The Role of Government in the Growth of Small and Medium Industries

CHAPTER 1

INTRODUCTION
Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Indian economy over the last five decades. MSMEs not only play
crucial role in providing large employment opportunities at comparatively lower capital cost
than large industries but also help in industrialization of rural & backward areas, thereby,
reducing regional imbalances, assuring more equitable distribution of national income and
wealth. MSMEs are complementary to large industries as ancillary units and this sector
contributes enormously to the socio-economic development of the country. Ministry of
Micro, Small & Medium Enterprises (MSME) envision a vibrant MSME sector by promoting
growth and development of the MSME 2 Sector, including Khadi, Village and Coir Industries
, in cooperation with concerned Ministries/Departments, State Governments and other
Stakeholders, through providing support to existing enterprises and encouraging creation of
new enterprises.

In India, the enterprises have been classified broadly into two categories:

(i) Manufacturing.

(ii) Those engaged in providing/rendering of services.

Both categories of enterprises have been further classified into micro, small and medium
enterprises based on their investment in plant and machinery (for manufacturing enterprises)
or on equipments (in case of enterprises providing or rendering services). The present ceiling
on investment to be classified as micro, small or medium enterprises is as under:

Classification Manufacturing Enterprises Service Enterprises

Micro Up to Rs. 25 lakh Up to Rs. 10 lakh

Small Above Rs.25 lakh & upto Rs.5 crore Above Rs.10lakh & upto Rs.2crore

Medium Above Rs.5crore & up to Rs.10 crore Above Rs.2crore & upto Rs.5crore

1
The Role of Government in the Growth of Small and Medium Industries

Definition of MSME

Micro, Small and Medium Enterprise is defined by RBI/GOI differently for the
Manufacturing and the Services Sector.

1.1 Growth and Performance of MSMEs

The Micro, Small and Medium enterprises (MSMEs) play a pivotal role in the overall
industrial economy of India. MSMEs constitute more than 80% of the total number of
industrial enterprises and support industrial development. MSMEs contribute nearly 45% to
manufacturing and about 40% to the Indian export sector. Their contribution to the Indian
GDP is 8% and the sector has registered growth rate of 10.8%. Indian MSMEs have moved
up from the manufacture of traditional goods including leather, gems and jewelry,
agricultural goods to much more value addition in the manufacturing sector to its entry in the
value added services as well. It is one of the major growth driver of Indian Economy. It is
based on the Model of Socio economic policies of the Govt. of India. It develops appropriate
indigenous technology. It possess the second largest sector after agriculture. It includes more
than 26 million units which are producing more than 8000 products within the country. It
provides employment to over 59 million.

1.2 Role of Entrepreneurship in MSME

The entrepreneur who is a business leader looks for ideas and put them into effect in
fostering economic growth and development. Entrepreneurship is one of the most
important inputs in the economic development of a country and MSME is the big platform
for entrepreneurthis. The entrepreneur acts as a trigger head to give spark to economic
activities by his entrepreneural decisions. Entrepreneur plays a pivotal role not only in the
development of industrial sector of a country but also in the development of farm and
service sector. There are various major roles played by an entrepreneur in the economic
development of an economy and MSME. This paper studies the major role of an
entrepreneur in growth of the MSME and challenges faced by them. The major roles play
by the entrepreneur for growth of MSME as follows;
A. Promotes Capital Formation
Entrepreneurs promote capital formation by mobilizing the idle savings of public.

2
The Role of Government in the Growth of Small and Medium Industries

They employ their own as well as borrowed resources for setting up their enterprises. Such
type of entrepreneurial activities leads to value addition and creation of wealth, which is
very essential for the industrial and economic development of the country and growth of
the micro, small and medium industry.
B. Creates Employment Opportunities
Entrepreneurs provide immediate large-scale employment to the unemployed
which is a chronic problem of underdeveloped nations. With the setting up of more and
more units by entrepreneurs, both on small and large-scale numerous job opportunities are
created for others. As time passes, these enterprises grow, providing direct and indirect
employment opportunities to many more. In this way, entrepreneurs play an effective role
in reducing the problem of unemployment in the country which in turn clears the path
towards economic development of the nation.
C. Wealth Creation and Distribution
It stimulates equitable redistribution of wealth and income in the interest of the
country to more people and geographic areas, thus giving benefit to larger sections of the
society. Entrepreneurial activities also generate more activities and give a multiplier effect
in the economy and helps MSME to grow.
D. Facilitates Overall Development
Entrepreneurs act as catalytic agent for change which results in chain reaction.
Once an enterprise is established, the process of industrialization is set in motion. This unit
will generate demand for various types of units required by it and there will be so many
other units which require the output of this unit. This leads to overall development of an
area due to increase in demand and setting up of more and more units. In this way, the
entrepreneurs multiply their entrepreneurial activities, thus creating an environment of
enthusiasm and conveying an impetus for overall development of the area.
E. Family and Entrepreneurship
In traditional society where men work outside the home to earn money and women
play an important role in doing housework and bringing up the children, men are more
likely than women to transmit business idea. The modern structure of family in today’s
society and consequently the women’s role outside the home may result in the emergence
of new manifestation of creativity and innovation in both males and females.
1.3 Opportunities with MSME’s

