A study of SMEs contribution towards GDP and Exports

(Suggestions for improvement)

Partial fulfillment of the Requirements for the Award ofPost Graduate Diploma in Management

(Recognized by AICTE, Ministry of HRD, Govt. of India)

By

Bhabagrahi Sahoo

PG-13-008

Batch 2013-15

Under the guidance of

Prof. Mohit Dhawan

Asst. Dean – PGDM

INMANTEC, Ghaziabad

Integrated Academy of Management and Technology

Ghaziabad

ACKNOWLEDGEMENT

I would like to thank my institution guide Professor Mohit Dhawan (program coordinator) for their constructive discussion, advice and encouragement that enabled me to carry out this program to its rightful conclusion.

S No. Contents Page No.

Executive Summary 4

1. Introduction 51.1 Purpose of the Study 081.2 Industry Overview 081.2.1 MSME 08

2. Literature Review 113. Research Objective 124. Research Methodology 12

4.1 Research Design 124.2 Data Requirement 124.3 Data Collection Method and Instrument 134.5 Data Analysis and Techniques 134.5 Limitations of the Study 13

5. Data Analysis and Interpretation 146. Findings of the Study 187. Recommendations 238. Conclusions 249. References 25

EXECUTIVE SUMMARY

The MSMEs are known as the Backbone of India after the agriculture sector. In the current era the MSMEs are contributing about 22 percent to the nation’s GDP and about 40 percent to the total exports.

The whole project is based on the secondary data collected from the annual report of MSMEs of different years. There is very good development in the sector of MSMEs which is possible with their self improvement and with the help of Financial and Government.

There are many weaknesses in this sector which are creating hurdles in correct growth of development. In every Five Year Plan government makes plans to make the development in this sector.

1. INTRODUCTION

Indian economy has been witnessing economic deregulation in many ways since 1991. The policy makers implement the liberalization policies in all the sphere of the economy despite strident criticism from every nook and corner of the country. The very purpose of the loosening the economic policy is to achieve the targeted economic growth and to cope up with the global economic needs. Employment generation is top among the important aims. No economy can economically sustainable until and unless it generates adequate employment opportunities to its people. India like developing countries are concerned employment is crucial problem which hinder the economic growth of the country. SMEs plays an inevitable role in growth both in developing countries as well as developed countries as SMEs have been the important source of employment generation, output growth. In India, role of SMEs have become very crucial as SMEs have potential to balanced distribution of income, reduction of poverty, generation of employment and growth in export, development of entrepreneurship, development of industry and rural economy. With over 44 million units SMEs contributes around 9% GDP, 45% of manufacturing output, 40% of the export of the country, SME units estimated to employ about 101million people.

SMEs help the countries having low level investment by contributing to socio-economic benefits. SMEs had to face many challenges as well as they have got many opportunities due to the globalization of the country. SMEs faced problems such as lack of management efficiency, poor skill of employees, poor marketing strategy, lack of R & D and innovative technology. Other problems faced by the SMEs were lack of finance. There were lack of corporate governance and legal & regulatory frameworks are also hindering the growth of SMEs.

BACKGROUND

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. 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. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socioeconomic development of the country.

Khadi is the proud legacy of our national freedom movement and the father of the nation. Khadi and Village Industries (KVI) are two national heritages of India. One of the most significant aspects of KVI in Indian economy is that it creates employment at a very low per capita investment. The KVI Sector not only serves the basic needs of processed goods of the vast rural sector of the country, but also provides sustainable employment to rural artisans. KVI today represent an exquisite, heritage product, which is ‘ethnic’ as well as ‘ethical’. The Sector has a potentially strong clientele among the middle and upper echelons of the society.

Coir Industry is an agro-based traditional industry, which originated in the state of Kerala and proliferated to the other coconut producing states like Tamil Nadu, Karnataka, Andhra Pradesh, Odisha, West Bengal, Maharashtra, Assam, Tripura, etc. It is an export oriented industry and has greater potential to enhance exports by value addition through technological interventions and diversified products like Coir Geotextiles etc. The acceptability of Coir products has increased rapidly due to its ‘environment friendly’ image.

Ministry of Micro, Small & Medium Enterprises (M/o MSME) envisions a vibrant MSME sector by promoting growth and development of the MSME Sector, including Khadi, Village and Coir Industries , in cooperation with concerned Ministries/Departments, State Governments and other Stakeholders, through providing support to existing enterprises and encouraging creation of new enterprises.

