Small and Medium Enterprises

In the Indian context, the small and medium enterprises (SME) sector is broadly a term
used for small scale industrial (SSI) units and medium-scale industrial units. Any
industrial unit with a total investment in its fixed assets or leased assets or hire-purchase
asset of upto Rs 10 million, can be considered as an SSI unit and any investment of upto
Rs 100 million can be termed as a medium unit. An SSI unit should neither be a
subsidiary of any other industrial unit nor be owned or controlled by any other industrial
unit.

An SME is known by different ways across the world. In India, a standard definition
surfaced only in October 2, 2006, when the Ministry of Micro, Small and Medium
Enterprises, Government of India, imposed the Micro, Small and Medium enterprises
Development (MSMED) Act, 2006.

This definition, however was changed according to the changing economic scenario and
thus has separate definitions to it. For instance, an SME definition for manufacturing
enterprises is different from what an SME definition for service enterprises has to say.

Description of SME in the manufacturing sector:

The term enterprise in the manufacturing context stands for an industrial undertaking or a
business concern involved in the production, processing or preservation of goods for the
list of eligible industries in the First Schedule to the Industries (Development and
Regulation Act), 1951.

For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium
enterprises (MSMEs) as mentioned below:

* A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs 25 lakh.

* The investment in plant and machinery in a small enterprise is more than Rs 25 lakh,
but does not exceed Rs 5 crore.

* A medium enterprise is one where the investment in plant and machinery is more than
Rs 5 crore, but does not exceed Rs 10 crore.

In all these, the cost excludes that of land, building and the items specified by the
Ministry of Small Scale Industries with its notification No SO 1722 (E) dated October 5,
2006.

SME definition for Service Enterprises:

A service sector enterprise is defined as one involved in providing services. The
following points will explain how.

• Small road and water transport operators that can now own a fleet of vehicles not
exceeding ten in number.
• Small business, whose original cost price of equipment used for business, does
not exceed Rs 20 lakh.
• Professional and self-employed persons, whose borrowing limits do not exceed
Rs 10 lakh of which not more than Rs 2 lakh should be for working capital
requirements
• Professionally qualified medical practitioners setting up a practice in semi urban
and rural areas, whose borrowing limits should not be less than Rs 15 lakh with a
sub-ceiling of Rs 3 lakh for working capital requirements.

Defintion of MSMEs for the Service sector is as follows:

• A micro enterprise is an enterprise where the investment in equipment does not go

beyond Rs 10 lakh.

• A small enterprise is an enterprise where the investment in requirement is not less

than Rs 10 lakh, but does not exceed Rs 2 crore.

• A medium enterprise, where the investment in equipment is not less than Rs 2

crore, but does not exceed Rs 5 crore.

Definition of SME by MSMED Act, 2006

Investment ceiling for plant, machinery and equipment
Manufacturing Enterprise Service Enterprise
Micro Up to $62,500 Up to $25,000
Small $60,000 to $1.25 mn $25,000 to $0.5 mn
Medium $1.25 mn to $2.50 mn $0.5 mn to $1.25 mn

Source: Ministry of MSMEs

History:

Small and Medium Enterprises or SMEs are vital for the growth and well being of the
country. This sector was recognised and given importance right from independence and is
being encouraged ever since then.
Though, it commenced on a small scale, it gradually gained significance, because it
employed a considerable number of people.

When it started gaining momentum, this sector was defined as an enterprise with
investment in plant and machinery of up to Rs 1 lakh and situated in towns and villages
with a strength of less than 50,000 people. The policy statement put in place special
legislation to recognise and protect self employed people in cottage and home industries.
District industries centres (DICs) were set up and made the focal point of SSI
development, bypassing large cities and state capitals. Also, the government started
providing special services akin to product standardisation, quality control and marketing
surveys in order to assist the SSIs in enabling them to market their products in an
underdeveloped market.

The scenario for the small-scale sector changed with the Industrial Policy of July 1991,
which, for the first time in India’s development history spoke of liberalisation. What this
meant was that medium and large enterprises would no longer need licenses to run.
Export-oriented enterprises could be wholly foreign owned and foreign equity
participation was selectively allowed. Industries could import capital goods with much
fewer restrictions.

