26 SMEs and their Features

Mandeep kaur

SMEs AND ITS FEATURES

 

 

Learning Outcome:

After completing this module the students will be able to:

  • Understand the concept of SMEs
  • Describe the Features of SMEs
  • Growth and Performance of SMEs
  • Know the basic problems faced by SMEs

1.  Introduction:

 

Micro, Small and Medium Enterprises (MSMEs) have emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. Small and medium sector is a vital constituent of India’s Gross Domestic Product and export earnings.     MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. SMEs play a catalytic role in the development of any country. They are the engines of growth  in  developing  and  transition  economies.  In  India  they  account  for  a  significant proportion in manufacturing, exports and employment, and are major contributors to GDP. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socioeconomic development of the country. The small scale sector covers a wide spectrum of industries categorised under (a) small scale industrial undertakings, (b) ancillary industrial undertakings, (c) export oriented units, (d) tiny enterprises, (e) small scale service enterprises, (f) artisans, village and cottage industries and (g) women entrepreneurs’ enterprises.

 

2. DEFINITION OF SMALL AND MEDIUM ENTERPRISES

 

In 1977, units having investment of less than Rs 10 lakh were defined as small scale industrial undertakings, while for ancillary units, the investment limit was Rs 15 lakh. Units with investment of less than Rs 1 lakh were defined as tiny enterprises. In 1991 (the year in which economic reforms were initiated), the investment limit for small scale industries was Rs 60 lakh, for ancillary units Rs 75 lakh, and for tiny enterprises Rs 5 lakh. Consequent to the enactment of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the small and medium sector has been defined as micro, small and medium enterprises with effect from October 2, 2006. The new definition is as follows:

 

A: Manufacturing Enterprises

 

(i)A micro enterprise, where the investment in plant and machinery does not exceed Rs 25 lakh;

 

(ii)   A small enterprise, where the investment in plant and machinery is more than Rs 25 lakh but does not exceed Rs 5 crore; and

 

(iii)    A medium enterprise, where the investment in plant and machinery is more than Rs 5 crore but does not exceed Rs 10 crore.

 

B: Service Enterprises

 

(i)   A micro enterprise, where the investment in equipment does not exceed Rs 10 lakh;

 

(ii)    A small enterprise, where the investment in equipment is more than Rs 10 lakh but does not exceed Rs 2 crore ; and

 

(iii)    A medium enterprise, where the investment in equipment is more than Rs 2 crore but does not exceed Rs 5 crore.(Misra and Puri,2009)

 

3. FEATURES OF MSMEs

 

Small-scale industries play very important role in the economic development of any developing or under-developed country. These industries meet the twin needs of society namely solution of unemployment problem and checking the economic concentration in the hands of a few. These enterprises encourage self sufficiency, self-reliance and co-ordination.

  In the light of the various benefits of SMEs, some of its characteristics are discussed below:

 

1. Employment Generation

 

Small and medium scale industries create huge employment at the local level. The sector absorbs excess labour from agricultural sector reducing the problem of rural or agricultural disguised employment and raises overall productivity. Labour-capital ratio in small scale industries is generally higher as compared to large scale industries so that one unit of capital generates more employment in the former than in the latter.

 

2. Industrialisation and Growth

 

As small and medium scale industries are easy to establish, their number is usually large. These firms promote industrialisation and contribute to economic growth through the production of a wide variety of goods and services. Because of this contribution, most governments maintain institutional arrangements and facilities and incentives in the area of finance, infrastructure, production and marketing for their growth.

 

3. Low Gestation Period

 

SMEs projects take much less time in their completion as compared to large enterprises. The period is low basically due to easy availability of capital and labour. Moreover, government assistance, facilities and incentives help in keeping the length of period low. Due to low gestation period, the project involves low degree of risk.

 

4. Low Level of Capital

 

As SMEs require relatively small amount of investment, these are capable of being set up under sole proprietorship and partnership forms of business. Banks are also willing to extend financial support to them as low level of investment is required.

 

5. Easy Availability of Labour

 

The skill requirement for operating SME units is not much sophisticated. Machinery in most lines of production is easily available in the open market and skills are also commonly known and available. Easy availability of skilled workforce provides a good ground for the growth of entrepreneurship in the SME sector.

