Analysis of SMEs in India
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What are SMEs?
Small and medium enterprises (also SMEs, small and medium businesses, SMBs, and variations thereof) are companies whose headcount or turnover falls below certain limits.
The lack of a universal definition for SMEs is often considered to be an obstacle for business studies and market research. Definitions in use today define thresholds in terms of employment, turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-year changes in these measures so that a business qualifying as an SME in one year can have a reasonable expectation of remaining an SME in the next. The thresholds themselves, however, vary substantially between countries. As the SME thresholds dictate to some extent the provision of government support, countries in which manufacturing and labor-intensive industries are prioritized politically tend to opt for more relaxed thresholds.
Definition of SMEs in Indian context
The MSMED Act 2006, which came into force w.e.f. 02/10/2006, defines the Micro, Small, and Medium Enterprises. As per the Act, the activities are classified into Manufacturing and Service Category. Initially, the MSMED Act 2006 had not defined the ‘Services Sector' and RBI's guidelines were awaited. However, subsequently RBI have defined the services sector and the activities that can be covered under the SME sector.
The following chart indicates the threshold investment levels for both Manufacturing sector (INVESTMENT IN PLANT & MACHINERY) and Services sector (INVESTMENT IN EQUIPMENT) for the above three categories of Manufacturing and Services Enterprises :
Engaged in Manufacturing / Preservation of Goods(incl. Processing Units)
Engaged In Providing/ Rendering of Services
Not to Exceed Rs. 25 Lakhs.
Not to Exceed Rs. 10 Lakhs.
1.Separate threshold investment limits proposed by the Act for Manufacturing and Services Sectors. 2. Micro Enterprises newly introduced under both the sectors.
More than Rs.25 lakhs but does not exceed Rs. 5 Crores.
More than Rs.10 lakhs but does not exceed Rs. 2 Crores.
More than Rs.5 Crore Rupees but does not exceed Rs. 10 Crore.
More than Rs. 2 Crore Rupees but does not exceed Rs. 5 Crore
While calculating the investment in plant and machinery/equipment referred to above, the original price thereof shall be taken into account,irrespective of whether the plant and machinery/equipment are new or second hand.
In case of imported machinery/equipment, the following duty/charges/costs shall be included in calculating their value:
- Import Duty (not to include miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);
- Shipping Charges;
- Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the following plant & machinery/equipments etc would be excluded:;
- equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and the cost of consumable stores;
- installation of plant &machinery;
- research and development and pollution control equipments;
- power generation set and extra transformer installed by the enterprises as per the Regulations of the State Electricity Board;
- Bank charges and Service Charges paid to the National Small Industries Corporation or the State Small Industries Corporation;
- Procurement or Installation of cables, wiring bus bars, electrical control panels (not mounted on individual machines)
- Oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures;
- Gas producer plants;
- Transportation charges (other than sales tax or value-added tax and excise duty) for indigeneous machinery from the place of their manufacture to the site of the enterprise);
- Charges paid for technical know-how for erection of plant machinery;
- Such storage tanks which store raw materials and finished products only and are not linked with the manufacturing process;
- Fire-fighting equipment; and
- Such other items as may be specified, by notification from time to time.
In case of Service Enterprises, the original cost to exclude furniture, fittings and other items not directly related to the services rendered. Land and Building would also not be included while computing the machinery/equipments cost.
SME would be meant to include Micro Small and Medium Enterprises (MSMEs). The above definitions of Micro, Small and Medium Enterprises would be in place of the existing definitions of Small & Medium Industries and SSSBEs/Tiny Enterprises.
- Micro Enterprises would include Tiny Industries also.
- Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs).
- Medium Enterprises (Manufacturing) would mean Medium Industries (MIs).
- Small Enterprises (Services) and Medium Enterprises(Services) would mean other Small & Medium Enterprises.
Thus, SME Advances would be categorised as under:
- All advances to segments viz. Micro, Small and Medium Enterprises in the Manufacturing sector irrespective of sanctioned limits, (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers), and
- Advances to Services Sectors such as Professional & Self-Employed, Small Business Enterprises, and Small Road/Water Transport Operators and other enterprises,
- engaged in providing/rendering of services,
- conforming to the above investment criteria and
-enjoying borrowing/non-borrowing facilities with the Bank (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers).
- Those enterprises exceeding the investment ceilings would be categorized as Large Enterprises and be outside the purview of SME.
- The sanctioned limits would no longer be the criteria determining the status as micro or small or medium enterprises in these cases.
- Reserve Bank of India has since reviewed the definition on Priority Sector and have issued revised guidelines on lending to Priority Sector vide their Master Circular dated 2nd July, 2007. As per this circular Retail Trade is excluded from the activities classified as SME.
Importance of SMEs
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. SMEs constitute the dominant form of business organization, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60-70% net job creations in Developing countries. Small businesses are particularly important for bringing innovative products or techniques to the market. Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his colleagues had a saleable product were they able to take it to the marketplace and look for investment from more traditional sources.
SMEs are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs. Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit.
Boosting industrial growth
By enhancing existing capacities, and by delivering cost-efficient goods and services as per the requirements of the local markets, SMEs have been driving industrial growth.
Inspiring Consumption and Social Change
SMEs play a defining role by offering reasonable, yet revolutionary goods and services to cater to the changing market requirements. Currently, SMEs have made its presence felt in areas like education, medical care, transportation, entertainment and local infrastructure development.
SMEs need low capital investment, in terms of per unit of output
Increased Employment Opportunities
SMEs generate both direct and indirect employment opportunities, in 2006-07, for instance, for every ten million rupees invested by the SME sector spawned employment opportunities for over 150 people. However, the same amount of investment carried out by the overall economy generated employment for just 37. 4 people. As per Government statistics in 2007-08, SMEs generated employment for 31.25 million people.