1996 saw the government involved in the setting up of a higher level committee, known
as the Abid Hussain Committee, to review policies for small industries and recommend
measures to help formulate a strong and innovative policy package for the rapid
development of SMEs. With liberalisation, rapid changes were seen in the Indian
economy. Indian companies were no longer insulated form the global economy. In fact,
there was an urgent need to make them, especially SMEs, more competitive and resilient.

In 1991, the growth rate of SSIs was almost three times that of the total industrial sector
at 3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total
industrial sector. Yet, in 1995-96, the growth rate of SSIs was slightly lower than the total
industrial sector, however it increased again in 1996 and continued to be higher than the
total industrial growth rate till 1999. till 2006, the SME segment saw a lot more
development and support from the government.

A novel beginning to this sector:

Concerted efforts to support and promote SMEs in the context of a globalised

competitive world began with the implementation of the Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006.

The MSMED Act 2006, which came into effect from October 2, 2006 aims to remove
several bottlenecks faced by the SME sector such as those mentioned under:

Competition from domestic companies and MNCs

Inadequate access to finance due to lack of financial information and non-formal business
practices

• Lack of access to private equity and venture capital

• Lack of access to inter state and international markets
• Limited access to secondary market instruments
• Fragmented markets in respect of their inputs as well products.
• Vulnerability to market fluctuations
• Limited access to technology and product innovations
• Lack of awareness of global best practices
• Considerable delays in the settlement of dues/payment of bills by large-scale
buyers.

General:

The small and medium enterprises (SME) sector in India has a very pivotal role to play in
the development of the country. The SME sector in India has a minimum of 95% of
industrial units, which accounts for almost 40 % of the gross industrial value-added in the
Indian economy, 34% of exports and provision of direct employment to 20 million
persons in around 3.6 million registered SME units. In addition, the SME sector in India
contributes to about 7 % of India’s gross domestic product (GDP).

This sector produces a melange of industrial products such as food products, beverage,
tobacco and goods produced from it, cotton textiles and wool, silk, synthetic products,
jute and jute products, wood and wood products, furniture and fixtures, paper and goods
produced from it, printing publishing and such. Other services also include machinery,
apparatus, appliances and electrical machinery. This sector also has a large number of
growing service industries.

At the moment, Small and Medium Enterprises (SMEs) stand for one of the fastest
establishing industrial sectors of our country. Liberalisation and globalisation has
provided a whole lot of opportunities and challenges for the industry as a whole and more
so for the SMEs. They can now aspire to market their products to any part of the world
along with facing tight competition in the domestic markets from low cost imports.
Furthermore, with more than a year of recession, it has become extremely important for
SMEs to reorient their focus according to the emerging market trends and thus strive to
become globally competitive.

A growing recognition has been felt throughout the world such that small and medium
enterprises (SMEs) have a vital role to play in the present context given their greater
resource-use efficiency, capacity for employment generation, technological innnovation

Economic Importance

Unarguably, the services sector contribution to the GDP is noteworthy; nonetheless

SMEs contribution to the economy is also growing.

As per government estimates there are around 12 million registered small and medium
enterprises in India, of which 55 percent are located in rural hinterlands, while the
remaining 45 percent live in urban areas.

However, according to a research organization Zinnov, the total number of SMEs in India
in 2006-07 was almost 35 million, next to China. This number is slated to reach 48
million by 2015. The research also claims that Indian SMEs contribute almost 60 percent
to the nation’s GDP.

Interestingly, the growth rate of SMEs has been consistently on the higher side, as
compared to the overall industrial growth. In the last two years, the SMEs have registered
a remarkable growth rate of 35 percent. However, proper use of technology will
predictably boost its growth prospects further, by almost 40 percent.

A crucial link in the economic value chain

Boosting industrial growth

By enhancing existing capacities, and by delivering cost-efficient goods and services as

per the requirements of the local markets, SMEs have been driving industrial growth.

