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Incentives and Support for Micro, Small and Medium Enterprises By R.K. Mathur, Secretary, Ministry of Micro, SME

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. 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.

The sector contributes significantly to manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of total exports of the country. The sector is estimated to employ about 69 million persons in over 26 million units throughout the country. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by MSMEs in the country. It is well known that MSME sector provides maximum opportunities for both self-employment and jobs, outside agriculture sector. The inclusiveness of the sector is underlined by the fact that nearly 50% of the MSMEs are owned by disadvantaged groups of society.

To make the sector a significant player in the global marketplace, Government has taken a number of policy initiatives during the recent period. The definitions and coverage of MSE sector were broadened significantly under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which recognized the concept of “enterprise” to include both manufacturing and services sector besides, defining the medium enterprises, setting up a Board for developing policy frameworks and indicating a procurement policy.

To identify issues inhibiting growth of the sector, a PM’s Task Force was constituted by the Prime Minister in 2009. In its report, the PM’s Task Force made 85 recommendations to unshackle the Indian MSMEs. Most of the recommendations have already been implemented. The problems faced by MSMEs (access to bank credit, access to capital, technology, skill, market, etc.) are quite unique to the nature of the sector. Therefore, the PM’s Task Force classified these problems into 6 major segments to address the issues in an effective manner, which are as follows:

Lack of availability of adequate and timely credit;

Inadequate infrastructure facilities, including power, water and roads;

Low technology levels and lack of access to modern technology;

Lack of access to markets and procurements;

Lack of skilled manpower for manufacturing, services and marketing;

Lack of supportive institutional structure.

1. Lack of availability of adequate and timely credit:
Lack of timely and adequate credit at the reasonable cost is the serious challenge before the large number of MSMEs in this country. Credit related problems of MSME sector have been examined by several Committees constituted by the Reserve Bank of India (RBI) in the past. In spite of acceptance of most of the credit-related recommendations of these Committees by the RBI, the availability and cost of credit remain far from satisfactory. While the quantum of advances from the public sector banks (PSBs) to the MSEs has increased over the years in absolute terms from Rs.46,045 crore in March 2000 to Rs.3,76,625 crore in March 2011, the share of the credit to the MSE sector in the Net Bank Credit (NBC) has also increased from 12.5 per cent to 15.1 per cent during the period. However, there has been a decline in the share of micro sector as a percentage of NBC from 7.8 per cent in March 2000 to 6.4 per cent in March 2011. The major reasons for low availability of bank finance to this sector are high risk perception of the banks in lending to MSEs and high transaction costs in processing of loan applications of MSEs. The problem is more serious for micro enterprises requiring small loans and the first generation entrepreneurs.
The outstanding credit to MSE sector from scheduled commercial banks has registered a growth of 33.5 per cent in 2010 -11 against a growth of 42.1 per cent in 2009 -10. Credit to Micro enterprises sector however, continues to remain an area of concern. The growth in outstanding credit to micro enterprises has come down from 47.0 per cent in 2009-10 to 28.7 per cent in 2010-11.

To meet the credit needs of the MSMEs in general and the MSEs in particular the Government has initiated following steps:

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make available collateral-free credit to the micro and small enterprise sector. Under this scheme, over 2.06 lakh MSE proposals for an amount of Rs.11,788 crore have been approved for extending loans without collateral/third party guarantee during the year 2011-12 (up to 29th February 2012). Cumulatively, about 7.55 lakh MSE proposals for loans of Rs.35,197 crore have been approved under the scheme up to February 2012. The Credit Guarantee Scheme is a major scheme for enhancing credit flow to MSEs. To extend the reach and further increase the coverage loans under the scheme, the corpus of the fund would be augmented with additional contribution from the Government in the future.

Prime Minister’s Employment Generation Programme (PMEGP) is a credit linked subsidy programme of Government of India for generation of employment opportunities through establishment of micro enterprises in rural as well as urban areas. This is the flagship scheme of the Ministry of MSME which was launched in August, 2008 after merging PMRY and REGP.   Under the scheme since its inception in 2008-09, 1.49 lakh new entrepreneurs have been assisted so far creating 14.75 lakh employment opportunities across the country. The scheme has got a very good response and played a significant role in creating employment of opportunities through setting up of micro enterprises. Therefore, the ministry has an ambitious target of setting up of 4 lakh new micro enterprises with creation of more employment opportunities to around 32 lakh persons throughout the country in the 12th five year plan.

