A study of SMEs contribution towards GDP and Exports

(Suggestions for improvement)

Partial fulfillment of the Requirements for the Award of

Post Graduate Diploma in Management
(Recognized by AICTE, Ministry of HRD, Govt. of India)

By
Bhabagrahi Sahoo
PG-13-008
Batch 2013-15

Under the guidance of

Prof. Mohit Dhawan
Asst. Dean PGDM
INMANTEC, Ghaziabad

Integrated Academy of Management and Technology

Ghaziabad

ACKNOWLEDGEMENT

I would like to thank my institution guide

Professor Mohit Dhawan (program coordinator) for their
constructive discussion, advice and encouragement that enabled
me to carry out this program to its rightful conclusion.

S No.

Contents

Executive Summary
1. Introduction
1.1 Purpose of the Study
1.2 Industry Overview
1.2.1 MSME
2. Literature Review
3. Research Objective
4. Research Methodology
4.1 Research Design
4.2 Data Requirement
4.3 Data Collection Method and Instrument
4.5 Data Analysis and Techniques
4.5 Limitations of the Study
5. Data Analysis and Interpretation
6. Findings of the Study
7. Recommendations
8. Conclusions
9. References

EXECUTIVE SUMMARY

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The MSMEs are known as the Backbone of India after the agriculture sector. In the
current era the MSMEs are contributing about 22 percent to the nations GDP and
about 40 percent to the total exports.
The whole project is based on the secondary data collected from the annual report
of MSMEs of different years. There is very good development in the sector of
MSMEs which is possible with their self improvement and with the help of
Financial and Government.
There are many weaknesses in this sector which are creating hurdles in correct
growth of development. In every Five Year Plan government makes plans to make
the development in this sector.

1. INTRODUCTION

Indian economy has been witnessing economic deregulation in many ways since
1991. The policy makers implement the liberalization policies in all the sphere of
the economy despite strident criticism from every nook and corner of the country.
The very purpose of the loosening the economic policy is to achieve the targeted
economic growth and to cope up with the global economic needs. Employment
generation is top among the important aims. No economy can economically
sustainable until and unless it generates adequate employment opportunities to its
people. India like developing countries are concerned employment is crucial
problem which hinder the economic growth of the country. SMEs plays an
inevitable role in growth both in developing countries as well as developed
countries as SMEs have been the important source of employment generation,
output growth. In India, role of SMEs have become very crucial as SMEs have
potential to balanced distribution of income, reduction of poverty, generation of
employment and growth in export, development of entrepreneurship, development
of industry and rural economy. With over 44 million units SMEs contributes
around 9% GDP, 45% of manufacturing output, 40% of the export of the country,
SME units estimated to employ about 101million people.

SMEs help the countries having low level investment by contributing to socioeconomic benefits. SMEs had to face many challenges as well as they have got
many opportunities due to the globalization of the country. SMEs faced problems
such as lack of management efficiency, poor skill of employees, poor marketing
strategy, lack of R & D and innovative technology. Other problems faced by the
SMEs were lack of finance. There were lack of corporate governance and legal &
regulatory frameworks are also hindering the growth of SMEs.

BACKGROUND
Micro, Small and Medium Enterprises (MSME) sector has emerged
as a highly vibrant and dynamic sector of the Indian economy