The Micro, Small and Medium Enterprises Development (MSMED) Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. The Act seeks to facilitate the development of these enterprises as also 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/ programs 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 and assurance of a scheme for easing the closure of business by these enterprises, are some of the other features of the Act. On 9 May 2007, subsequent to an amendment of the Government of India (Allocation of Business) Rules, 1961, the erstwhile 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 (M/o MSME). This Ministry now designs policies and promotes/ facilitates programs, projects and schemes and monitors their implementation with a view to assisting MSMEs and help them to scale up.

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. The role of the M/o MSME and its organizations is to assist the States in their efforts to encourage entrepreneurship, employment and livelihood opportunities and enhance the competitiveness of MSMEs in the changed economic scenario. The schemes/programs undertaken by the Ministry and its organizations seek to facilitate/provide: i) adequate flow of credit from financial institutions/banks; ii)

support for technology up gradation and modernization; iii) integrated infrastructural facilities; iv) modern testing facilities and quality certification; v) access to modern management practices; vi) entrepreneurship development and skill up gradation through appropriate training facilities; vii) support for product development, design intervention and packaging; viii) welfare of artisans and workers; ix) assistance for better access to domestic and export markets and x) cluster-wise measures to promote capacity building and empowerment of the units and their collectives.

1.1 PURPOSE OF THE STUDY:

1.1.1 To examine the growth and performance of SMEs.1.1.2 To study the contribution of SMEs towards GDP and Exports.1.1.3 To analyze the problems and suggestions for improvement.

1.2 INDUSTRY OVERVIEW:

1.2.1 MSME1.2.1.1 Meaning of MSME

The term MSME encompasses a broad spectrum of definition and it varies from country to country. In India it is classified under Micro, Small, and Medium Enterprises on the basis of investment. The criteria like number of employees, sales and investment level are commonly used internationally to define SMEs. In India MSMEs are defined on the basis of their investment level as per MSME

Development Act 2006. Manufacturing units are classified according to their investment in plant and machinery and service units are classified based on investment in equipment.

The table delineates the definition of MSMEs clearly

Description INR(on P & M) INR(on services) No. of employees

Micro Enterprises upto Rs. 25 Lakhs upto Rs. 10 Lakhs upto 9

Small Enterprises

above Rs. 25 Lakhs & upto Rs. 5 Crores

above Rs. 10 Lakhs & upto Rs. 2 Crores

10 to 49

Medium Enterprises

above Rs. 5 Crores & upto Rs. 10 Crores

above Rs. 2 Crores & upto Rs. 5 Crores

49 to249

1.2.1.2 SME’s in different sectors of Indian industry:

SMEs have been established in almost all-major sectors in the Indian industry such as:

1. Food Processing2. Agricultural Inputs3. Chemicals & Pharmaceuticals4. Engineering; Electricals; Electronics5. Electro-medical equipment6. Textiles and Garments7. Leather and leather goods8. Meat products9. Bio-engineering10.Sports goods11.Plastics products12.Computer Software, etc.

1.2.1.3 Significance of SMES

SMEs are considered the engine of economic growth as they:

1. Provides low cost employment since the unit cost of persons employed is lower for SMEs than for large sized units.

2. Assists in regional and local development since SMEs accelerate rural industrialization by linking it with more organized urban sector.

3. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.

4. Contribute significantly to export revenues because of the low cost labor intensive nature of its products.

5. Have a positive effect on the trade balance since SMEs generally use indigenous raw materials, reducing dependence on imported machinery, raw material or labor.

6. Assist in fostering self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.

7. Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.

8. Converts the raw material within the country into semi-finished items and later pass it on the LSEs that have capital, skill and equipment to process these into finished goods.

9. Provide rural people an opportunity for income generation and personal growth since they can work at home. This helps to achieve fair and equitable distribution of wealth by creating nationwide non-discriminatory job opportunities.

10.Attracts direct foreign investment since multinationals and big conglomerates have started to outsource from countries with strong SME sectors. The low labor cost makes production of semi finished goods very economical for large concerns operating in international markets.

11.The SMEs act as engines through which the growth objectives of developing countries can be achieved.

2. Literature Review

2.1 Bala Subrahmanya (2004) highlighted the impact of globalization and domestic reforms on small-scale industries sector. The study stated that small industry had suffered in terms of growth of units, employment, output and exports. The Researcher highlighted that the policy changes had also thrown open new opportunities and markets for the small-scale industries sector. He suggested that the focus must be turned to technology development and strengthening of financial infrastructure in order to make Indian small industry internationally competitive and contribute to national income and employment.

