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April 04, 2017 @ 01:15 PM

Role and Contribution of SMEs in Indian Economy

Published : Thursday, 10 December, 2015 10:30 AM

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Role and Contribution of SMEs in Indian Economy


Medium Small and Micro Enterprises (SMEs) have always been the backbone of an economy in general and secondary sector in particular. For a capital scarce developing country like India, SMEs are considered as panacea for several economic woes like unemployment, poverty, income inequalities and regional imbalances.

The MSME Development act classifies manufacturing units into medium, small and micro enterprises depending upon the investment made in plant and machinery. Any enterprise with investment in plant and machinery of up to INR 50 million is considered as medium enterprise while those having investment between INR1.0 million to INR2.5 million is a small enterprise and one with less than INR1.0 million is a micro enterprise. In service sector, any enterprise with the investment limit of INR1.0 million, between INR 1.0-20 million and of upto INR 50 million is called as micro, small and medium enterprise respectively.


Contribution of MSMEs

The MSMEs have played a great role in ensuring the socialistic goals like equality of income and balance regional development as envisaged by the planners soon after the independence. With the meagre investment in comparison to the various large scale private and public enterprises, the MSMEs are found to be more efficient providing more employment opportunities at relatively lower cost. The employment intensity of MSMEs is estimated to be four times greater than that of large enterprises. Currently, around 36 million SMEs are generating 80 million employment opportunities, contributing 8% of the GDP, 45% of total manufacturing output and 40% of the total exports from the country. MSMEs account for more than 80% of the total industrial enterprises in India creating more than 8000 value added products.

The most important contribution of SMEs in India is promoting the balanced economic development. The trickle down effects of large enterprises is very limited in contrast to small industries where fruits of percolation of economic growth are more visible. While the large enterprises largely created the islands of prosperity in the ocean of poverty, small enterprises have succeeded in fulfilling the socialistic goals of providing equitable growth. It had also helped in industrialization of rural and backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income.Urban area with around 857,000 enterprises accounted for 54.77% of the total working enterprises in Registered MSME sector whereas in rural areas around 707,000 enterprises (45.23% of the working enterprises) are located. Small industries also help the large in industries by supplying them ancillary products.


Challenges For MSMEs

The time ahead for the MSMEs in India is a reason to worry. In the event of increasing globalization when every now and then a free trade agreement is being signed with a country or a region, MSMEs in India would face cut throat competition from the technological advanced industries of distant lands. In order to sustain such competition, SMEs in India would need highly skilled labour force along with timely redressal of financial needs and technological up gradation.

Lack of timely and adequate credit to MSMEs is a major obstacle for the growth of MSMEs. Relatively high cost of credit, requirement of collateral and limited access to equity capital often put such firms outside the net of institutional credit. Other challenges encountering the MSMEs include high cost of raw material, limited access to global markets, lack of infrastructural facilities, limited access to modern technology, lack of limited manpower, stringent labour laws and unavailability of business friendly environment.  

In order to make SMEs stand erect in the event of stiff competition from foreign enterprises, government should introduce reforms in credit, marketing, labour, rehabilitation and exit policy, infrastructure, technology and skill development and taxation areas.

Measures Taken For MSMEs Growth

Some of the measures taken by government to improve the performance of MSMEs are as under –

  • Government has set up an India Opportunities Venture Fund with SIDBI worth INR 50 bn to provide equity to the MSME sector.
  • Under the Public Procurement Policy for Micro and Small Enterprises (MSEs), government organizations and Central Public Sector Enterprises(CPSEs) are required to make a minimum of 20% of their annual purchase from MSMEs. Of this purchase, 4% to be earmarked for procurement from MSEs owned by SC/ST entrepreneurs.
  • To improve the productivity, competitiveness and capacity building of MSMEs, the Government of India has adopted a cluster based approach.
  • Credit disbursed to micro and small enterprises is considered part of priority sector lending by banks.
  • Around 20 items have been reserved for exclusive manufacturing by MSMEs. Large scale enterprises cannot produce these items.
  • In order to build the capacity of MSMEs, central government has initiated National Manufacturing Competitiveness Programme (NMCP). It would help them in facing stiff competition from global MNCs. 

Apart from the aforesaid measures, the most important prerequisite for the unbridled growth of SMEs is ensuring the availability of enabling environment and requisite infrastructure.  If government can ensure the double digit growth for the SMEs, it would definitely help in achieving the long cherished goals of equality of income and promoting the growth in rural hinterlands and stop the avoidable migration to the urban areas.

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