Msme Sector in India

Empowering MSMEs for Sustainability: “Make In India”

With the change of power in the Centre various new initiatives have been taken by the

government to kick start the economy to give a double digit growth in the years to come.

One such initiative is Make in India. It is a slogan coined by the Prime Minister of our

country on 25th September 2014. The idea behind this is to attract businesses from across

the world to set up a manufacturing base in India. The purpose behind this is to fulfill the

promise of job creation, give a fillip to the national economy and making India into a self

reliant country. This campaign is also an attempt to attract FDI in the country.

The purpose of Make in India includes economic transformation in India and making India a

manufacturing hub. This is sought to be achieved by simplifying laws, making bureaucratic

processes shorter and easier, bring more transparency in the government transactions and

making the government more accountable. It is also envisaged to have time bound project

clearances which would be done online. It is also proposed to have a dedicated group of

people who would be replying to issues raised by investors in a period of 48 hours.

The idea and the intentions are very good. However this cannot happen in isolation and this

cannot be pursued by one ministry or a group of persons. Every arm of the government be

it for creation of infrastructure or launching IT initiatives or reforming labour laws etc.

Unless everyone pursues this objective with a missionary zeal things may not pan out as

envisaged. However looking at the passion with which it is being pursued it seems that the

objective of Make in India would be achieved.

Jyoti Prakash Gadia

Managing Director

Resurgent India Limited

MESSAGE

Jyoti Prakash Gadia

Managing Director

Resurgent India Ltd.


Contents

Introduction ........................................................................................ 1

MSME Sector in India: The Engine of Growth ..................................... 2

Key Government Schemes and Initiatives to support MSMEs .......... 14

Current Financing Landscape for MSMEs .......................................... 23

Issues and Challenges for MSMEs ..................................................... 29

Role of ICT ......................................................................................... 34

Innovation as a Catalyst for MSME growth ....................................... 39

Recommendations ............................................................................ 44

Conclusion ........................................................................................ 50

Page | 1


Introduction

The MSME sector contributes in a significant way to the growth of the Indian economy with

a vast network of over 46 million units, creating employment of about 106 million people,

manufacturing more than 6000 products, contributing about 45% to manufacturing output

and about 40% of exports, directly and indirectly.

It has been witnessed globally, that the MSME segment constitutes the mainstay for

maintaining growth rates as well as employment generation rate and provides stability

during economic downturns. India’s GDP is expected to touch 8.5 %, with the country likely

to be a USD 5 trillion economy by 2025. To accomplish this, growth of the MSME sector will

be paramount. Further, the progress of this sector is extremely critical to meet the national

objectives of financial inclusion and employment generation across urban and rural areas in

the country.

MSMEs can make significant impact in the area of indigenization, with both domestic and

foreign companies investing in the ‘Make in India’ initiative. With the launch of this

initiative, MSMEs will increasingly focus on securing investment and technical expertise

from foreign firms, which on the other hand, would be willing to leverage existing networks

/ resources of the MSMEs to get higher returns on investment.

It is essential, that as India embarks on a new wave economy, it adopt an MSME opportunity

framework that will provide the necessary momentum to seize the opportunities created by

the ‘Make in India’.

The new wave MSMEs should support the development of a conducive business eco system

that enables and continuously supports business that are striving to deliver their products

and services at a competitive price, both in domestic and international markets.

It is imperative that the MSME sector develops in all areas of manufacturing and services

sectors because each of these sectors will continue to be very relevant to the overall GDP

growth as well as employment generation. The MSME sector will act as a catalyst to bring

about this socio-economic transformation.

The Indian MSME segment has the potential to emerge as a backbone for this economy and

act as an engine for growth, given the right set of support and enabling framework.

Page | 2


MSME Sector in India: The Engine of Growth

Micro, Small and Medium Enterprises (MSMEs) are a significant contributor to the economic

growth of the country across the realms of production, exports and employment.

Today, the sector produces a wide range of products, from simple consumer goods to high-

precision, sophisticated finished products. It has emerged as a major supplier of mass

consumption goods as well as a producer of electronic and electrical equipment and drugs

and pharmaceuticals. An impetus to the sector is likely to have a multiplier impact on

economic growth.

MSME Definition

Prior to 1991, industries were divided into two blocks, at a very broad level: large and small.

SSIs were defined based on investment in plant and machinery (excluding land and building)

and there were no licensing required to set-up such a unit.

In 2006, under MSMED Act, a more comprehensive definition based on capital investment

was laid out. The details enumerated below:

Classification Manufacturing Enterprises Service Enterprises

Micro Does not exceed INR 25 lakh Does not exceed INR 10 lakh

Small More than INR 25 lakhs but

doesn’t exceed INR 5 crore

More than INR 10 lakhs but

doesn’t exceed INR 2 crore

Medium More than INR 5 crores but

doesn’t exceed INR 10 crores

More than INR 2 crores but does

not exceed INR 5 crores.

Key Characteristics

Number of MSMEs –

Ministry of MSME periodically conducts Census to ascertain the size and status of the

industry from time to time. While all registered units form part of the survey, from the

unregistered a representative sample is selected across geographies and its findings

extrapolated for the country. The two sets together represent the entire MSME sector.

Further, this survey has incorporated revisions on coverage and expansion from time to

time. So before MSMED Act 2006, the sector was comprised only of manufacturing units.

The Act included a small list of industry related and IT services. By the time results of 4th

MSME Census (2006-07) were published, a few very large sectors were included such as

wholesale and retail trade; legal, education and social services; hotel and restaurants;

transports , storage and warehousing (except cold storage) among others. # # Anil Bhardwaj Blog “Counting the Beans – Part 1” on Economic Times Website

Page | 3


As per the last Census of 2006-07, there were 361.7 lakh MSME units. The corresponding

figures have been used by the Ministry to project size of the sector and as per MSME Annual

Report for 2013-14;the projected estimate of the size of number of MSMEs for 2012-13 is

467.6 lakhs. This has grown at CAGR of 4.4% over a period of 6 years ending 2012-13.The

Annual MSME Report for 2012-13 pegs the composition of the MSME sector as - Services

68.2% and Manufacturing 31.8%.

Exhibit 1: Number of MSMEs (In Lakhs)

Source: Annual Report 2013-14, Ministry of MSME

Employment Generated by MSMEs –

Similarly, for the Employment figures, The MSME Annual Report for 2013-14 puts the

projected estimate of employment at 1061.52 lakh, having grown at a CAGR of 4.7% over a

period of 6 years ending 2012-13.

Exhibit 2: Employment in the MSME Sector (In Lakhs)

Source: Annual Report 2013-14, Ministry of MSME

361.8 377.4 393.7 410.8 428.7 447.7 467.6

0.0

100.0

200.0

300.0

400.0

500.0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

4.4%

805.2 842.0 880.8 921.8 965.2 1011.8 1061.5

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

4.7%

Page | 4


Split by Segment : Registered vs Un-registered –

In terms of the split by registered – unregistered, the fourth (All-India) Census of MSMEs

estimates, that out of the total number of MSMEs, almost 94 % are still in the unregistered

segment.

Exhibit 3: Split by Registered Vs Unregistered

Source: Annual Report 2013-14, Ministry of MSME. 4th All India MSME Census, 2006-07

Contribution of MSME (Manufacturing Sector) in the GDP –

Based on the results of Third and Fourth All India Census of Small Scale Industries / Micro,

Small & Medium Enterprises, an attempt has been made to estimate the share of MSME

Sector in manufacturing output and GDP revising the existing ratio-based estimation

procedure adopted by the Planning Commission in the year 1992. As per the Ministry’s

Annual Report 2013-14, the contribution of MSMEs in Manufacturing Output is provided

below.

Exhibit 4: Contribution of MSME in Manufacturing Output (in 000 Crs, and %)

Note: * - Provisional.

Source: 1. Fourth All India Census of MSMEs 2006-07, 2. National Account Statistics 2013, CSO, M/O SPI and 3.

