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Researchjournali’s Journal of Entrepreneurship Vol. 2 | No. 2 February | 2014

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www.researchjournali.com

Bhoomika Garg

Assistant Professor

Rajdhani College, University of Delhi, BK-52 (West)

Shalimar Bagh, New Delhi – 110088

Role Of MSMEs In

Economic

Development


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Abstract

It is well known that the MSME sector constitutes the spine of the nation, small Industry has been one of the

major pillars 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, vibrant and over time, these have become major contributors to the GDP. Moreover, the

MSME sector has weathered and overcome stiff competition in the post liberalization period in the domestic

and International arena.

Keywords: MSME, Economic Growth, Multinational Companies, SIDBI, MFI, Self Help Group (SHG).

1. Introduction

MSEs have been regarded as the engine of economic growth and development all over the world. Today,

MSEs are constituting nearly about 90% of the total enterprises in most of the economies (especially in

developing economies) which creates marvelous employment opportunities and is accounting major share of

exports & industrial production. In India, MSE is generally referred to as MSME i.e. Micro, Small and

Medium Enterprises. Multinational companies have played a pivotal role in the emergence of Indian MSMEs

as world leaders in specific products. This sector plays an important role in the growth of GDP in the

economy as it creates employment opportunities at low capital cost.

1.1 What Is MSME In India

The Govt. of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006,

in terms of which the definition of micro, small and medium enterprises is as under:

a) Enterprises engaged in the manufacturing or production, processing or preservation of goods as

specified below:

- A micro is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakhs

- A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakhs

but does not exceed Rs. 5 crores.

- A medium Enterprise is an enterprise where the investment in plant & machinery is more than Rs. 5

crores but does not exceed Rs. 10 crores.

b) Enterprises engaged in providing or rendering of services (original cost excluding land &

building, furniture, fittings and other items) not directly related to the services rendered or as

may be notified under the MSMED Act, 2006 are specified below:


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- A micro enterprise is an Enterprise where the investment in equipment does not exceed Rs. 10

lakhs.

- A small enterprise is an enterprise where the investment in equipment is more than Rs. 10 lakhs but does

not exceed Rs. 2 crores.

- A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crores but

does not exceed Rs. 5 crores.

2. Objective Of The Study

The objective of this study is to know the growth trend in MSME sector, challenges being faced and to study

the future of MSME in India.

3. Current Status Of MSME In India

As per data released by the Ministry of MSME, Govt. of India, at present, there are about 26.1 million

enterprises in this sector. The sector has a share of 45 percent in the manufactured output and 8% in the GDP.

MSMEs contributed close to 40 percent of all exports from the country and employed nearly 59.7 million

people, which is next only to agricultural sector. As on March 2013 there are 2032 specialized MSME

branches (Source: RBI).

Figure1: Growth trend in MSME sector. All India Growth rate (%)

Source: Ministry of MSME

0

5

10

15

20

25

2007-08 to 2008-09 2008-09 to 2009-10 2009-10 to 2010-11 2010-11 to 2011-12


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The above graph depicts the growth trend in MSME sector which indicates an upward moving growth trend.

Though in initial few years, there was steady growth rate of around 10-11% which shot up to 19% during the

period 2010-11 to 2011-12.

Challenges to MSME Sector

No doubt, MSME sector is contributing a lot to the Nation’s economy but it is not getting enough support

from the concerned Govt. departments, Banks, Financial institutions and Big Corporate houses. It affects the

growth of the sector to become more competitive in the National and International markets.

Credit to MSMEs

Receiving timely and adequate finance is a tedious exercise for both established as well as emerging MSMEs

in India. According to the Indian Govt. survey, 90% of the total Micro units in India procure funds from

friends, relatives and private lenders only. Though the Banks finance to MSME has shown an upward trend in

India, yet the lenders do not feel secure about lending to this sector for number of reasons. The borrowers of

this segment are considered as high risk borrowers because of insufficient assets, low capital, vulnerability to

market fluctuations and high mortality rates. Further, access to equity capital is a genuine problem. At

present, there is almost negligible flow of equity capital into this sector.

Access to Markets

Due to lack of finance, this sector has failed to create market access through marketing and promotions. Use

of Information Technology can play a pivotal role in opening new ventures and expanding the scope for

MSMEs.

Lack of Technological Knowledge

With the increasing competition, globalization and uncertainty in the global market, it is essential for MSMEs

to be technologically literate. Moreover lack of IT support, poor internet facility, and improper information

and communication technology applications impedes the growth of this sector.

Lack of proper Infrastructure

Raw material is the basic necessity of every enterprise whether it is small scale or large scale. Lack of

infrastructure results in shortage of basic raw material, especially which are to be imported from other

countries. Lack of waterways and airways facilities also moderate the growth of those MSMEs whose target

customers are located abroad. As most of the MSMEs are located in rural area of our country, non-existence

of proper telecom network makes it difficult to communicate with people residing in urban areas.


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Inadequacy of Managerial Personnel

There is lack of experienced and trained employees as MSMEs cannot afford to have high salaried personals

and at the same time they cannot spend on training and development of their employees. Therefore, they have

to depend mainly upon their family members who do not have diversified skills.

Inadequate Market Information

One of the factors which is limiting the growth of this sector is the lack of adequate information. Once

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

material, technical information and marketing trends which suits their needs for their products. This

information is rarely available at grass root level.