Fuelling the local economy
SMEs make use of natural resources and domestic skills to cater to the domestic market. The growth of SME sector also helps in socio-economic upliftment as it generates employment opportunities for untapped masses, living in urban and rural regions.
Discourages migration to urban areas
SMEs are synonymous for entrepreneurship. And the best part being setting up an SME doesn't include much risk. If SMEs generate employment opportunities in rural and semi-urban areas, migration to urban areas can be stemmed to a great extent.
Transition from Agriculture Economy to Service-oriented one
SMEs can play a crucial role in achieving the transition from a dominant agricultural economy to a service oriented economy, akin to Japan. Japan's agricultural workforce has gone done from 68 percent to 4.9 percent, in case of United States, from 44 percent to 9 percent.
Further, Indian agriculture sector can no longer generate extra employment opportunities to meet the requirements of the ever-growing population. In such a situation, only SMEs can come to the nation's rescue.
SME in the global scenario
Even in the global scenario SMEs have always played a crucial role in their respective country's economy. International comparisons reveal that SMEs create the majority of jobs.
In the USA, nearly half of the private workforce is employed in small firms, of which three-fifth have less than five employees. In Japan, 78 percent of jobs are generated by SMEs.
The same sector in Korea accounts for 99 percent of all manufacturing enterprises and 69 percent of employment in this sector. Therefore, SMEs must play a central role in the country's employment strategy. This will require modification of policies and programmes to level the playing field, improve availability of credit, increase productivity, raise quality consciousness and competitiveness, and enhance job quality.
Recent experiences of different countries in the context of globalisation also demonstrate that SMEs are better insulated from the pressures generated by the volatility of world trade and capital markets. They are more resistant to the stresses, and more responsive to the demands of the fast-changing technologies and entrepreneurial responses. Indeed, they are observed to be a very important vehicle for new technology adoption and entrepreneurial development. Ensuring the competitiveness of the SMEs is important as it would help in overall growth of manufacturing sector as also the national economy.
The Indian Context
The micro, small and medium enterprises (MSME) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 percent of the total exports of the country. The sector is estimated to employ about 42 million persons in over 13 million units throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well known that the MSMEs provide the maximum opportunities for both self employment and jobs after agriculture.
Recognizing the contribution and potential of the sector, the definitions and coverage of the MSE sector were broadened significantly under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which recognized the concept of “enterprise” to include both manufacturing and services sector besides, defining the medium enterprises. For collecting and compiling the data for the MSME sector (including khadi, village and coir industries), the Fourth All India Census of MSMEs with reference year 2006-07, is being conducted in the country. The Census will provide the first database on the MSME sector after the enactment of MSME Development Act, 2006.
PERFORMANCE OF MSEs
As per the quick estimates of 4th All-India Census of MSMEs, the number ofenterprises is estimated to be about 26 million and these provide employment to an estimated60 million persons. Of the 26 million MSMEs, only 1.5 million are in theregistered segment while the remaining 24.5 million (94%) are in the unregistered segment. The State-wise distribution of MSMEs show that more than 55% of these enterprises are in 6 States, namely, Uttar Pradesh, Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh and Karnataka. Further, about 7% of MSMEs are owned by women and more than 94% of the MSMEs are proprietorships or partnerships. In view of the MSME sector's role in the economic and social development of the country, the Government has emphasized on its growth and development. It has taken various measures/initiatives from time to time which have facilitated the sector's ubiquitous growth. No discussion on MSMEs can be complete without a full treatment of the unorganized sector in which enterprises are typically established through own funds or funds obtained through non-institutional sources, they lack managerial bandwidth, do not have established channels for marketing and are centered around a single traditional technology. More than 94 percent of MSMEs are unregistered, with a large number established in the informal or unorganized sector. The National Commission for Enterprises in the Unorganised Sector (NCEUS) defines unorganized sector as enterprise employing less than 10 workers. It has estimated such enterprises at 58 million with employment generated of 104 million persons. Of these, more than half the workers are classified as ‘self-employed'. A large segment in this universe of self-employed consists of those who are engaged in non-farm activities. This segment predominantly consists of own account enterprises, i.e., where there are no hired workers and are run by self with or without the help of unpaid family members. The own account enterprises can be distinguished into those running within households and those outside the households. The household enterprises operate on the basis of family labour - organizing production on its own, acquire its own raw material, use its own machinery and tools and market its products. Apart from own account enterprises, this segment also consists of enterprises having hired workers between 2 to 9. Very often, these enterprises are located in clusters but function independently without inter-firm linkages.
The Office of the DC (MSME) provides estimates in respect of various performance parameters relating to the Sector. The time series data in respect of the Sector on various economic parameters, is incorporated in the following Table: -
MSEs Performance: Units, Investment, Production, Employment &
- The figures in brackets show the % growth over the previous year.
COMPARISON OF THE MSE SECTOR WITH THE OVERALL INDUSTRIAL SECTOR:
The MSE sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as would be clear from the comparative growth rates of production for both the sectors during last five years as incorporated in the Table given below: -
Comparative Growth Rates
CONTRIBUTION OF MSEs IN THE GROSS DOMESTIC PRODUCT (GDP)
EMPLOYMENT IN MSE SECTOR
The total employment from the MSE sector (including SSSBEs) in the country as per the Third All India Census of MSEs with reference Year 2001-02 was 249.33 lakh numbers. The units operating with fixed premises are treated as MSEs. As per the estimates compiled for the year 2007-08, the employment was 322.28 lakh persons in the sector. The share of MSEs in the total employment among units engaged in manufacturing and services is around 34.93%.
