CHAPTER 6 : MICRO, SMALL AND MEDIUM BUSINESS

ENTERPRISES IN INDIA

6.1 Meaning, Definition and Classification

6 . 1.1 Meaning of MSME
6. 1.2 Meaning of Ancillary Units
6 . 1.3 Classification of Ancillary Units
6.2 Business Structure of Small and Medium Enterprises
6.3 Role of MSMEs in Economic Development of India
6.4 Government Provisions for Assistance to MSMEs - Ancillary Units
6.5 Importance of MSMEs for the Survival and Growth of Large
Enterprises
6.6 Weaknesses of MSMEs
6.7 Survival and Growth Needs of MSMEs
 CHAPTER 6 : MICRO, SMALL AND MEDIUM BUSINESS
ENTERPRISES IN INDIA

The current chapter discusses the development of MSME sector in India. It shows the
classification and business structure of MSMEs in India. This is followed with the
analysis of the role of MSMEs in economic development of India from the point of
view of growth rate in number of establishments, employment, investment, and
production output and export performance. It highlights the interest level of the
Central Government in the development and growth Indian MSME sector.

Micro, Small and Medium Enterprises (MSMEs) are widely called the back-bone of
the Indian economy. According to the online official portal of MSME, this sector is
the largest employment providing sector in India with employing more than 600 lakhs
persons in India”. In recent years, it has emerged as the most dynamic sector
displaying phenomenal growth by contributing 10% of share in GDP of India,
contributing 40% to total economy exports, producing about 7500 items and involving
in Technology Upgradation and implementation (55% of MSMEs involved) in
particular (ASSOCHAM report, 2010). This sector comprises of business units with
varying sizes that range from tiny to medium based on level of investment. Most of
these also act as ancillary units for large scale industry. The following section defines
each type of units in the small scale sector.

6.1 Meaning, Definition and Classification

This section discusses the meaning of MSME given by various international and
national bodies, followed with the evolution of the definition of MSMEs in India and
finally the classification of MSMEs in India based on various criteria is given.

6.1.1 Meaning of MSME

There are wide variations in definition regarding the size of a small company (Atkins
and Lowe, 1997; Keasey and Watson, 1993, p. 3; Storey et ah, 1987). While some
researchers define size of small company in term of number of employees, the others
201
use both number of employees and annual sales (or turnover) when defining the size
of a company. Other works define enterprise size in relation to the sector within
which the firm is active. Commonly used criteria at the international level to define
SMEs are the number of employees, total net assets, sales and investment level

According to the European Union, the following classification of units is done on the
basis of number of employees.

Table 6.1: Classification of Units on the Basis of Number of Employees

Number of Type of unit Number of Type of unit

Employees Employees
0 Self- 10-49 Small business
employed
2-9 Micro 50-249 Medium sized
business business

Recognizing the contribution and potential of the sector, the definitions and coverage
of the Small Scale Industry (SSI) sector were broadened significantly under the
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The Act
recognized the concept of “enterprise” to include both manufacturing and services
sector and separately defined medium enterprises. MSME Development Act 2006 of
India defines micro, small and medium enterprises on the basis of their investment m
plant and machinery (for manufacturing enterprise) and on equipments for enterprises
providing or rendering services. According to this act, the definitions of micro, small
and medium enterprises include the following:

202
Table 6.2: Definition of Micro, Small and M edium Enterprises

Investment in P lant and Investment in Equipm ent Type of unit

M achinery (Service)
(Manufacturing)
Does not exceed Rs. 25 lacs Does not exceed Rs. 10 lacs Micro business
Between Rs, 25 lacs and 5 Between Rs. 10 lacs and Rs. Small business
crores 2 crores
Between Rs 5 crores and 10 Between Rs 2 crore and Rs. Medium sized
crores 5 crores business

6.1.2 M eaning of Ancillary Units

Ancillary units are a part of MSMEs. MSMED Act 2006 gave them a separate
identity because of their nature of work of being providers of materials to large/parent
enterprises. Promotion of ancillary units provides good scope for the development of
MSME sector as it facilitates off- loading of the products from the large sector, thus
providing assured market. An ancillary unit can be a micro, small or a medium sized
enterprise. Though the earlier SSI policy gave it a separate identity, now under
MSMED Act, it is considered as a part of MSMEs. Efforts have been made to define
ancillary type of enterprises also.

