India’s Industrial Sector:

The Role of Micro, Small and Medium Enterprises

 Theme of the Session
• With the introduction of economic reforms in 1991
India hoped for a dynamic industrial sector, in particular
manufacturing sector.

• But the sector never took off as it did in other countries

such as China and South Korea.

• According to estimates to achieve a growth rate of GDP

of 8 to 10% consistently over a longer period the
industrial and manufacturing sectors respectively needs
to grow at 11.21% and 12.26%.
• Moreover, in so far as subsectors within manufacturing
have performed well, these have been relatively
capital-or skill-intensive industries, not the unskilled
labour-intensive ones as would be expected for a
labour-abundant country like India.

• This pattern of manufacturing growth has two major

negative fallouts: (i) the relatively slow transformation
of India from a primarily agricultural and rural
economy to a modern one; (ii) jobless growth.
• Therefore, the challenge of transformation facing
India is that of creating an environment that allows
unskilled labor-intensive manufacturing to grow
rapidly.

• In this context, for reaching the goal of a dynamic

manufacturing sector and achieving faster growth of
unskilled labor intensive manufacturing, the
governments have launched several initiatives such as
Make in India, Start up India and Skill India.
• According to analysts, to realise the goal of making
India a manufacturing powerhouse, it is imperative to
promote the growth of Micro, Small and Medium
Enterprises Sector (MSME).

• Against this background, the aim of this session is to

discuss various challenges facing the development of
manufacturing sector in general and MSME sector in
particular in India and identify policy solutions to
overcome the challenges
 Definition of MSMEs

Enterprises Manufacturing Sector Services Sector

(Investment in plant & machinery) (Investment in plant & machinery)

Micro Does not exceed Rs. 25 lakh Does not exceed Rs. 10 lakh

Small Over Rs 25 lakhs but not exceeding Over Rs. 10 lakh but not exceeding
Rs 5 Crores Rs. 2 crores

Medium Over Rs 5 Crores but less than Over Rs. 2 crore but not exceeding
Rs 10 Crores Rs. 5 crores

Note: Definition according to Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. This
definition is also used by the formal financial sector in credit disbursal to MSME sector.
 Significance of MSME for India
(1) Source of Employment:
• As per 4th Census of MSME Sector, the sector
employs 59.7 million persons spread over 26.1
million enterprises.
• Since the sector is more labour-intensive, it has the
potential to create more employment per unit of
capital employed.
• Also the sector is capable of generating
unskilled/semi-skilled employment
(2) Contribution to manufactured output and
exports:
• In terms of value, MSME sector accounts for about
45% of the manufacturing output.
• Around 40% of the total exports (in value terms) of
India is contributed by MSME sector
(3) Best way for achieving inclusive growth:
• Income benefit of small enterprises is derived by
large population while large enterprises encourage
more concentration of economic power
(4) Taps latent resources:
• MSMEs are a training ground for entrepreneurial
talent.
• A MSME of today will be a big enterprise of
tomorrow, and might well become a MNC eventually,
if given adequate policy support.

(5) Reduces regional disparity:

• To spread benefit of industrialization to smaller towns
and country side MSMEs play major role.
 Reasons for Inadequate Manufacturing Growth
• Infrastructure constraint • Dependence on consumer goods
industry
• Difficulties with tax administration
and tax rates • Inability to attract FDI on a large
scale
• Governance issues, particularly • High transaction cost of doing
corruption
business
• Shortage of availability of skilled • Low R&D expenditure
labour
• Poor performance by PSEs
• Labour market regulations
• Inadequate efforts on the part of
• Cost and access to finance or states
credit constraint • Absence of export led
• Sub-optimal levels of operations manufacturing
(absence of economies of scale)
 India’s Policy Towards SSIs/MSMEs
Pre-1991 Post-1991
• Reservation (from 1967): In many • Progressive reduction in
industries only MSMEs were reservation list (from year 2000) –
allowed to operate and produce. from 47 products in 1967 to 821 in
• Preferential purchase of MSME 1999 to 239 in 2007
• Import liberalisation, espl.
products by government agencies
consumer goods (from April 2001)
• Supply of materials, technology, • FDI inflows leading to greater
and inputs at concessional rate competition
• Lower/concessional interest rates • Reduction in public sector demand
on loans. Priority sector lending by for SSI products
banks • Reduction in no of products
• Many other initiatives to improve reserved for purchase by PSEs
credit availability (SIDBI, SFC, (PSE procurement revived
NSIC) recently)
• Withdrawal of concessional lending
• Fiscal measures like excise duty
• Expansion of sectors under priority
exemptions and tax concessions
sector lending
 Major issues concerning SSI/MSME sector in India
• Lack of availability of adequate, • Inadequate skilled manpower for
timely credit & high cost of credit manufacturing, services,
• Lack of collateral to offer to avail marketing
of bank finance • Problems of storage, designing,
• Declining prospects of supply to packaging and product display
government departments • Lack of proper access to global
• Inadequate markets
infrastructure
facilities, including power, water, • Seasonality of markets (faced by
and roads unorganized sector)
• Low technology levels • Issues relating to taxation and
• Lack of access to modern procedures thereof
technology and innovation • Delay in settlement of
• Weak marketing facility dues/payment of bills by large
scale buyers to MSMEs.
• Poor quality of products
 Video Links
• MSMEs in India (Education Video by MHRD, GoI)
https://www.youtube.com/watch?v=Kcl3DFPTdco

• FabIndia’s Community-owned-Company Model (3 Parts):

http://www.youtube.com/watch?v=03zsWdXlVEg&feature=relat
ed

http://www.youtube.com/watch?v=ZXEfZAr6sTQ&feature=relat
ed

http://www.youtube.com/watch?v=lFO6Pshq4qw
 Policy Issues for Class Discussion

(A) What are the best ways to ensure adequate supply of

physical infrastructure and funds/credit for MSMEs?

(B) What are the effective ways to improve the quality and
marketing (including global marketing) of MSME products?

(C) What are the best ways to promote entrepreneurship in

MSME sector?