MSMEs-PRESENT POLICY FRAMEWORK AND FOCUS

AREAS

In a nation’s economy it’s the micro small and medium enterprises that
play a pivotal role in the overall industrial development of the country.
They have been the significant contributor to the national income through
industrial production and exports. It is a well known fact that after
agriculture, the MSMEs provide maximum opportunities for self
employment and jobs. They not only provide employment opportunities to
millions of unskilled and semiskilled people across the country, mainly
village artisans and rural people, but also support large enterprises by
supplying raw materials, components, finished parts etc. They also help in
building entrepreneurial base in the country by developing and nurturing
talents and skills of small and medium scale entrepreneurs. They check
the problem of economic concentration in the hands of few. The labour
intensity in MSME sector is considerably high, almost four times, as
compared to larger enterprises. Thus, the MSME sector has been given a
priority sector status by both central and state governments.

The following statistics reveal the contribution of this sector. This statistics
is based on the third all-India census conducted during 2001-2002, when
the old definition was in vogue. The statistics related to new definition is
based on unofficial sources.

Old definition New definition

Number of micro and small enterprises 12.8 million 13 million

Employment 31.0 million 41.0 million

Production (at current prices) $ 140 billion N.A

Exports $ 33 billion• N.A

Share in GDP 6% 8-9 %

Share in manufacturing output 39 % 45 %

Share in exports 33 % 40 %

•Exchange rate used for conversion- Rs. 40 = 1 US dollar (Source- Ministry

of micro, small and medium enterprise, Third All-India census)

Recognizing the contribution and scope of this sector the definition and
coverage of MSE sector were significantly broadened under micro, small
and medium enterprises development (MSMED) act, 2006. It gave
recognition to the concept of ‘enterprise’, replacing the term industries, to
include both manufacturing and service sectors. With the passing of this
act various components of this sector got a clear cut definition. Micro
 enterprises which were earlier known as tiny enterprises got a formal
definition for the first time. For the first time, medium enterprises got
official recognition and definition. The investment ceiling of medium
enterprises in plant and machinery was also raised to Rs. 5 crore as
against Rs. 1 crore earlier.

In accordance with the provisions of MSMED act, 2006 the micro small and
medium enterprises can be classified into manufacturing enterprises and
service enterprises. The manufacturing enterprises are defined in terms of
investment in plant and machinery while the service enterprises are
defined in terms of investment in equipments. Any enterprise that is
engaged in manufacture or production of goods pertaining to any industry
specified in first schedule of industries (development and regulation) act,
1951 comes under manufacturing enterprises where as any enterprise
engaged in providing and rendering services comes under service
enterprises. Both categories of enterprises are further classified as micro,
small and medium enterprises.

Type of Manufacturing Services

enterprise

Investment in plant and Investment in

machinery equipment

Micro Does not exceed 25 lakh rupees Does not exceed 10 lakh
rupees

Small More than 25 lakh rupees but does More than 10 lakh rupees but
not exceed 5 crore rupees. does not exceed 2 crore
rupees.

Medium More than 5 crore rupees but does More than 2 crore rupees but
not exceed 10 crore rupees. does not exceed 5 crore
rupees.

To capture the data of MSME sector, the fourth all-India census of MSMEs
for the reference year 2006-2007 is being conducted in the country. It was
launched in May 2008 and its field work was completed in March 2009.
This will be the first database after the enactment of MSMED act, 2006.
The quick estimates of the fourth census (2006-2007) are as follows.

No. Of MSMEs 26.1 million

No. Of Manufacturing enterprises 7.3 million

No. of service enterprises 18.8.million

No. of women enterprises 2.1 million (8%)

No. Of rural enterprises 14.2 million (54.4 %)

Employment 59.7 million

Per unit employment 6.24

Per unit fixed investment Rs. 33.78 lakh

Per unit original value of plant and Rs. 9.66 lakh

machinery

Per unit gross output Rs. 46.13 lakh

Employment per one lakh fixed 0.19

investment
(Source- Ministry of micro, small and medium enterprise,
Fourth All-India census)