Annual Survey of Industries, CSO, M/O SPI

6

94

Registered

Unregistered

1,1991,323

1,376 1,4881,656

1,79142% 42%

41%40%

38% 38%

36%

37%

38%

39%

40%

41%

42%

43%

0.4

200.4

400.4

600.4

800.4

1000.4

1200.4

1400.4

1600.4

1800.4

2000.4

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12*

Gross Output Value Contribution %

Page | 5


The contribution to GDP over the period is shown in the table below.

Exhibit 5: Contribution of Manufacturing Output inGDP (in 000 Crs, and %)

Note: * - Provisional.

Source: 1. Fourth All India Census of MSMEs 2006-07, 2. National Account Statistics 2013, CSO, M/O SPI and 3.

Annual Survey of Industries, CSO, M/O SPI

Key Industries for MSME –

It is a very heterogeneous sector, encompassing diverse industries ranging from traditional

to high-tech manufacturing and valued services. An overview of leading industries with

respective shares is provided in the chart below.

Exhibit 6: Key Industry Shares for MSME (in %)

In terms of manufacturing, Apparel, F&B, Furniture and Textile constitute the majority

share. However in terms of gross output, IFC/ World Bank Inetllecap Analysis, 2013 pegs

1,1991,323 1,376

1,4881,656

1,791

7.7% 7.8% 7.5% 7.5% 7.4% 7.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12*

Gross Output Value Contribution %

39.9

8.86.9

6.2

3.8

3.6

3.6

3.6

2.3

2.3

19.4

Retail Trade, Except of MV; repair of personaland HH goodsManufacture of Wearing Apparel, Dressing &Dyeing furManufacture of F&B

Other Services

Other Businesses

Hotel & Restaurants

Sales, Maintenance & Repair of MV & MC,Retail sale of automotive fuelManufacture of Furniture

Manufacture of Textiles

Manufacture of fabricated metal products

Others

Page | 6


the share of food products and beverages segment as the highest followed by textiles, basic

metals and chemicals.

Industry Context: Overall Outlook

While the Indian economy remained soft, with especially lower manufacturing performance

in the last few years, the outlook looks upbeat and the mood positive. The shift is led by two

key factors:

a) Biggest mandate to a single party since 1984, on an election fought on

‘Developmental’ issues

b) A sign of revival evident across global economies – led strongly by US and is expected

to continue as per IMF estimates.

Exhibit 7:Positive Economic Estimate augurs well For ‘Make in India’ (% GDP growth)

Source: *IMF Estimate, BCG

‘Make in India’ Campaign

Given the current and projected favorable domestic and global sentiments, the launch of

campaign could not have been timed better. The honorable Prime Minister launched make

in India Campaign in September 2014 with an intention of reviving manufacturing

businesses and emphasizing key sectors in India (25 sectors identified including both

manufacturing and services domain). This has come amidst growing concerns that most

entrepreneurs are moving out of the country due to its low rank in ease of doing business

ratings.

The Make in India sets the program’s vision around –

a) Facilitate investment

b) Foster innovation

c) Enhance skill development

1.5

0.9

2.1

3.12.7

1.72.1

3.0

4.3

3.3

0.0

1.0

2.0

3.0

4.0

5.0

Germany Euro Zone USA ME,NA World

2010-14 2014-20*

Page | 7


d) Protect Intellectual Property

e) Build best in class manufacturing infrastructure

f) Provide employment

g) Making ‘Doing Business’ easy for India

Relevance of ‘Make in India’

India must become a manufacturing powerhouse in order to gainfully employ its

demographic dividend. Its natural advantages like a big labor pool and a large domestic

market are available enablers. In addition, China’s competitive advantage in terms of cost is

fast eroding, being only marginally better than other developed countries. India has the

opportunity to take some share of global manufacturing away from China. This would be

possible only if the prevalent process inefficiencies are solved through—improved

infrastructure, ease of doing business, rationalized tax policies, labor reforms, enhanced

skills, ease of land acquisition, implementation of Goods and Services Tax (GST) and fast

track approvals.

Exhibit 8: Weakening China’s Cost Competitiveness

Source: US Economic Census, BLS; BEA, ILO, EIU, BCG Analysis

The "Make in India" initiative, will also tackle the key issue of “Ease of doing Business”. It

will act as a first reference point for guiding foreign investors on all aspects of regulatory

and policy issues and assist them in obtaining regulatory clearances. The Centre has already

allowed 100% Foreign Direct Investment (FDI) under the automatic route in construction,

operation and maintenance in rail infrastructure projects and increased FDI in defense from

26 to 49 %.

The investor facilitation cell will assist the foreign investors from the time of their arrival in

the country to the time of their departure, with focus on green and advanced

manufacturing and helping these companies to become an important part of the global

4.4

7.05.8

12.511.0

13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Productivity AdjustedManufacturing Wages (USD)

Industrial Electricity Cost(cents per KwH)

Industrial Natural Gas Cost(USD per mn BTUs)

2004 2014

+187% +57% +138%

#Source: DNA

Page | 8


value chain. Key imperatives that have been undertaken to improve business process

efficient include#:

a) Process of applying for Industrial License & Industrial Entrepreneur Memorandum

made online on 24×7 basis through eBiz portal.

b) Validity of Industrial license extended to three years.

c) States asked to introduce self-certification and third party certification under Boilers

Act.

d) Major components of Defense products’ list excluded from industrial licensing.

e) Dual use items having military as well as civilian applications deregulated.

f) Services of all Central Govt. Departments & Ministries will be integrated with the E-

Biz – a single window IT platform for services by 31 Dec. 2014.

g) Process of obtaining environmental clearances made online.

h) Following advisories sent to all Departments/ State Governments to simplify and

rationalize regulatory environment.

i) All returns should be filed on-line through a unified form.

j) Checklist of required compliances should be placed on Ministry /Department’s web

portal.

Sectors covered under ‘Make in India’

Page | 9


The campaign covers a mix of manufacturing and services dominant sector, as listed below:

Source: MakeinIndia website

Market Reactions

The initiative has been hailed by one and all, some industry reactions are captured below:

"As a nation we need to focus on four

areas - rules & regulations, infrastructure,

policies and skill training. Make in India

can add 90 million jobs in the next

decade.” –ChandaKochhar, CEO, ICICI

Bank

“Policy changes if get into action we

should see a fairly significant change in

the situation, fairly significant change in

investment”—Nitin Nohria, Dean, Harvard

Business School

"In response to Prime Minister Narendra

Modi's call to the world to make in India,

the UK is launching a campaign to

celebrate and inspire Great Collaborations

between the UK and India”.—Official

statement, British High Commission

“This offers a timely and unique

opportunity for industry and government

to work together to make India truly,

globally competitive”-- Chairman of Tata

Group, Cyrus Pallonji

Page | 10


Potential Impact of ‘Make in India’

The vision statement of official website, www.makeinindia.gov.in commits to achieve for

the country among other things an increase in manufacturing sector growth to 12-14 % per

annum over the medium term, increase in the share of manufacturing in the country’s Gross

Domestic Product from 16% to 25% by 2022 and importantly to create 100 million

additional jobs by 2022 in the manufacturing sector alone. These are ambitious targets,

acknowledging slowed growth of manufacturing sector in the last few years.

As per BCG survey and analysis, 2014, India Inc. expects an 8-10% growth in the

manufacturing sector Y-o-Y. Growth at this rate would place the manufacturing share of

GDP around 17-18% against the targeted 25%. If the same growth were maintained until

2030, Indian manufacturing would be at 22% of GDP at INR 40 trillion. It is important to note

that a consistent 8-10% growth is not small anyway, as achieving this can allow India to be

among the top 3-5 manufacturing economies globally.

An overview of key benefits from the initiative is listed below:

a) Boost of FDI in Identified Sectors: Increased government commitment and direction

to give a sense of reduced risk to investors, thereby fuelling inflows.

b) Access to Advanced Technology and Research Support: The campaign aims to urge

both local and foreign companies to invest in India. The foreign investment could

enable access to advanced technologies and research know-hows, leading to

improved efficiency and quality.

c) Push towards Infrastructure Growth: The campaign provides direct thrust on

infrastructure development, in the absence of which investors’ confidence would

remain jittery.

d) Labor Law Reforms: The Industry has been plagued by high incidence of strikes due

to outdated labor laws, especially the flash point between automotive companies

and their labor force but reforms could change this scenario in the days ahead.