Inspiring Consumption and Social Change

SMEs play a defining role by offering reasonable, yet revolutionary goods and services to
cater to the changing market requirements. Currently, SMEs have made its presence felt
in areas like education, medical care, transportation, entertainment and local
infrastructure development.

Minuscule investment

SMEs need low capital investment, in terms of per unit of output

Increased Employment Opportunities

SMEs generate both direct and indirect employment opportunities, in 2006-07, for
instance, for every ten million rupees invested by the SME sector spawned employment
opportunities for over 150 people. However, the same amount of investment carried out
by the overall economy generated employment for just 37. 4 people. As per Government
statistics in 2007-08, SMEs generated employment for 31.25 million people.

Fuelling the local economy

SMEs make use of natural resources and domestic skills to cater to the domestic market.
The growth of SME sector also helps in socio-economic upliftment as it generates
employment opportunities for untapped masses, living in urban and rural regions.

Discourages migration to urban areas

SMEs are synonymous for entrepreneurship. And the best part being setting up an SME
doesn’t include much risk. If SMEs generate employment opportunities in rural and semi-
urban areas, migration to urban areas can be stemmed to a great extent.

Transition from Agriculture Economy to Service-oriented one

SMEs can play a crucial role in achieving the transition from a dominant agricultural
economy to a service oriented economy, akin to Japan. Japan’s agricultural workforce has
gone done from 68 percent to 4.9 percent, in case of United States, from 44 percent to 9
percent.

Further, Indian agriculture sector can no longer generate extra employment opportunities
to meet the requirements of the ever-growing population. In such a situation, only SMEs
can come to the nation’s rescue.

Moreover several developed nations like USA, Japan and several European countries
have brought to light the fact that conscious and articulated policies on SME promotion
can generate far better employment opportunities than large enterprises. In the US, for
instance, firms that employ less than 100 people, generate 80 percent of the new jobs. But
one can’t deny the fact that SMEs are the offshoots of many large enterprises. SMEs in
auto ancillary and pharmaceutical sectors in India have grown, given the fact that these
areas have witnessed growth of large companies. On the other hand, vertical growth of
SMEs can also result in formation of big groups via M&As. Aurangabad-based Rucha
Engineers collaboration with US-based precision sheet metal and integrated assembly
player Craftsman Custom Metals in 2006, is a case in point.

Opportunities for SMEs

The size of the SMEs fortunately works in its favour. The biggest plus; they can manage
most of the processes in-house, in comparison to larger companies where majority of the
work gets outsourced. As a result of this, SMEs have greater control and demand shorter
production time. In addition, since SMEs operate in rural areas, cheap labour is also
available in plenty.

Meanwhile, SMEs can profit from India’s growing economy and especially focus on
India’s domestic market. In fact, recent studies reveal that Asian companies should better
concentrate on catering to the local demand, though exports, of late, form their top
priority. Currently, India’s population stands at 1.1 billion and is increasing at a rate of
1.3 percent a year. And incidentally, almost 350 million Indians are reported to have
disposable income. Unarguably, India’s per capita income is low; however, it has more
than doubled in the past years. India’s current per capita disposable income stands at
around US$556 per annum, which will be inch up to $1,150 by 2015. Plus, the opening of
SMEs to foreign direct investment is going to benefit the SME players in a significant
way.

Prospects of SMEs in the future

As per the survey conducted by Neilson group, Indian SMEs are pretty positive about
their future growth prospects. Nearly, 79 percent of SMEs surveyed were looking
forward to positive growth this year. Around 30 percent of SMEs expect moderate
growth, while 43 percent expect phenomenal growth in the future. In terms of cross-
border trade, 73 percent are looking forward to trade with China.

Even from the global perspective Indian SMEs are doing pretty well. According to UPS
ABM 2008 survey, almost 41 percent of offshore SMEs respondents have rated Indian
SMEs more aggressive and competitive than them.

Industry Verticals

According to Dun & Bradstreet’s Emerging SMEs of India 2008, in India there are
certain sectors invariably dominated by SMEs and these SMEs have been contributing
significantly to the economy. Auto components, chemicals, petrochemicals, engineering
goods, food and agro products, gems and jewellery, IT and IT enabled services, leather
and leather products, pharmaceutical, plastic goods and textiles are some of the
prominent sectors, principally dominated by the SMEs.