over the last five decades. 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 socioeconomic
development of the country.
Khadi is the proud legacy of our national freedom movement and
the father of the nation. Khadi and Village Industries (KVI) are two
national heritages of India. One of the most significant aspects of
KVI in Indian economy is that it creates employment at a very low
per capita investment. The KVI Sector not only serves the basic
needs of processed goods of the vast rural sector of the country,
but also provides sustainable employment to rural artisans. KVI
today represent an exquisite, heritage product, which is ethnic
as well as ethical. The Sector has a potentially strong clientele
among the middle and upper echelons of the society.
Coir Industry is an agro-based traditional industry, which
originated in the state of Kerala and proliferated to the other
coconut producing states like Tamil Nadu, Karnataka, Andhra
Pradesh, Odisha, West Bengal, Maharashtra, Assam, Tripura, etc.
It is an export oriented industry and has greater potential to
enhance exports by value addition through technological
interventions and diversified products like Coir Geotextiles etc.
The acceptability of Coir products has increased rapidly due to its
environment friendly image.
Ministry of Micro, Small & Medium Enterprises (M/o MSME)
envisions a vibrant MSME sector by promoting growth and
development of the MSME Sector, including Khadi, Village and
Coir
Industries
,
in
cooperation
with
concerned
Ministries/Departments,
State
Governments
and
other

Stakeholders, through providing support to existing enterprises

and encouraging creation of new enterprises.
The Micro, Small and Medium Enterprises Development (MSMED)
Act was notified in 2006 to address policy issues affecting MSMEs
as well as the coverage and investment ceiling of the sector. The
Act seeks to facilitate the development of these enterprises as
also enhance their competitiveness. It provides the first-ever legal
framework for recognition of the concept of enterprise which
comprises both manufacturing and service entities. It defines
medium enterprises for the first time and seeks to integrate the
three tiers of these enterprises, namely, micro, small and
medium. The Act also provides for a statutory consultative
mechanism at the national level with balanced representation of
all sections of stakeholders, particularly the three classes of
enterprises and with a wide range of advisory functions.
Establishment of specific funds for the promotion, development
and enhancing competitiveness of these enterprises, notification
of schemes/ programs for this purpose, progressive credit policies
and practices, preference in Government procurements to
products and services of the micro and small enterprises, more
effective mechanisms for mitigating the problems of delayed
payments to micro and small enterprises and assurance of a
scheme for easing the closure of business by these enterprises,
are some of the other features of the Act. On 9 May 2007,
subsequent to an amendment of the Government of India
(Allocation of Business) Rules, 1961, the erstwhile Ministry of
Small Scale Industries and the Ministry of Agro and Rural
Industries were merged to form the Ministry of Micro, Small and
Medium Enterprises (M/o MSME). This Ministry now designs
policies and promotes/ facilitates programs, projects and schemes
and monitors their implementation with a view to assisting MSMEs
and help them to scale up.

The primary responsibility of promotion and development of

MSMEs is of the State Governments. However, the Government of
India, supplements efforts of the State Governments through
various initiatives. The role of the M/o MSME and its organizations
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. The schemes/programs undertaken by the Ministry and
its organizations seek to facilitate/provide: i) adequate flow of
credit from financial institutions/banks; ii) support for technology
up gradation and modernization; iii) integrated infrastructural
facilities; iv) modern testing facilities and quality certification; v)
access to modern management practices; vi) entrepreneurship
development and skill up gradation through appropriate training
facilities; vii) support for product development, design
intervention and packaging; viii) welfare of artisans and workers;
ix) assistance for better access to domestic and export markets
and x) cluster-wise measures to promote capacity building and
empowerment of the units and their collectives.

1.1 PURPOSE OF THE STUDY:

1.1.1 To examine the growth and performance of SMEs.
1.1.2 To study the contribution of SMEs towards GDP and Exports.
1.1.3 To analyze the problems and suggestions for improvement.

1.2 INDUSTRY OVERVIEW:

1.2.1 MSME
1.2.1.1 Meaning of MSME
The term MSME encompasses a broad spectrum of definition and it varies from
country to country. In India it is classified under Micro, Small, and Medium
Enterprises on the basis of investment. The criteria like number of employees, sales
and investment level are commonly used internationally to define SMEs. In India
MSMEs are defined on the basis of their investment level as per MSME
Development Act 2006. Manufacturing units are classified according to their
investment in plant and machinery and service units are classified based on
investment in equipment.
The table delineates the definition of MSMEs clearly