3
The Role of Government in the Growth of Small and Medium Industries

MSME’s are playing very crucial role in the development of Indian economy. It is
contributing majorly in export, production and in last five years MSME‟s generated
employment 6, 50,000 approx. Government have also understood that for the growth of
Country it is important to develop MSME in rural areas also because 73% of our population
are from rural area, that is reason government have declare the MSME‟s as a priority and
instructed banks to pay special attention in the case of MSME and also Ministry of industrial
development are planning very cautiously for growth of industries, as urban areas are
saturated Government are more concentrating rural industrial development. The government
vision for the development is mentioned in above table. To stop Migration of this 73%
population employment generation in their origin are is the only way and MSME‟s will be
the only solution to this problem. It would be easy to run MSME‟s in rural area as it requires
less capital. It need cooperation and support from government to show opportunity and scope
of MSME.

1.4 Employment Opportunities

SSI Sector in India creates largest employment opportunities for the Indian populace, next
only to Agriculture. MSMEs not only play crucial role in providing large employment
opportunities at comparatively lower capital cost than large industries but also help in
industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring
more equitable distribution of national income and wealth. MSMEs are complementary to
large industries as ancillary units and this sector contributes enormously to the socio-
economic development of the country. The sector contributes significantly to manufacturing
output, employment and exports of the country. In terms of value, the sector accounts for
about 45 per cent of the manufacturing output and 40 per cent of total exports of the country.
It is estimated to employ about 60 million persons in over 26 million units throughout the
country. There are over 6000 products ranging from traditional to high-tech items, which are
being manufactured by 35 the MSMEs in India. It is well known that the MSME sector
provides maximum opportunities for both self-employment and wage-employment, outside
agriculture sector. MSME sector contributes not only to higher rate of economic growth but
also in building an inclusive and sustainable society in innumerable ways through creation of
non-farm livelihood at low cost, balanced regional development, gender & social balance,
environmentally sustainable development and to top it all, recession proofing of economic
growth, which the sector has proven time and again.

4
The Role of Government in the Growth of Small and Medium Industries

Chapter 2

HISTORICAL VIEW

Government policies for the MSME sector in India

The evolution of the policy framework and support measures of the Government can be
broadly grouped into the following three periods:

1948-1991:

In all the policy resolutions from 1948 to 1991, recognition was given to the micro and small
enterprises, termed as an effective tool to expand employment opportunities, help ensure
equitable distribution of the national income and facilitate effective mobilization of private
sector resource of capital and skills. The micro, small and medium enterprises development
organization [earlier known as small industries development organization (SIDO)] was set up
in 1954 as an apex body for sustained and organized growth of micro, small and medium
enterprises. Within next two years, the national small industries corporation, the Khadi and
Village Industries Commission and the Coir Board were also set up. The era provided the
supportive measures that were required to nurture MSEs, in the form of reservation of items
for their exclusive manufacture, access to bank credit on priority Sector Lending Programs of
commercial banks, excise exemption, reservation under the Government Purchase Programs
and 15% price performance in purchases, infrastructure development and establishment of
institutes for entrepreneurial and skill development. MSME- Development Institutes [earlier
known as Small Industries service Institute (SISI)] were set up all over India to train youth in
skills/entrepreneurship and Tool Rooms were established with German and Danish assistance
for providing technical services essential to MSEs as also for skill - training. At the State
level, District Industries Centers were set up all over the country.