According to United Nations Statistics Division, Economic Statistics Branch,

National Accounts Section, Current SNA93: definition of ancillary units/activities is,
“A productive activity undertaken with the sole purpose of producing one or more
common type of service for intermediate consumption within the same enterprise is
defined as an ancillary activity. These are supporting activities undertaken within an
enterprise in order to create conditions within which the principal or secondary
activities can be earned out. Examples of ancillary activities are: headquarter activity,
keeping records, communication, purchasing of materials and equipment, personnel
management, warehousing etc ”

Online dictionary by Farlex defines ancillary as, “of secondary importance; auxiliary;
helping; subsidiary or supplementary”.
203
Business definitions section of Webster’s dictionary defines ancillary business as, “Of
or relating to something that is available but not essential. For example, a study guide
is one of several ancillary materials offered for many college textbooks”.

As per the Government Acts related to SSI Policy of 1970s and MSME Act 2006,
definition of Ancillary has gone through many reforms. Developments in definition of
ancillary units have been abridged m Table 6.3. In 1972, the government appointed a
committee for drafting legislation regarding small scale industries and classified it
into three categories (1) Tiny Unit Industry, (2) Small Scale Industry and (3)
Ancillary Industry. The policy and Act inferred that all ancillary units were supposed
to be engaged in the manufacture of parts, components, sub-assembles, toolings or
intermediate. Apart from these criteria, the SSI and MSME policies and Acts of the
Government of India proposed reforms related to investment limits and conditions
related to supply of production to large units.

Table 6.3: Developments in Definitions of Ancillary Units

YEAR INVESTMENT LIMITS ADDITIONAL CONDITIONS

1950 Upto Rs.5 lakhs in fixed assets Less than 50/100 persons with or
without power
1960 Upto Rs.5 lakhs in plant and No condition
machinery
1972 Capital investment in fixed assets Supply atleast 10% of their
does not exceed Rs. 10 lakhs production to one large unit and
50% to one or more large units
1974 investment in plant and machinery Proposes to supply 50% of its
not exceeding Rs.15 lakh production to one or more parent
units and further provided that it is
not a subsidiary to or controlled by
any large unit
1980 investments m fixed assets in plant Proposes to supply 50% of their
and machinery not exceeding Rs 25 production or the total services, as
lakhs the case may be to other units for
production of other articles

204
1985 investments in fixed assets m plant proposes to supply or render not less
and machinery not exceeding Rs.45 than 50 per cent of its production or
lakhs services, as the case may be, to one
or more other industrial
undertakings
1990 investment in fixed assets m plant proposes to supply or render not less
and machinery whether held on than 50 per cent of its production or
ownership terms or on lease or on services, as the case may be, to one
hire-purchase, does not exceed Rs or more other industrial
10 million undertakings
1997 Upto Rs.100 lakhs in plant and No condition
(Dec) machinery
Source: Panda S.C. (1996), “Entrepreneurship Development m Small Scale Industries,
Anmol Publications, New Delhi: 1st Edition: page 28

Thus, the definition related to ancillary industrial undertaking has been changing for
over five decades.

Till the Industrial Policy of 1990, an ancillary undertaking was defined separately and
was given a separate recognition. However, after the introduction of the Industrial
Policy of 1991, all industrial undertaking were divided into 3 categories namely large,
medium and small on the basis of their level of investment in plant and machinery
instead of their nature of work. Therefore, on the basis of the level of investment, an
ancillary unit could be a micro, a small, a medium or a large type of business unit.

6.1.3 Classification of Ancillary Units

In this section, classification of MSMEs is based on the following:

• Size

• Nature of activity

• Location and

205
 Ownership

According to Search Marketing, an online portal for small and micro professional
businesses in India, the size of the registered MSME sector in 2010-11 was 15,63,974
number of MSMEs. Following table 6.4 gives the percentage distribution these
registered MSMEs in 2010 under the above listed classification.

206
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Table 6.4: Percentage Distribution of Registered MSMEs in 2010

ahoxrm ohh
8006
Total number of Registered MSMEs 15,63,974
LOCATION (in %)

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45 23

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207
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Typically, each large business unit needs two types of ancillary services. One is
common to all industries and businesses m an industry and the other is industry or
business activity specific. This classification can be explained with the help of an
example m table 6.5,

Table 6.5: Types of Ancillary Business

INDUSTRY GENERAL ANCILLARY INDUSTRY SPECIFIC

BUSINESSES ANCILLARY BUSINESSES
TEXTILE Warehousing, transport, Fabnc, buttons, embroidery,
banking, insurance stitching, etc.
ENGINEERING Warehousing, transport, Components, welding, etc
banking, insurance
rr/ITES Banking Computer hardware

