Small and medium enterprises

junior-grade and medium enterprisesAbstr proceedingChapter 1 Introduction base and medium enterprises view antithetic definitions in different countries. In India, it is known as the Micro, Small and spiritualist Enterprises (MSMEs) which is defined in monetary value of coronation required. The MSMEs embroil all the enterprises in which the replete(p) investment does not exceed more(prenominal) than Rs. 50 billion. The European cathexis defines SMEs on the rear end of the work force employed, heart turn over of the moving in and the balance sheet total. In the US, the criteria for recognition is based on the work force employed.Small and medium sized enterprises (SMEs) argon unmatch subject of the principal driving forces in sparing learning. This heavens has been recognised as offshoot engine roughly the globe. A healthy and vibrant SME welkin renders in a high and sustainable economic growth. They pass on private ownership and entrepreneurial skills, they ato mic number 18 flexible and abide adapt quickly to changing commercialize demand and supply situations. They permit workout opportunities to the masses, help diversify economic activity and solve a signifi puket contri exception to exports at that placeby increasing foreign trade.Many economies be possessed of acknowledged the need for growth and ontogenesis of SMEs for industrial restructuring and obtain ashesulated subject SME policies, course of instructions and enterprise bumpment policies. Enterprise helps boost productivity, change magnitude competition and innovation, in that respectby creating business and prosperity, and re liveizing the communities.SMEs parting to the foreign trade has been ever increasing. During the resist decade, thither has been a considerable augment in the foreign trade arising from the products of these SMEs. The open trade policy has been a great success. The policy makers in training countries equivalent India, Sri Lanka, Pakis tan, and many other(a) South Asian countries fuck off been continuously reviewing their policies to help the functioning of these SME units.Finance is a subject of major concern to the SMEs. The financial creations like banks and other money lending firms have come forward with plans of funding these units at truly agonistic ranks. Subsequently, there has been an increase in the lending by such financial institutions to the SMEs. This has increased the efficiency of the SMEs to a great extent.Chapter 2 SMEs An OverviewContribution of SMEsSMEs be the backbone or the key drivers of the industrial economy. They can in like manner be described as the engines of growth of the industrial atomic number 18a. Although they are individually shrimpy, collectively they play a multiplayer office in the growth of an economy. They have a multiplayer impact in developed as considerably as develop economies. The main USP of SMEs is low damage toil i.e. the ability to manufacture low volumes profitably, partake niche requirements, capitalize on local skills and imaginativenesss, provide outsourcing opportunities and close of importly have personal impute lines.The at a lower place mentioned flurry indicates the plough ploughshare of SMEs across diverse economies. ( carry over-1)Table 1 Contribution of SMEs across diverse economiesThe sector has been consolidating over the years. What is new is the articulation and recognition of this process and its pump priming role. Therefore national SME policies, programmes and enterprise development policies have been arised to support glisten working of SMEs and to overcome major obstacles such as privation of legislation, promotion and infrastructure. This can be done in the form of promotion programmes, positive discrimination devote holding and advocacy. Policy initiatives seek to highlight basic SME skills in low hail labor.SMEs have an imposing presence in service industriousness ranging from the simp le and traditional organisations to the most modern and hi-tech ones. SMEs contribute not only in terms of quantitative factors such as output, employment, income, investment or exports but in like manner in terms of qualitative factors viz the synergies they promote with large industry, their contribution towards balanced regional growth, their contribution in nurturing entrepreneurial spirit, innovation and in providing a nation capacious pool of skilled and trained manpower. plot of ground the comparative advantage of SMEs are tumefy acknowledged, SMEs as well have their share of pros and cons which prevent them from realising their full potential. They have to face some worrys such as overleap of proper guidance in the initial full stops, miss of funds in the times of crisis, lack of proper marketing strategies, stiff competition from big players, lack of access to latest applied science, no proper infrastructure etc.Therefore, although new SMEs are emerging very rapidly worldwide, the number of SMEs closedown surmount all(prenominal) year is also very high. Also because of the oppose forces of globalization and free trade policy of WTO, there is a serious threat to the SMEs sector. It will have to reorient and reinvent itself to overcome these challenges. This can be done