Executive Summary

SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly called as the backbone of the GDP of India. The SME sector in India is growing at an exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy. However, there are some important points that need to be considered for further development of the SME sector. The contribution of the SME sector to the entire output of country is 45%. Currently, there are over 26 million SME units in India that produces more than 6000 products. 90 % of the Industrial Units in India belong to the SME sector. These SME units contribute 40 % to the Indian Industrial Export. Some of the factors that have contributed to the growth of the SME sector in India: SME units in India are being funded by foreign and local fund providers. The advancement in technology has also contributed highly to the SME sector. There are numerous business directories and trade portals available online that contains a rich database of manufacturers, sellers and buyers To start and maintain these units, minimal investment is required. These SME units are now being funded by many government and private banks. The SME sector is one of the greatest contributors of domestic production as well as the export earnings. Many major mergers have taken place recently. Thought the sector is flourishing and expected to grow further in the near future, there are however certain challenges that the SME sector will have to face: Though the SME industries are spread all over the urban areas, proper infrastructure needs to be developed in the rural areas to establish these industries there. The SME units are functioning efficiently and effectively, but even now there is lack of information regarding the inputs of these industries, like the raw materials, skills, machinery and equipment. There is need of high level research and development required to develop these sectors in both the urban and rural areas. The SME sector is almost at the initial stage of its growth. With further advancements in technology, this sector is likely to grow further and contribute greatly to the economy of India. Some of the areas where the Small and Medium Enterprises are expected to grow are: Textiles/Readymade Garments (Including Footwear) Food Products/Processing Drugs and Pharmaceuticals (Including Chemicals and Chemical Products) IT and ITES (IT enabled services) Retail

Automobiles/ Automotive Components Service Sector Leather Industry Furniture/Wood Basic Metal/ Metal Products Rubber and Plastic Products Manufacturing/Engineering Design Precision Engineering

Chapter 1 : Introduction
Small industry has been one of the major planks 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 and vibrant and over time, these have become major contributors to the GDP. Despite numerous protection and policy measures for the past so many years, SMEs have remained mostly small, technologically backward and lacking in competitiveness. The opening of the Indian economy in 1991 added problems to the SMEs. At the beginning, small scale enterprises found it difficult to survive. In the last decade, the economic environment has changed in favour of SMEs. In this context, it is important to re-look into the basic issues of SMEs, past, present and future prospects, especially in the policy framework

1.1 Definition of the Small and Medium Enterprises

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes: (a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery. (b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under Particulars Investment in Plant & Machineries Investment in Equipment in case of in case of Manufacturing Service Sector Enterprises Enterprises Up to Rs. 25/- lacs Above Rs. 25/- lacs and up to Rs.500/- lacs Up to Rs.10/- lacs Above Rs.10/- lacs and upto Rs.200/lacs

Micro Enterprises Small Enterprises

Medium Enterprises

Above Rs.500/- lacs and up to Rs.1000/- lacs

Above Rs.200/- lacs and up to Rs.500/- lacs

Table 1- Classification of Micro, Small and Medium Enterprises as per MSME Act 2006

1.2 Importance of the Small and Medium Enterprises

SMEs are considered as the engine of economic growth in developed as well as developing countries as they : Provides low cost employment since the unit cost of persons employed is lower for SMEs than for large sized units. Assists in regional and local development since SMEs accelerate rural industrialization by linking it with more organized urban sector. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities. Contribute significantly to export revenues because of the low cost labour intensive nature of its products. Have a positive effect on the trade balance since SMEs generally use indigenous raw materials, reducing dependence on imported machinery, raw material or labour. Assist in fostering self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes. Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency. Firms with sales less than $1 million spend 2x - 3x more on R&D per $ of sales than the average. And result is SMEs producing 55 percent more innovations than LSEs Converts the raw material within the country into semi-finished items and later pass it on to the LSEs that have capital, skill and equipment to process these into finished goods. Provide rural people an opportunity for income generation and personal growth since they can work at home. This helps to achieve fair and equitable distribution of wealth by creating nationwide non-discriminatory job opportunities. Attracts direct foreign investment since multinationals and big conglomerates have started to outsource from countries with strong SME sectors. The low labour cost makes production osemi finished goods very economical for large concerns operating in international markets. The SMEs act as engines through which the growth objectives of developing countries can be achieved Advantages of SMEs The advantages of SMEs in an economy, be it labour intensive or otherwise are manifold. Therefore, the development of small and medium industries in any country has specific

effects on the balanced and dynamic growth of a country. It has a number of advantages over large scale industries. Some of these are mentioned below: It generates more jobs per unit of capital and is more capital efficient. Similarly it is also strongly integrated into the domestic economy. Small industries use a high percentage of local raw materials. Most of local consumable products are produced by small scale industries. It taps the resources at the grass root levels The promotion of Small and medium industries induces rapid growth of large scale manufacturing in the long run. It also generates cheaper goods and services to the general population which attempts to break the cycle of the ever increasing price hikes. The increased employment and the goods/services produced has a positive effect on the GNP of a country. This becomes a catalyst in breaking the poverty cycle. The small businesses are remarkably flexible because they operate near the customer, thus it has the ability to adapt according to the ever changing needs of the customer. By its less capital intensive and high labour absorption nature, SME sector has made significant contributions to employment generation and also to rural industrialisation. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. This is the opportune time to set up projects in the small-scale sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and the demand structures. The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units. The promotional and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bugbear of the sector has been the inadequacies in capital, technology and marketing. The process of liberalisation coupled with Government support will therefore, attract the infusion of just these things in the sector.

1.3 Contribution of SMEs to the 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 countrys GDP 45 per cent of the manufactured output 40 per cent of its exports 90 per cent of Industrial Units 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. 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. The opportunities of growth in the SMEs sector are enormous due to the following factors: 1. Less Capital Intensive 2. Extensive Promotion & Support by Government 3. Reservation for Exclusive Manufacture by small scale sector 4. Project Profiles 5. Funding - Finance & Subsidies 6. Machinery Procurement 7. Raw Material Procurement 8. Manpower Training 9. Technical & Managerial skills 10. Tooling & Testing support 11. Reservation for Exclusive Purchase by Government 12. Export Promotion 13. Growth in demand in the domestic market size due to overall economic growth 14. Increasing Export Potential for Indian products 15. Growth in Requirements for ancillary units due to the increase in number of green-field units coming up in the large scale sector. Table 2: Contribution of SMEs in different countries Country Share of total establishment 90% 98% 99% 97% 97% 90% 92% 99% Share of output 45% n.a. 52% 81% 32% 33% 13% 36% Share of Employment 45% 53% 72% 79% 58% 51% 17% 45% Share of exports 40% n.a. 13% 48% 16% 40% 15% 11% Criteria for recognition Fixed Assets Employment Employment Paid up Capital, Assets & Sales Fixed assets & Employment Employment Shareholders Funds & Employment Employment

India U.S.A. Japan Taiwan Singapore South Korea Malaysia Indonesia

SMEs sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification. By its less capital intensive and high labour absorption nature, SMEs sector has made significant contributions towards employment generation and rural industrialisation. SMEs sector in India creates largest employment opportunities for the Indian populace, next only to agriculture. Statistics from Ministry of Micro, Small & Medium Enterprises also reflect the growth trajectory of SSI industry in India. The number of SSI units has increased from 6.79 million in 1990-91 to 26 million in 2009-10 providing employment to more than 60 million people in India. SMEs Sector plays a major role in India's present export performance. 45%-50% of the Indian Exports is contributed by the sector. Direct exports from the sector account for nearly 40% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 10% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. The exports from SMEs sector have shown excellent growth rates in this decade. The product groups which dominate the exports from SMEs sector include sports goods, readymade garments, woollen garments and knitwear, plastic products, processed food and leather products. The SMEs sector is reorienting its export strategy towards the new trade regime being ushered in by the WTO. This sector is ideally suited to build on the strengths of the traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. This is the opportune time to set up projects in the sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and the demand structures. The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units. The promotional and protective policies of the Government of India have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bottleneck of the sector has been the inadequacies in capital, technology and marketing. The process of liberalisation coupled with Government support will therefore, attract the infusion of these in this sector. The capability of Indian MSME products to compete in international markets is reflected in its share of about 40% in national exports. In case of items like readymade garments, leather goods, processed foods, engineering items, the performance has been commendable both in terms of value and their share within the MSME sector while in some cases like sports goods they account for 100% share to the total exports of the sector. In view of this, export promotion from the small scale sector has been accorded high priority in India's export promotion strategy which includes simplification of procedures, incentives for higher production of exports, preferential treatments to MSMEs in the market development fund, simplification of duty drawback rules, etc. Products of MSME exporters are displayed in international exhibitions free of cost under SIDO Umbrella abroad. 7

1.4 SME Insights

As per the quick estimates of 4th All-India Census of MSMEs, the number of enterprises is estimated to be about 26 million and these provide employment to an estimated 60 million persons. Of the 26 million MSMEs, only 1.5 million are in the registered segment while the remaining 24.5 million (94%) are in the unregistered segment. The State-wise distribution of MSMEs show that more than 55% of these enterprises are in 6 States- Uttar Pradesh, Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh and Karnataka. About 7% of MSMEs are owned by women More than 94% of the MSMEs are proprietorships or partnerships. MSMEs in the country manufacture over 6,000 products. Some of the major subsectors in terms of manufacturing output are: Table 3: Major Subsectors of SMEs (in terms of Manufactured Output) Product Food Products Textile and Readymade Garments Basic Metal Chemicals and Chemical Products Metal Products Machinery and Equipment Transport Equipment Rubber and Plastic Products Furniture Paper and Paper Products Leather and Leather Products % of Manufactured Output 18.97 % 14.05 % 8.81 % 7.55 % 7.52 % 6.35 % 4.5 % 3.9 % 2.62 % 2.03 % 1.98 %

Source: Publication PMs Task Force on MSME, 2010 on www.msme.gov.in In view of the MSME sectors 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 sectors 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 (NMCP), launching of Prime Ministers 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. hese 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 countrys 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

(b) Enterprises with market linkages (Sub-Contracting)

Promotion of sub-contracting has been one of the important ingredients of the policy envisaged for the development of MSMEs in the country. Several measures have been taken by the Government towards this endeavour such as ancilliarisation, vendor development programmes, buyer-seller meets, etc. This has resulted in a significant number of micro and small enterprises operating under some system of sub-contracting with large enterprises. Such arrangements has not only helped in providing marketing linkages but has also resulted in technological linkages through provision of product specification and design. However, in view of the dependent relationship of such enterprises with the large enterprise, they also face several problems. Some of the major problems include: (i) Considerable delays in payments; 9

(ii) Uncertainty in case of rejection, the small firms end up with practically no option but to dispose off their products (iii) Linkages such as financial and supply of raw material are seldom provided by the buyer enterprises (iv) Buyer enterprises are not bothered to ensure that such enterprises operate with minimum working conditions or comply with various regulations related to their working. In the present globalized regime, there is an increasing pressure on industries to reduce costs to withstand the domestic as well as international competition. Sub-contracting offers significant scope for cost reduction and may lead to higher incidence of sub-contracting among micro and small enterprises. It is, therefore, important to address the constraints faced by the enterprises operating under such arrangements. While the MSMED Act, 2006 provides for more rigorous provisions to counter the problems of delayed payments to the MSEs, the sense of insecurity of contract prevents them from taking legal action for recovery of dues. The MSE Facilitation Councils constituted in the States have to become more active to help MSEs in quick resolution of disputes relating to delayed payments. Further, the MSMEs need to be supported through appropriate programmes/schemes with focus on skill development and technology upgradation for improving the quality of their products so that rate of rejection is minimized. Also, there is a need to provide enabling legal environment by suitably amending the labour and urban zoning laws that is conducive to setting up of new enterprises as well as functioning of existing enterprises.

(c) Unorganized Sector Enterprises

No discussion on MSMEs can be complete without a full treatment of the unorganized sector in which enterprises are typically established through own funds or funds obtained through non-institutional sources, they lack managerial bandwidth, do not have established channels for marketing and are centered around a single traditional technology. More than 94 per cent of MSMEs are unregistered, with a large number established in the informal or unorganized sector. The National Commission for Enterprises in the Unorganised Sector (NCEUS) defines unorganized sector as enterprise employing less than 10 workers. It has estimated such enterprises at 58 million with employment generated of 104 million persons. Of these, more than half the workers are classified as self-employed. A large segment in this universe of self-employed consists of those who are engaged in non-farm activities. This segment predominantly consists of own account enterprises, i.e., where there are no hired workers and are run by self with or without the help of unpaid family members. The own account enterprises can be distinguished into those running within households and those outside the households. The household enterprises operate on the basis of family labour organizing production on its own, acquire its own raw material, use its own machinery and tools and market its products. Apart from own account enterprises, this segment also consists of enterprises having hired workers between 2 to 9. Very often, these enterprises are located in clusters but function independently without inter-firm linkages. Shortage of capital, particularly working capital, is the major problem faced by the

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enterprises in the unorganized sector. Further, the field studies undertaken by NCEUS indicate that seasonality of markets is another major problem faced by them. Although enterprises in the unorganized sector do not report skill shortages as a major constraint may be because skilled workers demand higher pay, leave to work for competitors or establish enterprises themselves it remains a serious barrier towards their upgradation/modernization. A similar situation exists for technology upgradation market uncertainties, lack of information, etc have resulted in poor adoption of even the available technologies by the enterprises in the unorganized sector. Table 4: Percentage of SMEs in Exports of Various Goods Product Sports Goods Ready Garments Woolen Garments, Knitwear Processed Foods Marine Products Leather Products Plastic Products Cosmetics, Basic Chemicals & Pharmaceutical Products Engineering Goods % of SMEs in Exports 100 % 90 % 35 % 65 % 29 % 80 % 45 % 55 % 30 %

1.5 Problems/Challenges faced by SMEs

Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are briefly indicated below: Lack of availability of adequate and timely credit; High cost of credit; Collateral requirements; Limited access to equity capital; Problems in supply to government departments and agencies; Procurement of raw materials at a competitive cost; Problems of storage, designing, packaging and product display; Lack of access to global markets; Inadequate infrastructure facilities, including power, water, roads, etc. Low technology levels and lack of access to modern technology; Lack of skilled manpower for manufacturing, services, marketing, etc. Multiplicity of labour laws and complicated procedures associated with compliance of such laws; 11

 Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable entities to close down speedily; and Issues relating to taxation, both direct and indirect, and procedures thereof. Identification of new markets

1.6 Changes in Industrial policy over the years

1948 Policy Statement - The Industrial Policy Resolution of 1948, which marked the evolution of Indian Industrial Policy, outlined the broad contours of the policy and defined the role of the state in industrial development both as an entrepreneur and a regulatory authority. In order to optimize the utilization of scarce resources and reduce the threat of recolonization by the multinationals, centralized planning was adopted with wide ranging controls on private trade, investment, land ownership and foreign exchange. The foundations of the policy for the small scale industry were laid in the Second Five Year Plan. In 1956, the government announced its second industrial policy which unambiguously chose equity as the guiding principle for small industry development. The operative statement says: small scale industries provide immediate large scale employment, offer a method of ensuing a more equitable distribution of national income and facilitate an effective mobilization of resources of capital and skill which might otherwise remain unutilized 1977 Policy Statement - A high watermark in the evolution of the policy for small industry was the Industrial Policy Statement of 1977. It was then that the protection of small industry touched its acme; the guarded initiatives of earlier years were cast aside by a heightened zeal for an expanded role for this sector, in particular, the reservation of products for exclusive manufacturing by the small industry, begun in 1967, was greatly extended to many more products. The important planks of the 1977 industrial policy statement were: * Whatever can be produced by small, cottage industries must only be so produced * The number of products reserved for SSI was increased from 180 to 504 and further to 836 items in 1986. * Special attention to be given to the `Tiny Sector defined as enterprises with investment in plant and machinery of upto Rs. 1 lakh and situated in towns and in villages with population less than 50,000 * Special Legislation will be introduced to give due recognition and adequate protection to the self-employed in cottage and household industries. * The focal point of development for small sector and cottage industries will be taken away from big cities and state capitals to the district headquarters. In each district, there will be one agency to deal with all requirements of small and village industries. This will be called District Industries Center. * Special arrangements for marketing of the products of Small Scale Sector will be made by providing services such as product standardization, quality control, marketing surveys, etc. 1980 Policy Statement - The recognition of the importance of ancillary industry found expression in the policy statement of 1980 which laid emphasis on ancillaries. Moreover, the program for the development of rural and backward areas was accelerated.

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The Industrial Policy Statement of 1985 made incremental changes and took into account the impact of inflation. The investment ceiling for SSI was raised to Rs. 35 lakh and for ancillaries to Rs. 45 lakh 1991 Policy Statement - The Industrial Policy of July 1991 marks a conscious shift from the regulated and controlled policy to a liberal one. Most of the medium and large industrial units, with a few exceptions, would no longer need licenses. Full foreign ownership will henceforth be possible in export oriented enterprises. Import of capital goods has been significantly made free from restrictions. Foreign equity participation is also encouraged. The openness that has come with the ongoing economic reform process during the last five years has hastened several changes and the debate has shifted from the 'whys' to 'hows' indicating high level of acceptability of the reform process. With the lifting of several trade and investment related restrictions, India is witnessing a mini-revolution in its economic growth faced with the challenges of global market and competitiveness.

1.7 SME Clusters

A cluster is a sector targeted geographical concentration of micro and/ or small & medium enterprises service providers and institutions faced with common opportunities and threats. In other words, a cluster of MSMEs is a concentration of economic enterprises, producing a typical product/service or a complementary range of products/services within a geographical area. The location of such enterprises can span over a few villages, a town or a city and its surrounding areas. Thus a cluster of MSMEs, hereafter referred to as cluster, is identified by the product/service that the micro and small enterprises produce and the place where the enterprises are located. Foundation for MSME Clusters assists institutions in undertaking cluster based local area development. Features of Cluster:

Give rise to collective benefits, for example through the spontaneous inflow of suppliers of raw materials, components and machinery or the availability of workers with sector specific skills. Favour the creation of providers of specialised technical, administrative and financial services. Create a conducive environment for the development of inter-firm co-operation as well as of co-operation among public and private institutions to promote local production, innovation and collective learning.

Around 636 SME (industrial) and 6000 artisan/micro enterprises clusters are estimated to exist in India. The micro and SME clusters in India are estimated to have a significantly high share in employment generation. A way of categorizing the clusters depends upon the type of relationship amongst the constituents of a cluster which may be important for the establishment and growth of not only an individual enterprise but also for the entire cluster. Such relations are dependent on i) the

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nature of production processes, ii) the policies of the government that may regulate the entry of firms into the market and thus their competition with medium & large firms and iii) on how the relationship it may have evolved over a period of time. Based on these relationships, the clusters can be classified as : Horizontal clusters: This type of cluster is characterized by units which process the raw material to produce and subsequently market the finished product themselves. Some of their examples are sports goods in Jallandhar, agricultural pumps cluster in Coimbatore etc. This may indicate the individualistic approach to business in clusters or no scope for division of units, as the different stages of production are confined to a unit itself. Large Unit Based: A cluster which is established around a large unit or a few large units is called a large-unit based cluster. The relationship that exists between the small and the large units could be based on supply of some of the critical raw materials from large enterprises or on their working as subcontractors to the large firms which means they are either backward linked or forward linked. Development of a cluster of ancillary units is one of the examples of large unit based clusters. However, even where the large firms have their strong presence, their relationship with small firms within the cluster may or may not be healthy and long term oriented as has been witnessed in the case of automotive components industry except in the case of Maruti Udyog Ltd. Small firms in such clusters therefore tend to shift to products with wider application or for the product for replacement markets through trader intermediaries, thus shifting to horizontal linkages rather than vertical ones. They could also undertake to produce the final product by developing trading and non trading links among themselves depending upon whether it could technically be feasible to do so. Vertically integrated clusters: In vertical clusters the operations required in producing the finished product are divided and are carried out separately by different units, most of which are essentially SMEs, in order to distinguish from the large unit based clusters. Since a mixed character may emerge in several clusters, it may be a possible to develop an indicator that if more than half of the SMEs in particular cluster are large unit based, it could be called large munit based cluster. However, we have preferred to keep the mixed character a separate classification. There is a high degree of inter-dependence among the small firms in the vertically integrated clusters.This is usually witnessed in the case of hosiery, textile processing and metal products, in all of which it is possible to split the production process and farm out to separate firms due to non perishable character of the product. Second, this becomes feasible if it requires a degree of specialization for each of the processes involved. This phenomenon may also be witnessed due to splitting up of units to remain small for easy management, for escaping labor regulations that come into force when the firm grows to become large and/or to enjoy the policy related advantages that the small firms are entitled to. Example

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The major SME clusters in Punjab 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Rice Mills: Amritsar Shoddy Yarn, Powerloom: Amritsar Steel Re-rolling: Mandi, Govindgarh Machine Tools: Batala Rice Mills: Batala, Gurdaspur Castings & Forging: Batala Sports Goods: Jalandhar Agricultural Implements, Hand tools: Jalandhar Rubber Goods: Jalandhar Wooden Furniture: Kartarpur Rice Mills: Kapurthala, Sangrur Diesel Engines: Phagwara Auto Components, Electroplating: Ludhiana Bicycle Parts: Ludhiana Agricultural Implements, Cutting Tools: Patiala

The SME clusters are well connected through roads, railways and air transport. Public Works Department Building and Roads branch has been responsible for assets of State Government in terms of roads, bridges and buildings. The length of the rail routes passing through the State is around 3,726.06 km. Rail communication with Pakistan also emanates from Punjab (Amritsar). There are Four Civil Aviation Clubs at Ludhiana, Patiala, Amritsar and Jalandhar, one domestic airport at Chandigarh; International Airport at Rajasansi (Amritsar) and two aerodromes at Patiala and Sahnewal (Ludhiana). The major SME clusters in Rajasthan: 1. 2. 3. 4. 5. 6. 7. 8. Oil Mills: Alwar, S. Madhopur Bharatpur belt Marble Slabs: Kishangarh Chemicals: Alwar Plaster of Paris: Bikaner Sand Stone: Mahuwa Food Processing: Ganganagar Gems & Jewellery: Jaipur Wooden Furniture: Shikhawati

The major SME clusters in Jammu and Kashmir: 1. 2. 3. 4. Cricket Bats: Anantnag Steel Re-rolling: Jammu Oil Mills, Rice Mills: Jammu/ Kathua Timber Joinery/ Furniture: Srinagar

The major SME clusters in Gujarat: 15

1. Readymade Garments, Textile Machinery Parts: Ahmedabad 2. Diamond Processing, Machine Tools, Castings & Forging, Steel Utensils, Wood Product & Furniture, Paper Products: Ahmedabad 3. Electronic Goods: Ahmedabad 4. Auto Parts, Auto components: Ahmedabad 5. Weights & Measures: Savarkundla 6. Oil Mills Machinery: Amrelli Juna Garh Rajkot belt 7. Steel re-rolling, Machine Tools, Plastic processing, Moulded Plastic Products, Diamond Processing: Ahmedabad, Bhavnagar 8. Powerloom: Kalol 9. Brass Parts, Wood Product & Furniture: Jamnagar 10. Cotton Cloth Weaving: Vijapur 11. Wall Clocks: Morvi 12. Diesel Engines, Electric Motors, Machine Tools, Diamond Processing: Rajkot, Surat, Choryasi 13. Dyes & Intermediates, Chemicals, Pharmaceuticals- Bulk Drugs: Ahmedabad, Vapi/Ankleshwar

Chapter 2 Auto-Component Industry

2.1 Overview of the Auto-Component Industry
The Indian auto component industry has been navigating through a period of rapid changes with great lan. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweeping ramifications for the industry. The global auto components industry is estimated at US$1.2

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trillion. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015. The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. Indias processengineering skills, applied to re-designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers. Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and setting up greenfield ventures, R&D facilities and design capabilities. Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros. The Indias Top 500 Companies, published by Dun & Bradstreet in 2006, listed 22 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the process of making a mark on the global arena, and some have already acquired assets abroad. The range of products manufactured, with each broad product segment having a different market structure and technology, has negated any possible concentration of the market in a few hands. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. However, there are a select few large companies that have integrated their operations across the value chain. The key to competing in this industry is through specialisation by product-type, and integrating operations across the related area of specialisation.

