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SME- A Road To Growth & Stability

Posted in Finance Articles, Total Reads: 4425 , Published on November 01, 2012

I remember a quote from book Robert Kennedy: In His Own Words: The Unpublished Recollections of the Kennedy Years “Some people look at things as they are and ask why? But I dream of things that never were and ask why not” – Robert F Kennedy.


SME or Small and Medium Enterprises can be rightly called as the backbone of the GDP of India. SMEs are playing a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, creates around 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SME’s Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. There are approximately 30 million MSME Units in India Estimates widely vary as government sources only report registered SME’s.

Definition of an SME

The definition of SMEs in India has changed with the passing of Micro, Small and Medium Enterprises Development Act, 2006. Accordingly it is divided into Manufacturing Enterprise and Service Enterprise.

Manufacturing Enterprises – Investment in Plant & Machinery



Micro Enterprises

Up to Rs. 25 Lakhs

Small Enterprises

above Rs. 25 Lakhs & up to Rs. 5 Crores

Medium Enterprises

above Rs. 5 Crores & up to Rs. 10 Crores

Service Enterprises – Investment in Equipments



Micro Enterprises

Up to Rs. 10Lakhs

Small Enterprises

above Rs. 10 Lakhs & up to Rs. 2 Crores

Medium Enterprises

above Rs. 2 Crores & up to Rs. 5 Crores

SME definitions vary widely among countries.

  • Indian definition hinges on Investment amount.
  • Malaysia, UK etc… define based on Turnover.
  • China, Honk Kong, Canada etc… define based on number of Employees.

History of SME

The History of SMEs in INDIA can be traced back to the Gandhian Model of economic self-reliance. After Independence and with subsequent liberalization policies of the govt in 1991, this sector has seen significant growth. SMEs are now being truly encouraged. MG’s vision for this economic model was aimed at providing employment to large no of people to address the prevalent issue of poverty.

Post Independence India adopted the Industrial policy resolution of 1948 that defined the role of state in industrial development for first time. Centralized planning was a strong feature for first few decades and several controls were kept on private trade, investment, land ownership and foreign trade.

Later during second five year plan through second industrial policy small industries were placed clearly that too in an important position. But the scenario of Small Scale sector changed with Industrial policy of July 1991 which for the First time in India’s development history spoke of liberalization. This reflects the growth of SSIs as against the total industrial sector from 1991-1999. In 1991 the growth rate of SSIs was almost 3 times of the total industrial sector at 3.1%. From 1992-1995 the growth rate of SSIs exceeded that of industrial sector. However in 1995-96 the growth rate was slightly lower, but again it increased in 1996 and continued to be higher than the total industrial growth rate till 1999. Till 2006, SME segment saw a lot more development and support from government which led to Entrepreneurial Development and diversification of industrial sector with the service sector dominating SMEs.

A fresh start for the Sector

A Concerted effort to support and promote SMEs in the context of globalised competitive world by the implementation of MSMED Act 2006. This aimed at removing the bottleneck faced by SME sector such as :

  • Competition from domestic companies and MNCs
  • Inadequate access to Financial resources due to lack of financial information and non formal business practices.
  • Lack of access to Interstate and International markets.
  • Vulnerability to market fluctuations.
  • Lack of awareness of global best practices.

Region and Location wise Distribution:

Largest Concentration of clusters is in western India followed by northern India because of rise in Entrepreneurial talent and developed industries. About 80% of the clusters are located in cities or towns.

Policies for SMEs

A number of policy initiatives in recent years have set the ball rolling for the overhaul of the SME sector in India. The Ministry of Small Scale Industries (SSIs) and the Ministry of Agro and Rural Industries (ARIs) were merged to form the Ministry of Micro, Small and Medium Enterprises (MSMEs). This was the major step in effecting a massive overhaul of the SME sector in India. The Ministry of MSMEs design policies, programmes, projects, and Schemes in consultation with its organization and various stakeholders and monitors their implementation with a view to assist the promotion and growth of MSMEs. Today, there is a strong regulatory and governmental ecosystem for SMEs to grow in India, led by organizations like Small Industries Development bank of India (SIDBI), National Small Industries Corporation (NSIC) , SME Rating Agency of India(SMERA).