Description
Micro
Enterprises
Small
Enterprises
Medium
Enterprises

INR(on P & M)
upto Rs. 25 Lakhs
above Rs. 25 Lakhs &
upto Rs. 5 Crores
above Rs. 5 Crores &
upto Rs. 10 Crores

INR(on services)
upto Rs. 10 Lakhs
above Rs. 10 Lakhs &
upto Rs. 2 Crores
above Rs. 2 Crores &
upto Rs. 5 Crores

No. of
employees
upto 9
10 to 49
49 to249

1.2.1.2 SMEs in different sectors of Indian industry:

SMEs have been established in almost all-major sectors in the Indian industry such
as:
1.
2.
3.
4.

Food Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics

5. Electro-medical equipment
6. Textiles and Garments
7. Leather and leather goods
8. Meat products
9. Bio-engineering
10.Sports goods
11.Plastics products
12.Computer Software, etc.

1.2.1.3 Significance of SMES

SMEs are considered the engine of economic growth as they:
1. Provides low cost employment since the unit cost of persons employed is
lower for SMEs than for large sized units.
2. Assists in regional and local development since SMEs accelerate rural
industrialization by linking it with more organized urban sector.
3. Help achieve fair and equitable distribution of wealth by regional dispersion
of economic activities.
4. Contribute significantly to export revenues because of the low cost labor
intensive nature of its products.
5. Have a positive effect on the trade balance since SMEs generally use
indigenous raw materials, reducing dependence on imported machinery, raw
material or labor.
6. Assist in fostering self-help and entrepreneurial culture by bringing together
skills and capital through various lending and skill enhancement schemes.
7. Impart the resilience to withstand economic upheavals and maintain a
reasonable growth rate since being indigenous is the key to sustainability
and self-sufficiency.
8. Converts the raw material within the country into semi-finished items and
later pass it on the LSEs that have capital, skill and equipment to process
these into finished goods.
9. Provide rural people an opportunity for income generation and personal
growth since they can work at home. This helps to achieve fair and equitable
distribution of wealth by creating nationwide non-discriminatory job
opportunities.

10.Attracts direct foreign investment since multinationals and big

conglomerates have started to outsource from countries with strong SME
sectors. The low labor cost makes production of semi finished goods very
economical for large concerns operating in international markets.
11.The SMEs act as engines through which the growth objectives of developing
countries can be achieved.

2. Literature Review
2.1

2.2

2.3

2.4

Bala Subrahmanya (2004) highlighted the impact of globalization and

domestic reforms on small-scale industries sector. The study stated that
small industry had suffered in terms of growth of units, employment,
output and exports. The Researcher highlighted that the policy changes
had also thrown open new opportunities and markets for the small-scale
industries sector. He suggested that the focus must be turned to
technology development and strengthening of financial infrastructure in
order to make Indian small industry internationally competitive and
contribute to national income and employment.
Bargal et al. (2009) examined the causal relationship among the three
variables GDP, SSI output and SSI exports and also have compared the
performance parameters of SSIs in the pre and post liberalization era. The
study found that the annual average growth rate of different parameters of
SSIs have declined in the period of nineties vis--vis the pre-reform years.
There is an absence of any lead-lag causal relationship between exports
and production in small-scale sector and GDP of Indian economy.
Dixit and Pandey (2011) applied co-integration analysis to examine the
causal relationship between SMEs output, exports, employment, number
of SMEs and their fixed investment and Indias GDP, total exports and
employment (public and private) for the period 1973-74 to 2006-07. Their
study revealed the positive causality between SMEs output and Indias
GDP.
International Journal of Marketing (2013), Contribution of MSME to
the nations total GDP, Export, Industrial productions are quite
commendable. It accounts for more than 90 percent of the total industrial

units. More support is needed for MSMEs from the government in the
form of priority sector lending, government procurement programme,
credit and performance ratings and marketing support. The policy makers
should focus on to provided possible help to the sector to utilize the
potentials of the sector and to review the sector to act as back bone of the
countrys economy and propel economic growth.

