MEDIUM, SMALL AND MICRO ENTERPRISES (MSMEs)

• MSMEs contribute about 8 per cent of the GDP of the country, about 45 per cent of manufactured output and about 40 per cent of exports. This, coupled with a high labour to capital ratio, high growth and high dispersion makes them crucial for achieving the objective of inclusive growth. As per the Quick Results of the 4th All India Census of MSMEs (2006-07), there were 26 million MSMEs in the country, which provided employment to about 60 million persons. Of the total, 28 per cent were in the manufacturing sector and 72 per cent in the service sector. This is the first Census after the enactment of the MSMED Act 2006 and includes,for the first time, medium enterprises.

MSMEs Definition

• W.e.f. From 26th oct,2006: Micro and tiny enterprises will be those having plant and machinery of less than Rs. 25 lakh, Small enterprises will be those having plant and machinery between Rs. 25 lakh and Rs. 5 crore, Medium enterprises- between Rs. 5 crore and Rs. 10 crore

NEW definition 2018

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved change in the basis of classifying Micro, Small and Medium enterprises from ‘investment in plant & machinery/equipment’ to ‘annual turnover’ in 2018.

This will encourage ease of doing business, make the norms of classification growth oriented and align them to the new tax regime revolving around GST (Goods & Services Tax).

Section 7 of theMicro, Small and Medium Enterprises Development (MSMED)  Act, 2006 will accordingly be amended to define units producing goods and rendering services in terms of annual turnover as follows:

• A micro enterprise will be defined as a unit where the annual turnover does not exceed five crore rupees;
• A small enterprise will be defined as a unit where the annual turnover is more than five crore rupees but does not exceed Rs 75 crore;
• A medium enterprise will be defined as a unit where the annual turnover is more than seventy five crore rupees but does not exceed Rs 250 crore.

Additionally, the Central Government may, by notification, vary turnover limits, which shall not exceed thrice the limits specified in Section 7 of the MSMED Act.

At present the MSMED Act (Section 7) classifies the Micro, Small and Medium Enterprises (MSMEs) on the basis of investment in plant and machinery for manufacturing units, and investment in equipment for service enterprises. The criterion of investment in plant and machinery stipulates self declaration which in turn entails verification if deemed necessary and leads to transaction costs.

Taking turnover as a criterion can be pegged with reliable figures available e.g. in GST Network and other methods of ascertaining which will help in having a non discretionary, transparent and objective criteria and will eliminate the need for inspections, make the classification system progressive and evolutionary, help in overcoming the uncertainties associated with the classification based on investment in plant & machinery/equipment and employment, and improve the ease of doing business. In addition the amendment will provide flexibility to the Government to fine-tune the classification of MSMEs in response to changing economic scenario without resorting to the amendment of MSMED (Micro, Small & Medium Enterprises Development) Act.

The change in the norms of classification will enhance the ease of doing business. The consequent  growth and will pave the way for increased direct and indirect employment in the MSME sector of the country.

MSMEs - ROLE AND IMPORTANCE

• Employment
• Decentralized industrial expansion
•  Equitable distribution of income.
• Channelization of latent resources, both financial and entrepreneurship skills
• Exports
• Contribution in GDP
• Productivity, efficiency and profitability

PROBLEMS WITH MSMEs

• Management problems
• Credit constraints
• Infrastructural constraints
• Industrial sickness
• Obsolete technology
• Dereservation
• External competition

GOVT POLICY REGARDING MSMEs

• Policy prior to 1991
• 1947-setting up of cottage industries board
• 1954- small industries development organization (SIDO)
• 1955-national small industries corporation ltd (nsic)
• 1955- the programme of industrial estates was started
• 1967- ssi reservation was introduced
• 1979- the programme of district industries centre (dics) introduced (at present there are 422 dics in india)
• 1982- council for advancement for rural technology(cart) introduced
• 1986- small industries development fund(sidf) launched(for development, diversification, expansion and rehabilitation
• 1987- national equity fund(nef) launched (financial and rahabilitation support)
• 1988- singel window scheme (sws) launched(for working capital and fixed capital loan)

POLICIES AFTER 2000

• New three tier definition
• Raising of investment limit
• Enhancing of excise exemption limit
• Credit gurantee fund scheme launched to provide loans up to rs. 25 lakh without any collateral
• Market development assistance (mda) launched
• Scheme for technology upgradation launched
• Dereservation launched in a big scale
• Cluster approach
• Policy initiatives recommended by Arjun Sen Gupta commission, 2004

RECENT POLICY MEASURES

1.   Focus on six major thematic areas, namely credit, marketing, labour, rehabilitation and exit policy, infrastructure, technology and skill development, and taxation as also special measures for the north-eastern region and Jammu and Kashmir.