Initiatives taken by Govt. of India and RBI

Keeping in view the important role played by MSMEs in Economic Development and its vital contribution in

the Indian Economy and Employment. The Govt. and RBI are proactively supporting the growth of MSMEs

in every possible manner. Some of the Govt. measures include:

1. The Ministry of Micro, Small and Medium Enterprises have been implementing schemes of

survey, study and policy research with a view to collect data on various aspects of MSMEs

engaged in manufacturing and services. The purpose of this survey is to design appropriate

strategies, measures to assist and enable these enterprises in facing the challenges to make use of

opportunities with a view to enhancing their efficiency and competitiveness.

2. Micro, Small and Medium Enterprises Development Act, 2006 has been enacted to facilitate the

promotion and development of these enterprises. Under this Act, three types of enterprises i.e. Micro,

Small and Medium have been defined for the very first time.

3. Credit is one of the crucial aspect for the promotion of MSMEs. Thus, various schemes have been

undertaken to provide sufficient credit to these enterprises such as “Credit Linked Capital Subsidy

Scheme” (CLCSS) which was launched to facilitate technology improvement in MSMEs including khadi,

tiny and village units. Moreover finance to this sector by commercial banks has been classified under

priority sector lending of the banks.

RBI Guidelines for MSMEs

1. In view of suggestions of the Prime Minister’s task force on MSMEs formed by Government. Banks are

advised to achieve 20% year-on-year growth in credit to micro and small enterprises, with allotment of

60% of the MSMEs advances to Micro Enterprises which helps to make credit available to this sector.


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2. RBI closely monitors the achievement of targets by banks on a quarterly basis and the non-achievers are

advised to devise strategies to gear up the credit mechanism for this sector.

3. New Generation Entrepreneurs who do not have sufficient collateral securities to provide to the bank for

availing the finance. To overcome this problem Govt has formed Credit Guarantee Fund Trust for Micro

and Small Enterprises (CGTMSE) to facilitate this sector which will provide guarantees to the banks and

banks are instructed to provide collateral free loans to this sector up to Rs 1 crore.

4. RBI also made it compulsory to acknowledge all loan applications which are submitted manually or

online, by MSME borrowers.

5. To address the problems such as absence of financial literacy, working skills, business planning etc.

which shows alarming situation to MSME borrowers. RBI advised commercial banks to play proactive

role to supports MSME clients by providing them banking literacy and consultancy support in addition to

Financial services.

4. Way Forward

Globalization brings new business opportunities which MSME sector needs to grab. This sector has to

redesign their strategies and innovate themselves. To successfully to do so major aspects need to be kept in

mind.

1. This sector needs innovation to create new business and sense the changes that have already occurred in

the business, technology and demographics.

2. There should be adequate attention to be given to cash flow. Entrepreneurs of this sector looks into the

profit for the success of the enterprise but cash flow matters more than the profit.

3. In order to cater the needs of growing business, there should be efficient and skilled management team. It

is therefore, necessary to recognize the talent of the people working with them, so that business can grab

the new opportunities.

4. As business passes through stiff competition. The entrepreneurs should evaluate the business demands

and continuously strive to cater them. For successful enterprises one should learn from their mistakes and

make sure not to repeat again.

Some of the major steps which should be taken in this regard is given as under:

Segmentation: Banks should conduct sector specific studies and the problem of different industries should be

noted. This way, bank will be able to connect with the specific problems of the particular industry and devise

strategy accordingly.


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Assistance in Marketing: There should be an adequate finance for the MSMEs so that these enterprises can

focus more on brand building and should be given chance to advertise their products and participate in trade

fairs.

Becoming More Technologically Advanced: MSMEs are required to continuously update and use latest

technology into their production process, management function and marketing to reduce cost, increase

productivity & efficiency.

Skill Development and Trained Manpower: There should be an allotment of more funds to set up resource

development and growth centers. Skilled manpower is required for the small enterprises which will enhance

MSMEs competitiveness.

Need for Infrastructure Development: The MSMEs need to have an adequate infrastructural set up which

includes development of MSME clusters near highways, rail corridors, proper channels of

telecommunication, adequate supply of power and other supporting facilities.

Approach to Equity Capital: The ability of MSMEs should be enhanced by expanding their reach to access

equity market. For this purpose, regulatory and fiscal barriers should be removed. Based on the

recommendations of the PM’s task force on MSMEs, the Bombay Stock Exchange and National Stock

Exchange have also set up separate exchange for listing and trading of shares of MSMEs making it easier for

them to raise equity capital.

Innovative Financing: MSMEs are dependent mainly upon banks and informal modes of financing like

family, friends and private money lenders. Self Help Groups (SHG) and Micro Finance Institutions (MFI) are

only on its initial stage of financing. The possibility of linking MSMEs with secondary market i.e. capital

market needs to be considered. Institutions like SIDBI need to design instruments to link MSMEs with

capital market.

5. Conclusion

The Micro, Small and Medium Enterprises (MSMEs) are one of the major segments of the Indian economy. It

plays an important role in the economic development of the Nation. It is the major constituent sector in

employment generation, production system, enhancing exports and GDP. But, there is a need to carefully

nurture and support this sector. Joint effort is needed from the Govt. and MSMEs to acquire technological

effectiveness. Financial support needs to be ensured taking into consideration the growing investment

demand, including the requirements of technological transformation. This sector needs to adopt a proactive

approach where the Govt. should propose a long term strategy to sustain themselves in the changing

economic scenario and progress beyond the current GDP growth.


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6. References

1. RAVI, S. (2009). Entrepreneurship Development in the Micro, Small and Medium Enterprises sector in India,

Indian School of Business P2.

2. GUPTA, R. (2006), Scope of cottage and Small Scale Industry in West Bengal in the early 2000, IBS Research

Centers, Kolkata.

3. DAS, B. Shil, N.C., Pramanik, A. (2007). Strengthening SMEs to make export competitive, Munich Personal Re-

PEC Archieve (MPRA).

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