Major Issues and Emerging Challenges Faced by Micro, Small and Medium Enterprises in India

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1 Major Issues and Emerging Challenges Faced by Micro, Small and Medium Enterprises in India ABSTRACT Dr. M.Subba Rao Director & Principal Sri Balaji P.G College (MBA) Anantapur Andhra Pradesh - India The Micro, Small and Medium Enterprises have been accepted as the engine of economic growth and for promoting equitable development in India. MSMEs have been playing a momentous role in overall economic development of a country like India where millions of people are unemployed or underemployed & facing the problems of poverty. MSMEs constitute more than 80% of the total number of industrial enterprises and support industrial development. MSMEs contribute nearly 45% to manufacturing and about 40% to the Indian export sector. Indian MSMEs have moved up from the manufacture of traditional goods including leather, gems and jewelry, agricultural goods to much more value addition in the manufacturing sector to its entry in the value added services as well. Associated with this high growth rates, MSMEs in India are also facing a number of problems like sub-optimal scale of operation, technological obsolescence, supply chain inefficiencies, increasing domestic and global competition, fund shortages, change in manufacturing strategies and turbulent and uncertain market scenario. To survive with such issues and compete with large and global enterprises, MSMEs need to adopt innovative approaches in their working. The primary objective of this study is to identify the major issues and challenges faced by Micro, Small and Medium Enterprises (MSMEs) in India. And also comparative analysis of allocation funds on various schemes of Keywords: Micro, Small, Medium, Enterprises, Economic Development, Technological Obsolescence, Strategies INTRODUCTION Micro, Small and Medium Enterprises are also referred to as Small and Medium Enterprises (SMEs) and small and medium-sized businesses (SMBs) in some other countries. In India, the sector is generally referred to as the Micro, Small and Medium Enterprises (MSMEs). MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. The significance of Micro, small and Medium Enterprises (MSMEs) is attributable to its capacity of employment generation, low capital and technology requirement, use of traditional or inherited skill, use of local resources, mobilization of resources and exportability of products. After independence, the Govt. took up the policy of accelerating industrialization since Second Five Year Plan. The Policy resolution 1948 emphasized that cottage and small-scale industries can ensure best utilization of local resources, achieve local-self-sufficiency in production, increase employment generation through rehabilitation of displaced persons and ensure balanced economic growth. Industrial Policy Statement 1977 introduced the concept of District Industries Centers (DICs) for SSIs to ensure supply of raw materials and machinery, market survey of the district, generating new business ideas, arrangement of credit facility, maintenance of quality of products etc. > RJSSM: Volume: 03, Number: 12, April 2014 Page 94

2 The Industrial Policy Statement 1980 took some path breaking measures like increase in Investment limit for tiny, small, and ancillary units, withdrawal of industrial location restriction, elimination of provisions regarding expansion, increase in private participation. The New Industrial Policy in 1991 emphasized on raising the investment ceiling for the purpose of definition of a small unit to 6 million ( Rs 7.5 million if the unit concerned undertakes to export 30 percent of its output or if it is an ancillary unit i.e. a firm supplying at least 50 percent of its output to large scale industries), allowing other investors (including large-scale enterprises and foreign investors) 24 percent equity participation in a small-scale unit, introduction of the Act on delayed payment to small and ancillary enterprises, encouraging banks to open specialized SSI Branches and giving better priority to the sector in their annual credit budgets. Comprehensive Policy Package for SSIs and Tiny Sector 2000 increased the exemption for excise duty limit from 50 lakh to Rs One crore to increase competitiveness, conducted the third census of small-scale industries and motivated the SSI associations to develop and operate testing laboratories. As per the Policy Package for SME Small and Medium Enterprises were recognized in the services sector, and treated at par with SSIs in the manufacturing sector and emphasized on Cluster Development Model. Changing Pattern of Investments in Small Scale Industries Year Investment Limit (in rupees) 1950 Up to Rs. 0.5 million in fixed assets 1966 Up to Rs million in Plant & Machinery 1975 Up to Rs. 1 million in Plant & Machinery 1980 Up to Rs. 2 million in Plant & Machinery 1985 Up to Rs. 3.5 million in Plant & Machinery 1991 Up to Rs. 6 million in Plant & Machinery 1997 Up to Rs. 10 million in Plant & Machinery 1999 Up to Rs. 30 million in Plant & Machinery Source: Ministry of Small Scale Industries A major change took place in 2006 with the enactment of MSME Development Act, In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into two categories. (a) Manufacturing Enterprises:- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, The Manufacturing Enterprise is defined in terms of investment level in plant & machinery. (b) Service Enterprises:- The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified are as under: Enterprises Manufacturing Sector Investments in Plant & Machinery Micro Enterprises Small Enterprises Does not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed 5 crore rupees > RJSSM: Volume: 03, Number: 12, April 2014 Page 95

