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MMA – IGCC – KAF Seminar

on

Small and Medium Enterprises

“Engines for Growth and Employment”

Organised by
Madras Management Association 

SMEs & THEIR ECONOMIC RELEVANCE:

OVERALL POLICY AND FRAMEWORK
By
Dr. J.S. Juneja
Chairman
Global Projects & Services (P) Ltd.
707-708, Ansal Chamber – II, Bhikaji Cama Place, New Delhi-110 066
Tel : ++91 11 26170146, 26178443 Fax : ++91 11 26172457
E-mail: gpsjsj@del6.vsnl.net.in & gpsjsj@bol.net.in

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April 2007
“The entrepreneur always searches for change, responds
to it, and exploits it as an opportunity.”

By
Peter F. Drucker

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EVOLUTION OF POLICY FRAMEWORK
Industrial Policy Resolution 1948
• Priority to promote rural and traditional industries in sectors, such as:
Handlooms, Handicrafts, Sericulture, Coir and Khadi and village industries
• Constitution of Statutory Boards / Commissions for the same

Industrial Policy Resolution 1956

• Policy Framework for SSI sector
• Constitution of Independent Board for Small Scale Industries
• Policy on Credit, Marketing, Technical Assistance, Industrial Infrastructure
and Extension Services.

Policy Focus
• Priority to mitigate regional imbalances – 1977
• Measures to promote ancilarisation – 1988
• Stress on Exports and dispersal of enterprises in rural areas year 1990
• Priority for Small tiny agro industries – 1991

MSMED Act 2006 4

 DEFINITION OF SMALL
INDUSTRIES
• Year 1950
Size of Gross Investment in fixed assets in plant and machinery, land, building etc.
(not exceeding Rs. 5 lakhs and strength of workforce (employment less than 50
workers / day using power or less than 100 workers / day without use of power)

• Year 1950 to 2004

Periodical change in the definition shifting the definition from work force, criteria,
inclusion of cost of building in the definition to a sole criteria of investment in
plant and machinery only and merging of this requirement for both segments of
the industry

• Eligibility criteria based on investment in Machinery and

Equipment only

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 INVESTMENT CEILINGS FOR SMALL
SCALE INDUSTRIES YEAR 2004
Type of Unit Investment Ceiling Conditions
Limit in IRS
Small Scale Industry 1 crore (10 million) Original value of plant and
machinery
Ancillary 1 crore (10 million) At least 50% of its output to go
together other industrial
undertakings
Export Oriented Unit 1 crore (10 million) Obligation to export 50% of
production
Tiny Enterprise 25 lakhs (2.5 million) No location condition

Service and Business 10 lakhs (1 million) No location condition

(industry related) Enterprise

Women Enterprises 1 crore (10 million) 51% equity holding by women

High Tech and Export 5 crore (50 million) Total only for 64 items
oriented units
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 OBJECTIVES FOR PERIODIC
CHANGES IN DEFINITION

• To facilitate growth of this sector with changing economic

scenario
• To facilitate growth within the framework of social and
economic policy of the country
• To encourage technology modernization
• To promote entrepreneurship among technically qualified
persons
• To improve product standards
• To create opportunities for in house R&D
• To provide greater export thrust
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 SMES – THE MOST VIBRANT &
POTENTIAL GROWTH SEGMENT

• A recent World Bank Report states: “There is now

widespread recognition within India that vibrant SMEs
are potentially a key engine of economic growth, job
creation and greater economic prosperity”.

• 10th Plan Document of Govt. of India states: “Growth

as planned will come from a sharp step-up in industrial
and services growth, spurred by SMEs”.

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 SME SECTOR – SIGNIFICANCE IN
INDIAN CONTEXT

• SMEs are generally less capital-intensive and more labour-intensive.

• Are best suited for countries like India, China and most of the developing world
having abundant supply of low-cost manpower and bountiful natural resources

• Have provided seed bed for Enterprise Development in the country

• Provide large scale employment, ensure equitable distribution of income and

facilitate effective mobilization of resources of capital and skills, which would
otherwise remain unutilized, particularly in rural and backward areas.

• India has already established a niche in SME Development Strategy and providing
excellent support in product development, R&D, financial instruments, Infra-
structure, marketing and export development

• Consequently, India is fast emerging as a global hub for labour-intensive

manufacturing and knowledge-oriented businesses.

