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Chapter 2

Micro, Small and Medium Enterprises in India

2.1 Introduction

MSMEs in India are an important contributor to the Indian economy

and are drivers of growth. By its less capital intensive and high labour

absorption nature, MSME sector has made significant contributions to the

manufacturing output, employment generation, rural industrialization 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

the total exports of the country. Over 6000 products ranging from traditional to

high-tech items are manufactured by MSMEs in India. The sector creates

largest employment opportunities next only to agriculture. The sector is

estimated to employ about 595 lakh persons in over 261 lakh enterprises

throughout the country (Ministry of MSME, 2012). It is estimated that 95 per

cent of all industrial units are in the MSME sector (Singh et al., 2010).

The sector has consistently showed growth in production, fixed

investment, employment and total exports over the years. One of the

strengths of Indian MSMEs is that of cost advantage in comparison to their

global counterparts (Singh et al., 2010). It has been a vibrant sector in spite of

inadequacies. In recent years, the MSME sector has consistently registered

higher growth rate compared to the overall industrial sector. The MSMEsectors performance and growth data during the period 2001-2011 are

included in Appendix 1. Growth in demand in the domestic market size due to

overall economic growth, increasing export potential for Indian products and

growth in requirements for ancillary units due to the increase in number of

units coming up in the large scale sector has led to several opportunities for

this sector. The promotional and protective policies of the Govt. have ensured

the presence of this sector in wide range of products, particularly in consumergoods.

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MSME sector plays a major role in India's present export performance.

According to the Ministry of MSME (2011b), around 45-50 per cent of the

Indian exports is contributed by this sector. Direct exports from the sector

account for nearly 35 per cent of total exports. Besides direct exports, it is

estimated that small-scale industrial units indirectly contribute about 15 per

cent to exports. This takes place through merchant exporters, trading houses

and export houses. They may also be in the form of export orders from large

units or the production of parts use in finished exportable goods. It would

surprise many to know that non-traditional products account for more than 95

per cent of the MSME exports. In the last decade, the export performance has

been further fuelled by the growth of garments, leather and gems & jewelry

units of this sector. The product groups where the sector dominates in exports

are sports items, readymade garments, woolen garments & knitwear, plastic

products, processed food and leather products (Ministry of MSME, 2011b).

According to the fourth census of MSME, 67 per cent of the enterprises

in the registered MSMEs sector were engaged in manufacturing, whereas 17

per cent of the enterprises were engaged in the services activities. The

remaining 16 per cent of the enterprises were engaged in repairing and

maintenance. About 90 per cent of the firms were proprietary owned firms

(Ministry of MSME, 2011a).

The manufacturing sector is an important segment and considered to

be a key growth driver of the Indian economy like in several developing

countries. Government of India has made several efforts to enhance the

competitiveness of the Indian manufacturing industry. National Manufacturing

Competitiveness Council (NMCC) was set up to undertake initiatives to

enhance competitiveness of the sector. According to a report by NMCC and

NASSCOM (2010), the Indian manufacturing sector has over 53 lakh

manufacturing units with 99 per cent of the units employing less than 10

workers. Food & beverages, textiles, non-metallic mineral products, chemical

products and machinery & equipment are the top 5 verticals in terms of

number of units and they account for nearly 75 per cent of the total number ofunits in the manufacturing sector.

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Small scale sector is the backbone of Indian manufacturing sector with

90 per cent of the total industrial units. However, according to the report by

NMCC and NASSCOM (2010), the contribution of Indian manufacturing to the

national GDP has stagnated over the last few years by about 15 per cent in

spite of the growth in the manufacturing sector. The contribution level is found

to be much lower when benchmarked with comparable economies such as

China (39.3 per cent), Thailand (35.2 per cent), Malaysia (31.1 per cent),

Indonesia (24.7 per cent) and Vietnam (20.8 per cent) (NMCC & NASSCOM,

2010).

The small sale sector is an important component of the foundationlayer of manufacturing sector and entrepreneurial activities in India. As the

productivity and performance of large manufacturing firms would be

influenced by the competitiveness of their suppliers, i.e., mainly MSMEs, it is

important to improve productivity levels of MSME to improve the

manufacturing sector as a whole.

2.2 Challenges faced by MSME sector in India

Despite the huge potential, the small scale sector faces several

challenges and there have been the inadequacies in capital, technology and

marketing. While SME sector in India did well in terms of the absolute

numbers, its relative performance was on the verge of stagnation. Even the

employment level remained stagnant on a per unit basis, but has improved

substantially in relation to the organized sector employment. The number of

unregistered units is much higher than the number of registered units (NMCC,

2010).