Challenges faced by smes
Mentoring & Advocacy
Even today, most small business in India are set up by first generation entrepreneurs. They often have a product or service idea, some money, a zest to hard work but limited knowledge about markets, Government or bank procedures, cash flows or how to manage labour. This is where mentoring a hand holding support becomes crucial. At times, this comes from an individual such as friend, relative, an NGO or a parent unit. This is episodic and unable to meet the vast requirement which the country has. This is sought to be institutionalized through extension/outreach efforts of central and state Governments. Trained manpower is made available for this task, right down the district levels, to act as the friend, philosopher and guide. These resource persons guide in setting up a evit, making it commercially viable, interacting with financial institutions and understanding markets, as well as the impact of globalisation with advancements in it. There is a strong more towards linking SMEs with bigger commodity or supply chain and providing acceptable quality and delivery schedules. The Central Government's agency for the task, the Small Industry Development Organisation, has accordingly moved away from its pre-reform regulatory to a direct promotional role of hand holding, advocacy and facilitation. This encompasses the legislative support put in place, fiscal incentives and protection from unequal competition.
Credit is the lifeline of business. Small businesses lack access to capital and money markets. Investors are unwilling to invest in proprietorships, partnerships or unlisted companies. As risk perception about small businesses is high. So is the cost of capital, institutional credit, when available, requires collateral which in turn makes the owner of the unit even more vulnerable to foreclosure. Credit guarantee funds which assist lending institution in advancing loans or mutual guarantee systems involving common guarantees from a group of people have not emerged in a significant manner. Unit finances comes under severe stress whenever an occasional event such as a large order, rejection of consignment, inordinate delay in payment occurs. The common stereotype about a banker lending an umbrella in sunshine and wanting it back as soon as it rains, gets reinforced in their dealing with small enterprises. It is, therefore, not surprising, that small enterprises prefer to first tap own resources or loans from friends and relatives and theres look for external finance.
In India, many of small manufacturing enterprises do not access bank finance and only about 16% of total bank credit finds its way to the sector. Despite being a priority sector for lending, small manufacturing enterprises get just about 8% of their annual turnover as working capital requirements, as against normative requirements of 20%. Even for this, cost of credit is high. The problem is recognized and is sought to be addressed through various ways:
- Establishment of ISO 9000 certified, specialized SSI bank branches in districts/clusters.
- Directive for working capital finance @ 20% of annual normative turnover.
- Waiver of collateral requirements upto Rs. 0.5 million.
- Setting up of a credit Guarantee Trust to cover loans upto Rs. 2.5 million.
- Composite loans from a single agency upto Rs. 2.5 million.
- A national equity fund for equity to SSI units at 5 percent service charge
As mentioned earlier, small enterprises are often regarded for their labour intensity and the capability to work with local resources. In the part, this has often led to less emphasis on technology. Run of the mill technology coupled with functional packaging and inadequate finishing have at times led to small sector products being labeled as being of poor or substandard quality. This has a cascading impact on competitiveness. As small enterprises realize the need to link up with large ones, they are having a relook at technology options which would improve productivity, effectiveness and competitiveness. While sourcing technology, small business need to concentrate on the following essential issues:
Information about Technology
For small units information about technology options is often through word of mouth or from a visit to an advanced unit. With the advent of internet, new vistas are opening up through electronic journey catalogue downloads and advanced search facilities. The technology bureau for small enterprise promoted with the assistance of the UN offers access to databases and information on technology. Technology intervention in clusters offers near by units an opportunity for a look and feel of advanced technology entrepreneurs are also assisted to participate in overseas trade fairs to update tem with latest worldwide. Tool rooms, testing centres, production-cum-process centres and workshops also assist in this task.
Actual procurement of technology
Barriers to import technology, technology transfer issues, vendor capability, after sales support, import procedures impede procurement. In India, the Asia Pacific Centre to Transfer of Technology promotes match making between buyer and seller and facilities procurement through escort services. Encouragement to import of capital goods has also helped.
Finance for Technology upgradation
Small enterprises look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs. In India, a technology upgradation and modernization fund and a hire purchase scheme attempts to meet this requirement. These are however, funds at normal lending costs. A new scheme called the credit linked capital subsidy scheme, for reducing the cost of funds, has now been put into place.
In today's world, small enterprises can hardly match the adventising support or distribution reach of a large corporation. In India, small units sell best in limited or neighbourhood markets or when they are meeting a low volume specialized demand which no large player can effectively caterto. Increasingly, now the endeavour is to build the marketing activity of small units around their competitive advantage i.e., products which are labour intensive, items which cater to niche markets, low volume high margin products, sub assembly tasks, outsourcing jobs and ancillarisation. Sub-contracting exchanges are being established through Government and Industry associations to promote such interface. After sales service for imported products, AMCs on electronic equipment, reverse engineering (to the extent that it is WTO compatible) are the other areas being encouraged, sophisticated marketing is a task best left to large players. Small enterprises in India are realizing that the term “marketing” perhaps implies different things to different people for new SME businesses, head on competition with established giants makes little sense.
Small units have traditionally operated from homes or a neighborhood work shed. Slowly, they began moving out and clustering together wherever electricity, water, raw materials, markets or labour were easier to access. Policy makers in India had anticipated the need for suitable infrastructure five decades ago and began a programme for setting up industrial estates. Non-assessment of economic viability, tardy implementation and poor maintenance due to drying up of funds affected these adversely. Later in the post reform period, the problem was sought to be addressed by setting up of such estates exclusively for small business. Almost 50 such estates have been set up. Because of their better infrastructure such as roads, telecommunication, power, effluent treatment plants, power, banks, watch & ward, and reasonable cost, they have proved to be popular with small manufacturing for factory accommodation, allotment of sheds on hire purchase as well as outright sale etc. A concerted move has also now been initiated for upgrading existing estates.