3. Research Objective
The objective of the study is to evaluate the contributions made by the SMEs
towards the GDP and Exports of Indian Economy. The study also includes the
suggestions for the improvements.

4. Research Methodology
The data for the present study have been collected from various secondary sources
especially from the annual report published by Ministry of Micro, Small and
Medium Enterprises for various years.

4.1 Research Design

This is an exploratory research. In this contribution of SMEs are calculated on
different parameters and the suggestions are given on the basis of findings.

1.1 Data Requirement

4.1 Performance chart,
4.2 Gross output,
4.3 Exports of MSMEs,

4.4 GDP
4.5 Total Exports

1.2 Data Collection Method and Instrument

All the data in this research is collected by secondary data method from the annual
report of Ministry of MSME and from previous literature reviews.

1.3 Data Analysis Techniques

To analyze the change in Percentage year 2006-07 is taken as a benchmark for
comparison with further years. Bar Graphs are used to show the contribution in
percentage.

1.4 Limitations of the Study

Proposed data is provided in the annual report of Ministry of MSME for the year
2011-12 and 2012-13 so the results may vary from the finding of the study with
actual. The data of Export is different as compared to other.

5. Data Analysis and Interpretation:

5.1 Distribution of SMEs in different sectors

Source: Annual Report MSME(www.msme.gov.in)

5.2 Performance of MSME

(in Lakh)
Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13

No. of Enterprises

Increase in Percentage
361.76
377.37
393.70
410.82
428.77
447.73
467.56

4.32
8.83
13.56
18.52
23.76
29.25

5.3 Gross Output of MSMEs

(in crores)
Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

Gross Output

Increase in Percentage
1351383.45
1435179.26
1524235.83
1619356.53
1721553.42
1834332.05

6.20
12.79
19.83
27.39
35.74

5.4 MSMEs Export

(in US $ mn)

Year
2009-10
2010-11
2011-12

Export by MSMEs
82494
111403
131483

Change in Percentage
35.04
59.38

5.5 GDP
(in crores)
Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

GDP (Current Price)

Increase in Percentage
3953276
4582086
15.91
5303567
34.16
6108903
54.53
7248860
83.36
8391691
112.27

5.6 Total Exports

(in crores)
Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

Exports

Increase in Percentage
5717.79
6558.64
8407.55
8455.34
11429.22
13829.36

14.71
47.04
47.88
99.89
141.87

5.7 Contribution of MSME to GDP

Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

GDP

MSME
3953276
4582086
5303567
6108903
7248860
8391691

1351383
1435179
1524236
1619357
1721553
1834332

Share in GDP %
34.18389
31.32153
28.73982
26.50814
23.7493
21.85891

5.8 Contribution of MSME to Exports

Year

Exports

2009-10
2010-11
2011-12

MSME
178751
251136
305964

Share in Export %
82494
111403
128978.00

5.9 Major Issues of SME Sector:

i. Facilities Lack of availability of adequate and timely credit.
ii. High cost of credit.
iii. Collateral requirements.
iv. Limited access to equity capital.
v. Problems in supply to government departments and agencies.
vi. Procurement of raw materials at a competitive cost.
vii. Problems of storage, designing, packaging and product display.
viii. Lack of access to global markets.
ix. Inadequate infrastructure facilities, including power, roads, water, etc.
x. Low technology levels and lack of access to modern technology.
xi. Lack of skilled manpower for manufacturing, services, marketing, etc.
xii. Multiplicity of labor laws and complicated procedures associated with
compliance of such laws.

46.15
44.36
42.15

xiii.

Absence of a suitable mechanism which enables the quick revival of viable

sick enterprises and allows unviable entities to close down speedily; and
Issues relating to taxation, both direct and indirect, and procedures thereof.
Lack of social security.

xiv.