A study on MSMEs in western India, Singh et al. (2010) found that

cost, quality and delivery time are the main pressures on the small industries.

According to the study, SSIs opine that the major constraints are lack of

growth conducive environment, inadequate government support and

incentives and poor infrastructure for training. SSIs have highest

competitiveness at local level and lowest competitiveness at international

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level. Use of information to optimize decisions, to define quality standards,

and optimization of working environment are the main areas of competency

development (Singh et al., 2010).

According to the fourth all India census 2006-2007, conducted by

Ministry of Micro, Small and Medium enterprises, Govt. of India, it was

revealed that about 29.40 per cent of the total units were suffering from

sickness and about 3.73 per cent of enterprises suffered from incipient

sickness. Major problem for the sickness was found to be lack of demand,

shortage of working capital and marketing problems as mentioned in Table

2.1 (Ministry of Micro, Small and Medium enterprises, 2011a).

Table 2.1: Reasons for sickness in small scale industries in India

Sl.

No.

Reason for sickness

/ incipient sickness

Proportion of sick/ incipient

sick units (per cent)

1 Lack of demand 41.94

2 Shortage of working

capital

20

3 Non-availability of raw

material

5.11

4 Power shortage 5.71

5 Labour problems 5.64

6 Marketing problems 11.48

7 Equipment problems 3.17

8 Management problems 6.46

Source: Ministry of Micro, Small and Medium Enterprises (2011a), Government of

India, Fourth All-India census 2006-2007

Food products and beverages (17.73 per cent), apparel (10.23 per

cent), textiles (9.11 per cent) were the top three industries that suffered from

sickness. Percentage share of closed enterprises at national level was about

22 per cent of the total registered enterprises.

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According Confederation of Indian Industry (CII), Indian MSMEs face

several challenges for growth. Some of the problems are high cost of credit,

limited access to equity capital, problems in supply to government

departments and agencies, procurement of raw materials at a competitive

cost, inadequate infrastructure facilities such as power, road, low technology

levels and lack of access to modern technology, lack of skilled manpower,

problems of storage, designing, packaging and product display, absence of

suitable mechanism to revive/close sick enterprises quickly and lack of

resources for branding and marketing, lack of access to global markets (CII,

2010).

Infusing competitiveness, infrastructure development and bringing vast

population of MSMEs in the unregistered sector to the mainstream is the main

challenge before the GoI at present.

2.3 Governance and Institutional support for MSMEs

The Ministry of Micro, Small and Medium Enterprises is the

administrative Ministry in the Government of India for all matters relating to

Micro, Small and Medium Enterprises. It designs and implements policies and

programmes through its field organisations and attached offices for promotion

and growth of MSME sector. The office of the Development Commissioner is

an attached office of the Ministry of MSME, and is the apex body to advise,

coordinate and formulate policies and programmes for the development and

promotion of the MSME sector. The office also maintains liaison with Central

Ministries and other Central/State Government agencies/ organisations/financial institutions (www.dcmsme.gov.in).

2.3.1 Ministry of MSME and its network of organisations

The Development Commissioners office of MSME, have a network of

Development Institutes, Testing Centres, autonomous bodies which include

Tool Rooms and Tool Design Institutes, Technology Development Centers

and Training Institutes. Other associated agencies of this office are National

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Small Industries Corporation (NSIC), Small Industries Development Bank of

India (SIDBI) and Khadi & Village Industries Commission (KVIC).

National Small Industries Corporation (NSIC) Ltd. was establishedin 1955 by the GoI with a view to promote, aid and foster the growth of small

industries in the country. NSIC continues to remain at the forefront of

industrial development throughout the country with its various programmes

and projects to assist the MSME in the country. The main functions of the

corporation are to promote, aid and foster the growth of micro and small

enterprises in the country, generally on a commercial basis. It provides a

variety of support services to micro and small enterprises by catering to theirrequirements in the areas of raw material procurement, product marketing,

credit rating, acquisition of technologies, and adoption of modern

management practices. The NSIC is directly operating different programmes

by a dedicated team of professionals at all levels and operates through 142

offices located all over India and one office located at Johannesburg, South

Africa (Ministry of MSME, 2012).