6.2 Business Structure of Small and Medium Enterprises

MSMEs are very typical m nature of functioning, management and governance

because of its size and financial strength. Most of the MSMEs are family owned
businesses across the world. Therefore, their functioning is quite limited to the
leadership of the head of the household. There is hardly any architecture found in its
structure. Most of the MSMEs have a simple, flat structure rather than a hierarchal
one. It is usually a ‘one man show’ and this single person, the entrepreneur or the
owner plays the role of marketing, HR, as well as finance head. Only those MSMEs
that are also involved m manufacturing may have a separate functional head to inspect
the day-to-day production activity. But even in this case, the owner has complete
involvement in the same and remains the final decision maker. Only when a firm
grows to become medium sized from small and become large from medium sized, the
structure get more and more hierarchal and less flat. Organizational structure of
MSMEs also depends on the type of business that they are involved in. For example,
trading firms have a flatter structure as compared to that at a manufactunng firm.
Most innovative firms have more developed organizational structures —in terms of

208
number of departments as compared to a routine activity firm (Sanchez and Mann,
2005; Camison, 1997).

Organizational structure concerns with work division (the distribution of tasks and
activities) and coordination mechanisms (this includes standardization and
formalization).

Studies on MSME organizational structures have also proved that the myth “small
firms are informal, unstructured and centralized” is untrue. Small firms that exhibit
specialization and centralized decision making have a more complex structure
(Meijaard et al. 2005). Meijaard, Brand and Mosselman (2005) proposed the
following nine typical organizational structures of SMEs:

a) Entrepreneur with a ‘submissive’ team (characterized by an authoritarian

entrepreneur and several quite independent employees)

b) Co-working boss with an open structure (is characterized by employees

that are highly involved m operational decision-making)

c) Entrepreneurial team (concerns firms characterized by employees closely

involved m strategic and operational decision-making)

d) Boss - loose control (concerns firms characterized by independent

employees that are relatively uncoordinated)

e) Boss - tight control (has few tasks and responsibilities defined beyond that
of the dominant entrepreneur-owner-decision maker)

f) Singular structure (has few divisional or functional departments. The

entrepreneur is important, not extremely dominant, yet employees have
limited leeway for self-coordination)

g) U-form (is simple, yet rather strongly hierarchical in structure)

h) Matrix organization (is flat, yet rather strongly functionally and

divisionally departmentalized)

209
 l) M-form (is hierarchically structured and departmentalised in divisions)

j) Existence of each of these structures, depend highly on performance m

terms of sales growth and profit and innovativeness.

Thus, to sum it up there can be either a formal structure or a central structure in

MSMEs. Most MSMEs that have a formal structure have basically six broad
functional areas defined by Latem (2009) as Research and Development, Sales,
Marketing, Customer Service, Finance and Administration.

6.3 Role of MSMEs in Economic Development of India

MSMEs are vital for economic growth and development because they encourage
entrepreneurship, generate employment, and reduce poverty (Kayanula and Quartey
2000; Mead and Liedholm 1998, Fischer 1995). MSMEs have contributed
to economic development by creating employment for rural and urban growing labor
force, providing desirable sustainability and innovation in the economy as a whole
(Curran, 2007). Moreover a large number of people rely on the micro, small and
medium enterprises directly or indirectly (Curran, 2007). MSMEs in India have
employed more labor-intensive production processes than large enterprises
(Leutkenhorst, 2004) Consequently, they have contributed significantly to the
provision of productive employment opportunities, the generation of income and,
eventually, the reduction of poverty (Jasra et. al. 2011). Accordmg to an online portal
- economywatch.com, the importance of MSME to India does not only revolve
around its contribution to employment and exports alone. Other features that make
MSME’s role very important to the economy are:

• Providing various items of daily use at affordable cost. There are more
than 30 million MSMEs spread out across the length and breadth of
India. They may be touching the lives of 123.4 million directly or
indirectly which is roughly 10% of India’s population (Lokhande,
2011).

• Leading to addition m output of goods and services to economy

• Providing a platform for low capital cost of establishment.

210
 • Facilitates fast decision making due to less staff and more control of an
entrepreneur.

• Availability of raw material at door step.

• Providing innovative products catering to the needs of the entire and

even especially of a particular region and

• Providing reduction m income disparities and an admirable

propagation ground for entrepreneurial talent.

• Promotes entrepreneurship. According to Banerjee (2008), “This is

perhaps the only segment of economy with such huge population of
risk taking entrepreneurs entering the fray annually; during 1980-84
period 0.1622 million or more entrepreneurs started up, during 1985-
90 similarly 0.3247 million or more and during 1991-96 period 0.4215
million or more entrepreneurs started up new ventures”.