2.   The National Manufacturing Competitiveness Programme (NMCP)

3.   Skill development as a high priority area.

4.   The cluster approach

5.   The Credit Guarantee Fund Scheme

6.   The Credit Linked Capital Subsidy Scheme

7.   Under the Prime Minister’s Employment Generation Programme (PMEGP)

8.   Market Development Assistance (MDA)

9.   Financial aid from the Asian Development Bank (ADB)

10. Scheme of fund for regeneration of traditioal   industries.

Competition act

On June 26, 2001, the union cabinet cleared the trade related Competition bill 2001.

With India moving from a regulated to a free market economy, an urgent need was felt to replace the existing Monopolies and Restrictive Trade Practices (MRTP) act 1969 by another that was more enabling and less restrictive. Infact, the SVS Raghavan committee had already called for such a move. Another crucial factor that played a vital role in bringing about this proposed act was the feeling that in the changed climate of globalization and liberalization the vulnerable consumer needed to be protected by ensuring fair competition among goods and services providers.

Features of the Act

The enactment of the competition bill, due to be passed in the monsoon session of parliament will lead to

• the termination of the MRTP act and the dismantling of the MRTP commission.
• It will now be replaced by a ten member Competition Commission of India (CCI), which will be empowered to fight unfair competition, restrict emergence of monopolies and keep an eye on Mergers and Acquisitions (M&As). At the micro level, the task of the commission would include prevention and investigation of collusive bidding rigging of bids, unfair supply controls and territorial market dominance.
• The proposed act is quite clear on what constitutes a restrictive practice. According to this act, mere dominance will not be considered restrictive but abuse of such dominance will be considered as such especially if prices are rigged by restricting supplies and skewing or distorting distribution patterns.
• As far as Mergers and Acquisitions go, the government has gone against the SVS Raghavan committee report, which had recommended mandatory notification prior to any merger. Now according to the proposed act, no prior notification will be required to be filed with commission for merger and acquisition and only companies with a turnover in excess of Rs. 3000 crore or with an asset size of Rs. 1000 crore will fall under its purview, should it suspecting wrong practices, seek to inquire into the specifies of deal. This is an encouraging move, more so, because only 19 companies (only 9 from private sector) fall under the category of turnover size.

The basis of distinction between the large scale, medium scale and small and micro scale industries is generally the size, capital resources and labour force of the individual unit.

The Differences Between The Small-Scale And Cottage Industries Are Basically Two:

i)    While small-scale industries are mainly located in urban centers as separate establishments, the cottage industries are generally associated with agriculture and provide subsidiary employment in rural areas and

ii)   While small-scale industries produce goods with partially or wholly mechanized equipment employing outside labour, the cottage industries involve operations mostly by hand which are carried on primarily with the help of the members of the family. The basis for this distinction between the small scale and cottage industries was laid down by the Fiscal Commission in 1950 when it stated that:

‘A cottage industry is thus one which is carried on wholly or primarily with the help of the members of the family either as a whole or a part time occupation.

A small-scale industry, on the other hand, is one, which is operated mainly with hired labour, usually 10 to 50 hands. Probably it was this definition that prompted the Industries (Development and Regulation) Act, 1951, to exempt units employing less than 50 workers with power, and less than 100 workers without power, from registration and this exempted sector came to be known as the small-scale sector.

While the differences between the small and large industries arise largely because of the distinct organizational character of the former which is indicated by such factors as ownership, management, technique, flow of input and output, localization and finally the historical sequence of development, in the official industrial policy formation, fixed capital investment in a unit is the most crucial criterion for differentiation.

The investment limit has continuously been enhanced over time. While in April 1991, investment in fixed capital (plant and machinery) was Rs. 60 lakhs for small-scale units and Rs. 75 lakhs for ancillary units (one which sells at least 50% of its single shift output to a large firm under separate ownership or control-ancillary unit), government in 2000 enhanced the investment ceiling for plant and machinery of small scale industries (SSIs) to Rs. 1 crore and of tiny units to Rs. 25 lakhs (enhanced from previous Rs. 5 lakhs set in August 1991).