Small Industries Development Bank of India (SIDBI) is an apex

bank set up to provide direct/indirect financial assistance under different

schemes to meet credit needs of the small-scale sector and to coordinate the

functions of other institutions in similar activities. Its major operations are in

the areas of refinance assistance, direct lending, and development & support

services.

Khadi & Village Industries Commission (KVIC), established underthe Khadi and Village Industries Commission Act, 1956, is a statutory

organization engaged in promoting and developing Khadi and Village

Industries for providing employment opportunities in rural areas, thereby

strengthening the rural economy. The KVIC has been identified as one of the

major organizations in the decentralized sector for generating sustainable

rural nonfarm employment opportunities. This also helps in checking migration

of rural population to urban areas in search of the employment opportunities.

(Ministry of MSME, 2012)

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2.3.2 Divisions of Ministry of MSME

The Ministry of MSME has two Divisions called Small & Medium

Enterprises (SME) Division and Agro & Rural Industry (ARI) Division. The

SME Division is allocated the work of administration, vigilance and

administrative supervision of the National Small Industries Corporation (NSIC)

Ltd. and the three autonomous national level entrepreneurship

development/training organisations. The division is also responsible for

implementation of the schemes relating to marketing and export promotion.

The ARI division looks after the administration of two statutory bodies

viz. the Khadi & Village Industries Commission (KVIC) and the Coir Board. It

also looks after a newly created organization called Mahatma Gandhi Institute

for Rural Industrialisation (MGIRI). It supervises the implementation of the

Prime Ministers Employment Generation Programme (PMEGP).

The Coir Board is a statutory body established under the Coir Industry

Act, 1953 for promoting overall development of the coir industry and

improving the living conditions of the workers engaged in this traditional

industry. Coir Industry is one of the major agro based rural industries in the

country. The activities of the Board for development of coir industries include

undertaking scientific, technological and economic research and development

activities; developing new products & designs; and marketing of coir and coir

products in India and abroad. It also promotes co-operative organisations

among producers of husks, coir fibre, coir yarn and manufacturers of coir

products, ensuring remunerative returns to producers and manufacturers. The

Board has promoted two research institutes namely; Central Coir Research

Institute (CCRI), Kalavoor, Alleppey and Central Institute of Coir Technology

(CICT), Bengaluru for undertaking research activities on different aspects of

coir industry (Ministry of MSME, 2012).

The national level institute namely Mahatma Gandhi Institute for Rural

Industrialization (MGIRI) , has been established as a society under Societies

(Registration) Act, 1860 at Wardha, Maharashtra, to strengthen the R&Dactivities in khadi and village industry sector. The main functions of the

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Institute are to improve the R&D activities in the rural industrial sector through

encouraging research, extension of R&D, quality control, training and

dissemination of technology related information.

2.3.3 State Government support for MSMEs

The primary responsibility of promotion and development of MSMEs is

of the state Governments. However, the GoI, supplements the efforts of the

State Governments through various initiatives. The role of the Ministry of

MSME and its organisations is to assist the states in their efforts to encourage

entrepreneurship, employment and livelihood opportunities and enhance the

competitiveness of MSMEs in the changed economic scenario. State

Government executes different promotional and developmental

projects/schemes and provide a number of supporting incentives for

development and promotion of MSME sector in their respective states. These

are executed through State Directorate of Industries, who have District

Industries Centers (DICs) under them to implement central/state level

schemes (www.dcmmsme.gov.in).

Apart from commercial banks, at state level, State Financial

Corporations (SFC) and twin function State Industrial Development

Corporations are the main sources of long term finance to MSMEs.

In Karnataka state, the Department of Industries and Commerce under

Government of Karnataka, acts as a catalyst for the overall development of

the industrial sector through effective discharge of developmental and

facilitation roles. It looks after both large scale projects and MSMEs with a

view to promote industrialization, investment and trade. It formulates policies,

schemes and programmes to promote industrialization in the state. The

department functions through the Districts Industries Centers, various Boards

Corporations and special purpose vehicles. There are 17

boards/corporations/societies operating under the Department of Industries

and Commerce. The Department has established the Single Window

Mechanism (Karnataka Udyog Mitra) for faster, single point clearances to be

http://www.karnatakaindustry.gov.in/functions_districtlevel.htmlhttp://www.karnatakaindustry.gov.in/boards_corporations.htmlhttp://www.karnatakaindustry.gov.in/boards_corporations.htmlhttp://www.karnatakaindustry.gov.in/boards_corporations.htmlhttp://www.karnatakaindustry.gov.in/boards_corporations.htmlhttp://www.karnatakaindustry.gov.in/functions_districtlevel.html

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given to projects seeking infrastructure facilities/incentives/concessions and

help in establishing industries and businesses in Karnataka

(www.karnatakaindustry.gov.in).