The contribution of MSME sector (at 1999-2000 prices) m the GDP and total
industrial production of India during the last ten years is as per the table 6.6 below:

Table 6.6: Contribution of MSME Sector (at 1999-2000 prices) in the GDP and
Total Industrial Production

Year Contribution in Total Share in GDP

Industrial Production (in %)
(in %)
1999-2000 39 74 5.86
2000-2001 39.71 6.04
2001-2002 39.12 5.77
2002-2003 38.89 5.91
2003-2004 38.74 5.79
2004-2005 38 62 5.84
2005-2006 38.56 5.83
2006-2007 45.62 7.20

211
2007-2008 45.24 8.00
2008-2009 44.86 8.72
Source: Annual Report 2009-10 of MSME
*This includes medium enterprises in the sector after the enactment of micro, small
and medium enterprise development (MSMED) Act, 2006.

Thus, MSMEs are the major growing force behind the growing economy of India, in
terms of 10% contribution to the national GDP and 41% contribution to the industrial
production of total Indian economy.

Table 6.7 below, further justifies the importance of MSMEs in growth of Indian
economy by its increasing contribution in number of establishments, employment,
investment, production output, and export growth.

212
Table 6.7: MSMEs Performance: Units, Employment, Investment, Production and Exports

Sr. No. Year Total MSMEs Employment Fixed Production {Rs. Crore) Exports (Rs.
(Lakh Numbers) (Lakh Person) Investment (Rs. Current Prices Constant Prices Crore)
Crore) (1993 -1 9 9 4 )

1992-1993 73.51 174 84 109623 84413 92246 17784

(407) (5.33) (9 24) (4 71) (5.6) (28 10)

in
ON
1993 - 1994 76 49 182 64 98796 98796 25307

in
vo
cn
(17 04) (7 1) (42 30)

'w'
(4.07) (446)

O
3

O
ON
VO
n
1994 -1995 123790 122154 108774 29068

w
O n"
(4.07) (4.79) (23.64) (101) (14.86)

Tt
oo
00

"3-
1995 - 1996 197 93 125750 147712 121175 36470

00

CO
in
(4.07) (20 92) (11 40) (25.46)

m
1996 -1997 86.21 205.86 130560 167805 134892 39248
(407) (4.00) (3 82) (13.60) (11.32) (7.62)

VO
1997 - 1998 89.71 213 16 133242 187217 146262.9 44442
(4.07) (3.55) (205) (11 57) (8 43) (13.23)
1998 - 1999 93.36 220.55 135482 210454 157525.1 48979
00
vq

(4 07) (3 46) (12 41) (7.7) (10 21)

21B
 o
r-
orezz

NO
139982 54200

cn
97.15 170379 2

OQ
1999 - 2000

C4
(4.07) (3.88) (3.32) (11.07) (8.16) (10.66)

Os
2000 - 2001 101.1 238.73 146845 261297 1844014 69797
(4.07) (4.21) (4.90) (8.23) (28.78)

00 o

o
o
o
ri

©
cs
00
105.21 249.33 154349 195613 71244

o(N
(4.07) (4.44) (5.11) (8.03) (6,06) (2.07)
At 2001-2001 Prices
2002 - 2003 260.21 314850 306771 86013

i
109.49 162317

i—
(4.07) (4.36) (5 16) (11 54) (8.68) (20 73)
Z Y IL Z
2003 - 2004 113.95 170219 364547 336344 97644

<N
(4.07) (431) (4 87) (15 78) (9.64) (13 52)
124417

y—
2004 - 2005 118 59 28257 178699 429796 372938

cnt
(4 07) (4.11) (4.98) (17.90) (10.88) (27 42)
W P6Z
2005 - 2006 123.42 : 188113 | 497842 418884 150242

-efr
(4.07) (4.37) (5.27) (15.83) (15.83) (20.76)

s
tn
00

O
ot-*
182538

r—
2006 - 2007 594.61 709398 NA

<
(111.48) (101.62) (166 20) (42.49) NA (21.50)

**•
NO
2007 - 2008 272.79 626.34 558190 790759 NA 202017
(4.51) (5.34) (11.47) (11.47) NA (10 67)
o

■
N

#r-*
00
00
00

2008 - 2009 285.16 659.35 621753 NA 1NA

OQ

214
 (4.53) (5.35) (1139) (11.39) NA

**
693835 982919 NA NA

00
2009-10 298.08 695.38
(453) (5.47) (11.59) (11.59) NA
i_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Source. S&D Division - Office o f the D C (MSME)

The figures m brackets show the % growth over the previous year The data for the period up to 2005 - 2006 is only for small scale industries (SSI) Subsequent to 2005 -
2006, data with reference to micro, small and medium enterprises are being complied
** Projected
Table 6.7 above shows that the average growth of number of establishments (10%),
employment (10%), investment (15%), production output (15% at current prices) and
exports (19%) in MSMEs of India over the last two decades. However, it is noticed
that growth after 2005-06 (when micro enterprises were also included in the definition
of MSME) was remarkably more in each case of contributing items. This is because
of the sudden spurt in increase in the number of units in 2006-07 after the definition
increased the span types of units. Apart from this incident, the growth of MSMEs and
its contribution has remained consistent. Information of table 5.6 also supports this
statement. The following graphs (6.1 to 6.4) give a clearer idea on the growth pattern
of MSMEs on the basis of criteria given in table 6.7.