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Figure 1 Segments of Auto Component Products An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMs constituting 33%, local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. A large part of the spurious or grey market companies are in the unorganised sector. The regional base of auto component manufacturers is mostly concentrated in the West, North and South of India.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions. The set up of Tata Motors, Bajaj, Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South, whilst the entry of Maruti during the 1980s created the base in the North.

2.2 SMEs in the Auto-Component Industry

The division of production processes and outsourcing among global automobile manufacturers has led to a major reorganisation of the supply base within the automobile and auto component industry. This new business model being followed by global companies holds tremendous potential for the growth of small and medium enterprises (SMEs) in India. Auto component SMEs are one of the fastest growing within the SME category of industries. These units are key contributors to the total production of auto components and also have a significant share in the exports of the industry. As part of a highly fragmented industry, these companies mostly are part of the unorganised sector. They operate in a tier framework, and most of the companies in the SME segment are in the Tier II or below. Few of the suppliers to OEMs are medium scale enterprises.

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The SMEs are riding a boom phase, driven by demand from global auto manufacturers. The industry is undergoing a major restructuring and many existing companies are expected to move up in the value chain to a higher tier. Nevertheless, sustenance and survival still remains an issue of concern for these companies as they will have to absorb global best practices in this competitive environment. Cost competitiveness, customer orientation, lead time, are some key factors the auto component SMEs will have to imbibe to survive in the new global set-up. At the same time, these companies face the limitations of being SMEs, like

Low capital base Limited generation of surplus funds for re-investment due to tight working capital cycle Lack of awareness of business opportunities Inadequate exposure to international environment Limited geographical diversity of markets Obsolete Technology Poor infrastructure facilities

Despite these limitations, the SMEs have managed to significantly contribute towards development of Indias industrial base. The key risks that the auto component SMEs faces include:

Fluctuations in the cost of production; especially raw materials like steel, aluminium, polymers Poor negotiation powers due to fragmented nature of industry; which in turn limits their pricing power Dependence on traders and agents to access overseas markets which threatens their competitiveness Product substitutes due to fast-changing technology

Addressing these challenges and risks will be crucial to promoting SMEs in the auto component industry. The government has initiated cluster-based development geographical concentration of enterprises having similar lines of business which gives rise to external economies and favours emergence of specialised technical, administrative and financial services. This form of networking of small firms is a means of achieving economies of scale. Extending this intitiative further, the government is encouraging banks to adopt a cluster-based lending approach to ease availability of funds to SMEs. Multinational automobile manufacturers like Magna International of Canada, Delphi and Ford of US and some European companies have announced plans to enter the Indian markets. This bodes well for the auto component industry as it would enable the collective development auto component SMEs. This will bring in better technology, skills, new products and an assured market. Strategic tie-ups and contract manufacturing is another way forward for SMEs in the auto component industry.

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Looking forward, it is the best of times for Indian auto component manufacturers. The outlook for the industry is bright and is expected to continue on a high-growth trajectory for the next 10 years. Capitalising on this growth prospect will mean keeping pace with global developments and imbibing capabilities that will give an edge to Indian SMEs in surviving this rapidly changing competitive environment. Table 5 State-Wise Distribution Auto Component Clusters in India State No. Andhra Pradesh 1 Delhi 1 Gujarat 5 Haryana 3 Jharkhand 1 Karnataka 2 Maharashtra 5 Madhya Pradesh 1 Punjab 4 Tamil Nadu 1

2.3 SME insights

Figure 2

20

Figure 3

Figure 4

Figure 5

21

Figure 6

Figure 7

22

Figure 8

Figure 9

Figure 10

23

2.4 Future Outlook

The factors that will drive growth for the auto component industry are: The growth expected in the domestic automobile industry will give a fillip to the auto component sector. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles, especially passenger cars and two wheelers. These two segments are estimated to grow at between 10-12% for at least the next five years. The entry of global OEMs, making India as their manufacturing base, has given a big boost to the industry. For instance, Skoda plans to source parts for its European operations from its Indian base and raise indigenisation level for Indian models to 70%. This trend has also enabled Indian companies to gain a competitive edge in the global market. Further, the model of cluster-based development prominent in this sector will provide economies of scale. Export of automobiles has also emerged as a key component of growth. Rising exports of Indian-made vehicles like M&Ms Scorpio model, Bajaj Autos Bikes, Tata Motors City Rover are indirectly increasing the demand for Indian auto components. Also, the export of India-made models of global OEMs like Hyundais Santro Xing and Suzukis Alto has given a boost to the industry. De-regulation and the Governments policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Also, the Governments initiative towards road development will give a boost to demand for vehicles and indirectly auto components. The Governments initiatives towards opening up channels of finance. Investments coming in for research and development will keep the industry abreast of the latest technology.

These factors portend a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises. Extending their reach to global markets is the pre-dominant outlook among the top auto component manufacturers in the country. The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. Some features are:

Cost reduction of 25-30% in production in the domestic market compared to overseas Low labour costs Designing, engineering and technical skills Established quality systems Availability of raw materials Adaptability to new technology Investments in research and development, coming in from global OEMs. This stands out positively in favour of India. Key players are not only willing to invest in R&D but also in mechanical and engineering operations. These investments are expected to increase in the near future

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Though India rides on these inherent strengths, a few risks exist that the auto component manufacturers may have to confront

A global slowdown can derail the prospects of the industry. Volatility in the prices of metals and other inputs could erode the industrys cost competitiveness. Further, global OEMs expect a commitment of 5-10% reduction in prices every year. Tier I manufacturers taking up greenfield projects overseas. Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers.

Figure 11 The overall trend is encouraging, but remaining competitive in this changing scenario will be the toughest challenge. Expansion and diversification will help break into new markets. The SMEs can exploit these opportunities through joint ventures, collaboration and technical tie ups. Knowledge, specialisation, innovation and networking will determine the success of the SMEs in this globally competitive environment.

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Chapter 3 Textile Industry

3.1 Overview of the Textile Industry
The Indian textile industry is one the largest and oldest sectors in the country and among the most important in the economy in terms of output, investment and employment. The sector employs nearly 35 million people and after agriculture, is the second-highest employer in the country. Its importance is underlined by the fact that it accounts for around 4% of Gross Domestic Product, 14% of industrial production, 9% of excise collections, 18% of employment in the industrial sector, and 16% of the countrys total exports earnings. With direct linkages to the rural economy and the agriculture sector, it has been estimated that one of every six households in the country depends on this sector, either directly or indirectly, for its livelihood. A strong raw material production base, a vast pool of skilled and unskilled personnel, cheap labour, good export potential and low import content are some of the salient features of the Indian textile industry. This is a traditional, robust, well-established industry, enjoying considerable demand in the domestic as well as global markets. India vis--vis Global Textiles The global textile and clothing industry is estimated to be worth about US$ 4,395 bn and currently global trade in textiles and clothing stands at around US$ 360 bn. The US market is the largest, estimated to be growing at 5% per year, and in combination with the EU nations, accounts for 64% of clothing consumption. The Indian textile industry is valued at US$ 36 bn with exports totalling US$ 17 bn in 20052006. At the global level, Indias textile exports account for just 4.72% of global textile and clothing exports. The export basket includes a wide range of items including cotton yarn and fabrics, man-made yarn and fabrics, wool and silk fabrics, made-ups and a variety of garments. Quota constraints and shortcomings in producing value-added fabrics and garments and the absence of contemporary design facilities are some of the challenges that have impacted textile exports from India. Indias presence in the international market is significant in the areas of fabrics and yarn. India is the largest exporter of yarn in the international market and has a share of 25% in world cotton yarn exports India accounts for 12% of the worlds production of textile fibres and yarn In terms of spindleage, the Indian textile industry is ranked second, after China, and accounts for 23% of the worlds spindle capacity Around 6% of global rotor capacity is in India The country has the highest loom capacity, including handlooms, with a share of 61% in world loomage.

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The fibre and yarn-specific configuration of the textile industry includes almost all types of textile fibres, encompassing natural fibres such as cotton, jute, silk and wool; synthetic / man-made fibres such as polyester, viscose, nylon, acrylic and polypropylene (PP) as well as multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). The type of yarn used is dictated by the end product being manufactured. It is well-established that India possesses a natural advantage in terms of raw material availability. India is the largest producer of jute, the second-largest producer of silk, the third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of synthetic fibres/yarn. Nonetheless, overall cloth production in the country has been growing at 3.5% per annum since 2000, with growth driven largely by the powerloom sector. Being the largest manufacturer of fabric in the country, the powerloom sector produces a wide variety of cloth, both grey as well as processed. According to the Ministry of Textiles, there are 1.923 mn powerlooms in the country distributed over 430,000 units. The sector accounts for 63% of the total cloth production in the country and provides employment to 4.815 mn people. Government Initiatives A major boost to the 1999-established Technology Upgradation Fund Scheme for its longevity through a Rs 4.35 bn allocation with 10% capital subsidies for the textile processing sector Initiation of cluster development for handloom sector Availability of health insurance package to 0.2 mn weavers from 0.02 mn initially Reduction in customs duty from 20% to 15% for fibres, yarns, intermediates, fabrics and garments; from 20% to 10% on textile machinery and from 24% to 16% in excise duty for polyester oriented yarn/polyester yarn Reduction in corporate tax rate from 35% to 30% with 10% surcharge Reduction in depreciation rate on plant and machinery from 25% to 15% Inclusion of polyster texturisers under the optimal CENVAT rate of 8%

3.2 SMEs in the Textile Industry

The phasing out of the international quota system is a major turning point for the Indian textile industry an opportunity and a threat. The textile industry is among the SME intensive sectors in India, largely an outcome of government policies during the early years of Independence. Focusing on promoting domestic employment, large-scale production in the textile industry was curtailed through restrictions on total capacity and level of mechanisation. Several textile items were reserved for the small scale segment. These policies promoted the extensive growth of small scale textile enterprises that were highly labour intensive, though it eroded the competitiveness of the industry and acted as a disincentive for capital investment.

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These policies -- pursued from the 1950s to the 1970s -- resulted in the dominance of the decentralised powerloom and handloom sectors in the textile industry, which are mainly small and medium scale enterprises. In fact, many of the large textile companies are also conglomerates of medium sized mills. Statistics released by the Ministry of Textiles shows a highly fragmented industry, except in the spinning sub-segment. The organised sector contributes over 95% of spinning, but hardly 5% of weaving fabric. Small Scale Industries (SSIs) perform the bulk of the weaving and processing operations. De-reservation of textile products has been a priority area for the government since 1997, which was believed to be the most effective way to foster productivity and efficiency within the sector. All textile items were removed from the reservation list by 2005. These measures were a prerequisite to compete globally in the post-MFA regime. As trade barriers come down and capital mobility increases, large, organised and integrated firms will gain importance in establishing a presence in the global market and to tap opportunities. In the new scenario of a quota-free world, the readymade garments sector will play a crucial role in the economy, in terms of contributing to exports as well as employment generation, considering its inherent labour-intensive nature. In the cloth production segment, the hosiery and mill sectors are likely to be the gainers. Buyer-Driven Network The global textile industry, a buyer-driven network, is dominated by retailers, marketers and manufacturers. In the newly defined business environment for textiles, retailers like Zara, H&M, etc. have redefined the life of fashion trends from the earlier five to six months to around two months. In this scenario of such short shelf-life, the small scale operations of Indian SME apparel manufacturers gives them the flexibility to service custom-made orders at low cost. It is likely that India will become a preferred destination for global manufacturers and retailers as well, and big opportunities for SMEs are forthcoming. Today, apart from the big Indian textile manufacturers like Gokuldas Exports, Alok Industries, Raymonds, Welspun India, Arvind Mills and Madura Garments, several small and medium sized apparel manufacturers have also become significant contributors to the total apparel exports of the country. Cotton knitwear suppliers of Tirupur, hosiery suppliers of Ludhiana and suppliers of home textiles from Tamil Nadu, Kerala and Punjab, among others, have been accepted as high quality and cost effective apparel suppliers in international markets. These regions are also SME dominated textile clusters that have emerged either due to market access, availability of raw material or private initiatives. The textile industry of India operates largely in the form of clusters -- mostly natural clusters -- with roughly 70 textile clusters producing 80% of the countrys total textiles. Based on a UNIDO study conducted on SME clusters in India, some noteworthy textile clusters include:

Panipat, accounting for 75% of the total blankets produced in the country Tirupur, responsible for 80% of the countrys hosiery exports

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Ludhiana, which accounts for 95% of the countrys woollen knitwear produced.

Cluster-based Approach to Development Inspite of some natural advantages such as low costs and flexibility, the SMEs suffer from disadvantages of being in a relatively isolated environment. The Government of Indias cluster development initiatives, involving technical assistance, subsidies for technology upgradation and marketing support, have strengthened the competitiveness of the SMEs, which has also consolidated their position in the global value chain. A case in point is the initiative undertaken by the Textile Committee under the Ministry of Textiles, which has undertaken a cluster-based programme for capacity building in textile and clothing SMEs in across 20 clusters in the country. Some key benefits of a cluster based approach for developing SMEs are:

Networking among enterprises Economies of scale Improved bargaining power Technology and skill upgradation Global visibility and being part of the value chain Easier access to finance Greater institutional support.

Among the successes of the Textile Committees cluster development initiatives has been the acquiring of intellectual property rights protection for the Pochampally Ikat tie-and-dye sari, from Andhra Pradesh. It is the first traditional Indian craft to receive this status of XXVIII geographical branding, and is expected to benefit at least 100,000 weavers in the state. The powerloom clusters in Sholapur and Salem are also following suit in acquiring geographical indications protection. Another successful initiative is seen in the Terry Towel cluster of Solapur, where some major interventions were undertaken by the committee such as setting up of a polytechnic institute, acquiring quality certifications for some of the units, setting up an export consortium and establishing networks. The concentration of textile firms in the form of clusters is to a natural advantage for adopting a cluster-based development approach of the textile SME segment. International and domestic experience has proved that this approach has helped firms in attaining competitiveness -- a requisite in todays new market.

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Linking with the Global Value Chain An inevitable outcome of the opening up of the textile markets is the rationalisation of supplier base by large retail chains such as Wal Mart and Gap. Under such circumstances, it will be difficult for small enterprises to individually meet the requirements of these international buyers. Hence, it will be essential to build value networks through linkages with large players who can win large orders, while smaller players service these orders. This entry into value networks will not only link up small players to the global value chain but also assure a market for their products. Incorporation of textile SMEs as third and fourth tier suppliers will be an effective way of ensuring that they gain from the growing demands of the global market. However, here the role of the government and the large textile companies will be imperative.

3.3 SWOT Analysis of the Indian Textile Industry

Strengths

Self reliance Manufacturing flexibility Abundance of raw material production Design expertise Availability of cheap labour Growing economy and domestic market Progressive reforms

Weakness

Highly fragmented High dependence on cotton Lower productivity Declining mill segment Technological obsolescence Non-participants in trade agreements

Opportunities

End of quota regime Shift in domestic market to branded readymade garments Increased disposable income Emerging mall culture and retail expansion

Threats

Stiff competition from developing countries; especially China Pricing pressure

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Locational disadvantage International labour and environmental laws

3.4 SME Insights

Table 6: Indian Textile Clusters Cluster Location Guntur Nagari Narsapur Pochampally Anantpur Sirsilla Warangal Delhi Ahmedabad Jetpur (Rajkot) Gandhinagar Surat Vijapur Bhiwani Gurgaon Panipat Bangalore Belgaum Bellary Gadag Mysore Ernakulam Faizlure Kannur Mallappuram Palakkad Burhanpur Chanderi Indore Jabalpur Maheshwar State AP AP AP AP AP AP AP Delhi Gujarat Gujarat Gujarat Gujarat Gujarat Haryana Haryana Haryana Karnataka Karnataka Karnataka Karnataka Karnataka Kerala Kerala Kerala Kerala Kerala MP MP MP MP MP Product Specialisation Powerloom & Cotton Ginning Powerloom Crochet lace Tie and dyeing Jeans/ RMG Powerloom Powerloom RMG/ Hosiery RMG Textile printing Powerloom Powerloom Weaving Powerloom RMG Powerloom RMG Powerloom Jeans Powerloom Silk Powerloom Powerloom Handloom Powerloom Powerloom Powerloom Handloom RMG RMG/ Powerloom Handloom

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Ujjain Bhiwandi Ichalkaranji Madhavnagar Malegaon Mumbai Nagpur Pune Solapur Balasore Dhenkanal Ganjam Nuapatna Amritsar Ludhiana Jaipur Jodhpur Kishangarh Sanganer & Bagru Bhavani & Chennimalai Karur Madurai Rajapalyam Salem Surampatti Tirupur Agartala Banda Gorakhpur Jhansi Kanpur Lucknow Mau Noida Varanasi Kolkata Ranaghat

MP Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Orissa Orissa Orissa Orissa Punjab Punjab Rajasthan Rajasthan Rajasthan Rajasthan TN TN TN TN TN TN TN Tripura UP UP UP UP UP UP UP UP WB WB

Powerloom Powerloom Powerloom Powerloom Powerloom RMG/ Hosiery Powerloom, RMG RMG Powerloom Powerloom Powerloom Powerloom Tussar silk Powerloom Woollen knitwear Garments Hand processing Powerloom Hand block printing Home textiles Home textiles Tie & dye, hand printing,RMG Surgical textiles Powerloom Powerloom Knitwear/ Hosiery Handloom & Loin Looms Powerloom Powerloom Powerloom Hosiery Chikan embroidery Powerloom RMG Powerloom Hosiery/ RMG Powerloom

Source: D&B Research, UNIDO, SMERA (SME Rating Agency of India Ltd)

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Figure 12

Figure 13

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Figure 14

Figure 15

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Figure 16

Figure 17

3.5 Future Outlook

Expectations are high, prospects are bright, but capitalising on the new emerging opportunities will be a challenge for textile companies. Some prerequisites to be included in the globally competing textile industry are:

Imbibing global best practices Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains.

Strategic Initiatives 35

Business integration -- especially forward integration -- by the larger textile companies has been prominent among Indian companies. Several companies that are engaged in fabric manufacturing, are now keen to enter the readymade garments space. A recent entrant is Siyaram, which launched its readymade garments range in Nov 06, following suit with other majors like Century Textiles and Raymonds. Acquisition is the most logical step towards integrating operations and building the value chain. Some recent domestic acquisitions that have been executed in 2006 include KSL & Industries acquisition of Deccan Cooperative, and Ambattur Clothing taking over Celebrity Fashions. Another growing phenomenon observed among Indian textile companies is the setting up of manufacturing facilities in strategic regions outside India, where they can avail of duty concessions and reduce export lead-time. Zodiac and Ambattur Clothing have set up facilities in the Gulf region to cut down on export delivery schedules to the European and US markets. Raymonds has set up a unit in Bangladesh to avail of the zero duty access to the EU. Table 7: Foreign Acquisitions by Indian Textile Companies Period May 01 Jun 01 Sep 01 Sep 03 Dec 04 May 05 Jun 05 Dec 05 May 06 May 06 Jul 06 Jul 06 Jul 06 Acquirer Arvind Mills Ambattur Clothing Raymonds Jindal Polyester JCT Ltd Reliance Group Zodiac Clothing GHCL Malwa Industries Malwa Industries Welspun India Spentex Industries GHCL Acquired Company License Of Healthtex Kidswear Brand Of Vf Corpn (USA) Colourplus (UK) Regency Texteis Portuguesa Limitada (Portugal) Rexor Group (France) CNLT Malaysia (Synegal) ICI Pakistan Ltd (Pakistan) Shirting Company Located In AlqozeIndustrial Area (Dubai) Dan River (USA) Emmetre Tintolavanderie Industrial (Italy) Third Dimension Apparels (Italy) CHT Holding (UK) Tashkent-Toyetpa Tekstil Ltd (Uzbek) Rosebys (UK)

Source: D&B Research

Implications for SMEs

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The new business dynamics have varying undertones across the value chain. The segment that is likely to be hit is weaving. The SMEs in the powerloom and handloom sector will face significant churn in the future. Spinning mills that account for 95% of the yarn and fibre production, will move up the value chain into weaving. This will erode the viability of the hitherto protected powerloom and handloom operators numbering over 400,000, who have remained insulated from competitive forces so far. A possible remedy could be for these weavers to align with bigger players or integrate operations that would ensure off-take of their products. The fragmented industry structure has in the past been beneficial in generating employment, but will be difficult to sustain in a globally competitive environment. For fabric manufacturers in the unorganised segment, this will mean inefficient units losing out eventually, while the more efficient and dynamic ones aligning with manufacturers or buyers.For readymade garment SMEs, rising demand and preference for ready-to-wear outfits in the domestic market will sustain a large number of units in this sector. This will be the most thriving segment in the industry and SMEs will play a key role. Indias key assets include a large and low-cost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities. On the basis of these strengths, India will become a major outsourcing hub for foreign manufacturers and retailers, with composite mills and large integrated firms being their preferred partners. It will thus be essential for SMEs to align with these firms, that can ensure a market for their products and new orders.

