MEDIUM SCALE ENTERPRISES AND INDIAN ECONOMY

A research paper submitted in partial fulfillment of the course Economics-I

for the requirements of the degree B.A.LL.B.(Hons.) for the academic session
2019-20.

Submitted By:

Name: Ananya Shukla

Roll Number: 1914

Submitted To:

Dr. Shivani Mohan

August, 2019

Chanakya National Law University, Nyaya Nagar, Mithapur, Patna-800001

 Acknowledgement
First of all I am very grateful to my subject teacher Dr. Shivani Mohan without the kind support
of whom and help the completion of the project would have been a herculean task for me. She
took out time from her busy schedule to help me to complete this project and suggested me from
where and how to collect data.

I acknowledge my family and friends who gave their valuable and meticulous advice which was
very useful and could not be ignored in writing the project. I want to convey most sincere thanks
to my faculties for helping me throughout the project.

Thereafter, I would also like to express my gratitude towards our seniors who played a vital role
in the compilation of this research work.

I would also like to express my gratitude towards the library staff of my college which assisted
me in acquiring the sources necessary for the compilation of my project.

Last, but not the least, I would like to thank the Almighty for obvious reasons.

Ananya Shukla

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 Declaration
I hereby declare that the work reported in the BA LL.B (Hons.) Project Report entitled “Medium
Scale Enterprises and Indian Economy” submitted at Chanakya National Law University, Patna
is an authentic record of my work carried out under the supervision of Dr. Shivani Mohan. I have
not submitted this work elsewhere for any other degree or diploma. I am fully responsible for the
contents of my Project Report.

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 Introduction
The Medium Scale Enterprises has emerged as a highly vibrant and dynamic sector of the Indian
economy over the last five decades. It contributes significantly in the economic and social
development of the country by fostering entrepreneurship and generating largest employment
opportunities at comparatively lower capital cost, next only to agriculture. Medium Scale
Enterprises are complementary to large industries as ancillary units and this sector contributes
significantly in the inclusive industrial development of the country. The Medium Scale Enterprises
are widening their domain across sectors of the economy, producing diverse range of products and
services to meet demands of domestic as well as global markets. An overview of the growth and
performance of Medium Scale Enterprises in the country is provided in the proposed research.
Ministry of Medium Scale Enterprises envisions a progressive the sector by promoting growth and
development of the Sector, including Khadi, Village and Coir Industries, in cooperation with
concerned Ministries/Departments, State Governments and other Stakeholders, through providing
support to existing enterprises, adopting cutting edge technologies and encouraging creation of
new enterprises. A number of statutory and non-statutory bodies work under the aegis of the
Ministry of Medium Scale Enterprise. These include the National Institute for Micro, Small and
Medium Enterprises (NIMSME) and Mahatma Gandhi Institute for Rural Industrialisation
(MGIRI). There are various schemes aimed at financial assistance, technology assistance and
upgradation, infrastructure development, skill development and training, enhancing
competitiveness and market assistance of the sector. Also the study includes the opportunities one
can avail while talking about the potential of the sector. The study makes an attempt to focus on
the huge growth potential and opportunities available in India for development of Medium Scale
Enterprises sector, to identify important issues and challenges and offer suggestions to address the
same.

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 Objectives
The objectives of the study are to briefly highlight on the functional scenario of Medium Scale
Enterprises in India, to focus on the huge growth potential and opportunities available for
development of this; to identify some important issues, challenges and constraints confronted by
these enterprises and to offer suggestions to overcome the same.

Hypothesis
The progress of Medium Scale Enterprises in India is better than the progress of Medium Scale
Enterprises in other Asian countries.

There is no direct relationship between investment and employment in Medium Scale Enterprises
in the Indian Economy.

The MSME Sector holds a pivotal role in the Indian employment industry.

Research Methodology
As the research work for this topic is confined to the library and books and no field work has been
done. Hence, researcher in this research work has opted the doctrinal methodology of research.
For doing the research work various sources have been used. Researcher in the research work has
relied upon the sources like various books and online materials as a source for the research.

Sources of Data
The researcher has used primary and secondary sources of data for the purpose of research.

Limitations of the Study

Area of limitations - Every study has own limitation due to the limited time, lack of sufficient
financial resources and limited area of survey/study of the subject matter.