In India the MSMEs manufacture more than 6000 types of products

ranging from traditional to hi-tech items. Reservation of Items for small
scale sector has always been an important feature of industrial policy. As
a result of favourable balance of payment India was under obligation to
remove quantitative restrictions by 1st April 2001. After the quantitative
restrictions were removed the government adopted a policy of de-
reservation. For the last twenty years the de-reservation has been a topic
of debate within the government. The approach to eleventh five year plan
recommends progressive de-reservation of items to facilitate further
investments for technological up gradation and higher productivity in
micro and small enterprises. About 654 items have been removed off from
the list of reserved items for exclusive manufacturing by micro and small
enterprises in the last few years thus

(Source- Ministry of micro, small and

medium enterprises)

reducing it to 21 at present. Bread, wooden furniture, steel chair, pickles,

safety matches, stainless steel utensils, aluminium utensils etc. are in the
list of reserved items. Non-MSEs can also produce these reserved items as
long as they export 50 % of additional production within maximum three
years and will also have to obtain the industrial licence. Press note-6 has
clarified that all the non- MSEs producing reserved items will have to take
prior approval of the foreign investment promotion board before raising
the FDI above 24 %. This de-reservation has paved the way for larger
enterprises for manufacture of these products in keeping with the global
standards.
A press note 18 issued in the year 1997 had capped foreign investments
in small scale industries at 24 %. The MSMED act 2006, which was cleared
by UPA govt. during its first innings expanded the definition of small units
but was silent on the FDI so, the cap of 24% FDI continued. This meant
that a micro unit the capex of which cannot exceed Rs 25 lakh could get a
meagre $13,000 in FDI, and a small-scale unit with a maximum capex of
Rs 5 crore could gather just about $0.4 million in FDI. Because of this,
Indian MSEs were not able to attract foreign investors and left starved of
capital and technological know-how. Recently, a fresh press note-6 has
been issued by Department of Industrial Policy and Promotion (DIPP). The
present policy on FDI in MSEs permits FDI subject only to the sectoral
equity caps, entry routes and other relevant regulations. The press note
18 stands modified by press note 6, which allows FDI in MSEs as per
sectoral equity caps and other sectoral regulations. This modification will
be able to double the credit flow in the small scale sector over the next
five years and will be able to attract more investments from large
corporates and foreign investors as the clubbing of FDI rules and the
definition is made redundant. This act can also be seen as an effort to
bring the economy back on growth trajectory which cannot be done
without the healthy growth of MSME sector.

The Eleventh Five Year Plan document rightly recognises this sector as
one that needs infrastructure, credit and policy support yet in successive
Five Year Plans, this sector has not received its due. MSMEs still continue
to face problems in their operations. Inadequate infrastructural and credit
facilities are the major problems. MSMEs are often unable to procure
adequate financial resources for the purchase of machinery, equipment
and raw materials. They find it difficult to sell their output at remunerative
prices and cannot spend much on advertising, marketing research, etc.
They also face tough competition from large firms. There is lack of trained
managerial and technical personnel as they cannot afford to pay higher
salaries to employees and cannot spend much on training. MSMEs are still
reluctant to adopt new technologies and methods of management. The
primary responsibility for promotion and development of MSMEs is in the
hands of the concerned State and Union Territory Governments. But, the
Central Government has always shown its interest in supplementing the
efforts of State/UT Governments through its various regulations. The
Ministry of micro, small and medium enterprises (formed after the merger
of Ministry of Agro and Rural Industries (Krishi Evam Gramin Udyog
Mantralaya) and Ministry of Small Scale Industries (Laghu Udyog
Mantralaya)) is the main central authority in India which assists the
States/UTs in their efforts to promote growth and development of MSMEs.
It has been implementing several schemes/programmes and policies so as
to enhance the global competitiveness of the MSMEs.