2.4 Government policies and support measures for MSMEs

Since independence, GoI has given importance to the MSME sector,

as it creates employment opportunities and facilitates mobilization of private

sector resources. GoI has taken supportive measures such as reservation of

items for exclusive manufacture by MSMEs, access to credit through priority

sector lending programme for commercial banks, excise exemption,reservation under Government purchase programme and 15 per cent price

preferences in purchases, infrastructure development and establishment of

institutes of entrepreneurial and skill development.

MSME Development Institutes, formerly known as Small Industries

Service Institute (SISI), were set up all over India to train youths and tool

rooms were set up with German and Danish assistance to provide skill

training and provide technical assistance. At the state level, District Industrial

Centres were setup throughout the country. Over a period of time, with

liberalization, government policies have moved from protective measures to

infusing growth and competitiveness in the sector. Supportive measures

focused on infrastructure development, technology and quality.

In 1999, Ministry of MSME (earlier known as Ministry of Small Scale

Industries and Agro and Rural Industries SSI & ARI) came into being to

provide focused attention to the sector. Policy package announced in August

2000, addressed persistent problems on credit, infrastructure, technology and

marketing. Credit linked capital subsidy scheme to encourage technology

upgradation, credit guarantee scheme to provide collateral-free loans

particularly first time entrepreneurs and exemption limit for central excise duty

was raised to one crore rupees and list of products for exclusive manufacture

was gradually decreased. To facilitate further investments for technologicalupgradation and higher productivity in the micro and small enterprises, 654

http://www.kumbangalore.com/http://www.kumbangalore.com/

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items have been taken off the list of items reserved for exclusive manufacture

by the manufacturing micro and small enterprises in the last few years,

reducing it to 21 at present.

In 2006, Micro Small and Medium Enterprises Act was passed to

improve competitiveness of this sector and it defined medium enterprises for

the first time. It provided a legal framework for the concept of enterprise, both

manufacturing and service industries. The Act provides statutory consulting

mechanism at the national level with a wide range of advisory functions and

defines three levels of enterprises i.e., micro, small and medium. With the

MSMED ACT Ministry of Agro and Rural Industries and Ministry of SmallScale Industries were merged into a single Ministry, namely, Ministry of Micro,

Small and Medium Enterprises. Some of the salient features of the MSMED

Act (Ministry of MSME, 2012) are:

Setting up of a National Board for MSMEs, an apex advisory body

constituted to render advice to the Government on all issues pertaining

to the MSME sector. It brings together the representatives of different

sub-sectors of MSMEs, along with policy-makers, bankers, trade

unions and others in order to move towards cohesive development of

the sector.

Classification of enterprises

Advisory Committees to support MSMEs

Measures for promotion, development and enhancement of MSMEs

Schemes to control delayed payments to MSMEs

Enactment of rules by State Governments to implement the MSMED

Act, 2006 in their respective states

Some of the important policies and schemes related to finance,

technology, marketing & procurement, skill development, and rural

development & inclusiveness for MSMEs are compiled from the various

publications of Ministry of MSME and are discussed in the following sections:

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2.4.1 Finance

The Government has initiated several measures to facilitate easy

access of funds to MSME sector. One such initiative is priority sector lending.

For public and private sector banks, 40 per cent of the Net Bank Credit (NBC)

is earmarked for the priority sector. Credit to MSMEs is through the priority

sector lending policy of the bank. For the foreign banks, 35 per cent is for

priority sector of which 10 per cent is reserved for MSMEs. Any shortfall in

lending by foreign banks has to be deposited in Small Enterprise

Development Fund (SEDF) setup by SIDBI.

The Government has also announced policy package for stepping up

credit to small and medium enterprises with the objective of doubling the

credit flow to the sector in the next five years. In recent years, the sector has

shown interest in alternative sources of funding such as primary/secondary

securities market, venture capital and private equity, external commercial

borrowings, factoring services etc. Efforts are being put for Limited Liability

Partnership Act to provide thrust to MSMEs in their move towards

corporatization.

The Government has introduced a Credit Guarantee Scheme which

provides collateral free credit facility by eligible lending institutions to new and

existing MSMEs for loans upto 100 lakh per borrowing unit.

