programmes are of short duration and the curriculums based on needs of the industry. The office of the DC (MSME) also conducts vocational and educational training through its Regional Testing Centres, Field Testing Stations and autonomous bodies like Tool Rooms and Technology Development Centres (TDCs). These long term, short term, trade/field-specific and industry-specific tailor-made courses also include specialized programmes for engineers, diploma holders so that their absorption by the industry is immediate. Rajiv Gandhi Udyami Mitra Yojana scheme aims to promote and support establishment of new micro and small enterprises through handholding of potential first generation entrepreneurs One of the main objectives is to facilitate the potential entrepreneurs in dealing with various procedural and legal hurdles and completion of various formalities which are required for setting up and running of enterprise. As a part of this scheme, the Ministry has recently launched a MSME Call Centre (known as Udyami Helpline) with a toll-free number 1800-1806763. The Udyami Helpline, provides basic information on how to set up an enterprise, various schemes being implemented for the promotion of MSMEs, accessing loans from banks and further contacts for obtaining detailed information. To provide an opportunity for first generation entrepreneurs to acquire skills for enterprise building and to incubate them to become successful small business owners, NSIC has setup 47 training-cum-incubator centres (TICs) under PPP mode. 2.4.5 Rural development and Inclusiveness The Ministry of MSME launched a special programme, namely, 'Outreach Programme for Skill Development in Less Developed Areas' in
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September, 2006. Under this programme, the field offices of the Ministry organize short-term skill development programmes in the less developed areas. Such short-term courses are tailor-made for these areas so as to enable trainees to get employment or start self-employment ventures. The target group consist wholly or partly of disadvantaged sections. A national level credit linked subsidy scheme, namely, Prime Ministers Employment Generation Programme (PMEGP)was introduced in August 2008 and a financial assistance is provided for setting up of micro enterprises each costing up to ten lakh rupees in service sector and twenty five lakh rupees in manufacturing sector. The assistance is provided in the form of subsidy up to 25 per cent (35 per cent for special category including weaker sections) of the project cost in rural areas while it is 15 per cent (25 per cent for special category including weaker sections) for urban areas. The Government has initiated several schemes for enhancing productivity & competitiveness of Khadi industry & Artisans and schemes for Modernisation and Technological Upgradation of Coir industry. Market Development Assistance (MDA) Scheme has been introduced in 2010 and provides financial assistance @ 20 per cent on value of production of khadi and polyvastra which will be shared among artisans, producing institutions and selling institutions in the ratio 25:30:45. Under the workshed Scheme for Khadi Artisans, assistance is provided for construction of worksheds for Khadi artisans for better work environment. has been established at Wardha, Maharashtra to Mahatma rural Gandhi Institute for Rural Industrialization (MGIRI), a national level institute accelerate industrialization for sustainable village economy so that KVI sector co-exists with the main stream. Ministry of MSME has also taken initiatives such as National Database of MSMEs. However, biggest challenge is to bring vast number of unregistered MSMEs in to the database. District Industrial centres would have to take a pivotal role in this effort.
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2.5

Indian MSMEs and ICT adoption

The role of Information and Communication Technologies (ICT) in the

growth of small firms is well acknowledged in the literature (UNCTAD, 2011; CII, 2010; NMCC & NASSCOMM, 2010). Developments in ICT have led to increased transparency and information sharing across borders. Small firms which were earlier operating in protected zones have to now face competition from outside players. To meet with pressure, automation and using information to take decisions is essential for small firms. Small firms that have quality products, flexibility in manufacturing based on demand and robust processes will be the ones that will survive. However, Indian MSMEs are giving the highest priority to quality and the least priority to flexibility. In the present era of globalization SMEs should possess the ability to get the organization to innovate quickly and produce an acceptable product and service to capture upcoming business opportunity (Dangayach and Deshmukh, 2005). IT investment in SMEs differs from IT investment in large firms because a smaller number of people have decision making responsibility, standard procedures are not instituted, long- term planning is limited and there is more reliance on external IT experts in SMEs (Premkumar, 2003a). Several researchers have acknowledged that MSMEs lag behind ICT

adoption compared to larger businesses (Jones et al., 2003; Macgregor and Vrazalic, 2005). Indian MSMEs are no exception and penetration of ICT in Indian MSME sector is still very low (Sharma and Bhagawat, 2006; Singh et al., 2009; CII, 2010) and majority of MSMEs use basic ICT such as email, spreadsheets etc (CII, 2010) or financial accounting packages(Sharma and Bhagawat, 2006). ICT adoption in Indian manufacturing sector has significantly lagged behind its global peers. Indias spend on ICT is only USD 50 per capita while China spent double that amount during 2006 (NMCC & NASSCOM, 2010).

