ENGLISH ASSIGNMENT ON

MSME’S Contribution to Domestic

Market and business

SUBMITTED BY
SATYAPRIYA PANGI
19/06/DBM/28
2nd Mid Semester
Micro, Small and Medium
Enterprises(MSME)
contribution to Domestic
market and business
Abstract:
Micro, Small and Medium Enterprises
constitute the backbone of an
economy in maintaining an appreciable growth
rate and in generating employment
opportunities. This sector has been regarded as
engine of economic growth and
social development in many developed and
developing countries.Contribution of
MSMEs to the Indian economy in terms of
employment generation, containing
regional disparities, fostering equitable
economic growth and enhancing export
potential of the country has been quite
phenomenal. Despite some infrastructural
deficiencies and challenges like flow of
institutional credit and inadequate market
linkages, this sector has registered remarkable
success with regard to increase in
number, quantum of investment, scale of
production and overall contribution to
national GDP. The study makes an attempt to
focus on the huge growth potential and
opportunities available in India for
development of MSME sector, to identify
important issues and challenges and offer
suggestions to address the same.

1. Introduction
Micro, small and medium enterprises (MSMEs)
in India have
demonstrated considerable strength and
resilience in maintaining a consistent rate
of growth and employment generation during
the global recession and economic
slowdown. Indian economy during the recent
years has shown an appreciable
growth performance by contributing to
creation of livelihood opportunities to
millions of people, in enhancing the export
potential and in increasing the overall
economic growth of the country. Prompt and
appropriate fiscal stimulus, effective
monetary policy and huge capital inflows were
greatly instrumental in the bounce
back situation of the economy. As a catalyst for
socio-economic transformation
of the country, the MSME sector is extremely
crucial in addressing the national
objectives of bridging the rural-urban divide,
reducing poverty and generating
employment to the teeming millions. It is
therefore, essential that India adopts
a suitable policy framework that provides the
required impetus to seize the
opportunities and create an enabling business
environment in order to keep the
momentum of growth and holistic development.
It is equally important that the
MSME sector must address the infrastructural
deficiencies and is well empowered
to meet the emerging challenges for its
sustainable growth and survival in a
globally competitive order.

2. Objectives of the Study

The objectives of this study are to briefly
highlight on the functional
scenario of micro, small and medium
enterprises in India, to focus on the huge
growth potential and opportunities available
for development of this sector; to
identify some important issues, challenges and
constraints confronted by these
enterprises and to offer suggestions to overcome
the same.

3. Methodology
The study involves a critical analysis of
functioning of some micro, small
and medium scale enterprises in the country
both in manufacturing and service
sector and intends to identify the potentialities
for growth, opportunities, major
issues and challenges experienced by these
enterprises. The data are collected
mostly from secondary sources by way of access
to various Government policies/
programs including published Annual Reports,
Journals, Books and available
official websites. The primary data are based on
analysis of structured questionnaire
and interview of entrepreneurs, industry
workers and other stake-holders.