by restructuring the small scale organisations, and if zip works, they have to be closed down. Closures are undesirable but sometimes they are advisable from the resource allocation point of view. Thus the high rate of entries and exits reflect the dynamic nature of this sector and also explains why it is seen as an industrial incubator. As mentioned earlier, SMEs play a very important role in the development of an economy, especially from the employment point of view. They are very resultantive for the generation of employment for both skilled as well as unskilled workers. Therefore craunch extensive countries should opt for SMEs. purge the chthonicdeveloped or develop ing countries which are capital intensive and labour extensive, SMEs can be a great help. There has been increasing growth of SMEs worldwide in the young past. The government of the developed and developing economies have been formulating policies which promote smooth working of the SMEs. SMEs have contributed significantly in the developed as well as developing countries.In the European Economic Area (EEA) and Switzerland there are more than 16 million enterprises of which less than 1% comprise large companies while the rest are SMEs. Two thirds of the job opportunities are provided by SMEs in this region and the remaining one third of the job opportunities are by large companies. SMEs are considered the backbone of Asia Pacific region as they account for 90% of enterprises. They provide or so 32% 48% of employment and their contribution to Gross Domestic Product is approximately 60% 80% in individual Asia Pacific economies.Even in the United States, SMEs contribute greatly. I t contributed at around 43% of the net employment opportunities from 1990 1994.SMEs are considered the engine of economic growth in both developed and developing countries not only because of low cost production but also because of low unit cost of persons employed as compared to large scale enterprises. Thus they provide a significant share of general employment. Also SMEs assist in local and regional development by regional dispersion of economic activities, thus helps achieving fair and equitable distribution of wealth. SMEs not only contribute towards the gross domestic product but also towards the export revenues.Although SMEs are at a disadvantage in terms of finance, technology, human resource development and networking SMEs involved in foreign trade are very dynamic. This may be collectible to its inexpensive labour intensive nature of its products and since these units generally use indigenous raw-materials they have a positive effect on the trade balance. For example, SMEs in OECD member states produce about 26% of OECD countries exports, and about 35% of Asian exports. Also SMEs increase flexibility in the provision of services and the manufacture of a variety of consumer goods and scrap of the market place and thereby curb monopoly of large enterprises. All this leads to fostering of self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes. Thus SMEs not only enables an economy to maintain a reasonable growth rate but also imparts resiliency to withstand economic upheavals.Chapter 3 Indias SME scenarioThe Indian Small and Medium enterprises sector formally known as the Small Scale Industries (SSI) has had a notable sizeableness since the period of Mahatma Gandhi. SSIs were mend up in the plain parts of India with a view to inculcate the habit of self reliance amongst the people. Later on, after independence, the SSI units were an important source of income to the p eople of India. Indian policy makers had noticed the brilliance of this self reliant industry and had ceaselessly been striving hard for their progress.After achieving independence in 1947, India drafted and adopted the Industrial Policy of 1948 which meant that the government would act as both an entrepreneur and also as a governing system. With the beginning of the planning of a free India in 1951, the role of SMEs has been earmarked specially.In its industrial policy, the government started announcing special schemes for the growth of the SMEs in India. It was in 1956, during the Second Five Year Plan that the government announced the Second Industrial Policy, clearly stating the importance of the SME sector. This gave an impetus to the development of SMEs in a manner that make it possible for them to achieve the objectives of High contribution to domestic production. Significant export earnings. Low investment requirements. Operational flexibility. Low intensive imports. Capa city to develop appropriate indigenous technology. Import substitution. Technology-oriented industries. Competitiveness in domestic and export marketsToday, small and medium enterprises (SMEs) are the ladder of progress for a nations economy, especially in case of developing countries. They contribute handsomely to the exports, the industrial base, the Gross Domestic Product (GDP) and the Gross National Product (GNP) of the nation. Small and medium enterprises help provide employment and various facilities to the society.In 2006, the regimen of India passed an move known as the Micro, Small and Medium Enterprises Act (MSMEDA), 2006 to define SME sector