The globalisation of trade & commerce has been given a push by agreements in the WTO and changed the business environment. It has therefore become necessary to sensitise SMEs about these changes and prepare them for the future. In India, a number of steps have been taken in this regard. Apart from setting up a WTO cell in the nodal ministry, 28 sensitization workshops were conducted across the country. Workshops have also been held on intellectual property rights and bar coding. Monitoring of imports in specific sectors where SMEs hae a significant presence and initiation of anti-dumping action where dumping was noticed, are the other steps taken in this respect.
Government and bank procedures coupled with inspections remain a major hurdle in growth of small units. There are over 60 central, state and local laws which regulate small businesses in the areas of labour, factory maintenance environment, municipal bye laws, taxation, power etc. These require the maintenance of as many as 116 registers and forms. To enforce these, there is an army of inspector who visit units leading to harassment, delay, obstruction and increase in cost of production. Many small units are one man shows and cannot satisfy the letter of the law. The streamlining of such rules and regulations has become necessary if the creative genius of Indian entrepreneurs is to be fully unleashed. Some state governments have exhibited initiative in this regard. The Central Government has initiated a study to enact a single law for small businesses. This enactment should ease the situation considerably.
Like products, Industries too have life cycles. There are industry segments which have seen their best days. Similarly, there are individual units where no amount of additional funds will help. Their bank loans have become bad and non performing. A sound exit policy which also safeguards labour interests has therefore, become necessary. It is anticipated that as of 1998, over Rs. 3.8 billion were locked in sick/weak units. An exit policy would help fresh circulation of a significant amount. The first steps in this regard have been taken recently by India's central bank where by one time settlement of dues as on 31 March, 1997 was allowed. The results have been encouraging.
Strategy Interventions for Revitalisation and Growth
Significant charges in economic environment are being heralded in by the WTO. The removal of QRS has led to increased competition with imports. Many sectors of industry are facing competition from Chinese or Taiwanese imports within the country or from Bangladesh Srilanka or Nepal in export markets. It is the belief of the Indian Government that promotion and not protection is the answer to the issues of survival and growth. Thus, while reservation of items for exclusive production continues, the focus must now be on strengthening capabilities. This implies a holistic look at the concerns of industry. As part of this, the following strategic interventions have been initiated
- Easing access to general credit
- Introduction of options of limited partnership and factoring
- Subsiding cost of finance for upgrading technology
- Industry specific technology upgradation programmes
- Fund for developing and accessing overseas markets for export
- Expanding reach of infrastructure programmes
- Ushering in a regime of self certification in lien of inspections for various regulations
Interventions in the future require that hurdles to growth are removed. They must encourage a seamless movement from small to medium to large. The Indian Government, therefore, is working on a new vision for the SSI sector through a flexible approach and a motivated team. The advocacy role of Government now involves new dimensions such as building up and arguing cases before the world trade body or dispute redressal for a, articulating needs of small enterprises before decision makers and other agencies. Credit is increasingly being made available at international rates. Technology upgrades at both the cluster and the individual level are being assisted. Cluster level technologies will be at Government cost with only user charges recovered credit guarantee scheme has been put in place if our market has opened up to due to WTO, we need to enable our small units established foot holds in new markets opened up for then by globalisation. Thus, along with improving quality, they are being given the opportunity of over seas travel, conducting market surveys, test marketing etc. The existing industrial centres are being revamped by involving industry associations with some government assistance and finally a migration from sunset industries to sunrise industries is being encouraged through a comprehensive and graceful exit policy, which balances interest of labour with those of the owners.
The singular contribution of SMEs is on account of their unique characteristics. Their role in economic activity is manifest in both tangible and intangible ways. If this contribution is to be sustained, then their uniqueness needs to be nurtured in an overt and explicit manner. The Indian experience has shown that it is possible to design targeted interventions be they area specific like clusters or be they sector / sub-sector or product-specific. Other countries, be they Asian or OECD, also have policies which aim at similar support. The need of the hour is for us to learn from each other, drawing upon experiences and identity" "best practice policies". These in turn have to meet local conditions and circumstances. A "one size fits all" approach will not work. Nevertheless, there can be no two opinions about the priority that SME policies deserve for achieving the socio-economic goal of employment growth and social justice, along with the individual "aspirations".
Recent Government Policies and Measures
In addition to the growth potential of the sector and its critical role in the manufacturing and value chains, the heterogeneity and the unorganised nature of the Indian MSMEs are important aspects that need to be factored into policy making and programme implementation. There is considerable segmentation among the MSMEs in terms of their size and need tailor made policies for each size class. The policies and programmes for the micro and small enterprises in the sector would need to address their survival strategies and should be in the direction of providing livelihood alternatives such as social security, skill formation and credit. On the other hand, policies/programmes for the larger sized MSMEs need to address issues relating to growth marketing, access to raw material, credit, skill development and technology upgradation. Some of the recent policy measure are:
- A single comprehensive legislation for the promotion, development and enhancement of the competitiveness of the MSME sector - Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 came into effect from October 2006.
- National Manufacturing Competitiveness Council (NMCC) was set up to energise and sustain the growth of the manufacturing industry. New Promotional Package for MSMEs, and focus on accelerating development of clusters.
- Revised strategy of lending and introduction of newer measures, such as the scheme to establish Small Enterprises Financial Centres (SEFC) for strategic alliance between branches of banks and SIDBI located in 388 clusters identified by ministry of SSI.
- SME Fund of US$ 2.27 billion operationalised. Proposal for doubling the credit flow to MSME sector in next 5 Yrs.
