problems and prospects of msme in india

VOLUME NO.1, ISSUE NO.2 ISSN 2277-1182

11

Problems and Prospects of MSME in India

Dr. Urmila Moon

Assistant Professor, Department of Commerce, Ramnarain Ruia College, Mumbai

E-mail: [email protected]

ABSTRACT

MSMEs have been significantly contributing towards employment, export,

manufacturing sector in India. They occupy an important place in India’s

industrialization strategy and display enormous growth potential. These

units produce a wide range of items employing traditional to state-of-the-art

technology. This vibrant segment of the Indian economy, has been

contributing over 45 per cent of the manufacturing sector output, close to 40

per cent of the national exports. There has been a paradigm shift in the

approach of the Government towards this sector. MSME is the best vehicle

for inclusive growth, to create local demand and consumption. The

contribution of service sector apart from manufacturing sector was realized

and with the introduction of MSMED Act, 2007, the importance of service

enterprises along with the need to shift from small enterprises to medium

enterprises has been clearly brought out. There have been many policies

protecting this sector and yet there are number of challenges faced by

MSMEs. This paper examines the trends in performance and growth of

MSMEs. The paper also makes an attempt to understand various problems

faced by this sector. An attempt is made to offer few suggestions to augment

the success of this sector.

Keywords: SSI, MSMEs, Export, Manufacturing factor

INTRODUCTION

Small Enterprises play a very significant role in terms of balanced and sustainable growth of

the economy by way of employment generation, development of entrepreneurial skills and

contribution to export earnings. This vibrant segment of the Indian economy, has been

contributing over 45 per cent of the manufacturing sector output, close to 40 per cent of the

national exports and providing employment to about 59 million persons (which is next only

to agriculture) through about 2.6 crore units, located in both the rural and urban areas across

the country. This sector accounts for 8 per cent of the Gross Domestic Product (GDP). In the

First Five Year Plan, priority was given to agriculture and the Second Five Year Plan

focused on large industries. By early eighties, the weaknesses of small scale industries were

recognized especially about their inability to withstand adverse developments. Small and

Medium Enterprises are an important tool for entrepreneurship development. However, there

are numerous challenges faced by this sector. Banks and constructive government policies

can play a lead role for furthering their growth and development.

mailto:[email protected]

ABHINAV NATIONAL MONTHLY REFEREED JOURNAL OF REASEARCH IN ARTS & EDUCATION

www.abhinavjournal.com


12

OBJECTIVES

1. To study the performance and growth of MSMEs in post reform period.

2. To understand the challenges faced by MSMEs.

3. To give suggestions on the basis of the study.

REVIEW OF LITERATURE

Bhide (2009) Lack of adequate and timely institutional credit is a frequent complaint of the

small-scale industry. Banks insist on collaterals which the small entrepreneurs, with limited

resources, are unable to furnish. Bank officials frequently point out to the high level of NPAs

and the poor culture of repayments to justify their cautious lending policies.

Sandesara (1993) suggests that the lackluster performance of the reserved industries might be

attributed to excess entry of small firms into these protected sectors. Mohan (2000) argued in

his paper that the support system were apt for the period of 1950s, 1960s and 1970s. Today

not only are these policies obsolete but also possibly harmful to the development of SSI. The

policy support are inadequate over the years as compared to the growth in SSIs.

RESEARCH METHODOLOGY

This study is based on secondary data. The study concentrates on post reforms era.

Secondary information has been collected from a number of sources such as books, journals,

periodicals, newspapers and websites, published reports of RBI, Annual reports of

MSMEDO, data from Third SSI and Fourth MSME Census. The data collected has been

tabulated, analyzed and interpreted for drawing conclusions. Statistical tools including

percentages have been used for interpretation. After the analyses of the data, few suggestions

are made at the end.

Definition of MSMEs

Earlier small enterprises were called Small Scale Industries (SSI) and with the enactment of

the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, they are

addressed as Small and Medium Enterprises (SMEs). Thus, service enterprises were included

in the MSME sector realizing the importance of service sector.