Performance and Credit Rating Scheme was launched in April 2005

with an objective of improving their performance and access bank credits if

the rating is high. Under the scheme, 75 per cent of the fees charged by therating agencies are reimbursed by the Government to a maximum of

40,000.

2.4.2 Technology

To facilitate technology upgradation and quality improvement, several

measures have been initiated by the GoI. The Government has set up ten

state of the art Tool Rooms and Training centres. These tool rooms are

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proficient in mould and die making technology and abreast with latest

technology such as CAD/CAM, CNC machining for tooling, Vacuum Heat

Treatment, Rapid Prototyping etc. Tool Rooms offer training programmes on

technical skills required for the manufacturing sector.

The Government has introduced ISO 9000/14001 Certification Fee

Reimbursement Scheme and reimburses 75 per cent of the certification fees

subject to maximum of 75,000. To facilitate replacement of old machinery

with new ones, Government introduced Credit Linked Capital Subsidy

Scheme with state assistance of 15 per cent of the bank credit required to

finance the new purchases.

Micro and Small Enterprise Cluster Development Programme

(MSECDP) has been implemented to develop MSME clusters. It aims at a

focused programme of upgrading skills and technologies that exist in these

clusters and exposing entrepreneurs/workers to better products, processes

and practices and creation of common facility centres (CFC). These CFCs are

in the form of processing facilities, finishing or packaging centres, tool rooms,

testing or certifying laboratories, training centres and so on. Integrated

Infrastructure Development Scheme started in 1994 has been now subsumed

under MSECDP. It was started to establish industrial estates and develop

infrastructure facilities such as power distribution network, roads, drainage

and pollution control, telecommunication, banks, raw materials, storage and

marketing outlets, water, technological backup facilities etc. The scheme

cover rural as well urban areas with 50 per cent of the area reserved in rural

areas and 50 per cent of the industrial plots to be reserved for micro

enterprises.

National Manufacturing Competitiveness Programme (NMCP) aimed at

technology, marketing and skill upgradation mainly in public-private

partnership mode was initiated by National Manufacturing Competitiveness

Council in 2007-2008. Some initiatives such as application of Lean

Manufacturing to reduce wastage of resources, Design Clinic to address

design problems, attaining Quality certification, improving use of ICT,

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enhancing familiarity with Intellectual Property Rights and Intellectual Property

Facilitation Cell (IPFC).

The Ministry is also under the process of establishing TechnologyMission to promote appropriate technologies for the MSME sector. The NMCP

introduced 'Marketing Assistance/ Support to MSMEs' scheme is to

popularise the bar code registration and motivate the manufacturing MSMEs

to adopt the bar code certification on large scale and to sell their value added

products worldwide and enable higher export price realization. It also helps in

domestic marketing (wholesale & retail). 75 per cent of annual fee (recurring)

of bar code certification for the first three years are reimbursed to Micro &Small Entrepreneurs, under the Scheme.

To promote use of Information and Communication Technologies (ICT)

in the Indian MSME sector, GoI has initiated a programme with some clusters

of MSMEs. The GoI has stipulated as 160 crore (approx.) for this scheme.

Under this scheme, clusters that have quality production and export potential

are identified for ICT intervention. E-readiness infrastructure, web portals and

e-catalogues for the clusters are set up, skill development of MSME staff in

ICT applications and preparation of local software solutions for MSMEs are

undertaken to enhance their competitiveness. Networking MSME cluster

portals on the National Level Portals in order to outreach MSMEs into global

markets is also initiated. One such initiative called Project Vikas was

undertaken by National Manufacturing Competitive Council (NMCC) in

association with Microsoft India in Textile cluster Tirupur.

Design Clinics Scheme was undertaken to provide expert advice to

MSMEs and solutions on real time design problems, resulting in continuous

improvement and value-addition for existing products.

Marketing Assistance and Technology Upgradation Scheme for

MSMEs was started to identify and encourage those clusters of MSMEs,

which have quality production and export potential and assist them to achieve

competitiveness in the national and international markets. The scheme aims

at improving the marketing competitiveness of MSME sector by improving

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their techniques and technology for promotion of exports. The broad activities

planned under the scheme include technology upgradation in packaging,

development of modern marketing techniques, competition studies, etc.

