prospects and challenges of sme's in india

TITLE OF THE PAPER:

PROSPECTS AND CHALLENGES OF SME’S IN INDIA

NAME OF THE INSTITUTE:

A.J.INSTITUTE OF MANAGEMENT (AJIM)

{TRASFORMATIONAL INSTITUTE FOR MANAGERIAL EXCELLENCE (TIME)}

KOTTARA-CHOWKI BYPASS ROAD, ASKOKNAGAR POST MANGALORE-575006

AUTHORS NAME:

BHARATH.P

+919739459820

[email protected]

NAVEEN RAJESH MORAS

+919964071498

[email protected]

A.J.INSTUTUTE OF MGT (AJIM)

mailto:[email protected]

mailto:[email protected]

ABSTRACT

Small and medium enterprises (SMEs ) also known as small and medium scale enterprises

are the essential part of healthy economy. The SME sector represents over 90 percent of

enterprises in most of the developing countries and contribute 40-60 percent of the total

output or value added to the national economy.

SME sector in India is the key driver of the nation's economic growth with a

contribution of over 40 percent of the country's industrial output and about 35 percent of

direct exports and another 15 percent of indirect exports. In terms of employment it is a

very crucial sector being the second largest sector after agriculture. In recent years the

SME sector has consistently registered higher growth rate compared to industrial sector.

Small is beautiful but is it Powerful? Yes, say the SMEs.

The growth recorded by SSI in India is 2% more than any other sector; it accounts for 40% of the

country’s GDP, 35% of Direct exports, 15% of Indirect Exports (through Merchant Exporters,

Trading Houses & Export Houses) and employs more than 20 million people. The SSIs needs just

Rs. 60, 000 – 70, 000 to generate employment for one man, while for the same a whopping 5-

6lakhs is required for other sectors.

SME sector faces a number of problems - absence of adequate and timely banking finance, limited

knowledge and non-availability of suitable technology, low production capacity, ineffective

marketing and identification of new markets, constraints on modernization and expansions, non

availability of highly skilled labour at affordable cost, follow up with various agencies in solving

regular activities and lack of interaction with government agencies on various matters.

SMEs have strong technological base, international business outlook, competitive spirit and

willingness to restructure them shall withstand the present challenges and come out with shining

colours to make their own contribution to the Indian economy.


TABLE OF CONTENTS

CHAPTER I: INTRODUCTION……………………………………………………………………4

1.1 DEFINITION……………………………………………………………………...4

1.2 SME’S IN DIFFERENT SECTORS OF INDIA………………………………..

……………………………………………5

1.3 SIGNIFICANCE OF SME’S……..………………….............................................6

CHAPTER II: REVIEW OF LITERATURE……………………………………………,…………8

CHAPTER III: PROSPECTS OF SME’S IN INDIA…………………………………………...9-11

\

CHAPTER IV: CHALLENGES OF SME’S IN INDIA…………………………….................12-14

CHAPTER V: CONCLUSION……………………………………………………………………15

BIBLIOGRAPHY………………………………………………………………………………….16


CHAPTER I

INTRODUCTION:

Small industry has been one of the major planks of India's economic development strategy since

Independence. India accorded high priority to small and medium enterprises (SMEs) from the very

beginning and pursued support policies to make these enterprises viable and vibrant and over time,

these have become major contributors to the GDP. Despite numerous protection and policy

measures for the past so many years, SMEs have remained mostly small, technologically backward

and lacking in competitiveness. The opening of the Indian economy in 1991 added problems to the

SMEs. At the beginning, small scale enterprises found it difficult to survive. In the last decade, the

economic environment has changed in favour of SMEs. In this context, it is important to re-look

into the basic issues of SMEs, past, present and future prospects, especially in the policy

framework.

1.1DEFINITION:

In the Indian context, we have not so far defined medium enterprises clearly. What is

neither small nor large is being loosely defined as medium. Further, enterprise encompasses

businesses, services and industries. In the broadband of ' small', the discussion extends to

medium as well. Another possible connotation for the SMEs is the small manufacturing

enterprises.

ROLE OF SMES IN ECONOMY

Due to fast developing modern technologies and production scales, the small and medium

enterprises have become very critical for economic growth. This sector is now very important for

those nations whose desire is to be prosperous as it is the starting point of industrial development.

Large Scale Enterprises (LSEs) of today were SMEs in the past and SMEs of today would be LSEs

of tomorrow. This rule holds good for all countries of the world.


1.2SME’S IN DIFFERENT SECTORS OF INDIAN INDUSTRY:

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

Food Processing

Agricultural Inputs

Chemicals & Pharmaceuticals

Engineering; Electricals; Electronics

Electro-medical equipment

Textiles and Garments

Leather and leather goods

Meat products

Bio-engineering

Sports goods

Plastics products

Computer Software, etc.

