SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA

1.1 SMEs IN INDIA

With the advent of planned economy from 1951 and the subsequent industrial policy followed by
Government of India, both planners and Government earmarked a special role for small-scale
industries and medium scale industries in the Indian economy. Due protection was accorded to
both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted
a policy of liberalization and globalization. Certain products were reserved for small-scale units
for a long time, though this list of products is decreasing due to change in industrial policies and
climate. 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; non concentration 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. It was also coupled with the policy of
de-concentration of industrial activities in few geographical centers.
In the Indian context, micro, small and medium enterprises as per the MSME Development
Act, 2006 are defined based on their investment in plant and machinery(for manufacturing
enterprise) and on equipments for enterprises providing or rendering services. According to the
Micro, Small and Medium Enterprises (MSME) Development Act of 2006, (India) a micro
enterprise is where the investment in plant and machinery does not exceed twenty five lakh
rupees. A medium enterprise is where the investment in plant and machinery is more than five
crore rupees but does not exceed ten crore rupees. A small enterprise is where the investment in
plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees.
In the case of the enterprises engaged in providing or rendering of services, as
(a) a micro enterprise is where the investment in equipment does not exceed ten lakh
rupees.
(b) a small enterprise is where the investment in equipment is more than ten lakh rupees
but does not exceed two crore rupees.
(c) a medium enterprise is where the investment in equipment is more than two crore
rupees but does not exceed five crore rupees.
 According to the Ministry of Micro, Small and Medium Enterprises, recent ceilings on
investment for enterprises to be classified as micro, small and medium enterprises are as follows:
1.2 Classification Manufacturing Enterprises* Service Enterprises**
Classification Manufacturing Enterprises* Service Enterprises**
Rs. 2.5 million/ Rs. 25 lakh Rs. 1 million/ Rs. 10 lakh
Micro (US$ 50,000) (US$ 20,000)
Rs. 50 million/ Rs. 5 crore Rs. 20 million/ Rs. 2 crore
Small (US$ 1 million) (US$ 40,00,000)
Rs. 100 million/ Rs. 10 crore Rs. 50 million/ Rs. 5 crore
Medium (US$ 2 million) (US$ 1 million)

* Investment limit in
Plant & Machinery
** Investment limit in
equipments
*** Rs 50 = 1 USD

It can be observed that by and large, SMEs in India met the expectations of the Government in
this respect. SMEs developed in a manner, which made it possible for them to achieve the
following objectives:
(i) High contribution to domestic production
(ii) Significant export earnings
(iii)Low investment requirements
(iv) Operational flexibility
(v) Location wise mobility
(vi) Low intensive imports
(vii) Capacities to develop appropriate indigenous technology
(viii) Import substitution
(ix) Contribution towards defense production
(x) Technology – oriented industries
(xi) Competitiveness in domestic and export markets
At the same time one has to understand the limitations of SMEs, which are:
(i) Low Capital base
(ii) Concentration of functions in one / two persons
(iii)Inadequate exposure to international environment
(iv) Inability to face impact of WTO regime
(v) Inadequate contribution towards R & D
(vi) Lack of professionalism

In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports. SMEs have been established in almost all-major sectors
in the Indian industry such as:

a. Food Processing
b. Agricultural Inputs
c. Chemicals & Pharmaceuticals
d. Engineering; Electricals; Electronics
e. Electro-medical equipment
f. Textiles and Garments
g. Leather and leather goods
h. Meat products
i. Bio-engineering
j. Sports goods
k. Plastics products