of India. This Act defines micro, small and medium enterprises in India on the basis type of sector namely manufacturing and the service sector. In case of manufacturing sector, the size of the enterprise is decided on the basis of investment in plant and machinery. In case of service sector enterprise, the size is decided on the ba sis of investment in equipment required to set up the industry.Table 2 Definition of SME in India.strategic Importance of Indian SMEsIn Indian economy, the SMEs occupy a place of strategic importance imputable to its contribution to the overall output, exports and employment. The total number of SMEs has been increasing rapidly. The total number of registered enterprises has been around 3million and has been increasing at an even faster speed. They contribute about 50% of the total industrial output and constitute 42% of total exports. These units produce approximately 8000 units which range from very basic to highly sophisticated products. By providing employment opportunities to nearly 29.4 million people, this sector takes the consultation for employment to the largest number of workforce. Chart 1 Growth rate of SSI sector vis--vis Total Industrial Sector.Chart 2 Growth Rate of Employment in the SSI sector. connect http//www.smebank.org/SME%20Sector.htm2Role of Indian SMEsThe ro le of SMEs in the overall economic growth of the country has been first harmonic and has been achieving steady progress over the dying couple of years. With a view from the industrial development of India and the overall economic growth, SMEs have to play a vital role since their labour intensiveness helps to generate employment opportunities. In a developing country like India, the SME sector is of utmost importance in post to eradicate indigence and hence to drive sustainable growth. In case of countries where the capital resources are scarce, and an verdant supply of labour, SMEs help in the efficient allocation of resources by implantation of labour intensive production process.Performance of Indian SMEsIn the late 1940s, there were around 80,000 units. Today, the total number of units has increased enormously and the total number of units is approximately 13 million units in 2006-07. Of the total 13million units, around 55% are in the rural India and the rest in cities an d urban regions.Table 3 Number of Small and Medium Enterprises.The contribution of the SSI sector to the GDP was approximately 13% in 2000-01 this has grown to a 15.5% in 2007-08. The operation of the SSI sector in terms of economic parameters such as number of units, production, employment and export during the last decade is indicated in the table belowTable 4 Performance of Small Sector in IndiaThe SME has not only been successful in increasing its contribution to the GDP, but it has also outperformed the organized sector to a great extent in terms of production and also in employment creation. Table 5 Share of SME output to Indias GDPEmploymentThe employment opportunities created by the SMEs is considerable. It is evident from the table below that for every 10 million rupees invested by the SMEs, more than 4 times of employment opportunities are created more than any other sector in India. It is clearly seen that in the year 2006, for every 10 million rupees invested in SMEs, g enerated employment opportunities for around 151.4 persons, whereas, the same amount invested in the other sectors would create employment opportunities for around 37.4 persons only.Table 6 Investment to employment ratioExportsThe SME sector is a major contributor to the total exports of India. Of the total exports by India, approximately 50% exports are contributed by this sector. SMEs are responsible for 35% of the total direct exports and 15% are contributed by its allied activities. The indirect exports may be in the form of export orders of other large units or in the form of production of various parts and components for the do of the correct product. The major trading houses, merchant exporters and the export houses play a vital role in the export development.The non traditional products account for more than 95% of the exports. The exports from the SME sector have increased tremendously during the last decade. The growth of the garments, leather, gems and jewellery units i n the recent past is the reason for the increase in the exports by the SME sector. The SME sector dominates the sports goods, readymade garments, woollen garments and knitwear, plastic products, processed nutriment and leather products industry.The table below indicates these discussion sections and the corresponding SME contribution. (Table 7)Table 7 % of SSI in total ExportSME exports growing in tandem with total exportsSMEs constitute an important segment of Indias industrial production with a contribution to 33% of its exports. During FY03-06, Indias total ware exports in US dollar bill terms witnessed a CAGR growth of 25%, while in the same period SME exports grew at a CAGR of 24%. The remarkable contribution of SMEs in generating employment in the country has been instrumental in addressing issues pertaining to poverty and inequality of income. As per the Third All India Census on Small Scale