Graph 6.1: Number of Enterprises in MSME Sector

Source: MSME Annual Report 2009-10

* Projected data for the year 2007-08 and 2008-09.
** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 the number of MSMEs increased to 298.08 lacs (Source:

www.msme.itove.in accessed on 2 February 2012).

216
The following graph 6.2 depicts growth in employment generation by MSME sector.

Graph 6.2: Employment in MSME Sector

Employment
700
626.34
eoo
500

400
o 282 57 294 91
Z 300

200

TOO

2 0 0 8 -0 0 * *

Source: MSME Annual Report 2009-10

* Projected data for the year 2007-08 and 2008-09.
** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 employment in MSMEs increased to 695.38 lacs (Source:

www.msme.gove.in accessed on 2 February 2012).

The following graph 6.3 depicts the magnitude of fixed investment growth in MSME
sector.

Graph 6.3: Fixed Investment in MSME Sector

Source: MSME Annual Report 2009-10

* Projected data for the year 2007-08 and 2008-09.
** Data for 2004-05 and 2005-06 pertain to small scale industries only.
In 2009-10 fixed investment in MSMEs increased to rupees 693835 crores (Source:
www.msme.gove.in accessed on 2 February 2012).

217
The following graph 6.4 depicts Production Output growth in MSME sector.

Graph 6.4: Production in terms of Gross Output in MSME Sector

Source: MSME Annual Report 2009-10

* Projected data for the year 2007-08 and 2008-09.
** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 production in terms of gross output in MSMEs increased to rupees 982919

crores at current prices (Source: www.msme.gove.in accessed on 2 February 2012).

All the above criteria have shown an evidence of growth of MSMEs that has
contributed concretely to the overall economic growth and development of India.
Looking at the importance of MSMEs in economic growth and development of India,
the Government of India has taken initiatives to further boost the growth of MSMEs.
Government has taken steps to improve the functioning and growth of MSMEs since
the early Industrial Policy of 1970s. Table 5.4 shows that a huge number of MSMEs
(approximately 68%) are engaged in manufacturing, assembling and subcontracting
and (approximately 17%) are engaged in repair and maintenance type of work. Units
that are engaged in assembling, repair and maintenance, and subcontracting type of
work are called ancillary units. Banerjee (2008) highlights that according to Third All
India Census of Small Scale Industries 2001-2002, while the ancillary units constitute
of 3% of the Indian MSME sector. Considering the size of MSME sector in India, this
number is quite huge. Realizing the importance of ancillary units in terms of their
proportion, the Government of India has taken initiatives to assist their growth.

218
6.4 Government Provisions for Assistance to MSMEs - Ancillary Units

'Ancillary' developments have to be deemed as a mutually beneficial bipartite

arrangement between the parent and the ancillary units Over the last several years,
various measures have been taken by the government to promote a healthy
relationship between the ancillary small scale units and the parent unit. These
measures can be identified as under:

a) In 1980, the Industrial Policy statement recognized the ancillary units with
special emphasis on the development of rural and backward areas. The
investment ceiling was raised for SSI to Rs. 35 lakh and for ancillaries to Rs.
45 lakh in the Industrial Pohcy Statement of 1985 Thus, ancillanzation was
promoted in India.

b) In 1991, the Industrial Pohcy liberalized the controlled policy.

c) The Industrial Policy 1991 Statement has proposed setting up of a few

'nucleus' plants in each district identified as industrially backward to generate
as many ancillaries units as possible. The ‘nucleus’, plants would concentrate
on assembling the products of the ancillary units, producing the inputs needed
by them and making adequate marketing arrangements.

d) Under SSI pohcy, the programme of ancillansation included motivation of

public and private sector units to offload production of components, parts,
sub-assemblies, tools, intermediates, services etc., to ancillary units.

e) After 2005-06, the Ministry of MSME observed that about 98% of MSME
units in India have no channel partners or any connection with big industries
depicting that they are more or less independent entities. Therefore, for the
betterment of Indian MSME, ancillanzation was the foremost initiative of the
government of India along with other development activities (Biswas et.al.
2008). Therefore, to promote ancillary MSME units in India, the government
took the following steps:

o Inter-departmental teams set up to identify items which could be taken

up by ancillary units.
219
o Plant level committees asked to work out the details of ancillary
development programme, and 25 broad groups of industries have been
identified for intensive development

o The Bureau of Public Enterprises (BPE) has issued detailed guidelines

to the public sector undertakings spelling out the measures to be
adopted for the promotion of ancillary units.

