Report by ASSOCHAM
Micro, Small and Medium Enterprises (MSMEs) are the backbone of economy and also drivers of growth. The sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. With their inherent strength and resilience, MSMEs weather adverse situations, and emerge successfully in a competitive environment. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.
They also play a key role in the development of the economy with their effective, efficient, flexible and innovative entrepreneurial spirit. The MSME sector contributes significantly to the country’s manufacturing output, employment and exports and is credited with generating the highest employment growth as well as accounting for a major share of industrial production and exports. MSMEs have been globally considered as an engine of economic growth and as key instruments for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of large enterprises.
MSMEs constitute more than 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, MSMEs play an essential role in the overall industrial economy of the country. In recent years, the MSME sector has consistently registered higher growth rate compared with the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession. The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services, and levels of technology.
Current Scenario
As per the All India Census of Micro, Small and Medium Enterprises (MSME) 2006-07, there are 26.1 million micro, small and medium enterprises employing 60 million people. The sector is projected to employ about 73 million people in more than 31 million units spread across the country. MSMEs manufacture more than 6,000 products ranging from traditional to high tech items. Out of the total MSME units, 7.45 million units are in manufacturing sector comprising 28.56% while 18.65 million units belong to service sector which is a staggering 71.44%.
They are the major creator of employment, creating 1.13 million jobs per annum. As regards the contribution of MSME to the Indian economy, 40% of exports and 45% of industrial output are coming from this sector. For FY11, total production coming from MSME sector was projected at 10,957.6 billion, an increase of more than 11% over the previous year. MSMEs have outperformed IIP and GDP growth rates in the past five years. The domestic MSME sector has outpaced industrial and GDP growth. During FY12, total production of MSMEs was projected to grow at 11.48% compared to industrial and GDP growth of 8.2% and 8.4% respectively. In FY11, total production of MSMEs was equivalent to about 14.28% of India’s GDP (at current market prices). The total production of MSMEs for FY11 was 10,957.6 bn (at 2001-02 prices). Between FY07 and FY11, the sector’s total production grew at a CAGR of 11.5%, clearly indicating the substantial contribution of MSMEs to the Indian economy. Productivity of the MSME sector has been improving tremendously with fixed investment and employment growing consistently in the past couple of years. This is a direct indication of the efforts in the sector to integrate the work force with technological enhancements to increase production. Fixed investment in the MSME sector between FY07 and FY11 has grown at 11.48% CAGR and employment grew more than 5% y-o-y. Indian SME offer a variety of products and services and are well equipped to cater to the needs of National, Regional and World Markets.
Government Initiatives
Major initiatives undertaken by the Government in FY12 to revitalise the MSME sector:
• BSE and NSE got the approval for SME platforms from SEBI and have been operational. This will serve as an opportunity for Indian SMEs to raise funds from capital markets.
• To achieve the overall target set by the Prime Minister’s National Council on Skill Development, Ministry of MSME and the agencies conducted the skill development programmes for 478,000 persons during FY12. During FY13, the Ministry aims to provide training to 572,000 people through its various programmes for development of self-employment opportunities as well as wage employment opportunities in the country.
• To improve the productivity, competitiveness and capacity building of MSMEs, the Government of India has adopted a cluster-based approach. During Apr-Jan 2012, the government has taken 8 new clusters for diagnostic study, 5 for soft interventions, and 4 for setting up of common facility centres. Till Jan 2012, the government has taken total 477 clusters for diagnostic study, soft interventions and hard interventions and 134 infrastructure development projects.
Source: Economic Survey 2011–12
Snapshot of Budget 2012-13 for MSME Sector
• Availability of equity to the MSME sector, the Government has set up an India Opportunities Venture Fund with SIDBI worth 50 billion.
• Allocation for the Prime Minister’s Employment Generation Programme increased by 23% from 10.37 bn to 12.76 bn.
• Under the Public Procurement Policy for Micro and Small Enterprises (MSEs), Ministries and Central Public Sector Enterprises (CPSEs) are required to make a minimum of 20% of their annual purchase from MSEs. Of this purchase, 4% to be earmarked for procurement from MSEs owned by SC/ST entrepreneurs.
• Increase in the turnover limit from 6 mn to 10 mn for SMEs for compulsory tax audit of accounts and for presumptive taxation.
• Exemption of capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.
• Reduction in the basic customs duty to 2.5% with concessional CVD of 6% on specified parts, components and raw materials for the manufacture of medical devices such as disposables and instruments.
• Full exemption from basic customs duty and CVD to specified raw materials for the manufacture of coronary stents and heart valves.
• Reduction in the excise duty from 10% to 6% on matches manufactured by semi-mechanised units.