Traditionally, access to Equity Capital has been very limited for the MSMEs and they have been largely dependent on finance from banks and other institutional sources. This acts as a major impediment for the growth of the sector. So the need for developing a dedicated stock exchange for the SME sector is highly felt by the stockholder of this sector, through which the SMEs can access capital markets easily, quickly and at lower costs. Such dedicated SME exchange is expected to provide better, focused and cost effective service to the SME sector. As recommended by the PM’s Task Force the Securities and Exchange Board of India (SEBI) has permitted setting up of a Stock Exchange / a trading platform for SMEs by a recognized stock exchange having nationwide trading terminals and also issued guidelines and necessary amendments to the SEBI Regulations. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have been given final approval for launching SME platforms. With the operationalisation of SME Exchange / Platform, Indian SMEs would find an opportunity to raise funds from capital markets.

Similarly lack of scope for the equity capital is also impacting the growth in number of start-ups and their transition into larger enterprises. This requires participation by angel investors / venture funds which has been very limited. Approving the recommendation of the PM’s Task Force the Planning Commission has set up a Committee on Angel Investment and early stage Venture Capital to examine various issues and to recommend measures for accelerating Angel Investment and early stage Venture Capital. The Committee is considering the appropriate regulatory and fiscal incentives that have to be provided to encourage such investment. This initiative will help the MSMEs (especially those involving innovations and new technologies) to access alternative sources of capital like angel funds/risk capital.

2. Inquate infrastructure facilities, including power, water and roads:
In the present global environment, the MSMEs have to be competitive to survive and thrive. To ensure competitiveness of the MSMEs, availability of proper industrial infrastructure is a critical factor. At present, MSMEs are either located in industrial estates set up many decades ago or are functioning within urban areas or have come up in an unorganised manner in urban or rural areas. The state of infrastructure, including power, water, roads, etc. in such areas is poor and unreliable, leading to very high transaction costs. With the growth of the industrial sector, including MSEs (which are an integral part of the value chain), adequate areas for extension of MSEs are simply not available. This has resulted in crowding of MSE operations in existing areas, often in conflict with environmental and urban regulations.

Cluster based intervention has been acknowledged as one of the key strategies for comprehensive development of Indian industries, particularly the Micro and Small Enterprises (MSEs). The Ministry of MSME has adopted the cluster approach as a key strategy for enhancing the technical and physical infrastructure as well as capacity building of micro & small enterprises and their collectives in the country. The Micro & Small Enterprises Clusters Development Programme (MSE-CDP) Scheme has made broad-based by adopting holistic development encompassing soft interventions (viz. technology, marketing, exports & skill development) and hard interventions (viz. setting up of Common Facility Centre (CFC), etc.). Since 1994, Ministry had also been supporting creation and upgradation of industrial infrastructure in the States under Integrated Infrastructural Development (IID) Scheme.

To meet the requirements of planned development and growth, consistent with the policy of progressively organizing the MSMEs, the PM’s Task Force has recommended the following measures:

Local bodies need to be encouraged to set aside substantial part of the collections derived from industrial estates, to upgrade infrastructure such as roads, drainage, sewage, power distribution, water supply distribution, etc. for the existing industrial estates. Alternatively, industrial estates could be notified as separate local bodies as envisaged in the Constitution and entrusted with municipal functions that shall include levy of taxes, responsibility to maintain the infrastructure within the Industrial Estate, etc. As this may involve some reforms/changes in the existing laws/administrative arrangements, a suitable reforms-cum-financial package may be evolved to incentivize the State Governments.

Expand the scope of the existing Integrated Infrastructural Development (IID) scheme of Ministry of MSME to cover the private sector.

Setting up of common facility services in the industrial estates/clusters on PPP mode be encouraged by providing adequate assistance under various on-going schemes of the Ministry.

Encourage setting up/earmarking of at least one industrial estate in each block for MSEs. Wherever possible, private sector participation may be encouraged.