The level of employment and /or sales turnover is what most countries follow as the criterion

for defining the small scale sector. However, in India, it is defined in terms of investment in

„Plant and Machinery‟. As per MSMED Act, 2006, the enterprises are now grouped under

two major heads namely manufacturing and service enterprises. Earlier, service enterprises

were not covered under the definition of SSI.




13

Table 1. Classification of MSMEs

Sector Micro Enterprises Small Enterprises Medium Enterprises

Manufacturing Investment in plant

and machinery does

not exceed Rs.25

lakh

Investment in plant and

machinery is more than

Rs.25 lakh but does not

exceed Rs.5 crore

Investment in plant

and machinery is more

than Rs.5 crore but

does not exceed Rs.10

crore.

Services

Investment in

equipment does not

exceed Rs.10 lakh

Investment in equipment

is more than Rs.10 lakh

but does not exceed Rs.2

crore

Investment in

equipment is more

than Rs. 2 crore but

does not exceed Rs. 5

crore.

Source: Ministry of Micro, Small & Medium Enterprises, 2007: Micro, Small and Medium

Enterprises in India: An Overview

Growth and Performance of MSMEs:

MSMEs produce over 6000 products which includes traditional as well as high tech items.

The labour to capital ratio and the overall growth in this sector is much higher than in the

large industries. The contribution of this sector to the Indian economy and its importance in

the national objectives of growth with equity and inclusion is revealed in the table 2. The

data with respect to MSMEs till the year 2005-06 refer to micro and small scale industries

only. Since 2006-07, the data with respect to MSMEs have been presented as under.

Table 2. Performance of MSMEs

Year Units (Lakh nos.) Production

(Rs. crore)

Employment

(Lakh nos.)

Exports

(Rs. Crore)

At current prices

1980-81 8.7 28100 71.0 1600

1981-82 9.6 32600 75.0 2100

1982-83 10.6 35000 79.0 2000

1983-84 11.6 41600 84.2 2200

1984-85 12.4 50500 90.0 2500

1985-86 13.5 61200 96.0 2800

1986-87 14.6 72300 101.4 3600

1987-88 15.8 87300 107.0 4400

1988-89 17.1 106400 113.0 5500

1989-90 18.2 132300 119.6 7600

1990-91 67.9 78802 158.3 9664

1991-92 70.6 80615 166.0 13883

1992-93 73.5 84413 174.8 17784

1993-94 76.5 98796 182.6 25307

1994-95 79.6 122154 191.4 29068

1995-96 82.8 147712 197.9 36470

1996-97 86.2 167805 205.9 39248

1997-98 89.7 187217 213.2 44442

1998-99 93.4 210454 220.6 48979




14

Table 2. Performance of MSMEs (Contd…..)

Year Units (Lakh nos.) Production

(Rs. crore)

Employment

(Lakh nos.)

Exports

(Rs. Crore)

At current prices

1999-00 97.2 233760 229.1 54200

2000-01 101.1 261297 240.9 69797

2001-02 105.2 282270 252.3 71244

2002-03 109.5 314850 263.7 86013

2003-04 114.0 364547 275.3 97644

2004-05 118.6 429796 287.6 124417

2005-06 123.4 497842 299.9 150242

2006-07 261.01 709398 594.61 182538

2007-08 272.79 790759 626.34 202017

2008-09 285.16 880805 659.35 N.A.

2009-10 298.08 982919 695.38 N.A.

Note: The data for the period up to 2005-06 is of small scale industries (SSI). Subsequent

to 2005-06, data with reference to micro, small and medium enterprises (MSMEs) are being

compiled.

Source: Ministry of Micro, Small & Medium Enterprises, Annual Report, various years.

Number of Units:

There has been an enormous growth in the number of units in the MSME sector from 8.7

lakh in 1980-81to 298.08 lakh in 2009-10 (refer Table 2). After the inclusion of service

enterprises in 2006-07, the number of units almost registered an increase of 111.48 per cent

over the previous year. As per the data available from annual report 2010-11 on MSME, the

size of the registered MSME sector is estimated to be 15,63,974. Interestingly Of the total

working enterprises, the proportion of micro, small and medium enterprises were 94.94%,

4.89% and 0.17% respectively. This comprises of 67.10% manufacturing enterprises and

32.90% services enterprises. About 45.23% (7.07 lakh) of the units were located in rural

areas.

