Role of Smes in National Development

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ABSTRACT SMEs form the backbone of the Indian manufacturing sector and have become engine of economic growth in India. It is estimated that SMEs account for almost 90% of industrial units in India and 40% of value addition in the manufacturing sector. This paper closely analyses the growth and development of the Indian mall scale sector from opening of the economy in 1991. Third part looks into the present scenario of SMEs and the problems they phases like lending, marketing, licensing issues in detail. The Micro, Small and Medium Enterprises Act, 2006 is intended to boost the sector. The provisions of the Act are examined closely. The final part provides some future policy framework for the sustainability of the sector. INTRODUCTION Worldwide, the micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and 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 the large enterprises. The MSMEs constitute over 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, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to 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. As per available statistics (4th Census of MSME Sector), this sector employs an estimated 59. 7 million persons spread over 26. 1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country. The President under Notification dated 9th May 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries (Krishi Evam Gramin Udyog Mantralaya) and Ministry of Small Scale Industries (Laghu Udyog Mantralaya) have been merged into a single Ministry, namely, “MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES (SUKSHMA LAGHU AUR MADHYAM UDYAM MANTRALAYA)” SMEs IN INDIA With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small- scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non- concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives: • High contribution to domestic production • Significant export earnings • Low investment requirements • Operational flexibility • Location wise mobility • Low intensive imports • Capacities to develop appropriate indigenous technology • Import substitution • Contribution towards defense production • Technology – oriented industries • Competitiveness in domestic and export markets At the same time one has to understand the limitations of SMEs, which are: • Low Capital base • Concentration of functions in one / two persons • Inadequate exposure to international environment • Inability to face impact of WTO regime • Inadequate contribution towards R & D • Lack of professionalism In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost all-major sectors in the Indian industry such as: • Food Processing • Agricultural Inputs • Chemicals & Pharmaceuticals Engineering; Electricals; Electronics • Electro-medical equipment • Textiles and Garments • Leather and leather goods • Meat products • Bio-engineering • Sports goods • Plastics products • Computer Software, etc. As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of economy in India and abroad, particularly USA and European Union and enhanced competition from China and a few low cost centers of production from abroad many units have been facing a tough time. Those SMEs who have strong technological base, international business outlook, competitive spirit and willingness to restructure themselves shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy. DEFINITION OF SMEs IN INDIA A well-debated issue, the definition of small and medium enterprises in India was very recently ratified. The Micro, Small and Medium Enterprises Bill, 2006, which is likely to take effect from October 2006, define the segment on the basis of investments in plant and machinery. Small enterprises are those with an investment of not more than Rs 50 million in plant and machinery, and medium enterprises with an investment of over Rs 50 million but less than Rs 100 million in plant and machinery. This definition has finally put the segment within a legal framework. SMEs will be as defined in RPCD Circular No. RPCD. PLFNS. BC. 31/ 06. 02. 31/ 2005-06 dated August 19, 2005, which is reproduced below: ” At present, a small scale industrial unit is an undertaking in which investment in plant and machinery, does not exceed Rs. crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs. 5 crore. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/ tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs. 10 crore may be treated as Medium Enterprises (ME). MICRO, SMALL AND MEDIUM ENTERPRISES FINANCING IN INDIA The Census of Small Scale Industries found that only 14. 26% of the registered units availed bank finance, while only 3. 09% of the unregistered units had access to bank finance. This means that 97% of the smaller among the small enterprises were deprived of the institutional credit. In other words, most of tiny and micro enterprises use self finance or borrowed funds from friends, relatives and moneylenders. Moneylenders continue to play important role after self-finance. The recent All India Debt and Investment Survey has revealed that the share of moneylenders in total dues of rural households rose from 17. 5% in 1991 to 29. 