 

6. Full Utilisation of Local Resources

 

Most of the SMEs have local area of operation. These firms provide demand for locally produced raw material which is both cheap and easily available. A large number of industries choose their location according to the local availability of inputs. As local materials are used as inputs, the problem of excess supply, low price and wastages are reduced. This backward linkage promotes production of local materials.

 

7. Better Industrial Relations

 

As these units are small in size, the employer- employee are in close contact often leading to better understanding of inter personal relations. This promotes industrial peace which further reduces strikes and labour turnover. Good industrial relations are important for steady flow of output and efficiency in production.

 

8. Forward Linkages

 

Small scale units not only have backward linkages causing development of the raw material supplying activities but have substantial forward linkages. A large number of small enterprises exist as ancillary units of large scale industries producing a range of raw materials, intermediates or components for them. Industries like automobiles, bicycles and textiles depend heavily upon a number of small units for the supply of components.

 

9. Personalised Customer Service

 

Another main feature of SMEs is that it provides an environment in which management is close to its customers. This closeness and acquaintance with customers makes it possible to better serve the specific needs of customers and to respond to their suggestions and complaints. While large businesses attempt to provide a personal touch with their customers, the results are seldom very successful because employees may not recognise their value or may not be motivated to cultivate close and personal customer relationship.

 

10. Contribution to exports

 

With the establishment of a large number of modern small scale industries in the post independence period, the contribution of the small scale sector in export earnings has increased a lot. It is observed that major exports of India consist of readymade garments, sports goods, leather products, processed food and large number of engineering goods. As per Fourth All India Census of MSMEs, 46,675 enterprises reported to have undertaken exports. Out of the same, share of micro enterprises was substantial at 85.83%, Share of small enterprises was 12.75% and medium enterprises 1.42%.

 

4. GROWTH AND PERFORMANCE OF SMEs IN INDIA

 

There are over 6000 products ranging from traditional to high-technology items, which are being manufactured by the MSME sector besides providing wide range of services. The Fourth All India Census of MSME 2006-07 estimated the size of MSME sector for the first time taking data from multiple sources. The size of the sector was estimated at 361.76 lakh and 105.21 lakh as compared to Third All India Census of Small Scale Industries (SSI), 2001-02 in terms of estimated number of enterprises. The estimated employment generated in the sector is 805.24 lakh and 249.33 lakh as compared to Third All India Census of SSI. The growth recorded during the year 2001-02 to 2006-07 in manufacturing sector was 22.46% and 18.49% for estimated number of enterprises and employment respectively.

 

For service sector, the growth rate in estimated number of enterprises and employment recorded was 31.21% and 34.00% respectively, during the period of 2001-02 to 2006-07. The table 1 shows the growth of SMEs in India in terms of number of units, production and employment for the period from 1991-92 to 2011-12. The SMEs has shown a rapid growth over the years. This could be possible due to the conducive policy environment during the liberalization era (post 1991).

 

Adequate economic infrastructure is one major factor that affects the performance and competitiveness of small industry. It is to overcome the infrastructural deficiencies faced by the sector, particularly in rural/backward areas and to strengthen linkages between agriculture and industry that the Government introduced the Integrated Infrastructure Development (IID) Scheme in 46 centres in 1994. The IID scheme proposes to contain developed sites, power distribution network, water, telecommunications, drainage and pollution control facilities, roads, banks, raw material depots, storage and marketing outlets, common facilities and technological back-up services. Government’s efforts will definitely help in enhancing the growth and performance of SMEs (Subramanya 2005).

 

Moreover, MSMEs function in a highly competitive environment and require an enabling environment to sustain growth. Well-rounded fiscal support, a strong policy framework, and incentives promoting innovation by financial institutions can significantly increase the penetration of formal financial services to the MSME sector.

 

Based on the results of Fourth All India Census of Micro, Small and Medium Enterprises, the estimated value of manufacturing output and GDP are shown in table 2:-

The primary responsibility of promotion and development of MSMEs is of the State Governments. However, the Government of India, supplements efforts of the State Governments through various initiatives.