- Promotion and financial support for Credit-cum-Performance Rating in MSME sector in India, to facilitate greater and easier flow of credit from the banking sector to SMEs.
- The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been set up as an advisory body and a watchdog for the informal sector to bring about improvement in the productivity of these enterprises for generation of large scale employment opportunities on a sustainable basis, particularly in the rural areas.
- Facilitation of technology transfer through the Technology Bureau for Small Enterprises (TBSE)
- Accelerating initiatives to address various developmental needs for MSMEs in the 11th Five Year Plan.
- “Scheme of Fund for Regeneration of Traditional Industries” [“SFURTI”]
- Guarantee coverage under Credit Guarantee Fund for Small Enterprises expanded substantially
- Credit Linked Capital Subsidy Scheme for Technological Upgradation.
- New legislation on Limited Liability Partnerships.
- Emphasis on bi-lateral/ multi-lateral partnerships at multiple levels.
- Merger of the Ministry of SSI with the Ministry of ARI.
- Earmarked 40% of net bank credit of public and private sector banks for the priority sector, which include SMEs.
- Earmarked 32% of net bank credit of foreign banks for the priority sectors, of which 10% is allocated to SMEs .
SME policy initiatives in 2009
A continuous attention to ongoing schemes to assist MSME has demonstrated success in several areas. However, the Ministry of MSME and other government departments are still working hard to pull the sector out of the recession and overcome some inherent problems.
Several of the schemes started by the Ministry of Micro, Small and Medium Enterprises (MSME) to promote the development of micro, small and medium enterprises in the country saw success this year. This article outlines some progress areas in 2009 that have made a positive impact on MSMEs, especially during the painful process of recovering from an economic recession.
Better credit flow
The ‘Policy Package for Stepping up Credit to Small and Medium Enterprises (SME)' was set up by the government in August 2005 for doubling the credit flow to the MSME sector within a period of five years. Credit flow from Public Sector Banks (PSBs) to this sector has increased from Rs.67,634 crore at the end of March 2005 to Rs.1,91,307 crore at the end of March 2009.
Skill development on priority
Various measures like enhancing the training capabilities of the Tool Rooms, MSME Development Institutes and other organizations under the Ministry of MSME have helped to train nearly 2.61 lakh trainees during 2008-09. The target set for 2009-10 is to train 3.2 lakh persons, with several programs organised free of cost for the weaker sections of society.
Six out of the ten components under the National Manufacturing Competitiveness Programme (NMCP) for MSMEs are now operational. These are (i) Quality Management Systems and Quality Technology Tools, (ii) Building awareness on Intellectual Property Rights, (iii)Support for Entrepreneurial and Managerial Development of MSMEs, and (iv)Marketing support/assistance to MSMEs (v)Lean Manufacturing Competitiveness Scheme and (vi) Mini Tool Room Scheme.
Success of credit guarantee scheme
MSMEs are often unable to provide collateral as security to procure loans. The government's credit guarantee scheme has been rather successful because of timely interventions to make the scheme more attractive to lenders and borrowers. For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh, the one-time guarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged from the data on increased coverage. From about 40,000 proposals received (for loans of Rs.1000 crore) at the end of March 2004, more than 2.27 lakh proposals (for loans of over Rs.8200 crore) at the end of November 2009.
Capital Subsidy spreads coverage
Under the Credit Linked Capital Subsidy Scheme for Micro And Small Enterprises
(CLCSS), 15 per cent capital subsidy is provided on loan amounts upto Rs. 100 lakh for technology upgradation. From the 47 products/sub-sectors with nearly 1400 well-approved technologies/machines for subsidy under the scheme, now 179 new technologies machines for pharma sectors have been added to this list. Until October 2009, 7810 proposals of subsidy were approved and Rs. 338.68 crore was released to the MSEs under the scheme.
Quality improvement on priority
The ISO-9000/ISO-14001/HACCP Certification Reimbursement Scheme is an incentive scheme to upgrade technology and improve quality that provides for one time reimbursement of charges for acquiring ISO-9000/14001/HACCP (or its equivalent) certification to the extent of 75% of the cost subject to a maximum of Rs. 75,000/- in total. Decentralised in 2007, the scheme saw growing popularity in 2009, with about 690 units amounting to Rs. 2.88 crore being reimbursed uptil November 2009 during 2009-10.
The Prime Minister's Employment Generation Programme (PMEGP) was launched in August 2008 with a total plan outlay of Rs. 4735 crore including Rs. 250 crore for backward and forward linkages. Around 38 lakh additional employment opportunities in the terminal four years (2008-09 to 2011-12) of XI Plan are expected. The program provides financial assistance to set up microenterprises costing upto Rs. 10 lakh in service sector and Rs. 25 lakh in manufacturing sector in the form of subsidy upto 25 per cent of the project cost in rural areas and 15 per cent for urban areas. Until March 2009, 2,17,762 applications were received under PMEGP, of which 83,454 candidates were selected. About 36,444 projects were sanctioned financial assistance by banks for generating an estimated 3.64 lakh additional employment. Loans were disbursed in 25,507 cases by banks giving employment opportunities to about 2.55 lakh persons until 31st August 2009. About 4.5 lakh additional employment will be generated in 2009-10.
Budget 2010 Implications and SMEs
The Small and Medium Entrepreneurs (SMEs) was benefitted in many aspects as the Union Budget 2010 has given them several tax concessions and benefits. Thought there still exists room for improvement and many items of the SME wish-list did not find place in the Budget.
ax Rates: From a direct income-tax rate perspective, the proposed reduction of surcharge for Indian companies from 10% to 7.5% is a welcome initiative but provides only marginal relief. The proposed increase in the basic rate of Minimum Alternate Tax (‘MAT') on Book Profits from 15% to 18% will put additional strain on small companies. The beneficial revision of income-tax slabs for an individual will increase the take-home for an individual who carries his business in proprietary or partnership form.