Finance is one of the critical inputs for growth and development of the
micro, small and medium enterprises. They need credit support not only
for running the enterprise and operational requirements but also for
diversification, up gradation of facilities, capacity expansion, etc.
Inadequate access to credit is a major problem facing micro, small and
medium enterprises. Generally, such enterprises have a tight budget.
Whenever a difficult situation like rejection of consignment, inordinate
delay in payments etc. comes the problem of credit becomes serious.
Sometimes they have to close their operations due to shortage of funds.
Provision of finance to this sector is a part of the priority sector lending
policy of the banks. For the public and private sector banks 40% of the net
bank credit is embarked for the priority sector and for the foreign banks it
is 32 %, of which 10 % is earmarked for the small scale sector. A study by
a small business and solution firm Milagrow says that MSMEs must have at
least 20% quota out of the total 40% quota of priority sector lending
because MSMEs contribute about 40 % of the total industrial output.
MSMEs have now started to move to more specialized financial services
and options. The more advanced MSMEs have now started to realize the
importance of these alternative sources of funding. In the CII
(confederation of Indian industries) 10-point agenda a lot of stress has
been given on the need for an SME Exchange, to create an effective
markets for raising of equity funds by the SME sector located in remote
parts of the country, especially by those which are excellent in
performance, but need infusion of fresh capital (mainly in the range of Rs.
4-40 crore and upwards) for expansion of business. Also, the new Limited
Liability Partnership (LLP) Bill passed recently by Parliament will prove
very handy for MSMEs in protecting them against market risks.
Out of several problems faced by SMEs, one is the absence of adequate
marketing facilities. They lack in expertise, knowledge and experience of
various marketing concepts and strategies and thus are unable to face the
stiff competition posed by larger firms in terms of cost, quality, promotion
etc. They find it difficult to sell their output at remunerative prices
because of higher cost of production and non-standardised quality of
products. 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 issue of Tender
Sets free of cost, exemption from payment of Earnest Money Deposit,
waiver of Security Deposit up to the Monetary Limit for which the unit is
registered; and price preference up to 15% over the quotation of large-
scale units. There are about 358 items that have been reserved for
exclusive purchase from the MSE Sector. However, as these guidelines are
not of a mandatory nature, the same has failed to achieve the desired
results. It is to be noted that the US procurement targets ranges from 20%
to 30%, whereas in the EU and Japan it is 5-7%. In India, the public
procurement is less than 1%. As promised through the MSMED Act, there
is a need to set-aside 20% of all public procurement for micro and small
enterprises. To assist the MSEs in marketing of their products, Section 12
of the new MSMED Act enjoins the formulation of a scheme of preferential
procurement of goods/services produced/rendered by MSEs both at the
Central and State/UT levels. Once formulated, the procurement scheme
may be more effective in providing the much-needed marketing support
that MSEs seek so desperately. Each Ministry/Department, CPSU, etc.,
would have to make specific mention of the compliance of the preference
policy in its Annual Report to be tabled in Parliament.
MSME sector accounts for about 40 % of the exports in India. There has
been a prominent growth in the exports of both traditional and non
traditional goods. About 95 % of the total goods exported by SSIs are non
traditional goods. The bulk of the share of items exported by SSIs are
garments, engineering goods, chemicals, pharmaceuticals, leather, plastic
products, processed food, gems and jewellery. Potential export
destinations for products of SMEs are the USA, EU and Japan. It has been
identified that the US could provide a market for textiles, leather item,
electrical and electronic items. Japan is a potential market for exporting
chemicals, agricultural, marine and allied products. The European Union
can be a target for enhancing SSI exports of engineering, electrical,
textiles, and electronic items. But, there is still lot of problems in
exporting the products by small and medium entrepreneurs to other
countries. They are not very familiar with the formalities and steps
involved in exporting goods like registration of exporters, selection of
export market and buyers, receipt of enquiries, letter of intent, letter of
credit, bill of lading, insurance coverage, obtaining shipping order,
certificate of origin; sending documents to importers etc. Export
promotion from the MSE sector has been given a high priority. To help
MSEs in exporting their products, the facilities being provided are,
Products of MSE exporters are displayed in international exhibitions and
the expenditure incurred is reimbursed by the Government, 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, 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 etc.
Majority of the small scale units use old techniques of production and
outdated machinery and equipment. With liberalization of the economy,