Technology and Quality Upgradation Support scheme to sensitize the

manufacturing (MSME) sector in India to upgrade their technologies, usage of

energy efficient technologies to reduce emissions of greenhouse gases,

adoption of other technologies mandated as per the global standards, improve

their quality and reduce cost of production, etc., towards becoming globally

competitive. The major activities planned under the scheme include capacity

building of MSMEs clusters for energy efficiency/clean developmentinterventions, implementation of energy efficient technologies in MSME

sector, Setting up of carbon credit aggregation centres and encouraging

MSMEs to acquire product certification licenses from National/International

bodies.

2.4.3 Marketing and Procurement

National Small Industries Corporation has launched a B2B Web portal

www.msmemart.com / www.nsicindia.com in 2009 to provide B2B marketing

facilities. The portal provides the services such as tender & trade information,

banner display on NSIC website, access to national and international

business leads, joint venture opportunities and trade information,

comprehensive information on Government policies, rules and regulations,

schemes and incentives, access to industrial databases and member's

directory, various value added, specialized services for members ofinfomediary Service. The portal would enable MSMEs to showcase their

products in global markets and to weave strategic and networking alliances.

NSIC has also initiated performance and credit rating service for the MSMEs

to provide trusted third party ratings for the MSMEs (NSIC, 2011).

Further, NSIC has established a Marketing Intelligence Cell in May

2010, which shall provide database and information support to the MSMEs on

http://www.msmemart.com/http://www.msmemart.com/

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marketing of their products/services. Many of these initiatives are recently

launched and yet to reach the masses.

Under Government Stores Purchase Programme, various facilities areprovided to enterprises registered with National Small Industries Corporation

(NSIC) in order to assist them for marketing their products in competitive

environment. These facilities are: (i) issue of tender sets free of cost; (ii)

exemption from payment of Earnest Money Deposit; (iii) waiver of security

deposit up to the monetary Limit for which the unit is registered; and (iv) 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 exclusivepurchase from the MSE Sector. However, as these guidelines were/are not of

a mandatory nature, the same has failed to achieve the desired results.

To help MSEs in exporting their products, the following

facilities/incentives are provided: (i) Products of MSE exporters are displayed

in international exhibitions and the expenditure incurred is reimbursed by the

Government; (ii) To acquaint MSE exporters with latest packaging standards,

techniques, etc., training programme on packaging for exporters are

organised in various parts of the country in association with the Indian

Institute of Packaging; (iii) 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 (i) sector specific market study by MSE associations/Export

Promotion Councils/Federation of Indian Export Organisation (ii)

initiating/contesting anti-dumping cases by MSE associations.

2.4.4 Skill development

The Ministry of Micro, Small & Medium Enterprises promotes the

development of micro and small enterprises in the country with the objective

of creating self-employment opportunities and upgrading the relevant skills of

existing and potential entrepreneurs. The entrepreneurship and skill

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development scheme is implemented by Office of the DC (MSME) through its

network of 58 MSME-DIs and their branches. The programmes conducted

include Entrepreneurship Development, Entrepreneurship and Skill

Development, Management Development and Business Skill Development.

These programmes are of short duration and the curriculums based on needs

of the industry.

The office of the DC (MSME) also conducts vocational and educational

training through its Regional Testing Centres, Field Testing Stations and

autonomous bodies like Tool Rooms and Technology Development Centres

(TDCs). These long term, short term, trade/field-specific and industry-specifictailor-made courses also include specialized programmes for engineers,

diploma holders so that their absorption by the industry is immediate.

Rajiv Gandhi Udyami Mitra Yojana scheme aims to promote and

support establishment of new micro and small enterprises through

handholding of potential first generation entrepreneurs One of the main

objectives is to facilitate the potential entrepreneurs in dealing with various

procedural and legal hurdles and completion of various formalities which are

required for setting up and running of enterprise.

As a part of this scheme, the Ministry has recently launched a MSME

Call Centre (known as Udyami Helpline) with a toll-free number 1800-180-

6763. The Udyami Helpline, provides basic information on how to set up an

enterprise, various schemes being implemented for the promotion of MSMEs,

accessing loans from banks and further contacts for obtaining detailed

information. To provide an opportunity for first generation entrepreneurs to

acquire skills for enterprise building and to incubate them to become

successful small business owners, NSIC has setup 47 training-cum-incubator

centres (TICs) under PPP mode.

2.4.5 Rural development and Inclusiveness

The Ministry of MSME launched a special programme, namely,

'Outreach Programme for Skill Development in Less Developed Areas' in

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September, 2006. Under this programme, the field offices of the Ministry

organize short-term skill development programmes in the less developed

areas. Such short-term courses are tailor-made for these areas so as to

enable trainees to get employment or start self-employment ventures. The

target group consist wholly or partly of disadvantaged sections.

