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 | ||
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Investment ceiling for plant, machinery and equipment |
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Manufacturing Enterprise |
Service Enterprise |
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Micro |
Up to $62,500 |
Up to $25,000 |
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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.
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