Investment Limit Raised

The Government in 2005 has further raised the investment limit (within the SSI sector) to Rs. 5 crores (from Rs. 1 crore) in plant and machinery for the following seven items of sports goods: all types of sports net, shuttle cocks, hockey sticks, protective equipment like pads, gloves (soft leather), dump bells and expanders, cricket and hockey balls and covers of football/volleyball/basketball.

Industrial units included under the ‘small scale and village industries’ by virtue of fulfilling the above capital investment requirement are a ‘hybrid’ of units of various types arranging from the age-old household industries to modern mechanized small scale units and MSMEs can be divided into the following two categories:

1.   Traditional industries based on traditional skills and techniques, and

2.   Modern small-scale industries making use of modern technology as well as artisans’ workshops engaged in activities such as repairing of various implements, machinery, vehicles, etc.

The traditional industries can be further sub-divided into two categories:

(i)   handicrafts producing highly selective goods of high-skill workmanship (wood and ivory carving, carpet weaving, metal works, etc.), and

(ii) village and household industries producing common consumer goods and other utilitarian products predominantly by hand or wing simple tools (pottery, leather products, hand woven textiles, silk materials etc.).

Role of Cottage and MSMEs Industries

SSIs present an entirely distinct pattern of development. Emphasizing the importance of SSIs in the Indian economic development, the IPR 1956 stated: ‘they provide immediate large-scale employment; they offer methods of ensuring a more equitable distribution of the national income and they facilitate an effective mobilization of resources of capital and skill, which might otherwise remain, unutilized. Some of the problems that unplanned urbanization tends to create will be avoided by the establishment of small centres of industrial production all over the country.’

This sector presently accounts for around 40% of gross turnover in the manufacturing sector, 6.9% of the net domestic product and 34% of the country’s exports. Some of other distinct features are:

Employment Generation

• SSI provides employment to the largest number of people after agriculture.
• SSIs are generally labour intensive. The capital per person employed is much smaller. This ideally suit for India where capital is scarce is labour is super abundant.
• India is endowed with a large fund of traditional skills SSI provides opportunity for profitable employment of these skills.
• SSI provides opportunities for entrepreneurship ship to more persons than large scale Industries.

Equitable distributions of National Income

• The owner ship of SSI is more wide spread.
• They posses a much larger employment potential, so west majority of people can share the fruits of economic development.

Mobilization of capital

• Domestic savings and entrepreneurial skills all the country participates in Enhancement of national income.

Regional disparities decreases

• Large Scale Industries are concentrated is few states but SSI can be operated in dispersed area.
• Decentralization of Productions made Possible by SSI provides check on excessive and premature urbanization.

Contribution to exports

• The Artistic handicrafts can earn valuable forex for the country. E.g. In recent years gems & jewelry, carpets, have grown to major export items.
• Around 93% of experts of SSI consist of non-traditional Items like sports goods, leather products garments, processed food etc.

Less capital Intensive

• The starting & operating cost is much less than large-scale industry
• SSI can be constructed and brought is to Production in Smaller Period.

Use of local Resources

• SSI generally uses locally available Raw material or By Product of large-scale industry, which may go waste otherwise.

Miscellaneous Reasons

• The labour and personal relation ships are more peaceful and cooperative.
• SSI can meet the demand of items in scarcity in country in shorter three period.
• SSI has greater flexibility in operations. So, are thus better placed in catering to changing fashion.

Financial benefits

SSI receives many other favors by way of credit subsidies, price preferences in public procurement, sales and excise tax concessions. Excise tax exemption or reduction is often the most important. These concessions act in a peculiar way. Luxury good, and other ‘demerit’ goods, as are naturally subject to the highest excise taxes. So SSIs producing those goods receive the most valuable preferences. Very small producers are always exempt from indirect taxes because it costs too much to collect revenue from them.

SME Fund

Looking to the credit needs of the SMEs in 1990, the Small Industries Development Bank of India, (SIDBI) was launched to aid and finance for small enterprises with a corpus of Rs. 2500 crores. To further improve credit availability, a SME Fund of Rs. 10,000 crores has been operationalised under SIDBI from April 2004.