4. Literature Review
Although the MSMEs continue to dominate the
industrial sector in most
of the countries including India, the literature
and the studies on their varied
functioning are not many especially with
reference to changing perspectives. The
available research literature rather indicates
some missing gaps that need to be
addressed appropriately.
Christopher J. Green, Colin H. Kirkpatrick,
and Victor Murinde, (2006) in
their paper have examined the ways in which
financial sector development policy
might contribute to poverty reduction,
particularly by supporting the growth of
micro and small enterprises (MSEs). This paper
highlights on the changing role of
MSEs in the development process and the
access of MSEs to informal and formal
finance, including the role of
microfinance.Nanda, Ramana & William
R.Kerr
(2009) have expressed the view that financing
constraints are one of the biggest
concerns impacting potential entrepreneurs
around the world.
De, Sankar (2009) in his article has viewed that
SME’s in India face many
challenges, but perhaps none are as difficult as
the challenge of financing, both
short term and long term.
K,Vasanth,Majumdar M., K. Krishna (2012) in
their paper have stated that
since several successful models of the
sustainable SME are gradually evolving,
networks of SMEs would become essential for
addressing the systemic problems
under lying the industrial ecology, enterprise
resilience, and global supply chain
sustainability.
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Issue No 1 Page 79
Export-Import Bank of India, (2012) has
critically analysed the present
situation of MSMEs and support systems
available in India as well as in the global
context. It has suggested that MSMEs in India
should have access to alternative
sources of capital like angel funds/risk capital
etc. and that existing laws should
effectively address issues like
insolvencies/bankruptcies; need to redefine the
ceiling limits to encourage MSMEs to move up
the value chain and need for
cluster development approach to increase the
level of competitiveness.
Srinivas K T, (2013) has studied the
performance of micro, small and
medium enterprises, and their contribution in
India’s economic growth and
concluded that MSMEs play a significant role
in inclusive growth of Indian
economy.
5. MSMEs- An Indian Perspective Micro
, Small and Medium Enterprises in India offer
a heterogeneous and
varied nature of fabric in terms of the size and
structure of the units, variety of
products and services, scale of production and
application of technology. These
enterprises are quite complementary to the
large scale industries as ancillary
units. They contribute to the socio-economic
development of the country quite
significantly. The MSMEs in India constitute
about 80% of the total number of
industries and produce about 8,000 value added
products.
An appropriate definition of Micro, Small and
Medium Enterprises and
their proper classification in a national or
international context offers a varied
perspective. The term ‘MSME’ is normally
used to describe small industrial or
business units in private sector. MSMEs have
been classified differently in different
contexts in terms of their nature of assets and
scale of production etc. while others
have defined those units in term of employment
generation, shareholder funds,
scale of investment or sale of products etc. The
definition according to the World
Bank is that, a business classified as MSMEs
when it meets two of the three criteria
– employee strength, size of assets or annual
sales.
Medium <300 <USD 15 Million
<INR 750 Million
<USD 15 Million
<INR 750 Million
Small <50 <USD 3 Million
<INR 150 Million
<USD 3 Million
<INR 150 Million
Macro <10 <USD 10,000
<INR 500,000
<USD 10,000
<INR 500,000
Source: International Finance Corporation
(IFC) World Bank
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Issue No 1 Page 80
The enactment of Micro, Small & Medium
Enterprises Development
(MSMED) Act, in 2006 by the Government of
India (GOI) gave a legal basis and
framework to the micro, small and medium
enterprises by defining and classifying
these enterprisers on a uniform basis. This
classification covers industries both
under manufacturing and service sector and the
above limits are excluding the
cost of land, building and other specified items.
Enterprises Micro Small Medium Remarks
Manufacturing
Sector
Up to Rs.25
lakh
Above Rs.25
lakh- up to
Rs.5 crore
Above Rs.5
crore up to
Rs.10 crore
Investment
in plant &
machinery
Service Sector Up to Rs.10
lakh
Above Rs.10
lakhs up to
Rs.2 crore
Above Rs.2
crore- up to
Rs.5 crore
Investment
in equipment
Source : MSME Annual report
The growth and development of MSME sector
in our country has been
consistent and remarkable over the preceding