As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have
been passing through a transitional period. With slowing down of economy in India and abroad,
particularly USA and European Union and enhanced competition from China and a few low cost
centers of production from abroad many units have been facing a tough time. Those SMEs who
have strong technological base, international business outlook, competitive spirit and willingness
to restructure themselves shall withstand the present challenges and come out with shining
colours to make their own contribution to the Indian economy.
The role of micro, small and medium enterprises (MSMEs) in the economic and social
development of the country is well established. The MSME sector is a nursery of
entrepreneurship, often driven by individual creativity and innovation. This sector contributes 8
per cent of the country’s GDP, 45 per cent of the manufactured output and 40 per cent of its
exports. The MSMEs provide employment to about 60 million persons through 26 million
enterprises. The labour to capital ratio in MSMEs and the overall growth in the MSME sector is
much higher than in the large industries. The geographic distribution of the MSMEs is also more
even. Thus, MSMEs are important for the national objectives of growth with equity and
inclusion.
2. The MSME sector in India is highly heterogeneous in terms of the size of the enterprises,
variety of products and services produced and the levels of technology employed. While one end
of the MSME spectrum contains highly innovative and high growth enterprises, more than 94 per
cent of MSMEs are unregistered, with a large number established in the informal or unorganized
sector. Besides the growth potential of the sector and its critical role in the manufacturing and
value chains, the heterogeneity and the unorganised nature of the Indian MSMEs are important
aspects that need to be factored into policy making and programme implementation.
3. The representatives of 19 prominent MSME Associations met the Hon’ble Prime Minister on
26th August 2009 to highlight their concerns and issues regarding MSMEs. The Prime Minister
announced the setting up of a Task Force to reflect on the issues raised by the associations and
formulate an agenda for action within a period of three months after discussions with all
stakeholders. Accordingly, a Task Force under the chairmanship of the Principal Secretary to
Prime Minister was constituted to address the issues of the MSME Sector.
MSMEs in the country manufacture over 6,000 products. Some of the major subsectors in terms
of manufacturing output are food products (18.97%), textiles and readymade garments (14.05%),
basic metal (8.81%), chemical and chemical products (7.55%), metal products (7.52%),
machinery and equipments (6.35%), transport equipments (4.5%), rubber and plastic products
(3.9%), furniture (2.62%), paper and paper products (2.03%) and leather and leather products
(1.98%).
In view of the MSME sector’s role in the economic and social development of the country, the
Government has emphasized on its growth and development. It has taken various
measures/initiatives from time to time which have facilitated the sector’s ubiquitous growth.
Some of the recent measures include enactment of the Micro, Small and Medium Enterprises
Development Act, 2006, amendments to the Khadi and Village Industries Commission Act,
announcement of a Package for Promotion of Micro and Small Enterprises (MSEs), launching of
new/innovative schemes under National Manufacturing Competitiveness Programme Report of
The Task Force on MSME (NMCP), launching of Prime Minister’s Employment Generation
Programme (PMEGP) to generate employment opportunities, etc.
The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety
of products and services produced the levels of technology employed, etc. These could be
broadly grouped into the following three categories, based on the different sets of constraints
faced and requirements of policy interventions:
(a) High Growth Enterprises

One end of the MSME spectrum contains highly innovative and high growth enterprises. These
include MSMEs in sectors like textiles and garments, leather and leather products, auto
components, drugs and pharmaceuticals, food processing, IT hardware and electronics, paper,
chemicals and petrochemicals, telecom equipment, etc. Such enterprises not only have high
potential for growth but could also contribute significantly in enhancing country’s exports. One
of the major constraints in growth of such enterprises is access to equity capital. At present, there
is almost negligible flow of equity capital into this sector despite the fact that overall such capital
inflow has witnessed significant increase in the recent years. There is, therefore, a need to
promote inflow of equity capital into this sector by providing suitable incentives to MSME-
focused angel/venture capital funds as well as by setting up of SME Exchanges/platforms.

Another aspect that is critical for their growth is technology. Given their scale of operations, it is
not only difficult for them to invest in research and development activities but even to acquire
modern and latest technologies available in the market due to high costs. The Government has
launched the National Manufacturing Competitiveness Programme with the objective of
enhancing the competitiveness of MSMEs. The programme includes several new and innovative
schemes (viz., Lean Manufacturing, Design Clinics, Quality Management Standards and Quality
Technology Tools, Incubators, etc.) for assisting the MSMEs in adoption of best international
practices to enhance their competitiveness. Simultaneously, there is a need to make massive
efforts for dissemination of information on the latest/modern technologies among the MSMEs
and supporting them for undertaking technology upgradation, acquisition, adaptation and
innovation. In addition, the Government also needs to encourage R&D in the
engineering/technical institutions through suitable tax incentives and setting up of Business
Incubators.