“The Make in India campaign promises to

fast-track India's growth trajectory by

making it a manufacturing hub. Made in

India, made by India but made for the

world “– Rana Kapoor, President,

ASSOCHAM

"Make in India and Clean India are very

important social campaigns”— Preeti

Patel, UK’s Minister of Parliament

Page | 11


e) Reduced Trade Deficit backed by multiplier effect on exports. With the help of

‘Make in India’, the dependence on imports can be brought down and at the same

time, current account deficit can also be controlled. India is heavily dependent on

imports for a large number of goods and services. While import of certain goods like

crude is inevitable, many other products across consumer sectors like electronic

white goods, lighting, and consumables which are not technology intensive, have a

significant potential to be substituted by local enterprises.

f) Business Mindset Change: The strong government backing and support would help

design MSMEs outlook for future. According to a global study done by Egon Zehnder,

Indian businesses tend to think more short term as compared to their global

counterparts. This takes a toll on investing in process creation, R&D setup thereby

hindering innovation and expansion possibilities. ‘Make in India’ through sustained

government support and access to technical know-how through foreign investments

can help change the mindset for longer payoffs.

g) Global Recognition: India’s performance on ease of doing business has been dismal

in global surveys. PM’s flagship initiative towards harnessing foreign investment in

India through the promise of a favorable investment climate and reformed ways of

business doings has the potential to get India a big perceptual lift overseas.

While it is still early days to see real impact, the initial signs are impressive. Here is a look

below:

Exhibit 9: Early Impact of the Campaign

Source:Mapsofindia

• Indian Government has cleared INR 80,000 cr worth of defence deals

including the construction of six submarines

• Defence Acquisition Council (DAC) approved the manufacturing of

these diesel-electric submarines in a single domestic shipyard.

Defence Boost

• Campaign is the key highlight at the Sweden India Nobel Memorial

Week

• The Swedish Ambassador, H E Harald Sandberg praised PM Modi’s

initiative to boost the manufacturing, automobile, infrastructure &

other sectors drawing upon the traditional strengths of the country.

Sweden Appreciation

Page | 12


Strengthening ‘Make in India’

The campaign comes with its fair share of challenges, which would be important to counter

to make ‘Make in India’ a reality:

Exhibit 10: Imperatives for Strengthening Make in India

a) Identify Levers for Competitiveness: As the Reserve Bank of India Governor

Raghuram Rajan has correctly pointed out, that, the nature of manufacturing is

changing. Pure labor cost competitiveness is partly as advanced nations approach

efficiency and automation led competitiveness. Developed countries are also

realizing how crucial local manufacturing is to jobs and to having stable, prosperous

societies and so there is an attempt to reverse outsourcing and revive local

manufacturing by embracing new technologies and innovations such as 3-D printing

and the “Internet of things”. India, thus needs to strategically decide which

competitive lever to play for which sector –i) sectors that leverage India’ core

strengths ii) sectors that have big domestic market iii) sectors that could benefit

from global shift.

b) Assign Sector Priority: In addition to above, we must also assign a clear sector

priority. Herein, we must assess the idea of localization and building scale for

sectors that have large domestic market, e.g. Defense (we are world’s leading

importers of arms); Health care (need to get aggressive on IPR support), Electronics

(Projected import to outgrow oil import bill), Construction.

c) Provide for Infrastructure: The success story would not be complete without

adequate support of Infrastructure. We must invest further in power and transport

infrastructure – to give a perspective of our transport infra, our average speed for

freight trains is 25 km/hr., which is less than half of US and Germany and ports have

a turn-around time twice that of China.

Page | 13


d) Build ‘Ecosystems’: Close dialogue and partnership between government and the

private sector, both domestic and foreign, is critical. Indian companies along with

Chinese, Japanese, German, American and Swedish companies are all vital partners

and we must create an environment that is open and welcoming. Critical to create

few oases in the form of special economic zones with localized support and

efficiencies to boost manufacturing.

e) Encourage Innovation: Foster an environment of innovation as a means to drive

competitiveness (detailed further in ‘Role of Innovation’ section in the report).

f) Driving Talent Pool for the Identified Sectors: MSME sector per se suffers from the

lack of accessibility of talent pool. Government can, through the use of advertising

maybe, create buzz around identified sectors and project them as attractive

employability destination for young talent pool.

Page | 14


Key Government Schemes and Initiatives to support MSMEs

To a large extent, the growing number of MSMEs across the nation can be attributed to a

slew of available government schemes and initiatives. Over the last decade, many schemes

for the development of MSMEs have been launched by the central and state governments.

The following table captures in brief the nodal government bodies looking after MSME

development and some of the central government financing schemes available.

Exhibit 11: Key Government Pillars and Schemes

Page | 15


Exhibit 12: Role of Key Government Pillars

Key Government Schemes and Initiatives launched to support MSMEs

An overview of government support listed below:

1. Incubation Support Schemes –

1.1. Technology Incubation and Development of Entrepreneurs (TIDE) Scheme - The

scheme aims to support institutes of higher learning to strengthen their

Technology Incubation Centers so as to nurture technology MSMEs, especially

start-up companies. Key initiatives undertaken by the Host institute includes

mentoring, infrastructure and financial support, entrepreneurial training, IPR

facilitation, initiate contact with AIs/VCs, etc. Host institute/TIDE center receives

financial support from government up to INR 155 lakhs. These funds can be used

for improvement in infrastructure - up to INR 30 lakhs and for providing financial

support to the incubating companies – INR 125 Lakhs (@ INR 25 lakhs per

company).

1.2. Support for Entrepreneurial and Management Development of SMEs through

Incubators- The Scheme aims to provide early stage funding for nurturing

innovative business ideas in select fields including electronics and software.

Under this scheme, financial assistance is provided for setting up of business

Page | 16


incubators. The objective of the scheme is to promote development of

knowledge based innovative start-ups and improve the competitiveness and

survival ability of the MSMEs. Under this scheme, Business Incubators (BIs) are to

be set up under Technology (Host) Institutions which are normally the Indian

Institutes of Technology (IITs), National Institutes of Technology (NITs),

engineering Colleges, Technology Development Centers, etc. Each BI is expected

to support incubation of 10 new ideas/units. Each BI is given financial assistance

between INR 4 lakh to INR 8 lakh per idea/unit subject to an overall cap of INR

62.5 lakh per incubator. The Scheme is implemented in a Public Private

Partnership (PPP) mode with private participation ranging b/w 15 % to 25 %. This

scheme has been successful as more than 80 ideas have already been

commercialized under the scheme, with a majority being in the IT space.

1.3. Technology Development Board – GOI set up TDB to provide financial assistance

to the industrial concerns and other agencies undertaking development and

commercial application of indigenous technology or adapting imported

technology for wider domestic application. TDB a) Provides financial assistance

to research and development institutions b) Provides financial assistance to

Venture Capital Funds for assisting technology MSMEs c) Provides grants to

Technology Business Incubators in IITs/Labs/ Institutions for giving loans/equity

support to small technology start-ups d) Provides loans and grants to Labs/

Institutions/ Indian Companies to co-develop and commercialize technologies of

national importance.

2. Business Development & Promotion / Marketing Support Schemes– Since most SMEs

do not have easy access to capital and have to invest a larger amount of their funds in

production activities, they do not have any surplus funds left for marketing activities.

Moreover, even with availability of funds, the importance of marketing is not recognized

by majority of them. Thus, the government provides special schemes wherein SMEs are

specially provided assistance solely for their marketing activities. Some of the schemes

provided by the Government are listed below-

2.1. Scheme to Promote International Cooperation – This scheme offers assistance

to MSMEs for exploring new areas of technology infusion/up gradation and

identifying new markets through Joint ventures and foreign collaborations.