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Chapter 4 IT Industry
4.1 Overview of Indian Information Technology Industry
The Information Technology (IT) Sector has been one of the hotshots of Indian economy. Remarkable transformation and growth of the economy has created opportunities both in exporting software and services and in the domestic market. The Indian IT & ITES Sector has grown considerably over the last decade to contribute over 6% of the countrys GDP. The revenue amassed by Indian information technology sector is estimated to have grown by over 5% to reach $73.1 billion in 2009-10. Growth in Indian information technology in the world market is primarily dominated by IT software and services, including system integration, IT consulting, application management, custom applications, infrastructure management, software testing and web development. Competitive factors such as skilled workers, adequate telecommunication networks, and an improving policy and regulatory environment have enabled both domestic and foreign firms to rapidly expand in the internationally competitive IT services sector. The Indian Software and Services export is estimated to grow at 5.5% and to generate export revenue of $49.7 billion in year 2009-10. The IT services exports is estimated to be $27.3 billion in 2009-10 as compared to US $ 25.8 billion in 2008-09, showing a growth of 5.8%. ITeS-BPO exports are estimated to grow from $11.7 billion in 2008-09 to $12.4 billion in 2009-10, a year-on-year growth of 6%. Though the United States & United Kingdom still remains the dominant market, accounting for about 79%, for the Indian IT-BPO industry, the Continental Europe and Asian markets are catching up as they witness higher growth in demand. In contrast, the IT hardware segment has lagged and has focused very largely on the domestic market, which remains heavily dependent on imports of components and finished IT goods. Government is actively pursuing measures to stimulate the growth of Electronics Hardware Industry. India is regarded as the premier destination for the global sourcing of IT-ITeS, accounting for almost 51% of the global sourcing market size of $94 billion in 2009. India now has a 62% share of the global technology services market (IT Services, Engineering Services and R&D) of about $58 billion and a 32% share of the Global Business Outsourcing Market of about $37 billion. With the BPO going strong for the past few years, the Knowledge Process Outsourcing (KPO), which may be called the highest level of the BPO, is still at a nascent stage of development in the country. It is expected that emergence of the KPO market will offer high-value services in off shoring and help the Indian ITeS Industry to climb the global value and knowledge chain. Information Technology Industry in India 2010, provides a comprehensive understanding of the entire market dynamics of the Information technology sector to assist players interested in assessing the market opportunities in this robust and dynamic market. Besides providing detailed analysis of the Indian Electronics & IT hardware and Software & Services Sectors, the report also conducts a scrutiny of the various political, economic, social, technological, legislative and environmental trends impacting the sector. It provides a complete technology road map on how the Indian IT sector has evolved over the years and detailed information about the policies and events. The key highlight of the report is that it presents a complete and coherent competitive overview of the Indian Information Technology. Along with a 38

detailed profile of top players in the industry, the report further details various business models adopted by the leading players in the sector. This study is a critical guide to understanding the forces that produce the changes in the IT/ITeS Market and in making informed decisions on the industry. More than 2.5 million people are employed in the sector either directly or indirectly, making it one of the biggest job creators in India and a mainstay of the national economy. In 2010-11, annual revenues from IT-BPO sector is estimated to have grown over US$76 billion compared to China with $35.76 billion and Philippines with $8.85 billion. India's outsourcing industry is expected to increase to US$225 billion by 2020. The most prominent IT hub is IT capital Bangalore. The other emerging destinations are Chennai, Hyderabad, Coimbatore, Kolkata, Kochi, Pune, Mumbai, Ahmedabad and NCR . Technically proficient immigrants from India sought jobs in the western world from the 1950s onwards as India's education system produced more engineers than its industry could absorb. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crisis has deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries, which have been growing phenomenally over the last few years. Each year India produces roughly 500,000 engineers in the country, out of them only 25% to 30% possessed both technical competency and English language skills, although 12% of India's population can speak in English. By 2009, India also has a total of 37,160,000 telephone lines in use, a total of 506,040,000 mobile phone connections, a total of 81,000,000 Internet userscomprising 7.0% of the country's population, and 7,570,000 people in the country have access to broadband Internet making it the 12th largest country in the world in terms of broadband Internet users. Total fixed-line and wireless subscribers reached 543.20 million as of November, 2009.

4.2 SMEs in the Indian IT Industry

Indian IT Small and Medium Enterprises Characteristics etc Mostly thriving on single contract or client. More in numbers though contribution to the IT industry's revenue bases is very low Focus on outsourcing led growth Missing entrepreneurial mindset. Desire to go global, but lack the vision or/ and adequate exposure Go alone approach. Mostly followers of the successful models set forth by the likes of Infosys, WIPRO

Table 8: Comparison of SMEs in IT industry

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Manpower Strength Start-ups Very Less

Act as a subvendor to another subvendor. No direct interaction with end client

Very small capital. Do not even qualify for most Venture Capital (VC) funds

Mostly resellers

Manpower Strength Survivors Medium to High

May have direct access/ dealing with the end user. Multiple client base.

Beneficiaries of the most VC funds and policies implemented for SMEs

Customized Service Provider/Integrator/ Reseller/ Product Companies/ Global Presence or Operations

Manpower Strength Strugglers Medium

Act as a subvendor to the main vendor. But No direct interaction with end client

Moderate Capital. Qualify for some VC funds. Yet most of VCs ignore them

Service Provider/ Reseller

4.3 The Looming Problems for Indian IT SMEs

Large Dependency on Exports Indian Rupee appreciating Lack of means and information to hedge export risks. New competition from China, East Europe etc. Lack of financial patronage Very few Venture Capitalist are interested in the lower segment of SMEs which require more support Lack of proper infrastructure for SMEs to go for public issues in order to collect money for further investment.

Lack of Market Intelligence

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 Limited ability to gather information regarding the market opportunities, upcoming changes and competitors Limitations to get client /prospective partner, employee verifications in new territories Cost of Operations going up Increasing Recruitment and Training Costs High employee attrition rate The SME sector has become a headhunting ground for the big companies. Inflation is at all time high

4.4 The Opportunities Ahead

Growing domestic market. Healthcare, Retail, E-commerce etc. Potential for technology led growth Collaborations for reduced cost of operations Focused growth Booming economy has already roped in many VC and Angle funds Reverse brain drain : Brings in the global mindset help creating the much needed environment. Entrepreneurship is on the rise. Specific emphasis by trade bodies like NASSCOM, FICCI, CII and Government agencies to support IT SME Emergence of tier 2 cities with IT infrastructure Potential Action Areas E-Commerce Embedded Software Communication Gaming and Animation Mobile Devices/Application Website Content Open Source Solutions

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4.5 Nurturing Indian IT SMEs

SIDBI (Small Industries Development Bank of India) Problems faced by SMEs Delayed Payment of Bills Schemes operated by SIDBI to address the problems

Direct Discounting of bills scheme

Invoice Discounting Scheme

Bills Rediscounting Scheme

Obsolescence of Technology

Technological Development and Modernization Fund Scheme Single window composite loan scheme

ISO 9000 Scheme: Subsidy on Quality Consultation

Working Capital Availability

Working capital term loan

Short term loan

NASSCOM (National Association of Software and Service Companies) Increase networking and face-to-face meetings between SME companies and potential customers in the developed markets. Facilitating SMEs for bidding for contracts in a transparent manner. Organize SME Focused delegations to and from India Cross industry tie up for SME-SME interaction. Creating SME oriented CIO forum from developed markets to facilitate B2B interactions. A fund for marketing SMEs will be created. To help SMEs identify new market segments Promoting the cause of IT SMEs with various trade commissions across the globe. To promote the SME participation by pitching at the policy level for Government contracts Nasscom is likely to form a formal SME forum both for meetings as well as on the Web. Initiating mentoring programs in association with large companies

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 Creating detailed directory containing capability statements and service offerings for ready reference by potential clients. STPI (Software Technology Parks of India) 1. Infrastructure Support Incubation Facility Data Com Facility Non Built Area 2. Association with State Government Help in Policy making E-governance Research 3. Collaboration with Educational institutes Technology Incubators Provide domain expertise Enable Industry Interaction The objectives of STPI are To promote the development and export of software and software services including Information Technology (IT) enabled services/ Bio- IT. To provide statutory and other promotional services to the exporters by implementing Software Technology Parks (STP)/ Electronics and Hardware Technology Parks (EHTP) Schemes and other such schemes which may be formulated and entrusted by the Government from time to time. To provide data communication services including value added services to IT / IT enabled Services (ITES) related industries. To promote micro, small and medium entrepreneurs by creating conducive environment for entrepreneurship in the field of IT/ITES. Other Initiatives to support SMEs in IT sector CII (Confederation of Indian Industries) plans 100 clusters across the country only for SMEs Government of India directive to promote SME participation in Government projects, E-Governance implementation. UN supply cell set up to promote and develop business of IT sector with various United Nations procurement agencies like UNIDO. Special division by CRISIL(S&P Company) to rate the SME sectors.

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 Various initiatives by Small Industries Development Organization (SIDO) targeted at developing Small Scale Industries (SSI) through credit guarantee schemes, bill discounting etc.

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Chapter 5 - Food Processing Industry

5.1 Overview of the Food Processing Industry in India
The food processing industry in India is a sunrise sector that has gained prominence in recent years. Availability of raw materials, changing lifestyles and relaxation in policies has given a considerable push to the industrys growth. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy. Strengthening this link is of critical importance to improve the value of agricultural produce; ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it. The Indian food processing industry holds tremendous potential to grow, considering the still nascent levels of processing at present. Though Indias agricultural production base is reasonably strong, wastage of agricultural produce is sizeable. Processing of fruits and vegetables is a low 2%, around 35% in milk, 21% in meat and 6% in poultry products. By international comparison, these levels are significantly low - processing of agriculture produce is around 40% in China, 30% in Thailand, 70% in Brazil, 78% in the Philippines and 80% in Malaysia. Value addition to agriculture produce in India is just 20%, wastage is estimated to be valued at around US$ 13 bn (Rs 580 bn). India, with an arable land of 184 mn hectares is, the highest producer of milk in the world at 90 mn tonnes p.a., second largest producer of fruits & vegetables (150 mn tonnes), third largest producer of foodgrains and fish and has the largest livestock population. Considering the wide-ranging and large raw material base that the country offers, along with a consumer base of over one billion people, the industry holds tremendous opportunities for large investments. Ministry of Food Processing Industries The Ministry was set up in 1998 and the industry segments that come under its purview are: Fruit & Vegetable processing (including freezing and dehydration) Grain Processing Processing of Fish (including canning and freezing) Processing and refrigeration of certain agricultural products, dairy products, poultry and eggs, meat and meat products Industries related to bread, oilseeds, meals (edible), breakfast foods, biscuits, confectionery, malt extract, protein isolate, high protein food, weaning food and extruded food products (including other ready-to-eat foods) Beer, including non-alcoholic beer Alcoholic drinks from non-molasses base

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Aerated water and soft drinks Specialised packaging for food processing industries.

The Ministry of Food Processing Industries, GoI, has estimated the size of the Indian food market at US$ 191 bn (Rs 8,600 bn). The processed food market is projected to be over US$ 100 bn, of which the primarily processed food market accounts for 60%, while the valueadded processed food market is around 40%.

Figure 18 Industry Sub-Segments Fruits and Vegetables Milk and Milk Products Meat and Poultry Marine Products Grain Processing Beer and Alcoholic Beverages Consumer Foods Packaged/Convenience Foods, Cocoa Products, Soft Drinks

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Figure 19 In terms of policy support, the ministry of food processing has taken the following initiatives over the years:

Formulation of the National Food Processing Policy Complete de-licensing, except for alcoholic beverages Declared as priority sector for lending in 1999 100% FDI on automatic route Excise duty waived on fruits & vegetables processing from 2000 01 Income tax holiday for fruits & vegetables processing from 2004 05 Customs duty reduced on freezer van from 20% to 10% from 2005 06 Implementation of Fruit Products Order Implementation of Meat Food Products Order Enactment of FSS Bill 2005 Food Safety & Standards Bill, 2005

5.2 SWOT Analysis of the Food Processing Industry

Strengths

Abundant availability of raw material Priority sector status for agro-processing given by the central Government Vast network of manufacturing facilities all over the country Vast domestic market

Weaknesses

Low availability of adequate infrastructural facilities Lack of adequate quality control & testing methods as per international standards Inefficient supply chain due to a large number of intermediaries High requirement of working capital. 47

Inadequately developed linkages between R&D labs and industry. Seasonality of raw material

Opportunities

Large crop and material base offering a vast potential for agro processing activities Setting of SEZ/AEZ and food parks for providing added incentive to develop greenfield projects Rising income levels and changing consumption patterns Favourable demographic profile and changing lifestyles Integration of development in contemporary technologies such as electronics, material science, bio-technology etc. offer vast scope for rapid improvement and progress Opening of global markets

Threats

Affordability and cultural preferences of fresh food High inventory carrying cost High taxation High packaging cost

5.3 SMEs in Food Processing Industry

The food processing industry, due to its diverse nature and a policy of SME reservations, has ordained a predominant role for small enterprises. The organised sector, consisting of mostly large companies, accounts for only 25% of the market while the remaining 75% of the market is divided between the small scale and the unorganised sectors. The micro and local community based food processing enterprises have dominated the primary processing segment of the industry. Small and medium firms are mostly operating in niche markets. The food processing industry is among the sectors reserved for the small scale industry. Though de-reservation of food products began during the 1990s, there are still around 12 products reserved for manufacturing in the small scale sector. These products include bread, pastries, confectioneries, rapeseed oil (except solvent extracted), mustard oil, sesame oil, groundnut oil, sweetened cashewnut products, ground and processed spices other than spice oil and Oleo resin spice, tapioca sago and tapioca flour. Prominent food processing companies like Priya Foods, MTR, Surya Food & Agro and Haldirams were for long well-known names in their respective regions, with limited national presence. However, lately these companies have changed their strategy towards expanding their market reach. This phenomenon among the food processing companies received impetus following the entry of Indian large business enterprises like ITC, Godrej, Venkys India, Marico, etc, into the branded foods segment,. Another factor has been growth of retail stores, which are emerging as a driving factor for food processing, though they account for just 1% of food sales at present.

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UNIDO has identified over 60 clusters of small and medium enterprises across India existing in the food processing sector. The state-wise distribution of the clusters shows the largest concentration of companies in Maharashtra and Gujarat followed by Andhra Pradesh, Punjab and Orissa. UNIDOs study of Indian food processing clusters identified some common deficits in these areas. These include: Inadequate knowledge of technical standards, packaging facilities, food laws and regulations Quality raw material supplies Weak information channels with regards to price and quality Lack of infrastructure facilities in terms of facilities for testing and research. For perishable food items, sub-contracting relationships among processing firms does not appear to be a conducive arrangement. As a result, cooperation among the small units is limited. Also, linking with larger processing firms will be to a limited scale. Thus, unlike in the auto components and textile industries, where supply chain plays a critical role in the development of the SME segment, it may not be very relevant to the food processing segment, especially in the short-shelf life products. However, being part of the supply chain for retail outlets could be a driving factor for the growth of SMEs. In the light of these realities, the Government will have to continue playing a critical role in supporting SMEs in the food processing sector.

Table 9 Food Processing Clusters

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50

Source D & B Research, UNIDO, SIDO

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5.4 SME Insights

Figure 20

Figure 21

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Figure 22

Table 10 Average Exports as % of Total Production

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Table 11 Capacity Utilization of Food Processing Plants

Figure 23

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5.5 Future Outlook

The decade-and-a-half of Indian economic reforms have now reached a stage where it is bringing about changes in the the agriculture and food processing sectors. Reforms had more or less bypassed the agriculture sector till recently. However, demographic factors, changing lifestyles and consumer demand for greater variety has increased pressures on the food processing sector to provide products at competitive prices. Experience of large developed agricultural economies has proven that the integration of production and processing stages are a universal feature of efficient food marketing systems in the advanced stages of economic development. Driving growth in the food processing sector holds the key to imparting changes in the labour intensive agriculture sector in India. Inefficient marketing systems are already being targeted. Policies are now promoting the participation of private investors that would promote efficiency in food processing and agriculture marketing systems. These are just the initial stages of development and further efficiencies in the agriculture sector, in terms of improving productivity and investments, will be a source of power for the food processing sector in turn. In other words, the two sectors share a symbiotic relationship and changes to either will impact the other. In this backdrop, the Government of India is already in the midst of a vision, strategy and action plan for the food processing sector. This strategy addresses issues of taxation, organised retail, infrastructure development, marketing interventions and regulations, strengthening of institutions and issues of food safety and regulations. The Vision 2015 strategy released in 2003-04 envisages: Trebling the size of the processed food sector to close to US$ 300 bn by 2015 Increasing level of processing of perishables from 6% to 20% by 2015 Value addition to increase from 20% to 35% Increase share in global food trade from 1.5% to 3% Increase the share of value added products in food consumption from the current 16% to 50%.

The food processing industry in India has taken off substantially and will continue to grow rapidly considering the untapped potential in the sector. The growth in this segment not only indicates the changing development patterns of the country, similar to the developed nations, but also the promise it holds in driving growth of a certain section of society that has remained marginalised for a long time. More than just demand and supply dynamics, stakeholders in the food processing sector of India have a social responsibility to fulfill.

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Chapter 6 - Pharmaceutical Industry

6.1 Overview of the Pharmaceutical Industry in India
The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian pharmaceutical industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. The pharmaceutical industry in India meets around 70% of the countrys demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations. Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market. Global Scenario in 2010 - India's pharmaceutical industry is now the second largest in the world in terms of volume. Its rank is 14th in terms of value. Between September 2008 and September 2009, the total turnover of India's pharmaceuticals industry was US$ 21.04 billion. The domestic market was worth US$ 12.26 billion. This was reported by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers. As per a report by IMS Health India, 56

the Indian pharmaceutical market reached US$ 10.04 billion in size in July 2010. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. Domestic Market - In the domestic market, Cipla retained its leadership position with 5.27 per cent share. Ranbaxy followed next. The highest growth was for Mankind Pharma (37.2%). Other leading companies in the Indian pharma market in 2010 are Sun Pharma (25.7%) Abbott (25%) Zydus Cadila (24.1%) Alkem Laboratories (23.3%) Pfizer (23.6 %) GSK India (19%) Piramal Healthcare (18.6 %) Lupin (18.8 %

The Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020 from US$ 12.6 billion in 2009. This was stated in a report title "India Pharma 2020: Propelling access and acceptance, realising true potential" by McKinsey & Company. In the same report, it was also mentioned that in an aggressive growth scenario, the pharma market has the further potential to reach US$ 70 billion by 2020 Due to increase in the population of high income group, there is every likelihood that they will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. This was estimated in a report by Ernst & Young. The domestic pharma market is estimated to touch US$ 20 billion by 2015. The healthcare market in India to reach US$ 31.59 billion by 2020. The sale of all types of pharmaceutical drugs and medicines in the country stands at US$ 9.61 billion, which is expected to reach around US$ 19.22 billion by 2012. Thus India would really become a lucrative destination for clinical trials for global giants.

6.2 SMEs in the Pharmaceutical Industry

With a large number of medicines expected to go off patent during the next few years and with increasing emphasis on the use of generic medicines in developed countries, competition in the global pharmaceutical industry is set to get steeper. India will have a key role to play in this transforming scenario, with the small and medium enterprises expected to chalk out a defining role for themselves. Despite the lag in R&D investments in India, small and medium players seem well poised to take on global challenge, especially in the bulk drugs space. Several new opportunities have opened up for the SME sector. An emerging trend among these enterprises has been their involvement in clinical trials, either on their own or on contract basis. CRAMs (Contract Research and Manufacturing) opportunities are also 57

accruing to small and medium players who have got expertise and facilities approved by regulatory agencies. New product launches, although mainly done by large players, helps the SMEs to acquire contracts for manufacturing and opportunities to supply APIs and related chemicals. Moreover, a marketing approval of generic products gives them the opportunity to increase their product portfolio. Outsourcing opportunities, though immense, are however being acquired by mainly players with better economies of scale and constant quality delivery. Growing competition has compelled huge capital investments in fixed assets and technology, which the SMEs are finding difficult to sustain. Some of the key challenges faced by SMEs include achieving stricter quality norms, consistent technical upgradation and marketing. The GoI continues to closely regulate the pharmaceutical sector and maintains a list of products reserved for manufacturing by the small scale enterprises. These include: Nicotinic Acid/Niacinamide, Paracetamol, Parabens and their Sodium salts starting from p-hydroxy benzoic acid, Calcium Gluconate, Benzyl Banzoate, Pyrazolones, Aluminium Hydroxide Gel and Para Amino Phenol Industrial grade. Most of these items relate to medicines of mass consumption and therefore have a huge market. Most of the small and medium enterprises in the pharmaceutical segment operate in the local market, and mainly manufacture formulations. To a great extent, survival of these units would depend on how well and quickly these companies are able to adapt to the changing business scenario. The Indian government has been making every attempt to support SMEs through several incentives. The development of pharmaceutical SEZs can support the growth of SMEs. Around 18 pharmaceutical SEZs have already been identified so far that will focus on the pharmaceutical industry. The advantage of locating in these zones includes availability of developed infrastructure, market access, exports, and excise relief. Given that a large number of drugs are going off patent, many multinational and large Indian companies are expected to enter the generics market. The major customers of these companies would be the rural customers, hospitals in these areas, health institutions and medical practitioners. This calls for high investments on the part of SMEs in R&D as also to maintain quality standards. The draft National Pharmaceuticals Policy 2006 has incorporated some key factors favouring the small and medium enterprises: Since Jan 2005, an excise duty of 16% is being levied on 60% of the maximum retail price (MRP), as compared to the ex-factory price earlier. This has increased the burden on the industry. The policy proposes a reduction in excise duty from 16% to 8%. Enhance the exemption limit of small scale units from excise duty from the present level of Rs 10 mn to Rs 50 mn

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A dedicated fund would be set up for providing interest subsidy (5%) on borrowings to small scale/medium pharma units going in for Schedule M implementation for GMP for Drugs and Cosmetics Rules.

SMEs in the pharmaceutical industry are linking up with larger players and are entering into clinical trials and contract manufacturing in a big way. However, government support will be critical in laying the foundations for SMEs to gear-up and face the inescapable challenge that they confront today.

6.3 Pharmaceutical Clusters and SEZs

Andhra Pradesh, Gujarat, Maharashtra and Goa are the major pharmaceutical manufacturing clusters in the country. The bulk drug clusters are located primarily in the following regions: Gujarat- Ahmedabad, Ankleshwar, Vapi, Vadodara Maharashtra - Mumbai, Tarapur, Aurangabad, Pune Andhra Pradesh - Hyderabad, Medak Tamil Nadu Chennai, Pondicherry Karnataka - Mysore, Bangalore, Goa Visakhapatnam (Vizag) in Andhra Pradesh is the upcoming bulk drug cluster that has generated significant interest in the players. Goa, Mumbai, Pune and Hyderabad have been the preferred destinations for formulation players in the past. However, Baddi in Himachal Pradesh and Pantnagar and Haridwar in the state of Uttarakhand are the upcoming formulation clusters, attracting formulation manufacturers from across the country due to fiscal incentives offered by the Government. The R&D clusters have followed a similar development pattern. Apart from the National Capital Region (NCR), other R&D clusters have been limited to the established pharmaceutical regions in the country. The captive R&D Units are located in the following regions: National Capital Region Ahmedabad Mumbai Aurangabad Hyderabad Bangalore Chennai The contract R&D Units are located in the following regions: Mumbai Hyderabad

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 Bangalore Chennai Ahmedabad Table 12: Pharmaceutical SEZs in India

6.4 SME Insights

The attention small and medium enterprises are lately commanding from banks, institutions, industry and academicians, has encouraged this study on the SME segment. The SMEs were relatively over-shadowed for long by other economic concerns. As a result, there has been a defi cit of authentic information on this segment and has limited the estimation of value contributed by it to Indias economy. The pharmaceuticals segment is the fourth sector in the Emerging SMEs of India series, after auto components, textiles, and food processing which have been examined to draw insights relevant to the small and medium enterprises segment. On an average, the capacity utilisation was at 75.5% with the North-based companies being way ahead of the rest of the regions. These companies were operating at an average 82% of their capacity. There were 43% companies which were operating at more than 90% capacity utilization, and most of these companies were located in the West.