o The government insists the parent units for assistance to ancillary

business units with regard to transfer of technology and in providing
necessary technical guidance and arrange supply of quality raw
materials so that the end-product of ancillary units comes up to the
requisite specifications.

o In order to provide help to ancillary units in regard of getting timely

payments from their parent units, an Act has been passed under which
interest is payable on the delayed payments by large undertakings. As
regards timely payments by the parent umt for purchases from the
small scale units, the RBI has since evolved some measures of part
payment in advance, from out of the accounts of the parent units with
the banks.

o Small Industry Development Organisation (SIDO), a nodal agency of

the Central Government and Ancillary Division, continued its function
for the promotion of ancillarisation programme in the country. For this
constant liaison has been maintained with Administrative Ministries
both at Central & State Levels, Department of Public enterprises,
public/private sector undertakings and other industrial developmental
agencies through various programmed such as Vendor Development
Programmes, Buyer- Sellers Meet, Ancillary Exhibition, Seminars,
Workshops, State Level Ancillary Advisory Meetings, Plant Level
Committee Meetings and PSUs and visit to public/pnvate sector
undertakings for the promotion of small ancillary & sub-contracting
units.

220
 o Sub-contracting Exchanges (SCX) are functioning as a part of major
SISIs in the country at important cities for the promotion of fruitful and
lasting contracts between large & medium undertakings and small
scale ancillary units. These SCXs organise contacts between large units
as buyers and ancillary units as sellers by way of organising Vendor
Development Programmes, Buyers and Sellers Meet and Exhibition,
etc.

o In new Industrial Policy 2009, stress has been given on the

development of ancillary industry in the country by strengthening
existing SCXs and setting up of new SCXs by industrial associations
and other non-Govemmental organizations.

o For providing advisory assistance, State Level Ancillary Advisory

committees have been set up in almost all the States to provide
infrastructural facilities and to recommend measures for the promotion
of ancillary industry in the State and to monitor the outcome of these
efforts. SLAACs have members from SISIs, State Industries
Departments, Industrial Associations, Large Undertakings, Industrial
Development Agencies, Banks and Financial Institutions etc.

f) In response to the problems of recession, credit challenges and variety of

regulations from centre, states and local governments faced by MSMEs, the
government came up with an enactment called Micro, Small & Medium
Enterprises Development Act (MSME) 2006. As a result of this Act, the sector
has become more competitive and innovative.

g) Ever since MSME Act 2006 has been enacted, the cluster development has
been the driving force with more and more assistance both to the formal as
well as non formal clusters flowing ranging from better infrastructure,
marketing assistance, fiscal stimulus, and host of other incentives including
better technology and global sourcing of raw material.

h) The special mention of NSIC who have assisted in capacity building as well as
technology up gradation, pooling for raw material and marketing on a pool
221
 basis, has built up stability and better pnce realization for MSME sector of
which ancillary units are also a part.

Thus, considering the importance of MSMEs shown in section 6.3 and the measure
taken by the Government of India for growth of ancillary MSMEs show in section
6.4, though the dictionary defines ancillary business as “of secondary importance”,
the fact remains that no business unit can grow without the existence of these units.
Ancillary business units, with the help of all their respective parents units and
government aid have managed to walk an extra mile m this competitive business
scenario.

6.5 Importance of MSMEs for the Survival and Grow th of Large Enterprises

Section 6.1 3 highlights that almost 17% of MSMEs are engaged in repair and
maintenance type of work and section highlights that ancillary unit constitute 3% of
the total MSME sector of India. Considering the large size of MSME sector, 3%
makes quite a huge number. It means these many ancillary units provide supporting
activities and services to the large scale business units in the Indian economy.
Therfore, the dependence of large enterprises on ancillary MSMEs cannot be ignored.
Generally speaking, supplier reliance and supplier retention, year on year, gives an
idea about dependence of large enterprises on ancillary MSMEs. Further, the ability
of these enterprises to negotiate rate at the supplier end is also an indicator of
dependence of large enterprises on ancillary MSMEs, The following points show the
different ways m which large enterprises are dependent on ancillary MSMEs for their
survival and growth.

• They provide repair and m aintenance support of machineries

(imported or non-imported) used by large manufacturing enterprises.

• They provide raw-m aterial to large enterprises.

• They fulfill innovation needs of large enterprises. For example,

ancillary units of Bharat Heavy Electricals Ltd (BHEL) at Tiruchi have
emerged as product designers for on-site (large enterprise clients)
fabncation of materials.