Financial assistance up to 95% of airfare and space rent is provided to

entrepreneurs to participate in international exhibitions, trade fairs and buyer-

seller meets in foreign countries and India.

2.2. Marketing Assistance Scheme offers assistance to MSMEs for undertaking

marketing promotion activities. Under the scheme, MSMEs can avail financial

assistance for organizing exhibitions, trade fairs, buyer-seller meets and other

marketing promotion events.

2.3. MSME Market Development Assistance Scheme offers financial assistance to

MSMEs for using Global Standards in bar coding. The scheme also provides

Page | 17


funding to MSMEs for participation in the international exhibitions / fairs,

producing publicity material and sector specific studies and for contesting anti-

dumping cases.

2.4. Information Assistance- Ministry of MSME launched ‘Udyami helpline’ in 2010.

This call center acts as a single-point facility for a wide spectrum of information

and accessibility to banks and other MSME-related organizations. It also gives

information on a wide range of subjects, including guidance on setting up a unit,

access loans from banks, project profiles and about various MSME schemes.

3. Manufacturing Support Schemes–

3.1. Lean Manufacturing Competitiveness for MSMEs aspires to enhance the

manufacturing competitiveness of MSMEs through the application of various

Lean Manufacturing (LM) techniques. Under this scheme, manufacturing MSMEs

can receive financial assistance up to 80% of the cost from the GOI on the

implementation of lean manufacturing techniques.

3.2. Enabling Manufacturing Sector to be Competitive through Quality Management

Standards and Quality Technology Tools – This scheme seeks to encourage

MSMEs to understand and adopt latest Quality Management Standards (QMS)

and Quality Technology Tools (QTT) in the manufacturing process.

3.3. Design Clinic Scheme - The design clinic scheme is an initiative of the Ministry of

MSME and National Institute of Design. The main objective of the scheme is to

bring the MSME sector and design expertise onto a common platform and to

provide expert advice and solutions on real-time design problems, resulting in

continuous improvement and value addition for existing products. This model

brings design exposure at the doorstep of industry clusters for design awareness,

improvement, evaluation, analysis and design-related intervention. It aims to

enhance industry competitiveness and productivity with the help of design

intervention at various functional levels.

3.4. National Manufacturing Competitiveness Programme- The NMCP is the nodal

programme of the government of India to develop global competitiveness among

Indian MSMEs. There are 10 components under the NMCP targeted at enhancing

the entire value chain of the MSME sector. It includes programmes like

establishment of new tool rooms, benchmarking of the global competitors,

enhancing of product and process quality, cost reduction through lean

manufacturing techniques, etc. The programme is to be implemented through

the public-private partnership mode with close physical and financial

participation of the MSME sector.

4. Finance and Credit Rating Support Schemes – The principal constraint facing the MSMEs

has remained access to adequate and timely loan finance. This becomes more crucial

during the early and growth stage of business when the financing need of the enterprise

is high. For the purpose, the government offer various incentives and funding support to

encourage growth of Business.

Page | 18


4.1. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme

was launched by the GOI in 2000 to strengthen credit delivery system and

facilitate flow of credit to the MSME sector. To operationalize the scheme, GOI

and SIDBI set up the Credit Guarantee Fund Trust for MSMEs. The scheme

provides collateral free funding up to INR 1 Crore for individual MSMEs. The CGS

assures the lender that, in the event of a default on the part of the MSME unit,

which availed collateral free credit facilities, the Guarantee Trust would make

good the loss incurred by the lender, up to 75/80/85 % of the credit facility with

a maximum guarantee cap of INR 62.50 lakhs / INR 65 lakhs. The CGTMSE

Scheme is operated through a network of Banks and FIs called Member Lending

Institutions (MLIs). All scheduled commercial banks (PSU, Private or Foreign),

specified Regional Rural Banks, National Small Industries Corporation Ltd, North

Eastern Development Finance Corporation Ltd and SIDBI, which have entered

into an agreement with the trust (CGTMSE) are considered as MLIs.

4.2. Credit Linked Capital Subsidy Scheme – This scheme aims at facilitating

technology up-gradation of MSMEs by providing 15 % capital subsidy for

purchase of Plant & Machinery / Improved technology. Maximum limit of eligible

loan for calculation of subsidy under the scheme is Rs.100 lakhs. At present,

more than 1500 well established/improved technologies under 51 sub-sectors

have been approved under the Scheme. Since inception of the scheme in the

year 2000, more than 28287 MSME units have availed subsidy of Rs.1619.32

crore till 31.03.2014.

4.3. GOI launched ‘India Inclusive Innovation Fund’, jointly created by National

Innovation Council and MSME Ministry with an initial corpus of INR 500 Crores

which could be scaled up to INR 5000 crores over the next 2 years. Of the INR

500 crore, the ministry of MSME has committed INR 100 crore and the remaining

INR 400 crore will come from 12 public sector banks. Under the fund, the plan is

to fund anything b/w INR 50 lakh to INR 2 crores to 70 and 200 ideas with

special focus on MSMEs which address social needs like healthcare, agriculture,

education, financial inclusion and water, etc.

4.4. Growth Capital and Equity Assistance Scheme aims to provide adequate capital

to MSMEs so as to enable them to make investments in marketing, brand

building, creation of distribution network, technical know-how, R&D, and ICT

adoption / software purchase, etc.

4.5. General Refinance – Under this scheme financial support is provided to MSMEs

for new business set up, expansion, modernization or diversification of existing

business.

4.6. Composite Loan Scheme offers assistance up to INR 25 lakh for purchase of

equipment and/or working capital requirements.

4.7. Single Window Scheme provides support to entrepreneurs, both term loans for

fixed assets and loan for working capital through a single agency.

Page | 19


4.8. Rehabilitation of Sick Industrial Units Scheme provides financial assistance for

rehabilitation of potentially viable sick units which are capable of being restored

to normal health within a reasonable time.

4.9. Development of Industrial Infrastructure for MSME Sector Scheme provides

financial support for development of industrial infrastructure / industrial

estates/I industrial areas.

4.10. ISO 9000/ISO 14001 Certification Reimbursement Scheme for MSMEs offers

reimbursement of expenses up to 75% (subject to a maximum of INR 75,000)

incurred towards the acquisition of ISO 9000/ISO 14001/HACCP certification.

5. R&D, IPR support schemes– IPR schemes were launched for building awareness on IPRs

so as to enable MSMEs to use the tools of IPR effectively for innovative projects. The

Ministry of MSME has set up an intellectual property cell which provides a range of IP

related services such as prior art-search, validity search, patent landscape, studies on

technology development, etc.

5.1. R&D Funding scheme provides funds to institutions/ organizations in the area of

research and development, for technical collaboration, etc.

5.2. Multiplier Grants scheme aims to encourage and accelerate development of

indigenous products by establishing, nurturing and strengthening the linkages

between the Industry and R&D Institutes. The objective of the scheme is to

bridge the gap between R&D and commercialization by strengthening linkages

between the industry and R&D institutes. The maximum funding ranges between

INR 2 crore and INR 4 crore. The grants cover specific expenditures under the

project like equipment’s, consumables, manpower, travel and training,

contingencies, and overheads (which are limited to 15 % of the total project).

5.3. Building Awareness on Intellectual Property Rights scheme endeavors to

enhance awareness among the MSMEs about IPRs. Under this scheme, financial

assistance is provided for conducting awareness programs on IPRs including

seminars, workshops, training, etc. Additionally, it also offers one time financial

support limited up to INR 25,000 on grant of domestic patent and INR 2 lakh for

foreign patent to MSMEs.

5.4. Support International Patent Protection in Electronics and IT (SIP-EIT) – This

scheme provides financial support up to 50% of total patent cost (subject to a

max. of INR 15 lakh) to MSMEs for international patent filing so as to encourage

indigenous innovation.

6. Export Promotion Schemes –

6.1. SEZ– Special Economic Zone provides simplified procedures and a single window

clearance policy on matters relating to central and state governments. Key

benefits offered under the scheme include Drawback/ DEPB benefits, CST

exemption, Service Tax exemption and income tax holiday. Exemption from

income tax is tapered down over 15 years from the date of commencement - 100

% exemption of export profits from income tax for the first five years, 50 % for

Page | 20


the next five years and 50% for the five years subject to transfer of profits to

special reserves.