 

A large number of steps were initiated by the Government of India for development of small and medium scale firms. National Small Industries Corporation Ltd (NSIC) was set up in 1955 to provide machinery to small scale units on hire purchase basis. Moreover, it also assisted small units in procuring orders from government departments. Small Industries Development Organisation (SIDO) was set up in 1954. It functions as an apex body in the formulation of policies for organised growth of small scale industries. The programme of District Industrial Centre (DICs) was introduced in 1979. The main aim was to establish one agency in each district to provide assistance to small firms for credit guidance and other necessary help. For providing financial assistance to small firms, Small Industrial Development Bank of India (SIDBI) was set up in 1989. Till now SIDBI has satisfactorily contributed in credit disbursement to small and medium enterprises in India. The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be “the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector (Shah and Khedkar, 2006). The major activities of SIDBI are: (a) Refinance of loans and advances; (b) discounting and rediscounting of bills; (c) granting direct assistance and refinancing of loans; and (d) providing services like factoring, leasing etc to small firms.

 

5. New Small Enterprise Policy, 1991

 

The government announced a policy package for small, tiny and village industries in August 1991 with the main aim of imparting more vitality and growth impetus to this sector. Important measures announced in this policy were as under:

 

1. The investment limit for tiny units was raised from Rs 2 lakh to Rs 5 lakh. In addition, while earlier ‘Industry’ meant manufacturing only, the new policy widened the scope by including industry related service and business enterprises.

 

2.   The 1991 policy provided for equity participation by other industrial units in the small scale units not exceeding 24 percent of the total shareholding. This was done for the mutual benefit of all kinds of units. This provision not only relieves the small units from the burden of full equity funding, but also builds up the stakes of large units in the survival and growth of small units.

   3.   The another important feature was the introduction of a new legal form of organisation of business, namely limited partnership. In this form, the liability of at least one partner is unlimited, whereas other partners have their liability limited to invested capital.

 

4.  Other features of the policy were:

 

(i)   The policy proposed to meet the entire credit demand of the small and tiny units.

 

(ii)      the policy envisaged market promotion of small and tiny sectors products to be undertaken by cooperatives, public sector institutions and other professional agencies.

 

(iii)      The policy proposed a scheme of integrated infrastructure development for small industries to facilitate location of industries in rural and backward areas and to promote stronger co-ordination between industry and agriculture.

 

(iv)    The scope of the National Equity Fund (NEF) scheme and Single Window Scheme (SWS) was enlarged.

 

6.  The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

 

The Micro, Small and Medium Enterprises Development (MSMED) Act was notified in 2006 to address policy issues affecting MSMEs as well as to prescribe investment ceiling of the sector. The Act seeks to facilitate the development of these enterprises and to enhance their competitiveness. It provides the first-ever legal framework for recognition of the concept of “enterprise” which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, micro, small and medium. The Act also provides for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises and with a wide range of advisory functions. Establishment of specific funds for the promotion, development and enhancing competitiveness of these enterprises, notification of schemes/programmes for this purpose, progressive credit policies and practices, preference in Government procurements to products and services of the micro and small enterprises, more effective mechanisms for mitigating the problems of delayed payments to micro and small enterprises. On 9 May 2007, subsequent to an amendment of the Government of India (Allocation of Business) Rules, 1961, the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of Micro, Small and Medium Enterprises. This Ministry now designs policies and promotes programmes, projects and schemes and monitors their implementation with a view to assist MSMEs in their growth and development.

 

7. Highlights of Fourth All India Census of MSME sector Establishment of NBMSME

 

The National Board for Micro, Small and Medium Enterprises (NBMSME) was established by the Government under the Micro, Small and Medium Enterprises Development Act, 2006. It examines the factors affecting promotion and development of MSMEs, reviews existing policies and programmes and makes recommendations to the Government in formulating the policies and programmes for the growth of MSMEs.

 

Prime Minister’s Task Force on Micro, Small and Medium Enterprises

 

The Task Force under Shri T. K. A. Nair, the then Principal Secretary to Prime Minister was constituted on 2nd September 2009 to reflect on the issues raised by the associations and formulate an agenda for action after discussions with all stakeholders. Its members included Member, Planning Commission; Secretaries of concerned Government Departments; Deputy Governor, RBI; Chairman and Managing Director, SIDBI and representatives of associations.

