India Micro, Small , and Medium Enterprise Report 2014

An Introduction
1.0.Background
Small and Medium Enterprises (SMEs) (micro, small and medium enterprises, as it is called in India) are
undoubtedly a significant global presence. People need them because they speak the common mans language.
Reporting, which means documenting developments, and bringing to the limelight the least known, is often the
researchers or scientists job. But from the societys point of view, the scientists job, even with the best of justice
he has done to his work, just begins there. The societal implication of his exercise comes out only when the result
his research is communicated. India MSME Report series, at the Institute of Small Enterprises and Development,
is such an annual scientific exercise, with a clear social orientation. Forming part of a larger Programme of
theInstitute, called India MSME Communication Programme, the Report comes out from the Institutes specialized
Knowledge platform, the ISED Small Enterprise Observatory.

Given the spectrum of issues relating to MSMEs in India that demand attention , and given the
limitations of a twelve months reporting, the India MSME Report 2014 focuses on four broad strategic
objectives:
1. An overview of recent changes in the economic and political spectrum, and their implications;
2. Public perceptions and responses relating to the MSME role in such a context;
3. Stake holder interaction and their impact on the MSME constituency;
4. The broad signals emerging from the macro and micro level experience, as also the first- hand
information available to the ISED Small Enterprise Observatory.

2.0.Discussion
The Report discusses the following issues under twelve chapters, running into about 250 pages:

2.1.Global Trends
Indias MSME scene, as in 2014, need to be understood and analyzed against the global trends in
enterprise and technology. On lines of the Moores Law, there has been some remarkable changes in
technology that leads to a major paradigm shift in the global economy. These include, areas such as
social smartness, information security, sustainable consumption, the so-called redistributing industrial
revolution, the phenomenal explosion of scientific advances, volatility of markets, the global resource
gap, the swelling of the ranks of unemployable labour etc. The global MSME spectrum itself has been
undergoing changes, marked by such developments as, enhanced utilization of machines against people,
the reduction of the real economy as against a booming financial economy, the growth of the rental
economy, the swelling of necessity entrepreneurship as against innovators, the race to the local
economy, and the enhanced use of SMEs as contra-cyclical tool.Overall, the MSMEs around the world,

have performed a commendable role of social inclusion, and as a guard against massive unemployment,
and income inequalities.
2.2.Indias Waiting Period
While the global reality has obvious consequences and impact on the country- level experiences, in
India, the last about two years happened to be a waiting period of political and administrative
transition. This transitional period was marked by a sharp fall in entrepreneurial confidence on account
of:1) the subjective experience of MSME entrepreneurs regarding day-to-day business; and 2) their
perception on the governments role that was broadly passive.
The above MSME experience should be understood against the recent state of the Indian economy.
Against the declining trend in exports, investments, and growth, there are major challenges for the
MSMEs. Development, a subject of campaigns for the General Elections, provided space for a
discussion on the MSME role, though it did not happen to a significant extent.
Despite the challenges of the economy, as above, the MSME sector in India demonstrated its social
responsibility by all major macro economic indicators. While savings and capital formation in the
corporate sector fell drastically during the last 3 years, the MSME sector actually expanded it, thereby
saving the economy from a major crisis.
The Indian economy today is on a revival path, though with serious challenges that linger on. This
scissors effect of investment offers an opportunity to have an MSME-led growth strategy.The recent
policy perspective of the Union Government implies a significant thrust on development of MSMEs in
two forms: 1) labour market intervention through an integrated skilling approach; and 2); the Make in
India strategy on a campaign mode. There is need for a strong labor market policy in order to overcome
the labour market rigidities . Will the new approach lead to a major start-up strategy? The answer
seems positive, considering the Prime Ministers policy announcements and the thrusts of the Union
Budget 2014,which carries the bare outline of a labour market policy,though it has not yet been
scientifically articulated.Much homework need to be done on this.
2.3. Focal Themes of the Year
As the new economy increasingly gets stronger, its effect will get reflected in the way business is done.
Therefore, unlike in the past, one need to think of the structure and transition of MSMEs in more
concrete terms, with special focus on their sub categories. The sub category called modern small- scale
industries has been the focal area of most public programmes today. Non-farm / micro enterprises,
the second category, the key driver of employment in the country, has witnessed a significant growth
during the past few years. It has undergone a major structural shift over time, though the relative share
of unorganized manufacturing jobs declined during recent years. But, influenced by the booming
construction sector, the growth has been significantly polarized, away from the farm sector. Social
enterprises, an upcoming category globally is yet to get due recognition in India. As an emerging
economy, Indias share of new economy enterprises has been growing. The emerging knowledge- base
of goods and services implies major changes in the enterprise scene.

