CHAPTER - V. PROBLEMS AND CHALLENGES FACED BY SME s ENTREPRENEURS

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1 5.1 Introduction CHAPTER - V PROBLEMS AND CHALLENGES FACED BY SME s ENTREPRENEURS Small and Medium Enterprises (SME s) plays a major role in the socio-economic development of the country. Though, SME s sector has consistently registered higher growth rate compared to the overall industrial sector, they have been facing great challenges in the era of liberalization. The SME s have to continuously update themselves to meet these emerging challenges due to changes in technology, demand patterns and the varying market conditions. This chapter aims to detail the various problems and challenges faced by the SME s based on the nature of SME s as well as the problem creating areas for these SME s. 5.2 Nature of SMEs and their Problems SMEs are among the largest job creators in the country and as such are recognized as engines of economic growth. Being the largest source of employment after agriculture, SMEs sector in India enables lakhs of men, women and children living in urban slums, upcoming towns, remote villages and isolated hamlets to use indigenous knowledge, culture wisdom, and entrepreneurial skills for the sustenance of their lives and livelihoods. SMEs sector in India is highly heterogeneous in term of the size of the enterprises, variety of products and services produced the levels of technology employed. These could be broadly grouped into the following three categories, based on the different sets of constraints faced and requirement of policy interventions. a) High Growth Enterprises These include SMEs in sector like textiles and garments, leather products, auto components, drugs and pharmaceuticals, food processing, information technology (IT) hardware and electronics, paper, chemicals and petrochemicals, telecom equipment etc.

2 One of the major constraints in growth of such enterprises is access to equality capital. Presently, there is almost negligible flow of equity capital into this sector despite the fact that overall such capital inflow has witnessed significant increase in the recent years. There is, therefore, a need to promote inflow of equity capital into this sector by providing suitable incentives to SMEs-focused angel/venture capital funds as well as by setting up of SME s Exchanges/Platforms. Technology is another aspect that is critical for the growth of SMEs. Given their scale of operations, it is not only difficult for them to invest in research and development activities but even to acquire modern and latest technologies available in the market due to high costs. There is a need to make massive efforts for dissemination of information on the latest/modern technologies among the SME s and supporting them for undertaking technology up gradation, acquisition and innovation. In addition, the Government also needs to encourage R&D in the engineering/technical institutions through suitable tax incentives and setting up of Business Incubators. (b)enterprises Operating under Sub-contracting Promotion of sub-contracting has been one of the important ingredients of the policy envisaged for the development of MSEs in the country. However, in view of the dependent relationship of such enterprises with the large enterprise, they also face several problems. Some of the major problems include the following: 1. Delays in payments. 2. In case of rejection, the small firms end up with practically no option but to dispose off their products. 3. Linkages such as financial and supply of raw material are seldom provided by the buyer enterprises. 4. Buyer enterprises are not bothered to ensure that such enterprises operate with minimum working conditions or comply with various regulations related to their working.

3 While the Micro, Small and Medium Enterprises Development Act, 2006 provides for more rigorous provisions to counter the problems of delayed payments to the MSEs, the sense of insecurity of contract prevents them from taking legal action for recovery of dues. The SMEs need to be supported through appropriate programmes/schemes with focus on skill development and technology up gradation for improving the quality of their products so that rate of rejection is minimized. Also, there is a need to provide enabling legal environment-by suitably amending the labour and urban zoning laws-that is conductive to setting up of new enterprises as well as functioning of existing enterprises. (c) Unorganized Sector Enterprises No discussion on SMEs can be complete without a full treatment of the unorganized sector in which enterprises are typically established through own funds obtained through non-institutions sources. They lack managerial bandwidth, do not have established channels for marketing and are centered around a single traditional technology. The workers in the informal economy are clearly the overwhelming proportion of the workface and most of these suffer from various forms of insecurities and vulnerabilities. It follows that policies have to focus on improving their conditions. A substantial proportion of wage workers in agriculture and non-agriculture are either landless or land-poor. Self-employed in agriculture have better to land ownership. Unorganized workers have the lowest level of education and literacy. Scheduled Castes (SCs), Scheduled Tribes (STs) and Muslims are overwhelmingly concentrated in the unorganized sector and in self-employed activities to meet their livelihood needs. d) Self-employed Workers In agriculture, the self-employed are the various categories of marginal, small and big farmers. In non-agriculture, majority of the self-employed are own account workers, i.e. engaged in tiny enterprises often with the help of family labour or one or two outside workers.