6.2. Duty exemption schemes enable duty free import of inputs required for export

production.

7. ICT support Schemes –

7.1. Software Technology Parks of India (STPI) – STPI offers a single-window

clearance for project approvals, import certification software valuation and

certification of exports for software exporters. The STPI Scheme is considered as

one of the most effective schemes for the promotion of exports of IT and BPM; ~

51 STPI centers have been established under the scheme since inception. Key

benefits offered include exemption from customs duty available for capital

goods, exemptions from service tax, excise duty, and rebate for payment of

Central Sales Tax. STPI is pan India Scheme with over 8,000 units registered

under this scheme.

7.2. Export Promotion of Capital Goods (EPCG) scheme provides support to

exporters of electronic products by allowing import of capital goods for pre-

production, production and post-production at 0% customs duty, subject to an

export obligation equivalent to 6 times of duty saved on capital goods imported

under EPCG scheme, to be fulfilled in 6 years reckoned from the date of

authorization issue.

8. Other schemes and initiatives –

8.1. Public Procurement Policy for MSMEs - The ministry of MSME formulated the

Public Procurement Policy for MSMEs, which mandates every Central

ministry/Department/PSU to achieve a procurement goal of at least 20 % of the

total annual purchases of the products or services, produced or rendered by

MSMEs. The policy seeks to promote MSMEs by improving their market access

and competitiveness through increased participation in Government purchases

and encouraging linkages between MSMEs and large enterprises.

8.2. The Reserve Bank of India has, from time to time, issued a number of directives

to banks to facilitate lending to the MSME sector. Some of them are highlighted

below-

8.2.1. Advances to the MSME sector are considered in computing achievement

under the overall Priority Sector target of 40 % (32 % for Foreign Banks) of

adjusted Net Bank Credit

8.2.2. Banks are advised to achieve a 20 % year-on-year growth in credit to

MSMEs

8.2.3. Banks are mandated not to accept collateral security for loans up to INR 10

lakh extended to units in MSME sector.

8.2.4. Public sector banks have been advised to open at least one specialized

MSME branch in each district with special focus on key industrial clusters/

manufacturing centers.

Page | 21


8.2.5. Banks have been advised to fix sub-limits within the overall working capital

limits to the large borrowers specifically for meeting the payment

obligation in respect of purchases from MSMEs.

8.2.6. Banks have been directed to create separate cells to provide consultancy to

MSMEs in areas related to operations, accounting and finance, business

planning etc.

8.2.7. Banks have been advised to strengthen their existing systems of monitoring

credit growth to the MSME sector.

8.2.8. Banks have been directed to allow restructuring of debt for all eligible

MSMEs.

8.3. National Small Industries Corporation (NSIC) Schemes–

8.3.1. Credit Rating and Facilitation – This scheme aims to encourage MSMEs to

upgrade their competence in terms of business and technologies by getting

rated through the rating agencies empanelled with NSIC. The scheme

strives to establish independent and trusted third party opinion on the

capabilities and credit worthiness of MSMEs so as to facilitate swift loan

approvals from Banks and FIs. Under the scheme, the MSME can seek

partial re-imbursement of the rating fee, if the credit-rating is undertaken

by an empanelled rating agency of NSIC. Additionally, NSIC has entered into

a MOU with various nationalized and private sector banks to provide credit

support from banks without any cost to MSMEs.

8.3.2. Raw Material Assistance scheme provides assistance to MSMEs by way of

financing the purchase of raw material (both indigenous & imported).

8.3.3. Single Point Registration scheme aims at increasing the share of Govt.

purchases from MSMEs. This scheme offers MSMEs a single point of

registration for participation in Govt. schemes. The units registered under

the scheme are entitled to special benefits such as issue of tender free of

cost, exemption from payment of Earnest Money Deposit (EMD), etc.

8.3.4. Infomediary Services scheme provides a one-stop, one-window service

office for information on business, technology and finance through its web

portal- www.msmemart.com

8.3.5. Marketing Intelligence Services Lease scheme aims to support MSMEs

seeking business collaboration or joint ventures, exporters and importers,

etc. Under this scheme, MSMEs can avail information on bulk buyers in

Government/public & private sectors, Exporters, International buyers,

Technology suppliers, and units registered with NSIC under Single Point

Registration Schemes, and also market intelligence reports pertaining to

several sectors, trends analysis and export – import statistics.

8.3.6. Bill Discounting scheme covers purchase/discounting of bills arising out of

genuine trade transactions i.e., sales made by MSMEs to reputed public

limited companies / State and Central Government Departments.

http://www.msmemart.com/

Page | 22


8.3.7. NSIC Infrastructure scheme offers MSMEs – a) Enabling infrastructure

supporting business incubation b) Exhibition halls / Complex in Hyderabad

and New Delhi for organizing exhibitions/ conferences c) Office space to

IT/ITES and non-IT/ITES MSMEs in STP’s in New Delhi and Chennai

8.4. Skill Development Initiatives – GOI has recognized the importance of vocational

education and skill up gradation of the existing workforce. As a result, it has

taken initiatives to upgrade nearly 1,390 industrial training institutes (ITIs) in

public private partnership mode across the nation.

8.5. Prime Minister's Employment Generation Programme (PMEGP) was launched

to generate employment opportunities in rural as well as urban areas through

setting up of new self-employment ventures / projects / micro enterprises.

Under the programme, beneficiaries can set up micro enterprises by availing of

margin money subsidy of 25% (35% for special categories) of the project cost in

rural areas. The maximum cost of the projects assisted under PMEGP is 25 lakh

INR in the manufacturing sector and 10 lakh INR in the service sector.

Page | 23


Current Financing Landscape for MSMEs

Exhibit 13: Current Financing Options Available

Overall Funding Demand and Gap for MSMEs

The overall finance gap in the MSME sector is estimated to be INR 20.9 trillion. The demand

for finance form external sources is estimated to be INR 27.9 trillion, while the total finance

channeled by formal sources is estimated to be INR 7 trillion. The overall finance (debt and

equity) gap of INR 20.9 trillion is split into a debt gap of INR 19 trillion and an equity gap of

INR 1.9 trillion. This gap largely remains unmet, with a significant share met through

informal channels, which is often at higher cost than the institutional finance.

Page | 24


Exhibit 14: Current Funding Gap

Source- IFC-Intellecap report

Financing options available to MSMEs

1. Funding from FIs–

Scheduled Commercial Banks - Conventionally, Banks have been the largest source of

finance for SMEs. Amongst commercial Banks, Public Banks have a better access to

MSMEs and take the lead in lending to the sector, as compared to private and foreign

Banks. Public sector Banks have been the front-runners in providing financial support to

the MSMEs which can approach them for loans under various schemes. Public sector

banks also have considerable empirical knowledge of the MSME sector, and with the

increased use of core banking technology, they are able to analyze historical data on

MSMEs to develop targeted products and better risk management techniques.

However, Banks have also aimed at limiting their exposure due to high risk perception

and high transaction costs. Credit is usually extended against collateral equivalent to

100% of the loan amount. Majority of the MSMEs, especially those in the early / start-up

stage do not have sufficient assets to offer as collateral for lending, thereby making the

banking system inaccessible to them.

Further, Banks appraise loan proposals based on the financial ratios of the MSME. As

majority of the MSMEs do not follow proper accounting processes, the task of

generating clean financial statements becomes quite difficult.

SMEs are part of the priority sector lending for banks. As per RBI guidelines, priority

sector lending should be 40% of the total credit lending of banks. However, there are no

Page | 25


sub-targets within the priority sector lending requirements. However they are mandated

to have a 20% growth YoY. This has limited the quantum of credit which banks have

extended to MSMEs.