1991- 1999:

5
The Role of Government in the Growth of Small and Medium Industries

The new policy for small, tiny and village enterprise of august 1991 laid the framework for
Government support in the context of Liberalization, which sought to replace protection with
competitiveness to infuse more vitality and growth to MSEs in the face of foreign
competition and open market. Supportive measures concentrated on improving infrastructure,
technology and quality. Testing centers were set up for quality certification and new tool
rooms as well as sub-contracting exchange were established. The small industries
development bank of India (SID-Bl) and a technology development and modernization fund
were created to accelerate finance and technical services to the sector. A Delayed Payment
Act was enacted to facilitate prompt payment of dues to MSEs and an industrial infrastructure
development (IID) scheme was launched to set mini industrial estates for small industries.

1999 onwards:

The ministry of MSME came into being from 1999 to provide focused attention to the
development and promotion of the sector. The new policy package announced in august 2000
sought to address the persisting problems relating to credit, infrastructure, technology and
marketing more effectively. A credit liked capital subsidy scheme was launched to encourage
technology up gradation in the MSE sector and a credit guarantee scheme was started to
provide collateral - free loans to micro and small entrepreneurs, particularly the first
generation entrepreneurs. The exemption limit for relief from payment of central excise duty
was raised to Rs. I crore ($0.25 million) and a market development assistance scheme for
MSEs was introduced. At the same time, consolations were held with stakeholders and the
list of products reserved for production in the MSE sector was gradually reduced each year.
In 2006, the long- awaited enactment for this sector finally became a reality with the passage
of the micro, small and medium enterprises act. In march 2007, a third package for the
promotion micro and small enterprises was announced which comprises the
proposals/schemes having direct impact on the promotion and development of the micro and
small enterprises , particularly in view of the fast changing economic environment, wherein
to be competitive is the key of success (MSMEs in India an overview, 2007).

Some of the recent policy reforms for the MSME sector in India are as follows:

6
The Role of Government in the Growth of Small and Medium Industries

 National Manufacturing Competitiveness Council (NMCC) was set up to energies

and sustains the growth of the manufacturing industry. New Promotional Package for
MSMEs, and focus on accelerating development of clusters.

 A single comprehensive legislation for the promotion, development and

enhancement of the competitiveness of the MSME sector - Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006 came into effect from October 2006.

 Revised strategy of lending and introduction of newer measures, such as the scheme
to establish Small Enterprises Financial Centres (SEFC) for strategic alliance between
branches of banks and SIDBI located in 388 clusters identified by ministry of SSI.

 Promotion and financial support for Credit-cum-Perfor-mance Rating in MSME

sector in India, to facilitate greater and easier flow of credit from the banking sector to SMEs.

 The National Commission for Enterprises in the Unorganized Sector (NCEUS) has
been set up as an advisory body and a watchdog for the informal sector to bring about
improvement in the productivity of these enterprises for generation of large scale
employment opportunities on a sustainable basis, particularly in the rural areas.

 Facilitation of technology transfer through the Technology Bureau for Small

Enterprises (TBSE)

 Accelerating initiatives to address various developmental needs for MSMEs in the I

Ith Five Year Plan.

 Guarantee coverage under Credit Guarantee Fund for Small Enterprises expanded
substantially

 Credit Linked Capital Subsidy Scheme for Technological Up gradation.

 New legislation on Limited Liability Partnerships being worked on.

 Merger of the Ministry of SSI with the Ministry of ARI ( India at 60 & beyond,
2007).

7
The Role of Government in the Growth of Small and Medium Industries

 Package for Promotion of Micro and Small Enterprises (MSEs): in order to assist the
MSEs in fully harnessing their potential by enhancing their competitiveness to face the
challenges of stiff competition and in availing opportunities generated by trade liberalization,
the Government in its NCMP declared that a "major promotional package" will be announced
for this segment to provide full support in the areas of credit, technological up-gradation,
marketing and infrastructure up-gradation in industrial infrastructure.

 Filing of Entrepreneurs' Memorandum by Enterprises: In pursuance of Section 8 of

the MSMED Act, 2006, an entirely new process of filing of Entrepreneurs' Memorandum
(EM) by Micro, Small and Medium Enterprises (MSMEs) has been put in place.

 Steps Taken to Discourage Delayed Payments to MSEs (MSME, 2007-08).

 Notification for Authority for receiving Memoranda for Micro and Small Enterprises
(MSEs): All States & UTs except Meghalaya and Mizoram have issued the Notifications
nominating authority for receiving Entrepreneurs Memorandum for MSEs (MSME, 2009-
10).

Chapter 3

CHALLENGES & ROLE OF MINISTRY

Challenges before MSME’s starts

 Problem of skilled manpower.