 

Public Procurement Policy for Goods Produced and Services rendered by Micro and Small Enterprises

 

The Policy mandates that every Central Ministry / Department / Public Sector Undertaking shall set an annual goal of procurement from Micro and Small Enterprises from the financial year 2012-13 and onwards, with the objective of achieving an overall procurement of minimum of 20 percent of total annual purchases of products produced and services rendered by Micro and Small Enterprises, in a period of three years. All the Chief Ministers of State Governments have also been advised to formulate similar policy for MSEs in their states. A Grievances cell has been constituted for redressal of the grievances for MSEs.

 

Establishment of National Manufacturing Competitiveness Programme (NMCP)

 

The objective of National Manufacturing Competitiveness Programme is to ensure healthy growth of the MSME Manufacturing Sector. One of the important cornerstones of the policies being pursued by the Government for sustenance of the MSME sector is to provide competitive edge to the units in this sector in the global environment. With a view to build the capacity of the Indian micro, small and medium manufacturing enterprises for overcoming competition in the global markets, NMCP has been established. It further helps small firms in facing challenges being posed by the entry of the multinationals in the domestic markets.

 

Presently, under twelfth five year plan (2012-2017), it is envisioned that the MSME sector will be upgraded through modern and new technologies to achieve global quality standards.

 

Niche markets will be identified and developed for MSME products, including khadi and coir products. The objective of the Ministry is to support and develop existing MSMEs; creation of new enterprises; support to Khadi, Village and Coir industries. The plan also recognised that the biggest problem faced by small units is inadequate availability of credit. Government needs to strengthen credit flow to the MSME sector, particularly micro sector by strict implementation of guidelines for year-on year growth of MSME credit. The reach of the MSEs to the banking net work has to be substantially enhanced through setting up of branches near clusters. Moreover, to address the risk perception of banks, particularly for lending to MSEs, the Credit Guarantee Scheme needs to be strengthened with enhanced budgetary support.

 

8. GENERAL PROBLEMS OF SMALL AND MEDIUM SCALE INDUSTRIES

 

All businesses regardless of size, have an element of vulnerability to failure arising from various weaknesses. Some are discussed below:

 

Financial Problem: The scarcity of finance is the main obstacle in the development of SMEs. The profit earned by them is often not enough for investment purposes. Banks are mandated to provide 40% of their lending to the priority sector comprising of agriculture, small scale industry and other small business etc. Although banks have met the priority sector lending targets on paper, their reluctance to lend to SMEs continues on account of following points:

 

Low recovery rates from the small firms.

 

More opaque as far as disclosure of information is concerned. Higher cost of lending to the small firms.

 

Unable to provide collateral security.

 

Hence, finance is all the more important for small scale firms in a fast-changing knowledge-based economy because of the speed of innovation. Innovative SSIs with high growth potential have played a vital role in raising productivity and maintaining competitiveness in recent years. But innovative products and services however need investment to flourish. If SMEs cannot find the financing they need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for the economy.

 

Inadequate Management

 

There is statistical evidence that the calibre and experience of management are the most important factors influencing a business success and failure. Small business management’s vulnerability to failure is most often attributable to the entrepreneur’s incompetence and lack of previous operating and management experience. An owner of a small business must be an expert in many areas of operations, whereas large companies can employ experts in procurement, finance, marketing and other functions.

 

Labour Problem

 

A growing small business often needs to hire additional managerial personnel. However, many entrepreneurs have a difficult time attracting qualified managerial talent. Labour problems spoil work environment, reduces productivity and causes disruption to production. These problems also account for fall in quality and increase in production costs.

 

Information Needs About Supplies and Shortages

 

Sometimes, business do not have sufficient knowledge of supply constraints in the economy. Once SMEs start the business, they may be interested in knowing about the suppliers of specific machinery that suit their needs, technical information and market trends for their products. This information is rarely available at the grassroots level. Hence, small firms have to face inflationary problems which lead to squeezing of profits.