Industries-2001-02, highly live states such as Madhya Pradesh, Uttar Pradesh, We st Bengal, Maharashtra, Karnataka and Jharkhand together contributed to around 55.4% of the total exporting units in India. In terms of distribution of value of exports from the SME sector, states like Punjab, Haryana, Uttar Pradesh, Tamil Nadu and Maharashtra together contributed 64.75% of total exports.Chart 3 Share of SME export to total exportsThe composition of export basket of SMEs in India, it has both traditional and non-tradition commodities in nature. There are few commodity groups which are exclusively exported by SMEs such as sports goods, cashew, Lac etc. In the commodity group of engineering goods, SMEs constitute around 40% of the total exports of this commodity group. Similarly, SMEs in basic chemicals pharmaceuticals finished leather and leather products and marine products account for around 44%, 69% and 50% of the export share in their respective commodity groups. In view of the establishment of Indias ambitious target of average GDP growth rate of 9% during th e 11th Five Year Plan, SMEs have to play a vital role in achieving this target. It is imperative for the government to address the major issues plaguing the sector and take further inclusive growth oriented policy initiatives to boost the sector. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing among others. As mentioned earlier, SMEs constitute 34% of Indias merchandise exports and in order to increase Indias export share to the global trade, SMEs are expected to enlarge their field manifold.Problems Faced by Indian SMEsThe SMEs in India have been facing lot of issues that hinder the performance and the excerption of this sector. The government has been striving hard to provide with policies that would help the smooth functioning of the SMEs. The main problems that have been face up by the SMEs areFinanceMicro, Small and Medium Enterprises, especially the micro enterprises have been facing the problem of in enough access to finance. This is mainly collectible to the lack of information on financing activities and also due to the traditional business style. In India, there is also a lack of private equity, venture capitalists and business angels entering the MSME sector which would provide easy financing options to businesses which have unique ideas.The availability of finance has been a major problem for the SME sector. The SMEs have not been able to have easy access to the loan offered by the various commercial banks and other financial institutions. This is despite the Reserve affirm of India ( rbi) and the Ministry of Finance having laid down instructions to the banks and financial institutions to encourage easy financing options to the SMEs. According to Morris et al., 200111 there are industrial-strength structural underpinnings to the inadequate flow the organisational structures of banks, and processes within them, have taken them far from task orientation a nd have created a specific bias against small loan portfolios. The government has been constantly seeking new shipway to make access to loan funds an easy process for the SMEs.The small industries sector has been worst prepare by the problem of financing. These units have not been able to understand their financial situation and also they havent been able to maintain transparency in their financials. The banks and financial institutions have been hesitant with regards to providing financing solutions by means of loans to these small units. This is because in the recent past, the loans that have been offered to some of these units have been transformed in to non-performing assets and hence, the banks have been trying to avert this high take aim of risk. The banks and other financial institutions have been in fact extending more of their loans to the medium industries sectors in order to comply with the RBI regulation of financing for the anteriority sector. InfrastructureAfter f inance, availing good infrastructural facilities has been a topic of concern for the MSME sector. The infrastructural facilities that are acquirable in the rural parts of India differ substantially with those available in the cities and the urban parts of India. There has been growing concern towards the supply of power at low-priced rates to these units. In the rural parts where the rates are comparatively lower than the urban parts, the adequate supply of electricity has been an issue.The lack of newer scientific knowhow has been growing. There has been a huge difference in the technique used in the towns to those used in the villages. Those in the urban areas have now been able to make use of computers and other computer operated machines whereas in the villages, the traditional methods of production are still being used. The glamour facilities have not been developed very well. In spite of so many highways being constructed, there has not been ease of transporting facilitie s for the SMEs at affordable rates. This hinders the rural and semi-urban markets to access new and larger markets in the other parts of India. Lack of skilled labourerLack of skilled labour hampers the productivity of the SME unit. The skilled labour can make better use of resourced