A national level credit linked subsidy scheme, namely, Prime Ministers

Employment Generation Programme (PMEGP)was introduced in August

2008 and a financial assistance is provided for setting up of micro enterprises

each costing up to ten lakh rupees in service sector and twenty five lakh

rupees in manufacturing sector. The assistance is provided in the form ofsubsidy up to 25 per cent (35 per cent for special category including weaker

sections) of the project cost in rural areas while it is 15 per cent (25 per cent

for special category including weaker sections) for urban areas.

The Government has initiated several schemes for enhancing

productivity & competitiveness of Khadi industry & Artisans and schemes for

Modernisation and Technological Upgradation of Coir industry.

Market Development Assistance (MDA) Scheme has been introduced

in 2010 and provides financial assistance @ 20 per cent on value of

production of khadi and polyvastra which will be shared among artisans,

producing institutions and selling institutions in the ratio 25:30:45. Under the

workshed Scheme for Khadi Artisans, assistance is provided for construction

of worksheds for Khadi artisans for better work environment. Mahatma

Gandhi Institute for Rural Industrialization (MGIRI), a national level institute

has been established at Wardha, Maharashtra to accelerate rural

industrialization for sustainable village economy so that KVI sector co-exists

with the main stream.

Ministry of MSME has also taken initiatives such as National Database

of MSMEs. However, biggest challenge is to bring vast number of

unregistered MSMEs in to the database. District Industrial centres would have

to take a pivotal role in this effort.

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2.5 Indian MSMEs and ICT adoption

The role of Information and Communication Technologies (ICT) in the

growth of small firms is well acknowledged in the literature (UNCTAD, 2011;

CII, 2010; NMCC & NASSCOMM, 2010). Developments in ICT have led to

increased transparency and information sharing across borders. Small firms

which were earlier operating in protected zones have to now face competition

from outside players. To meet with pressure, automation and using

information to take decisions is essential for small firms.

Small firms that have quality products, flexibility in manufacturing

based on demand and robust processes will be the ones that will survive.

However, Indian MSMEs are giving the highest priority to quality and the least

priority to flexibility. In the present era of globalization SMEs should possess

the ability to get the organization to innovate quickly and produce an

acceptable product and service to capture upcoming business opportunity

(Dangayach and Deshmukh, 2005).

IT investment in SMEs differs from IT investment in large firmsbecause a smaller number of people have decision making responsibility,

standard procedures are not instituted, long- term planning is limited and

there is more reliance on external IT experts in SMEs (Premkumar, 2003a).

Several researchers have acknowledged that MSMEs lag behind ICT

adoption compared to larger businesses (Jones et al., 2003; Macgregor and

Vrazalic, 2005). Indian MSMEs are no exception and penetration of ICT in

Indian MSME sector is still very low (Sharma and Bhagawat, 2006; Singh et

al., 2009; CII, 2010) and majority of MSMEs use basic ICT such as email,

spreadsheets etc (CII, 2010) or financial accounting packages(Sharma and

Bhagawat, 2006). ICT adoption in Indian manufacturing sector has

significantly lagged behind its global peers. Indias spend on ICT is only USD

50 per capita while China spent double that amount during 2006 (NMCC &

NASSCOM, 2010).

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Several research studies conducted on Indian MSMEs revealed that

successful use of ICT by small firm has resulted in significant benefits. Singh

et al. (2010) found that use of information technology has significant

relationship with performance of small firms in India. Lal (2004) found that

users of advanced e-business technology perform better than non-users in

the export market.

Study of Indian MSMEs in western India reveals that use of information

system has resulted in benefits such as responsiveness, better customer

service, increase in turnover, better capacity utilization, edge over other

competitors, reduction in inventory and improved relations with supply chainpartners (Sharma and Bhagawat, 2006). Kale et al. (2010) found that ERP

implementation in Indian MSMEs is beneficial in reducing inventory, improving

customer services and improving communications. Advanced IT such as

ERP/SCM software can help SMEs to increase productivity, improve inventory

controls, increase sales through closer relationships, and faster delivery

times.