2.2 Bargal et al. (2009) examined the causal relationship among the three variables GDP, SSI output and SSI exports and also have compared the performance parameters of SSIs in the pre and post liberalization era. The study found that the annual average growth rate of different parameters of SSIs have declined in the period of nineties vis-à-vis the pre-reform years. There is an absence of any lead-lag causal relationship between exports and production in small-scale sector and GDP of Indian economy.

2.3 Dixit and Pandey (2011) applied co-integration analysis to examine the causal relationship between SMEs output, exports, employment, number of SMEs and their fixed investment and India’s GDP, total exports and employment (public and private) for the period 1973-74 to 2006-07. Their study revealed the positive causality between SMEs output and India’s GDP.

2.4 International Journal of Marketing (2013), Contribution of MSME to the nation’s total GDP, Export, Industrial productions are quite commendable. It accounts for more than 90 percent of the total industrial units. More support is needed for MSMEs from the government in the form of priority sector lending, government procurement programme, credit and performance ratings and marketing support. The policy makers should focus on to provided possible help to the sector to utilize the potentials of the sector and to review the sector to act as back bone of the country’s economy and propel economic growth.

3. Research Objective

The objective of the study is to evaluate the contributions made by the SMEs towards the GDP and Exports of Indian Economy. The study also includes the suggestions for the improvements.

4. Research Methodology

The data for the present study have been collected from various secondary sources especially from the annual report published by Ministry of Micro, Small and Medium Enterprises for various years.

4.1 Research Design

This is an exploratory research. In this contribution of SMEs are calculated on different parameters and the suggestions are given on the basis of findings.

1.1 Data Requirement4.1 Performance chart,4.2 Gross output,4.3 Exports of MSMEs,4.4 GDP4.5 Total Exports

1.2 Data Collection Method and Instrument

All the data in this research is collected by secondary data method from the annual report of Ministry of MSME and from previous literature reviews.

1.3 Data Analysis Techniques

To analyze the change in Percentage year 2006-07 is taken as a benchmark for comparison with further years. Bar Graphs are used to show the contribution in percentage.

1.4 Limitations of the Study

Proposed data is provided in the annual report of Ministry of MSME for the year 2011-12 and 2012-13 so the results may vary from the finding of the study with actual. The data of Export is different as compared to other.

5. Data Analysis and Interpretation:

5.1 Distribution of SMEs in different sectors

Source: Annual Report MSME(www.msme.gov.in)

5.2 Performance of MSME

(in Lakh)

Year No. of Enterprises Increase in Percentage2006-07 361.762007-08 377.37 4.322008-09 393.70 8.832009-10 410.82 13.562010-11 428.77 18.522011-12 447.73 23.762012-13 467.56 29.25

5.3 Gross Output of MSMEs(in crores)

Year Gross Output Increase in Percentage

2006-07 1351383.452007-08 1435179.26 6.202008-09 1524235.83 12.792009-10 1619356.53 19.832010-11 1721553.42 27.392011-12 1834332.05 35.74

5.4 MSMEs Export

(in US $ mn)

Year Export by MSMEs Change in Percentage2009-10 824942010-11 111403 35.042011-12 131483 59.38

5.5 GDP

(in crores)

Year GDP (Current Price) Increase in Percentage2006-07 39532762007-08 4582086 15.912008-09 5303567 34.162009-10 6108903 54.532010-11 7248860 83.362011-12 8391691 112.27

5.6 Total Exports(in crores)

Year Exports Increase in Percentage2006-07 5717.792007-08 6558.64 14.712008-09 8407.55 47.042009-10 8455.34 47.882010-11 11429.22 99.892011-12 13829.36 141.87

5.7 Contribution of MSME to GDP

Year GDP MSME Share in GDP %2006-07 3953276 1351383 34.183892007-08 4582086 1435179 31.321532008-09 5303567 1524236 28.739822009-10 6108903 1619357 26.508142010-11 7248860 1721553 23.7493

2011-12 8391691 1834332 21.85891

5.8 Contribution of MSME to Exports

Year Exports MSME Share in Export %

2009-10 178751 82494 46.152010-11 251136 111403 44.362011-12 305964 128978.00 42.15

5.9 Major Issues of SME Sector:i. Facilities Lack of availability of adequate and timely credit.

ii. High cost of credit.iii. Collateral requirements.iv. Limited access to equity capital.v. Problems in supply to government departments and agencies.

vi. Procurement of raw materials at a competitive cost.vii. Problems of storage, designing, packaging and product display.

viii. Lack of access to global markets.ix. Inadequate infrastructure facilities, including power, roads, water, etc.x. Low technology levels and lack of access to modern technology.

xi. Lack of skilled manpower for manufacturing, services, marketing, etc.xii. Multiplicity of labor laws and complicated procedures associated with

compliance of such laws.xiii. Absence of a suitable mechanism which enables the quick revival of viable

sick enterprises and allows unviable entities to close down speedily; and Issues relating to taxation, both direct and indirect, and procedures thereof.

xiv. Lack of social security.