Non-Banking Finance Companies – NBFCs have also been a significant source of MSME

debt. Large share of the funding is for purchase of asset / plant & machinery. Major

share of the loan portfolio comprises of business related to transport, engineering,

vendor supply chains and retail trade. According to Frost & Sullivan, the MSME Small

Loan Credit Market for NBFCs in India stood at INR 7,200 crores in FY 2012 and is

expected to grow to INR 38,400 crores by FY 2020 at a compounded growth rate of 23

%.

Small Banks- Small banks such as RRBs, UCBs and government financial institutions such

as SFCs, SIDCs enjoy significant branch outreach, and have been able to leverage their

local presence to get better knowledge and understanding of MSME financial needs.

Small Banks have also exhibited the potential to serve a much larger MSME customer

base than they are currently serving.

It was felt that the risk-averse lending practices of banks were hindering credit disbursal

to the MSME sector. In order to counter this, the RBI allowed collateral-free lending up

to a limit of INR 5 lakh for all enterprises covered under the definition of the MSMED Act

2006.

Further, in an effort to minimize the impact of default on loans, the GOI and SIDBI

launched the Credit Guarantee Trust for MSMEs. The CGTMSE aims to comfort the

financier that in the event of MSME unit (which availed collateral-free credit facilities)

default, the Guarantee Trust will make good the loss by up to 75 to 85% of the credit

availed.

2. Equity Funding –

Venture capital provides financial assistance primarily by way of equity or equity-linked

capital investment carefully scrutinizing projects. Typically, MSMEs which are involved in

commercializing innovations and high-end technologies need access to the VC fund.

These firms need finance during the initial stages of conceptualizing their product

offerings (seed phase) and during development and marketing phase. Besides infusing

capital, VCs also bring expertise, superior advice and other skills that help the MSME to

develop marketable products. They also seek to provide overall guidance and mentoring

support to IT SMEs so as to enable them to realize their growth potential and gain

competitive edge in both domestic and global markets. Typically, the VC provides

assistance to the entrepreneur in recruiting key personnel, providing contacts in

international markets, introductions to strategic partners, etc. Their main aim is to earn

Page | 26


higher returns on their investments. In addition to that, they also take active part in the

management of the company and provide expertise / involve in the board decisions of

the firm. Furthermore, VC funding improves the credibility of the MSME and increases

the chances of receiving Bank finance.

Angel Investors – An angel Investor is typically a HNI or network of affluent individuals

who/which provides capital to a start-up in exchange for equity. Angel investors

normally invest their own funds, unlike venture capitalists who manage the pooled

money of others in a professionally-managed fund. Typical investment made by the

Angel investor ranges between INR 25 lakhs to 5 crores. Indian Angel Network is one of

the largest angel networks in the country with almost 90 individual members and

institutional members like SIDBI, IBM, etc. Angel investors are also attuned to the start-

up or venture they invest in, thus benefiting the venture not only financially but also by

providing the intellectual capital.

Accelerators – Though at a nascent stage, the accelerator model in India has witnessed a

significant surge in the number of accelerators in recent years. Typically, accelerators

provide assistance around 4 core areas – Strategic, Financial, Operational and

Collaboration.

With the aim to create a conducive eco-system for the venture capital in the MSME

sector, the government proposes to establish an INR 10,000 crore fund to act as a

catalyst to attract private capital by way of providing equity, quasi equity, soft loans and

other risk capital for start-up companies.

3. SME Exchange–

GOI and regulators have initiated several measures to address the low level of MSME

financing through the capital markets. In March 2012, post issuance of SEBI guidelines,

both BSE and NSE have set up institutional trading platforms in the SME segment to

allow MSMEs to list and raise equity capital through venture funds, private equity and

wealthy individuals, without initial public offerings.

The listing process in this platform is completed within a month and also involves lower

costs compared to regular IPO route. Besides offering a suitable platform to raise capital,

it also provides easier entry and exit options to angel investors, VCFs and PEs, etc. It also

offers better visibility and wider investor base while offering tax benefits to long term

investors. The platform offers relaxed compliance and cost effective listing to SMEs.

Since this facility involves minimum regulatory procedures to be followed, it has already

encouraged a host of MSMEs to tap the BSE’s SME platform. A total of 70 companies

with a collective market capitalization of INR 8,200 crore now trade on these platforms.

Page | 27


These companies are from various sectors like trading, manufacturing, steel, textile and

finance spread across the geography of India.

4. Export Lines of Credit –

This financing option supports export oriented segments such as leather, gems and

jewelry, etc. EXIM Bank has launched several initiatives for the benefit of such exporters

- Export lines of credit to overseas financial institutions, regional development banks and

foreign governments and their agencies and buyers credits (BC) to foreign corporates.

Line of credits serve as a market-entry mechanism to Indian exporters and provide a safe

mode of non-recourse financing option to Indian exporters. LOCs and BCs are

particularly relevant for Indian SME exporters as the payment risk is borne by Exim Bank

without the need for insurance from Export Credit Guarantee Corporation.

5. Microfinance –

Leading national financial institutions like the SIDBI and the Rashtriya Mahila Kosh (RMK)

have played a significant role in making micro-credit an important movement. In India,

the size and types of implementing organizations range from very small to moderately

big, involved in savings and credit activities for individuals and groups. These groups also

adopt a variety of approaches. However, most of these organizations tend to operate

within a limited geographical range.

6. Electronic Bill Factoring Exchange –

In a recent move, RBI permitted the setting up of an exchange-based trading platform

(Trade Receivables Discounting System) to facilitate financing of bills /invoices raised by

MSMEs to corporate buyers including government departments and PSUs. This initiative

was taken to make the MSMEs capable of converting their trade receivables into liquid

funds.

Despite the many policies and measures to provide financial assistance to the MSMEs,

they continue to face difficulties in raising timely and adequate credit at reasonable cost.

This has led to the emergence of alternative sources of financing, some of which have

been detailed below.

7. Factoring–

Under this mode of finance, the MSME sells or assigns its accounts receivables to a

finance company (a factor) at a discount to meet its immediate funding requirement.

This method of financing evolved so as to minimize the adverse effect of delayed

payments by large scale customers on the operations of MSMEs. Factors buy the right to

Page | 28


collect on invoices raised against any sales by the SME and releases 80-90% of the

invoice value to the firm. The Indian factoring market is still at a nascent stage. There are

approximately 10 factoring companies in India, and the oldest among them are Canbank

factors and SBI Global Factors.

8. Supply Chain Finance –

Supply chain finance is fast emerging as another route to facilitate MSMEs access to

enhanced working capital from bank and non-bank sources. This mode of financing

enables SME suppliers to large OEMs to receive short-term credit against the volume

supplied during the payment receivable period.

Page | 29


Issues and Challenges for MSMEs

Exhibit 15: Overview of Key Challenges faced by MSMEs

MSMEs face several challenges in the fields of technology, finance, operations, and

marketing. Further, they also face challenges from a disruptive competitive environment, in

which they must compete with established players in the marketplace and imports.

Finance Related – As per the 4th Census on MSMEs, only 5.2% of MSMEs availed credit

from financial institutions.

a) Non-availability of timely and adequate funds at reasonable cost is one of the most

critical problems faced by the MSME sector- The banks are usually found to be averse

to offer credit to the MSMEs for a several reasons, the foremost of which originates

from a wide-ranging perception that the credit risk in lending to MSMEs is very high.

Banks regard this sector as high risk segment for different reasons like low capitalization,

lack of appropriate accounting records, and unavailability of complete financial

statements and business plans. Precisely because of this banks demand heavy collateral,

charge higher interest rates and transaction costs from MSMEs. The lack of adequate

collateral further hampers availability of funds to the sector and hinders their

competitiveness.

b) High cost of credit Interest Rates- Interest rates for non-collateral as well as collateral

backed loans to SMEs are often very high and at times prohibitive. The reason is

attributed to the high risk of lending to SMEs.

Page | 30


c) Non-conducive bank Policies towards lending to start-ups- It has been observed that

the Banks give undue significance to business vintage and financial statements / track

record to compute eligibility for loan. India has witnessed significant surge in the

number of start-ups in the last few years. Majority of them fail to meet this criteria and

hence, not able to meet the funding requirements of banks.

d) Lack of sufficient collateral - Banks seek tangible assets to secure their loans against

default. MSMEs normally do not have sufficient collaterals to obtain debt finance.