6% in 2002. A recent World Bank survey (August 2006) on the status of flow of credit to SME sector has revealed that in the start-up phase, family constitutes an extremely important source of funds for overwhelming majority (over 85%) of the respondents and trade credit came next in importance, representing extremely important source of funds for 27% of the respondents. In comparison, bank loans from state-owned banks make up an extremely important source for 15% and very important source for about 17% of the firms surveyed 1. Institutional Credit Structure A multi-level institutional structure exists for financing of small enterprises and non-farm enterprises in India. This consists of commercial banks, cooperative banks, RRBs, State Financial Corporations. Credit to small enterprises comes under priority sector lending programme of banks. The Reserve Bank of India (RBI) constantly reviews the flow of credit to this sector. To improve the flow of credit, the RBI has constituted several committees and working groups since 1991. Notable among the committees are Nayak Committee, Kapur Committee and Ganguly Committee. Appropriate measures are taken by the RBI and Government from time to time based upon the decision of the Standing Committee on SSI set up at the RBI. An exclusive refinancing bank, called Small Industries Development Bank of India (SIDBI) was set up in 1990. The issue of providing micro credit to micro-enterprises through development of SHG-Banks Linkage rests mainly with National Bank for Agricultural and Rural Development (NABARD). However, major part of SHG-Bank Linkage credit is in the form of micro credit to meet production and consumption needs and not for micro enterprises CONTRIBUTION TO NATIONAL DEVELOPMENT 1. It is estimated that SMEs account for almost 90% of industrial units in India and 40% of value addition in the manufacturing sector 2. The major advantage of the sector is its employment potential at low capital cost; this sector employs an estimated 59. 7 million persons spread over 26. 1 million enterprises 3. The MSMEs constitute over 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, i. e. MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country The SMEs in India: Present Scenario In the recent past, small companies have performed better than their larger counterpart. Between 2001-06, net companies with net turnover of Rs. 1 crore – 50 crore had a higher growth rate of 701 per cent as compared to 169 per cent for large companies with turnover of over Rs. ,000 crore (Business World Jan. 2007). The total SSI production, which had reached the all time high of Rs. 1,89,200 crores in 1989-90 dropped dramatically in the next 10 years and only in 2001-02 the level of production was surpassed. But after 2002, the production has risen at a aster rate. Since 2000, there is a continuous growth in number of units, production, employment and in exports. The average annual growth in the number of units was around 4. 1%. At the Note : Figures in parenthesis Indicate percentage growth over previous years Source: Development Commissioner (SSI) CONCLUSION Small industry in India has found itself in an intensely competitive environment since 1991, thanks to globalisation, domestic economic liberalisation and dilution of sector-specific protective measures. The international and national policy changes have thrown open new opportunities and markets for the Indian small industry. Concerted effort is needed from the government and small industry to imbibe technological dynamism. Technological upgradation and in-house technological innovations and promotion of inter-firm linkages need to be encouraged consciously and consistently. Financial infrastructure needs to be broadened and adequate inflow of credit to the sector be ensured taking into consideration the growing investment demand, including the requirements of technological transformation. Small industry should be allowed to come up only in designated industrial areas for better monitoring and periodic surveys. A technologically vibrant, internationally competitive small and medium industry should be encouraged to emerge, to make a sustainable contribution to national income, employment and exports. It is essential to take care of the sector to enable it to take care of the Indian economy. REFERENCES • Raju K. D. ,2008, ” Small and Medium Enterprises (SMEs) in India: Past, Present and Future,” PHDCCI Working Paper, Rajiv Gandhi School of Intellectual Property Law, IIT Kharagpur https://papers. ssrn. com/sol3/papers. cfm? abstract_id=1080505 • • Emerging SMEs of India, auto component https://www. dnb. co. in/smes/smes. asp • THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, (2006) https://www. and. nic. in/C_charter/indust/msmeact2006. pdf • Ministry of micro , small and medium Enterprises (Government of India) 2007 https://msme. gov. in/msme_aboutus. htm Reserve bank of india,2005, “Debt restructuring mechanism for SMEs in India, https://www. rbi. org. in/scripts/NotificationUser. aspx? Id=2502&Mode=0 • SME TIMES 2008, “Alternative avenues to SME financing,” https://smetimes. tradeindia. com/smetimes/news/top- stories/2008/Aug/14/alternative-avenues-to-sme-financing. html • Prasad C. S. ,Micro, Small and Medium Enterprises Financing in India – issues and concern Issues, https://cab. org. in/CAB%20Calling%20Content/Small%20and%20Medium%20Ent erprises%20- %20Financing%20Need%20for%20Paradigm%20Shift/MSME%20Financing%20in%2 0India%20-%20Issues%20and%20Concerns. pdf

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