Provisions relating to Limited Liability Partnership: The Limited Liability Partnership (LLP) under the statute enacted in March 2009 is currently the most tax friendly form of business entity for SMEs. This is because it stands protected from the levy of Dividend Distribution Tax and Minimum Alternate Tax which are applicable to Companies. With the advent of LLP, several small private limited companies desired to convert into LLP but did not so due in absence of beneficial tax provisions. The Union Budget 2010 proposes to introduce several provisions to grant tax neutrality to such conversion subject to certain basic conditions.
Income tax holidays: The SME Sector was expecting grant of tax holiday with respect to support and services provided to IT / ITes Sector on the same lines as eligible to them for exports. However, the sunset date of 31 March 2011 for the Tax Holiday for exports from STP and EOU units itself has not been extended. This is likely to disappoint the IT / ITes Sector including the SMEs who provide services or support thereto. Further, the competitive advantage that India has so far which is already facing challenges from several other countries is likely to undergo further strain in this scenario.
Withholding taxes and deduction linked thereto: An expense would now be tax deductible so long as the underlying taxes deducted at source in a financial year are deposited on or before the relevant due date for filing of the return of income. It would be more beneficial if such provision would have been retrospective in nature. This is a welcome provision though the corresponding interest levied on belated payments is to be enhanced to 18% p.a. as against the current 12% p.a.
Other provisions: The thresholds for deducting tax at source have been revised to a more realistic basis. However, it was expected that the SMEs would be eased of the burdensome withholding tax compliance requirements. The Small and Medium Enterprises (SMEs) will benefit from the increase in the threshold limits for tax audit which are to be enhanced to Rs. 60 lakhs (current ceiling of Rs. 40 lakhs) for business undertakings and Rs. 15 lakhs (current ceiling of Rs. 10 lakhs) in cases of professionals. However, these thresholds are still too low and a higher threshold of atleast Rs. 1 Crore is warranted and can still be considered at the enactment stage.
The Finance Minister has been considerate by giving attention to the SMEs by proposing relief / rationalization but the Union Budget 2010 could have been more attractive for the SMEs, had it given further incentives such as higher or rational tax depreciation on assets, progressive basis of taxation like individuals and several such benefits.
Let me, at the outset, say that though overall it is a progressive budget with clear focus on infrastructure, agriculture and inclusiveness, it does not mean much for the MSME sector.
For the micro, small and medium enterprises, although there has been an apparent increase of approximately Rs. 800 crore, some of the major announcements which were expected in the budget were sorely missing.
It was expected that the MSMEs would atleast get a 50% reservation out of the total quota of 40% reservation of the priority sector lending. Internationally, in most of the developed/ developing countries, MSMEs get between 40% and 60% of the banking loans, whereas in India, it languishes between 8 - 10%. This is the biggest reason for MSMEs to not be able to grow, turn sick, or resort to taking money from the parallel economy at much higher rates.
There seems to be a lack of this understanding despite the fact that the government has announced that a high-level national council will be formed to oversee the implementation of the recommendations of Prime Minister's Task Force on the MSME sector. It is also very sad to see that while a small or medium farmer, who is also a businessman is extended huge benefits, the unorganized and micro enterprises in the country do not get the same treatment, though they may be needing the support more than that farmer.
The credit support program of the MSME Ministry, which runs the Credit Guarantee Fund Scheme, has got an additional budget of about Rs. 73 crore i.e. the planned expenditure under this program has gone up from Rs. 99.12 crore to Rs. 172.75 crore. Through this scheme, the guarantee cover is provided for collateral-free credit facility, extended by Member Lending Institutions (MLIs), to the new as well as existing small enterprises on loans of upto Rs. 1 crore. While the objective is laudable, the fact remains that MLIs really have no compulsion or incentive to extend this facility to the needy small entrepreneurs, because in reality, the Credit Guarantee Trust doesn't move fast enough to settle the issues related to the bad-debts, if any.
The allocation to ‘Quality of technology support institutions and programs' has been raised from Rs. 251.64 crore to Rs. 333.50 crore. This, according to me, may not be at all enough to upgrade the tool-rooms and technical institutions of the 24 very important institutions and 4 programs that run under this scheme, namely Credit Linked Capital Subsidy Scheme, ISO Reimbursement Scheme, Schemes of National Manufacturing Competitiveness Program and Vertical Shaft Brick Kiln technology. The conditions of the various tool rooms and technology centres actually have to be seen to be believed. If machines have come, there are no specialists to operate them; and if machines & specialists both are present, then there are no funds to run these centres. Hence, the very purpose of the existence of these centres is defeated.
It is also surprising that the National Commission on the Enterprises in the unorganized and informal sector has zero allocation in this year's budget, though till last year, it had a Rs. 1 crore budget. The Rajiv Gandhi Udyami Mitra Yojna, which provides handholding assistance to designated nodal agencies, namely Udyami Mitras, for providing handholding support to first-generation entrepreneus in dealing with various procedural and legal hurdles, has got an allocation of just Rs. 7 crore.
MSME Cluster Development Program, under which, special emphasis has been given to comprehensive development of clusters, including infrastructural development has seen an increase of about Rs 25 crore taking the total expenditure to Rs. 50.50 crore. But for a country of our size, this may be spread too thin and too wide to really have any major impact.