From the point of view of analysis and policy, the key concerns of 2014 are varied: jobless growth, the
mixed start-up experience, constraints to growth, need for crisis management strategies, the sideeffects of inclusive strategies, issues relating to local economic development and regeneration,
addressing the confidence crisis, and informalization of work, are some of these. India needs an
integrated MSME policy against the Countrys new policy thrust on making it a manufacturing
destination.
2.4. Growth Story is Telling
The Indian economy, more recently, is characterized by jobless growth. Rights-based programmes such
as NREGA, instead of enhancing productivity and employment opportunities, have, in fact , stolen away
jobs through structural rigidities. An MSME- led development strategy could have contributed, at a
time, to reduce the structural rigidities and to overcome economic slowdown. Against this, the start-up
experience in the country has been lop-sided.
Essentially focused on the new economy, and
concentrated in the metros, the start-up initiatives in the country did not take off. There was no serious
national level effort to boost start-up. Besides ,the flow of institutional finance, over the past few
years, did not support start-up initiatives significantly.
The experience of MSME growth in India, in recent times, has been confined largely to clusters.
However, the growth experience on the cluster mode demonstrates a lop-sided pattern. One can
identify three categories of States. They are, the leading States consisting of Gujarat, UP and Tamil
Nadu, the Growing States of Kerala, Madhya Pradesh and Karnataka, and the emergent States of Punjab,
Bihar, Rajasthan and Maharashtra. Studies by the ISED Small Enterprise Observatory have shown that,
the growth of the clusters have been largely because of the magnets of manufacturing logic, rather
than by the Cluster Development Programme. This necessitates a fresh look at the Governments role in
enterprise promotion, towards more of the so-called governance.
While the growth constraints of the MSME sector can be explained in terms of both internal structural
factors and external factors, the recent developments in the economy have triggered a debate on the
definitional limits of the MSMEs. As a response, the Finance Minister announced the Union
Governments intention to redefine the sector. (Also see, ISED White Paper on MSME Definition in
India: The Present State and the Imperatives.)
2.5.Side-effects of Inclusive Strategies
Across the world, countries are on efforts for evolving strategies for crisis management, wherein,
MSMEs figure as a major instrument of job creation.. ISED had warned, since 2007, the shape of things
to emerge, and of the potential role MSMEs could play in such circumstances. However, the role of
MSMEs was largely viewed, at the policy level, as part of an inclusive development strategy, rather
than as a strong sector that can act as a growth trigger. Besides, the side-effects of the inclusive
strategies were largely on MSMEs than on other sectors of the economy.
2.6. Start-up and Entrepreneurship Resources

The ISED Small Enterprise Observatory, based on its field research, reported a serious confidence
crisis in the MSME sector, demanding immediate corrective strategies. It advocated a Local economic
Development Model that can kick-start start-up initiatives. Besides, informalisation of work is an
important recent development in the Indian economy having implications for policy. While MSME startup was a focal theme of public policy in 1950s and 1960s, it has undergone major changes during
recent times. Start-up programs got a new boost in 2014, thanks to the initiatives of the Union
Government. While the role of skill development has been widely appreciated in policy circles, the
importance of motivational skills was not hitherto properly appreciated. The new policy approach
considers motivational skills on par with modular skills. Such an approach is important in a context
where, the tastes and aspirations of the people, and especially of the youth, are undergoing rapid
changes.
Apart from the differences in approach of governments, do we have a long term policy of sustained
enterprise development. Entrepreneurs come into the stream and go. But the society need to show
greater interest in their actions and contributions. The country also needs an MSME policy to shape the
direction of its growth and to use this vital sector as a powerful instrument of development.
2.7.Nonfarm Enterprises
The role of micro enterprises(or the so-called non farm sector) as the largest single sub sector of MSMEs
is widely accepted in India. This relatively deprived subsector, from an angle of inclusive growth, need
to have effective development strategies. The growth of the nonfarm sector, unlike in other countries, is
largely a story of autonomous growth. Therefore, as the largest employment provider, it has a
significant potential in any major enterprise development programme. The rural nonfarm sector has
undergone major structural changes in the recent part. The Indian experience, unlike in the western
model, does not follow a stage theory of growth; it is also different from the Chinese model. Besides,
its acts both as a rural reservoir and an urban growth pole.
Recent evidences show that, construction is the major growth- trigger of the non farm sector. The
experience, as above, has significant policy implications. First, there is need for an inclusive policy of
growth. Secondly, there is a significant opportunity of developing social marginality as an opportunity.
Thirdly, there is need for ensuring flow of credit to the weaker sections as an important trigger for
nonfarm sector development . Fourthly, there needs articulating and establishing appropriate linkages
for non farm sector development.
The new policy perspective of the Government of India, as outlined by the Union Budget 2014, marks a
significant departure from the conventional thinking of nonfarm sector development. It moves away
from the rights- based approach into a developmental approach focusing on capabilities and
entrepreneurship. Taking this perspective forward, it is necessary to consider entrepreneurship as a
critical national resource. In a bottom-up approach to enterprise development, the role of institutions
and organizations should be looked afresh and judged on the basis of demonstrated capabilities.
2.8.Subsectoral Strategy
Around the world, value chains and knowledge-base are emerging as critical aspects of MSME
development. Today the traditional, and often rather fundamentalist, approach to MSME development