1. Production

Table 2 reveals clearly that production in SSI sector has been continuously increasing since

1980-81 from 28100 crore to Rs.982919 crore. The small-scale industries sector plays a vital

role in the growth of the country. The major items of production includes food products (22

%), basic metal products (10 %), metal products (8 %), chemical and chemical products (12

%), rubber and plastic products (6 %), electrical and machinery parts (6 %) and others (36

%) (MSME Annual Report 2010-11).

2. Employment

Employment generation is of paramount importance in our labour surplus and capital scarce

economy. Small enterprises are more labour intensive and generate more employment. The

ministry of MSME shows continuous rise in the production, exports and employment in

particular since 1980-81 till today. The employment generation has increased from 0.71

persons per unit in 1980-81 to 6.95 persons per unit in 2009-10. In 2006-07, employment




15

rose by 101.62 per cent over 2005-06, due to change in the definition. The dominance of

traditional methods of production in industries located in rural areas market their products at

local level. The employees are mainly the family members in such units. Whereas there has

been a change in post independent India where modern units require employees trained in

modern technology. These employees get trained through formal training institutes.

3. Exports

It is evidenced that SSI plays a major role in India‟s export performance. Exports from this

sector also increased hugely over the years. From Rs. 1600 crore in 1980-81 it has increased

to Rs.2,02,017 crore in 2007-2008 (Table 2). Exports of this sector take place through

trading houses, export houses and merchant exporters. They also produce parts and

components to be consumed for producing finished exportable goods. The trend of exports

from this sector is very positive and growing. SMEs constitute 34% of India‟s merchandise

exports and in order to increase India‟s export share to the global trade, SMEs are expected

to enlarge their scope manifold.

Finance

The MSME sector primarily rely on bank finance for purposes like purchase of land,

building, plant and machinery, to meet working capital needs and exports receivables

financing etc. The prominent objective hence which follows is to ensure timely and adequate

flow of credit. As per Reserve Bank guidelines, advances extended to the MSE sector are

treated as priority sector advances and banks are required to extend at least 60 per cent of

their advances to the MSE sector.

1. Figure in parentheses indicates year-on-year growth.

2. The high growth witnessed during 2008 is on account of re-classification of MSEs as per

MSMED Act, 2006. Firstly, the investment limit of small (manufacturing) was raised from

Rs.1 crore to Rs.5 crore and small (services) was added to include enterprises with

investment limit between Rs.10 lakh to Rs.2 crore. Secondly, the coverage of service

enterprises were broadened to include small road and water transport operators, small

business, professional and self-employed and all other service enterprises as per definition

provided under MSMED Act, 2006.

Table 3. Outstanding Bank Credit to MSE (Amount Rs. In Crore)

As on last

reporting

Friday of

March

Public Sector

Banks

Private

Sector Banks

Foreign

Banks

All

Scheduled

Commercial

% of MSE

Credit to Net

Bank Credit

2005 67,800 8,592 6,907 83,498 8.8

2006 82,434(21.6) 10,421(21.3) 8,430(22.1) 1,01,285(21.3) 7.5

2007 1,02,550(24.4) 13,136(24.4) 11,637(26.1) 1,27,323(38.0) 7.2

2008 1,51,137(47.4) 46,912(257.1) 15,489(33.1) 2,13,538(67.7) 11.6

2009 1,91,408(26.6) 46,656(0.0) 18,063(16.6) 2,56,127(19.9) 11.3

2010 2,78,398(45.4) 64,534(38.3) 21,080(16.7) 3,64,012(42.1) 13.4

Source: MSME, Annual Report, 2010-11.