and could also be able to handle computers. Skilled labourers can be of great help with means of management and marketing.Product ReservationFor the purpose of good productivity, there has been product reservation which means around 800 products are being taciturn to be produced only by the SMEs. The list is being revised on a regular basis but under governmental influence. The main purpose of product reservation was to create local employment by means of apply locally available resources. But due to increased political influence, the main purpose of the reservation has been lost. The SMEs are at times not informed that they produce the reserved product.Role of administration for SME development in I ndiaThe brass of India has recognised the role of MSMEs in the overall development of the countrys economic situation. The MSMEs are of utmost importance in terms of employment generation, share to the GDP, share to the industrial output, foreign exchange generation, etc. The Government of India has implemented various policies in conjunction with the state government, the RBI and various NGOs for the betterment of the MSMEs in India.As a stepping stone towards MSME development, the Ministry of Small Scale Industries (SSIs) was combined with the Ministry of Agro and Rural Industries to form the Ministry of Micro, Small and Medium Enterprises (MSMEs). This helped to formulate policies on a national basis bringing all the enterprises whether rural or urban under one cabinet. The main purpose of the Ministry of MSMEs was of drafting policies, programmes, development projects and schemes and also to keep a check on the implementation of these policies.The Government of Indias has launc hed a landmark initiative by the introduction of the MSEMD Act, on 2nd October, 2006. It is due to the enactment of this Act that there has been an increase in the SME competitive strength. The issues related to the growth of SMEs had been surfaced and thus, the SME had been able to comport challenges and reap the benefits of large scale economies. The co-ordination of policies at both the state and the national level has helped strengthen the role of SMEs not only at the lower but also at the higher level. A recent policy introduction by the Tamil Nadu government to encourage the agro-based industries by means of providing a wide range of incentives, support for infrastructure development, subsidies for investing in industrially backward areas, capital investment and technology development with an aim to sustain a growth rate of over 10% in the food and agro based sector.The Government of India has set up various institutions at both national and state level which are both a gover ning as well as a support body for the SMEs in India. The Ministry of Micro, Small and Medium Enterprises, Small Scale Industries Board, Small Industries Development Organisation (SIDO), National Small Industries sess (NSIC) Limited, The Khadi and Village Industries Commission (KVIC) and Coir Board work in co-ordination with the various institutes and assist the SMEs at both national and state level.Today, the working of the Ministry has lead to the existence of various SME governing bodies which help the smooth functioning of the SMEs. The Industrial Development deposit of India (IDBI), the Small Industries Development Bank of India (SIDBI), National Small Industries Corporation (NSIC), the SME Rating Agency of India (SMERA), etc. all play a convincing part in the development and smooth functioning of the SMEs in India.Policies implemented by the GovernmentThe Government of India has been reviewing its policies for the SMEs. The various organisations set up in coordination with t he Ministry of Micro, Small and Medium Enterprises look after the formulation and implementation of the various policies for the SMEs.FinanceThe Government of India in co-ordination with the Reserve Bank of India (RBI), the countries apex bank has been striving hard in order to create policies for reservation available easy financing options to the SMEs. The RBI has been issuing directives for every bank and financial institution to maintain a quota of funds to be made available to the Micro, Small and Medium enterprises.The Government of India has set up special financing institutions that provide easy finance options to the SMEs at very nominal care rates. The Government has taken many initiatives to make finance readily available to the SMEsIndustrial Development Bank of IndiaIndustrial Development Bank of India (IDBI) was instituted in 1964 as a wholly owned footslogger of the RBI as the top institution for providing finance to the SME sector. The Government of India in 1975 passed a law for de-linking IDBI from RBI and making it the principal financial institution for(i) co-ordination of the working of institutions engaged in financing, promoting or developing industry(ii) assisting the development of such institutions and(iii) Providing credit and other facilities for development of industry and for matters connected therewith.IDBI has brought about a revolution in industrial growth by means of providing finance for medium and long term projects in co-ordination with the national policies. The range of products