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Micro, Small and Medium Enterprises of India - Issues and Challenges

RashmiRanjan Panigrahi1 Feb 2013 Paper type: Empirical Paper ABSTRACT The Micro, Small and Medium Enterprises (MSMEs) constitute an important segment of the Indian economy in terms of their contribution to countrys industrial production, exports, employment and creation of entrepreneurship base. The primary responsibility for promotion and development of MSMEs lies with State Government. However, the Government of India has always taken active interest in supplementing the efforts of the State Governments. The future of MSMEs is of major policy concern given their 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 government support to the sector since independence compared to most developing countries. The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. Research design and Methodology: This paper is meant to carry out an empirical study for a period of 10 years from 2001- 2010 where by MSME recent trends, issues, challenges related datas have been collected for analysis. . Research Limitation: To carry out the study only SSI & Over all Industrial Sector had considered. However looking at the scope of the study, it can be applied to various other states & its industries coming under MSMEs in Indian Key Words: MSMEs, IIP, GDP growth, SMEs, SIDBI, DTC, GST, CAGR

1 .*Asst.Prof.Rashmi Ranjan Panigrahi- Finance, Dept- MBA/ MFC (Master of Finance


and Control)/ MCOM -Education, ARYA SCHOOL OF MANAGEMENT & IT, Bhubaneswar-751019. Contact Details: 9778789570, rashmipanigrahi090@gmail.com

Micro, Small and Medium Enterprises of India - Issues and Challenges


RashmiRanjan Panigrahi ASMIT, Bhubaneswar

INTRODUCTION : In this section we will highlight the definition, profile, size, composition and performance of this sector. MSMEs have been globally considered as an engine of economic growth and as key instruments for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of the large enterprises. MSMEs constitute more than 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, MSMEs play an essential role in the overall industrial economy of the country. In recent years, the MSME sector has consistently registered higher growth rate compared with the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession.

The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services, and levels of technology. The sector not only plays a critical role in providing employment opportunities at comparatively lower capital cost than large industries but also helps in industrialization of rural and backward areas, reducing regional imbalances and assuring more equitable distribution of national income and wealth. MSMEs complement large industries as ancillary units and contribute enormously to the socio-economic development of the country. MSMEs have outperformed IIP and GDP growth rates in the past five years. The domestic MSME sector has outpaced industrial and GDP growth. During 2009-10, total production of MSMEs was projected to grow at 12% compared with industrial and GDP growth of 10.5% and 8% respectively. In FY10, total production of MSMEs was equivalent to about 15% of Indias GDP (at current market prices). Total production of MSMEs for 2009-10 was ` 9,829.19 bn (at 2001-02 prices). Between 2005-06 and 2009-10, the sectors total production grew at a CAGR of 18.5%. This is a clear indication of the substantial contribution of MSMEs to the Indian economy. (Source-http://www.dnb.co.in/Axis_bank_SME_awards/MSMEs_In_India.asp)

COMPARISON OF THE MICRO AND SMALL ENTERPRISES (MSEs) SECTOR WITH THE OVERALL INDUSTRIAL SECTOR The MSE sector has maintained a higher rate of growth vis--vis the overall industrial sector. Comparative growth rates of production for both the sectors are given in the Table below. Comparative Data on Growth Rates of MSE Sector
Year
Growth rates of SSI Sector[2001-02 base IIP(%age)]

Over all Industrial Sector Growth rates (%age

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

10.88 12.32 12.60 13.00 ** ** **

8.40 8.00 11.90 8.70 3.20 10.50 7.80

* : Projected, IIP Index of Industrial Production. # : Source- M/o Statistics and PI website- http://www.mospi.nic.in 4

** : Due to revised defination of MSMEs Sector, methodological revisions are under progress

ISSUES AND CHALLENGES TO MSMEs SECTOR A dynamic global economic scenario has thrown up various opportunities and challenges to the MSME sector in India. On the one hand, numerous opportunities have opened up for this sector to enhance productivity and look at new national and international markets. On the other hand, these opportunities compel the MSMEs to upgrade their competences to contend with competition since obsolescence is rapid with new products being launched at an incredible pace and are available worldwide in a short time. Key Challenges faced by the MSME Sector:

Lack of availability of adequate and timely credit High cost of credit Collateral requirements Limited access to equity capital Procurement of raw material at a competitive cost Problems of storage, designing, packaging and product display Lack of access to global markets Inadequate infrastructure facilities, including power, water, roads Low technology levels and lack of access to modern technology Lack of skilled manpower for manufacturing, services, marketing, etc Multiplicity of labour laws and complicated procedures associated with compliance of such laws. 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.

Despite the various challenges it has been facing, the MSME sector has shown admirable innovativeness, adaptability, and resilience to survive the recent economic downturn and recession.

SUGGESTIONS FOR EFFECTIVE GROWTH OF SMEs Finance is as crucial one to an enterprise as is blood to the human body. The requirements of finance are inevitable for SMEs and setting up new enterprises as well and almost everywhere in the world. However, a fund for SMEs has been made available more liberally to the entrepreneurs in the western world then in the developing countries. Development financial institutions were meant to support to large scale enterprises, but slowly they have started equally themselves with the commercial Banks in terms of stringency and rate of interest. In India, the government has taken several measures to expand availability of credit to SMEs through commercial Banks for working capital and through term lending institutions (SIDBI, SFC etc), the problems of SMEs are far from over. SMEs traditionally have face difficulty in obtaining formal credit or equity. This is because of the maturity of commercial bank loans extended to SMEs are often limited to a period for too short to pay off any sizeable investment. Banks in many developing countries have traditionally lent over helpingly to the government, which offered less risk and higher returns.
1. The government should ensure strict adherence to the stipulated targets by the

commercial banks for the micro enterprises (like. 20 percent year-by-year growth for micro and small enterprises lending with 60 percent apportionment for micro sector).
2. A separate fund may be created with SIDBI, using the short falls, if any, against the MSE

credit targets set for the commercial banks. This fund named Special Fund for Micro Enterprises should be utilized exclusively for lending to the micro enterprises.
3. A Public Procurement Policy for MSMEs as envisaged in the Micro, Small and Medium

Enterprises Development Act, 2006 may be introduced at the earliest. The policy may set a goal for government departments and PSUs to reach, over a stipulated period, a target of at least 20 percent of their annual volume of purchases from micro and small enterprises (MSEs), and mandate them to report their achievements in this regard in the annual reports.

4. The ongoing exercise to introduce a new Direct Tax Code (DTC) and Goods and Services

Tax (GST) should specifically seek to achieve these policy objectives through appropriate provisions for graded corporate tax structure, tax pass through for angel and venture capital fund sand incentives for R and D.

References-:
1. Annual 2. 3.

Reports, Ministry of Small Scale Industries, Government of India

http://www.dnb.co.in/Axis_bank_SME_awards/MSMEs_In_India.asp Micro, Small and Medium Enterprises Development Act Background Paper, Jessica Wade, Small Enterprise Finance Centre, IFMR. Ministry of Micro, Small & Medium Enterprises, 2007: Micro, Small and Medium Enterprises in India: An Overview, Ministry of Micro Small and Medium Enterprise, Government of India MSME Development Act 2006, Ministry of MSME, Government of India Das, K. (2005a). Industrial Clustering in India: Local Dynamics and the Global Debate. InIndian Industrial Clusters, ed. K. Das. Aldershot, UK: Ashgate. Guidelines for Rehabilitation of Sick Small Scale Industrial Units, Reserve Bank of India Document, January 2002.

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