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Figure 24 Like other SME intensive sectors, the pharmaceutical SMEs also showed a strong preference for banking with public sector banks. A massive 84% revealed banking with PSUs, followed by co-operative banks. A large number of West-based companies were receiving funds from co-operatives. MNCs had a small share in funding of pharmaceutical SMEs

Figure 25

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48% companies were exporting their products. The West-based companies were found to be dominating in terms of exports with 61% of those exporting concentrated in this region. The 100% export-oriented firms were mostly large companies with turnover above Rs 500 mn. Nearly 87% of the exporting companies were found to be having quality certifications, a prerequisite in the pharmaceutical industry. A large number of these companies were operating in the anti-infectives, gastrointestinal, cardiac, and vitamins therapeutic segments. Over 90% of these companies divulged future plans of accessing new markets or undertake product diversification.

Table 13- Region Wise Exports Classified as Share in Turnover Some interesting aspects came to light when companies were asked what they perceived as the major hindrances to the growth of their business. Pertaining to lack of infrastructure, 56% companies agreed that infrastructure inadequacy was a big hindrance, with majority emphasising as investment in R&D as a big constraint. A whopping 94% of the respondents viewed lack of institutional support as a major hindrance, the biggest worry being industry regulation along with price controls, taxes & duties imposed. 78% of the companies cited marketing issues and the lack of marketing and distribution networks. Quite a few of companies expressed apprehensions regarding the threat from spurious and counterfeits available in the market. To conclude, the western region was found to be the most prominent and dominant region for pharmaceutical companies, especially Maharashtra and Gujarat. Concentration of companies in the higher turnover bracket was largely from this region and also in terms of exports. Advantage India in the Pharmaceutical Industry Competent Workforce Cost-effective Chemical Synthesis Legal and Financial Framework Information Technology

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Globalization Consolidation

6.5 Future Outlook

Demographic Factors Population growth coupled with the rise in per capita income and increasing health awareness will continue to drive the domestic demand. New Product Launches - After the introduction of product patent laws in India, multinational companies have shown renewed interest in launching some blockbuster products in India Increasing investments in R&D Growing generics market - Increasing number of products getting off-patent and recognition of generic drugs by some developed countries is set to expand opportunities for India in the generics market. Generic drugs make up 55% of the written prescription. Growing Export Market - Exports will continue to remain strong and an enabler of growth for the pharmaceutical industry. Impressive performance of Indian exports, achieved during last few years, is likely to continue in the near future. CRAMs opportunities will continue to pick up - Contract manufacturing and contract research will gain prominence among the Indian pharmaceutical companies. There has been a spate of tie-ups and acquisitions by companies in the CRAMS segment in India. The driving factors include the rising manufacturing costs in developed countries and falling prices in the generics segment world over. India aptly suits the changing global scenario, having the largest number of US FDA approved facilities outside the US and low cost manpower with technical expertise. Price control remains the principal concern - The expanding span of control on drug prices in India remains the main concern for the pharmaceutical industry. As the price is proposed to be fixed on the basis of manufacturing costs and fixed margins, the volume of sales will determine the profits of the players. Under this situation SMEs may be hit due to the smaller economies of scale. Nevertheless, the price scenario in markets not under price control will witness a rise in prices due to increasing demand. Hedge risk by changing the product mix - Despite the price control on certain bulk drugs and formulations, it has been seen that the prices of medicines, on an average, have been increasing over a period of time. The increase in average price is attributed to the rise in prices of drugs not under control and upward revision in prices of certain controlled drugs owing to rise in input costs. Most of the OTC drugs are out of the ambit of price control and recent trends show an impressive growth in the Over The Counter (OTC) segment. Therefore, the product-mix between prescription and OTC drugs or the mix of business between domestic and exports holds the key to profitability for players in general, and for SMEs in particular.

Chapter 7 Other Industries

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7.1 Small Scale Forest Enterprises ( and Wood Industry)

As regards the small-scale forestry sector, available information strongly indicates that the bulk of forest produce processing in India is carried out by small-scale forestry enterprises (SSFEs), and that these enterprises play an important role in the national economy. As well as processing a wide range of products, SSFEs are also involved in production of forest products. Amongst the diverse range of activities carried out by the Indian SSFE sector are production or collection of products such as fuelwood, poles and non timber forest products; their processing either by hand (e.g. leaf plate stitching) or by modern machinery, and marketing at every level ranging from barter at the local level to export to international markets. The sector produces a wide range of products such as poles, fuelwood, charcoal, sawn timber, furniture, veneer, plywood, blockboard, fibreboard, particle board, paper, safety matches, sports goods, handicrafts, herbal medicines and other non-timber forest products. Due to the diversity of products, markets and policies, it is difficult to make generalisations for the entire SSFE sector. Still, there are certain features of the sector that are clearly discernible: While most of Indias forests are owned by the government, the bulk of SSFEs are in the private sector. It is estimated that more than 90% of Indias wood-based products are presently manufactured in the private sector. SSFEs are an important player in the forestry sector. For example, 98% of the sawmills in India are small, and they produce as much as 82% of the sawn timber. About 87% of plywood factories and 94% of paper mills also fall into the small enterprise category. It is estimated that the wood processing industries in India process about 24 to 30 million m3 of wood per annum, the bulk of which is processed by SSFEs. Farmers and communities are important producers though their contribution is not widely recognised or acknowledged. Joint forest management communities are now protecting over 18% of India's forests and half the industrial wood supply is coming from non-forest sources, mainly farms. There are many very small enterprises that cater to local demand. For instance, it is estimated that 2.1 million bullock carts are constructed each year, as are 50 million yokes, 100 million wooden ploughs and 30 million wooden seeders. Most of this demand is met by local artisans who utilise local raw materials and traditional skills. Generally SSFEs are by nature location specific, which is determined on the basis of the availability of resource, labour and markets. For instance, most safety matches are manufactured in Tamil Nadu, whilst the bulk of sports goods are manufactured in just two cities. SSFEs generate significant employment in India. While it is difficult to obtain national figures, available industry wise figures do indicate large-scale employment in this sector. It is estimated that 30-40 million people are directly or indirectly involved

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in the beedi industry, many of whom are tendu leaf collectors and beedi rolling workers. Nearly half a million people are employed in safety match making, sawmilling and wood carving. Some SSFEs also earn valuable foreign exchange e.g. medicinal plants and wood carving industries. Some of the categories of Small scale forest enterprises are 1. SawmillingFigure 26 - The main uses of the sawn wood produced by the saw mills

2. Safety Matches - There are approximately 12,000 safety match making units in the country, and all except five are in the small-scale and cottage industries category. 82% of the production is in the small-scale and cottage sectors.3 The industry as a whole employs 250,000 people out of which only 6,000 are in the large-scale mechanised sector. Over two-thirds of India's matches are produced in just two districts - Ramanathapuram and Tirunelveli, both in Tamil Nadu. The bulk of the wood comes from neighbouring Kerala, where there are over 400 small-scale units making veneers and splints for supply to the match industry. This ancillary industry employs over 15,000 people directly and indirectly 3 Wood-based Panels There are three major wood-based panel products that are manufactured in India - plywood, including veneers, blockboards and flush doors; fibreboard; and particle board. SSFEs play animportant role in the manufacture of these products. According to an estimate made a few years ago, there were 480 plywood factories in the country, of which 418 (87%) were in the small-scale sector (Federation of Indian Plywood and Panel Industry)

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4 Wood Working Wood working is a traditional industry in India producing furniture, doors, windows, panels, sports goods, handicrafts, shoelasts and heels, textile mill accessories (bobbins and shuttles) etc. In addition, truck and bus body building and the manufacture of agricultural implements are also important wood-based industries which consume a large quantity of wood. It is estimated that construction of the body of each truck consumes 6.25 m3 of sawn timber. A large number of wooden agricultural implements are manufactured each year. Most of the work is done in small-scale units or by individual artisans. 4.1 Sports Goods - Three-quarters of the registered sports goods units are in Punjab, Uttar Pradesh and Jammu and Kashmir. Nearly half the units were located in two towns, Jalandhar and Meerut. Around 85% of the units were in the small-scale sector. The main raw materials used were willow, cane, mulberry, maple, ash and rosewood. . 4.2 Pencils 4.3 Wood Carving - India has a well-developed traditional wood carving industry. The major wood carving centres are located in the states of Uttar Pradesh (Saharanpur and Nagina), Rajasthan (Jodhpur), Arunachal Pradesh (Tirap), Gujarat (Surat and Mahuva), Kerala (Kochi, Ernakulum, Trichur and Thiruvananthapuram), Jammu and Kashmir, and Madhya Pradesh. The industry gets its raw material from the Forest Department as well as farmers.4 The consumption is high. In Saharanpur alone, it is estimated that around 25 truck loads of wood are consumed per day by the industry, which translates into roughly 3.2 million ft3 per annum. It is estimated that 70,800 ft3 of wood is consumed by the industry in Kerala. The main products made are boxes, figurines, idols, jewellery boxes, incense boxes and stick holders, candle stands, photo frames, coaster sets, letter racks, stationery holders, pipe stands, tobacco jars, tables, screens and carved furniture 4.4 Paper Paper and paperboard production is an important forest-based industry in India. The Indian Paper Industry is among the top 15 global players today, with an output of more than 6 millions tones annually with an estimated turnover of Rs. 150,000million Paper Industry in India is riding on a strong demand and on an expanding mood to meet the projected demand of 8 million tones by 2010 & 13 million tones by 2020. A large number of expansion programme & expansion of capacities with an outlay of Rs. 10,000 crores have been announced covering the various sectors like paper, paperboard, newsprint etc. The handmade paper industry, a traditional craft, is a recognized village industry under the Khadi and Village Industries Act and receives special assistance from the Khadi and Village Industries Commission (KVIC). It generally utilizes textile fibre derived from rags, gunny bags, cotton linters and other waste material. Most of this paper is used for greeting cards and certain stationery items

Figure 27- Raw Material Mix of Paper Industry 66

Table 14- Capacity Wise Breakdown of Indian Paper and Pulp Mills Source- Indian Agro Paper Mills Association (IAPMA) , New Delhi 5. Non-Timber Forest Products Indias forests yield a large number of diverse Non-Timber Forest Products (NTFPs) There are a number of industries based on NTFPs such as beedi (country cigarette), lacquerware, brooms, essential oils, katha and cutch, tannins, resin and rosin, cane and bamboo furniture, herbal medicines and cosmetics, etc. It is estimated that NTFPs worth Rs. 350 billion are used annually in India and the government revenue from NTFPs is around Rs. 20 billion, nearly 50% of the total forest revenue. 5.1 Beedi (Country Cigarette) Beedi is a local cigarette that is made by rolling tobacco into tendu (Diospyros melanoxylon) leaves. It is estimated that about 550 billion pieces of beedi are sold annually in India. Beedi smoking is the most prevalent form of tobacco use among Indians around 54% of tobacco is used in beedis, 27% is used as chewing tobacco and the balance 19% is used in cigarettes. The beedi-making industry has an annual turnover of Rs.190 billion, The beedi industry employs a large number of workers directly and many more are indirectly involved, especially in the collection of tendu leaves. It is estimated that over 30 million people are indirectly dependent on the beedi industry. The employment generated through tendu leaf collection is very valuable for the poor, especially tribal, collectors as these leaves are collected during the summer months, which are otherwise a lean season from the employment perspective. Madhya Pradesh and Chhattisgarh are largest tendu 67

leaf producing states (41%) followed by Orissa (17%), Maharashtra (15%) and Andhra Pradesh (13%). The value of tendu leaves harvested for making beedis is estimated at Rs. 15 billion annually. It is estimated that 350,000 tonnes of leaves are harvested annually and 4,700 tonnes are exported. The majority of beedis are rolled by women and child workers, who are generally paid on piece rate basis by sub-contractors of the beedi manufacturers. The trade in beedis is reported to be declining due to increased competition from chewing tobacco (guthka). Some of the industries have also shifted base from Madhya Pradesh a major tendu producing state to neighbouring states like Maharashtra due to a hike in minimum wages bythe Madhya Pradesh state government. 5.2 Katha and Cutch Katha and cutch are products made from the heartwood of Acacia catechu tree. Katha is used as an ingredient of paan (betel) and paan masala chewing confectionery in India. Cutch is used for dying canvas and tanning leather. According to an estimate made a few years ago, 3,000 tonnes of katha was produced annually in India, of which 2,000 tonnes was produced in the factory sector, which also produced 4,500 tonnes of cutch. The total consumption of wood was estimated to be around 200,000 m3. 5.3 Lac Lac is produced from the secretions of a tiny insect Laccifer lacca Kerr., which is a parasite on a number of wild and cultivated plants. India is an important producer of lac and lac products. The present production of lac is about 15,000 metric 68ptim, which is much less than the peak production of 91,199 metric 68ptim achieved between 1978 and 1979. Lacquerware and lac turnery is a traditional industry based on lac. It is estimated that in Channapatna Taluka of Karnataka, over 35% of the workforce is engaged in lacquer work. 5.4 Bamboo and Rattan Products There are a number of SSFEs manufacturing bamboo and rattan based products. The main products manufactured from bamboo are handicraft items such as table mats, trays, lampshades and other household articles. Reed bamboo based traditional industries, such as mat and basket weaving, play a crucial role in the rural economy. Many tribes and ethnic groups (Bhanjaras, Bansforias, Kamars, Kotwalias, etc.) earn their living through bamboo handicraft work. Recently some bamboo mat board manufacturing units have also been established. It has been estimated that bamboo based SSFEs provide livelihoods to more than 300,000 village people in Kerala state alone. Rattan (cane) extraction and 68ptimizing68 in India is, by and large, a cottage industry. It is estimated that there are around 2,000 small to medium sized rattan-based industrial units inIndia, employing over 200,000 people, some in the manufacture of a variety of handicraft items and furniture, and the rest predominantly in the rural areas in extraction, cleaning, processing and transportation. The rattan furniture industry produces goods worth Rs. 50 million annually. About 10% of the goods are exported. The cottage units are generally located near the rattan growing forests in three regions: South India, East and North East India, and the Andaman and Nicobar Islands. The larger units are in urban areas such as Kolkata, Chennai, Delhi, Mumbai, Bangalore, Hyderabad and Jullundhar 5.5 Broom Making A large quantity of brooms are used in India annually and most are made from grasses (such as Thysanolaena maxima), palms (such as Phoenix acaulis) and 68

bamboos. Broom making is an important forestry enterprise in several parts of the country. For instance, a survey conducted in two blocks of Mandla district in Madhya Pradesh showed that there are several household based broom making enterprises in the area 5.6 Essential Oils Oils originating from plants are used for perfumery and similar purposes. These are derived from grasses, wood, leaves, roots and flowers. There are a number of tree and plant species which yield oil but only a few are commercially exploited for extracting essential oils. These essential oils are major raw materials for soaps and cosmetics, pharmaceuticals, confectionery, aerated water, attars, scented tobacco, agarbattis and incense industries. These are not only important for the domestic market but have a growing market in other countries as well. While disaggregated export data is not available, the total exports under the category essential oils and resinoids; perfumery, cosmetic or toilet preparations were to the tune of Rs. 47.166 billion 5.7 Resins There are a number of resins derived from plants of which sal resin, pine resin and turpentine, salai or guggal and balsam resins are commercially important. However, their production is declining over the years. The main reason for the decline in production is unscientific and indiscriminate tapping of trees, and frequent fires in pine forests resulting in heavy mortality of trees. Another possible reason is the availability of chemical substitutes. 5.8 Herbal Medicines The Indian system of medicine comprises Ayurveda, Siddha and Unani systems. The supply base of medicinal plants used for manufacture of traditional medicines is largely from the wild. It is estimated that around 80% of the medicinal plants active in trade are procured from wild areas, mostly notified as forest land. Ayurveda is the major system followed in India. The Ayurvedic manufacturing units can be broadly classified into two groups: the organised sector, comprising well-established manufacturers who operate in both domestic and/ or international markets. These could be large or small units. Often a small manufacturer can be considerably strong in a niche market. the unorganised sector, comprising mainly 69ptimizing ayurvedic doctors (vaidyas) and micro-units manufacturing only a few products and operating at local levels It is estimated that the total annual turnover of the ayurvedic industry is around Rs. 45 billion, although the figures are uncertain due to the large number of micro-units By far the most important export is Psyllium husk. The major importing countries are USA, Germany, France, Switzerland, Ukand Japan.

Some major threats faced by Small Scale Forest Enterprises are A growing shortage of quality raw material due to felling bans and restrictions on extraction in several states. However, while this is certainly a threat to processing industries, as noted above it is actually also an opportunity for production enterprises such as farm forestry plantations. Growing concerns over environmental and labour issues are also significant threats. In recent years, many court rulings have also resulted in the closure of many forest

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produce processing industries on account of enhanced environmental concerns . The industries in the north-eastern states and the Andaman and Nicobar Islands have been particularly badly affected. Since economic 70ptimizing70tio there has been growing competition from cheap imports and a trend towards removal of protective policies, such as reservation. Indian SSFEs are generally quite inefficiently run, the quality of products is poor and there is lack of 70ptimizing70tion thus they are quite uncompetitive internationally. Stringent application of an international intellectual property rights regime is also likely to affect Indian SSFEs, especially processing industries, adversely.

7.2 Leather Industry

The Indian leather industry occupies a place of prominence in the Indian economy in terms of its export earnings, employment generation and growth. The industry comprises tanning & finishing, footwear & footwear components, leather garments, leather goods and finished leather. The tanning industry in India is primarily concentrated in Tamil Nadu, West Bengal, Uttar Pradesh and Maharashtra. It is heavily dependent on the availability of indigenous raw hides and skins for its supply of raw materials, which is very fragmented. In the Indian tanning sector, semi-finished leather and finished leather is produced mainly by the small units, whereas the large units are usually fully integrated. While the Southern region including Tamil Nadu focuses on finished leather and footwear component, the eastern region including Kolkatta and West Bengal accounts for nearly 66% of the countrys exports of leather accessories like wallets and handbags; whereas in the North, Agra and Kanpur are prominent exporters of leather garments & harnesses and footwear. According to National Manufacturing Competitiveness Council (NMCC), the size of Indian leather industry is approximately Rs. 250 billion and it employs around 2.5 million people. Around 10% of worlds supply of leather is processed in India. The leather exports turnover in FY07 stood at approximately US$ 2.9 billion, which is about 2.3% of Indias total exports. Exports of finished leather grew at a moderate rate in comparison with various types of leather products. The fragmented nature of the leather industry has resulted in nearly 90% of the industry being operated by the SSI units, which are facing strong competition from their Chinese counterparts. With the world leather industry shifting its manufacturing base to the developing countries; the relative ease of availability of raw material, skilled labour, designing capabilities and technical know-how make India an attractive destination for FDI into leather industry. However, the industry is confronted with major challenges like effluent management, quality specifications, non tariff barriers and cost of compliance to various standards. Nonetheless, large investments, 70ptimizing of production capacities, upgradation of technology and

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strengthening of enabling infrastructure along with increasing demand would drive the growth of Indian leather industry. Figure 28

Source : www.rbi.org.in

85% of the companies manufacturing leather goods followed by 80% of the leather garments manufacturers earn more than 50% of their revenue from the international market. The average revenue growth of the companies dealing in finished leather is 19% and for leather footwear is 24%.

Figure 29

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Cluster Benefits and Hindrances - Marketing initiatives, quality upgradation, manpower training and technology were the key benefits derived by the companies. On the other hand, funding from institutions, government subsidies, lack of proper infrastructure and availability of skilled labour were the major obstacles observed for the companies covered in the sector. Infrastructure Leasing and Financial Services (IL&FS) has been selected by SIDBI for implementation of BDS component of the project in the Kanpur leather cluster. Under the cluster approach, business development services are slated to be provided by three categories of providers including government support institutions (like the Council of Leather Exports, the Central Leather Research Institutes and IIT-K, etc), industries associations and private BDS providers like online business platforms (fibre2fashion) etc. As per a report of Leather Council, export of leather will see a growth of 15 per cent by 2011. The reason is attributed to an increase in demand from EU. India's labour intensive leather industry, which provides employment to 2.5 million people, accounts for 2.62 percent of the global leather import trade of $137.13 billion. Leather exports from India are expected to touch US $8.25 billion by 2013-14. As compared to the US, the increasing demand is largely witnessed from EU, which covers 80 percent of Indian leather exports. The Slowdown in Leather Industry With a direct employment of 2, 50, 000 (with 27% of them being Women), turnover of Rs 15,200 Crores and an export earnings of Rs 1500 Crore, leather and leather goods industry is a significant driver of economic growth. Footwear is the major segment of the leather goods market and constitutes about 1400 Crores. The industry is labour intensive and is concentrated in the small and cottage industry sectors. The country produces over two billion pairs of different categories of footwear and nearly 95 percent of its production goes to meet its own domestic demand. The major production centers of leather and leather products are located at Chennai, Ambur, Ranipet, Vaniyambadi, Trichy, Tamil Nadu, with Tamil Nadu is the biggest leather exporter (40%) of the country and its share in Indias output on leather products is 70%. While leather shoes and uppers are concentrated in large scale units, the sandals and chappals are produced in the household and cottage sector. More than 4000 units are engaged in manufacturing, of which 95% are SME. Indias share in the global footwear imports is around 1.4%, and wwith worlds largest livestock stock, Indias export is to reach 10%. About 46 per cent of the production in the leather sector is exported to other countries. The major markets for Indian leather products are Germany, Italy, UK, and USA. Other destinations such as Hong Kong, Spain, France, Netherlands, UAE and Australia act as trade hubs. Global recession had a major impact on the industry, in terms of revenue fall and markets. Exports dipped by 11% and SMEs that were primarily into semi-finished leather processing saw a dip over 30% in their revenues. Exports to Germany, UK, and USA, the three major exports markets saw a fall of 17%. With the collapse of traditional Germany and UK market, SME were expecting Dubai to bail them out. However, that did not happen. Cheaper alternate markets such as Russia, Eastern Europe with lower gross margins emerged to fill in the coffers. 72

Central Government announced Stimulus package offering the following to leather industry:

2% interest subvention scheme for leather sector continued till 31st March 2010, Duty emissions for Duty Entitlement Pass Book Scheme (DPEB) scheme, removal of FBT, Service tax exemptions for Transport of goods through road and Commission paid to foreign agents instead of going through refund route

This slowdown has brought forth significant learnings for SMEs in the Leather IndustryFirstly, they need to diversify and expand in order to stay competitive in the market and explore domestic market. The leather SMEs needs to exploit opportunities for leather products in countries such as Russia and Newzealand which has huge potential for value add products like gloves, saddler and leather clothing this can enable the SMEs to grow at a faster rate with better global reach. Opportunities in countries such as Russia (primarily imports from Turkey), Argentina, and Brazil with no manufacturing base were targeted more aggressively. Vaniyambadi and Agra based SMEs also discovered Japan as a profitable destination for low quality leather products. Secondly, focus on domestic market beyond semi-finished leather and uppers. Retail footwear segment in Indian is very price sensitive and has been steadily growing over the year. Major part of the demand is met by the unorganised sector and still there is a shortfall of 300 million pairs. Branded shoe market only account for 20% of the entire market. While international brands largely dominate the higher end of the spectrum, the lower end of the market is dominated by home-grown players as well as unorganised players. While men's footwear is the biggest target category (contributing almost 48%), children's (11%) and women's lifestyle footwear (41%) is not behind in the race. From a price perspective the market consists of four primary segments: less than $3(about 19%), $3-$8 (46%), $9$16(41%), and >$16(4%). While an average Indian male purchase 3 shoes per annum, the second gender purchases an average 6 pairs per annum. Store format targeting women and children is an unexplored area in retail footwear market. With organised retail on the rise and increase in the disposable income retailing certainly looks a promising option. Domestic footwear retail business witnessed a shift in channels too. With large volume brands sales remaining at high streets, and mid segment customers preferring to purchase shoe and other accessories in tandem with clothes, some of the retailers were reworking their presence. For example, M&B footwear does high street retailing through multi-brand outlets and discounts retail chain stores, prefers Malls to position international retail chain stores (sale of international brands such as Lee, Provogue, etc). Domestic brands moved beyond regional markets and were embarking pan-India presence. Domestic brands were realizing the limits to growth by pursuing own store format and switching over to franchise formats to tap markets such as Patna, Ranchi, Vizag, Raipur, etc. Expansion into sub-brands such as sportswear, kids and women were the steps the domestic brands expected to pursue in future. Domestic Tier-II market (semi-rural) with high support crop prices and loan waivers had seen growth over 30%. According to the National Council of Applied Economic Research (NCAER) reports, there are 720 million consumers across 73

6,27,000 villages in rural India. Led by the rising purchasing power, changing consumption patterns, the rural market (semi-urban) which constitutes about 32% showed a growth rate of 17%. Thirdly, moving up the value chain from just suppliers of semi-finished leather and expansion into retail helps to grow revenues even in difficult times. SGL leathers increased their gross margins with introduction of Bags, Wallets and Leather Accessories. SMEs focused more emphatically on institutional sales. Local players such as Damask, SS and other also found safety shoes for industrial use a niche segment where margins are better than in the wholesale business. Finally, branding does pay off. Even in price sensitive markets, Customers prefer to buy brands they can relate and trust. The recessionary period has been a great teacher. It taught SMEs to seek out opportunities in moments of challenge.