Apparel and textiles

Indian textile sector is highly fragmented. Government’s focus on increasing

employment opportunities, and at the same time curbing capacity and mechanization; and
reserving products for small-scale industries have contributed to the rise of large scale
SMEs in this sector. In 2005, all items were removed from reservation.

Today, the industry clocks an annual growth rate between 9 and 10 percent and has
generated employment opportunities for 35 million people and another 56 million
indirectly. The sector encompasses of several sub sectors like cotton textiles, wool, silk
and synthetic fibers.

The most well-known clusters can be found in cities of Bhilwara, Sanganer, Panipat,
Palli, Jetpur, Jodhpur, Surat, Sambhalpur, Mysore and Bhiwandi.

According to Ministry of Textiles the industry will predictably grow from the present
US$52 billion to $115 billion in 2012. At the same time, exports will also rise from 4
percent to 7 percent.

According to Confederation of Indian Textiles Industry, global meltdown may have a

damaging effect on the growth of this sector. It has been predicted that in the next five
years, over 1.2 million people can lose their jobs. In addition, recession in countries like
USA, Japan, and EU which comprise of 60 percent of our exports, may have an adverse
effect on the Indian markets.

Government Initiatives

• 100 percent permitted via automatic route.

• Around 40 textile parks being established under the scheme for Integrated Textile
Parks(SITP)

• SITP also facilitates setting up of infrastructure facilities for setting up textile units in
public-private partnerships.

• Ten jute parks coming up

• Technology Up gradation Fund Scheme extended till 2011-12.

• Interest subvention of upto 2 percent, till March 2009 for pre and post shipment export
credit.

Automotive Components

The automotive component sector is the proverbial Goliath in the melee of Indian SME
Davids. What sets Indian auto component industry apart is its labour cost component
factor. As a matter of fact, the labour cost component of developed nations is 30 to 35
percent of sales, in India it is merely 8 to 9 percent of sales.

According to Auto Component Manufacturers Association of India (ACMA), the present

value of Indian auto components industry stands at $10 billion and will probably increase
by $40 billion over the next decade.

As per a D&B publication, Indian auto component sector, of all the SMEs in India is the
fastest growing. The prominent SMEs clusters in this sector can be found at Indore,
Jamshedpur, Kolkata, Pune, Manesar and Chennai.

In between 2000 and 2005, the exports of SME auto components sector grew at 25
percent, and is expected to grow by a compound annual growth rate of 34 percent
between 2006 and 2014. In an endeavor to upgrade their technology and skill-sets the
sector is looking beyond its home territory and collaborating with foreign companies as
well.

Furthermore, to support SMEs the United Nations Industrial Development Organisation

(UNIDO) has launched a flagship programme in association with Government of India
and ACMA. Of late, almost 58 countries from all over the country are participating in the
programme. Price-waterhouse Coopers (PWC) have studied the impact of the programme
and has observed that participating firms have largely benefited from this programme,
especially in terms of quality of products and productivity of the employees.

Government Initiatives

• To sustain the high growth trajectory in this area has prompted The National
Manufacturing Competitiveness Council (NMCC) to accord priority status to the auto
components sector in the National Strategy of Manufacturing.

• The automotive Mission Plan aims to increase the GDP contribution to 10 percent by
2016, from the current 5 percent. The mission also endeavors to generate additional
employment opportunities to 25 million people and enhance the output of this sector to
$145 billion

• Under the industrial infrastructure up gradation scheme, the sector will be allowed a
grant of up to 75 percent of the total cost of the product or a maximum of $12 million,
whichever is less.

• The Department of Heavy Industries and Public Enterprises plans to set up government-
run institutes, research and training facilities specially focusing on this sector. The
department has also mapped out plans to improve exports, communication, and transport
infrastructure in and around auto component clusters.

• 100 percent FDI permitted through the automatic route.

The plus points of Indian auto component sector include, high technical knowledge of its
workers, low production costs, facilitates low batch production and value for intellectual
property. The future of the industry lies in the collaboration with technical universities
like IITs, training institutes and research and development centers.