1.3SIGNIFICANCE OF SMES

SMEs are considered the engine of economic growth in both developed and developing countries

as they:

Provides low cost employment since the unit cost of persons employed is lower for SMEs

than for large sized units.

Assists in regional and local development since SMEs accelerate rural industrialization by

linking it with more organized urban sector.

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

activities.

Contribute significantly to export revenues because of the low cost labour intensive nature

of its products.


Have a positive effect on the trade balance since SMEs generally use indigenous raw

materials, reducing dependence on imported machinery, raw material or labour.

Assist in fostering self-help and entrepreneurial culture by bringing together skills and

capital through various lending and skill enhancement schemes.

Impart the resilience to withstand economic upheavals and maintain a reasonable growth

rate since being indigenous is the key to sustainability and self-sufficiency.

Firms with sales less than $1 million spend 2x - 3x more on R&D per $ of sales than the

average. And result is SMEs’ producing 55 percent more innovations than LSEs’.1

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.

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.

Attracts direct foreign investment since multinationals and big conglomerates have started

to outsource from countries with strong SME sectors. The low labour cost makes production

of semi finished goods very economical for large concerns operating in international markets.

The SMEs act as engines through which the growth objectives of developing countries can

be achieved.

ADVANTAGES OF SMES

The advantages of SMEs in an economy, be it labour intensive or otherwise are manifold.

Therefore, the development of small and medium industries in any country has specific effects on

the balanced and dynamic growth of a country. It has a number of advantages over large scale

industries. Some of these are mentioned below:

It generates more jobs per unit of capital and is more capital efficient.

Similarly it is also strongly integrated into the domestic economy.

1


Small industries use a high percentage of local raw materials. Most of local consumable

products are produced by small scale industries. It taps the resources at the grass root

levels.

The promotion of Small and medium industries induces rapid growth of large scale

manufacturing in the long run.

It also generates cheaper goods and services to the general population which attempts to

break the cycle of the ever increasing price hikes. The increased employment and the

goods/services produced has a positive effect on the GNP of a country. This becomes a

catalyst in breaking the poverty cycle.

The small businesses are remarkably flexible because they operate near the customer, thus

it has the ability to adapt according to the ever changing needs of the customer.


CHAPTER II:

REVIEW OF LITERATURE

This paper reviews the existing microeconomic evidence on whether SMEs boost growth

and reduce poverty. A growing body of work suggests that SMEs do not boost the quantity and

quality of employment. Initially, Birch (1979) argued that small firms are particularly important in

job creation. He reports that over the 1970s, firms with fewer than 100 employees generated eight

out of ten new jobs in America. However, a wide array of evidence rejects the view that small

firms are the engines of job formation (Dunne, Roberts, and Samuelson, 1989; Leonard, 1986;

Brown, Hamilton, and Medoff, 1990). For instance, Davis, Haltiwanger and Schuh (1993) show

that while gross rates of job creation and destruction are higher in small firms; there is no

systematic relationship between net job creation and firm size. In Sub-Saharan Africa, Biggs and

Shah (1998) find that large firms were the dominant source of net job creation in the

manufacturing sector.


CHAPTER III

PROSPECTS OF SMALL MEDIUM SCALE INDUSTRIES IN INDIA:

ROAD MAP FOR THE DEVELOPMENT OF MICRO DEVELOPMENT UNIT IN THE

11TH PLAN

The limit set for investment in the micro units is a major hindrance in this era of Globalization and

competitiveness. The limit has been increased to 5 crores. Steps for development of MSE in the

eleventh plan are as follows.

(1) It has been targeted to raise the production of MSE units to 13,98,803 cores for the year 2011-

12. employment has been planned to be increased from 322.28-391.73 lakhs

In the MSE scheme in the eleventh plan, previously the manifesto was good for all which has been

turned to development. Regarding this, the document (VOL III p. 203) it has been informed that

"The eleventh plan approach to the MSE sector marks shift from welfare approach to that of

empowerment. The plan looks at the sector as an engine for sustained and inclusive economic

growth and employment. The eleventh plan emphasizes on the improvement of living standard of

workers and believes that only if a worker is physically and mentally sound, then will he be able

to produce a good output.

(3) In the eleventh plan, as the MSE sector is unorganized, the plan aims at organizing it so that

MSE sector gets maximum benefit of all the govt. schemes and plans.

(4) In the eleventh plan, MSE groups have been taken as a cluster and workers have been made

into a group (SHGS) so that their bargaining power is increased


(5) The MSE sector gets a loan of 5 lakh for 8 % interest without any bailee will be encouraged a

vehement drive will be undertaken, to develop this sector.

(6) Centre and the state govt. will give prime importance to the MSE sector. Women working in

this sector, get their due rights, for that efforts will be made.