Credit Cards

LaghuUdyami Credit Card (LUCC) Scheme has been liberalized by enhancing the credit limit from Rs. 2 lakh to Rs. 10 lakh, for borrowers who have a satisfactory track record.

Earlier Policy initiatives

The National Commission on Enterprises in the Unorganized/Informal Sector was set up in September 2004. The commission will, inter-alia, recommend measures considered necessary for improvement in the productivity of these enterprises, generation of large scale employment opportunities on a sustainable basis, linkage of the sector to institutional framework in areas like credit, raw material supply, infrastructure, technology up-gradation, marketing facilities and skill development.

85 items reserved for exclusive manufacture in the SSI sector were de-reserved in October 2004. The total number of reserved items now stands at 605

To facilitate technology up-gradation and enhancing competitiveness, the investment limit (in plant and machinery) has been raised in October 2004, from Rs. 1 crore to Rs.5 crore, in respect of 7 items of sports goods, reserved for manufacture in the small scale sector

The small scale and Medium Enterprises (SME) Fund of Rs.10,000 crore was operationalised by the SIDBI since April 2004. Eighty percent of the lending from this fund will be for SSI units, at interest rate of 2 percent below the prevailing PLR of the SIDBI.

The Reserve Bank of India enhanced the composite loan limit for the SSI sector to Rs. 1 crore from Rs. 50 lakh.

With a view to integrate small and medium enterprises, facilitating their growth and enhancing their competitiveness (including measure for freeing is the sector from “Inspector Raj”), a suitable legislation is being finalized.

A new “Promotional Package for small enterprises” is being formulated. This world includes measurers to provide adequate credit, incentives for technology up-gradation, infrastructural and marketing facili ties, etc.

Problems of Small Scale and Cottage Industries

The small-scale and cottage industries are plagued by a number of problems, which often force these units to close down. The main problems faced by SSIs and Cottage Industries are:

Finance and Credit

The Capital base of the small industries units is usually very weak. The artisans or craftsmen running cottage industries either run their business with whatever little capital they possess or take credit at usurious rates of interest from the unorganized credit market in rural/semi-urban centres. The main institutional sources for small industries are the following: State Directorate of Industries, State Financial Corporations, Public Sector-Banks, Private and Cooperative Banks. Though the commercial banks have liberalized their policy of granting credit of SSIs and cottage industries and have in fact placed the credit to them under the mandatory priority sector lending resulting in enormous availability of institutional credit at subsidized rate to the small sector, the criterion of credit worthiness and willful default by past borrowers has led to excess caution being exercised through cumbersome systems and procedures by the financial institutions. In order to ensure that credit is available to all segments of the enlarged SSI sector, RBI has issued instructions for compliance of 40% of total credit to priority sector and out of the funds normally available to SSI sector 40% will be reserved for units with investment in plant and machinery upto Rs. 5 lakhs, 20% for units with investment between Rs. 5 lakhs and Rs. 25 lakhs and the remaining 40% for other SSI units.

Raw material availability

The majority of SSI and cottage industries depended entirely on local sources for their raw material requirements, initially but even then many a times, raw materials were supplied only on the condition that the finished product be supplied back to the raw material suppliers/traders and it were the latter who actually reaped profits. Ever since the modern SSIs have appeared on the industrial horizon manufacturing a lot of sophisticated and new products, the raw material constraint has emerged as a significant constraining on their production efforts. Many SSIs use imported raw materials and in case of foreign exchange crisis or volatility, these industries have to suffer a severe setback.

Machines and other equipment

Obsolescence has set in and so the costs of production are high and the quality, too, is inferior as compared to the large-scale units. Hence, modernization and rationalization are urgently required in SSIs. A well spread network of R & D and technical assistance is required.

Under-utilization of capacity

There is a considerable under-utilization of capacity in SSIs. For instance, in 1987-88, capacity utilization was only 41% in electrical machinery and parts, 58% in leather products, 60% in transport equipment and parts, 30% in miscellaneous manufacturing industries and 32% in metal products. Four small-scale units as a whole, capacity utilization was merely 48%.

Problems of marketing

Most of the SSIs, are forced to restrict their sales to the local markets, tailoring their supply to the local needs. The inability to procure clientele from distant markets compels them to restrict their scale of operations, and forego economics of scale, which a unit of an optimum size can derive. SSI units often do not possess any marketing organization and consequently their products compare unfavorably with the quality of the products of the large scale industries and hence suffer from a competitive disadvantage vis-a-vis large scale units.

