SUBMITTED BY: ROHIT KAPOOR VIBHOR AGARWAL VARUN TANDON TUHINA KAKKAR AHMAD NADEEM

MSME: An MSME (Micro, Small and Medium Enterprise) is defined by RBI/GOI differently f or 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 a nd machinery [original cost excluding land and building] and the items specified by the Ministry of Small Scale Industries. SERVICES SECTOR: Services sector refers to enterprises engaged in providing or r endering of services. These will include small road & water transport operators (owning a fleet of vehicles not exceeding ten vehicles), small business (whose o riginal cost price of the equipment used for the purpose of business does not ex ceed Rs.20 lakh) and professional & self-employed persons (whose borrowing limit s do not exceed Rs.10 lakh of which not more than Rs.2 lakh should be for workin g capital requirements except in case of professionally qualified medical practi tioners setting up of practice in semi-urban and rural areas, the borrowing limi ts should not exceed Rs.15 lakh with a sub-ceiling of Rs.3 lakh for working capi tal requirements). The definition of Micro, Small and Medium Enterprises under t he services sector is based on the enterprises investment in equipments. The President under Notification dated 9th May 2007 has amended the Government o f India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Minist ry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, namely, MINISTRY OF MICRO, SMALL AND MEDIUM INDUS TRIES.

IMPORTANCE AND CONTRIBUTION: MSMEs have an important role to play in the present context given their greater resource use efficiency, capacity for employment generation, technological innov ation, promoting inter-sectorial linkages, raising exports and developing entrep reneurial skills. Their location flexibility is an important advantage in reduci ng regional imbalances. Small and Medium Enterprises play a vital role for the g rowth of Indian economy by contributing 45% of the industrial output, 40% of exp orts, 59 million in employment in over 26 million units, create one million jobs every year and produces more than 6000 quality products for the Indian and inte rnational markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors. PRODUCTS: The Indian mark et is growing rapidly and Indian industry is making remarkable progress in vario us Industries like Manufacturing, Precision Engineering, Food Processing, Pharma ceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are fi nding increasing opportunities to enhance their business activities in core sect ors. INVESTMENTMENTS AND EXPORTS: As the investments in the agriculture and industria l sector have seen a growing trend so the investments in MSME have also been inc reasing and reached Rs. 621753 Crore in FY ending 2009 showing a 11.39 percent i ncrease. As MSME largely relates to the manufacturing and agriculture it plays a very important role in exports of the country. MSMEs have been showing a growing trend in the amount of exports made. In year 2008 the amount of exports made wa s Rs. 202017 crore showing a growth of 10.67 percent.

EMPLOYMENT: As per the 4th census with respect to year 2006-2007, there were abo ut 261 lakh enterprises providing employment to 595 lakh people. The projected c orresponding figure for year 2008-09 was 285 lakh enterprises providing employme nt to 659 lakh people. The following chart depicts the trends of employment show n by MSMEs. The contribution made my MSMEs show the importance of such enterprise for the eco nomy. The following points can be derived:

MSMEs play a major role in the countrys economic development through their cont ribution in the following: rural industrialization; rural development and decent ralization of industries; creation of employment opportunities and more equitabl e income distribution; use of indigenous resources; earning of foreign exchange (forex) resources; creation of backward and forward linkages with existing indus tries; and entrepreneurial development. They are vital in dispersing new industr ies to the countryside and stimulating gainful employment. A country like the In dia where labor is abundant has much to gain from entrepreneurial activities. MS MEs are more likely to be labor-intensive. Thus, they generate jobs in the local ity where they are situated. In this sense, they bring about a more balanced eco nomic growth and equity in income distribution. MSMEs are quick in assimilating new design trends, developing contemporary products, and bringing them to the ma rketplace ahead of the competition. MSMEs tend to be far more innovative in deve loping indigenous or appropriate technology, which may be grown later into pione ering technological breakthroughs. They are able to effectively increase the loc al content or the value added in final goods that are processed and marketed by large manufacturing firms. MSMEs are notably skillful in maximizing the use of s carce capital resources and are able to partner with large firms by supplying lo cally available raw materials in unprocessed or semiprocessed forms. Also, MSMEs can act as the seedbed for the development of entrepreneurial skills and innova tion. They play an important part in the provision of services in the community. They can make an important contribution to regional development programs.