16

Issues and Challenges for MSME sector

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up by

the Ministry of Micro, Small & Medium Enterprises (MSME), Government of India (GOI)

and Small Industries Development Bank of India (SIDBI) in August 2000. CGTMSE

operates the Credit Guarantee Scheme (CGS). The Ministry of MSME announced a package

for promotion of Micro and Small Enterprises in February 2007. Under this, the Credit

guarantee Fund Scheme increased the eligible loan limit to Rs.50 lakh. This scheme

guarantees grant of collateral-free and/or third party guarantee-free credit facilities to Micro

and Small Enterprises by Member Lending Institutions (MLIs). The CGS scheme was started

in 2000-01 but the trends in its operations indicate that in the initial years, the cover was low.

Later from 2005-06 onwards, there has been a steady growth in guarantee cover and as of

January 31, 2010, cumulatively 2,61,987 guarantee approvals have been accorded involving

an amount of Rs.9,822.50 crore. However, the CGS has not performed as expected mainly

because banks are reluctant to avail of guarantee cover. The branch level divisions prefer to

lend against secondary collaterals rather than take guarantee cover from CGTMSE. This is

because they assume that it would be easier to recover the dues by liquidation of collaterals.

It is also observed that though there has been several promotional initiatives taken by the

Government of India and Reserve Bank of India to promote the growth of the MSE sector,

the first generation entrepreneurs find it difficult to access credit from banks due to inability

of providing secondary collateral, particularly in the form of immovable property as also

third party guarantee. It is understood that banks undertake this measure of protection against

default in payment. The Reserve Bank of India has instructed now that banks should not take

secondary collaterals from MSE units.

Inspite of the promotional measures of RBI, there has been high rate of NPAs in this sector

leading to further hindrances in flow of credit to the sector. At end-March 2010, the

percentage of priority sector NPAs in total NPAs was 53.8 per cent for public sector banks as

against 27.6 per cent for private sector banks (RBI report, 2010). The total NPAs for

MSMEs in Public Sector Banks was Rs.11,537 crore during 2009-10 while the same for

private sector banks was Rs. 1,139 crore. Various issues like lack of power and

infrastructural facilities, economic conditions, limited entrepreneurial development

infrastructure has led to limited growth of this sector in spite of its tremendous growth

potential.

The inherent weakness of small enterprises and lack of transparency in the financial data

make the process of rating difficult for MSMEs. There has been a general complaint about

the complex processes in obtaining bank loans which causes to delays in sanctions. Rating

may further complicate and therefore delay the sanctioning process. Basel II norms permit

use of scoring models for loans upto Rs. 5 crores.

The Task Force appointed by RBI in 2010 made important recommendations to enhance the

flow of credit to MSMEs. These include strict adherence to the stipulated targets by the

commercial banks for the micro enterprises (viz., 20% year-on-year growth for MSE lending

with 60% apportionment for the micro sector).

Factoring is also the most suited product for MSMEs since it does not require collateral.

Under factoring the service provider offers a range of financial services like receivables




17

financing, sales ledger administration, accounts receivables collection and management,

credit protection, and advisory services. In factoring agreement, there are usually three

players--- the factor (banks/NBFCs), the client (the seller of goods/services) and the debtor

(the buyer of goods/ services). This mechanism definitely offers a better scope for financing.

It was introduced in April 1991. The penetration of factoring services is very low in India.

Factoring turnover constituted merely 1.24 per cent of the total bank credit in 2008.

Policy of Reservation and Dereservation

Through the Industries (Development and Regulation) Act, 1951, small units were a

privileged lot. The Policy of small scale product reservations started in 1967 to protect and

promote small scale sector vis-à-vis large scale sector. The major objectives of Reservation

Policy were to ensure increased production and employment in this sector. Another

objective was to make small scale industry products competitive in the market. But the

WTO-obligation to remove Quantitative Restrictions saw the beginning of the end of

reservation. With 47 items in 1967, the list of reserved items increased to 873 items in

October 1984. In the first two SSI Census surveys conducted in 1972 and 1987-88 it was

observed that the total SSI production in the reserved categories was 25 per cent in the total

SSI production and had rose marginally to 28 per cent in 1987-88. The Second Census

revealed that reserved products accounted for only 21 per cent. Due to the emergence of new

economic order which demanded more competitive SS sector, dereservation was initiated

and by February 2008 it has come down drastically low to only 35 items and in February

2010 it has come down to only 20 items. Non-MSME units can still manufacture these items,

provided they undertake 50%export obligations. Large organizations can „market‟ these

goods as there are no restrictions or regulations for the same. This all pose further challenges

for SMEs which produce these reserved items.