offered by IDBI has been increasing in every field of industrial need be it manufacturing or services sector. IDBI has been empowered to provide financial assistance to all types of small enterprises.Small Industries Development Bank of IndiaThe Government, in April 1990, established the Small Industries Development Bank of India (SIDBI) as a fully owned subsidiary of the Industrial Development Bank of India in order to promote financing activi ties for the Small and Medium Enterprises on a nationwide basis. In March 2000, the government amended the SIDBI Act and de-merged it from IDBI. The amendment led to the change in the capital structure, shareholding pattern, business and borrowing provisions.The SIBDI has two subsidiaries namely SIDBI Venture Capital Fund and SIDBI Trustee familiarity Limited. The Credit Guarantee Fund for the Small Industries and Technology Bureau for Small Enterprises are the two refer organizations that work in co-ordination with SIDBI.Since the foundation of SIDBI, it has been assisting the micro, small and medium sector (MSMEs) providing those with suitable schemes which are tailor made to suit the need of individual organizations. It assists in the setting up of new projects, expansion, diversification, modernization and rehabilitation of alive units. After the de-merger of SIDBI from IDBI, it has introduced several new schemes and products in order to meet the need of both new and brisk S ME units. It has been maintaining its policies and revising them from time to time keeping them in line with the policy plans of the Government and RBI. CompetitivenessThe Government has been striving hard in order to provide a competitive edge to the units in the global milieu. In order to increase the productivity of the MSME sector so as to overcome the competition that these units can face in the global markets and also to face the competition from the multi-national companies in the local Indian markets, the Government of India has introduced the National Manufacturing Competitiveness Programme (NMCP) in the year 2005-06.The NMCP programme was implemented to shift the focus of the SMEs from the production to the competitive side of business. There was a need for the SMEs to introduce some structural changes and therefore this programme was introduced. The programme was initiated to increase the competitiveness at the individual firm level and not at industry or sector level.Th e need of the hour was to address issues such as technology up gradation, cost reduction, in time delivery, total quality management (TQM) and to enhance the customer service. The NMCP worked in co-ordination with the SMEs and helped attain an environment for the accomplishment of these issues.National Commission for Enterprises in the Unorganised SectorThe National Commission for the Enterprise in the Unorganised Sector has been set up to improve the productivity of the unorganised sector. It acts as an advisory advance and a supervisory body for the informal sector for generation of large scale employment opportunities on a sustainable basis, particularly in rural areas.ReservationThe policy of product reservation had been started in the year 1967 with the governments objective of attaining socio-economic development by reserving the manufacturing of products solely by the SME sector. The Government introduce this policy with a view to improve the productivity of the SMEs especia lly in the rural areas which would in turn help to increase employment opportunities and also initiate the people to take up self employing business opportunities.The Government of India had reserved some products to be manufactured only by the SSI sector. In 1984, the list contained as many as 843 products to be manufactured only by the SME sector. But in the recent years, due to the lack of technological up gradation and competitiveness on the part of SMEs, the has been reduced to as low as 21 products. The de- reserving of the products has been progressive for the re introduction of the SMEs in the main stream.Simple ProcessThe registration of the SMEs was earlier a very painful and lengthy process. This system has now been replaced with the much simpler Entrepreneurs Memorandum (EM). The introduction of the EM has been the most valuable achievements of the MSMED Act, 2006.The Need of Credit as a Lifeline of BusinessFinance or credit is of crucial importance for any business to g row and survive. If adequate finance is not available, even the ruff plans need to be put to halt. In case of MSMEs, credit is needed at every stage be it start up, diversification, technological up gradation, survival and expansion. If finance is not readily available, there is every possibility that the best performing unit can fall sick thus leading to the closing down of the unit.Thus, the need for a focused credit policy for the MSMEs was recognised by the Government of India. Hence, a credit policy with the following terms was laid downPriority Sector LendingProviding of credit to the MSME sector has been made compulsory by the government under the Priority Sector Lending Scheme. The priority sector includes agriculture, small enterprises and businesses, retail trade, etc. Under this scheme,