(7) Technical information will be provided to Small Industries Development Organization now

known as Micro, Small and Medium Enterprises Development Organization which has around

3000 technicians who work in testing centres, tool rooms, etc.

(8) Ministry of MSME has been formed for the development of Micro, Small and Medium

Industries. In the eleventh plan, it has been decided to establish Technology mission, which will

help develop dissemination of technology.

(9) In the year 2006, the govt. started the National Manufacturing Competitiveness Programme.

Under it in 5 years, at the cost of 850 crores, design clinics, steps to increase the competitiveness

of groups, and decrease the wastage will be undertaken.

(10) This sector faces basic problems like that of electricity. In the eleventh plan it has been

suggested, that these small and micro units establish their own power plants.

(11) Owing to the industrial laws and disputes act, the worries of this sector have increased.

According to the planning commission, it has been advised to form a third party which will

investigate into the matter.

THE NON GOVERNMENT PROMOTION STRUCTURE:

There are three national associations representing all type of industries, small and large. These are

'Federation of Indian Chambers of Commerce and Industries' (FICCI), Confederation of Indian

Industries (CII) and 'Associatioan of Chambers of Commerce and Industries' (ASSOCHAM).

These associations represent mainly the interests of large scale industries. However, these


associations have membership of small sector as well and represent mainly the policy related

interests of SSI sector.

The Indian auto component industry is poised for robust growth till 2010. There is a perceptive

exuberance in the industry and growth estimates indicate a booming industry. Going by current

trends in production and exports of auto components, indicate a doubling of the domestic auto

component industry by 2010. The production of auto components could grow to US$22 bn by

2010. Similarly, India’s exports of auto components could grow to US$4.5 bn as compared to

US$1.8 bn in 2005. Expected growth in production and exports of auto components is shown in

the graph below:

This growth outlook implies opportunities for the small and medium enterprises. The overall trend

is encouraging, but remaining competitive in this changing scenario will be the toughest challenge.

The combination of low manufacturing costs along with quality systems would give an edge to

companies in terms of pricing and quality. Expansion and diversification will help break into new

markets. It would be imperative for these companies, which are largely based on traditional

management practices, to imbibe technology in a big way. The SMEs can exploit these

opportunities through joint ventures, collaboration and technical tie ups. Knowledge,

specialization, innovation and networking will determine the success of the SMEs in this globally

competitive environment

Recent Initiatives Taken - Policy Package for SMEs:


The policy makers have recognised the need to support the SME sector through a package of fi

scal and fi nancial incentives so as to help them to address the challenges being faced by the sector.

Further, the Government is also keen on making the operating environment conducive to the

conduct of business by SME units. With a view to improve the prospects of SME units, the

Government of India has recently announced a package for stepping up credit to the SME sector.

CHAPTER IV:

CHALLENGES OF SMALL AND MEDIUM SCALE ENTERPRISES IN INDIA:

In the current economic slowdown SME sector has been hit very hard due to raising

interest rates and financial crunch. The small size and capacity of the firms and their lack

of awareness have bred many hindrances to their growth such as Under-utilization of

capacity, Inadequate and untimely credit flows, Inability in technology up

gradation, Insufficient raw-material procurement Inability to market finished goods and

Ineffective monitoring and feedback mechanism. The problem which continues to be a big

hurdle for the development of the sector is the lack of access to timely and adequate credit.

Increasing competition and globalization, along with the need to produce quality products at best

prices, have prompted the industry to introduce new product development methods with modern

technology. The need to evolve technologically superior methods of product development holds

true, especially for players in the SME segment. The small and medium enterprise sector is widely

regarded as the engine of the Indian economy. Small and medium enterprises (SME) contribute to

the industrial, economic, technological and regional development in all developed and developing

countries. The Indian SME market is valued at $5 million. The 11 million SME units, which make

up the Indian SME sector. Produce over 8000 products. These constitute 95 % of all industrial

units and contribute 40% to industrial output. The SME sector also plays a significant role in the

development of entrepreneurial skills and forms a substantial portion of the country’s export

earnings.


The contribution of SME’s in the industrial development of the country has been remarkable. At

the state level, the government has played the major role in ensuring growth by establishing

various institutes to support this sector. Which include small industry Development Corporations

(SIDC) and several Centers for Entrepreneurship Development (CEDs). There are many institutes

that currently support SMEs at the national level. These include the National Research

Development Corporation (NRDC) and the Bureau of Indian Standards (BIS).

However, since the early 1990’s Indian SMEs have been exposed to intense Competition due to

increasing globalization. This has made survival and growth of this sector difficult.