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 Contents
Acknowledgement ...................................................................................................................... 2

Declaration .................................................................................................................................. 3

Introduction ................................................................................................................................. 4

Objectives ................................................................................................................................... 5

Hypothesis................................................................................................................................... 5

Research Methodology ............................................................................................................... 5

Sources of Data ........................................................................................................................... 5

Limitations of the Study.............................................................................................................. 5

1. Meaning and Definition of Medium Scale Enterprises ........................................................... 7

1.2. Medium Scale Enterprises in the Indian Economy .............................................................. 7

2. Opportunities for Growth ...................................................................................................... 10

3. Issues and Challenges ............................................................................................................ 11

4. Conclusion ............................................................................................................................. 13

5. Suggestions and Criticisms .................................................................................................... 14

Bibliography ............................................................................................................................. 15

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1. Meaning and Definition of Medium Scale Enterprises
Small and Medium Scale Enterprises are non-backup, free firms, which utilize not exactly a
fixed number of workers. This number is chosen by the nation, and along these lines differs
among different nations. Over the world, they are alluded to as the SMEs. Given their job in
business, they are viewed as significant for social and monetary benfits. The elements which
primarily decide if an organization is a SME are: 1) The number of personnel employed and 2)
either turnover or balance sheet total.

SME's are characterized diversely in various pieces of the world. Some utilization terms of
benefits, while others use work, deals or investors' assets as criteria to characterize SMEs, some
others utilize a mix of business and income as a joined basis. It is a well-discussed issue,
however the meaning of small and medium enterprises in India was as of late settled. The Micro,
Small and Medium Enterprises Act, 2006, characterizes enterprises based on interest in plant and
apparatus.

1.2. Medium Scale Enterprises in the Indian Economy

Development of SMES in India is administered by MSMED Act 2006. The enlistment under
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is for helping the
advancement, improvement and improving the aggressiveness of Micro, Small and Medium
enterprises. Enlistment of a firm under the Act is a way to profit the advantages accessible to
SMEs like easy finance availability from Banks, preference in acquiring Government tenders,
stamp duty and octroi benefits, concession in electricity bills, timely receipt of payments from
the buyers or debtors, reimbursement of ISO Certification expenses and so on.1 All segments and
classes of enterprises, in the case of Trading, Hindu undivided family, Service or Manufacturing,
Co-operative society, Partnership firm Proprietorship, Association of persons, Company or
Undertaking, can apply for the registration and get qualified for the benefits provided under the
Act.2

Micro, small and medium enterprises (MSMEs) have proven absolute resilience and power in
maintaining a regular fee of growth and employment generation in instances of world recession

1
https://www.necrc.in/SSI-registration.php
2
https://www.caclubindia.com/articles/all-about-msme-act-2006-opportunities-15687.asp

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and economic slowdown. Country’s economic system has shown a full-size increase overall
performance by way of contributing to introduction of livelihood opportunities to hundreds of
thousands of humans, enhancing the export potential and in increasing the general economy.
Prompt and suitable monetary stimulus, effective financial policy and huge capital inflows
performed vital roles in the bounce back scenario of the economy. As a catalyst for socio-
financial transformation of the country, this area is critical in addressing the national targets of
bridging the agricultural-city divide, lowering poverty and producing employment for tens of
millions. Thus, it is critical that India adopts a suitable policy framework that could provide the
needful impetus to capture the possibilities, and to hold the momentum of increase and holistic
improvement. It is likewise important that the MSME zone addresses the infrastructural
deficiencies and is empowered to meet the rising demanding situations for its sustainable growth
and survival in this kind of globally competitive order.

The Government 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:3

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

specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed
Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than
Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more
than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding
land and building and the items specified by the Ministry of Small Scale Industries vide its
notification No.S.O.1722 (E) dated October 5, 2006.

3
https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=966

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(b) Enterprises engaged in providing or rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fittings and other items not
directly related to the service rendered or as may be notified under the MSMED Act, 2006) are
specified below.

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10
lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10
lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2
crore but does not exceed Rs. 5 crore.

According to the Ministry of Micro, Small and Medium Scale Enterprises, the manufacturing
MSMEs are defined according to their capital investment, micro (less than Rs. 2.5 million), small
(between Rs. 2.5 to 50 million) and medium (between Rs 50 to 100 million).

The corresponding divisions for service MSMEs are: micro (less than 1 million), small (between
Rs. 1 to 20 million) and medium (between Rs. 20 to 50 million).

