Brief Overview of MSMEs in India

Role of MSMEs

Worldwide, the micro, small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. It is estimated that in terms of value, the sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. It produces over 8,000 value-added products Further, in recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity in the MSME sector is estimated to be almost 4 times higher than the large enterprises.

Problems of MSMEs

Despite constituting more than 80 % of the total number of industrial enterprises and supporting industrial development, MSMEs in India suffer from the problems of sub-optimal scale of operation, lack of appropriate manpower/skill sets, technological obsolescence, supply chain inefficiencies and fund shortages. Moreover, these organizations face competition from their global counterparts because of liberalization, change in manufacturing strategies and the turbulent and uncertain market scenario.

Focus of the Government

The Government is planning to increase financial assistance for micro, small and medium enterprises (MSMEs) to 80 per cent of their capital requirements in the 11th Five Year Plan. This aid will go towards technology upgradation and plugging of financial gaps. It will be available for existing MSME clusters.

Focus of Banks

Of late, several banks have focused on the MSMEs; in fact, some of them have launched specific funds to meet the capital requirements of MSMEs.

Rating of MSMEs

In spite of the increasing avenues of funding for MSMEs, credit penetration in this sector is still low. The primary reasons for this are insufficient credit information on MSMEs, low market creditability of SMEs and constraints in analysis. To tackle this problem, the SME Rating Agency of India (SMERA) was launched in 2005 by SIDBI in association with Dun & Bradstreet (D&B), Credit Information Bureau (India) Ltd and leading public and private sector banks.

Cluster Initiative

The concept of cluster development offers new insights into the potential role of MSMEs. It is estimated that there are about 400 MSME clusters in the country. A cluster may be defined as a local agglomeration of enterprises (mainly MSMEs) which produce and sell a range of related and complementary products and services. An example can be a localized leather industry, including leather tanning units, leather finishing units, leather goods producers, leather garment manufacturers, designers, sub-contractors, merchant buyers and exporters.

MSMEs-Success Story

In spite of the problems, the MSME sector has grown by leaps and bounds and has caught the fancy of corporate India. In fact, MSMEs fared better than most large organizations between 2001 and 2006. For example, the net profit of companies with a turnover of Rs. 50 crore–Rs. 100 crore appreciated by over 700 % in that period, compared to an increase of over 150 % in the net profit of large corporations. During the same period, MSMEs also outperformed large corporations in net sales and operating profits.