MSMEs especially start-ups/early stage firms do not possess sufficient collaterals, and in

case they do, the personal assets do not meet the loan to value norms of the bank. Lack

of adequate collateral translates to lack of adequate funds required for working capital

and/or capital expansion which further leads to a lower growth rate. In some of the

cases, the entrepreneurs are mandated to provide home/office premises/land as

collateral to secure funds from the banks.

e) Lack of equity support inhibits the growth of the MSME sector. Further, equity also acts

as leverage for raising debt finance from Banks.

Limited Accessibility of VCs / Angel investors – It has been observed that MSMEs find

it difficult to initiate contact with the VCs and Angel investors in the absence of a

reference or a previous relationship. VCs typically show greater confidence in the

idea/concept if it is referred by a credible source/contact. This problem is more

profound in tier 2 / tier 3 towns. Further, entrepreneurs in these locations are not

aware of the process/mechanism to reach out to VCs.

Funding norms not favoring early stage firms- Stringent conditions set by VCs such as

minimum funding criteria, expectation of high returns, detailed documentation

requirements and acquisition of substantial equity stake are some of the key reasons

deterring MSMEs from approaching VCs.

f) Lack of owners capital reduces eligibility to raise debt finance- It has been seen that

MSMEs typically bring in capital into the business from their own / borrowed money

from relatives, which is normally a small amount. Lending agencies are reluctant to fund

when they discover lower capital contributed by the entrepreneur.

g) Difficulty in loan proposal evaluation and high transaction costs involved- It has been

observed that several areas of MSME businesses are challenging to evaluate due to lack

of adequate information / absence of proper records. In such a situation, it becomes

difficult for the lending agencies to appraise the loan proposal. Further, due to low level

of technology adoption and poor record keeping-keeping and lack of efficient systems

and processes, the whole process of evaluation of loan application is extremely resource

intensive and costly for the lending agencies.

Page | 31


Operations Related –

a) Ineffective Marketing strategies - Limited understanding of new age marketing

strategies cripples MSMEs especially in smaller / Tier 3 towns. Limited access to market

intelligence and marketing tools such as packaging, labeling, bar coding, brand building,

advertisement, etc. limits the survival / growth prospects of MSMEs. Further, lack of

sufficient selling outlets and adequate infrastructure is a key concern disrupting

marketing of MSME products to the remote parts of the country.

b) Lack of skilled manpower- In spite of the fact, that India enjoys favorable demographic

dividend with large pool of human resources in the productive age group, the industry

continues to lack skilled manpower required for manufacturing, marketing, servicing,

etc. Further, MSMEs also face challenges around retaining talent and low productivity

levels of labor.

c) Unduly delayed payments especially from large-scale buyers- This disrupts the cash

flows and the ability of MSMEs to divert funds towards capex requirements and R&D.

d) Poor corporate governance mechanisms and weak organization structures- Majority of

the MSMEs are owner driven with lesser inclination towards formal organizational

structures. There is one (or two) owner and selected few core people working under

them co-handling key functions like accounts, production and sales. There are no

established governance mechanisms with any clear process of functioning, workflow or

instruction flow. The non-corporate structure and small size of the majority of MSMEs

makes the venture capitalists and other risk capital providers reluctant to investing in

them due to higher transaction costs and difficulties in exits out of such investments.

e) Low awareness of Government schemes and programs– Limited and a low level of

knowledge on key government schemes restricts their ability to avail benefits under

them.

Infrastructure Related –

a) Low levels of technology adoption - Low level of technology adoption in the MSME

sector driven by lack of awareness has been a major cause of low competitiveness of the

sector. For a country which boasts of strong IT labor poll and world’s top most

technology firms, the penetration of ICT in MSME sector has been rather low.

Consequently, a large number of MSMEs miss out on the greater benefits of increased

efficiency, better market linkages, and improved customer service.

b) Insufficient infrastructure- For MSMEs, land and infrastructure constraints are major

problem areas, especially in bigger cities and metros. The state and maintenance of

infrastructure in industrial estates (mainly maintenance of roads, drainage, sewage,

power distribution and captive power generation, water supply, dormitories for

workers, common effluent treatment plants, common facilities, securities, etc.) is poor

and unreliable.

Page | 32


c) Limited Market access - MSMEs are primarily small family run businesses which mostly

cater to domestic market. They majorly rely on traditional media like telephone

directory, customer references and tenders floated in the newspaper to reach

customers. It has been observed that MSMEs do not respond efficiently to the evolving

market trends and innovations thereby lag behind mid and large players in the market.

d) Low levels of modernization and technological up-gradation - Due to their small size

family driven nature, MSMEs have low access to new technology and face challenges in

modernization and technological up-gradation. This leads to cost inefficiency and poor

quality products. These result in the manufacturing processes being cost inefficient and

of poor quality standards.

e) Lack of innovation to develop new products with unique differentiators- There is a

growing need to innovate and develop products with unique differentiators among the

MSMEs to offset the rising threat from established players and global counterparts in

the marketplace. Over the years, MSMEs have largely ignored R&D requirements and

have not embarked on new product development or technological up-gradation at the

requisite pace. Though the MSMEs realize the importance of technological innovation,

most of them still favor importing technology rather than in-house development.

Legal and Tax Related –

a) Low relevance and innefective implementation of legislation on Intellectual property

rights (IPR)

Low relevance of IPRs in raising funds- It has been witnessed that majority of the

MSMEs are unable to leverage IPRs to raise funding from VCs or Banks in the

absence of formal mechanisms for evaluating IPRs.

Ineffective implementation of legislation on IPRs has adversely impacted innovation-

driven MSMEs. In the absence of stringent laws protecting inventions, MSMEs are

unable to monetize their innovation, thereby discouraging future innovation in

products.

b) No mechanism for quick revival of viable sick units and speedy shutdown of unviable

ones-At present there is no formal mechanism for systematic handling of sick units even

though financial assistance by way of debt restructuring for rehabilitation of sick MSE is

provided by primary lending institutions.

c) Bureaucratic hurdles in setting new business-Most SMEs suffer from the setup stage

due to systematic problems of bureaucracy at most government agencies/bodies like

taxes to labor. The ease of setting up a business index measured for various countries

considers this as a major make or break parameter.

d) Complex labor laws –Labor policies, especially multiplicity of labor laws and procedures

for compliance of various labor regulations have added to the woes of the MSME sector.

Page | 33


Page | 34


Role of ICT

Importance of ICT in the MSME Sector

Technology is one of the most important aspects in the sustenance of the MSMEs. The

personal competence of the entrepreneur can take the company up till a performance and

sustenance level, post that when the competition increases and the market expectations

mount, the “totality” of the workings of the enterprise becomes crucial. At this stage, use of

information and communication technology (ICT) becomes imperative for the growth of

SME, if not for survival.

Historically, ICT has been looked at as the enabler of productivity and quality through

process automation and quality control. However, its role is much and beyond in allowing

MSMEs to build a competitive advantage. According to World Bank Report (2006), firms that

use ICT grow faster, invest more, and are more productive and profitable than those that do

not.

Exhibit 16: Effect of ICT on Firm Performance in Developing Countries

Non IT Users IT Users

Sales Growth 0.4% 3.8%

Profitability 4.5% 9.3%

Labor Productivity $5,288 $8,712

Source World Bank. 2006. “Information and Communications for Development: Global Trends and Policies

Dili Ojukwu (2006) demonstrated that the more an organization increases its Investment in

both its Business and Information Solutions all other things being equal it would record an

appreciable and noticeable increase on the level of Growth. Madaswamy Moni (2009)

specified areas of MSME business that can be improved with the innovative use of ICT,

which are: (a) user profiling, (b) supply chain, (c) value chain, (d) customer relation

management (CRM), (e) SME networks, and (f) supplier cooperation.