The last MSMEs census (2006-07) reported that there were 36.17 million MSMEs units
employing over 80 million people producing a gross output of Rs. 13.5 trillion.4

MSME has a crucial role to play in equitable development of India. The reports generated
annually by the Ministry of MSME present that 45% of the total Exports of the country are
assisted by the sector, and are manufacturing more than 6000 quality products, which indicates
the immense opportunities for growth and venturing its support in different sectors. The report
also indicates that most of the MSMEs are unregistered, and there are a total of 1.6 million
registered MSMEs in India.

4
https://msme.gov.in/

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2. Opportunities for Growth
MSMEs have provided substantial input to the economic development of India. The sector in
India holds the second position next to agriculture for generation of employment. This sector
accounts for about 95% of the industrial units, 45% of manufacturing output, 40% of exports
total exports of the country. These enterprises have better opportunities to grow as ancillary
industries to unleash higher industrial growth. MSMEs being more employment-friendly yet less
capital intensive, have easier access to raw materials, subsidies and other incentives under cluster
programs. India has ergo, huge growth potential to create and enhance the capacity of
enterprises, both in the manufacturing and service sector. There are great opportunities for the
MSMEs to grow as ancillary industries to unleash greater industrial growth. Development of
these sectors is therefore extremely important as it holds the key to inclusive growth and plays a
pivotal role in holistic development of the country.

India accounts for 22% of GDP, 33.8% population and 32.5% of the potential workforce in
developing Asia. And it is evident from the increased investment in infrastructure, abundant job
opportunities, emergence of a robust private sector with small and big companies/corporate
houses and high rise in consumerism. MSME sector in India has the potentialities to emerge as
the spine of the economy and continue as an engine of growth if provided an environment-
friendly policy framework and enabling infrastructural support are made available for its
functional operations. This sector consistently feeds the domestic and the international value
chain as manufacturers, suppliers, distributors, retailers, contractors and service providers by
accounting for a substantial part of our industrial units.

The plan for the development of MSME must include targeting towards an increase in the share
of their contribution from 85 to 15% by 2020, an increase in generation of employment avenues
up to 50%, an enhancement in MSME contribution in the key public and private industry sector
by meeting the growing domestic demand, indigenization and important substitution and growth
in foreign exports. The ‘Make in India’ by Government of has made a substantial impact in the
area of indigenization and would also attract sizable foreign investment. Similarly, the ‘Digital
India’ program offers opportunities to MSMEs to participate in the Information and
Communication Technology sector.

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3. Issues and Challenges
Irrespective of the key role which the MSMEs play in the economic growth and industrial
development, it faces certain constraints. There exists failure in addressing certain issues remain
properly and there are measures which are yet to be taken in the interest of sustainable industrial
development. The Committee on financial architecture of MSME sector in their Report
submitted in the February, 2015 have identified some key issues, which include; i)Equity as a
source of financing is underutilized and the prevalence of investment by venture capital and
angel investors is low, ii) MSMEs face the problem of delayed payments from their buyers
which adversely impacts their working capital as well as their next cycle of production, iii)
MSMEs lack adequate information about various schemes and benefits available by the
government, iv) Financial institutions/Banks face challenges in credit risk assessment of
MSMEs, v) The utilization of the available credit guarantee and insurance schemes by banks has
been low.5

Some of the major challenges confronted by these enterprises include:

 Lack of adequate credit and capital

One of the best demanding situations which constrain the boom of MSMEs pertains to
inadequate capital and credit centers. Easy and timely right of entry to credit is essential factor to
development and increase of corporations. The Report of the Working Group on Rehabilitation
of sick MSMEs by the Reserve Bank of India has diagnosed this case as an essential motive for
industrial sickness of this sector. Complex collaterals as a substitute by means of the banks,
bulky sanction procedures and delay in disbursement and excessive rate of interest on time
period loans in addition worsen the situation.

 Poor and inadequate infrastructural facilities

Deficiencies inside the infrastructure and negative aid facilities marked via inadequate access to
simple facilities like water, energy deliver, road and rail connectivity and so on adversely have
an effect on this zone and make a contribution to increase their operational price with the aid of
rendering the MSMEs less competitive in the challenging market situations.

5
http://www.businessworld.in/article/Role-Of-Indian-MSME-Sector-In-Steel-And-Economy/31-03-2019-168604/

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  Inadequate access and marketing linkages

Poor marketing linkages which are a result of inadequate Government support and patronage,
lack of adequate marketing infrastructure/ network facilities prove to be a challenge for
marketing and sale of MSME products. In non-cluster situations, these enterprises get separated
and thus become unable to ensure reduction in procurement cost from big companies and fail to
streamline the output-supply chain.