7.3 Gem and Jewellery Industry

Gems and Jewellery symbolise Indian tradition in a lot many ways. A legacy that passes from one generation to another, the components of jewellery include not only conventional gold but also diamond, platinum accompanied by a variety of precious and semi-precious stones. The Indian gems and jewellery sector is expected to grow at a compound annual growth rate (CAGR) of around 13 per cent during 2011 2013, on the back of increasing government efforts and incentives coupled with private sector initiatives.The diamond industry in India is predicted to remain stable during 2010-11 due to improved prices and steady demand, as per the credit rating agency Crisil. On the back of healthy demand from Western markets like the US and Europe, India's gems and jewellery exports rose by about 22 per cent year-on-year (y-o-y) to US$ 2.86 billion in January 2011. Industry Structure - Although the market is highly dominated by unorganised players, with increase in consumer income and economic prosperity, the future of organised branded jewellery in India is very bright. In its bid to enhance the market strategy, a gems and jewellery special economic zone (SEZ) sprawling over 40 acres with an investment of US$ 441.1 million is being planned to be set up by Gold Souk, the jewellery mall developer. The company plans to have residential apartments named Gold Souk City, apart from having gems and jewellery manufacturers from Thailand and Dubai who will open their units in India. The US and European markets constitute about 60 per cent of Indias gems and jewellery exports. Indian exporters are also exploring other new markets including South America and East Asia in order to reduce their dependency on the West. Exports - Gems and jewellery exports from India, the largest supplier, rose by 39 per cent in the April 2010-January 2011 period, according to the Gem & Jewellery Export Promotion

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Council. Shipments increased to US$ 30.6 billion from US$ 22 billion a year earlier, the trade group said on its website, citing provisional estimates. Exports in January 2011 gained 22 per cent to US$ 2.9 billion. Exports of cut and polished diamonds saw the maximum growth of 23.44 per cent year-onyear in January 2011, followed by gold jewellery (15.38 per cent) and coloured gemstones (3.8 per cent). During the April 2010-January 2011, period, exports of precious items increased by 38.81 percent to US$ 30.59 billion in comparison to the same period last fiscal, as per data from Gem and Jewellery Export Promotion Council (GJEPC). The Diamond cutting and polishing industry is centered around Surat. The opportunities available to SMEs in this sector are

Highly skilled, yet low-cost labor. Established manufacturing excellence in jewellery and diamond polishing. India is the most technologically advanced diamond cutting center in the world. Opportunity to address one of the worlds largest and fastest-growing Gems and Jewelery markets. Opportunity to leverage Indias strengths to address the global market

7.4 Defence and Aerospace Industry

India Inc is set to promote the small and medium enterprises (SMEs) cluster in the defence and homeland security sector in the wake of India first Defence Production Policy (DPP) explicitly favouring the growth of SMEs. Seemingly, PHDCCI will launch initiatives to create Indias first-ever defence and homeland security clusters for SMEs in the states across the country. These defence and homeland security clusters are to be designated areas in each state which are to locate SMEs pursuing the burgeoning defence and homeland security sectors. Furthermore, India is expected to spend $100 billion over the next decade for defence and security related acquisitions and that would provide the country with nearly $30 billion as offsets, under which the global firms obtaining contract worth over '3 billion have to plough back 30 percent of the deal amount in the domestic industry. Besides, the defence ministry aiming at achieving 70 percent indigenisation and 30 percent imports in defence acquisitions, the accelerated growth of the domestic industry is essential to meet the requirements of the armed forces and the paramilitary. Citing Indian Automotive and Indian Information Technology (IT) sectors are proven examples of SME-led accelerated and sustainable growth. Any policy preference for SMEs in Defence extended by the Government can only help the growth of the industry in defence and homeland Security due to the use of dual-use technologies.

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Previously, the defence ministry, which introduced offsets clause in global armed forces tenders in 2006 to energise the domestic defence sector, had last month expanded the scope to the civil aviation, internal security and related training sectors. Also, Defence Minister had earlier indicated that his ministry was considering proposals for further expansion of the defence offsets implementation in new sectors. Indian SME sector is eyeing a substantial chunk from Indias defence spend, which is expected to touch USD 100 billion by 2012. Indian SMEs are partnering with global players such as Airbus, Boeing and government agencies in a bid to pick up complex engineering projects that are being outsourced. These include building aero structures for next-generation aircrafts to unmanned combat air vehicles (UAV) and robots. The Indian government said it will outsource work to these SMEs based on the virtue of their core competencies and unique capabilities in niche areas, the report said. However, it further added that help will be provided in every possible way. Experts believe that the government should look at Indian firms as real partners and not just as suppliers. With the offset policy coming in force in the Indian defence procurement system, there has been a big boost for the Indian companies including SMEs to be part of the supply chain to overseas supplier. The foreign companies are now looking for Indian companies including SMEs who can supply them with parts, equipment and services. This is also evident from the fact that in the recent past several overseas suppliers and Embassies/ High Commissions have approached us requesting for profile of Indian companies who could be potential supplier/ partner. For the first time, it creates the level playing field and a setting for partnerships for Indian private sector, particularly for SMEs with defence PSUs and foreign suppliers. The policy intent for enhancing potential of SMEs in indigenization and broadening the base of defence R&D is path-breaking. Creation of a specific fund for building such capabilities underlines the willingness of the Government to move forward. This is indeed a welcome step. The policy seems to have operationalize the recommendations of PMs Taskforce on MSMEs- which stipulated that the Offset policy of the government, particularly in the defence and aviation sectors, should give priority to SMEs. Keeping in view, the immense potential that Indian companies now have to provide linkages to overseas suppliers and also to collaborate with them, National Small Industries Corporation (NSIC) (A Government of India Enterprise) and Federation of Indian Micro and Small & Medium Enterprises (FISME) (National body of MSMEs in India) are jointly organizing an International Sub-contracting & Supply exhibition for Defence, Aerospace and Homeland Security viz., DEF+CONTRACT INDIA 2011 from 11th to 13th of March in Hyderabad, India. FISME and the Department of Defence Production have also initiated the process of identification for intervention to operationalize the policy for the SMEs. India to Become Credible Aerospace SME hub - Indian small and medium enterprises (SMEs) are set to gain substantially from the growing aerospace business in the country that 76

will arise from the offsets policy. According to an estimate by the reputed PricewaterhouseCoopers, India will spend $25 billion on commercial aircraft and $100 billion on defence until 2014. India is importing passenger and military aircraft in large numbers and the SMEs are eyeing the business that the offsets policy will bring for them. A host of units that are opening up in the southern Indian state of Karnataka where an aerospace-specific special economic zone (SEZ) is being developed will provide business for the SMEs. About 55 per cent of the land will be allotted to companies for setting up factories and aviation maintenance, repair and overhaul (MRO) activities will be undertaken as well. So far, the state-owned defence suppliers Bharat Earth Movers Limited (BEML) and Hindustan Aeronautics Limited (HAL), Mahindra and Mahindra, Dynamatic Technologies and Japans Amada have been allotted land. Karnataka has become a lucrative destination for aerospace companies due to the eco-system of public sector units engaged in aircraft manufacturing & development, a large number of IT companies and presence of precision equipment manufacturers. The creation of an aerospace park near the Bangalore international airport at Devanahalli on the outskirts of the city is created to attract global investments in the aerospace sector. About 1,000 acres of land was acquired to build world class infrastructure for the aerospace industry and about 250 acres of the land is earmarked for a special economic zone (SEZ) in the aerospace hub. These units in the SEZ will cater to domestic demand as well as the export market. In fact, the business in the aerospace sector has been proliferating and Bangalore-based companies have been supplying machining centres for making moulds, prototyping models, forging dyes and precision mechanical parts to them. The SMEs which supply aerospace components will gain by supplying structural parts to international firms like Airbus and Boeing as part of the offset policy. In fact, SMEs will also find a role in contributing cutting tools for the machining of parts and engines of Sukhoi fighter jets manufactured by HAL. Since the aerospace sector requires advanced and sophisticated components, the Indian Machine Tool Manufacturers Association (IMTMA) has urged the government to assist them in setting up a corpus fund to enable the adoption of new technologies. At present, the SMEs are lacking in skills and technology to develop high-precision components. In fact, it must be the Indian governments prerogative to mitigate the woes of the SMEs through better policies and incentives. The SMEs in the aerospace and defence industry should focus on building complementary activities and capacities and become innovative. In addition, the licensing procedure for defence manufacturing should be streamlined to encourage the entry of SMEs in the defence industry. Interestingly, the Department of Science and Technology and Boeing have set up the National Centre of Aerospace and Innovation Research (NCAIR) in Bombay which will carry out work on innovation and research on avionics and structures in order to build an ecosystem for the manufacture of aerospace components.

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SME Sector Opportunity The Indian defence industrial base needs to ramp up the design and production capabilities in the following technology areas: Thermal imaging, image intensification and infrared based equipment Sensors, detectors, radars and early-warning systems Wireless and mobile surveillance systems and IP surveillance solutions GPS and GSM-based tracking systems Interception and monitoring systems Trajectory correction system and missile guidance Advanced rocket technology Active tank protection systems Metallurgy and forging techniques for guns Automotive technologies Surveillance, communication and navigation technologies Miniaturization and nanotechnology Networking technologies for seam-less integration System simulators Access control and identification and biometric-based systems The defence market potential for SMEs is expected to be driven by the following: Offset program: Foreign companies that benefit from Indian orders for commercial and defence equipment have had to plough back outsourcing work worth 30% to 50%, of the total deal size to Indian companies. This mainly benefits Indian IT companies engaged in designing aerospace and other defence systems. OEMs in the aerospace and defence sectors are shifting their focus to design and systems integration from vertically integrated manufacturing. Global aerospace majors, including Boeing and EADS, are working with several Indian firms in aerospace design and manufacturing, helping them to improve their capabilities and enhance their work profile.

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Chapter 8 - Initiatives for the Development of SME sector

8.1 Governments promotional policy and framework
Table 15 - Administrative Structure for Governance of Small Scale Industries Industry Agency Administrative Dept./Ministry Large/Medium Industries Dept. of Industrial Policy, Dept. of Industrial Development Small Scale Industries SIDO (Small Industries Dept of Small Scale, Agro Development Organization) and Rural Industries, Ministry of Industry Powerlooms Textile Commissioner Ministry of Textiles Traditional Industries Khadi and Village Industries Khadi and Village Industries Dept of Small Scale, Agro Commission and Rural Industries, Ministry of Industry Handlooms Development Commissioner Ministry of Textiles (Handlooms) Sericulture Central Silk Borad Ministry of Textiles Handicrafts Development Commissioner Ministry of Textiles (Handicrafts) Coir Fibre Coir Board Dept of Small Scale, Agro

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and Rural Industries, Ministry of Industry The central and state governments in India have together set up an elaborate 3 tier structure for promoting the small scale sector: At national level, in pursuance of the recommendations of International Perspective Planning team (1953-54), several institutions have been set up. There is 'Central Small Industries Organization' (CSIO) which has been renamed as 'Small Industries Development Organization' (SIDO). During the last three and a half decades, this institution has emerged as the core promotional agency at the central level with a professional staff of more than 13,000 in the year 1993. It consists of 28 Small Industries Service Institutes (SISIs), 30 branch SISIs, 37 extension centers in specific products and 74 workshops as in the year 1993. However subsequently, some of these have been wound up due to their financial non sustainability. These institutions provide technical and management consultancy, organize training programs, conduct techno-economic surveys, prepare project profiles and help prepare unit specific project reports 'National Small Industries Corporation' (NSIC) is another important institution set up in 1955 that supplies primarily imported machinery on easy finance terms, provides marketing assistance, operates 'Prototype Development and Training Centers' (PDTC) in specific fields such as machine tools, injection molding, leather manufacturing equipment etc. NISIET (now called National Institute of Entrepreneurship and Business Development i.e. NIESBUD) was set up to train and promote personnel, industrial managers and entrepreneurs. Other national level institutions that are supporting the small scale sector are 'National Research Development Corporation' (NRDC), 'Bureau of Indian Standards' (BIS), 'National Productivity Council' (NPC), 'Consultancy Development Center' (CDC) and 'Electronics Test and Design Centers' (ETDC). The central financial institutions have also set up the Entrepreneurship Development Institute of India (EDII) at the national level to promote entrepreneurship. At the state level, the governments have set up institutions as follows : 1. Small Industry Development Corporations (SIDCs) to develop infrastructure in the form of industrial plots and industrial sheds. 2. State Financial Corporations (SFCs) to provide long term credit facilities. 3. State Exports Promotion Corporations to provide marketing assistance for exports from the small scale sector. 4. Technical Consultancy Organizations (TCOs) that provide technical, financial and marketing consultancy to the sector. 5. Center for Entrepreneurship Development (CEDs) and Institute of Entrepreneurship Development (IEDs) have been set up to promote entrepreneurship through training. At District level, in the year 1978, the central government launched a program of

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establishing District Industries Centers to provide under a single roof all the support services, clearances, licenses and certificates required by the small entrepreneurs. There are more than 400 such centers, one each in a district. 8.2 Institutional Finance for SMEs The following agencies through their various schemes provide finance to small scale industries sector under the overall policies and guidelines evolved by Reserve Bank of India. At the National Level: 1. SIDBI- Small Industries Development Bank of India 2. NABARD - National Bank for Agriculture & Rural Development 3. NSIC- National Small Industries Corporation 4. KVIC- Khadi & Village Industries Commission 5. Nationalised Banks 6. DCSSI- Development Commissioner, Small Scale Industries At the State Level: 1. State Financial Corporations (SFCs) 2. State Industrial Development Corporation (SIDCs) - Infrastructure/Finance 3. State Cooperatives Banks 4. Khadi & Village Industries Board At Regional & District Level: 1. Regional Rural Banks (RRBs) 2. District Central Cooperative Banks 3. Primary Cooperative Banks 4.Branches of State level institutions & nationalised banks about 65,000 in number 5. Khadi & Village Industries Commission 6. District Industries Center (DIC)

8.3 Khadi and Village Industries Commission (KVIC)

The Khadi and Village Industries Commission (KVIC) is a statutory body formed by the Government of India, under the Act of Parliament, 'Khadi and Village Industries Commission Act of 1956'. It is an apex organization under Ministry of Micro, Small and Medium Enterprises (Govt. of India), with regard to khadi and village industries within India, which seeks to - "plan, promote, facilitate, organise and assist in the establishment and development of khadi and village industries in the rural areas in coordination with other agencies engaged in rural development wherever necessary.". In April 1957, it took over the work of former All India Khadi and Village Industries Board. Its head office is based in Mumbai, with its six zonal offices in Delhi, Bhopal, Bangalore, Kolkata, Mumbai and Guwahati. Other than its zonal offices, it has offices in 29 states for the implementation of its various programs.

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Khadi- It refers to handspun and hand-woven cloth. The raw materials may be cotton, silk, or wool, which are spun into threads on a Charkha (A traditional spinning implement).Khadi was launched in 1920 as a political weapon in the Swadeshi movement of Mahatma Gandhi. Village Industry - Any Industry that is located within a rural area, where the Fixed Capital Investment per Artisan (weaver) does not exceed Rupees One Lakh The common characteristic found in both - Khadi and Village Industries is that they are labor intensive in nature. In the wake of industrialization, and the mechanization of almost all processes, Khadi and Village industries are suited like no other to a labor surplus country like India. Another advantage of Khadi and Village Industries is that they require little or no capital to set up, thereby making them an economically viable option for the rural poor. This is an important point with reference to India in view of its stark income, regional and rural/urban inequalities Objectives of the Commission The Commission has three main objectives which guide its functioning. These are:

The Social Objective - Providing employment in rural areas The Economic Objective - Providing salable articles The Wider Objective - Creating self-reliance amongst people and building up a strong rural community spirit.

The commission seeks to achieve these objectives by implementing and monitoring various schemes and programs. The process of Implementation of schemes and programs starts at the Ministry of Micro, Small and Medium Enterprises which is the administrative head of the programs. The Ministry receives funds from the Central Government of India, and routes these to the Khadi and Village Industries Commission for the implementation of programs and schemes related to Khadi and Village Industries. The Khadi and Village Industries Commission then uses these funds to implement its programs either directly - Through its 29 state offices, by directly funding Khadi and Village institutions and co-operatives, or indirectly through 33 Khadi and Village Industries Boards, which are statutory bodies formed by the state governments within India, set up for the purpose of promoting Khadi and Village Industries in their respective states. The Khadi and Village Industries Boards, in turn, fund Khadi and Village Institutions/Cooperatives/Entrepreneurs. At present the developmental programmes of the commission are executed through, 5600 registered institutions, 30,138 Cooperative societies and about 94.85 lakh people. Schemes and Programs of the Commission

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Prime Ministers Employment Generation Program (PMEGP) - Under the scheme, the beneficiary is required to invest his/her own contribution of 10 per cent of the project cost. In case of Schedule Castes/Schedule Tribes and beneficiaries from other weaker sections, the beneficiarys contribution is 5 per cent of the project cost. The remaining 90 and 95% as of the project cost, as the case may be, is granted by banks specified under the scheme. The Beneficiaries under the scheme are refunded a certain amount of the loan (25% for General, 35% for weaker sections in rural areas) which is credited after two years from the date that the loan was extended. Interest Subsidy Eligibility Certification Scheme (ISEC) - Under this scheme, loans are provided by the banks to the members to meet their working/fixed capital requirements. These loans are provided at a concessional interest rate of 4% p.a. The difference between the actual interest rate and the concessional rate is borne by the commission under the 'grants' head of its budget. However, only members producing Khadi or Polyvastra (a type of Khadi) are eligible for this scheme. Rebate Scheme - The rebate on sales of Khadi and Khadi products is made available by the Government so as to make the price of Khadi and Khadi products competitive with other textiles. Normal rebate (10 per cent) all through the year and an additional special rebate (10 per cent) for 108 days in a year, is given to the customers. The rebate is allowed only on the sales made by the institutions/centers run by the Commission/State Boards and also at the sales centers run by the registered institutions which are engaged in the production of Khadi and polyvastra.

8.4 Non-Government Promotion Structure

There are three national associations representing all type of industries, small and large. These are Federation of Indian Chambers of Commerce and Industries (FICCI) Confederation of Indian Industries (CII) Association of Chambers of Commerce and Industries (ASSOCHAM). These associations represent mainly the interests of large scale industries. However, these associations have membership of small sector as well and represent mainly the policy related interests of SSI sector. The exclusively small industry related associations are diversified geographically and sectorally and are supposed to have been linked with Federation of All India Small Scale Industries (FASSI) Federation of Small and Medium Industries (FOSMI) Indian Council of Small Industries (ICSI) However these institutions are weak in character due to their working for cross purposes and lack of dynamic perspective for small scale sector growth. They have virtually no linkages with the small industry in general and their local associations in specific. Another institution that is concerned with the small and medium enterprises is 'World Assembly of Small and

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Medium Enterprises' (WASME). There are only a few of the local associations that are involved in providing specific individual level services to the small industry. However, all the associations are involved in lobbying with the government to provide one or the other facilities or benefits to the sector.

8.5 Roadmap for the Development of SME sector in 11th Five Year Plan (2007-12)
The limit set for investment in the micro units is a major hindrance in this era of Globalization and competitiveness. The limit has been increased to 5 crores. Steps for development of MSE in the eleventh plan are as follows. (1) It has been targeted to raise the production of MSE units to 13,98,803 cores for the year 2011- 12. Employment has been planned to be increased from 322.28-391.73 lakhs (2) In the MSE scheme in the eleventh plan, previously the manifesto was good for all which has been turned to development. Regarding this, the document (VOL III p. 203) it has been informed that "The eleventh plan approach to the MSE sector marks shift from welfare approach to that of empowerment. The plan looks at the sector as an engine for sustained and inclusive economic growth and employment. The eleventh plan emphasizes on the improvement of living standard of workers and believes that only if a worker is physically and mentally sound, then will he be able to produce a good output (3) In the eleventh plan, as the MSE sector is unorganized, the plan aims at organizing it so that MSE sector gets maximum benefit of all the govt. schemes and plans (4) In the eleventh plan, MSE groups have been taken as a cluster and workers have been made into a group (SHGS) so that their bargaining power is increased (5) The MSE sector gets a loan of 5 lakh for 8 % interest without any bailee will be encouraged a vehement drive will be undertaken, to develop this sector. (6) Centre and the state govt. will give prime importance to the MSE sector. Women working in this sector, get their due rights, for that efforts will be made. (7) Technical information will be provided to Small Industries Development Organization now known as Micro, Small and Medium Enterprises Development Organization which has around 3000 technicians who work in testing centres, tool rooms, etc. (8) Ministry of MSME has been formed for the development of Micro, Small and Medium Industries. In the eleventh plan, it has been decided to establish Technology mission, which will help develop dissemination of technology.