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Several research studies conducted on Indian MSMEs revealed that successful use of ICT by small firm has resulted in significant benefits. Singh et al. (2010) found that use of information technology has significant relationship with performance of small firms in India. Lal (2004) found that users of advanced e-business technology perform better than non-users in the export market. Study of Indian MSMEs in western India reveals that use of information system has resulted in benefits such as responsiveness, better customer service, increase in turnover, better capacity utilization, edge over other competitors, reduction in inventory and improved relations with supply chain partners (Sharma and Bhagawat, 2006). Kale et al. (2010) found that ERP implementation in Indian MSMEs is beneficial in reducing inventory, improving customer services and improving communications. Advanced IT such as ERP/SCM software can help SMEs to increase productivity, improve inventory controls, increase sales through closer relationships, and faster delivery times. According to the study by NMCC and NASSCOM (2010), some of the drivers to adopt ICT are internal factors such as better business process flow, better inventory control, etc. and external factors such as client requirements, compliance needs, competition pressures etc. The clients of the small firm have a strong influence on the adoption of ICT. More than three-fourth of the companies especially in the micro and small firms category are strongly influenced by the owner/management team for their ICT investments. The education background of the firms owner has a strong impact on ICT adoption levels. According the studys detailed analysis of the manufacturing clusters across various Indian states, states with better physical infrastructure and industrial policies were found to be also leaders in the manufacturing sector. The states have been analysed on direct factors such as tele-density, education development, e-Government initiatives, power availability and indirect factors such as FDI inflow and export contribution. Maharashtra, Karnataka, Tamil Nadu, Chhattisgarh, Himachal Pradesh and Kerala have good Infrastructure and policy initiatives while states such as Bihar, Madhya
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Pradesh, Uttar Pradesh, and Jharkhand lag behind (NMCC and NASSCOM, 2010). The internet usage and technology adoption is improving with pressure from international customers, especially among export oriented firms. Indian SMEs with customers outside India were one of the first adopters of internet technology which enabled them to integrate themselves with the supply chains of their international customers. This integration enabled SMEs in India to respond faster to their customers requirements. Such initiatives in the three SME clusters of India (lock and brass clusters and garment clusters) are enabling awareness of benefits of internet among Indian SMEs. However, the integration of SMEs with their suppliers is non-existent (Faisal et al., 2006). One of the sectors that has been leading in ICT adoption is the automotive sector. However, this trend is yet to catch up in other verticals. However, Indian MSMEs face several challenges to use ICT. There are problems both at the demand side as well as supply side. Some of the barriers to use ICT in SMEs are lack of financial capacity, small scale operation and lack of in-house IT manpower inhibit the adoption, lack of R&D, marketing (Kale et al., 2010, NMCC & NASSCOMM, 2010; Kannabiran and Dharmalingam, 2012). MSMEs rely primarily on small number of customers and operate in limited markets (Sharma and Bhagawat, 2006; Kale et al., 2010). Most MSME firms lack formal ICT decision making structures and in majority of the firms, the responsibility for ICT decision making is often with the firms owner (CII, 2010; NMCC & NASSCOM, 2010). According to study by CII (2010), some of the barriers to ICT adoption by Indian MSMEs are limited internal IT expertise and managerial knowledge, not having a formal IT budgeting process, high costs of software and requirement of customization that increases costs and process changes, ICT service providers not servicing the MSME market segment directly due to high cost of sales and lack of awareness of ICT benefits (CII, 2010). Threats to information security, resistance to change and to adopt innovations, fear of

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supply chain break down and IS breakdown were found as major barriers to ICT adoption by Sharma and Bhagawat (2006). As per the study by NMCC and NASSCOM (2010), most of the MSMEs employ unskilled and non-English speaking people migrated from rural areas. They are not exposed to IT training and do not have any expertise in business process. Therefore, their ability to learn ICT applications is limited. Attracting qualified personnel is a challenge for small firms with limited resources. According to the study, software applications that are intuitive and provide user interfaces in vernacular languages would influence greater adoption of ICT solutions. The study also identifies few challenges faced by the national IT service providers catering to the MSME segment such as lack of innovative business models by the ICT firms, high cost of sales in servicing MSMEs, high piracy rate, and diverse needs of MSMEs. Extensive customization before deployment would involve changes into the significant business process of the firm which increases costs for both MSME as well as service provider. Broadband connectivity and reliable power are two major infrastructure challenges in the adoption of ICT solutions (NMCC & NASSCOMM, 2010). Cost effective ICT solutions would play a major role in the transformation of MSMEs and make them productive and competitive. Government of India is taking initiatives to provide cloud based IT services to allow MSMEs to use ICT solutions on pay-per-use mode. The barriers to adoption can be overcome through policy interventions by the Government and develop an ecosystem conducive for small firms to adopt ICT effectively.

2.6

Summary
In spite of small scale sector being the growth engine of Indian

economy, it faces several challenges in the globalized era. Government of Indias focus in the recent past has been enhancing competitiveness of the sector. The policies and initiatives undertaken by the Government of India have been discussed in this chapter. Past research shows that ICT adoption
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among small firms has been very low among Indian firms. The barriers to ICT adoption among small firms in India has been discussed to provide a backdrop for the study. Cost effective solutions provided through pay-per-use model would be suitable for MSMEs.

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