The special scheme recommended by PM's Task Force has got an allocation of just Rs. 1 crore in this year's budget. It has a massive agenda for immediate action to provide relief and incentives to MSMEs accompanied by institutional changes and detailing of programs in a time-bound manner. In addition to this, it also has suggested setting up of appropriate legal and regulatory structures to create a conducive environment for entrepreneurship and growth of MSMEs. It also has a task of setting up a special fund exclusively for micro-enterprises, and introduction of public procurement policy, which mandates government and PSUs to reach a target of 20% purchases from MSMEs. How all this can be achieved with an organization backed by Rs. 1 crore budget for the whole of 2010-11 is almost impossible for me to understand.
There have been some major additions of about Rs. 1300 crore in Khadi and Coir Board Industries but like last year, and the year before, both these sectors have spent 20-25% lesser than the budget that was allocated to them.
Some other initiatives which have been taken overall but will affect the SME sector positively are:
- Extension of packing credit interest subvention of 2% for another year,
- Raising of Audit requirement limit from Rs. 40 lakh to Rs. 60 lakh, and for professionals from Rs. 10 lakh to Rs. 15 lakh,
- Exemption from capital gains on conversion from general partnership to limited liability partnership,
- A one-time grant of Rs. 200 crore to Tirupur Textile Sector,
- Government initiative to give more banking licenses and extend banking service for the under-banked and un-banked segments of the society,
- Agreement signed with ADB for US$ 150 mn to implement Khadi Udyog Reform,
- Doubling of corpus of micro-finance development and equity fund from Rs. 200 crore to Rs. 400 crore,
- Allocation of Rs. 1000 crore to the National Social Security Fund for the employees of the unorganized sector.
Despite some sporadic initiatives visible here or there in this budget, there clearly seems to be a lack of a coherent approach towards a sustained development of the MSMEs. Let's hope that there will be more focus, which will come up in the future for the hidden jewels of India, who have always got more lip-service than real support from the powers that be.
Impact of Recession On SMEs
The current meltdown of global financial and commodity markets begun with the fall of housing markets in USA leading to collapse of the sub-prime market in August 2007. The problems later on engulfed the entire financial and commodity markets throughout the world leading to a serious liquidity crisis and most of the developed economies going into recession including USA, UK, and Japan. It also led to slowdown in emerging economies like India and China as most of their growth was either due to exports to developed markets like USA or due to foreign investments. Fall of credit markets in US and Europe resulted in foreign investors pulling back their investments leading to a sharp fall in equity indexes around the world.
Coupled with this the RBI followed a tight monetary policy by increasing the key rates like Repo, reverse repo and CRR resulting into a serious liquidity crunch in the domestic markets.
The impact on MSME sector of the above can be understood as under:
- Slowdown in key markets like USA, Europe and Japan resulted in decline in demand for goods produced by export oriented enterprises hence directly affecting their revenues and profitability.
- Due to overall increase in risk perception and liquidity crunch in the domestic markets the cost of funds has increased considerably for the MSMEs to more than 15% now.
- Many MSMEs did a lot of capacity building during the boom time, a significant amount of which was financed by debt increasing the interest cost significantly. Such companies are facing liquidity pressures due to decrease in demand for their products and unavailability of alternative sources of finance.
- The big financial firms in US and Europe were the key clients of Indian BPO and KPO industry. The collapse of big banks like Lehman Brothers, Bear Sterns etc. led to immediate cut down of their business seriously affecting the outsourcing industry.
- Export oriented auto ancillary manufacturers have been the worst affected due to fall in demand of vehicles resulting as a result of high oil prices during the first 9 months of the year and a general economic slowdown.
MSME sector in any country including India comprises of almost 90 per cent of all the enterprises. In India, MSME sector accounts for 40 per cent of exports, 45 per cent of the industrial production and contribute 8 per cent to the GDP. This sector employs an estimated 31 million persons and has been growing at the rate of 12 per cent per annum. MSME sector of India has felt the tremors of global crisis in varying manner. For the first time we heard stories of distress in the most famous diamond cutting & polishing industry in Surat & Navsari in Gujarat. Moradabad brassware industry that contributes to almost one-third of all handicraft exports from India has also been facing the distress like situation over the last two years, accentuated further by the recent economic slowdown. The other export oriented sectors dominated by small enterprises, particularly in the readymade garments, textiles, leather and engineering have also faced considerable downfall in the last few months of the financial year 2008-09. The energy intensive sectors like foundry, ceramics, re-rolling of metals, electro plating and food processing have faced high degree of turbulence thanks to high fluctuations of crude prices and metal during the year. For the month of February 2009 the export figure of India has hovered around 11 billion US $ where as for the same month in the year 2008 it stood over 15 billion US $. The story is similar for the other 5 months of the last financial year.
To unleash the Indian manufacturing SME`s, on one hand we need to address the structural and institutional weaknesses in the system and on another we will have to equip and provide them assistance for bracing global competition unabashedly.
We believe that manufacturing capabilities and exportability are inter-related and mutually reinforcing. Sustainable competitiveness cannot be achieved only by provisioning of short term measures such as currency manipulation or hedging or SWAPs. In medium and long term, competitiveness could only be ensured by increasing productivity and reducing transaction costs in economy.
There are some key exogenous and endogenous factors that stifle manufacturing growth and limit exportability. Following are some of the recommendations to the SME groups which have come out as a result of the analysis of the entire study.
The measures suggested aim at improving the current situation of SME`s.
1.SME Audit of Laws
Constitute a mechanism whereby all laws and bills go through mandatory ‘SME Audit' (on lines of US and EU) pre-empting negative fallout of existing and emerging regulations.
On an average the accounting activities of the SME's has been found to be fairly slow since on an average it was found it takes around 50 days to prepare the balance sheet one the annual account closes. This is primarily because the accounting activities are primarily taken care by an external CA who seems to be overburden with all the financial and accounting activities of the company. The SME's can think of keeping a separate small accounts team to manage the activities efficiently and quickly. It is recommended that all companies should do budgeting for every year & have financial planning for various functional areas for each year.