3. Low technology levels and lack of access to modern technology:

MSMEs face constraints in access to the latest technology due to lack of information and limited resources. With increasing competition due to liberalization of the economy, for the survival and growth of MSMEs, acquisition of modern technologies is of critical importance. There is a need to provide access to the latest technology as per emerging needs through appropriate programmes for technology acquisition / transfer. Technological upgradation of both manufacturing processes and plant & machinery is also necessary for the MSMEs to reduce the cost of production and remain competitive at a time when cheaper products are easily available in the global market. To address the technology needs of the MSMEs the Government has introduced the following measures:

The National Manufacturing Competitiveness Programme (NMCP) is the nodal programme of the Government of India to develop global competitiveness among Indian MSMEs through improvement in their processes, designs, technology and market access.  All the ten components of this programme are now under implementation which include Building Awareness on Intellectual Property Rights for  MSMEs;  Scheme for providing Support for Entrepreneurial and Managerial Development of SMEs through Incubators; Enabling Manufacturing Sector to be competitive through Quality Management Standards and Quality Technology Tools (QMS/QTT); Mini Tool Rooms under PPP mode; Marketing Assistance Support to MSEs (Bar Code); Lean Manufacturing Competitiveness Programme for MSMEs; Promotion of Information & Communication Technology (ICT) in Indian MSME sector; Design Clinic Scheme for MSMEs; Marketing Assistance and Technology Upgradation Scheme for MSMEs; and Technology and Quality Upgradation Support for MSMEs.

Acquisition and adoption of latest technology is of critical importance for MSEs which is difficult in the absence of proper information and resources.  It is proposed to modify the existing Credit Linked Capital Subsidy Scheme (CLCSS) and enlarge its scope to incentivize a larger number of MSEs to upgrade their technology. The scheme presently provides for 15% capital subsidy upfront on loan for technology upgradation by adoption of well-established and improved technologies approved under the scheme, subject to a loan limit of Rs.1 crore.

4. Lack of access to markets and procurements:
Marketing is the most important tool in business development that leads a product from creation to customer through different channels. In this era of globalization, market for a product sans frontiers. Marketing is one area where MSMEs face more challenges than opportunities. The challenges range from procurement of raw materials to lack of market information. Marketing is a dynamic activity that requires constant update on the marketing intelligence and new tools of marketing. It includes a whole gamut of activities such as packaging, labeling, trade mark, bar coding, brand building, advertisement, domestic & international exhibitions, buyer-seller meet, marketing intelligence, e-marketing and customer service to name a few. Compared to large industries, MSMEs face several constraints in the marketing &procurement front due to their limited maneuverability in such wide ranging activities either on account of lack of finance or on account of lack of awareness.

While marketing of products of MSMEs mostly depends upon the market forces and individual efforts of the enterprises, Government and its organizations can play the role of a facilitator to help MSME sector in these endeavors. Ministry of MSME and its attached organizations have been assisting the sector through certain schemes and programmes such as:

Under the MSE Marketing Development Assistance (MDA) Scheme, assistance is provided to individuals for participation in overseas fairs/exhibitions, overseas study tours, or tours of individuals as member of a trade delegation going abroad. The Scheme also offers assistance for (a) sector specific market study by MSE Associations/Export Promotion Councils/Federation of Indian Export Organisation; (b) Initiating/contesting antidumping cases by MSE Associations; and (c) reimbursement of 75 per cent of the onetime registration fee and annual fee (recurring for first three years) charged by GSI India (formerly EAN India) for adoption of Bar Coding.

The Government has recently approved the Public Procurement Policy for goods produced and services rendered by Micro & Small Enterprises (MSEs) by the Central Ministries/Departments/PSUs. The policy envisages that every Central Ministry/PSU shall set an annual goal for procurement from the MSE sector at the beginning of the year, with the objective of achieving an overall procurement goal of minimum 20 per cent of the total annual purchases of the products or services, produced or rendered by MSEs from the latter in a period of three years. The policy also envisages that out of 20 per cent target of annual procurement from MSEs, a sub-target of 4 per cent will be earmarked for procurement from MSEs owned by SC/ST entrepreneurs. The policy will help to promote MSEs by improving their market access and competitiveness through increased participation by MSEs in Government purchases and encouraging linkages between MSEs and large enterprises. The Ministry of MSME will make all efforts in coordination with various Central Ministries/Departments to implement the Public Procurement Policy for MSEs in letter and spirit.