6. Findings of the Study:

6.1 Performance of Enterprises

No. of Enterprises (in Lakh)

500
450
400
350
300
250
200
150
100
50
0

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

6.2 Gross Output

Gross Output (in crores)

2000000
1800000
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

6.3 Export by MSMEs

Export by MSMEs
140000
120000
100000
80000
60000
40000
20000
0

2009-10

2010-11

2011-12

2012-13

2013-14

6.4 GDP

GDP (in crores)

9000000
8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0

2006-07

6.5 Total Exports

2007-08

2008-09

2009-10

2010-11

2011-12

Total Exports(In Crores)

16000
14000
12000
10000
8000
6000
4000
2000
0

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

6.6 Contribution of MSME to GDP

Share in GDP %
40
35
30
25
20
15
10
5
0

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

6.7 Contribution of MSME to Exports

Share in Export %
47
46
45
44
43
42
41
40

2009-10

2010-11

2011-12

7. Recommendations
i.
ii.
iii.
iv.

v.

vi.
vii.
viii.
ix.
x.

SMEs can be given preference by providing relaxation of KYC norms.

SMEs need to be encouraged to take the venture capital route.
SMEs can be given incentives to raise capital through the equity route.
SMEs should be given short and long term credit along coverage of
insurance and also export development and investment funds (EDIF) can be
created in order to promote exports.
SMEs should be encouraged to contribute periodically to Technology
Development funds (TDFs). This way they would get involved with up
gradation and also have a stake in progress.
FDI should be promoted in SME segment. Multilateral agencies can be
provided with incentives to lend to SMEs.
Clustering Cluster support by IT and ITES systems will result in
strengthening of productive activity.
PPP Public private partnership will help in creation of viability gap
funding for SMEs.
Internal efforts such as working towards cash flow management and
innovation in operation would result in increase in productivity.
Improvement in training would also result in better operations of the
enterprise. This will bring them closer towards the skill levels observed in
larger industry.

8. Conclusions
Micro, Small and Medium Enterprises (MSMEs) have emerged as an engine of
growth in Indian economy. They have emerged as a vibrant and dynamic
component of the economy by virtue of their significant contribution to GDP and
exports. The growing importance of SMEs, which account for about one-fifth of
Indias total GDP and 42% in Exports, is manifesting itself in the economy.
Government is trying to push it forward with a number of plans to foster
technology, innovation and quality in SMEs. Banks have joined hands with private
players to create a rating agency focused on SMEs in order to improve the credit
disbursal to them. Indian SMEs are increasingly organizing themselves in clusters,
which improve their access to business associations are technical assistance
providers. It also helps in building inter-firm cooperation that adds to productivity
and innovation.

9. References
1. www.msem.gov.in , www.wikipedia.org
2. Annual Report (2013-14), Ministry of Micro, Small and Medium
Enterprises, Government of India, 2013-14.
3. Bala Subrahmanya, M.H. (2004), Small Industry and Globalization:
Implications, Performance and Prospects, Economic and Political Weekly.
4. Bargal, H., Dashmishra, M., and Sharma, A. (2009), Performance Analysis
of Small Scale Industries A Study of Pre-liberalization and Postliberalization Period, International Journal of Business and Management.
5. Dixit, A. and Panday, A.K, (2011), SMEs and Economic Growth in India:
Co integration Analysis, The IUP Journal of Financial Economics.
6. Dr. Sultan Singh Jaswal (May 2014), Problems and Prospects of Micro,
Small and Medium Enterprises (MSMEs) in India, International Journal of
Innovative Research and Studies.
7. India's SME sector, by Mr. D.R. Dogra, MD & CEO CARE Ratings, All
India Association of Industries on India SME Sector 26th February 2014.
8. SMEs role in Indias manufacturing sector, Indian Brand Equity Foundation
(IBEF), www.ibef.com
9. http://planningcommission.nic.in/data/datatable/0306/table%2013.pdf
10.http://www.dgciskol.nic.in/annualreport/book_3e.pdf