INFRASTRUCTURE DEVELOPMENT

The quality of the infrastructure affects the growth prospects of SMEs to a great extent, especially

in a developing country like India . Here, 77% of the population lives in villages. Many rural areas

still suffer due to the deplorable state of basic infrastructure like transport, telecommunications and

electricity. The integration of rural industries with mainstream industries is proving to be difficult

for these reasons. This has been identified as a key deterrent to the growth of SME clusters in rural

areas.

TECHNOLOGICALLY HANDICAPPED

Technology plays a crucial role in the development of SMEs. Technology not only helps in

evolving a multipronged strategy but also in maximizing business opportunities for these

enterprises. Technologies for SMEs should aim at fuelling innovation and business agility. They

should be easy to integrate with existing systems and processes, and help in leveraging

communicate and information management. Today, most SMEs in rural areas undertake

manufacturing using old methods and outdated technology. But today, the competition is fierce,

unlike in the past, when buyers were simply looked forward to purchasing the best products at the

lowest prices. There are additional challenges to be met. The influx of low-cost products from

china has made it even more difficult for Indian manufacturers to compete solely on the price

front. China is considered the world’s manufacturing backyard, due to its low manufacturing and

labour costs when compared to those in India.

UPCOMING MARKET TRENDS AND INFORMATION


One of the factors limiting the growth of SMEs is the lack of adequate information. Once SMEs

start the business, they may be interested in knowing about the suppliers of specific machinery that

suit their needs, technical information and market trends for their products. This information is

rarely available at the grassroots level.

NEW PRODUCT DEVELOPMENT

The SME market requires a strong new product development base. In India, most SMEs work on

the designs given to them by domestic or foreign buyers. There is very little innovation in product

design development, and even the technology used by the SMEs in India is Outdated. This has

direct implication on the profit margins, and a dip in productivity levels. The use of traditional

tools, old techniques, poor labour productivity, they have not been used to a large extent, resulting

in no substantial effect on the output.

MARKETING PROBLEMS:

The nature of marketing is ever changing so does the problems associated with the marketing. The

Indian SMEs are facing a lot of problems related to marketing in the national and international

arenas. This is mainly due to the fact that these organizations belong to rural or semi urban areas

where the resources are easily available to them and cheap labour is associated with . But when it

comes to selling of these products the SMEs have to face a difficulty in creating an impression and

awareness in the minds of urban and other potential buyers about the quality and related aspects of

their products and services.

THE WAY AHEAD

There e is a strong need to find ways to manage modern technology and labour market constraints,

which impede the productivity of SMEs. Policy-makers and research institutions have repeatedly

pointed out to the need for extensive research on the SME sector.

What these SMEs need today is knowledge and access to new technology, adequate financial aid,

high levels of R&D and adaptability to the changing trends in their respective industries.

With the increasing competition, globalization and the uncertainty due to the global downturn,

SMEs will have to continuously incorporate the latest technology into their production processes


as well as in their marketing and management functions, to cut costs, gain efficiency and

consistency. This will help them become successful, and contribute to the Indian economy in the

long run. Overall, the small industry sector has performed well, and has enabled the country to

achieve considerable industrial growth and diversification.

CHAPTER V

CONCLUSION:

There is an unprecedented importance of Small and medium Enterprises in the country.

This is because the number of units is maximum in the country. This sector, contributes a major

amount in the development and employment. This sector does the work of providing employment

to minorities, backward class people and also to women. This sector is rife with problems like

shortage of electricity and development of basic infrastructure along with the problems related to

market. In order to solve these problems and develop the SME sector, major efforts have been

done in the eleventh plan. However these efforts are not enough. For the development of rural and

farm group, different departments should be formed. Similarly, in the development of industrial

ministry for urban Micro and Small and Medium Industries specific efforts should be done. SMEs

always represented the model of socio-economic policies of Government of India which

emphasized judicious use of foreign exchange for import of capital goods and inputs; labour

intensive mode of production; employment generation; nonconcentration of diffusion of economic

power in the hands of few (as in the case of big houses); discouraging monopolistic practices of

production and marketing; and finally effective contribution to foreign exchange earning of the

nation with low import-intensive operations.

SMEs are the growth engine of the economy and help sustain other sectors such as services.


BIBLIOGRAPHY

1. http://cc.iift.ac.in/sme/NEWS/02032009_SMEs%20in%20India%20The%20Challenges

%20Ahead.pdf

2. http://www.dnb.co.in/smes/future%20outlook.asp

3. Financing Innovative SMEs in a Global economy- OECD study presented at the 2nd OECD

conference for SMEs , in Istanbul, Turkey.


http://www.dnb.co.in/smes/future%20outlook.asp

http://cc.iift.ac.in/sme/NEWS/02032009_SMEs%20in%20India%20The%20Challenges%20Ahead.pdf

http://cc.iift.ac.in/sme/NEWS/02032009_SMEs%20in%20India%20The%20Challenges%20Ahead.pdf

prospects and challenges of sme's in india

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