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 PERFORMANCE OF SSI SECTOR IN INDIA
No. of Production (Rs. Billion)
Year No. of Registered Unregistered SSI Total SSI Employment
SSI working Units working Units At current At constant (Million
working Units
(Million) (Millions) prices prices (1993-94 Persons)
(Millions)
prices)

1990-1991 0.79 6.00 6.79 635.18 682.95 15.834

1991-1992 0.87 6.19 7.06 730.72 791.80 16.599
1992-1993 0.99 6.36 7.35 855.81 935.23 17.484
1993-1994 1.06 6.59 7.65 988.04 988.04 18.264
1994-1995 1.16 6.80 7.96 1222.10 1091.16 19.140
1995-1996 1.16 7.12 8.28 1482.90 1216.49 19.793
1996-1997 1.20 7.42 8.62 1684.13 1353.80 20.586
1997-1998 1.20 7.77 8.97 1891.78 1478.24 21.316
1998-1999 1.20 8.14 9.34 2129.01 1594.07 22.055
1999-2000 1.23 8.48 9.71 2342.55 1707.09 22.910
2000-2001 1.31 8.80 10.11 2612.89 1844.28 23.909
2001-2002 1.37 9.15 10.52 2822.70 1956.13 24.909
2002-2003 1.59 9.36 10.95 3119.93 2106.36 26.021
2003-2004 1.70 9.70 11.40 3514.27 2265.81 27.142
2004-2005 1.85 10.11 11.86 4182.63 2515.11 28.257
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2005-2006 1.87 10.47 12.34 4762.01 2776.68 29.491
 INDIAN SME SECTOR – AT A
GLANCE
• SSI units : 12.3 million
• Employment generated in SSIs :
29.5 million
• Production : At current Princes
Rs. 4762.01 billion
• Exports : Rs. 1215 billion
• SSIs account
– Industrial Production : 40%
– Exports : 35% (50% of
Direct & Indirect)
– GDP Share : 7%
• Ownership pattern :
– Proprietorships : 78%
– Partnerships : 16%
– Corporate & Others : 6%
• Industrial Units : 96%
• Service Enterprises : 3%
• Ancillary Units : 1%
• Produces Diverse range of
products (more than 8000-
consumer items, capital goods
and intermediates)
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 COMPARATIVE GROWTH RATES OF SSI
SECTOR AND TOTAL INDUSTRIAL SECTOR
Year SSI Sector Growth Rate Total Industrial Sector
Growth Rate
1993-94 5.65 6.00
1994-95 10.44 9.10
1995-96 11.49 13.00
1996-97 1.29 6.10
1997-98 9.19 6.70
1998-99 7.84 4.10
1999-2000 7.09 6.70
2000-01 8.04 5.00
2001-02 6.06 2.70
2002-03 7.68 5.70
2003-04 8.06 6.09
2004-05 9.96 8.04
Source: SIDO Half Century by DCSSI, Govt. of India 2004 and Annual Report of the
Ministry of SSI 2005-06 12
NODAL AGENCY FOR POLICY FRAMEWORK
• Ministry of Small, Rural and Agro Industries

FACILITATING INSTITUTIONS / DEPARTMENTS

• Office of the Development Commissioner (Small Scale Industries)

• Small Industries Development Bank of India
• National Small Industries Corporation Limited
• Commercial Banks
• State Financial Corporations
• National Institute of Entrepreneurship and Small Business Development
• Product Process Development Centres
• Tool Rooms and Testing Centres
• NSIC Technical Services Centres 13
INSTITUTIONS FOR GROWTH OF
KNOWLEDGE BASED & SERVICES
SECTORS
• Software Technology Park of India (STPI)
• Tidal Park, Cyber City – Public / Private Participation
• STEP (Science & Technology Entrepreneurship Park)

• Incubators – Set up by Universities, Development

Institutions

• National Institute of Fashion Technology (NIFT)

• National Institute of Design

• Institutes Pertaining to Hospitality sector

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 Study by AIMA - SMALL SCALE INDUSTRY IN INDIA –
ASSESSMENT OF GROWTH AFTER LIBERALISATION
Results Revealed
Cumulative growth rate in various regions of India
between 1998-2003
Percentage
North -18.61
East -0.15
West 9.65
South 25.79
Over all -5.18
 While the cumulative growth rate over the five - year period (base: 1997-98) is negative,
there is a turn-around during the last two years.
 Overall negative growth rate is primarily on account of Northern and Eastern regions. The
companies in the South have recorded a growth rate of 25% in their turnover in the last
five years.
 The apparent wide disparity in the growth pattern of the SSIs between the Southern region
and the rest of India points to the fact that SSIs in South had exploited the market
opportunities better than others.
 However for 1999-2003 while overall growth rate is 8.48%, in case of companies in the
North, East and West, the Southern region has reported a 24% growth.
 Sector wise, the manufacturing sector has recorded a negative growth of -8.14% in the
last five years while in the services sector there is a growth of 16.34%.
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 AIMA –Impact Assessment
IMPEDIMENTS TO GROWTH

