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Development Policies for Micro, Small and Medium Enterprises (MSMES) in India
By Dinesh Rai, Secretary, Ministry of MSME

The Micro, Small and Medium Enterprises (MSME) sector has been an integral component of the industrial sector. The MSE sector has been accorded special status and importance in the Five-Year Plans since inception in view of the advantages it offers for better utilisation of resources of capital and skill at the local level. The continuous support provided to the sector in the form of incentives, infrastructural facilities and other assistance in the industrial policy resolutions has facilitated the sector to acquire a place of prominence in the socio-economic development of the country. The number of enterprises in the MSE sector is estimated to be over 13 million, providing employment to estimated 42 million persons. As per the latest estimates, the micro and small enterprises (MSE) sector accounts for about 39 per cent of the manufacturing output and 33 per cent of the national exports of the country (the estimated contribution is 45% and 40% respectively for the micro, small and medium enterprises (MSMEs) as defined under MSMED Act, 2006). Further, in recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector.

For achieving the objective of inclusive growth, creation of large employment opportunities is of significant importance. However, the declining employment trend in the organized sector has resulted in agriculture sector continuing to provide employment to almost two-third of the Indian population. With the land holding declining substantially, there is considerable surplus population engaged in the agriculture sector and needs to be provided gainful employment in the industrial and service sectors of the economy. The major advantage of the MSME sector lies in its significant employment potential at low capital cost and the labour intensity in the MSME sector is estimated to be considerable higher than the large enterprises. Hence, the MSME sector provides one of the most viable avenues for absorbing the large surplus population engaged in the agriculture sector.

However, in today’s liberalized and globalised environment, there are several preconditions to enhancing the global competitiveness of the MSMEs. These relate mainly to simplified systems and procedures, easy access to capital, positioning the MSMEs in the global value chain by enhancing their productivity (involving issues like technology upgradation, quality improvement, skill development, etc.) and access to markets (both domestic and global). For the promotion and development of the MSMEs, the Government has put in place policy measures as well as implemented several schemes/programmes to address the requirements of the MSME sector in these areas.

Enactment of the MSMED Act, 2006.
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 seeks to facilitate the development of these enterprises as also enhance their competitiveness. It provides the first-ever legal framework for recognition of the concept of “enterprise” which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, micro, small and medium. .

The Act also provides for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions. Establishment of specific Funds for the promotion, development and enhancing competitiveness of these enterprises, notification of schemes/programmes for this purpose, progressive credit policies and practices, preference in Government procurements to products and services of the micro and small enterprises, more effective mechanisms for mitigating the problems of delayed payments to micro and small enterprises and assurance of a scheme for easing the closure of business by these enterprises are some of the other features of the Act.

The Ministry of MSME has also taken a view, in the light of the liberalized provisions of the MSMED Act 2006, to do away with the restrictive 24% ceiling prescribed for equity holding by industrial undertakings, whether domestic or foreign, in the erstwhile Small Scale Industries (now MSEs). This coupled with the expected legislation on Limited Liability Partnerships (introduced in the Parliament by the Ministry of Corporate Affairs) should pave the way for greater corporatisation of the Small and Medium Enterprises – thereby enhancing their access to equity and funds from the market.

Access to Finance.
Finance is one of the critical inputs for the promotion and development of the micro and small enterprises. Finance to the MSEs is part of the Priority Sector Lending Policy of the banks. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the Priority Sector. For the foreign banks, however, 32% of the NBC is earmarked for the Priority Sector, of which 10% is earmarked for the MSE sector. Any shortfall in such lending by the foreign banks has to be deposited in the Small Enterprise Development Fund (SEDF) to be set up by the Small Industries Development Bank of India (SIDBI). The SIDBI is the principal financial institution for promotion, financing and development of the MSE sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. SIDBI’s major operations are in the areas of
(i) refinance assistance
(ii) direct lending and
(iii) development and support services. Commercial banks are important channels of credit dispensation to the sector and play a pivotal role in financing the working capital requirements, besides providing term loans (in the form of composite loans). At the State level, State Financial Corporations (SFCs) and twin-function State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the MSE sector.

Recognising the importance of easy and adequate availability of credit in sustainable growth of the MSE sector, the Government has announced a ‘Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs)’, with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the Policy Package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year. In addition, the Ministry of MSME is also implementing the following major schemes:

Credit Guarantee Scheme: To ensure better flow of credit to MSEs by minimizing the risk perception of banks/financial institutions in lending without collateral security, the Credit Guarantee Fund Scheme for Micro and Small Enterprises is being implemented.
The scheme covers collateral-free credit facility extended by eligible lending institutions to new and existing micro and small enterprises for loans up to Rs.1 crore.
Performance & Credit Rating Scheme: The Performance & Credit Rating Scheme for manufacturing MSEs is being implemented with the objective of assisting the MSEs in obtaining performance-cum-credit rating which would help them in improving performance and also accessing bank credit on better terms if the rating is high.

However, despite all the efforts, the number of MSEs having accounts with the banks has been only around 4 million. Taking this into account the fact that a majority of the MSEs at the lower-end of the sector are outside the ambit of institutional finance, concerted efforts are being made by the SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs.1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries. The outstanding loan under the SFMC programme is Rs.950 crore as at the end of March 2008.