Quality Management: The national Quality Campaign targeted at SMEs focuses on enabling them to adopt management systems and quality technology tools. The Technology Up gradation Scheme and benchmarking studies are some aspects of the quality management initiative.

Focused on Competitiveness: The National Manufacturing Competitiveness Programme (NMCP) was set up. NMCP is working towards providing the appropriate policy environment to SMEs to be able to achieve improvements in the face of global competition, regardless its an export oriented or domestic market.

National Commission for Enterprises in the Unorganized Sector: The commission has been setup as an advisory body and a watchdog for the informal sector to achieve improvement in productivity for generation of employment in large scale on a sustainable basis, particularly in rural areas.

Awareness in Intellectual Property: As innovation is key to the survival of SMEs, the government is looking to create awareness of IPR and encourage Indian firms to invest in next generation intellectual property in the product, process and practice domain.

Entrepreneurial and Management Support: The govt will offer financial assistance to set up business incubator units in colleges and training institutes to support entrepreneurs.

Simpler Processes: The replacement of the registration with the far simpler Entrepreneur’s Memorandum (EM) has been the most visible achievement in MSMED Act, 2006.

Delayed payments: With the coming of MSMED Act, 2006, SMEs have a legal tool to deal with non paying customers. Customers who do not pay SMEs now can be charged 18 per cent interest after 45 days of invoicing. With this Micro and Small Enterprise Facilitation Council (MSEFCs) are set up in 17 states.

Skill Development: MSME development institutes and other organizations under the ministry of MSMEs are conducting Skill Development programmes, with a monthly stipend.

Credit Support: Credit to MSE sector forms a part of priority sector lending by banks. For public and private sector banks, 40 per cent of the net bank credit is earmarked for priority sector. A credit guarantee fun had been set up to help SMEs who are unable to show collateral to get loans. The loan limits has been enhanced from Rs 25 lakhs to Rs 50 Lakhs and a onetime grantee is reduced from 2.5 per cent to 1.5 per cent. The Credit Linked Capital Subsidy Scheme (CLCSS) was made more attractive.

Scheme of Fund for Regeneration of Traditional industries: The govt launched the Scheme of Fund for Regeneration of traditional industries (SFURTI) for development of around 100 clusters in khadi, Village and Coir Sectors.

Encouragement through National awards: For the first time in 2008, national awards for MSMEs were presents in the categories of outstanding entrepreneurs of MSMEs.

Exhibition Opportunities: The MSME expo is being organized; trade fairs and buyer-seller meets are organized.

International Trade: India which is a part of WTO, with its help is expected to lead the expansion in volume of International trade bought by reduction in export subsidies, greater market access, and removal of non – tariff barriers and reduction in tariffs. India is also participating in number of Regional Trade agreements (RTA) that includes Free Trade Agreements (FTA), Preferential Trade agreements (PFA), Comprehensive Economic Cooperation Agreements (CECAs).

Better Patent Laws : There should be tightening of patent laws through regulation of intellectual property rights under the Trade Related Aspects of Intellectual Property rights (TRIPS) agreement, which lays down what is to be patented(both products and processes), the duration the terms and so on..

Tax Triangle : A five year tax holiday is given, commencing from the year of production, for the few industrial undertakings located in the backward districts and all the North Eastern States, Jammu & Kashmir, Himachal Pradesh, Sikkim , Goa and Union territories of Andaman and Nicobar Islands, Dadar and Nagar Haveli , Daman and Diu, Lakshadweep and Pondicherry from 1993-94. Exercise duty policies grant SSI units having a turnover of less than Rs 4 crore full exemptions from the payment of central excise duty on specified output and there after slab wise concession for goods produced for home consumption as well as goods exported to Nepal and Bhutan.

This article has been authored by Anoop Sharma from IMT Nagpur.

Image: FreeDigitalPhotos.net

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