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(9) In the year 2006, the govt. started the National Manufacturing Competitiveness Programme. Under it in 5 years, at the cost of 850 crores, design clinics, steps to increase the competitiveness of groups, and decrease the wastage will be undertaken. (10) This sector faces basic problems like that of electricity. In the eleventh plan it has been suggested, that these small and micro units establish their own power plants.

8.6 Initiatives for the Unorganized Sector

Based on the examination of the problems faced by the enterprises in the unorganized sector, the NCEUS (National Commission for the Enterprises in the Unorganized Sector) submitted eleven reports to the Government. In these reports, NCEUS has made several recommendations for facilitating adequate access to credit, technology, skill development, etc. The recommendations for augmentation of credit flow, inter alia, include revising Priority Sector Lending Guidelines to earmark 12% of Net Bank Credit (NBC) for micro enterprises, providing Adequate Safety Nets to the Banks by undertaking modifications in Credit Guarantee Scheme, fixation of annual targets of new accounts of non-farm unorganised sector enterprises by each bank branch (of commercial, RRBs, co-operative), same rate of interest on loans up to Rs.5 lakh to non-farm unorganized enterprises as for agriculture and creation of a National Fund for the Unorganised Sector (NAFUS). Similarly, for skill-related issues of the unorganized sector, the Commission has recommended launching of a National Mission for Development of Skills in the Unorganised Sector and a massive programme for employment assurance and skill formation with the aim to develop human capital through onjob-training. Further, the Commission has recommended adoption of Mission Mode approach for promotion of technology in the unorganized sector. The social security aspects relating to the unorganized sector have been sought to be addressed by the Unorganised Workers Social Security Act, 2008 (UWSSA). The UWSSA provides for a National Social Security Board at the Central level and for welfare schemes to be formulated by the Central Government on matters relating to (a) health and disability cover (b) health and maternity benefits (c) old age protection (d) any other benefits as may be determined by the scheme (Indira Gandhi National Old Age Pension Scheme, National Family Benefit Scheme, Janshri Bima Yojana, Rashtriya Swasthya Bima Yojana etc. are among the welfare schemes notified in Schedule 1 of the Act under the Central Government). The Act provides a State Social Security Board at the state level to recommend suitable schemes in the State sector and monitor social welfare schemes for unorganized workers. Schemes relating to (a) Provident Fund (b) Employment Injury Benefit (c) Housing (d) Educational Schemes for children (e) Skill Upgradation of workers

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(f) Funeral assistance; (g) Old Age Homes is to be formulated and administered by the State Governments. Policy Implications In addition to 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. There is considerable segmentation among the MSMEs in terms of their size and need tailor made policies for each size class. The policies and programmes for the micro and small enterprises in the unorganized sector would need to address their survival strategies and should be in the direction of providing livelihood alternatives such as social security, skill formation and credit. On the other hand, policies/programmes for the larger sized MSMEs need to address issues relating to growth marketing, access to raw material, credit, skill development and technology upgradation. The Government policy must focus its attention to ensure support to the growth-oriented MSMEs to prosper as also to provide an enabling atmosphere for the MSMEs in the unorganised sector to flourish and progressively integrate with the organized sector. At the same time, the government must take effective steps for the welfare of the workers in this sector. During the past few decades, for several reasons, not unconnected with the way industrial growth took place in our country, labour related issues had focused on regulation rather than welfare. Though labour welfare has taken deep roots, the actual number of workers in the country provided with social security continues to be quite small in relation to the work force. Therefore, if we are to reach out to the uncovered segment we need to focus equally on regulation and welfare. The future strategy ought to focus on providing social security to the unorganised workers in the MSME sector in terms of the mandate under the UWSSA. The definition of ach segment of unorganized worker will have to be clearly evolved because this will facilitate identification of workers for providing social security. This will also help in the registration of such workers. The UWSSA provides for issuing a smart card to each of the worker. The smart cards are already being issued under Rashtriya Swasthya Bima Yojana (RSBY), but the scheme extends to only BPL families. This scheme can gradually be extended to other segments of unorganized workers as are identified in due course. The RSBY platform can also be used for incorporating other social security schemes like Aam Admi Bima Yojana which is presently riding on an independent platform. Thus, there needs to be a convergence of schemes as far as possible on a single platform which will facilitate an easier and convenient delivery of benefits to the target group without any leakage. The existing socials security schemes incorporate a fund mechanism. In case of RSBY, 75% of the premium is paid by the Central Government and the remainder by the States. In case of Aam Admi Bima Yojana, it is 50:50. Since these schemes are meant for poorest of the poorer, almost the entire funding is by the government. However, for schemes 86

that are to be extended to non-poor workers, a contribution can be sought from the workers and, where employer can be identified, even by the employer. The RSBY is being operated in the States through State nodal agencies which are separate legal entities that are wholly owned by the State Governments. These independent institutions can be gradually assigned task of implementing the other social security schemes in respective states.

8.7 Initiatives taken by Bank of Baroda to support SMEs

Bank of Baroda (BoB) is the third largest bank in India, after the State Bank of India and the Punjab National Bank and ahead of ICICI Bank. BoB is ranked 763 in Forbes Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583 billion, a network of over 3,409 branches and offices, and about 1,657 ATMs. It plans to open 400 new branches in the coming year. It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, credit cards and asset management. Its total business was Rs. 5,452 billion as of June 30. As of August 2010, the bank has 78 branches abroad and by the end of FY11 this number should climb to 90. In 2010, BOB opened a branch in Auckland, New Zealand, and its tenth branch in the United Kingdom. The bank also plans to open five branches in Africa. Besides branches, BoB plans to open three outlets in the Persian Gulf region that will consist of ATMs with a couple of people. The Maharajah of Baroda, Sir Sayajirao Gaekwad III, founded the bank on 20 July 1908 in the princely stateof Baroda, in Gujarat. The bank, along with 13 other major commercial banks of India, was nationalised on 19 July 1969, by the government of India. Mission Statement : To be a top ranking National Bank of International Standards committed to augmenting stakeholders value through concern, care and competence.

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1) Baroda SME loan Pack

Baroda SME Loan Pack provides single line of credit for meeting SME borrowers working capital as well as long term requirements within the overall limit approved by the bank. PURPOSE : To provide hassle free credit for working capital (fund based and non-fund based) as also long term requirements, taking into account nature of business, cyclical trends, cash flow projections, peak time requirements and any eventuality of unforeseen spurt in the business. ELIGIBILITY : All Enterprises, i.e. Micro, Small & Medium Enterprises, as defined under MSMED Act, 2006, and other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/crores exclusively banking with our bank/new borrowers desirous of having sole banking arrangement with our bank. COMPOSITE LIMIT : 4.5 times of borrowers tangible net worth as per last audited Balance Sheet, or, Rs. 5.00 Crores, whichever is lower. MARGIN : 25%. RATE OF INTEREST : As per credit rating of the borrower. SECURITY : Exclusive charge on the assets of the enterprise. Personal Guarantees of all promoter Directors / Partners. Charge on the unencumbered personal properties of the partners, promoter Directors, wherever applicable. Third party guarantee in case of credit line above Rs.100.00 lacs to Micro & Small Enterprises as per Regulatory definition.

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 Any other collateral for the credit line above Rs. 25.00 lacs in case of other Enterprises, i.e. Medium Enterprises and Enterprises based on the turnover criteria to maintain asset coverage ratio above 1.25.

2) Working Capital Finance

A firm's working capital is the money it has available to meet current obligations (those due in less than a year) and to acquire earning assets. Bank of Baroda offers corporations Working Capital Finance to meet their operating expenses, purchasing inventory, receivables financing, either by direct funding or by issuing letter of credit. Key Benefits Funded facilities, i.e. the bank provides funding and assistance to actually purchase business assets or to meet business expenses. Non-Funded facilities, i.e. the bank can issue letters of credit or can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement of goods and services on credit. Available in both Indian as well as Foreign currency.

3) Term Finance
Under Term Finance, Bank of Baroda, offers the following: Fund Based Finance for capital expenditure / acquisition of fixed assets towards starting / expanding a business or industrial unit or to swap with high cost existing debt from other bank / financial institution. Non-Fund Based Finance in the form of Deferred Payment Guarantee for acquisition of fixed assets towards starting / expanding a business or industrial unit.

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4) Baroda Vidyasthali Loan

Baroda Vidyasthali Loan is a special scheme for financing Educational Institutions. PURPOSE - To meet the financial requirements for setting up the institutions which includes construction of building, purchase of equipment etc. for the new set up as also renovation of the existing facilities, purchase of instruments for imparting education training to the students. ELIGIBILITY - Educational institutions, Schools, Colleges and other education bodies running education activities LIMIT - Minimum Rs.25 lacs , Maximum Rs.10 crores SECURITY - Equitable mortgage of Land & Building (not agricultural land). Hypothecation of Instruments & Equipment acquired out of the loan and other assets of the Educational Institution, Personal guarantees of the Promoters of the Institution. MARGIN - 25% of the cost of the project. RATE OF INTEREST - Base rate plus 3.50% p.a REPAYMENT PERIOD - Maximum 84 months including moratorium period of 1 year, depending upon the projected cash flow.

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5) Baroda Arogyadham Loan

PURPOSE : To meet the financial requirements for setting up of new Nursing Home/Hospital including Pathological Laboratory, Expansion/renovation/modernization of existing Nursing Home/ Hospital including Pathological Laboratory, Purchase of medical diagnostic equipments as also office equipments, viz. computers, air conditioners, office furniture, Purchase of ambulance etc and to meet working capital requirements. ELIGIBILITY: All entities, i.e. MSMEs, Enterprises other than individuals like Proprietorship, Partnership firms, Private Limited Companies and Trusts engaged in providing medical/pathological diagnostic services to the Society and with turnover upto Rs. 150/- crores. LIMIT Rural Centres - Rs. 0.50 crores Semi-Urban Centres - Rs. 6.00 crores Urban & Metro Centres - Rs. 12.00 crores SECURITY

Equitable mortgage of Land & Building/premises of Nursing Home/Hospital Hypothecation of medical equipment/office equipment acquired out of loan amount. Personal guarantee of Promoter Directors in case of Limited Companies and Trustees in case of Trusts. Hypothecation of medicines, receivables and other chargeable current assets. Charge on unencumbered assets of Promoter Directors in case of Private Limited Companies, or any other collateral by way of FDR, mortgage of properties in the personal name of the relatives of Promoters, etc.

MARGIN : 25%. Higher margin if collaterals are inadequate

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RATE OF INTEREST : As per credit rating of the borrower. REPAYMENT PERIOD : 35 months to 84 months including moratorium depending upon the projected cash flow.

6) Baroda Laghu Udhyami Credit Card

PURPOSE: To provide hassle free credit facilities to Small business units, retail traders, artisans, village industries, small scale industrial units and tiny units, professionals and self employed persons etc. ELIGIBILE BORROWERS: All existing customers in the categories of Small Business, Retail Trade, Artisans, Village Industries, Small Scale and Tiny Units, Professional & Self Employed persons etc. having satisfactory track record / dealing with the bank for last 3 years. LIMIT: Maximum upto Rs. 10/- Lakhs per borrower. PERIOD / VALIDITY: The limit fixed under the scheme will be valid for a period of three years subject to internal annual review based on the conduct / operations of the account. SECURITY: Hypothecation of stock in trade, receivables, machinery, office equipment etc. as specified for existing limit. MARGIN: 25%.

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7) Baroda Artisans Credit Card (BACC)

PURPOSE: To provide adequate and timely assistance to the artisans to meet their credit requirements - both investment needs as well as working capital - in a flexible and cost effective manner. The scheme is implemented in rural and urban areas. ELIGIBILE BORROWERS: All artisans involved in production / manufacturing process. Preference given to artisans registered with Development Commissioner (Handicrafts). Beneficiaries of other Government Sponsored loan schemes will NOT be eligible for coverage under BACC scheme. LIMIT : Maximum Rs. 2/- Lakhs per borrower. MARGIN : For limits upto Rs. 25,000/- No margin For limits above Rs. 25,000/- but upto Rs. 2 Lakhs 15% to 25% margin. Margin is subject to change as per RBI guidelines from time to time or the bank's policy in this regard. SECURITY :

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Hypothecation of assets financed under the scheme..

8) Technology Upgradation Fund Scheme (TUFS) for Textile and Jute Industries
Bank of Baroda grants loans under Technology Up-gradation Fund Scheme launched by Government of India as per guidelines received from time to time from Ministry of Textiles. Bank of Baroda is a nodal agency for determining eligibility and releasing of subsidy for the cases financed by the bank under the scheme. OBJECTIVE To provide encouragement to textile industrial units for taking up technology up-gradation and to modernize their production facilities. The scheme envisages 5% interest reimbursement (4 percentage for spinning industry) of the normal interest charged by the bank on the loans availed by the units from the bank for undertaking technology up-gradation/modernization. New units set up with technology as per guidelines of the scheme would also be eligible for the above benefit, or, 15% Credit Linked Capital Subsidy for Small Scale Sector and 20% for Power-loom Sector, or, 5% interest reimbursement plus 10% capital subsidy for specified processing machinery, technical textiles machinery, garmenting machinery and for CAD, CAM, Design Studio, etc. The scheme also provides 25% capital subsidy on purchase of new machinery and equipments for the pre-loom and post-loom operations, handlooms/up-gradations of handlooms and testing and quality control equipments for handloom production units. PROMOTERS CONTRIBUTION

Minimum 20% of the project cost.

AMOUNT OF LOAN

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Need based.

PROGRAMME PERIOD

The scheme is in operation for a period upto 31.3.2012.

9) Credit Linked Capital Subsidy Scheme (CLCSS)

Bank of Baroda participates in the Credit Linked Capital Subsidy Scheme launched by Government of India to facilitate Technology Upgradation of Tiny and SSI units in the specified products/ sub-sectors. Bank of Baroda is one of the Nodal Agencies appointed by Government of India. OBJECTIVE To facilitate Technology Upgradation of Tiny and SSI units in the specified products/subsectors as notified by Govt. of India by providing 15% capital subsidy for induction of proven technologies approved under the scheme, viz. leather and leather products including footwear and garments; food processing (including ice-cream manufacturing); Information and Technology (Hardware); drugs and pharmaceuticals; auto parts and components; electronic industry particularly relating to design and measuring; glass and ceramic items including tiles, dyes and intermediaries, toys; tyres; hand tools; bicycle parts; foundries ferrous and cast iron; and stone industry (including Marble Mining Industry). LIMIT

Ceiling for loan under the scheme is Rs. 1/- crore.

RATE OF SUBSIDY

15% (Subsidy is calculated with reference to the purchase price of Plant and Machinery).

The Scheme is in operation for the period upto 31.3.2012.

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10) Composite Loans

ELIGIBILITY:

Small Enterprises (Manufacturing Sector) including artisans, village and cottage industrial units and Micro Enterprises in Small Enterprises Sector, and Micro/Small (Service Sector) Enterprises engaged in industrial activities only.

PURPOSE:

Fixed capital investment and / or working capital requirement.

TYPE OF FACILITY : Composite loans. AMOUNT OF LOAN : Upto Rs. 100/- Lakhs. MARGIN:

Nil in case of composite loan upto Rs. 25,000/-. 15% - 25% in case of composite loans above Rs. 25000/- and upto Rs. 100/- Lakhs.

SECURITY:

Charge on assets created out of loan amount and other collateral securities as determined on the merits of each case.

PERIOD OF REPAYMENT:

Minimum 3 years and maximum of 10 years (which can be extended), with initial holiday of 12 months to 18 months.

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11) Collateral Free Loans Under Guarantee Scheme of Credit Guarantee Fund Trust for Micro & Small Enterprises
PURPOSE: To provide collateral free loans upto Rs. 100/- lacs to Micro & Small Enterprises, as defined under MSMED Act, 2006. ELIGIBILITY: The coverage of the Scheme is extended to all new and existing Micro and Small Enterprises (both in the Manufacturing Sector as well as in the Service Sector) as defined under MSMED Act, 2006. LIMIT: The eligible loan limit under the Scheme is Rs.100 lacs.. SECURITY: "Primary security" in respect of a credit facility shall mean the assets created out of the credit facility so extended and/or existing unencumbered assets which are directly associated with the project or business for which the credit facility has been extended. This means if a borrower is sanctioned working capital facility only, a charge can be created on the fixed assets of the unit even though the same are not financed by the Bank and the same will not be treated as collateral security. MARGIN: The credit guarantee cover is available up to 75% of the amount in default in respect of credit facilities up to Rs. 50/- lacs extended by the Lending Institution to an eligible borrower subject to maximum guarantee cover of Rs. 37.50 lacs and 50% for the facilities over Rs. 50/- lacs and up to a limit of Rs. 100/-, i.e. maximum of Rs. 62.50 lacs. In case of following categories of borrowers, guarantee cover is available up to 80% of the amount in default. a) Loans to Micro enterprises up to Rs. 5 lacs (85%). b) Loans to Micro and Small enterprises operated and/ or owned by women. c) All loans in North East Region including the State of Sikkim. GUARANTEE FEE: Particulars One time Annual Service fee Guarantee fee

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Credit facility up to Rs. 5/- lacs Credit facility above Rs. 5/- lacs.

1.00% 1.50%

0.50% 0.75% Applicable as per the borrowing limit as stated above.

Loans in North East Region including 0.75% the State of Sikkim.

12) SME Short Term Loans

PURPOSE: To meet temporary shortfall / mismatch in liquidity, for meeting genuine business requirements only. ENTERPRISES GROUP: Micro, Small & Medium Enterprises as per Regulatory definition and all other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores. ELIGIBILITY CRITERIA Satisfactory credit rating for the last three years Latest Balance Sheet etc. should be available. Satisfactory financial performance in terms of sales / turnover and profits. Negative variance, if any, should not be more than 10%. Satisfactory dealings with the Bank for at least three years. LOAN AMOUNT: Upto 25% of the existing Fund based Working capital limits (depending on the Credit Rating), subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs. PERIOD: Not exceeding 180 days minimum 90 days SECURITY First charge / Equitable mortgage of fixed assets of the company / firm or extension of existing first charge / equitable mortgage of fixed assets, ensuring that there is a minimum asset cover of 1.25. Extension of Charge on current assets for the additional facility ensuring that adequate drawing power is available.

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Extension of all existing guarantees of Directors / Third party guarantees to cover the additional facility. RATE OF INTEREST: As applicable to existing working capital facilities. PROCESSING CHARGES: 25% concession in applicable charges.

13) SME Medium Term Loans

PURPOSE: To augment enterprises working capital gap and to help in improvement of current ratio and also for meeting genuine business requirements. The facility will also be available for repayment of secured and unsecured Loans of other banks or institutions, but not for any purpose, which is not related to the enterprises activity. ENTERPRISES GROUP: Micro, Small & Medium Enterprises as per Regulatory definition and all other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores. ELIGIBILITY CRITERIA

Satisfactory credit rating for the last three years Satisfactory financial performance in terms of Sales/turnover and profits. Negative variance, if any, should not be more than 10%. Total Debt-equity ratio should not be higher than 4.5:1 and total Term Liability and equity ratio should not be more than 3:1. Average DSCR should not be less than 1.75:1

LOAN AMOUNT: Upto 25% of the existing fund based Working capital limits (depending on the Credit Rating), subject to a minimum of Rs. 25 Lakhs and maximum of Rs. 500 Lakhs. PERIOD: Not exceeding 36- months, to be repaid in equal quarterly or half-yearly installments. SECURITY: First charge / Equitable mortgage of fixed assets of the Company / firm or extension of existing first charge/ equitable mortgage of fixed assets, ensuring that there is a minimum asset cover of 1.25 RATE OF INTEREST:

As per credit rating for the additional loan

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Prepayment penalty of 1%, if loan is prepaid within -24- months of drawdown

PROCESSING CHARGES: 25% concession in applicable charges

14) Baroda SME Gold Card

Baroda SME Gold Card envisages provision of additional limit of 10% of the assessed eligible bank finance for Working Capital to Micro, Small & Medium Enterprises as per Regulatory definition and all other enterprises with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores, on request along with regular application for Working Capital limits to meet emergent requirements. PURPOSE:

To provide hassle free on the spot assistance to take care of borrowers emergent requirements and tie up temporary mismatch in liquidity arising out of delayed payment by buyers, tax payment, execution of bulk orders, etc.

ELIGIBILITY

Accounts in Standard Category for last 2 years, with credit rating of BOB-4 and above and enjoying working capital limits of Rs. 25/- Lakhs and above. Accounts having sole banking arrangement with our bank/proposed to be financed under Sole Banking arrangement.

RATE OF INTEREST

As per Credit Rating and as applicable for regular Cash Credit facility.

PERIOD

12 months to be allowed on 4 occasions during the year for a maximum period of 2 months on each occasion with a minimum gap of 15 days between two drawals.

SECURITY

As applicable to regular Cash Credit facility.

DOCUMENTATION

No additional documentation/formalities required at the time of availing facility every time as the 10% additional limit will be a part of the regular sanction. 100

15) Schemes for Financing Energy Efficiency Projects

PURPOSE: Financing SMEs for acquisition of equipments, services and adopting measures for enhancement of energy efficiency/conservation of energy. ELIGIBILITY: SME units financed by bank as also other units desirous of shifting their account to Bank of Baroda. LIMIT: Upto 75% of the total project cost, subject to maximum of Rs. 1/- crore. (Minimum amount of loan Rs. 5/- Lakhs). Project cost may include the following:

Cost of acquisition/modification/renovation of equipment/software. Cost of alterations to existing machinery. Cost of structural / layout changes. Cost of energy audit/consultancy. Preparation of Detailed Project Report (DPR).

RATE OF INTEREST: Base rate plus 4.00% p.a REPAYMENT: Maximum 5 years, including moratorium, if any. SECURITY: a. For Sole Banking Accounts : Extension of first charge on all fixed assets. b. For Consortium/Multiple Banking Accounts : first charge on equipments acquired out of loan and collateral, if any, with the total security coverage being not less than 1.25. Grant from IREDA (Indian Renewable Energy Development Agency): IREDA, at present, gives a grant of Rs. 25,000/- for projects costing Rs. 1/- crore or below to meet partial cost of Energy Audit. This grant is available for the first 100 projects (SME Sectors only) approved by them.