Sickness in the MSME sector

Sickness has been one of the major problems hovering MSME sector. It has increased

marginally from 13.98 per cent in 2001-02 to 14.47 per cent in 2006-07. As per the Fourth

Census survey (2006-07), out of the total units surveyed, 21.94 per cent units were found to

be closed. The report revealed that out of the total 2211959 units surveyed, 480946 units

were found to be closed. The Census report also revealed that there were about 1,14,000 sick

units as on March 2007. Among these the number of units that were found to be potentially

viable by banks was only 4,287. This constituted for 3.7 percent of the total sick units.

Rehabilitation programs were conducted by banks for only 588 units. The cause of sickness

can be largely contributed to lack of demand, shortage of working capital, marketing

problems, and units becoming non-competitive, uneconomical and inefficient.

NPAs in MSMEs

Between 2009 and 2010, however, the share of priority sector NPAs in general, and small

scale industries in particular, went up for domestic banks, partly a reflection of the impact of

the financial crisis and the economic slowdown that had set in thereafter. As on March end

2010, the percentage of total MSME NPAs in total NPAs was 20.1 per cent. The total NPAs

for MSMEs in Public Sector Banks was Rs.11,537 crore which was 19.2 per cent in total

NPAs and the same in private sector banks was Rs. 1,139 crore which was 6.6 per cent in




18

total NPAs. Similarly, for foreign banks, the total NPAs against MSMEs was Rs.299 crore

which was 4.2 per cent of total NPAs in the priority sector.

The major of causes of sickness can be attributed to factors like marketing issues,

management issues, diversion of funds, technical obsolescence, delayed / inadequate

working capital, willful default/ diversion of funds and delayed realization of receivables.

For viable units, timely and effective rehabilitation by way of renegotiation of terms of

loans, induction of fresh dose of funds, business restructuring, change of management etc

may become necessary. There has to be quick, efficient and economical process of

rehabilitation which is acceptable to and implementable to all stakeholders.

Major Findings of the Study

The reforms in the banking sector and recommendations of several working groups

could have affected growth in number of units, production, exports and employment

in the MSME sector.

Credit Guarantee Scheme is not performing as expected. There has been falling

credit to SSI during the post-reform period and high incidence of NPAs in SSI

lending.

The small-scale industry in India needs to upgrade technologies on a continuous

basis to remain competitive.

The number of industries becoming sick is substantially high and hence working on

their rehabilitation is very challenging as the schemes do not seem to be very helpful.

The exports scene is very exciting though huge potential is still unexplored.

Reservation for SSI has not proved to be advantage them and hence the process of

dereserving them has been aptly introduced by the Government.

Difficulties in marketing the products have always been a major problem for the

small manufacturers.

SUGGESTIONS

Marketing issues like wrong identification of products, lack of marketing infrastructure,

inadequate marketing strategies, inability to meet competition from cheap imports and

products of large corporate have a bearing on the growth of the sector. There is a need for

multiple channels for assisting the MSME sector in technological up gradation, especially in

view of the identification of old and obsolete technology as one of the major reasons for the

sickness in the sector. Capital subsidy for setting up retail outlets may also be considered.

Definition for sick units is still based on recommendations made by Kohli Committee. It is

necessary to hasten the process of identification of a unit as „sick‟ and make changes in the

definition accordingly. The process should not only be quick, efficient, cheap and fair to all

stakeholders but also acceptable to and implementable by all, with necessary monitoring

arrangement for implementation of the same. There is a need to hasten the process of

identification of a unit as sick by way of change in the definition of sickness. It is imperative

to review high incidence of NPAs and sickness in MSME sector and take corrective actions

expeditiously.