decades. Statistics show that
the number of such enterprises has increased
from about 1.1 crore in 2001-02 to 4.1
crore units in 2009-10 and again to 4.48 crore
enterprises in 2014-15. The MSMEs
produce more than 7,500 products and also
contribute to about 35% of the India’s
exports. MSMEs contribute 8% of the
country’s GDP, 45% of the manufactured
output and 40% of exports (Prime Minister’s
Task Force on MSME, 2010).
The Government of India has introduced
several major policy initiatives
for support and promotion of micro, small &
medium enterprises in the country.
These include; establishment of Small
Industries Development Bank of India
(SIDBI) in 1990 for promotion and financing of
MSME sector, Credit Guarantee
Fund Trust of Micro and Small Enterprises
(CGTMSE) was in 2000 to offer credit
facilities to eligible borrowers and the Prime
Minister’s Employment Generation
Programme (PMEGP) in 2008 to generate
employment opportunities in rural and
urban areas through new self-employment
ventures / projects / micro enterprises.
Available data from the Fourth All India
Census of MSME in 2006-07,
indicate that around 60 % of these enterprises
are based in rural areas of the
country and 45% of total manufacturing output
is contributed by the MSME sector.
The share of MSME sector in the total exports
of India is about 40%. Statistics
reveal that the number of such enterprises set-
up, employment generated and the
investments made in the MSME sector in India
has shown an increasing trend over
the years as evident from Table - 1.
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Issue No 1 Page 81
Table – 1
Performance of MSME sector in India
Sl.
No.
Year Total Working
Enterprises
Employment
Generated
(In Lakh)
Market Value of
Fixed Assets
(Rs. in crores)
1 2006-07 361.76 805.23 868,546.79
2 2007-08 377.36 842.00 920,459.84
3 2008-09 393.70 880.84 977,144.72
4 2009-10 410.80 921.79 1,038,546.08
5 2010-11 428.73 965.15 1,105,934.09
6 2011-12 447.64 1,011.69 1,182,757.64
7 2012-13 447.54 1,061.40 1,268,763.67
8 2013-14 488.46 1,114.29 1,363,700.54
9 2014-15 510.57 1,171.32 1,471,992.94
Source: Annual Report of MSME, Government
of India, 2015-16.
The contribution of MSME sector towards
GDP and total manufacturing
output has been depicted in Table – 2. It is clear
that the share of service sector
MSMEs to the GDP has been increasing
indicating robust growth and changing
nature of economy.
Table – 2
Contribution of Manufacturing Output of
MSME in GDP
(at 2004-05 Prices)
Year Gross Value
of Output
of MSME
Manufacturing
Sector (Rs. in
Crores)
Share of MSME sector in total GDP (%) Share
of MSME
output in total
Manufacturing
Output (%)
Manufacturing
Sector MSME
Service
Sector
MSME
Total
2006-07 1198818 7.73 27.40 35.13 42.02
2007-08 1322777 7.81 27.60 35.41 41.98
2008-09 1375589 7.52 28.60 36.12 40.79
2009-10 1488352 7.45 28.60 36.05 39.63
2010-11 1653622 7.39 29.30 36.69 38.50
2011-12 1788584 7.27 30.70 37.97 37.47
2012-13 1809976 7.04 30.50 37.54 37.33
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Source:1. Fourth All India Census of MSME
2006-07,
2. National Accounts Statistics (2014), CSO,
MOSPI and
3. Annual Survey of Industries, CSO, MOSPI.
Flow of credit or availability of finance from
banking institutions is a major
factor contributing to the growth and success of
MSMEs. Available information
on flow of credit to this sector indicates a
declining trend from 17.34% in 2010
to 10.20 % in 2013.The credit flow by the
Scheduled Commercial Banks to this
sector in subsequent years has however, shown
an increased trend as depicted in
Table-3.
Table – 3
Flow of Credit by Scheduled Commercial
Banks (SCBs)
to MSME Sector in India
Year Outstanding in Rs. crore Share of MSME
to Gross Credit
(% )
Credit to MSMEs Gross Credit
March, 2009 431350 2647368 16.3
March, 2010 506166 3088569 16.4
(17.34) (16.67)
March, 2011 561759 3749500 15.0
(10.98) (21.40)
March, 2012 623414 4371400 14.3
(10.98) (16.59)
March, 2013 687000 4964200 13.8
(10.20) (13.56)
March, 2014 878508 5657200 15.5
(27.88) (13.96)
Note: Figures given in brackets are % change
over the previous year.
Source: Data on Sectoral Deployment of bank
credit published by RBI, Bhubaneswar.
MSMEs sector plays a major role in
contributing to India’s export performance.
This sector contributes 45%-50% of the Indian
exports out of which direct
export accounts for nearly 35% and indirect
15% to the total exports. Needless
to emphasize that while the organized industrial
sector with large scale industries
requires substantial amount of investment for
generation of employment,
the MSME sector creates larger employment
opportunities with less or same
investment.
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6. Potentialities for Growth :

