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Do SMEs have Bright Future in India?

Posted in Finance Articles, Total Reads: 3487 , Published on March 04, 2013

Small and Medium Enterprises or generally abbreviated as SMEs are the backbone of Indian Economy due to their contribution to the output of the country. According to the notification brought out by our Ministry of Small Scale Industries in 2006, if a company’s investment on plant and machinery exceeds Rs 25 lakh but is under Rs 5 crore the enterprise is categorised as ‘small’. Similarly for Medium Enterprise the upper cap is Rs 10 crore.



Review of the list of items reserved for exclusive manufacture in the SME sector is a continuous process and it has been brought down from 842 in 1991 to 21 in 2008, according to Press Information Bureau, Government of India. According to the press release of 2010 by the government, the government has already announced a ‘Policy Package for stepping up credit to Small and Medium Enterprises (SMEs)’ which will facilitate public sector bank to fix their own targets for funding of SMEs in order to achieve a minimum of 20% year on year growth in credit to the SME sector.

Presently SME sector in India contributes to 45% of industrial output, 40% of Indian exports and employs 60 million people creating 1.3 million jobs each year. The sector is worth $5 billion and is growing at 8%. More than 8000 products are produced by 13 million SME units (According to the ministry of MSME). The enterprises are expected to grow 20% year on year with 90% of the industrial units presently belonging to the sector. This growth can be attributed the fact that these units need comparatively lower investment and some of them are also backed by local and foreign funding.

The SME sector faces a lot of challenges irrespective of clocking impressive growth in the recent years. Lack of support from government departments, banks, financial institutions and corporate have been major issues of concern. Limited capital availability, lack of knowledge, infrastructure, and technology also pose threat to the development of the sector. The sector needs high end research and more penetration in rural areas.

“SMEs present Rs 500 billion opportunity for banks” -CRISIL

CRISIL conducted a study on the funding patterns of 2000 Small and Medium Enterprises revealed that there is an opportunity for banks to increase their funding to SMEs to Rs 500 billion. Strengthening of infrastructure in rural India will help SME sector to record sustainable growth. On 5th November 2012 Tata Steel unveiled a new brand of its hot rolled products called “Tata Austrum” to meet demands in small and medium enterprises (SMEs). In 2013-14 Tata Steel targets nearly Rs 4000 crore revenue from the segment.

Although the future may look promising due to manufacturing flexibility, abundance of raw materials and cheap labour, there are many problems that need to be addressed as the sector is still in its incubatory stage of growth. The sector is highly fragmented and is suffering from technological obsolescence and high cost of raw materials. The sector is threatened by stiff competition from developing economy and pricing pressure posed due to locational disadvantage. The emerging economy of India will help SME sector to grow due to end of quota regime and increasing disposable income. The credit policy of financing institutions like Oriental Bank of Commerce and SIDBI (Small Industries Development Bank of India) should be eased. In strategic association with SME Rating Agency of India Ltd (SMERA) has conceptualized a series of publications targeted to Emerging SMEs of India. The help from corporate such as moneycontrol.com (SME Mentor) and Dun and Bradstreet should inspire other corporates to contribute. Due to recent government initiatives by the Indian Government, many SMEs are planning to go international next year and future certail looks bright for the sector.

This article has been authored by Tanmoy Porel from Loyola Institute of Business Administration.

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