4 Weak presence or even absence of organizational capital is a critical problem. An important segment of the self-employed workers are the street vendors/hawkers in India who deal with petty trade. The street vendors interact with different segments of urban population and have a specific role in urban society and space. However, lack of recognition of their role culminates in a multitude of problems faced by them: obtaining license, insecurity of earnings, insecurity of place for hawking, gratifying officers and musclemen, constant eviction threat, fines and harassment by traffic policemen. Paradoxically, the precarious nature of informal enterprises is, in part, due to the restrictive nature of the regulatory regimes under which they have to operate, and partly due to their small size. Some of the principal constraints faced by these enterprises relate to the lack of entrepreneurial capacity, skills, access to capital and credit raw materials and markets and technology. Competition from larger units, access to markets and raw materials are the other major problems faced by the informal sector units. (e) Social Security Concerns for the Unorganized Workers Workers in the informal economy are excluded from the institutionalized social security cover. Health security is a prime concern for the unorganized sector workers. Many studies in India have shown that reduced public health expenditure can have detrimental effect on the workers and their families. Illnesses requiring hospitalization could be catastrophic for poor workers. The health-related vulnerabilities mentioned above can be compounded, especially for the poor households, due to the fact that there has been a steep rise in the cost of treatment for healthcare in India in recent years. Given the high levels of maternal mortality and morbidity in India, access to safe motherhood for poor working women in the unorganized sector is of critical importance. A major concern expressed by the poor women working in the unorganized sector is also the loss of income during advanced periods of maternity and immediately after childbirth.

5 In the light of the inadequate expenditure on social security in India, it is necessary that plans and programmes be devised to address the needs of diverse vulnerable sections of the people, comprising the total population of India. 5.3 Problems creating areas for SME s a) Irregular Supply of Raw Materials SME s generally depend on local sources of raw material. They have to purchase raw material in small quantities and often on credit. Apparently, they cannot compete with large-scale industries in the procurement of raw material. In many cases the raw material is an imported item. Quite often, small industries have to pay a higher price for inputs and suffer uncertainty in their procurement. Non-availability of quality raw materials like dyes and yarn (especially for handlooms and powerlooms), vital inputs like power (for powerlooms, handicrafts, other industrial SMEs) and proper packaging facilities continue to be major bottlenecks. Lack of credit combined with inadequate raw material often pushes weavers, artisans, entrepreneurs into the clutches of loan sharks and middlemen. Though the National Small Industries Corporation are providing some raw materials, their efforts are not in consonance with the requirements. SMEs face acute raw material problems in terms of availability constraints, financial constraints to purchase them and price volatility, where they are forced to take the brunt. The capacity of SMEs to buy raw materials is limited and at times when the material is needed, it is not readily available. Considering their financial constraints and the need for minimizing their inventory costs, SMEs are forced to buy small amounts of needed raw-materials as and when the actual need arises. Unlike the organized sector enterprises, they are unable to derive the advantage of bulk purchases when market is favourable. Nor can they be sure of meeting their full requirements from the open market whenever they want, especially at reasonable price of acceptable quality that would keep them competitive. Their capacity to withstand the consequences of fluctuations in the

6 prices of raw materials is also low. SMEs, on their own, also do not find easy to resort to direct imports. In times of acute shortages of raw materials and frequent escalation in the prices of raw materials, SMEs are worst affected and require special measures to sustain themselves through difficult times. To an extent, such issues of SMEs could be better addressed when the economy was regulated and price control and system of allocation was the rule. Much of this has changed with the liberalization of economy. The price control regime for a range of commodities has been dismantled, compounding the raw material constraints experienced by SMEs. b) Shortage of Finance and Credit Scarcity of finance is a major obstacle in the development of small industries. The capital base of the small entrepreneur is usually weak and often he has to procure credit at a high rate of interest. Difficulties in documentation for bank loans and lack of collateral security are bigger problems in India than in the majority of other developing countries in Asia. A system of integrated credit should be evolved to meet the long-term and shortterm credit requirements of the small industries at reasonable rate of interest. c) Lack of Infrastructural Facilities Many small industries in backward areas are still deprived of infrastructural facilities like power, transport, and communication services. This has hampered their proper and efficient working thereby retarding their development. d) Deficient Managerial and Technical Skills The development of the small-scale sector has been hampered due to the shortage of trained and experienced managerial and supervisory personnel. Provision of technical services is needed to stimulate productive efficiency and new product lines. Most SMEs do not have money to invest in market research and are unable to carry out design and technical improvements to keep up with market demands. Unlike big businesses, they cannot invest in advertising and packaging. This limits their ability to tap