has become less relevant. Particular MSME sectors need to be analyzed and understood in relation to
their position in the value chain. Growth and employment generation are becoming increasingly sizeneutral and knowledge based. These aspects need to be factored into an MSME policy .
Policy need to go into the fundamentals of Indias business demography. It demonstrates three broad
categories of sub sectors: Legacy subsectors which, in many cases, survive on monopoly rent; Enclave
subsectors having much growth opportunities;
and the New Economy sub sectors, with much
greater potential.
Given the current state of MSMEs in India, three sub sectors demonstrate a promising picture:

1. Food processing, having great potential because of its agro- linkages.

2. Textiles, offering great opportunities of innovation with backward linkages and having
an inclusive angle.
3. Electronics, having a great potential for value addition through linkages with ITES .
Food processing has much untapped potential, which need to be explored, especially in relation to
gender roles and farm linkages. Textiles have a key role in any inclusive growth strategy; but needs
restructuring with a clear definition of the role of MSMEs. Electronics have the potential of making India
a manufacturing powerhouse.
In India, there are three critical constraints that have adversely affected MSME growth from the supply
side, in recent times: 1) confidence crisis; 2) public policy inertia; and 3) a policy holiday. Such critical
constraints, and their adverse effects on flow of finance to the sector, necessities a fresh development
approach. The need arises in relation to both, relevant entrepreneurship and a corresponding situation
of relevant flow of finance. Both need to be inclusive in nature.
2.9.Policy Constraints
Both for policy and practice, there are some critical constraints. The major constraint relates to finance.
The global financial crisis affects MSME finance in two ways: 1) a general decline credit availability to the
MSMEs; and 2) the Base II norms that constrain the liquidity position of banks, and therefore , the
loanable funds of banks.
There are several strategy imperatives relating to institutional finance for MSMEs. An enhanced flow of
start-up finance need to be ensured through conventional and modern institutional sources. Secondly,
gender financing, despite various programs by banks, remain a neglected area. It needs to be a streaml
ined, within the existing work of universal banking. The relevance of small banks needs to be explored.
Thirdly, inclusive entrepreneurship need to be introduced as a new strategy. Fourthly, CSR, in the
context of enterprise creation, need to gain a new focus. Fourthly, the criteria for judging asset quality
of MSMEs need a thorough review and restructuring. Fifthly, there need to be a new asset
reconstruction strategy, by which, all cases of MSME sickness need to be addressed. Fifthly,
opportunities of alternative financing sources for MSMEs need closer examination.