 Inadequate credit assistance.

 Irregular supply of raw material.

 Absence of organised marketing.

 Lack of machinery and equipment.

 Absence of adequate infrastructure.

 Competition from large-scale units and imported articles.

 Other problems like poor project planning, managerial inadequacies, old and orthodox

8
The Role of Government in the Growth of Small and Medium Industries

designs, high degree of obsolescence and huge number of bogus concerns etc.

Challenges faced by MSME’s

Despite its commendable contribution to the Nation's economy, MSME Sector does not get
the required support from the concerned Government Departments, Banks, Financial
Institutions and Corporate, which is a handicap in becoming more competitive in the National
and International Markets.

MSMEs face a number of problems:-

 Mentoring and advocacy

 Credit

 Absence of adequate and timely banking finance,

 Limited capital and knowledge,

 Infrastructure

 Globalization of trade and commerce

 Non-availability of suitable technology,

 Low production capacity, ineffective marketing strategy,

 Identification of new markets or market access,

 Constraints on modernization & expansions,

 Non availability of highly skilled labour at affordable cost,

 Follow-up with various government agencies to resolve problems

 Exit mechanism

 Strategy interventions for revitalization and growth etc.

Why should the Government support MSME’s?

 MSME’s as they are called as the largest employers of people!

9
The Role of Government in the Growth of Small and Medium Industries

 Many creative minds evolve out of single or small businesses.

 The great businesses of today like Microsoft, Facebook, WalMart, KFC were started by
single or small groups of people.

 Employment is another good reason. If someone can be productive by offering a service,

they become less reliant on the state.

 Self-esteem and Self-worth.

Role of Ministry in MSME

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

The primary responsibility of promotion and development of MSMEs is of the State

Governments. However, the Government of India, supplements the efforts of the State
Governments through various initiatives.

The schemes undertaken by the Ministry to facilitate MSME

1. Adequate flow of credit from financial institutions/banks

2. Support for technology up gradation and modernization

3. Integrated infrastructural facilities

4. Modern testing facilities and quality certification

5. Access to modern management practices

6. Entrepreneurship development and skill up gradation through appropriate training facilities

7. Support for product development, design intervention and packaging

10
The Role of Government in the Growth of Small and Medium Industries

8. Welfare of artisans and workers

9. Assistance for better access to domestic and export markets

10. Cluster-wise measures to promote capacity-building and empowerment of the units and

their collectives.

Future Prospects of MSMEs

1. Employment generation: There are large opportunities in the field of manufacturing and
service rendering of MSME’s. In the field of retail and manufacturing sector, MSMEs are
generating different and ample amount of employment.

2. Focus on customer satisfaction: Primarily, MSMEs manufacturing goods focus on test and
preferences, liking and disliking of the consumer. But now a day they produce goods
according to the needs or expectations of the customers. So the MSMEs can be more
customer satisfaction oriented.

3. Minimization of regional imbalance: The MSMEs will utilize the manpower of rural areas
so such areas of the nation can equally developed through the running of MSME units in rural
areas. So this is helpful to minimize or remove the regional imbalance.

4. Development of Export: In the international market, there will be a large demand of Indian
product like wooden items, other handmade articles etc. So MSMEs have the potential to
improve the export of India.

5. Attraction of Foreign Investment: The Indian MSMEs are the growing sectors and their
growth rate and return on investment is satisfactory. This sector can attract foreign
investment in India , so their growth rate increasing drastically.

CONCLUSION

The Micro,Small and Medium Enterprises (MSMEs) contribute to economic development in

various ways, such as creating employment opportunities for rural and urban population,
providing goods & services at affordable costs by offering innovative solutions and
sustainable development of the economy as a whole. SMEs in India face a number of

11
The Role of Government in the Growth of Small and Medium Industries

problems - absence of adequate and timely banking, finance, non-availability of suitable

technology, ineffective marketing due to limited resources and non availability of skilled
manpower. The sector also contributes significantly to manufacturing output, employment
and exports of the country. It is estimated that in terms of value, the sector accounts for about
45 % of the manufacturing output and 40% of total exports of the country. To make this
sector to become more vibrant and significant player in the development of the Indian
economy, the Government of India has taken various initiatives. The definition and coverage
of the MSME sector were broadened MSME Development Act 2006 which recognized
concept of 'enterprise' to include both manufacturing and service sector besides defining
medium enterprises setting up a Board for developing policy frameworks and indicating
procurement policy.

12