1.3 SMEs In Uttrakhand

Since its inception in May 1999, (and even earlier as a part of ‘Uttar pradesh State’) Uttrakhand
has been in the forefront of industrialization. The state has always followed progressive
industrial policies and industry – friendly measures. Through a network of District Industries
Centre (DICs), it offers maximum guidance and assistance to SMEs. Many SMEs promoted by
local entrepreneurs as also by NRIs and foreigners have come up in Uttrakhand covering a broad
spectrum of industrial activity.
The quality of products of SMEs from Uttrakhand is high. Some of them have
acquired technology from abroad. Adequate budget is provided for R & D operations.
Many units are promoted by techno-entrepreneurs.
In view of the objective of the study, it was considered necessary to undertake a survey of SMEs
from major parts of Uttrakhand covering following sectors: Engineering; Electricals; Food
Processing; Chemicals and Pharmaceuticals. The field survey consisted of visits to industries in
the following cities / regions:
Table : 1.1

District-wise Number of Capital Investment Small Scale

Industries (Less than ten Lakh) in Uttarakhand
(2008-2010)

District Target Achievement (Upto july-2010) %age Achievement

Nainital 175 71 41

Udham Singh Nagar 300 62 21

Almora 200 170 85

Pithoragarh 150 82 55

Bageshwar 50 23 46

Champawat 50 43 86

Dehradun 250 65 26

Pauri 200 119 60

Tehri 175 56 32

Chamoli 140 52 37

Uttarkashi 140 95 68

Rudraprayag 50 39 78

Haridwar 300 204 68

Uttarakhand 2180 1081 50

Source Table 1.1 : Industrial Development Department, Govt. of Uttarakhand

 Table 1.2

District-wise Number of Capital Investment Small Scale

Industries (More than Ten Lakh) in Uttarakhand
(2007-2010)

Achievement (Upto July- % age

District Target
2010) Achievement

Nainital 60 50 83

Udham Singh
100 85 85
Nagar

Almora 40 36 90

Pithoragarh 40 36 90

Bageshwar 25 23 92

Champawat 25 23 92

Dehradun 95 80 84

Pauri 80 68 85

Tehri 60 50 83

Chamoli 40 33 83

Uttarkashi 40 34 85

Rudraprayag 30 29 97

Haridwar 100 83 83

Uttarakhand 735 630 86

Source Table 1.2 : Industrial Development Department, Govt. of Uttarakhand

Table 1.3

District-wise Number of Registered Small Scale Industries in Uttarakhand

(2000-2010)

District No. of Total Unit Working Unit in Consist Closed Unit

Uttarkashi 2655 1839 816

Chamoli 1712 954 758

Rudraprayag 656 422 234

Tehri 2090 1158 932

Dehradun 4191 2527 1664

Pauri 3368 1776 1592

Haridwar 4241 2622 1619

Pithoragarh 1083 604 479

Bageshwar 665 403 262

Almora 1926 1016 910

Champawat 366 165 201

Nainital 1897 835 1062

Udham Singh Nagar 2535 961 1574

Uttarakhand 27385 15282 12103

Source Table 1.3 : Industrial Development Department, Govt. of Uttarakhand

A total of 40 units in various sectors were contacted and finally 23 units were shortlisted
for inclusion in the study report. While making a final choice of the units from target sectors,
following factors were considered.
1. Set up of the unit and management
2. Technology status and product profile
3. Turnover & exports
4. Scientific manpower
5. Technology / Process / Product on offer

1.4 Review of Industrial sectors considered for SMEs in Uttrakhand

The industries in Chemical, Engineering, Electrical, Food Processing and Pharmaceutical sector
were contacted during the field survey. A broad outline of these industrial sectors and the list of
industries, which were considered for detailed study, are presented in the following sections.