According to the study by NMCC and NASSCOM (2010), some of the

drivers to adopt ICT are internal factors such as better business process flow,

better inventory control, etc. and external factors such as client requirements,

compliance needs, competition pressures etc. The clients of the small firm

have a strong influence on the adoption of ICT. More than three-fourth of the

companies especially in the micro and small firms category are strongly

influenced by the owner/management team for their ICT investments. The

education background of the firms owner has a strong impact on ICT

adoption levels. According the studys detailed analysis of the manufacturing

clusters across various Indian states, states with better physical infrastructure

and industrial policies were found to be also leaders in the manufacturing

sector. The states have been analysed on direct factors such as tele-density,

education development, e-Government initiatives, power availability and

indirect factors such as FDI inflow and export contribution. Maharashtra,

Karnataka, Tamil Nadu, Chhattisgarh, Himachal Pradesh and Kerala havegood Infrastructure and policy initiatives while states such as Bihar, Madhya

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Pradesh, Uttar Pradesh, and Jharkhand lag behind (NMCC and NASSCOM,

2010).

The internet usage and technology adoption is improving with pressurefrom international customers, especially among export oriented firms. Indian

SMEs with customers outside India were one of the first adopters of internet

technology which enabled them to integrate themselves with the supply

chains of their international customers. This integration enabled SMEs in India

to respond faster to their customers requirements. Such initiatives in the three

SME clusters of India (lock and brass clusters and garment clusters) are

enabling awareness of benefits of internet among Indian SMEs. However, theintegration of SMEs with their suppliers is non-existent (Faisal et al., 2006).

One of the sectors that has been leading in ICT adoption is the automotive

sector. However, this trend is yet to catch up in other verticals.

However, Indian MSMEs face several challenges to use ICT. There are

problems both at the demand side as well as supply side. Some of the

barriers to use ICT in SMEs are lack of financial capacity, small scale

operation and lack of in-house IT manpower inhibit the adoption, lack of R&D,

marketing (Kale et al., 2010, NMCC & NASSCOMM, 2010; Kannabiran and

Dharmalingam, 2012). MSMEs rely primarily on small number of customers

and operate in limited markets (Sharma and Bhagawat, 2006; Kale et al.,

2010). Most MSME firms lack formal ICT decision making structures and in

majority of the firms, the responsibility for ICT decision making is often with

the firms owner(CII, 2010; NMCC & NASSCOM, 2010).

According to study by CII (2010), some of the barriers to ICT adoption

by Indian MSMEs are limited internal IT expertise and managerial knowledge,

not having a formal IT budgeting process, high costs of software and

requirement of customization that increases costs and process changes, ICT

service providers not servicing the MSME market segment directly due to high

cost of sales and lack of awareness of ICT benefits (CII, 2010). Threats to

information security, resistance to change and to adopt innovations, fear of

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supply chain break down and IS breakdown were found as major barriers to

ICT adoption by Sharma and Bhagawat (2006).

As per the study by NMCC and NASSCOM (2010), most of the MSMEsemploy unskilled and non-English speaking people migrated from rural areas.

They are not exposed to IT training and do not have any expertise in business

process. Therefore, their ability to learn ICT applications is limited. Attracting

qualified personnel is a challenge for small firms with limited resources.

According to the study, software applications that are intuitive and provide

user interfaces in vernacular languages would influence greater adoption of

ICT solutions.

The study also identifies few challenges faced by the national IT

service providers catering to the MSME segment such as lack of innovative

business models by the ICT firms, high cost of sales in servicing MSMEs, high

piracy rate, and diverse needs of MSMEs. Extensive customization before

deployment would involve changes into the significant business process of the

firm which increases costs for both MSME as well as service provider.

Broadband connectivity and reliable power are two major infrastructure

challenges in the adoption of ICT solutions (NMCC & NASSCOMM, 2010).

Cost effective ICT solutions would play a major role in the

transformation of MSMEs and make them productive and competitive.

Government of India is taking initiatives to provide cloud based IT services to

allow MSMEs to use ICT solutions on pay-per-use mode. The barriers to

adoption can be overcome through policy interventions by the Government

and develop an ecosystem conducive for small firms to adopt ICT effectively.

2.6 Summary

In spite of small scale sector being the growth engine of Indian

economy, it faces several challenges in the globalized era. Government of

Indias focus in the recent past has been enhancing competitiveness of the

sector. The policies and initiatives undertaken by the Government of India

have been discussed in this chapter. Past research shows that ICT adoption

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among small firms has been very low among Indian firms. The barriers to ICT

adoption among small firms in India has been discussed to provide a

backdrop for the study. Cost effective solutions provided through pay-per-use

model would be suitable for MSMEs.