STRENGTHS AND WEAKNESS: MSME possess various strengths and weaknesses give below. STRENGTHS: The MSME se ctor is often driven by individual creativity. A major strength of the sector is its potential for greater innovation both in terms of products and processes. A n inherent strength of the sector is that these enterprises can be set up with v ery small amounts of investments and have the locational flexibility to be locat ed anywhere in the country. Their employment potential is higher compared to lar ge enterprises and are presently estimated to employ 6 crore persons. They are a menable to ancilliarisation and thus have natural linkages with large enterprise s. There exists a strong institutional structure at the State and Central level for the promotion and development of the sector. There is a well-spread network at the National, State and the local level for providing a comprehensive range o f support services under marketing, technology, finance, and infrastructure and skill development. The existing schemes/programs of the Central and State Govern ments span across major areas of operations of MSMEs. These are administered by a workforce who are qualified but can be upgraded with additional inputs. An ape x consultative body has been set up at the national level, namely, National Boar d for MSMEs, comprising of representatives of all sections of stakeholders for p roviding guidance/inputs in policy formulation and program implementation. WEAKN ESSES: . Of the 2.6 crore enterprises, a predominant number is in the unorganize d sector, often located in non-conforming urban zones. The sector is heterogeneo us with pockets of high technology enterprises but majority suffering from low t echnology base resulting in low productivity and poor quality of products. The u nits being small in size also have poor access to equity and credit. Most of the time, the equity is coming from savings and loans from friends and relatives ra ther than through banking systems. Very often, the credit is coming from operati ons or domestic savings rather than established systems of cheap banking credit for working capital. This problem is particularly acute for the village industri es as well as the lower end of micro industries. While we have large pool of hum an resources, this sector continues to face shortage of skilled manpower due to lack of paying capacity and poor managerial capabilities. Another major weakness is absence of marketing channels and brand building capacity. The present struc ture also suffers from poor delivery of services at the field level. The schemes and program have limited outreach with a large number of very small schemes. Th ere is a lack of coordination among the various organizations involved in the pr omotion of MSMEs, including organizations of the State/UT Governments and poor l inkages with the institutional stakeholders in the private sector. Absence of a suitable exit mechanism is a major constraint for the higher end entrepreneurs o f the MSME sector. A major weakness is a heritage weakness. Due to the protectio nist, subsidydriven, reservation based regime, the mindset of the sector continu es to demand similar legacy treatments.

CHALLENGES: Despite its commendable contribution to the Nations economy, SME Sector does no t get the required support from the concerned Government Departments, Banks, Fin ancial Institutions and Corporate, which is a handicap in becoming more competit ive in the National and International Markets. The MSMEs face problems at every stage of their operation. These industries are therefore not in a position to se cure the internal and external economies of scale. The major problems confrontin g the sector have been identified as:

ABSENCE OF ADEQUATE AND TIMELY BANKING FINANCE: All kinds of business enterprises require sufficient funds in order to meet thei r fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro, small and medium enterprises. Th ey need credit support not only for running the enterprise and operational requi rements but also for diversification, modernization/upgradation of facilities, c apacity expansion, etc. Inadequate access to credit is a major problem facing mi cro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owners own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate finan cial resources for the purchase of machinery, equipment and raw materials as wel l as for meeting day-to-day expenses. This is because, on account of their low g oodwill and little fixed investment, they find it difficult to borrow at reasona ble interest rates. As a result, they have to depend largely on internal resourc es.

NON AVAILABILITY OF HIGHLY SKILLED LABOR AT AFFORDABLE COST: There is lack of trained and experienced employees because small firms cannot pa y high salaries and cannot spend much on training their employees. Small scale f irms find it difficult to recruit and motivate skilled managerial and technical personnel as they look for better opportunities in the large scale industries. T herefore, they get the second rate talent or have to depend on family members wh o do not have diversified skills.

INEFFECTIVE MARKETING STRATEGY: Small scale units have to face several difficulties in the marketing and distrib ution of their products. Most of them do not have their own marketing network. T hey find it difficult to sell their output at remunerative prices due to higher cost of production and non-standardized quality of products. They cannot afford to spend much on advertising, sales, promotion, marketing research, etc. They ha ve to sell their products at throwaway prices due to weak bargaining power and i mmediate need for money. They also face stiff competition from large firms.

NON-AVAILABILITY OF SUITABLE TECHNOLOGY: Majority of the small scale units use old techniques of production and outdated machinery and equipment. Upgradation of the technology and achieving economies o f scale is one of the major problems facing the sector. They cannot afford new m achines and equipment and are therefore not in a position to use the latest tech niques of production. With liberalization of the economy, the MSMEs are facing s tiff competition from imports and need technological upgradation in order to pro duce better quality products at cheap rates.