Developing a business case for institutional finance is necessary for the banking industry to respond to
the needs of MSMEs. New institutional structures and incentive systems can play a major role in this
regard.
2.10.Governance Issues
In India, there has been significant debates on governance issues . There is a feeling among MSME
circles that government programs do not actually deliver in terms of their basic objectives.
Implementation is often perceived to be weak. Hence, there is some obvious rationale for arguing
for good governance, with respect to its two aspects: 1) government-MSME relation; and 2)
governance practice within MSMEs and their clusters. They need to be separately treated in a
transitional phase. Otherwise, liberalization and the progressive withdrawal of government roles will
lead to a collapse of the achievements of the past.
Democracy need to have three effective pillars of governance (a) a concrete policy regime; (b) strong
institutions ; and (c) effective policy instruments. Meeting the aspirations of entrepreneurs is the
primary objective of MSME policy. Today, it needs to be examined in relation to three aspects: (a) skill
development; (b) innovation; and (c) financial inclusion. The new official thrust on skill development is
of an integrated nature. However, on MSME innovation and financial inclusion, there need to be much
more home work.
2.11.Decentralisation
The recent political changes in India have trigged a debate on Center-State relations. A meaningful
debate need to spotlight on local economic development, where, MSMEs have a great role to play.
The latest available data indicate the role of selected States demonstrating significant visibility in terms
of their MSME presence. While the number of business start-ups, and their estimated employment,
can be meaningful indicators of visibility, they can be deceptive indicators as well. In this context, the
success story of States like Gujarat,need close examination. A national debate on Indias diversity on
the MSME front, therefore, becomes imperative. Such a debate needs to be against the countrys
national priorities on the MSME front, as outlined by the Prime Minister.
2.12. Key Policy Themes
The emerging scene indicates both the imperative and opportunity for MSMEs to play a significant role
in the Indian economy. However, realization of this opportunity demands a strong political will and a
concrete policy approach emerging there from.
The major policy imperatives emerging from the Reports analysis are:1) a focus on start-up;2) thrust
on local manufacture;3) a new understanding on skill development ;4) an integrated view of
manufacturing and MSME niche; and 5) harnessing social marginality as a development tool.

3.0.Learning and Tips for Action

The critical look, as above, should lead us to some concrete action points: need to be based on the
following aspects:
1)The macroeconomic understanding of the MSME sector and its role in India is of a piece meal type.
What does the national level data tell us? With the coming into force of the MSME Act 2006, a
framework was created, within which the performance of the sector can be monitored on the basis of a
regular five- yearly Census. However, by practice, the Union Budget and the Economic Survey often
make a casual statement on the MSME sector and its programmes. The country does not have effective
mechanisms for reporting and advocacy that can help our understanding of the sector and for scientific
articulation of the MSME case.
2)The Economic Survey 2014 speaks of a policy paralysis at the national level. For the last five years,
MSME policies revolved around the Prime Ministers Task Force, which was prepared 5 years ago. While
rapid changes have happened in the economy subsequently, these did not attract the attention of policy
makers. MSME policy, so far, essentially means, either perspectives of policy institutions or political
statements by Prime Ministers. In a democracy, what is needed is a national Policy Statement, around
which strategies need to be moulded, and signals given to the entrepreneurs.
3) Since the policy is ambivalent, programmes and schemes also lost their focus.. Subsequently, it is
found that the programmes are either repetitive, poorly targeted, less relevant, or that the benefits are
cornered by vested interests.
4)Strategy Approach: Given the programmes and schemes, the strategy approach. Therefore it needs to
be properly defined. While a strategy approach specific to MSMEs is crucial for sustained development,
in the actual practice, they are often of an ad hoc nature.
5) The role of actors is often confused. While public- private partnership is the dominant rule of
programme implementation today, the private sector often remain ill-defined. This is most evident in
the case of Cluster Development Programme. While, the main purpose of cluster mode of intervention is
to enhance collective efficiency, studies have shown that, measures for enhancing capability of the
collective efficiency platform are often insignificant. In fact, rather than the programme contributing to
enhancing collective efficiency, it is the relatively progressive industry associations that have proved to
be efficient in cluster management as well. This implies that, the important role of capacity building,
expected from Cluster Development Programme, remains unfulfilled.
6)In a democracy, advocacy has a crucial role in enhancing the visibility of a particular subsector, and to
establish its presence and relevance in the administrative system. It is also a mechanism that can play a
key role in establishing a positive linkage between the parliamentary process and a grass root level
economic activity. However, the advocacy role is practically very weak in India; it need to be shaped on
scientific lines.