Many states follow a flawed mechanism of determining Minimum Wages based on sectors in which a worker is employed. Therefore, a worker in engineering sector is entitled to a different rate than the one in food processing sector.
Nationally let there be a consensus on three issues:
- Base minimum wages on rational criteria and not sectorally or specific to industry (unlike the current situation in many states where a worker in Engineering sector is entitled to a different rate than the one in food processing sector)
- Allow Contract labour(as already in many states)
- Provide an option to SMEs for using market based mechanism for ESI and PF and after having contributed let them be freed from keeping records and unnecessary formalities. (ESI in particular is one of the most useless schemes where huge contribution goes waste in dilapidated ESI infrastructure that nobody uses.)
3.Seamless movement of goods across states
- Establish unified Regulatory Agency to ensure seamless movement of goods across states.
- Railways monopoly on freight movement needs to be broken. Un-bundle Railways (like Power sector) along operational lines into three separate independent operational companies: Railway stations, tracks and services of carrying goods and passengers (on lines of UK). Tracks and stations should be available for universal use on fee basis. Let private companies start carrying the export cargo first.
- There has been a shortage among most of the SME' s in tracking and reporting important factors like innovation and loss of productive time because of labour, power and material. Innovation as perceived by most of the SME's has been launching of completely new products. However tracking and reporting internal innovation in terms of cutting down cost does not seem to be a focus area of majority of the SME' s. This needs to be taken care.
- Managing attrition seems to be an area that SME group does not lay much emphasis on. Although SME's have a lot of contract labours, there has been a significant number of permanent employees who left the companies last year. Hence there should be employee friendly policies which would help SME' s retain employees for long.
- Alternative Avenues to SME financing:
Highlighting the emergence of risk capital funds and equity funds for SME financing compared to conventional borrowing, adding that there is a need to create more alternative SME financing techniques for sustainable double digit growth. An SME exchange with appropriate framework was needed, besides primary and secondary markets for SME, simplification of NRI investment policy and the Foreign Exchange Management Act, implementation of the MSMED Act and lobbying for the enactment of Limited Liability Partnership Act (LLP Act), emphasizing the need for increased FDI participation in SME sector through removal of the 24 per cent cap on FDI investment in companies according to present policy.
6. Improve Industrial infrastructure
- Step-up building of hard infrastructure. Neither the current outlay and nor the institutional and operational mechanisms are commensurate to address huge existing gaps
- Urgently renew focus on creation of industrial areas with basic infrastructure - an area now languishing for over 15 years because of lack of attention ( Creation of SEZs will not improve SMEs' plight)
- Cede the administrative and tax collection powers to associations to maintain the Industrial Areas in PPP mode (there are already successfulmodels in India)
7. Easy access of capital for less matured companies or start ups.
Induce massive competition in financial sector opening it up to foreign banks and lifting restrictions unilaterally. Establish independent Regulatory Authority for Banks and Finance Institutions to induce competition and improve service quality and let RBI concentrate management of larger macro-economic issues d. Regulate the Rating Companies for better service codes, their rating models and pricing. Do not let monopolies build in this domain.
8. Significant improvement in infrastructure needed especially power.
- Improve access to economically priced and adequate Electricity
- Support collective SME initiatives for distribution of electricity in geographical concentrations, industrial areas and clusters
- Remove policy impediments in open access particularly levy of subsidy element on collective initiatives
- Accord top priority on providing electricity to manufacturing units ( as has already been done in a few states)
9. The creation of a “Single Window” facility that takes care of all issues concerning water, electricity, labor, land etc and is fast enough to respond to the needs of these SME's. Many promoters cited the case of China, where it takes two days to start a new business.
10. Provide Representation to SME bodies - Provide due representation to SMEs in Prime Minister's EconomicCouncil, Board of Trade and other Trade related decision making bodiesin Ministry of Commerce for better appreciation of their needs in policydecisions (none of SME bodies are represented in these committees).
11. Education and Skilled workforce
SMEs are suffering from acute skill shortages. Most ITIs have become redundant. The recent ITI upgradationprogramme is not SME need sensitive and is likely to have only marginal impact.
- Fund ‘district-wise skill deficiency mapping' exercise and invite private parties to train people, develop skills, get them third party rated and pay fee based on success. ( there are already successful initiatives at a few places particularly in Gujarat)
- Fund Audio-visual and print aids for skill enhancement ( on lines of US) and create channels for continuous skill developmentcoupling it with distance education.
- Fund massive skill identification and grading programme for those not having any formal education but possessing requisite skills (on lines of recent UNDP sponsored programme for leather craftsmen in Agra wherein 62,000 skilled craftsmen were identified and graded on skill level and ID cards issued to 47000 of them).
Area based exemptions create huge disparities with in India. The current dispensation rewards inefficient companies and punish efficient ones. SMEs suffer most in such conditions.
Phasing out of Entry Tax and the speeding up of the process to introduce a nationwide GST or General Sales Tax, wherein an industrialist or an entrepreneur has to pay uniform tax, whichever part of the country he operates in.
13. Bankruptcy and Insolvency Codes
Put in place the modern bankruptcy and insolvency codes reflecting the needs of ruthless competitive markets and uncertainties in globalization so that while entrepreneurs are encouraged to take risk, lenders are confident of quick disposal of cases and repossession of assets after failure.
14. Stamp Duties
High stamp duties on transfer of property and on commercial transactions such as on financial instruments create huge cascading effect. Harmonize the Stamp Duties across states and drastically reduce them.
15. Comprehensive Programme for Internationalization of SMEs
Some Indian SME`s are unaware of the brand creation.
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