SHORTAGE OF RAW MATERIALS: Non-availability of quality raw materials on a timely basis in an adequate quant ity is one of the main problems faced by MSMEs. There is acute shortage of even the basic raw materials required by small scale units. These units are handicap in obtaining raw materials of requisite quality and quantity at reasonable price s. They do not get the benefits of bulk buying. For instance, the handloom indus try is facing shortage of yarn. Small scale industries also face shortage of pow er due to which they are unable to make full utilization of plant capacity. Majo rity of them cannot afford to install their own power generating plants to ensur e uninterrupted operations. There can be many more similar issues hindering the orderly growth of the MSME s ector such as: Limited capital and knowledge Low production capacity Identificat ion of new markets Constraints on modernization & expansions Follow-up with vari ous government agencies to resolve problems Delayed Payments Lack of Appropriate Infrastructure All these problems have been hindering the fast growth of these enterprises in all parts of the country which can be made clear with the help of the following diagram.

FUTURE OF MSMEs: Even though MSMEs face various challenges but still they have been showing a gro wing. Due to this government has also been taking various measures to secure a b right future for these enterprises. The sector is expected to show: Increase in Production Increase in Turnover Increase in Exports and Profitability Increase i n Number of Enterprises Various measures are also taken on state level to improv e the working. Example of Gujrat and Orissa can be seen who have set up various action plans and targets for this sector. Various changes at different functiona l areas are also expected to be seen. FINANCE: It has been proposed to set up an SME exchange for easy finance. The capital gains tax exemption to be extended t o those reinvesting their wealth in MSMEs. Also introduction of credit guarantee scheme is being proposed to provide loan without collateral to SMEs. INFRASTRUC UTRE: In terms of infrastructure the MSMEs have been growing due to the benefits provided by states. The MSME cluster has been doing a god job in this context. But improvements are required at private level as not these many benefits are pr ovided by government to these enterprises. MARKETING AND SKILL DEVELOPMENT: Mark eting and skill development is a key concern for the future. Marketing will see use of information technology and effective advertising to promote SMEs. Various skill development programs are run by governments but still better infrastructu re is required here. Thus the future of MSMEs is of major policy concern given t heir strategic importance in any discussion of reshaping the industrial sector. This is more so in case of India, which has one of the longest histories of gove rnment support to the sector since independence compared to most developing coun tries. Higher investments for innovative and knowledge based ventures as well as for research and development through greater partnership between the industry a nd academic institutions is required. The ongoing exercise to introduce a new Di rect Tax Code and GST should specifically seek to achieve these policy objective s through appropriate provisions for graded corporate tax structure, tax pass th rough for angel and venture capital funds and incentives for R & D. Support shou ld be extended to new formats like Limited Liability Partnerships and Single Per son Companies, which provide MSMEs with an interim solution in the move from the informal to the formal economy. All these measure and the steps already taken a re a step towards building the MSME sector which is called as the sector of futu re by banks. The importance of this sector in India can be easily testified by t he strong focus on MSMEs during recent visit by president Obama to India.

STRATEGIES FOR MSMEs: The strengths and weaknesses provide learning for the future strategy. Thus the learning agenda is at several levels. It would be in the creation of insular lay ers to protect the MSME from the vagaries of global/financial markets and misuse of WTO/TRIPS regimes. There is also need to learn from best of the breed intern ational practices both in technology and marketing. On another level, creation a nd professionalization of efficient organizational systems even at the lowest le vel and promoting innovations at grass root level, knowing full well that the su ccess of some of them is only an enigma in futuris. Various strategies implement ed are: At a macro level there is need for a strategy for a horizontal geographi cal spread of the various outreach programs for balanced growth. On the other ha nd, there is also a need to emphasize the inclusive nature of any strategy to ta rget women entrepreneurs and other weaker sections of the society. It is only by such horizontal and vertical inclusiveness that we can attain the objectives of this mission with equity. The potential strategies would mainly rest on five pi llars, as it were, concurrently. They are (not in order of priority): o Skill de velopment o Markets o Technology o Infrastructure o Credit availability There ar e individual analyses and proposed actions which are listed below including new knowledge driven initiatives and actions which can leverage our strength and low er the susceptibility of the MSME to external threats. The Ministry would focus on its efforts for giving financial assistance for Entrepreneurship Development Training Programs (EDPs), Skill Development Training Programs (SDPs), Entreprene urship-cum-Skill Development Training Programs (ESDPs) and Training of Trainers Programs. Centre for Excellence would be set up at national level for standardiz ation of training curriculum, training of trainers etc. Financial assistance to States/UTs for their efforts to set up Entrepreneurship Development Institutes w ould be enhanced with more focus on Naxalite affected areas, hilly areas of Jamm u & Kashmir, Himachal Pradesh and Uttarakhand, North Eastern Region and difficul t areas e.g. Andaman & Nicobar group of Islands, Lakshadweep group of Islands, e tc. MSME Development Institutes would be converted into autonomous organizations to provide handholding and advisory services to the MSME. All training institut ions of Ministry of MSME would be brought under single umbrella, in terms of sta ndardized syllabi, updated course content and market sensitive training. Dependi ng upon the individual strength, the national level institutions would endeavor to develop into separate Centers of Excellence in their chosen areas. Study woul d be conducted to see the impact of Assistance to Training Institutions Scheme of the Ministry and the efficiency of private/Government Partner Institutions empan elled by national level Institutions. Database of the trained persons would be c reated and linked to Job Exchange to give the benefit of training to the trainee s and the industry. Industry would be enabled to access the database of trained manpower.