3 Medium Enterprises More than five crore rupees but does not exceed ten crore rupees Service Sector Enterprises Investments in Equipments Micro Enterprises Does not exceed ten lakh rupees Small Enterprises More than ten lakh rupees but does not exceed two crore rupees Medium Enterprises More than two crore rupees but does not exceed five core rupees Source: MSME Development Act 2006, Ministry of the District Industry Centers (DIC) MSME, Government of India. STATEMENT SHOWING FUNDS ALLOCATION AND ACTUAL UNDER VARIOUS PLAN SCHEMES Name of the Marketing Assistance Performance & Credit Rating Survey, Studies & Policy Research Assistance to Training Institutions Rajiv Gandhi Udyami Mitra Yojana International Cooperation BE RE EXP. BE RE EXP. BE RE EXP * NCEUS Share capital to NSIC *Including LoA issued for Rs lakh to NIC under RGUMY. The development of the micro, small and medium enterprises (SME) sector is on the priority of Government Agenda. As per the Results-Framework Document (RFD) for Ministry of Micro, Small and Medium Enterprises ( ), the Mission of the government is to Promote growth and development of globally competitive Micro, small and Medium Enterprises, including Khadi, Village and Coir industries, in cooperation with concerned Ministries / Departments, State Governments and other stakeholders by providing support to existing enterprises and encouraging creation of new enterprises. To endeavour, to achieve a cumulative growth of 40%-50% in the number of registered enterprises by the end of 12 th Plan and enhance this sector's contribution to GDP from the present 8% to 10% by the end of the 12 th Plan. > RJSSM: Volume: 03, Number: 12, April 2014 Page 96

4 MAJOR ISSUES CONCERNING THE MSME SECTOR As per the Report of the Subgroup on Unorganized Sector (of the Working Group on MSMEs Growth during 12th Plan), although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are briefly indicated below: Lack of availability of adequate and timely credit; High cost of credit; Collateral requirements; Limited access to equity capital; Problems in supply to government departments and agencies; Procurement of raw materials at a competitive cost; Problems of storage, designing, packaging and product display; Lack of access to global markets; Inadequate infrastructure facilities, including power, water, roads, etc.; Low technology levels and lack of access to modern technology; Lack of skilled manpower for manufacturing, services, marketing, etc.; Multiplicity of labour laws and complicated procedures associated with compliance of such laws; Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable entities to close down speedily; and Issues relating to taxation, both direct and indirect, and procedures thereof Lack of Social Security A prominent drawback of the MSME sector is that a predominant number (94%) of the enterprises are in the unorganized sector. Due to this, there is lack of reliable and updated database and it hampers monitoring of development initiatives and formulation of appropriate schemes to meet the differential needs of the heterogeneous profile of the enterprises. One of the major problems facing these enterprises is the access to equity and credit. Most of the time, the equity is coming from savings and loans from friends and relatives rather than through banking systems. Very often, the credit is coming from operations or domestic savings rather than established systems of cheap banking credit for working capital. To identify issues preventing the growth of the sector, the Prime Minister set up a Task Force in Further, the Planning Commission constituted a Working Group on MSMEs Growth for the 12th Five Year Plan ( ) under the Chairmanship of Secretary, (MSME) with 46 members representing various Ministries/ Offices of Government of India, representatives of selected State Governments and Industry Associations, NGOs etc. in May The Working Group submitted its Report on 13th January The Working Group classifies the issues relating to growth of MSME sector under six important verticals viz. i) Credit & Finance, ii) Technology, iii)infrastructure, iv) Marketing & Procurement, v) Skill Development & Training and vi) Institutional Structure, to provide theme based focus while devising any strategy for the sector. CURRENT OPPORTUNITIES AND CHALLENGES IN MSME SECTOR Today, some of the MSMEs are acquiring companies abroad as part of the globalization process. Mostly, these units are ancillaries and are export oriented. The MSME sector have transformed to the need of large local manufacturers and suppliers to global manufacturers like Auto Industry. Today some MSMEs are investing in R&D in order to compete globally. Outsourcing from multi-national companies has played a vital role in the emergence of Indian MSMEs as world leaders in specified products. The advantages in labour-intensive manufacturing units, lower transport costs > RJSSM: Volume: 03, Number: 12, April 2014 Page 97