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16) Baroda Overdraft Against Land and Building

Baroda Overdraft against land and building is a unique product for financing working capital requirements/long term margin requirements of SME borrowers against the security of unencumbered land and building belonging to the unit or Promoters of the unit, or, close relatives of the promoters. PURPOSE: To provide hassle free credit to SME borrowers to meet working capital requirements/augment long term margin requirements. ELIGIBILITY: All Enterprises, i.e. Micro, Small & Medium Enterprises, as defined under MSMED Act, 2006, and other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/crores exclusively banking with our bank/new borrowers desirous of having sole banking arrangement with our bank. LIMIT : Minimum :Rs. 25.00 lacs (for Rural/Semi-Urban/Urban/Metro branches) Maximum: Rs. 50.00 lacs (for Rural branches) Rs. 200.00 lacs (for Semi-urban branches) Rs. 500.00 lacs (for Urban & Metro branches) SECURITY : Mortgage of factory land and building and/or any other property (Land & Building) belonging to the unit, promoters of the unit, or close relatives of the promoters, (viz. father, mother, wife, son and daughter only provided they stand as guarantors). Personal guarantees of all Promoter Directors/owners of property. Third party guarantee, if available. Charge on unencumbered personal properties of the Promoter Directors, if available. Hypothecation of stocks/book debts. MARGIN: 40% of the market value of property mortgaged (valuation of the property will be carried out by the valuer on banks approved panel/Government approved valuer) PERIOD: 12 Months RATE OF INTEREST :

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For Micro & Small Enterprises in Manufacturing & Service Sector (As per Regulatory definition) For Medium Enterprises in Manufacturing & Service Sector (As per Regulatory definition) For other Enterprises, i.e. with annual sales turnover of Rs. 1/crore to Rs.150/- crores. OTHER FEATURES :

Base rate +3.25% p.a.

Base rate + 4.00% p.a.

Base rate + 4.50% p.a.

Simplified assessment methods. Submission of stock/book debts statements on half yearly basis. Annual inspection of securities. Non-fund based facilities, like Guarantees, allowed by earmarking Overdraft facility. Valuation of properties once in 3 years.

17) Loans Under Interest Subsidy Eligibility Certificate Scheme of Khadi and Village Industries Commision (KVIC- ISEC)
PURPOSE: To finance institutional financing agencies for lending to Khadi & Village Industries ELIGIBILITY: Institutional financing agencies Khadi & Village Industries Commission, State Khadi & Village Industries Boards, Registered Institutions, Co-operative Societies SUBSIDY: Interest subsidy limited to the difference between the actual rate of interest charged by the Bank and 4% borne by the borrowers NOTE: Bank Finance Cell of KVIC will issue Interest Subsidy Eligibility Certificate. On the strength of these Certificates, the eligible institutions may negotiate with Bank for finance assistance. However, the final decision to accept or reject any loan to the eligible borrower is vested with the Bank. Claims should be commuted on the loan amount indicated in the ISEC or an actual availment whichever is less based on the day to day transactions.

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CASE Proposal of Tricity Tours and Travels

NOTE TO THE ASSTT GENERAL MANAGER, BANK OF BARODA, REGIONAL OFFICE, CHANDIGARH Name of the Account Branch Region Zone : : : : M/s TRICITY TOURS AND TRAVELS Sector 8, Panchkula Chandigarh Region Northern Zone

SECTION I : DETAILS OF THE PROPOSAL Gist of the Proposal 1. a) To consider review of the existing facilities and sanction of additional term finance to the captioned firm for a period of 12 months subject to review thereafter. b) Last Sanction/Review carried 26.03.2010 on c) Reason for Short Review Not Applicable 1.2) Increase Fund Based Limits Fund Based Limits Non-Fund Based Limits Total 1.3) Sanction/Ratification a) b) c) C) d) Modifications Concessions Waivers Confirmation Reference of existing sanction Sanction no. Date Authority Due date of review To permit the firm to continue to maintain Current Account with HDFC Nil Nil Nil SMELF/F/CM/2009-10/08 26.03.2010 Chief Manager, SMELF Chandigarh 26.03.2010 (Amt in Lacs) Existing 156.00 156.00 Proposed 261.76 261.76

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2.0) Basic Data:Asset Classification Banks Credit Rating (Present) Carried out on BOBRAM SME Services model on the basis of ABS as at 31.03.2010

Standard as on 31.03.2010 Rating Borrower Rating Project Rating Term Finance Facility Rating Composite Rating BOB 5 P1 FR3 CR4 Description Investment Safety Investment Safety High Safety Reasonable expected Loss Grade Grade Moderate Moderate

Banks Credit Rating (Previous) Credit Rating carried out on Rating Term Description BOBRAM offline module Loan based on Estimated Borrower MSMEB Investment Grade High Safety financials as at 31.03.2010 Rating OB3 Term Finance Facility N.A. Rating Composite CR3 Low Expected Loss Rating External Credit Rating N.A. Constitution Partnership firm Date of Establishment 12.08.2009 Location Registered Office H.NO.35, Sector- 2, Panchkula Business Premises SCO 866, 2ND Floor, NAC Manimajra Group None Segment Medium Enterprise SME( Service). Industry Transport and Nature of Activity Running of Radio Autos & Taxis Exposure to Industry Sectoral Cap for Industry Banks Exposure Data not Available with the SMELF, Chandigarh Zones Exposure NPA (Bank) NPA (Zone) Collaboration / Joint Venture, if any None Dealing with the Bank since 09.10.2009 MPBF N.A. Our Banks Share 100% 105

Rate of Interest Security Available

4.25% over base rate (Base rate 8.00% as on date) Present effective rate 12.25% PRIMARY A Hypothecation of vehicles, Equipments & Furniture Fixtures including proposed addition having estimated wdv of Rs.314.22 lacs as at 31.03.2011 COLLATERAL A Extension of Equitable Mortgage of H.No.35, Sector-2, Panchkula, admeasuring 402 Sq Meter, standing in the names of Col.(Retd) Virsa Singh Dhillon & Smt. Jagir Kaur Dhillon having market value of Rs.340.00 Lacs ( Distress value Rs. 306.00 Lac) as per valuation report of Er Satish Chander Chawla dated 13.08.2010. The said property was earlier valued at Rs. 248.23 lacs by Mr. Rahul Jindal as per valuation report dated 13.09.2009. The appreciation in the value of the property is mainly on account of increase in the value of land and also on account of inclusion in the valuation of the basement which was not included in the previous valuation. The property has been originally mortgaged to secure housing loan of Rs. 6.90 lacs (present outstanding balance Rs.6.67 lacs) granted to Rs. Mr. and Mrs. Dhillon who are also partners in the captioned firm.The residual value available for the proposed exposure to the captioned firm after allocating 150% of the outstanding balance in the housing loan works out to Rs. 330.00 lacs B Personal guarantee of all the partners of the firm.

Yield in the account during 2009- Rs. 7.94 lacs (12.78% annualised) 2010 Major Inspection irregularities Internal Inspection The last branch inspection was carried out in September 2009 whereas the facilities to the captioned firm was disbursed in October 2009.As such there is no mention in the report of the said account. Auditors of the company. M/s Hitesh Brij & Associates Qualification remarks of the auditors Nil Pollution Clearance Not Applicable Whether statutory dues have been Yes paid Whether the names of the Company / No Associates or Directors appear in RBI defaulters list and / or caution list Whether the Company / firm / No promoters and their Associates are on ECGC caution list. / Special

106

Approvals List. Compliance of Earlier terms and Yes (however branch to ensure) conditions including creation of charge. CIBIL report in respect of the directors / partners /proprietor/ guarantors was obtained on 30.08.2010 and the observations are as under Mr. Virsa Singh Dhillon Ms. Jagir kaur Dhillon Mr. Harbir Singh Mann As per the report there is nil outstanding in respect of 1 Personal Loan availed by Mr. Virsa Singh Dhillon. As per the report there are no borrowings made by Ms. Jagir kaur Dhillon As per the report Mr. Harbir Singh Mann is sanctioned a Housing Loan of Rs.23.01 lacs with outstanding balance of Rs. 22.43 lacs as at 30..06.2010 with nil overdues. Branch to ascertain the name of the Bank/ FI Sole Nil Not Applicable No Net worth in lacs as on 31.07.2010 127.61 362.05 69.74

2.02) 2.03) 2.04) 2.05) 2.06)

Banking Arrangement Loans from Financial Institutions Security/ W.D.V. of security Any reschedulement agreed (in last 3years) Name of Partners

Col.(Retd.) Virsa Singh Dhillion Mrs. Jagir Kaur Mr. Harbir Singh Mann 2.07) Name of Key Persons Col.(Retd.) Virsa Singh hillion Sh. Harbir Singh Mann 2.08) Name of Guarantors Col.(Retd.) Virsa Singh Dhillion 127.61 Mrs. Jagir Kaur 362.05 Mr. Harbir Singh Mann 69.74 2.09) Business experience of Partners Col.(Retd.) Virsa Singh Dhillion: He retired from Indian Army in 2002 after serving the country for 39 years. He is a Mechanical Engineer by profession & has handled army transport during his career in Army. At present he is serving with a Radio AC Cabs company as manager on honorarium basis since last three years. Before starting his own venture of Radio Autos, the first in India, he was serving with a Radio AC Cabs company as manager on honorarium basis for three years. Mrs. Jagir Kaur Dhillon: She is a house wife and is also looking after the accounts of the company Mr. Harbir Singh Mann: He is graduate from Panjab University. He is 25 year old. He is working along with Col Dhillon

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3.0. ISSUE FOR CONSIDERATION: 3.1) To consider review of the existing credit facilities and sanction of fresh term loan for a period of 12 months subject to annual review thereafter (Amt in lacs) Nature of facilities Existing Proposed Outstanding Excess/ Overdue Limit Limit As on 31.08.10 Term Finance Term Loan I 42.14 35.10 41.51 6.41 Term Loan II 113.86 106.66 106.74 Term Loan III 120.00 Working Capital TOTAL EXPOSURE 156.00 261.76 148.25 @6.41 @ The firm is reported to have since deposited Rs. 3.00 lacs and the balance is proposed to be deposited within 10-15 days but before availment of the fresh facility. 3.2 3.3 Modifications To permit the firm to continue to maintain Current Account with HDFC Concessions -Rate of -interest Charges -Waivers -Confirmations --

3.4

4) BACKGROUND OF THE FIRM The firm was established in Aug 2009 with the object to provide round the clock radio monitored Auto service to the middle class under the branch name of TRICITY TUK TUK It was a new concept introduced for the first time in India. The firm initially proposed to introduce 100 autos along with 5 radio cabs at an estimated cost of Rs. 208.00 lacs. The promoters had planned to introduce 50 autos along with 2 cabs in the first phase and the remaining was to be inducted into their fleet after examining the market response. The firm after inducting 31 autos and 5 cabs changed their plans to induct more autos and proposed to induct 20 more cabs on account of the following factors The matter of granting of permission for inter city plying of autos ie between Mohali, Panchkula and Chandigarh remained pending with the transport departments of Haryana, Punjab and Chandigarh UT. As a result of which the firm had to allocate autos amongst the 3 centers. They therefore would require more autos then envisaged earlier. There was also delay in setting up of LPG pumps in the tricity as a result of which the refilling of the LPG took considerably long time and the firm was not able to achieve the optimum mileage envisaged by them The price of LPG sharply increased from Rs. 26.80 per kg to Rs.33.90 per kg however the request of the firm for increase in the tariff remained pending with the local administration.

108

In view of good response the firm has now proposes to induct 25 more cabs in their fleet. The cost of the proposed expansion is estimated at Rs 159.43 lacs. They have approached us for sanction of Term Loan of Rs. 124.00 lacs for part meeting of the cost. 5) SECURITY COVERAGE Security Detail Primary Security Hypothecation of vehicles, Equipments & Furniture Fixtures including proposed addition having estimated wdv of Rs.314.22 lacs as at 31.03.2011 Total Primary Security Collateral Security Extension of Equitable Mortgage of H.No.35, Sector-2, Panchkula, admeasuring 402 Sq Meter, standing in the names of Col.(Retd) Virsa Singh Dhillon & Smt. Jagir Kaur Dhillon having market value of Rs.340.00 Lacs ( Distress value Rs. 306.00 Lac) as per valuation report of Er Satish Chander Chawla dated 13.08.2010. The said property was earlier valued at Rs. 248.23 lacs by Mr. Rahul Jindal as per valuation report dated 13.09.2009. The appreciation in the value of the property is mainly on account of increase in the value of land and also on account of inclusion in the valuation of the basement which was not included in the previous valuation. The property has been originally mortgaged to secure housing loan of Rs. 6.90 lacs (present outstanding balance Rs.6.67 lacs) granted to Rs. Mr. and Mrs. Dhillon who are also partners in the captioned firm.The residual value available for the proposed exposure to the captioned firm after allocating 150% of the outstanding balance in the housing loan works out to Rs. 330.00 lacs Total Collateral Security Total security Total Exposure Total Security Coverage Collateral Security Coverage 6.0 OTHER INFORMATION: 6.1 Dealing and conduct of account Value in lacs 314.22

314.22 330.00

330.00 644.22 261.76 2.46 1.26

the The dealings of the firm and conduct of their accounts has been reported to be satisfactory. Further the firm has been regular in servicing interest /loan instalment in respect of Term Loan II However on account of improper linkage of their Current Account with Term Loan I the instalaments and interest in respect thereof have not been recovered since April 2010 despite their being adequate turnover in the account. The firm

109

6.2

6.3 6.4 6.5 6.6

6.7

6.8

6.9 6.10 C&I

6.11 6.12

has since deposited Rs.3.00 lacs and they have assured to clear the overdues within 10-15 days and before availament of the fresh facilities Documentation: Whether verified Not Applicable (New firm) by Legal Dept. & whether in Branch has confirmed that the existing order/enforceable documents have been verified by the Law Officer posted at RO and irregularities pointed out have been rectified. Whether proposed limits are Yes within Banks prudential Single borrower/Group exposure norms. Pro-rata non-fund based business Not applicable Comments regarding utilization of The existing term loans sanctioned to the firm limits have been fully utilized. Comments regarding credit Credit Rating has been carried out on the basis of rating/when last done ABS as at 31.03.2010 on SME Services Model of BOBRAM and the firm attained acceptable rating of BOB-5 Justification for proposed rate of Proposed interest is as per the rate of interest interest applicable for borrower with combined rating of CR-4 and falling to ME category under SME services (Regulatory) Whether listed firm: present No market quotation 52 weeks high / low: Not listed subsequent to buy back of shares. Our Banks investment in the Nil firm: Our Exposure (in lacs) to the captioned firm ME SMEInternational Investment Total Micro/SE (Mfg/Service s) 261.76 261.76 Contingent liabilities Not Applicable Others Pre sanction inspection was carried out by Mr. Raza Officer attached with SME LF Chandigarh on 30.08.2010 and nothing adverse has been reported in his report.

7.0 JUSTIFICATIONS FOR Review of Existing Term Loans - Term Loan I The firm /company was sanctioned a Term Loan of Rs. 42.14 lacs for purchase of 20 radio cabs. The loan was to be repaid in 48 monthly instalments with 47 installments of Rs. 0.88 lacs each and last installment of Rs. 0.78 lacs. The first instalment was to commence from 01.01.2010. The firm availed the entire loan amount of Rs. 42.14 lacs and the outstanding

110

balance as on 31.08.2010 was Rs. 41.51 lacs with overdues of Rs.6.73 lacs. The overdues are on account of inaccurate linkage of the current account of the firm with their loan account as a result of which the system did not recover the interest and instalment for the period April August 2010 despite there being turnover of Rs. 79.00 lacs in the account. The firm has since deposited Rs. 3.00 lacs towards the overdue amount and the balance is proposed to be deposited within next 10 days but before availment of the fresh term loan requested. In view of the above we recommend for review of the account for a further period of 12 months. Branch to however ensure to recover the overdue amount before disbursement of the additional loan Term Loan II The firm was sanctioned a Term Loan of Rs. 113.86 lacs for purchase of 25 radio cabs . The loan was to be repaid in 48 monthly instalments with 47 monthly installments of Rs. 2.40 lacs each and the last installment of Rs. 1.06 lacs. The first instalment was to commence 3 months after date of first disbursement. The firm commenced availment of the loan from 29.03.2010 and repayment of the loan was to commence from 29.07.2010, however branch has commenced recovery of instalment amount of Rs. 2.37 lacs in the account from June 2010. The present outstanding balance in the account is Rs. 106.74 lacs with nil overdues. Branch has recommended for review of the facility at the existing outstanding level for a further period of 12 months which we endorse. Term Loan III In view of higher margins available on plying of cabs and good response received for the cab services introduced by the firm the promoters plan to induct 25 more cabs at an estimated cost of Rs. 152.00 lacs. The cost of additional fare meters and other accessories is estimated at Rs. 7.43 lacs. They have therefore requested for sanction of additional Term Loan of Rs. 124.00 lacs. Keeping in view satisfactory performance of the firm so far and on the recommendations of the brand we recommend for favorable consideration of their request. The proposed loan is to be repaid in 57 monthly instalments to commence after 3 months from the date of first disbursement. Permit the firm to continue to maintain Current Account with HDFC. The firm opened a current account with HDFC which is very near to the office of the firm. The said bank is reported to be providing pick up services for cash deposits without any cash handling and other charges. Further they are reported to be extending free issuance of Drafts and cheque books. In view of the proximity of the Bank to their office, functional convenience and mitigation of risk of loss the firm has requested for permission to continue the account. We recommend for favorable consideration subject to that payment of statutory dues and salary is made through their account with the branch. Further the firm to also provide 12 PDC on their current account with HDFC which shall be used in case of non availability of balance in the account with the branch for recovery of instalments. The firm to also undertake to replenish these cheques every 9 months. 8.0 RECOMMENDATIONS:Based on the afore said, satisfactory performance of the firm so far, acceptable projections submitted as detailed in section II of this note, adequate collateral security offered and 111

keeping in view the market standing and experience of key persons we recommend for sanction of the facilities as detailed under Issue for Consideration on the terms and conditions as detailed in Annexure D and in this note. We also recommend for grant of permission to the firm to continue their current account with HDFC. However branch to further ensure that 1. The repayment schedule is correctly fed into Finacle System so as to ensure recovery of correct interest and instlament on due dates. Branch to specifically confirm compliance at the time of seeking permission for disbursement. 2. The loan is to be disbursed in stages directly to the supplier of the vehicles after ascertaining the discounted cost of vehicles under TAXI quota. 3. End use of funds are to be verified. 4. That the loan is to be disbursed after : The firm inducts additional capita of Rs. 39.43 lacs in tandem with margin contribution for the proposed fresh loan. Overdue interest/instalment in respect of Term Loan-I stands recovere3d All other terms and conditions of the sanction have been complied with including those contained in Corporate Office circular no. BCC:BR:98:313 dated 13.11.2006. 5. Undertaking from the partners/ company that dividend/ withdrawals from accruals shall be made by them only after attaining the projected level of TNW. In case of shortfall in profits the same are to be compensated by induction of additional capital so as to ensure that the projected levels are attained. 6. Undertaking from the landlords of the firm to the effect that they shall Give intimation to the Bank before seeking eviction of the rented premises Allow free access to the Bank staff for verification of assets financed by us 7. Our lien on all the vehicles to be duly registered in the records of RTO and insurance company. Recommended for sanction

(DR Wadhwa) Sr. Manager SME LF Chandigarh Place: Chandigarh Date : 13.06.2011 Comments of the sanctioning authority.

(LD Ahuja) Chief Manager SME LF Chandigarh Place: Chandigarh

112

113

MOVEMENT CHART Name of the Account Branch Region Zone M/S TRICITY TOURS AND TRAVELS Sector 8, Panchkula Chandigarh Northern , New Delhi

: : :

Complete proposal received at SME HUB. 9.06.2011 Clarifications/Last information received 13.06.2011 Proposal submitted to higher authorities for 13.06.2011 consideration Queries raised Reply Received Sent for Credit approval Put up for sanction.

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LEGAL COMPLIANCE CERTIFICATE: Name of the Account Branch Region Zone M/S TRICITY TOURS AND TRAVELS Sector 8, Panchkula Chandigarh Northern , New Delhi

CERTIFIED THAT while processing the proposal for the sanction of credit facility to be considered, all the relevant guidelines, regulations, rules and laws as applicable and required to be kept in view, have been complied with and all due diligence has been taken.

Place: Chandigarh Date:13.06.2011

(DR Wadhwa) Chief Manager

CERTIFIED THAT while exercising discretionary power for the sanction of credit facilities, all the relevant guidelines, regulations, rules and laws as applicable and required to be kept in view, have been complied with and all due diligence has been taken.