The employment generation is another area where MSMEs play a pivotal role. The M inistry of MSME would take initiatives for improving the performance under Prime Ministers Employment Generation Program (PMEGP) through implementing IT-enabled application tracking system and related data collection. A special effort would be made by creating a webportal as one-stop shop for multitude of products of PM EGP units to facilitate buyer-seller interaction. E-Commerce has emerged as a po werful tool world over for reaching out to buyers in business as well as consume rs worldwide. Territories/borders have been obliterated with the advent of this new technology. For giving better access to MSME sector to the market, Ministry has already promoted a Business-to-Business (B2B) Portal in NSIC. Now the endeav or would be to have a robust and inclusive, best of the breed, Business-to-Consu mer (B2C) Portal in addition to the above. The challenge would be to create a lo gistics supply chain and standardization of the products to service the customer s. The National Small Industries Corporation Ltd. (NSIC) would be strengthened b y providing more equity support for their efforts to create market for products of MSMEs. KVIC would be strengthened to provide market to village industries. Th e schemes of the Ministry to provide financial assistance to MSMEs for participa tion in domestic and international exhibitions/ trade fairs would continue in th e XII Plan also with more outlay. A policy has been formulated, awaiting Cabinet approval, to ensure that 20% of the procurement by the different Ministries/PSU s is made from MSME sector mandatorily. Challenge here would be to upscale the t echnical capabilities of MSMEs to meet quality standards and delivery schedules. Ministry is also implementing Credit Linked Capital Subsidy Scheme for Technolo gy Upgradation with the aim to facilitating Technology Upgradation of Micro and Small Enterprises by providing 15% capital subsidy on institutional finance avai led by them for induction of well-established and improved technology in approve d sub-sectors/products. The critical factor that drives growth in MSME sector is technology. In the present economic scenario of globalised competitiveness, it is the technological edge that will determine the winners. In view of this reali ty, the Ministry of MSME is initiating a number of programmes and schemes for te chnology development of the sector. It has recently introduced 10 innovative sch emes under the National Manufacturing Competitiveness Programme (NMCP) covering entire gamut of manufacturing in the sector aiming to develop global competitive ness among Indian MSMEs. These ten schemes are: o o o o o o o o o o o o Marketin g Support/Assistance to MSMEs (Bar Code) Support for Entrepreneurial and Manager ial Development of SMEs through Incubators Enabling Manufacturing Sector to be c ompetitive through Quality Management Standard & Quality Technology Tools (QMS/Q TT) Building Awareness on Intellectual Property Rights (IPR) for MSME Lean Manuf acturing Competitiveness Scheme for MSMEs Mini Tool Rooms (MTR) Design Clinic Sc heme for design expertise to MSMEs Manufacturing sector (DESIGN) Marketing Assis tance & Technology Upgradation Scheme in MSMEs Technology and Quality Upgradatio n Support to MSMEs Promotion of ICT in MSME Manufacturing Sector (ICT)

The cluster development approach can make the industry more competitive. This is the tool to enable them to take on the onslaught of competitive marketing strat egy of large scale sector as well as multinationals. The Cluster Development Sch eme of the Ministry of MSME addresses all the sectors of MSE clusters across the country. The awareness about the scheme would be increased among various stakeh olders including State Governments. More clusters will be undertaken for soft an d hard interventions including diagnostic study, infrastructure development and Common Facility Centre projects. All of these above strategies have been proposed and some of them have been appl ied by the government. The success of these strategies will be measured on the b asis of the parameters laid down for each scheme and their concurrent evaluation . Implementation will be measured through a robust MIS and grievance redressal m echanism.

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