6. Findings of the Study:

6.1 Performance of Enterprises

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-130

50

100

150

200

250

300

350

400

450

500

No. of Enterprises (in Lakh)

6.2 Gross Output

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-140

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

Gross Output (in crores)

6.3 Export by MSMEs

2009-10 2010-11 2011-12 2012-13 2013-140

20000

40000

60000

80000

100000

120000

140000

Export by MSMEs

6.4 GDP

2006-07 2007-08 2008-09 2009-10 2010-11 2011-120

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

GDP (in crores)

6.5 Total Exports

2006-07 2007-08 2008-09 2009-10 2010-11 2011-120

2000

4000

6000

8000

10000

12000

14000

16000

Total Exports(In Crores)

6.6 Contribution of MSME to GDP

2006-07 2007-08 2008-09 2009-10 2010-11 2011-120

5

10

15

20

25

30

35

40

Share in GDP %

6.7 Contribution of MSME to Exports

2009-10 2010-11 2011-1240

41

42

43

44

45

46

47

Share in Export %

7. Recommendationsi. SMEs can be given preference by providing relaxation of KYC norms.

ii. SMEs need to be encouraged to take the venture capital route.iii. SMEs can be given incentives to raise capital through the equity route.iv. SMEs should be given short and long term credit along coverage of

insurance and also export development and investment funds (EDIF) can be created in order to promote exports.

v. SMEs should be encouraged to contribute periodically to Technology Development funds (TDFs). This way they would get involved with up gradation and also have a stake in progress.

vi. FDI should be promoted in SME segment. Multilateral agencies can be provided with incentives to lend to SMEs.

vii. Clustering – Cluster support by IT and ITES systems will result in strengthening of productive activity.

viii. PPP – Public private partnership will help in creation of viability gap funding for SMEs.

ix. Internal efforts such as working towards cash flow management and innovation in operation would result in increase in productivity.

x. Improvement in training would also result in better operations of the enterprise. This will bring them closer towards the skill levels observed in larger industry.

8. Conclusions

Micro, Small and Medium Enterprises (MSMEs) have emerged as an engine of growth in Indian economy. They have emerged as a vibrant and dynamic component of the economy by virtue of their significant contribution to GDP and exports. The growing importance of SMEs, which account for about one-fifth of India’s total GDP and 42% in Exports, is manifesting itself in the economy. Government is trying to push it forward with a number of plans to foster technology, innovation and quality in SMEs. Banks have joined hands with private players to create a rating agency focused on SMEs in order to improve the credit disbursal to them. Indian SMEs are increasingly organizing themselves in clusters, which improve their access to business associations are technical assistance providers. It also helps in building inter-firm cooperation that adds to productivity and innovation.

9. References1. www.msem.gov.in , www.wikipedia.org2. Annual Report (2013-14), Ministry of Micro, Small and Medium

Enterprises, Government of India, 2013-14.3. Bala Subrahmanya, M.H. (2004), ‘Small Industry and Globalization:

Implications, Performance and Prospects’, Economic and Political Weekly.4. Bargal, H., Dashmishra, M., and Sharma, A. (2009), ‘Performance Analysis

of Small Scale Industries – A Study of Pre-liberalization and Post-liberalization Period’, International Journal of Business and Management.

5. Dixit, A. and Panday, A.K, (2011), ‘SMEs and Economic Growth in India: Co integration Analysis’, The IUP Journal of Financial Economics.

6. Dr. Sultan Singh Jaswal (May 2014), ‘Problems and Prospects of Micro, Small and Medium Enterprises (MSME’s) in India’, International Journal of Innovative Research and Studies.

7. India's SME sector, by Mr. D.R. Dogra, MD & CEO CARE Ratings, All India Association of Industries on India SME Sector 26th February 2014.

8. SMEs role in India’s manufacturing sector, Indian Brand Equity Foundation (IBEF), www.ibef.com

9. http://planningcommission.nic.in/data/datatable/0306/table%2013.pdf 10.http://www.dgciskol.nic.in/annualreport/book_3e.pdf