 Inadequate application of new technology

A lot of the industries require application of advanced technology in their operations whereas in
the context of our country, continuance of low technology base often results in low productivity
by making these enterprises uncompetitive in the ever-widening market contexts. Not only for
enhancing productivity and quality, new technology should also be adopted for an overall
transformation and providing a competitive edge.

 Lack of skilled human resources

Unavailability of skilled workforce and better managerial/entrepreneurial expertise at reasonable

cost close to the location of enterprises is another challenge for the MSMEs in our country. Lack
of managerial competence, absence of proper training on resource planning and capital
management etc. proves as hindrances to the growth of enterprises.

 Dilatory cumbersome regulatory practices

Cumbersome and dilatory regulatory clearances relating to sanction and disbursement of loans
from commercial banks, collateral securities/guarantees, for construction permits, resolving
insolvency and taxation etc. continue to be factors that constrain many MSMEs. The growth of
such enterprises is also affected by the absence of a common regulatory body and inadequate
provisions for start-ups.

Thus arises the need for strategic intervention which can improve coordination and linkages
between various stake-holders in the sector, which includes the Government, industries and other
agencies or associations who are working in this field.

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 4. Conclusion
MSMEs over the years have assumed greater significance in our burgeoning national economy
by contributing to employment generation and rural industrialization. This sector possesses
enough potential and possibilities to accelerate industrial growth in our developing economy and
with national programmes like ‘Make in India’, it garners the much needed support which can
ensure that the progress of these enterprises in India is better than in other Asian countries. The
government is aimed to increase the growth of manufacturing sector by 12 percent to 14 percent
per annum and to increase its share of GDP to 25 percent by 2025. The introduction of GST Bill
will help eradicate indirect taxes, brings in more transparency of tax process which will
significantly improve MSMEs.6

MSMEs employ 40% of India's workforce, which is estimated to be around 80 million people,
which give an opportunity for employment and livelihood through low skilled jobs. These 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.

In this project, the relationships among the employment, the growth rates of employment, and
investment, are investigated. It is also important to note that the investment and innovative
activities is able to contribute to an increase in employment. Also, the positive relationship
between growth in employment and investment growth implies that innovative activity promotes
development. Therefore, it may be important to increase physical(tangible) investment in order to
improve the growth potential of the economy. However, at the same time, the importance of
innovative investment is becoming more important because the major economies of the world are
transforming into an innovation-driven economy.
The weaknesses can be overcome with the help of two broad strengths – MSME owner’s
entrepreneurial abilities and government policy 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

6
https://www.goodreturns.in/classroom/2018/02/what-is-micro-small-medium-scale-enterprises-
india/articlecontent-pf10875-668731.html

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opportunity, the entrepreneur plans to expand the business and take advantage of the current and
prospective marketshare.

5. Suggestions and Criticisms

The worldwide and national policy adjustments have opened new opportunities and markets for
the SMEs in India. Integrated and unified attempt is required from the small enterprise and
authorities to apprehend and take in technological dynamism. Technological up-gradation,
Research and Development and encouragement of inter-company linkages need to be promoted
purposely and continually. Financial infrastructure wishes to be better and enough credit to the
world be made available contemplating the developing funding call for, globalization, increasing
opposition and the necessities of technological transformation. It is crucial to attend to the arena
to allow it to contribute closer to increase inside the Indian economy.

Though the performance of the MSME sector has been appreciable over the years in terms of
employment generation, growth of exports and in bringing about social transformation, a lot
more needs to be done for their constant growth and sustained development. The issues and
constraints which hinder their growth need to be identified and properly addressed. Some
suggestions to improve the performance of MSMEs can be easy access to finance and credit,
setting up infrastructural and support facilities, creation of adequate marketing linkages, skill
development and capacity building, access to modern tools and technology and policy
intervention.

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 Bibliography
 K. Vasanth Majumdar M.K. Krishna (2012) Innovative Marketing Strategies for Micro,
Small & Medium Enterprises Inter disciplinary Journal of Contemporary Research in
Business.
 Report of the Working Group on MSME Growth for 12th Five Year Plan (2012-17)
Ministry of MSME Government of India.
 Jeswal R. Role of SME in Indian Economy National Conference on Emerging Challenges
for Sustainable Business 2012 ISBN – 978-93-81583-46-3.
 www.businessworld.in
 m.economictimes.com/small-biz/sme-sector
 www.orfonline.org
 www.necrc.in
 www.caclubindia.com
 www.rbi.org.in
 msme.gov.in
 www.businessworld.in
 www.goodreturns.in

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