Cashew

India is the largest holder of cashew crops and cultivation principally takes place in the
peninsular areas. Cashew clusters can be found in the states of Kerala, Karnataka, Goa
and Maharashtra in the West and Tamil Nadu, Andhra Pradesh, Orissa and West Bengal
in the East.

The production of cashews is likely to increase by around 10 percent in 2008-09 and

attain 7.30 lakh tonnes. In 2007-08, domestic consumption of cashew was almost 1.66
lakh tones.

Food Processing

According to the Ministry of Food Processing, the organized small-scale industries in

particular, saw an influx of investment worth $8.46 billion in 2007, and the food-
processing industry, in general got FDI worth $109.84 million. The sector currently is
experiencing a growth rate of 13.14 percent and is estimated to touch 20 percent by 2015.
Gems and Jewellery

In 2007-08, gems and jewellery comprised of 13.41 percent of all of India’s merchandise
exports. As per D&B reports, India is number one in the world when it comes to diamond
processing and currently has a share of 57 percent in the world market. Nevertheless,
China is all set to turn the tables in its favour.

Information Technology

It may be hard to believe, but almost 80 percent of the IT companies in India are SMEs,
and these companies contribute almost 30 percent to the IT exports of the country. The
areas that IT SMEs cater to include: e-commerce, embedded software communication,
mobile devices, open source solutions etc.

Leather and leather Products

The Indian leather industry has come in a big way, in both organized as well as
unorganized sectors, and has been producing all sorts of goods from raw hides to
fashionable shoes. Both big and small firms, including global players form part of this
industry.

Institutions like Council for Leather Exports and Central Leather Research Institute have
been at the forefront endorsing the overall growth of the industry. Today, the industry, is
literally riding on the back of SMEs bagging 8th position in terms of foreign exchange
earnings. This is to say that SMEs currently comprise about 80 percent of leather
footwear units. SMEs mainly are into manufacturing of uppers, lowers, soles, accessories
etc. The major manufacturing clusters are in the states of Delhi, Haryana, Andhra
Pradesh, Karnataka, Punjab, Maharashtra, Uttar Pradesh, West Bengal and Tamil Nadu.

With state-of-the-art facilities in place and trained manpower available, the industry has
made its presence felt in a big way in the global markets. Germany and Italy are its
biggest export clients.

Government Initiatives

• The government permits 51 percent foreign equity via the automatic route, and in some
crucial areas upto 100 percent.

• Foreign Investors are not bound to collaborate with local firms

• In the tenth five year plan, assistance has been provided in terms of setting up a
footwear component park and a footwear complex in Chennai.

• Zero duty on import of any raw materials for the industry.

• Financial support is provided when it comes to setting up of a design studio and up
gradation of manufacturing facilities.

• The good news being, United Nations Industrial Development Organization is coming
up with a plan to improve the collaboration between Indian and Italian industries.
Nevertheless, the leather industry has invited a lot criticism from various quarters;
consequently states like Tamil Nadu are coming up with treatment plans to make
manufacturing little more environmental friendly.

Marine Products

According to Marine Products Export Development Authority (MPEDA), the exports of

of shrimps, lobsters, fresh and frozen fish, dried-fish products like shark fins and also
aquarium fish reached a record high in 2006-07 at 612,641 tonnes, valued at Rs.8363.53
crore.

Retail

The Indian retail industry is expected to register a turnover of $ 535 billion by 2013 and
about $755 billion by 2018. The market is expected to witness an investment worth $30
billion from various committed retailers in the coming five to seven years.

Potential of SMEs in the retail sector

India has a huge network of SMEs that could act as a supply chain, catering to the needs
of Indian and global suppliers. However these SMEs need to be made aware of the global
trends, limited marketing efforts and lack of capital, etc.

SMEs can play a key role as suppliers of private label products to retailers. In the wider
world retailers primarily rely on their brands or private labels to drive margins as well as
to strengthen consumer loyalty. Private labels normally follow a rule according to which
40 to 60 of the total merchandise is sold exclusively to the retailer. In India, retailers are
exclusively looking forward to stock more and more goods from private labels. Retailers
like Big Bazaar, Reliance etc are targeting 30 to 35 sales via private labels.