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 • At a macro level, they reduce overall unemployment by the way of
absorbing layoffs of manpower from large enterprises. SME gazelles
manage to absorb layoffs of manpower from large enterprises, thus
taking care of political and social ‘environmental conditions’ (McIntyre,
2001).

• Another way m which ancillary MSMEs are helpful to large enterprises

is being a source of adm inistrative and other business services. It is
very common to find large enterprises outsourcing their administrative
and other business services like housekeeping, training, maintenance,
accounting and collections, cafeteria, health-services, payroll and such to
MSMEs.

• MSME clusters are very helpful to larger enterprises in terms of

conducting subcontracting networks with firms of their respective
cluster. Tambunan (2005) is of an opinion MSMEs m the form of
clusters also have a positive effect on large enterprises.

Thus, it is the fundamental contribution of ancillary and other MSMEs to the overall
economic growth that indirectly affects the growth of large enterprises too. This in
turn, makes MSMEs mdispensible for survival and growth of large enterprises.

6.6 Weaknesses of MSMEs

According to Solomon (2012), “If India is to attain its aspiration of double-digit

growth rates and a reduced poverty ratio, greater focus on the well being of the Small
and Medium Enterprises (SME) sector becomes a necessity. According to AIMA
Study-August 2003, the constraints faced by the MSME’s have been observed as
follows.

• Market related 25 %

• Finance related 70%

• Government Policy related 12.78%

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 • Power related/ Infrastructure 14.0%

• Technology 14 6%”.

Solomon (2012) further assets that MSME sector in India has been confronted with an
increasingly competitive environment due to. (1) liberalisation of the investment
regime in the 1990s, favouring foreign direct investment (FDI); (2) the formation of
the World Trade Organisation (WTO) m 1995, forcing its member-countries
(including India) to drastically scale down quantitative and non-quantitative
restrictions on imports, and (3) domestic economic reforms. The cumulative impact of
all these developments is a remarkable transformation of the economic environment
in which small industry operates, implying that the sector has no option but to
'compete or perish'.

Some of the major issues and challenges of MSME growth and development are as
follows:

a) Personnel Issues

Very common problem that has been documented in case of MSMEs is

personnel issues. They face problems related to lack of technical manpower as
the most common personnel issues. While we have large pool of human
resources, this sector continues to face shortage of skilled manpower due to
lack of paying capacity and poor managerial capabilities. Another major
weakness is absence of marketing channels and brand building capacity.

b) Financial Issues

CARE in its latest report ‘Leading Small Industries, Performance and Growth
Potential” claims that the contribution of MSME’s to India’s GDP is expected
to increase to 30% by 2019-20 from its present 8% and this would not be
possible without addressing the funding constraint. Tagoe et al. (2005),
highlight that financial challenges faced by SMEs that include lack of long­
term funds and high interest rates for short term funds refrain SMEs from
growing. This is mainly because long term and short term funds are linked
with the business need of expanding, exploiting good growth opportunities,
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 increasing permanent working capital needs and replacement of obsolete
machines. The units being small in size also have poor access to equity and
credit. Most of the time, the equity is coming from savings and loans from
friends and relatives rather than through banking systems. Very often, the
credit is coming from operations or domestic savings rather than established
systems of cheap banking credit for working capital. This problem is
particularly acute for the village industries as well as the lower end of micro
industries. Credit availability remains one of the most major concerns. There
is a cyclical nature of availability of funds to the MSME sector. This is
determined by larger issues of international and domestic monetary policies,
fiscal policies and other parameters beyond the pale of the sector. In times of a
liquidity crunch, lack of liquidity in the financial system, even though caused
by external factors, can quite dry up the flow of credit to the sector. The most
major dependence of the sector is for the working capital requirement which
directly impacts their production cycle.

c) Lack of Technology Transfer

The sector is heterogeneous with pockets of high technology enterprises but

majority suffering from low technology base resulting in low productivity and
poor quality of products.

d) Lack of education in terms of policy, labour laws and government

schemes

The present structure also suffers from poor delivery of services at the field
level. The schemes and programmes have limited outreach with a large
number of very small schemes. There is a lack of coordination among the
various organisations involved in the promotion of MSMEs, including
orgamsations of the State/UT Governments and poor linkages with the
institutional stakeholders in the private sector. Absence of a suitable exit
mechanism is a major constraint for the higher end entrepreneurs of the
MSME sector.