Opportunities
Micro, Small and Medium Enterprises have
substantially contributed to
the economic development of our country. The
MSME sector in India occupies the
second position next alone to agriculture in
terms of employment generation. This
sector accounts for about 95% of the industrial
units, 45% of manufacturing output,
40% of exports total exports of the country.
MSMEs have greater opportunities to
grow as ancillary industries to unleash higher
industrial growth. MSMEs being
less capital intensive and more employment-
friendly have easier access to raw
materials, subsidies and other incentives under
cluster programs. The country has
huge growth potential to create and enhance
the capacity of enterprises both in the
manufacturing and service sector by using the
available resources. There are huge
opportunities for the MSMEs to grow as
ancillary industries to unleash greater
industrial growth. Development of the sector is
therefore extremely important as it
holds the key to inclusive growth and plays a
pivotal role in holistic development
of the country.
India is the fourth largest economy in the world
(in terms of PPP mode,
and the second largest in developing Asia)
which accounts for 22% of GDP, 33.8%
population and 32.5% of the potential
workforce in developing Asia. The incidence
of growth is evident from the increased
investment in infrastructure, abundant job
opportunities, emergence of a robust private
sector with small and big companies/
corporate houses and high rise in consumerism.
The MSME sector has the
potentialities to emerge as the backbone of
Indian economy and to continue as
an engine of growth provided an environment-
friendly policy framework and
enabling infrastructural support are made
available for its functional operations.
MSMEs in India consistently feed the domestic
and the international
value chain as manufacturers, suppliers,
distributors, retailers, contractors and
service provider by accounting for a substantial
segment of our industrial units.
This sector has been performing appreciably
better than the overall rate of GDP
(average 8% growth per annum) and the
overall industrial output (measured by
Index of Industrial Production-IIP).
Availability of adequate financial resources,
a supportive policy framework to address the
areas like entrepreneurial skill
development, a competent pool of human
resources, application of latest technology
and new innovations, adequate international
market linkages and bilateral trade
agreements etc. would make the Indian MSME
sector globally competitive to
address the emerging challenges and help
ensure their sustainability.
The roadmap for MSME development should
include a target for increase
in the share of their contribution from the
present 8% to 15% by 2020, a substantial
increase in generation of employment avenues
up to 50%, an enhancement in
MSME contribution in the key public and
private industry sector by meeting the
growing domestic demand, indigenization and
important substitution and growth
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in foreign exports15.The recent ‘Make in India’
initiative by Government of India
would make a substantial impact in the area of
indigenization and would also
attract sizable foreign investment. Similarly,
the ‘Digital India’ programmed offers
huge opportunities to MSMEs to participate in
big way in the Information and
Communication Technology (ICT) sector.
7. Issues and Challenges
Despite the pivotal role and strategic
importance in the context of industrial
development and economic growth of the
country, the MSME sector experiences
several constraints and challenges. Several key
issues remain to be addressed
properly and measures yet to be taken in the
interest of sustainable industrial
development. The Committee on financial
architecture of MSME sector in their
Report submitted in the February, 2015 have
identified some key issues16. These
include; i)Equity as a source of financing is
underutilized and the prevalence of
investment by venture capital and angel
investors is low, ii) MSMEs face the
problem of delayed payments from their buyers
which adversely impacts their
working capital as well as their next cycle of
production, iii) MSMEs lack adequate
information about various schemes and benefits
available by the government, iv)
Financial institutions/Banks face challenges in
credit risk assessment of MSMEs,
v) The utilization of the available credit
guarantee and insurance schemes by
banks has been low.
Some of the major challenges confronted by
these enterprises include;
lack of adequate credit and capital, poor and
inadequate infrastructural facilities,
inadequate access and marketing linkages,
technological obsolescence and
inadequate application of new technology,lack
of skilled human resources,dilatory
and cumbersome regulatory practices for
clearance and poor adaptability to
emerging international trends. This calls for the
need for strategic intervention to
improve coordination and linkages between
various stake-holders including the
Government,industries and other
agencies/associations working in this field.
i. Lack of Adequate Capital and Credit :
One of the greatest challenges which constrain
the growth of MSMEs in
our country relates to inadequate capital and
credit facilities. Easy and timely
access to credit is crucial factor to development
and growth of enterprises. The
Report of the Working Group on Rehabilitation
of sick MSMEs by the Reserve
Bank of India has identified this situation as a
crucial reason for industrial sickness
of this sector. Complex collaterals instead by
the banks, cumbersome sanction
procedures and delay in disbursement and high
rate of interest on term loans
further worsen the situation.
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ii. Poor and Inadequate Infrastructural
Facilities:
Deficiencies in the infrastructure and poor
support facilities marked by
inadequate access to basic facilities like water,
power supply, road/rail connectivity
etc. adversely affect this sector and contribute
to enhance their operational cost by
rendering the MSMEs less competitive in the
challenging market situations.
iii. Inadequate Access and Marketing
Linkages:
Poor marketing linkages characterized by
inadequate Government support
and patronage, lack of adequate marketing
infrastructure/ network facilities
continue to be a greater challenge for
marketing and sale of MSME products. In
a non-cluster situation, these enterprises get
segregated and are unable to ensure
reduction in procurement cost from big
companies and fail to streamline the
output-supply chain.
iv. Lack of Skilled Human Resources:
Non-availability of skilled workforce and better
managerial/entrepreneurial
expertise at affordable cost near the location of
enterprises is another such big
challenge for the MSMEs in our country. Lack
of managerial competence, absence
of proper training on resource planning and
capital management etc. hinders the
growth of enterprises.
v. Lack of Access to New Technology:
Most of the industries today require application
of advanced technology
in their operations whereas in the Indian
context continuance of low technology
base results in low productivity by making
these enterprises uncompetitive in the
ever-widening market contexts. Apart from
enhancing productivity and quality,
new technology should be adopted for an
overall transformation and competitive
edge.
vi. Dilatory and Cumbersome Regulatory
Practices :
Cumbersome and dilatory regulatory
clearances relating to sanction and
disbursement of loans from commercial banks,
collateral securities/guarantees,
for construction permits, resolving insolvency
and taxation etc. continue to be the
constraining factors for many MSMEs. Absence
of a common regulatory body
and inadequate provisions for start-ups affect
the growth of such enterprises. Nonadherence
to RBI guidelines regarding
revival/rehabilitation of seek enterprises
by the Banks is another such constraint that
needs to be addressed.