19

Several modes like use of business facilitators/business correspondents, opening of more

MSME branches, capacity building for the MFI Institutions etc. may be used along with

increased role Regional Rural Banks and Co-operative Banks for enhancing the growth of

credit to this sector. For inclusive growth, it is necessary for the banks to reach out to the

constituents physically by introducing innovative ways supported by technology and make

available credit facilities right at their doorstep.

The SME clusters which have developed over a period of time have their own advantages.

This can be used to infuse responsible business practices and help tap market opportunities

which could not achieved in isolation. Clusters also ensure that an otherwise disorganized

SME sector would come up in a planned manner.

It is evidenced that collateral-free financing is a great help for SMEs. However there is a

need for more credit made available to this sector. The CGFTS for MSME is of help but it is

not enough. There is a need for better environment for increased access and availability of

credit. The cost of the loans should be reduced for improving the flow of funds to the sector.

Also, prompt sanction of loans, sanction of collateral free loans or CGTMSE coverage and

training to bank staff and sensitize them on issues relating to credit and rehabilitation is

required.

Finally, various industry associations shall start coordinating their activities, participate in

policy formulation and attract more members. This will lead to appropriate decisions and

measures for development of this high potential industry.

CONCLUSION

If India has to have a growth rate of 8-10 percent for the next couple of decades, it needs a

strong MSME sector, without which it cannot be achieved. There are approximately 3 crore

MSMEs in the country. The SMEs have shown an average growth of 18 percent over the last

five years. Around 98 percent of the production units are in the SME sector. Only 4 to 5 per

cent MSMEs are covered by institutional funding given that approx 95 per cent of villages

are not covered by banks. There is, therefore, a need to bridge this gap through enabling

policies. While these can address some impending issues of SMEs, there is still a lot that

needs to be done to develop the sector as a whole.

FUTURE STUDY

The growth potential in the MSME sector has led to reforms in the definition, bank credit,

sickness, and rehabilitation scene. These areas could be further explored keeping in view

global scenario and also contribution of services sector can be studied in the future.

REFERENCES

1. Bhide Sheela (2000), “Development of Small-Scale Industries - A Collaborative

Approach”, Economic and Political Weekly, December 9, 2000.

2. „Credit Guarantee Scheme for Micro and Small Enterprises‟. Credit Guarantee Fund

Trust for Micro and Small Enterprises.(www.cgtmse.in) (accessed July 3rd

, 2011)

3. „Report of the Prime Minister‟s Task Force on Micro, Small and Medium Enterprises‟,

January 2010, Government of India.




20

4. Third All India Census of Small Scale Industries, 2001-02, (2004), Ministry of Small

Scale Industries, Government of India, New Delhi.

5. Fourth All India Census of Micro, Small and Medium Enterprises, 2006-07, (2009),

Ministry of Micro, Small and Medium Enterprises, Government of India, New Delhi.

6. Annual Reports 2009-10, Ministry of Micro, Small and Medium Enterprises,

Government of India, New Delhi.

7. Annual Reports 2010-11, Ministry of Micro, Small and Medium Enterprises,

Government of India, New Delhi.

8. Mohan Rakesh (May 31-June 1, 2000). “Small Scale Industry Policy in India: A Critical

Evaluation”, Conference on Indian Economic Prospects: Advancing Policy Reforms

Centre for Research on Economic Development and Policy Reform, Stanford University,

availale in Kapila Uma (2007), Indian Economy, Academic Foundation, New Delhi, pp

421-436.

9. Report on Trend and Progress of Banking in India, various issues, Reserve Bank of

India.

10. Report of Working Group on Rehabilitation of Sick SMEs (Chairman: K.C. Chakrabarty,

2008), Reserve Bank of India, Mumbai.

11. Sandesara J.C. (1993), “Modern Small Industry, 1972 and 1987-88: Aspects of Growth

and Structural Change”, Economic and Policy Weekly, Vol. 28, No. 6, pp. 223-229.

problems and prospects of msme in india

Documents