Even if the retailers target 25 percent private label sale, it leads into $18 billion
opportunity for SMEs in the coming five years. In apparel category, almost 80 percent of
the requirements are catered to by the SMEs. For that matter, even fast moving consumer
goods contract out their manufacturing to SMEs leading to massive employment in this
sector.

In developed nations like Unites States, Europe, Japan and the developing worlds like
Asia and Africa, SMEs phenomenally contribute to their industrial growth. In USA, it is
reported that almost 80 percent of the jobs are created by SMEs with 100 or fewer
employees.
The good part being these SMEs survives on low-capital investment; offer direct and
indirect employment opportunities, and create employment opportunities for the local
populace.

Modernization

The modernization of the retail sector will help SMEs in a big way. Since most of them
fall under the unorganized sector, modernization as well as upgradation will encourage
SMEs explore best global practices, latest technologies and also introduce efficiency in
their supply chain management, distribution. This will help our SME suppliers establish
themselves as top suppliers to cater to the global requirements of retailers.

Today, SMEs employing state-of-the-art technologies have embarked into sub-

contracting arrangements with large enterprises in India, especially in the area of
automobiles, electrical, electronics, chemicals, pharmaceuticals, software development
and other sectors.

In India, Suzuki, for instance has entered into JV with number of suppliers based in
Japan. However, to make India SMEs compliant with modern retailer’s requirement,
measures have to be undertaken to upgrade their skill-sets and scale up the capital
requirements. Currently, most of the SMEs function in the unbranded, or say local
branded products segments; consequently failing to cater to the needs of a retailer. But,
with the changing business environments, it’s high time the SMEs pull up their socks and
play a strong role as third-party suppliers of quality products and services.

Pharmaceuticals

The Indian pharmaceuticals industry is expected to attain a target of $24 billion in

formulations, with bulk drug manufacturing going up to $6 billion, by the year 2010.

It also needs to be emphasized that of the 1000 bulk-drug manufacturers in India, 750 are
SMEs. The pharmaceutical SME clusters can be found in the states of Andhra Pradesh,
Gujarat. These cluster account for 95 percent of the bulk drug manufacturer and make up
for about 50 percent of India’s drug production and export.

In 2006-07, the exports from Indian Pharmaceutical industry stood at $5.98 billion and
goods were exported to around 200 countries, including the developed nations.

In 2007, the Indian pharmaceutical clinched 4th position in the world in terms of volume.

As was in the case of all SMEs, the problem of funding plagues the SMEs. Presently
pharmaceutical are going for external borrowings and are presumably raising money out
of India. SMEs in India also in the process of unveiling private equity funds so as to meet
their financial requirements.
One of the major problems SMEs in this sector might face is when the government
goes ahead with its plan of price control. Other problems the SMEs encounter
include:

• Dearth of R&D operations

• Fake Drugs

• Bureaucratic roadblocks

• Environmental issues

• Zero Inspection Procedure

• Dearth of infrastructure

• High standards fixed by pollution control boards

• FDA and other problems

Government Initiatives

• To upgrade SME infrastructure, SMEs will be offered subsidies on interest.

• National Institute of Pharmaceutical Education and Research (NIPER) to be launched in

Bangalore, Kolkata, Hyderabad, Ahmedabad and Guwahati

• An NIPER set up unveiled in Mohali, Punjab in February 2009.

• Ministry of Science and Technology has announced finance of up to $240,042, with 15

percent capital subsidy to small-scale drug and pharmaceutical companies.

Sports Goods

It may be difficult to believe, but most of India’s exports of sports goods come from
SMEs. And the targeted countries are UK, USA, Germany, France, and Australia. And
the SME clusters are mainly based in Jalandhar and Meerut.

Some of the prominent items manufactured by these industries include: hockey and
cricket equipments, fishing gear, boxing kits, protective equipment and also indoor
games.

Keywords
Indian textiles,business,product