Problems Faced by SSIs as Barriers to Growth

Market Related 70%

Finance Related 25%

Government Policy Related 12.78%

Power Related/Infrastructure 14.0%

Technology 14.60%

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 TRENDS OF LENDING BY BANKING
SECTOR TO SSI
Rs. in Crores

As at end March Total advances by Total Advances to Proportion of SSI to

Banking Sector SSI Sector Total Advances
1999 246203 42674 17.30

2000 292943 45788 15.63

2001 469153 56002 1.94

2002 536727 57199 10.66

2003 669534 60394 9.02

2004 764383 65855 8.62

2005* 972587 76114 7.83

Source : RBI Report on Trend and Progress of Banking in India
* Provisional

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 SALIENT FEATURES OF MSMED
ACT - 2006
• Manufacturing enterprises defined in terms of investment in Machinery and
Equipment (excluding land and building) classified into
a.  Micro enterprises - investment upto Rs 25 lakhs,

b.  Small enterprises - investment above Rs 25 lakhs and upto Rs 5 crore

c. Medium enterprises - Investment above Rs 5 crores and upto Rs 10 crores

• Service enterprises defined in terms of their investment in equipment (excluding land

and building) classified into
a. Micro enterprises-investment upto Rs 10 lakhs

b. Small enterprises-investment above Rs 10 lakhs and upto Rs 2 crore

c. Medium enterprises-investment above Rs 2 crores and upto Rs 5 crores

• Constitution of national board, advisory committee

• Provisions for clear cut procurement policy, credit, delayed payment, closure of
business etc
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 MSMED Act – 2006 and its Impact
Clause
1. Establishment of National Small
and Medium Enterprises Board –
Maximum No. of members 47
2. Concept of Enterprises
3. Definition of Enterprises
4. Filing of memoranda optional
for Micro and Small enterprises
in manufacturing and service
sector Medium enterprises in
Service Sector but mandatory
for Medium enterprises in
manufacturing sector
Salient Features Impact
1. Specific representation for Statutory Status, compact board
Women and quarterly meetings will
2. Mandatory Quarterly Meeting address problems of SMEs
immediately to take corrective
action
Clear-cut demarcation of Facilitates SMEs to enter into
manufacturing/production and service enterprises aggressively
rendering services
Specific ceiling limit for Existing small units can graduate
manufacturing/production and into Medium units and avail
service enterprise definition for facilities under the act.
Medium enterprises
Replacement of registration with Facilitates SMEs to avail the
memorandum benefits of the act immediately
after setting up of the unit.
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Contd/----
MSMED Act – 2006 and its IMPACT
Clause
5. Procurement Policies
6. Delayed Payment Penalty &
dispute resolution
7. Dispute Resolution
8. Delayed Payment – allowable
deduction under IT Act 1961
9. Closure of Business
Salient Features
Notification of preference
policies by central or State
Governments for goods and
services provided by Micro &
Small enterprises
•Period of payment by the
procuring organizations – 45
days
•Penal interest 200% of PLR
Establishment of MSE
facilitation Council; 90 days
framework for dispute resolution
Deduction disallowed
Statutory notification of scheme
for closure
Impact
Facilitates opportunity for
supply of goods/services
without any hassles.
Public Procurement Policy
under Section 11 of MSME
Act, yet to be notified
SMEs can plan their cash
flow/financial requirement
Easy financial planning and no
waste of human resources for
chasing/follow up.
This will encourage
procurement agencies to
ensure timely payment to
SMEs.
Facilitates expedition of
liquidation 20
Contd/-
MSMED Act – 2006 and its IMPACT

Clause Salient Features Impact

10. Notification of guidelines or Statutory Mandatory on all facilitating

instructions for promotion
of SMEs – wrt. To Funds
appropriation and release
11. Facilitating Credit
development of SMEs ensuring
fast growth
Statutory Mandatory on all providing
credit. Guidelines for credit for
20% year on year growth

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 PRESENT POLICY FRAMEWORK
 Enactment of MSMED Act 2006.