5 and lose labour policies of the small scale sector have led to major outsourcing in manufacturing and services. The concept of cluster development also offers new insights into the potential role of MSMEs, in enhancing their access to new technology. It is estimated that there are 400 modern MSME and 2000 rural and artisan based clusters exist in India. These contribute to 60 % of India s manufacturing exports. Some of the clusters are so big that they produce 70 to 80 % of the total volume of that particular product produced in India. For example, Panipat produces 75 % of the total woolen blankets produced in the country; Tirupur produces 80% of the country s cotton hosiery. Characteristics of a successful cluster are inter-firm cooperation, cooperation blended with competition, the importance of local value systems, flexibility and innovative capacity, geographic proximity, sectoral specialization, a local pool of skilled labour and the presence of a large number of firms. It also includes willingness to work together to resolve potential clashes of interest, widespread entrepreneurial spirit and ability, promotion of a social compromise. With the elimination of Multi Fibre Agreement (MFA) in 2005, lots of new opportunities have also got opened for the Indian textile sector. Presently, MSMEs in this sector have shown an average growth rate of 32% for the past two years. The auto component sector grew at an average 35% over the past two years and expects to maintain this momentum. Besides this sector, food processing and construction have also been growing. The IT sector services are another success story of MSMEs. The retail business in India has become an area of immense opportunity. In the retail sector, the MSMEs will act as a supply source for the big retailers like Reliance Retail, Big Bazar, etc. However MSMEs, which constitute more than 90% of total number of industrial enterprises, are now facing a tough competition from their global counterparts due to liberalization, changes in manufacturing strategies, technological changes, and turbulent and uncertain market scenario across the world. Despite numerous protection and policy measures for the past so many years, MSMEs have remained mostly small, technologically backward and lacking in competitiveness. The opening of the Indian economy in 1991 added problems to the MSMEs. At the beginning, small scale enterprises found it difficult to survive. But in the last decade, the economic environment has tilted in favour of MSMEs. Presently, the MSMEs in India are at a crossroad and intense debate is centered on questions like what would be the future of the small enterprises? How these enterprises can survive in the international trade arena? What role can the government play in making these MSMEs more competitive? In this context, it is important to re-look into the basic issues of MSMEs. CONCLUSION MSMEs, as a major contributor towards growth of domestic economy and employment generation, should get adequate support in terms of policy framework, incentives and other relevant aids. Steps like providing infrastructural facilities, developing various industrial parks and technology incubators under MSME cluster development programmes, creating networks of organizations that help provide training to skilled workforce to improve productivity, encourage entrepreneurship and competency in management, funding R&D investments, technology advancement may work for the betterment of the sector. Indian MSMEs are finding it difficult to sell their products in the domestic and international markets because of increasing competition. To make their products globally competitive, Indian MSMEs need to up-grade their technology and put more emphasis on innovation. > RJSSM: Volume: 03, Number: 12, April 2014 Page 98

6 REFERENCE 1. Bhavani, T.A. (2011), Dynamic Business Environments: What These Mean for Indian Small Enterprises in Micro and Small Enterprises in India: Era of Reforms: Keshab Das (Ed) 2. Morris, S.; R. Basant; K. Das; K. Ramachandran; and A. Koshy (2001) The Growth and Transformation of Small Firms in India. New Delhi: Oxford University Press. Websites: > RJSSM: Volume: 03, Number: 12, April 2014 Page 99