8. Suggestions
Although the performance of the MSME sector
has been commendable
over the years in terms of employment
generation, growth of exports and in
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bringing about social transformation, a lot
more need to be done for their continued
growth and sustained development. The issues
and constraints that hinder their
growth need to be identified and properly
addressed. Some suggestions to improve
the performance of MSMEs are indicated
below;
a. Easy Access to Finance and Credit :
Institutional finance/credit from banks and
other financing institutions
should be promptly available without long and
cumbersome procedures. Sanction
of credit / loan applications by public sector
banks should be made within a
reasonable time frame at affordable and
reduced rate of interest.
b. Stepping up Infrastructural and Support
Facilities:
Deficiencies in basic infrastructural facilities
like water, power supply,
road/rail and telephone connectivity, etc. should
be addressed on priority basis.
Use of solar or renewable energy as an
alternative source should be encouraged in
rural areas on subsidized basis. A cluster-
centric or cluster development approach
should be adopted for a number of enterprises
working in closer proximity.
c. Creation of adequate Marketing
Linkages :
For enhancing sale of products, regular trade
fairs/exhibitions etc. should
be conducted for creation of a larger platform
for better marketing facilities. The
Govt. of India policy regarding 20% mandatory
procurement of MSME products
by government Departments/ State PSUs
should be ensured
d. Skill Development and Capacity
Building:
Initiatives should be taken for skill /
competency development of human
resources. Infrastructural and professional
support from Rural Self Employment
Training Institutes (RSETI) and suitable
training institutes may be obtained for
conducting training of entrepreneurs and
workers engaged in different activities.
Awareness / sensitization programmes and
TV/Radio talks should be conducted
e. Access to Modern Tools and Technology:
MSMEs today need to adopt and adhere to
quality parameters of international
standards in the context of a globalized market.
Technological obsolescence should
be replaced by adoption of modern and latest
tools and technology for increased
productivity and quality product for
competitive advantage
f. Policy Intervention and Support
Mechanisms:
Industry-friendly policies should be initiated by
the government for
promoting infrastructural support facilities and
for easy availability of finance by
the scheduled banks. Government and Banks
should take steps for revival of sick
units as per RBI Guidelines and Credit
Guarantee Fund Trust for Micro and Small
Enterprises (CGAMSE) Scheme.
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Sick enterprises should be given one time
settlement (OTS) facility by the
banks before enforcing measures under the
Securitization and Reconstruction of
Financial Assets and Enforcement of Security
Interest (SARFAESI) Act. Single
window system for approval of MSME projects
may be streamlined for clearance.
Creation of an apex National MSME Authority
under the Ministry of
MSME, universal registration and financial
inclusion of MSMEs, increase the flow
of equity to the MSME sector and steps to
enhance effectiveness and utilization of
credit guarantee/insurance schemes etc. are
some of the recommendations of the
Committee on financial architecture of the
MSME, 2015.

9. Conclusion
MSMEs over the years have assumed greater
significance in our
burgeoning national economy by contributing
to employment generation and rural
industrialization. This sector possesses enough
potential and possibilities to pushbutton
accelerated industrial growth in our developing
economy tosupport national programme like
‘Make in India’. This sector has exhibited
enough resilience to sustain itself on the
strength of our traditional skills and expertise
and by infusion of new technologies, capital and
innovative marketing strategies.
Appropriate strategies should be evolved for
creation of an enabling ecosystem
where these enterprises are able to access the
benefits meant for themselves under
a formal and friendly ecosystem and are
further capable of meeting the emerging
challenges of a globally competitive order.