the MSMEs are facing stiff competition from imports and need
technological up gradation in order to produce better quality products at
cheap rates. As far as sourcing technology is concerned, small businesses
face the following three essential problems. Obtaining information about
technology is the first important issue; actual procurement of the
technology is the next important issue because even if information is
obtained, there are barriers to import of technology and other problems
relating to technology transfer, acquiring finance for technology up
gradation is also a problem. With a view to speed up the growth of MSME
sector in the country, government has taken up several initiatives. ISO
9000/14001 Certification Fee Reimbursement Scheme was introduced in
order to incentivise technological up gradation, quality improvement and
better environment management by the MSEs. The scheme reimburses
75% of the fees, subject to a maximum of Rs.75, 000, for acquiring Quality
Management System (QMS)/ISO 9000 certification and/or Environment
Management System (EMS)/ISO 14001 certification by the MSEs. National
manufacturing competitiveness program (NMCP) has been launched by
the government in order to help MSMEs improve their competitiveness.
The schemes under this Programme are aimed at technology and quality
up gradation needs of the sector, mainly in the public-private partnership
mode. Government has also set up ten state-of-the-art Tool Rooms and
Training Centres. These Tool Rooms provide invaluable service to the
Indian industry by way of precision tooling and providing well trained
craftsmen in the area of tool and die making. The Tool Rooms are not only
equipped with the best technology but are also abreast with the latest
advancements like CAD/CAM, CNC machining for tooling, Vacuum Heat
Treatment, Rapid Prototyping, etc.
In the CII’s ten point agenda emphasis is given on climate friendly energy
technologies to enhance the self reliance on energy. A need is felt to
create Central Climate Friendly Technology Fund to help MSMEs to adopt
technologies, such as Wind Energy turbines & systems, Hydro energy
turbines & systems, solar photovoltaic and thermal systems and Geo-
thermal energy system.
For the overall development of every sector of the economy, adequate
infrastructure facilities are necessary. In the wake of liberalisation and
globalisation, its presence and importance for the proper growth of small
and medium enterprises cannot be underestimated. For setting up of
industrial estates and to develop infrastructure facilities like power
distribution network, water, telecommunication, drainage and pollution
control facilities, roads, banks, raw materials, storage and marketing
outlets, common service facilities and technological back up services, etc.,
for MSMEs, the Integrated Infrastructural Development (IID) Scheme was
launched in 1994. The scheme covers both, rural as well as urban areas
with a provision of 50 percent reservation for rural areas and 50 per cent
industrial plots are to be reserved for the micro enterprises. The Scheme
also has provision for up gradation of the infrastructural facilities in the
existing industrial estates. The estimated cost (excluding cost of land) to
set up an IID Centre is Rs.5 crore. Central Government provides 40 per
cent in case of general States and upto 80% for North East Region, J&K,
H.P. and Uttarakhand, as grant and remaining amount could be loan from
SIDBI,Banks,Financial Institutions or the State Funds. The IID Scheme has
been subsumed under the Micro and Small Enterprise Cluster
Development Programme (MSECDP). All the features of the IID Scheme
have been retained and will be covered as “New Clusters” under MSECDP.
The government has taken several measures to solve the problems faced
by micro, small and medium enterprises and enable them to play an
effective role in the country's economy. There are Protective Measures to
protect small scale industries from the competition of large firms,
promotional measures to promote the growth of the small scale sector,
institutional measures in the form of setting up of several institutions or
agencies to provide assistance to small scale industries. In a recent
development, after MSME Associations raised issues facing the sector in
August 2009, The Prime minister had set up a Task Force of 11 members
headed by his Principal Secretary, with Member Planning Commission,
Finance Secretary, Secretary MSME, Secretary Labour, Deputy Governor
RBI, CMD SIDBI, and Development Commissioner MSME, and five
representatives of MSME Associations as Members. The Task Force
addresses the issues raised by MSME bodies, including stepping up credit,
simplifying laws for conducting company affairs, skill up gradation, and
infrastructure improvement. The MSME associations include Association of
Lady Entrepreneurs of Andhra Pradesh, Indian Industries Association,
Federation of Tiny & Small Industries of India, Federation of Industries and
Commerce of North Eastern Region, and Industrial and Financial
Reconstruction Association for Small and Tiny Enterprises. The Task Force
has set up seven sub-groups in the areas of credit, marketing, labour
relations, Insolvency and Exit Policy, taxation issues, infrastructure
including technology and skill development and special issues of NE/J&K.
The seven sub-groups have just submitted the report and soon the
government may announce more packages and schemes for the MSME
sector.