 

Infrastructure Development

 

The quality of the infrastructure affects the growth prospects of SMEs to a great extent, especially in a developing country like India. Here, remarkable portion of the population lives in villages. Many rural areas still suffer due to the deplorable state of basic infrastructure like transport, telecommunications and electricity. The integration of rural industries with mainstream industries is proving to be difficult for these reasons. This has been identified as a key deterrent to the growth of SME clusters in rural areas.

 

Marketing Problems

 

Historically, small business has encountered problems in gaining access to market. The Indian SMEs are facing a lot of problems related to marketing in the national and international arenas. This is mainly due to the fact that these organizations belong to rural or semi urban areas where the resources are easily available to them and cheap labour is associated with it. But when it comes to selling of these products, the small firms have to face a difficulty in creating an impression and awareness in the minds of urban and other potential buyers about the quality and related aspects of their products and services.

 

Lack of Technology

 

Technology plays a crucial role in the development of SMEs. Technology not only helps in making a long term strategy but also helps in maximizing business opportunities for small enterprises. Technologies for SMEs should aim at fuelling innovation and business needs. Today, most SMEs in rural areas undertake manufacturing using old methods and outdated technology. But today, the competition is fierce, unlike in the past, when buyers were simply looked forward to purchase the best products at the lowest prices.

 

New Product Development

 

The SME market requires a strong new product development base. In India, most SMEs work on the designs required by domestic buyers. There is very little innovation in product design development, and even the technology used by the SMEs in India is Outdated. This has direct effect on sales and profits of these small firms.

 

Problem of Sickness

 

There are two main issues in respect of sick SMEs: (i) existence of large number of sick units which are non viable; and (ii) rehabilitation of potentially viable units. However rehabilitation of sick units is a costly proposition. It involves re- scheduling of past over dues with concessions on interest amount due, additional credit for modernisation and technological up gradation and provision for fresh working capital.

 

Exogenous Factors

 

There exist a large number of external factors which are beyond the control of the SME owners or managers and create many problems for the enterprises.

 

Main adverse factors beyond the control of the small units are Infrastructural bottlenecks, Stringent lending policies of financial institutions, Government control on prices and distribution, Burdensome taxation, Swings in government policy towards SMEs and Competition from large enterprises.

  1. Summary

   The role of small scale industries is an effective instrument for creating employment opportunities within the limited range of capital requirement. It has been realized in all the developed and developing countries that the SMEs directly help the nation to develop their economic stability. The threat to the small and medium industries multiplied in the post reform period. The new threats are emerging mainly from import liberalisation, increasing competition from large industry and inability of the small industry to keep pace with advancing technology and rising consumer expectations. Most of the SMEs support programmes and incentives go unutilised due to less efficient management and complicated procedures. The state support system must be simplified to make it relevant and convenient to the small firms. SSI units on their part have to make new strategies and must try to seek new relationships with the medium and large industry.

 

References:

 

  • BalaSubrahmanya, M.H.(2005), “SSIs in India in the Globalisation era”, International Journal of Management and Enterprises Development, vol 2,number 1,Pg- 122 to 139.
  • Bedi, S. (2004), “Business Environment”, ed. 1, Excel Books, Delhi, pp. 501-520. Datt, R. and Sundharam, K.P.M. (2003), “Indian Economy”, ed. 48, S. Chand and Company Ltd, Delhi, pp. 670-680.
  • Garg A.K. (2007),” Micro, Small and Medium Enterprises”, The Chartered Accountant, vol 55, number 10, April, pp.1613-1617.
  • Gaedeke, R.M. and Tootelian, D.H. (1980), “Small Business Management”, Scott, Foresman and Company, United States of America, pp. 14-20.
  • Government of India, Ministry of MSMEs, Annual Report (2013-14), pp. 16, available at www.msme.gov.in.
  • Government of India(2013), “Handbook of Statistics on the Indian Economy”  pp. 88. available at http://dbie.rbi.org.in.
  • Misra, S.K. and Puri, V.K. (2009), “Indian Economy”, ed. 27, Himalaya Publishing House, Mumbai, pp. 383-394.
  • Patankar Rahul, (2008), “SSIs in India, Key Challenges and Credit Ratings”, The Chartered Accountant, May, pp. 1912-1916.
  • Shah T and Khedkar A, (2006) ‘SIDBI- A Successful Financial Institution in SME Financing’, Indian Institute of Planning and Management.