7 markets and attract consumers. SMEs, especially those pertaining to traditional livelihoods, are therefore, increasingly being forced to rely on middle men, petty traders and big businesses to market their products. This has reduced many to the status of daily workers, earning less than the minimum wages. Unregulated or haphazard application of modem techniques in all spheres of production is apt to create or aggravate technological unemployment. There is need for regulation here. This is not to suggest freezing of existing techniques. It only means that conditions have to be created in which modern techniques can be adopted in these lines of production and that the transition is orderly. e) Marketing problems Access to marketing is a major constraint for enterprises in the unorganized sector. This sector produces a large proportion of industrial output in the economy and yet the sector becomes immediately vulnerable in response to volatile, fragmented and shifting demand that is characteristic of National and International markets today. Marketing issues of SMEs are distinct from those that the organized sector faces. First of all, there is no clear concept of advertising, as the customer base is the local population or trader. On very few occasions is the producer actually thinking in terms of targeting a market and building marketing strategies around that. In most cases, the formal markets as available in the cities or towns are too far the producer in the informal sector to be in a position to influence it or target it consciously. While this might be true for a large number of producers, it is also true that a significant proportion of unorganized sector output reaches international and distant national markets. Institutional arrangements for marketing are thus very crucial to allow SMEs producers to link up with markets, whether local, national or international. However, the institutional marketing requirements of different kinds of industries are different.

8 Many producers in the micro/small business environments are in remote rural areas or high population low income urban areas; from where accessing markets is rather difficult. Generally, transport costs add a further element to product and they seriously limit the competitiveness of the product or service while hampering physical access to the market place and the opportunity to trade locally. Access to affordable and reliable transport is therefore very critical in the case of SMEs. In the limited market potential within a limited population generates limited sales that do not stimulate bulk purchasing. Input costs are high and consequently the final product price is not always competitive. Product quality also remains undependable and uncertain. Also, SMEs generally use household grade equipment, implements and utensils in production. Experience indicates that the production to commercial quantities. As a result, customers are forced to find suppliers of better quality. The sole trader small entrepreneur is faced with a double dilemma often-production is a time consuming operation and he has little time for marketing. The international demands for quality assurance and the emergence of more competitive producers have also eroded these markets. While these are the generic marketing problems faced by SMEs in general, it is necessary to distinguish between sectors based on traditional structures of distinguish between sectors based on traditional structures of production and hereditary occupations such as handlooms, handicrafts, silk and so on and non-traditional sectors such as the entire range of metal and petrochemical based industries, machinery and equipment, both electrical and non-electrical. The organizational structure of these two sets of sectors are very often different, with the former broadly falling into the category of livelihood activities and the letter into the enterprise mode. f) Technological Obsolescence The technique of production used in many small industries like weaving and wood carving is obsolete. This has led to high production cost and output of inferior quality goods. Hence, modernization of technology is urgently required to make small industries

9 efficient. Technology is one of the most critical elements in the growth of the small sector. India is ranked at the top in terms of availability of science and engineering personnel. However, small industries in India are loosing their competitive edge in the global markets due to lack of modern technology. Due to obsolete technology, cost of manufacturing is much higher than in the other developing countries in Asia. Addressing these problems to ensure a vibrant SMEs sector is essential for sustained and inclusive growth. g) Challenges of Globalisation Due to liberalisation and opening up of the economy, SMEs are facing stiff competition from imports and need technological upgradation to produce better quality products at cheap rates. They should be able to access production supply units around the world through the internet. Information dissemination about availability of recent technologies, literature on modern machinery, contact details of suppliers etc. is essential. Many segments of SMEs especially the traditional sectors, find it difficult to compete against aggressive marketing by the big domestic and multinational players. Street vendors, petty traders, handloom and powerloom weavers, home based food processing units, Khadi institutions, zari workers and rural artisans, many of whom have even lost livelihoods and places of work due to developmental works, are the worst affected. There is a need to evolve a constructive response to this situation As these sectors employ the most marginalized, our indigenous/traditional industries should be given opportunities to tap both the domestic and international markets. As in other countries, globalization can also act as a tool for development of the SMEs sector. SMEs engaged in manufacturing of engineering and automobile products have shown excellent growth over the years due to their expertise in supplying assemblies and sub-assemblies, components etc. What is needed is a rational policy which adequate support and protection to this sector enabling it to reach Indian markets. SMEs have many inherent advantages like exclusivity world, ability to produce small

10 order quantities etc. In a globalised world, they can tap new markets, especially in the West where there is a big demand for handcrafted products. Information technology can be used as a tool to provide online information on indigenous products and producers, while Central legislations and patents can be used to prevent cheap imitations of designs and products by other countries. Efforts are needed to establish better linkages with the industry. In post-wto agenda, domestic markets have been opened up for imports, creating severe competition for the local industries. At the same time, it has created opportunities for the small industries for export to developed countries. To gain from this opportunity, however, effort must be made in pushing for greater market access in the developed countries.