7) The MSME sector is expected to gain its developmental role and relevance through an appropriate
labour market policy. While the country does not have a strong labour market policy, in the case of
MSMEs, the situation is worse. In a globalizing world, where the opportunities of labor migration are
greater, labor market interventions of a rather casual nature, are likely to make anachronistic results
(example: NREGA) In such a situation, one policy stands in the way of another one.Though such
anachronistic situation has, of late, been understood in policy circles, concrete corrective action is
awaited.
8) While the global value chains have an emerging role, it is necessary to have a sub sectoral approach
to development, so that the MSMEs can utilise the backward and forward linkages. This demands the
presence of significant domain expertise at the level of policy design and shaping of strategies, including
financing strategies. A sub sectoral approach, rather than MSME fundamentalism, that can produce
effective results.
9) Public Policy of Finance: In India, the executive and banking system are under two different
administrative controls. The banking system, though under the regulatory framework of the RBI, can
follow independent policies. The other regulatory angle come from the Ministry of Finance, which in
turn, exercise some regulatory tools through the Department of Banking. Despite these regulatory
angles public policy on finance to MSME remain a rather grey area. Similar problems are mediated
mainly through two types of measures: First, the Central Bank plays a proactive role in ensuring the flow
of credit to the MSME sector through appropriate directions, moral suation, and through development
of appropriate knowledge systems. Secondly, both the government and the Central Bank have joined
together to evolve consultative mechanisms.
While, in India, despite several regulations for ensuring the flow of credit to the MSME sector, the field
level feedback indicates that, this has never got translated into a proactive approach from the bankers
side. Banks still do not consider having a business case with MSME finance.This calls for radical
institutional changes.
10) Tapping the MSME Growth Opportunities: Making use of the potential of MSMEs is crucial to Indias
development policy. However, translated into strategies, they often do not work properly. The
constraints related to: 1. policy; 2. funding; and 3. linkages.
The country did not have a strong start-up policy for the last sixty years, though a beginning has been
made by the Union Budget 2014. Besides, start up funding continues to be a difficult area. Venture
capital Funds and other Start-up Funds can play a major role. But an appropriate environment need to
be created. Though there are opportunities of intervention through windows such as CSR funds, such
linkages are not often properly tapped or tailored to the context.
11) While the MSME Act 2006 was brought in as a major step forward in ensuring an environment of
competition, the benefits of the legislation have not yet trickled down. The Competition Policy of the
country is yet to properly understand and accommodate the MSME sector. The experience of countries
like South Africa and Indonesia, provide some lessons for India.

12): . Government-Governance Relationship The new thrust of the Union Government is on governance
While the results are yet to be seen, it gives promises to MSMEs is relation to a due space for
articulation of their case. There is much need for specifying and redefining this relationship, and for
restructuring the role of the government.
13) Knowledge Systems: The experience of the European Union and North America demonstrates the
significant role of knowledge systems that support both public policy and entrepreneurial activity.
While in India, even while major programmes like the National Manufacturing Competitiveness
Programme was introduced, the role of a knowledge system that can support them, was largely sidetracked. A major campaign like, Make in India, demands effective knowledge systems for its success.
14) Business Confidence: Business confidence is essential for orderly growth of private sector
development. However, this can happen only if public policy plays a proactive approach to boost
entrepreneurial confidence. Like that of Europe, it should start from a Think SME First policy, which can
give the correct signals to all the relevant stake holders.
15)Asset Reconstruction: Conserving the entrepreneurial resources of the country has, not so far ,
gained the importance it deserves .it is necessary to have an effective integrated asset reconstruction
strategy for the country as a whole, in order to arrest the chronic waste of entrepreneurial resources
through industrial sickness.
4.0. Points for Immediate Action
In order to meet the national policies and priorities on the MSME front, India needs a nine- point
approach and strategies thereon:

1) an integrated MSME Policy;

2) Effective MSME governance system, with the help of a sound data system;
3) Declaration of entrepreneurship as a national resource, and launch of a National MSME
Health Service.
4) Enterprise Security as a policy approach;
5) Think SME First as a campaign(for delivery of public services and public procurement).
6) Mission mode intervention for harnessing the MSME potential of States.
7) Creation of a National MSME Fund as a Centre-State initiative
8) Introduction of an MSME Unique Identification System and regular data base
9) Innovations in financial architecture, with special focus on a concept of Finance Parks.

5.0.Conclusion
In every democracy, the developmental outcomes are decided by peoples aspirations, to begin with.
These aspirations need to be articulated through effective platforms. Institutions are the outcome of
these platforms and their initiatives. Peoples mandate legitimizes the actions of institutions. Unless

public policy, evolved through a democratic process, gives the signals, one cannot expect India to
realize its aspirations on the MSME front.