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 e) Lack of fundamental mannerisms of doing business

One most common issue that hinders MSME growth is that the small business
owners lack the fundamental mannerisms of doing routine business. These
small things can really help them be big. For example they lack the art of
record keeping and building other infrastructure needs. Like it is done in large
enterprises, it is essential for small businesses to establish or update systems
for monitoring cash flow, tracking inventories and delivenes, managing
finances and tracking human resources information.

f) Lack of good Customer Service

Good customer service is often a significant factor in small business success,

but ironically it is also one of the first things that tend to fall by the wayside
when business growth takes on a hectic flavor.

g) Issues related to Ownership Arrangements

In many MSMEs, ownership arrangem ents that functioned fairly effectively

during the early stages of a firm’s life becomes increasingly problematic as
business issues become more complex and divergent philosophies emerge
after the firm is well established. These issues even worsen when the firm is a
family business. This may be because as the size of the firm grows, so does
the size of the cofounders family. Cofounders with young children may feel
pressure to spend more time at home, but their absence will significantly cut
their ability to make a continuous, valuable contribution to the firm’s growth.

h) Moreover, out of 2.6 crore MSMEs in India, a predominant number is still in

the unorganized sector, often located in non-conforming urban zones (Source:
online MSME Bulletin 2012). This leads to difficulties m purchase of inputs
such as raw materials, machinery and equipments, finance, consulting
services, new technology, highly skilled labor etc.

However, all these weaknesses can be covered up if there is a strong willingness on

behalf of the entrepreneur and an opportunity for the same.

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6.7 Survival and Growth Needs of MSMEs

MSMEs are important for achieving the national objective of growth with equity and
inclusion. Thus, it is important from them to grow and have a bright future. But this is
possible only if they are able to overcome the weakness listed in section 6.6. Most of
these weaknesses can be overcome with the help of two broad strengths - MSME
owner’s entrepreneurial abilities and government pohcy or intervention The factor of
entrepreneurial ability is unit specific. Only those units that are owned by
entrepreneurs with very high level of business development skills will experience
growth. The factor of government policy and intervention support small business
growth in the form a window of opportunity With this opportunity, the entrepreneur
plans to expand the business and take advantage of the current and prospective
marketshare. An online portal on small business expansion methods
(www.referenceforbusmess.com) suggests the following common routes of taking the
size of MSMEs from small to large:

1. Building organic growth

Organic growth can be built by developing a new product that gives the firm
the best understanding of the market and the product. By genuine
technological innovations, orgamc growth can be planned more meticulously.
It is more convenient since it is financed from the firms own cashflows along
with maintaining its own style of management and corporate culture. It can be
a method of expansion as the economies of scale can be achieved by efficient
use of head office functions such as finance, purchasing, personnel and
management services.

2. Growth through acquisition of another existing business(almost always

smaller in size)

3. Offering franchise ownership to other entrepreneurs

4. Licensing of intellectual property to third parties

5. Joining industry cooperatives to achieve savings in certain common areas of

operation, including advertising and purchasing
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 6. public stock offerings

7. Employee stock ownership plans

8. Spreading the costs and risks

Over and above these industry related and macro level methods of achieving growth,
MSMEs need to optimally utilize various business functions, so that they lead to
reduced costs and risks. Weaknesses related to business functional aspects can be
overcome by proper management of those business functions. These efforts of
MSMEs will lead to gaimng functional advantages that they can use for further
growth prospects in the following ways:
a. Marketing advantages
i. Buy in a new product range
ii. Buy a market presence
iii. Unify sales departments or to rationalize distribution and advertising
iv. Eliminate competition or to protect an existing market
b. Production advantage
i. Gain a higher utilization of production facilities
ii. Buy in technology and skills
in. Obtain greater production capacity
iv. Safeguard future supplies of raw materials
v. Improve purchasing by buying in bulk
c. Finance and management
i. Buy a high quality management team - which exists in the acquired
company
ii. Obtain cash resources where the company acquired is liquid
iii. Gam undervalued assets or surplus assets that can be sold off
iv. Obtain tax advantage

To overcome the basic weaknesses of record keeping and the similar, many software
programs currently available in the market can help small businesses implement
systems designed to address these recordkeeping requirements. In addition, growing

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enterprises often have to invest m more sophisticated communication systems in order
to provide adequate support to various business operations.
An overall mechanism to survive and grow should include strategies related to
marketing development, skill development, technology upgradation, infrastructure
development (may be with the help of state government and local authorities) and
looking for better options for availability of credit (Solomon, 2012).

Discussion and figures related to the overall status and performance of MSME sector
m India shows that MSME sector has been amply supported by the Government of
India. Information related to composition of SEZ (in chapter 4) and composition of
industry (in chapter 5) m India shows that most textile SEZs and ancillary units
belong to MSME sector. Thus, government assistance to the overall MSME has a
spillover effect on these textile SEZ and ancillary units, leading to then- individual
development and growth. On the other hand, the economic position of these textile
SEZ and ancillary umts has an impact on overall performance of MSME sector. Thus,
government provisions have an impact at macro as well as micro level of the industry.

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