 The present policy framework covers specific actions for

growth of MSME sector in the Areas of:
• Specific legislation on limited liability partnerships covering Micro, Small and
Medium enterprises
• Guidelines by RBI for 20% year on year growth of credit to SMEs

• Grant for SIDBI’s Portfolio risk fund

• Additional Branches by SIDBI to cater to credit needs of clusters of MSMEs

• Loan limit under credit guarantee fund to be raised to 50 lakhs

• Credit guarantee cover to be raised from 75% to 80% for micro enterprises up
to 5 lakhs

• Fiscal support excise exemption limit increased to Rs. 1.5 crores

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Contd/-

• Identification of new sites for clusters and Management of Infrastructure

related assets in public-private partnership mode.

• Project cost for cluster program to be raised to 10 crores

• Support and quality up gradation through setting up of new product

development centres

• Assistance for attainment of ISO 9000 and 14001 to be continued during next
Plan period

• Technology Mission to be launched

• Support for Marketing

• Support for Entrepreneurial and Managerial Development

• Empowerment for women owned enterprises

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Opportunities

 Fashion Technology
 Information Technology
 Design Technology
 Health Technology
 Bio Technology

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Fashion Technology
OPPORTUNITIES
   Glamour & Limelight
   Creative
   High Value Addition
   Coverage (Extensive)
   Clothes
   Dresses
   Garments
   Textile
   Footwear
   Various Leather Products
   Jewellery
   Travel Goods
   Fashion Accessories (purses, bags, carryon, watches etc.)
 Personal Embellishment (Face, Hair, Hands, Feet, Cosmetics, Perfumes etc.)
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 Information Technology

OPPORTUNITIES

     Media & Entertainment

     Contents,
     Animation,
     Games,
 Gaming.

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 Design Technology
OPPORTUNITIES

Interiors - (Furniture & Furnishing – homes, work places, community, hospitals,

schools, shopping places, recreation, sports)
Exteriors - (Architectural)
Industrial products
Textiles
Electrical appliances
White goods
Leather products
Engineering products
Machinery
Dies and tools
Watches
Jewellery
Hospital equipments
Medical instruments
Electronics and Communication Products and Equipments
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 Health Technology
OPPORTUNITIES
 Personal Health Care
 Preventive Health Care
 Physiotherapy
 Monitoring (sensors)
 Community Health
 Vaccines
 Public Health
 
Surveillance of Health Status (AIDS,
Bird Flu etc)
 Medical Imaging Technology such as
X-ray, Cat scanning, Computed
Tomography Scan (CTs), Magnetic
Resource Images (MRIs), Sonograms
etc.
 Surgical & Physiotherapy
 Health Information Management
 Medical Laboratory Technology
 Beauty Care and Wellness
 Nursing
 Pharmacy Technology
 Medical Research Laboratory
Yoga & Naturopathy
 Herbal Therapies
 Environmental Health
 Food Supplements
 Food, Inspection and Testing etc.
 Medical Waste Management
 Hospital Supplies & Staffing
Services
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 Bio Technology
With the industry zooming part the US $ 1 billion mark, registering revenues
of US $ 1.07 billion, the sector has achieved a significant milestone.

 The biotech industry continues to grow at almost the same rate that it did in last
year. The industry recorded 36.55 percent growth compared to the previous year’s
figure. There are 28 companies.
 An Ernst and Young study has named India as one of the five emerging biotech
leaders in the Asia Pacific besides Singapore, Taiwan, Japan and Korea, with
mainland China catching up quickly. The study ranked India third in the region
based on the number of biotech companies in the country, after Australia and
China, including Hong Kong.
 The above-expected growth will facilitate SMEs to enter into this field by setting
up contract Research Organisations (CROs) and in other areas to meet the demand
of US $ 3.1 billion market of Indian Pharmaceutical Industry.
 Target for 2010 US $ 5 billion
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Projected Market opportunities in the
knowledge sector including above is US $ 365
billion in 2020.

as per High level strategic group of AIMA

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 CONCLUSIONS
• It can be seen that the policy framework is consistent since
independence

• The specific definition for medium enterprises augurs well for

graduation of micro enterprises to small and small enterprises to
medium enterprises

• With more budgetary allocation to service sector, SMEs will be

able to generate more employment opportunities to educated
unemployed youth

• The launching of Technology Mission will facilitate the

Government to work out a long term action plan to ensure
organized growth of this sector to face competition in liberalized
services sector and knowledge based economic scenario
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