Faced with increased competition on account of globalisation, MSMEs are beginning to move from an obsession with bank credit to a variety of other specialized financial services and options. In recent years, the country has witnessed increased flow of capital in the form of primary/secondary securities market, venture capital and private equity, external commercial borrowings, factoring services, etc. Some of the measures required for promoting these emerging sources of finance are: To facilitate the MSME sector to garner resources, it is imperative that a separate trading exchange be set up exclusively for the MSMEs; Provide special incentives for encouraging larger flow of Venture Capital & Private Equity funds into the sector; More liberal “All-in-Cost Ceilings” for SMEs to raise low-cost funds through the External Commercial Borrowing route; and Urgent need to bring the legislation on ‘Factoring Services’.

Competitive Technology and Quality Improvement.
In today’s fast paced global business scenario, technology and quality of products has become more vital than ever before. With a view to foster the growth of MSME sector in the country, Government has set up ten state-of-the-art Tool Rooms and Training Centres. These Tool Rooms provide invaluable service to the Indian industry by way of precision tooling and providing well-trained craftsmen in the area of tool and die making. These Tool Room are highly proficient in mould and die making technology and promote precision and quality in the development and manufacture of sophisticated moulds, dies and tools. The Ministry of MSME implements the following schemes and programmes for the upgradation of technology/quality of the MSMEs:

ISO 9000/14001 Certification Fee Reimbursement Scheme to enhance the competitive strength of the MSEs, the Government introduced a scheme to incentivise technological upgradation, quality improvement and better environment management by the MSEs.

Micro and Small Enterprises Cluster Development Programme (MSECDP) is implemented for holistic development of clusters of MSEs. The programme envisages measures for capacity building, skill development, technology upgradation of the enterprises, improved credit delivery, marketing support, setting up of common facility centres, etc., based on diagnostic studies carried out in consultation with cluster units and their collectives.

The Credit Linked Capital Subsidy Scheme (CLCSS) aims at facilitating technology upgradation by providing 15 per cent upfront capital subsidy on institutional finance up to Rs.1 crore.

To help the MSMEs improve their competitiveness, the Government has also launched the National Manufacturing Competitiveness Programme (NMCP). The schemes under this Programme are aimed at addressing the technology/quality upgradation needs of the sector, mainly in the Public-Private Partnership mode.

Further, to facilitate investments for technological upgradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture by MSEs is being continued. There are now only 21 items that are reserved for this sector.

Skill Development
The Ministry of MSME has a long history of providing skill development related training of different kinds. The Ministry has a network of 30 MSME-Development Institutes (DIs), 28 Branch MSME-DIs, 18 Autonomous bodies including 10 Tool Rooms, 6 Technology Development Centres, 2 MSME – Training Institutes, 11 MSME – Testing Centres, 3 National Level Entrepreneurship and Business Development Institutes, 11 Technical Service Centres (TSCs) of NSIC, 36 Training Centres of KVIC and 2 National Coir Training and Design Centres.

The Tool Rooms, Technology Development Centres and 2 Training Centres support the MSME sector by providing the process and product technology development services, precision quality tooling and training manpower with hands-on exposure to the state-of-the-art machinery in different areas. These Institutes offer various training programmes to meet the wide spectrum of technical manpower required in the manufacturing sector. The MSME-DIs and the 3 National Level Entrepreneurship and Business Development Institutes organize a number of training programmes to train potential first generation entrepreneurs for upgradation of their techno/managerial knowledge and skills with ultimate object to start MSEs in various fields. The different training programmes are Industrial Motivation Campaigns, Entrepreneurship Development Programmes, Entrepreneurship Skill Development Programme, Management Development Programme and Business Skill Development Programme. In addition, 2 agencies under the Ministry of MSME, namely, Khadi and Village Industry Commission (KVIC) and Coir Board provide grass root training to enable the bottom rung of the society in basic skill development, followed by provision of institutional finance. The programmes conducted by these agencies enable the beneficiaries to set up their own projects as self-employment ventures.

Overall during 2007-08, the various agencies under the Ministry of MSME have conducted training programmes for 1.8 lakh trainees, and the targets for 2008-09 has been fixed at over 3 lakh trainees. The Ministry of MSME intends to increase the number of trainees significantly through enhancing the infrastructural facilities of the existing institutions and adopting Public-Private-Partnership model for providing skill development.

Access to Market
To facilitate the MSMEs in their marketing endeavour, the various organisations under the Ministry of MSME organize exhibitions/fairs and buyer-seller meets across the country providing an opportunity to them for displaying their products and capabilities. In addition, 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. Further, various facilities are provided to MSEs in purchases effected by the Ministries/Departments/CPSUs to the units registered under the Single Point Registration Scheme of NSIC. These facilities are issue of Tender Sets free of cost; exemption from payment of Earnest Money Deposit; waiver of Security Deposit upto the Monetary Limit for which the unit is registered under the Single Point Registration Scheme; and Price preference up to 15% over the quotation of large-scale units. In addition to these facilities/benefits, 358 items have also been reserved for exclusive purchase from the MSE Sector by the Government agencies.

The MSMED Act, 2006 has substantially strengthened the provisions to check delayed payments by larger enterprises to MSEs (that supply products to the larger enterprises). Besides laying down that payments must be made within 45 days of supply, the legislation lays down the institutional framework in the shape of MSE Facilitation Councils to be constituted by each State. In addition, the Ministry of MSME has also formulated two schemes under the NMCP to facilitate marketing of MSME products. These are - Marketing Support/Assistance for MSMEs for adoption of “Bar Code”, and Marketing Assistance for MSMEs & Technology Upgradation Activities.

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