On the institutional front, the Trade Development Authority and the State Trading Corporation held the SSIs in organizing their sales. The National Small Industries Corporation set up in 1955 is also helping the small-scale units in obtaining government orders and locating export markets.

Other Problems

In addition to the problems enumerated above, the SSI face a number of other problems like

• There has been lack of effective coordination among the various support organizations set up over the period for the promotion and development of these industries.
• Quality consciousness has not been generated to the desired level despite various measures taken in this regard.
• inefficient management,
• non-availability of cheap power,
• unchanging and unresponsive production pattern,
• burden of local taxes, and
• competition from large-scale units.

WTO and SMEs

Under the World Trade Organisation (WTO) regime, new opportunities are being created for linkages between SMEs across the globe. The dismantling of the textile quotas is being anticipated in India with great enthusiasm. Garment export is a dominant characteristic of Indian SMEs. Other sectors, such as Biotech, IT and IT enabled services, footwear to name a few, have shown promising potential. Closer connectivity of India’s large agricultural resources affords growing opportunities for new ventures. India’s vast pool of talented and educated persons, and low-cost labour can translate into possibilities for foreign collaborations. SMEs grew by 19% last year, faster than the overall growth of the IT sector, and has expected SMEs to deliver better results in the coming years. SMEs are also engaged in cutting edge research and development activities, logistics services, back-office operations and other services.

Institutional Set Up

Small Industries Development Organisation

The Small Industries Development Organisation (SIDO) under the Office of Development Commissioner (SSI) is implementing promotional/catalytic programmes for the growth and development of SSI sector.

• Modernisation and technology upgradation
• Incentives are given to small scale units to acquire ISO 9000 or equivalent certification.
• to equip them with modern machines and skilled manpower.
• set up ten Tool Rooms in the country to assist SSI units.
• The Product-Cum-Process Development Centres (PPDCs) have been established for Foundry and Forging at Agra, for sports goods and leisure time equipment at Meerut, for essential oils at Kannauj, for glass industry at Firozabad, and for pumps and diesel engines at Coimbatore.
• participation in international exhibitions, organisation of training programmes on packaging to enhance the value of exports by SSI units,
• provision of exports and trade related information to the target groups of export -oriented small scale units,

Integrated Infrastructure Development Centres (IIDCS)

The IIDC scheme was taken up for augmenting the infrastructural development facilities in rural and backward areas for promoting industrial development.

National Small Industries Corporation Limited (NSIC)

The NSIC was established in the year 1955 by the Government of India with a view to promote, aid and foster the growth of viable small industries in the country following an integrated approach and acting as a catalyst, particularly with emphasis on the development of industries in backward areas and in selected lines of production identified as priority areas from time to time.

The NSIC has been operating ‘marketing assistance’ programme which includes

1.   raw materials assistance

2.   integrated marketing support and

3.   marketing to the Government and tender marketing including consortia formation.

Khadi and Village Industries Commission (KVIC)

It is a statutory body established by an Act of Parliament in 1956. In April 1957, it took over the work of former All India Khadi and Village Industries Board.

Objectives

The broad objectives that the KVIC has set before it are...

• The social objective of providing employment.
• The economic objective of producing saleable articles.
• The wider objective of creating self-reliance amongst the poor and building up of a strong rural community spirit.

Kvic Schemes

• PMEGP  (Prime Minister's Employment Generation Programme)
• REGP  Rural Employment Generation Programme (REGP
• SFURTI Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
• RISC  Rural Industry Service Centre

Objectives Of The Programme

Provide backward forward linkages to Khadi & V.I. activities in a cluster.

To provided services like raw material support, skill up-gradation, training, Quality Control, Testing facilities, marketing promotion, design & product development in order to strengthen the rural clusters

•          EXPORT INCENTIVE SCHEME

•          INTEREST SUBSIDY SCHEME

Khadi Schemes

• Market Development Assistance (MDA)
• Khadi KarigarJanashreeBima Yojana
• Interest Subsidy Eligibility Certificate (ISEC)
• Strengthening of Infrastructure of Existing Weak Khadi Institutions and Assistance for Marketing Infrastructure
• Scheme for Enhancing Productivity & Competitiveness of Khadi Industry & Artisans
• Workshed Scheme for Khadi Artisans.