Place: Chandigarh Date:14.06.2011

( A N Mehta) Asstt. General Manager

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SECTION II- FINANCIAL PARAMETERS AND ASSESSMENT Particulars Audited Esti. Proj Year Ending 31st March 2010 2011 2012 a) Balance Sheet Data / Capital Structure Share Capital 21.73 81.49 87.43 Reserves & Surplus -4.75 6.12 45.40 Tangible Net worth 16.98 87.61 132.83 Term Liabilities 11.90 170.99 105.51 of which Unsecured Loans 0.00 0.00 0.00 Capital Employed 28.88 258.60 238.34 Net Block 53.95 303.00 265.78 Non Current Assets 11.84 0.75 0.75 of Which Funds Invested outside 0.00 0.00 0.00 Business Current Assets 7.05 20.33 54.12 Current Liabilities 43.96 65.48 82.31 Net Current Assets -36.91 -45.15 -28.19 Capital Deployed 28.88 258.60 238.34 b) Operational Data Net Receipts 32.21 228.54 326.98 Direct expenses 21.58 52.73 70.82 Adm. & Selling Expenses 5.25 92.25 113.40 Depreciation 8.35 58.49 64.66 Interest 1.78 18.94 22.00 Net Profit before Tax -4.75 6.13 56.10 Net Profit After Tax -4.75 6.13 39.27 Profitability Ratio NP/Sales % -14.82 2.68 12.01 NP/ Capital Employed % -16.45 2.37 16.48 Debtor Turnover ratio days) 2 29 30 PAT / TNW % -27.97 7.00 29.56 Current Ratio 0.16 0.31 0.66 DE Ratio (TTL/ TNW) 0.70 1.95 0.79 DE Ratio (TOL/TNW) 3.29 2.70 1.41 Quasi DE Ratio 3.29 2.70 1.41 FACR 1.07 1.28 1.55 Long Term Sources 326.29 109.88 Less: Long Term Uses 307.54 92.92 Surplus(+)/Short fall(-) 18.75 16.96 Short Term Sources 4.88 16.83 Less: Short Term Uses 23.63 33.79 Surplus(+) /Short fall(-) -18.75 -16.96

Proj 2013 87.43 102.47 189.90 42.77 0.00 232.67 248.41 0.75 0.00 70.71 87.20 -16.49 232.67 343.32 74.36 118.92 53.87 14.63 81.54 57.08 16.63 24.53 30 30.06 0.81 0.23 0.68 0.68 2.35 110.94 101.98 8.96 7.63 16.59 -8.96

Proj 2014 87.43 167.66 255.09 13.19 0.00 268.28 236.33 0.75 0.00 88.72 57.52 31.20 268.28 343.32 74.36 118.92 49.58 7.35 93.11 65.17 18.98 24.29 30 25.55 1.54 0.05 0.28 0.28 5.53 114.77 100.24 14.53 3.48 18.01 -14.53

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2.0 COMMENTS ON FINANCIAL PERFORMANCE: Receipts: The commercial operations were launched by the firm from 09.09.2009. They had estimated receipt level of Rs.30.50 lacs as at 31.03.2010 and achieved a level of Rs. 32.21 lacs. The receipts comprise of vehicle fare and advertisement receipts. They have based on the performance so far estimated receipt level of Rs. 228.54 lacs for 2010-11 and have projected a level of Rs. 326.98 lacs for 21011-12. The estimated /projected levels are based on the following No of Vehicles Avg KM per day running Avg rate per km Daily income in Rs. Est. Days of operations in a month 26 26 26 26 26 Operative months in a year Total Annual receipts in lacs 72.54 84.50 50.70 13.00 7.80 228.54 77.38 218.40 31.20 326.98

2010-11 Autos 31 90 Cabs 25 100 25 100 Advertisement earnings 25 25 Total receipts 2010-11 2011-12 Autos 31 100 Cabs 50 100 Advertisement earnings 50 Total receipts 2011-12

8.335 13 13

23250 32500 32500 5000 5000

12 10 6 10 6

8 14

24800 70000 10000

26 26 26

12 12 10

Keeping in view the above the estimated / projected receipts appear to be reasonable. Net Profit : The level of PBT of the firm was estimated at Rs. 3.04 lacs without providing for any depreciation. The firm however attained a level of Rs. (-) 4.75 lacs after providing for depreciation of Rs. 8.35 lacs. The level of cash profits of the firm was at Rs. 3.60 lacs during 2009-10 against estimated level of Rs. 3.04 lacs for the same period. The level of PBT is estimated at Rs. 6.13 lacs for 2010-11 and is projected at Rs. 56.10 lacs for 2011-12. The net profit margin works out to 2.68% for 2010-11 and 12.01% for 2011-12. Tangible Net worth (TNW) : The level of TNW of the firm was estimated at Rs. 16.98 lacs against estimated level of Rs. 17.54 lacs as at 31.03.2010. The shortfall in the level is on account of loss suffered by the firms in the first year of operations, however, the firm posted cash profits of Rs. 3.60 lacs. Fresh capital of Rs. 28.13 lacs has since been inducted upto

117

31.07.2010 along with unsecured loan of Rs. 4.00 lacs to part meet the margin requirement for the loan. The firm proposes to induct additional capital of Rs. 36.38 lacs and plough back part of estimated profits to attain TNW level of Rs. 87.61 lacs as at 31.03.2011. The unsecured loan of Rs. 4.00 lacs raised is proposed to be released.. Current Ratio : The current ratio of the firm after accounting for term loan instalment repayable within 12 months as current liability works out to 0.16 as at 31.03.2010 and is estimated at 0.31 as at 31.03.2011. The ratio is much below the acceptable level on account of the loan instalments being the only component of current liabilities. Further in this type of activity there are no current assets except cash and receivables. Keeping in view adequate fund flow estimated/ projected to meet the loan repayments the estimated/ projected level of current ratio may be accepted. Debt Equity Ratio: The level of TTL/TNW and TOL/TNW was at a comfortable level of 0.70 and 3.29 as at 31.03.2010 respectively. The estimated level of 1.95 and 2.70 as at 31.03.2010 and projected levels for the subsequent years too are at comfortable levels. FACR: The actual, estimated and projected level of FACR is at an acceptable level and is above the benchmark of 1. DSCR: The average DSCR for the proposed repayment period works out to 1.85 with a minimum of 1.42 during 2010-11. The same is considered satisfactory. 3.1. REQUIREMENT OF OTHER FACILITIES: Term Loan The firm proposes to expand their activity by inducting 25 more cabs in their business at an estimate cost of Rs. 159.43 lacs. The cost of the Project and Means of Finance proposed is as under Project Cost Sr. Particulars No As per last sanctio n 37.66 134.34 As at 31.03.10 in lacs 1 2 4 Autos Cabs Computer Soft Server Inverter TFT UPS Fare meter 37.67 10.41 27.50 3.83 0.63 2.07 0.41 3.57 23.71 5.80 As at 31.07. 10 @ 37.67 140.20 Additio ns propos ed in lacs 152.00 As at 31.03. 11 Margin Bank Finan ce

%a ge 37.67 292.20 29.51 25 25

Am t 38.0 114.0 0 0 1.45 4.35

5.00

4.09

1.63

5.72

25

0.41 1.22

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6 Furniture 7 AC Gross Block Less Dep. Net Block

3.50 208.00

3.70 62.29 8.35 53.94

4.18 0.56 210.41 16..01 194..4 0 6.51 200.91 49.86 (-)3.17 4.00 42.14 113.56

159.43

4.18 0.56 369.84 66.84 303.00 0.75 20.34 324.09 25.0 39.8 119.5 0 6 7

Advance payment for 11.84 FA/security Margin for WC 1.59 Total : 208.00 67.37 Means of Finance Partner s 52.00 1 Capital Internal 2 Accruals Unsecured 3 Loans Term Loan 42.14 4 1 Term Loan 113.86 2 Term Loan -3 Total TL /disbursed Less Prin. repayments Overdue interest TL O/s Total 208.00 21.73 (-)4.75 -42.14 10.50 -52.64 2.65 0.40 50.39 67.37

35.43

87.61

42.14 113.56 124.00 124.00 279.70 43.22 -236.48 324.09

155.70 7.39 1.91 150.22 200.91

124.00

159.43

@ Branch has allowed disbursement of the loan in excess of the item wise cost as envisaged by the party in their proposal. However the total assets created by the firm are more than the estimated level. Comments Purchase of Cabs The firm proposes to purchase 25 cabs of various models manufactured by Maruti, TATA and Ford. They have submitted quotation of M/s Joshi Auto Zone P Ltd. for Indigo Manza Aqua Quadrajet Dew White model for Rs. 6.08 lacs. The firm is yet to decide the exact number of vehicles of each brand to be purchased and have based cost of the vehicles on the basis of the said quotation. Any increase in the cost of vehicles shall be borne by the promoters from their own sources. Fare meters

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The firm will require 25 additional fate meters for the new cars to be inducted into their fleet. The cost of the meter has been quoted at Rs. 6500 per piece by M/s Pricol Limited. MDTS (fleet tracking devices ) The firm shall also require 25 additional MDTS (fleet tracking devices ) priced at Rs. 5.80 lacs as per offer letter of M/s Arya Omnitalk Wireless Solutions Pvt. Ltd. Capital The firm propose to induct additional capital to the tune of Rs. 37.22 lacs over and above the outstanding level of Rs. 52.14 lacs as at 31.07.2010 to meet the margin requirement for the proposed expansion. The balance amount of Rs. 2.64 lacs is proposed to be met from internal accruals. Repayment The fresh loan is proposed to be repaid in 57 monthly instalments with first instalment to commence 3 months after the date of first disbursement. Based on the proposed repayment schedule the DSCR of the firm has been calculated as under. 31.03 PAT Depreciation Interest(TL) Total Interest(TL) Installment Total DSCR 2011 6.13 58.49 18.94 83.56 18.94 41.28 58.65 1.42 2012 39.27 64.66 22.00 125.93 22.00 65.48 88.85 1.42 2013 57.08 53.87 14.63 125.58 14.63 65.48 81.53 1.54 2014 65.17 49.58 7.35 122.10 7.35 62.74 71.46 1.71 2015 70.14 47.27 2.59 120.00 2.59 31.98 34.66 3.46 2016 @ 34.36 25.19 0.19 59.74 0.19 12.99 13.17 4.53 Total 272.15 299.06 65.70 636.91 65.70 277.75 343.45 1.85

@ The fig of PAT, Depreciation and interest have been taken for half year on proportionate basis. The average DSCR for the proposed repayment period works out to 1.85 with a minimum of 1.42 during 2010 -11. The same is considered satisfactory. SENSIVITY ANALYSIS On reducing receipts by 10% Particulars Proj. Year Ending 31.03. 2011 Projected Receipts 228.54 Receipts Stressed 205.69 by10% Direct expenses 52.73

Proj. 2012 326.98 294.28 70.82

Proj. 2013 343.32 308.99 74.36

Proj. 2014 343.32 308.99 74.36

Proj. 2015 343.32 308.99 74.36

Proj. 2016 343.32 308.99 74.36

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Adm. & Selling Expenses Depreciation Interest Net Profit Before Tax Tax Net Profit After Tax

92.25 58.49 18.94 -16.72 -16.72

113.40 64.66 22.00 23.40 7.02 16.38

118.92 53.87 14.63 47.21 14.16 33.05

118.92 49.58 7.35 58.78 17.63 41.15

118.92 47.27 2.59 65.85 19.75 46.10

118.92 50.38 0.19 65.14 19.54 45.60

Impact of 10% reduction in sales on Average DSCR 31.03 2011 2012 2013 2014 2015 PAT -16.72 16.38 33.05 41.15 46.10 Depreciation 58.49 64.66 53.87 49.58 47.27 Interest(TL) 18.94 22.00 14.63 7.35 2.59 Total 60.71 103.04 101.55 98.08 95.96 Interest(TL) Installment Total DSCR 18.94 41.28 60.22 1.01 22.00 65.48 87.48 1.18 14.63 65.48 80.11 1.27 7.35 62.74 70.09 1.40 2.59 31.98 34.57 2.78 Proj. 2013 343.32 74.36 78.08 118.92 53.87 14.63 77.82 23.34 54.48

2016 22.80 25.19 0.19 48.18 0.19 12.99 13.18 3.66 Proj. 2014 343.32 74.36 78.08 118.92 49.58 7.35 89.39 26.82 62.57

Total 142.76 299.06 65.70 555.70 65.70 277.75 343.45 1.62 Proj. 2015 343.32 74.36 78.08 118.92 47.27 2.59 96.46 28.94 67.52 Proj. 2016 343.32 74.36 78.08 118.92 50.38 0.19 95.75 28.73 67.02

On increasing Direct expenses by 5% Particulars Proj. Proj. Year Ending 31.03. 2011 2012 Receipts 228.54 326.98 Projected Direct Expenses 52.73 70.82 Direct Exp increased by 55.36 74.36 5% Adm. & Selling Expenses 92.25 113.40 Depreciation 58.49 64.66 Interest 18.94 22.00 Net Profit Before Tax 3.50 52.56 Tax 18.77 Net Profit After Tax 3.50 33.79 Impact of 5% increase 31.03 2011 PAT 3.50 Depreciation 58.49 Interest(TL) 18.94 Total 80.93 Interest(TL) 18.94

in Direct Expenses on DSCR 2012 2013 2014 2015 33.79 54.48 62.57 67.52 64.66 53.87 49.58 47.27 22.00 14.63 7.35 2.59 120.45 122.98 119.50 117.38 22.00 14.63 7.35 2.59

2016 33.51 50.38 0.19 84.08 0.19

Total 255.37 299.06 65.70 620.13 65.70

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Installment Total DSCR

41.28 60.22 1.34

65.48 87.48 1.38

65.48 80.11 1.54

62.74 70.09 1.70

31.98 34.57 3.40

12.99 13.18 6.38

277.75 343.45 1.81

Stress Testing has been carried out by decreasing receipts by 10% and increasing direct expenses by 5%. It is observed that even after stressing the receipts/increasing direct cost the average DSCR decreases to1.62/1.81. However the ratio still remains over 1.50and can be considered acceptable. ASSESSMENT OF NON FUND BASED LIMITS: Any other matter which in the opinion of Branch / Zone is important to decide the proposal. Nil Nil

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SECTION III- INDUSTRY PERCEPTION. INDUSTRIAL BUSINESS SCENARIO PERCEPTION: The transport industry has been growing at a steady rate over the last few years and is likely to continue on the same path. The public transport is a conventional source of destination & is used by common man. Nowadays every body wants safe & secure journey at reasonable cost. 2.0. STRENGTH, WEAKNESS, OPPORTUNITY & THREATS (SWOT):

Strength: The partners of the firm are well experienced in this line and have a good understanding of the market. The firm will provide round the clock cheap & safe public transport system. Available security cover is adequate. This concept is first time launched by any administration in India. Ladies drivers are proposed for safe & secure service for ladies & children. By introducing GPRS system, every movement of the vehicles will be monitored by the control room. Weakness: It is a totally new concept for autos & no past history/data available. Opportunity: Presently all the autos in Tricity running on diesel, as per government guidelines the same are to be converted to LPG/CNG. The total strength of the autos in Tricity is near about 3000, all are on diesel. The firm has already introduced 31 radio autos which are on LPG. GPRS system. Ladies drivers also for few autos. Fully safety equipped autos.

Threats: Any change in Government policy can adversely affect the project. Competition in the market. Availability of LPG.

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ANNEXURE D Terms & Conditions of Sanction Term Loan I Amount Residual Period Amount of instalment Rate of interest Term Loan II Amount No of instalments Amount of instalment Rate of interest Term Loan III Purpose Amount Margin Period Moratorium period No of instalments Amount of instalment First Instalment commence from Rate of interest Security Rs. 35.10 lacs reduced from Rs. 42.14 lacs 40 moths 39 instal. of Rs. 0.88 lacs Last instal. of Rs. 0.78 lacs 4.25% over base rate (Base rate 8.00% as on date) Present effective rate 12.25% Rs. 106.66lacs reduced from Rs. 113.86 lacs 45 44 instal of Rs. 2.40 lacs Last instal of Rs. 1.06 lacs 4.25% over base rate (Base rate 8.00% as on date) Present effective rate 12.25% 25 new cabs (Maruti/Ford/Tata brand), Fare Meters and MDTs Rs. 120.00 lacs 25% 60 months 3 month 57 56 instal of Rs. 2.10 lacs Last instal of Rs. 2.40 lacs to 3 months after 1st disbursement 4.25% over base rate (Base rate 8.00% as on date) Present effective rate 12.25% PRIMARY Hypothecation of vehicles, Equipments & Furniture Fixtures including proposed addition having estimated wdv of Rs.314.22 lacs as at 31.03.2011 COLLATERAL Extension of Equitable Mortgage of H.No.35, Sector-2, Panchkula, admeasuring 402 Sq Meter, standing in the names of Col.(Retd) Virsa Singh Dhillon & Smt. Jagir Kaur Dhillon having market value of Rs.340.00 Lacs ( Distress value Rs. 306.00 Lac) as per valuation report of Er Satish Chander Chawla dated 13.08.2010. The said property was earlier valued at Rs. 248.23 lacs by Mr. Rahul Jindal as per valuation report dated 13.09.2009. The appreciation in the value of the property is mainly on account of increase in the value of land and also on account of inclusion in the valuation of the basement which was not included in the previous 124

valuation. The property has been originally mortgaged to secure housing loan of Rs. 6.90 lacs (present outstanding balance Rs.6.67 lacs) granted to Rs. Mr. and Mrs. Dhillon who are also partners in the captioned firm.The residual value available for the proposed exposure to the captioned firm after allocating 150% of the outstanding balance in the housing loan works out to Rs. 330.00 lacs Other terms and conditions: 1. 2. Banks Nameplate for lien should be displayed at the business premises of the firm. Banks name to be displayed over the vehicles financed by us. Firm to deal exclusively with us except for maintaining a current account with HDFC Bank subject to approval of the competent authority. The firm to deposit 12 cheques of the said current account with the branch for the loan instalment amount. Further an undertaking to replenish the cheque after every 9 months. Inspection charges for periodical verification of Vehicle/securities will be borne by the company/firm. All securities charged to the Bank principal/collateral to be insured as per bank norms preferably under Banc assurance Scheme of our Bank.Banks charge to be also got noted with RTO in respect of vehicles purchased out of banks finance. The firm to convey acceptance of terms and condition of sanction in writing before documentation and release of the credit facility. The penal interest @ 2% p.a. shall be charged for any of the following defaults / irregularities: a Non/delayed submission of Balance Sheet / Profit and Loss account; b Late payment of instalment / interest; c Non compliance of any of the terms and conditions of the sanction. Proper books of accounts, stock register and records of vehicles and other Fixed Assets are to be maintained as per the banks requirements and to be made available to the bank during inspection. The facilities are sanctioned for a period of 60 months subject to review after 12 months. Renewal of facilities will be subject to satisfactory conduct and performance of the unit, for which the required information (financial statements, revised CMA , etc) should be submitted by the firm at least 3 months before the due date. Processing , Front end fee and Documentation charges are to be paid by the firm at the rates prescribed by the bank from time to time. The credit facilities will be disbursed only after regularisation of the overdue loan accounts, execution of the prescribed documents / papers and compliance of various terms and conditions to the banks satisfaction. Valuation of property mortgaged to the bank got done once in three year The firm not to invest in any associate/sister/family concern/s without bank's prior approval. The terms and conditions are subject to change from time to time. All money advanced or to be advanced by the Bank will be utilized exclusively for the purpose set forth in application submitted to the Bank. In case the advance is utilized

3. 4. 5. 6

7 8

9 10 11 12 13 14

125

15 16

17

18 19 20

21 22 23 24 25

or attempted to be utilized for any other purpose or if the Bank apprehends or has reasons to believe that the said loan is being utilized for any other purpose, the Bank shall have the right to recall the entire or any part of the loan/ advance forthwith without assigning any reason thereof. The rate of interest, margin and other charges will be subject to change as per RBIs directive/banks Policy from time to time/ credit rating of the account. The Firm to : a To raise additional capital of Rs. 39.43 lacs & retain the same in the business till continuance of banks credit facilities b Not to undertake any modernization / up gradation / diversification/amalgamation/ reconstruction / expansion of the existing business without prior written consent of the bank The bank reserves the right to furnish / disclose such information to RBI / CIBIL / or any other institution in connection with credit facilities granted to the firm. Bank reserves the right to disclose / publish the names of the promoters / directors / firm under CIBIL in case of default or through such media as the bank deem fit. Bank reserves the right to examine the books of accounts / assets offered as security of the firm at all the time. The release of increased credit facilities is subject to vetting of security documents as per banks guidelines. The fees for the same charged by advocate etc. are payable by the firm. The branch should ensure and satisfy that all the required permission / approvals/licenses/ clearance under various laws / rules have been obtained by the firm from the competent authorities and the stipulated terms /provisions/ conditions thereof are complied with / observed by the firm in totality. A suitable undertaking to keep such permissions always valid should be obtained from the Firm. The bank reserves the right to recall the credit facilities at any time. Upfront fee and pre payment penalty would be applicable as per Banks latest guidelines. Branch to closely monitor the performance of the unit. Bank reserves the right to examine the books of accounts / assets offered as security of the company at all the time. Undertaking from the landlords of the firm to the effect that they shall Give intimation to the Bank before seeking eviction of the rented premises Allow free access to the Bank staff for verification of assets financed by us

Sr.No .

ASCROM DATA INPUT SHEET

126

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

( For Critical Fields Only) Zone Name Region Name Branch Borrower Name Borrower Ascrom ID Name of Field Constitution Occupation Religion Special Category Sector Scheme Activity Sanctioning Authority

Northern Chandigarh Sector 8 Panchkula M/s Tricity Tours & Travels Ascrom Code 48 703 4 15 998 4517 43 Description Partnership Concern (Male) Other Service Provider Sikh N.A. Services Bank Other Scheme Running of Radio Autos &Taxis RO-Assistant General Manager

16

Turnover Amt. in Rs. 228.54 lacs Lac(proj)2010-11 Business Segment 2 SME Last Three Year Sales (in Rs. Lacs) N.A. N.A. Rs. 32.21 Investment in P&M Rs. 44.83 Lacs Credit Rating/ Credit Score BOBRAM BOB5 FR3 CR4 External Credit Rating Not done Repayment Mode Term Loan I : To be repaid in 39 insal. of Rs. 0.88 lacs, last instal. of Rs. 0.78 lacs. Term Loan I : To be repaid in 44 insal. Of Rs. 2.40 lacs, last instal. of Rs. 1.06 lacs. Term Loan III: To be repaid in 56 insal. of Rs. 2.10 lacs, last instal. of Rs. 2.40 lacs. Security Value Primary Sec. Rs. 314.22 Lacs Value Collateral Sec Rs. 330.00 Lacs

Appendix 1 List of Tables

127

Page Number 1. Classification of Micro, Small and Medium Enterprises.3 2. Contribution of SMEs in different countries..6 3. Major Subsectors of SMEs.8 4. Percentage of SMEs in Exports of Various Goods...11 5. State-Wise Distribution Of AutoComponent Clusters..20 6. Indian Textile Clusters.......31 7. Foreign Acquisitions by Indian Textile Companies..36 8. Comparison of SMEs in IT industry.....40 9. Food Processing Clusters...50 10. Export (% of Production) of Food Processing Segments53 11. Capacity Utilization of Food Processing Plants in various segments..54 12. Pharmaceutical SEZs in India.60 13. Region Wise Exports Classified as Share in Turnover in Pharma Industry62 14. Capacity Wise Breakdown of Indian Paper and Pulp Mills67 15. Administrative Structure for Governance of Small Scale Industries...80

Appendix 2 List of Figures

128

Page Number 1. Segments of Auto Component Products ...18 2. SMEs Region Wise in AutoComponent Industry.20 3. Region Wise sales to OEMs and Replacement Market21 4. Region Wise Companies in AutoComponent Industry based on Turnover...21 5. Export Destinations of AutoComponent SMEs...21 6. AutoComponent Product Segments.......22 7. Purpose of Collaboration of AutoComponent SMEs...22 8. Banking Preference of AutoComponent SMEs23 9. Capacity Utilization Region Wise AutoComponent SMEs 23 10. Ownership Pattern AutoComponent SMEs .......23 11. Export of Auto Components25 12. SMEs Region Wise in AutoComponent Industry ......33 13. Distribution of Companies across Value chain in Textile Industry.33 14 Ownership Pattern AutoComponent SMEs 34 15. Export Destinations of AutoComponent SMEs .................................34 16. Capacity Utilization Region Wise Textile SMEs ..35 17. Banking Preference of Textile SMEs.35 18. Food Processing Industry Segments46 19. Structure of Indian Food Processing Industry.47 20. SMEs Region Wise in Food Processing Industry ......52 21. Segment Wise SMEs in Food Processing Industry52 22. Turnover Wise Regional Distribution Food Processing SMEs..53 23. Future Plans of Food Processing SMEs.54 24. Capacity Utilization Region Wise Pharmaceutical SMEs..61 25. Banking Preference of Pharmaceutical SMEs61 26. The main uses of the sawn wood produced by the saw mills..65 27. Raw Material Mix of Paper Industry...67 28. Sub-Segments of Leather Industry...71 29. Ownership Pattern in Leather Industry72

References
129

Journals/Books
SEDME Journal by National Institute of Small Industry Extension Training (NISIET) Business Environment : Text and Cases, Francis Cherunilam, Himalaya Publishing

House

Web Pages
www.bankofbaroda.com www.intranet.bankofbaroda.com www.msme.gov.in www.rbi.org.in www.economictimes.indiatimes.com www.smetimes.tradeindia.com/ www.dnb.co.in/ (Dun and Bradstreet) http://en.wikipedia.org www.economywatch.com www.spti.in www.unido.org www.dcmsme.gov.in www.planningcommission.nic.in www.msmefoundation.org

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