Current Opportunities and Challenges in MSME Sector
A dynamic global economic scenario has thrown up various opportunities and challenges to the MSME sector in India. On the one hand, numerous opportunities have opened up for this sector to enhance productivity and look at new national and international markets. On the other hand, these opportunities compel the MSMEs to upgrade their competences to contend with competition since obsolescence is rapid with new products being launched at an incredible pace and are available worldwide in a short time. Today, some of the MSMEs are acquiring companies abroad as part of the globalization process. Mostly, these units are ancillaries and are export oriented.
The MSME sector have transformed to the need of large local manufacturers and suppliers to global manufacturers like Auto Industry. Today some MSMEs are investing in R&D in order to compete globally. Outsourcing from multi-national companies has played a vital role in the emergence of Indian MSMEs as world leaders in specified products. The advantages in labour-intensive manufacturing units, lower transport costs and lose labour policies of the small scale sector have led to major outsourcing in manufacturing and services.
However MSMEs, which constitute more than 90% of total number of industrial enterprises, are now facing a tough competition from their global counterparts due to liberalization, changes in manufacturing strategies, technological changes, and turbulent and uncertain market scenario across the world. Despite numerous protection and policy measures for the past so many years, MSMEs have remained mostly small, technologically backward and lacking in competitiveness. Despite the various challenges it has been facing, the MSME sector has shown admirable innovation, adaptability and resilience to survive the recent economic downturn and recession.
Major issues concerning the MSME sector
• Lack of availability of adequate and timely credit
• High cost of credit
• Collateral requirements
• Limited access to equity capital
• Marketing is one of the critical areas where MSMEs face problems including product differentiation, brand building, customized tailor-made services, clientele building, after sales servicing etc.
• Limited scale of operations leads to low production capacity
• Procurement of raw material 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
• 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
Recommendations
ASSOCHAM has been significantly striving towards the growth and further development of the sector.
ASSOCHAM would like to put forward the following recommendations for the betterment of the sector.
• Availability and Cost of Credit
– An additional interest subvention of 2% for those exporters who repay on a timely basis, reduction of the spread on foreign currency credit to LIBOR + 2%, automatic increase in foreign currency limits due to rupee depreciation, banks to aim for at least 40% export credit to MSMEs and targets for banks to increase MSME borrowers by 10% annually until 2017.
• Marketing Support
– Enhancement of budget and scope under MDA/MAI schemes, greater focus on brand building and trade fairs, double income tax deduction for marketing expenses, support for E-Commerce and a focus on Asia.
• Productivity/Technology/Skill Upgradation
– Modification in labour laws to enable more overtime hours and employment of women in night shifts with necessary safety, enhancement of technology upgradation schemes with capital subsidy and interest subvention, setting up of research/resource/product development centres and linkages with the technical institutions and CSIR laboratories.
• Infrastructure for MSMEs
– 24*7 facilities for export consignments at major air cargo/sea port complexes, enhancement of ASIDE scheme and development of MSME clusters near Highways/Rail Corridors.
• Incentives/Tax related issues
– A differential corporate/income tax regime for MSME exporters, separate ECGC policy for MSMEs to reduce costs, removal of service tax on conversion of export proceeds remittances and a host of issues which will reduce transaction costs in exports.
• Institutional Framework
– Constitution of a Standing Committee of Secretaries to resolve policy and implementation related issues, greater coordination at the ground level between Customs and DGFT offices
• Sector Specific Issues
– Additional budgetary support for handicrafts sector, Enhancing the support under Integrated Leather Development Scheme
In addition to the above recommendations, ASSOCHAM believes that definition of MSME under MSMED Act 2006 may be revised. Keeping in view the definitions for MSMEs in other countries and the inflation in India in last few years, ASSOCHAM feels that the levels of capital investment for defining MSMEs are too low and therefore it should be increased by at least 50%.
Moreover, number of employees should also be incorporated in the MSME definition like other countries. In order to sustain and grow, it is very important for the MSMEs across the country not only to deal with big corporate and Government companies but also to interact amongst themselves to identify new business opportunities which are huge.
Conclusion..
MSMEs, as a major contributor towards growth of domestic economy and employment generation, should get adequate support in terms of policy framework, incentives and other relevant aids. Steps like providing infrastructural facilities, developing various industrial parks and technology incubators under MSME cluster development programmes, creating networks of organizations that help provide training to skilled workforce to improve productivity, encourage entrepreneurship and competency in management, funding R&D investments, technology advancement may work for the betterment of the sector. Although, Indian MSMEs are finding it difficult to sell their products in the domestic and international markets because of increasing competition. To make their products globally competitive, Indian MSMEs need to up-grade their technology and put more emphasis on innovation.
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