5. Lack of skilled manpower for manufacturing, services and marketing:
Lack of skilled manpower and information as well as lack of reach to modern technology are key issues affecting the growth of MSME sector. It is often said that India enjoys a “demographic dividend” compared to rest of the world due to its huge population in productive age group. Most of the other developed as well as developing countries face the threat of an aging population. If this comparative advantage can be augmented with adequate skill development, India can become the global supplier of quality manpower. In this backdrop, Ministry of MSME has decided to accord top priority to skill development. The Ministry conducts a large number of short term as well as long term courses to train unemployed youth for self employment, to provide necessary skill to the youth to make them eligible for wage employment and also to upgrade the skill level of existing workers and entrepreneurs of MSME sector. PM’s Task Force has identified lack of skilled manpower as a road block for the growth of the MSME Sector and has recommended following step:

In line with the overall target set by the Prime Minister’s National Council on Skill Development, the Ministry of MSME has taken up skill development as a high priority area. The agencies under the Ministry will conduct skill development programmes for about 4.78 lakh persons during 2011-12.  Further, the Ministry aims to train 5.72 lakh persons in the year 2012-13 through its various programmes for the development of self-employment opportunities as well as wage employment opportunities in the country.

6. Lack of supportive institutional structure:

The Institutional and legal framework for promotion and development of Micro, Small & Medium Enterprise (MSME) sector of India is spread both at the National & State level. The primary responsibility for the development of MSMEs lies with the State Governments. Government of India supplements their efforts through a range of initiatives. The employment intensive MSME sector has suffered extensively due to plethora of laws, rules and regulations that have accumulated during the years of control regime. Ensuring compliance with so many regulations coupled with Inspector Raj has stifled growth of the sector considerably. The PM’s Task Force, in its report, have made significant recommendations on liberalising the policy regime for the MSME sector, viz., introduction of Insolvency Act, liberalisation of labour laws, liberalisation of Apprenticeship Act, strengthening of District Industries Centres etc. The following are the significant measures recommended by the PM’s Task Force:

On the environmental issues, it is recommended that the relevant policies be made uniform all over India with appropriate relaxation of the controls for MSMEs. Regarding labour issues, the immediate need is to consolidate plethora of labour laws into one user friendly law. The enactment of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is a harbinger for the growth of MSME Sector. However, there is an urgent need to strengthen various provisions of the Act along with enactment of the rules under various sections.

The District Industries Centres under State Governments and MSME Development Institutes of Ministry of MSME provide facilitation to the new and existing entrepreneurs in developing their enterprises. With the implementation of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, two new sectors were classified in the country i.e. medium sector and service sector, which required special attention for promotion and growth as these sectors were identified for the first time in any statute. The total number of small and micro units tremendously increased from 3.3 million in 2000-01 to 26.1 million in 2007. The number of entrepreneurs trained in 2002-03 was 10,739 which has increased 8.2 times to 99,635 in 2010-11. Contrary to that the trainers and technological force of officers in MSMEDIs has gone down by 30%. To provide support at the grass root level to the MSMEs, there is an immediate need for the resurgence of both the agencies. While an elaborate proposal for the restructuring of the DICs is already under the consideration of the Government, re-engineering of the MSME Development Institutes and the office of the Development Commissioner, MSME may be taken up in future.

The PM’s Task Force has also recommended an elaborate programme for re-engineering of the office of DC, MSME as well as the network of field offices and retraining of the officers. Similarly, creation and maintenance of a comprehensive database of MSME sector, including unorganized sector, is a pre requisite for sound policy formulation. The database should also include data on Govt./ PSU procurement from MSEs and sectoral data.

Introduction of filing of Entrepreneurs Memorandum under the MSMED Act was an important initiative towards liberalisation of the MSME sector. This provision liberated the entrepreneurs from the hurdles of registration of enterprises required under previous policy regime, for availing institutional finance and infrastructural support. However, implementation of the process of filing of Entrepreneurs Memorandum is still very tidy and full of road blocks. Therefore, the PM’s Task Force has recommended for application of e-governance for streamlining of procedures and for that purpose setting up of an information and data base network among the DICs, MSME-DIs and the Ministry.

Provision of the delayed payment under the MSMED Act was another facilitator for ensuring regular cash flow to Micro & Small Enterprises against the supplies made. Micro & Small Enterprises Facilitation Councils (MSEFC) stipulated under the Act to be set up at the State level were foreseen as facilitators to the MSEs. However, most of these MSEFCs are not operating efficiently. In fact, in some states they are yet to be constituted. Therefore, the PM’s Task Force has recommended for immediate action for upscaling the activities of these MSEFCs and introduction of an information and communication network for operation and monitoring of these MSEFCs.

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