The last decade of the twentieth century has witnessed rapid technological advances

especially in the areas of ICT albeit at different levels of adoption. Although technology

adoption considerably increased during the implementation of the Government of India’s

11th Five Year Plan – with its focus on creating a technology infrastructure and rolling out

technology-driven services – the use of technology in MSMEs remains limited.

Stages of ICT Adoption

In a qualitative research study supported by Ministry of MSME#, three business types

emerged on the basis of their technology adoption: a) “tech non-adopters” b) “tech

Page | 35


aspirers” c) “moderate tech adopters” Currently a lot of our MSMEs were found to operate

in low-medium awareness.

The research also helped point out the importance of location and clusters in driving

technology adoption. So while Punjab may be known for its entrepreneurship and favorable

environments for business, the technology adoption here was not as healthy as Bangalore,

which could be due in part to IT hubs present throughout its metropolitan region.

Exhibit 17: Technology Awareness- Adoption Framework

# Source: Intuit study in collaboration with the Government of India’s Ministry of Micro, Small and Medium Enterprises, the

National Institute of Entrepreneurship and Small Business Development and the National Small Industries Corporation

In a subsequent PwC report and ASM e-journal paper*, another such framework for

technology adoption was used, which helped understand how a firm moves up the ladder of

ICT embracing.

The first stage is about very basic adoption, limited to routine administration and record

keeping activities. The IT applications at this stage may involve use of Word processing,

spreadsheet, email, intranet etc. ICT’s contribution here is more around providing

operational efficiencies.

The second stage of adoption relates to computerization of selective functions. At this

stage, there is no integration between functions as the individual IT applications automate

Low Adoption

MODERATE TECH ADOPTERS

Ambitious & Experimental

Mainly service units

TECH ASPIRERS

First generation/young

businesses

Mix of manufacturing & service

NON /LOW ADOPTERS

Embraces Status Quo

Mainly medium manufacturing

units

High Adoption

High Awareness

Low Awareness

Page | 36


individual functions. This may include coverage of Financial, Inventory Management, Payroll

systems etc. The role of ICT here is around improving effectiveness of functions through

standardization of common processes.

The third stage of adoption intends to automate key functions and offer complete business

integration. Thus, this stage marks use of an enterprise level resource planning application

(ERP). The integrated ICT systems at this stage facilitate having a cross-functional

perspective of the fundamental business processes.

The fourth stage marks the maturity of ICT adoption. At this stage, the companies are

integrated across the value chain and using IT innovatively, through adoption of DSS, e-

commerce etc. The quality of delivery, innovation and service would have become more

important at this stage than control and costs.

*Source: PwC report, 2010 and Hemant Dudhe Paper on Role of ICT in improving SME competitiveness

Triggers & Barriers

Benefits from increased IT adoption are manifold. While internally, increasing ICT

penetration can improve collaboration and efficiency, externally it can provide access to

markets which would have been otherwise inaccessible. In a study done by IDC, the top

drivers for adopting ICT were around:

a) Improved communication within the organization

b) Stronger linkages with Customers and Suppliers

c) Get an edge over competition

d) Future growth and expansion

e) Creation and delivery of products + services

f) Reduction in Inventory

The survey evidently pointed out that accounting functionalities no longer figure in the top-

7 drivers for IT adoption. This may be because accounting functionalities mostly come out of

the box and most organizations have already implemented solutions that can fulfill their

basic accounting needs. The need now is more around customization and reliability to

increases scale of implementation.

Stage 1 : BasicStage 2 :

Functional Automation

Stage 3 : Business

Automation

Stage 4 : Integration

Page | 37


Exhibit 18:Triggers & Barriers

Source: Red Seer Consulting Report, 2011 & Intuit study in collaboration with the Government of India’s Ministry of Micro,

Small and Medium Enterprises, the National Institute of Entrepreneurship and Small Business Development and the

National Small Industries Corporation.

The benefits of technology are undisputed and yet MSMEs in vast numbers are not adopting

it to the extent needed. We now look at some key barriers that hinder pervasive use of ICT:

a) High Cost - Given the financial tightrope, IT budgets are generally very small. In addition,

adopting IT is not a onetime cost because it also requires ongoing costs of maintenance,

upgrade and human resource. Cost concerns are exacerbated by low awareness of

devices and solutions, such as software, systems and processes. As a result, micro and

small businesses have little faith in their return on investment.

b) Poor Infrastructure - Most of the MSME clusters are around Tier-2, Tier-3 cities, which

completely lack adequate information and communication infrastructure, be it high

speed broadband connectivity or basic power outages.

c) Privacy & Data Security - IT users worry about storing sensitive data, such as invoices,

bills and client documents, on certain technology platforms without knowing how the

information will be used. In fact a lot of units keep a physical backup of their data on CDs

or external hard drives, exposing them to the risk of damage and subsequent loss of

data. This also limits the use of data for making informed decision making. The issue is

further compounded by the lack of awareness around the subject.

Poor Infrastructure, Limited access to tailored products, Low Awareness, Huge fixed costs, Steep Learning curve,

Issues on security

Increased Efficiency,Fuelling Innovation, Access to new

markets and new technologies, Managing

customers and employees

Page | 38


d) Lack of Awareness - Technology is currently perceived around heavy devices and thus

seen as more of a distraction than value-add to the business. MSMEs are also not aware

on what products are available in the market and if the same can be customized to meet

their needs. They require agility both in product features and usage. Most technology

vendors have been unable to provide enough customization.

e) Steep Learning curve/ Lack of access to skilled manpower - Clear communication and

advanced planning at the start of any IT initiative are keys to ensuring successful

implementation of any IT services or solution. Firms and employees need to be educated

and trained on the application and use of the IT and the policies of using IT. This is often

the hardest step, but if done perfectly it ensures that the firm derives maximum benefit.

Role of Cloud Computing

The many challenges cited by MSME firms has given way to IT firms to create products and

services which are more relevant, affordable and address the real-life challenges of the

users. Such is a model named “Cloud Computing“, which is an on-demand network access to

a shared pool of configured computing resources. This requires minimal management effort

or service provider interaction.

The cloud has tremendous potential to enable MSMEs to overcome hurdles relating to the

high cost of using IT. Because cloud services provide access on a usage-based pricing model,

they can reduce costs of desktop software and specialized manpower. The cloud also

minimizes the need for investing in new or updated software. Other benefits such as

scalability, flexibility and ability to access information from virtually anywhere with a

connection, are a highly attractive proposition for MSMEs.

It will be important, however, to keep the solution:

a) Simple but adequate

b) Serviced or licensed use model to pull down costs and multiple employee use

c) Minimal on fixed cost/ device reliance

d) Flexible in use and payment (periodic payments)

e) Easy to maintain, Automatic updates

Page | 39


Innovation as a Catalyst for MSME growth

‘Innovation’ is fast gaining policymakers’ attention for its recognized role in building a

nationwide entrepreneurial ecosystem and thereby shaping India’s socio-economic growth

and stature. Its growing importance can be assessed from the fact that 17% of the large

companies rank innovation as their top strategic priority today and 75% rank it among their

top three.

However, its application still remains limited with not much known around how to diffuse

and sustain innovation. In the latest annual Global Innovation Index survey, India has slipped

10 positions to drop to 76th position. It is the worst performer among the BRICS nations,

with all the others improving their positions from that of the last year. While we score with

quality of universities, IT services exports, and export of creative goods, but these are

outweighed by weaknesses in its institutional pillars such as ease of starting a business,

human capital and R&D.

Exhibit 19: Global Innovation index

Country Rank 2013 Rank 2014

Brazil 64 61

Russia 62 49

India 66 76

China 35 29

South Africa 58 53

Source: Global Innovation Index 2014

Putting it in the context of MSMEs, their challenge is stiff and distinct. It comes from mainly

two sources -- bigger and established players in the market and imports. These make it

Page | 40


necessary for MSMEs to innovate and either introduce a new product or a service that is not

offered currently by any existing player or through process innovations reduce costs or time

to deliver so it gives a level-playing field if not an upper hand to the MSMEs.

According to a recent World Bank report aimed at enhancing India’s innovation capacities,

India would need to include following key imperatives in its MSME strategy:

Grow competition as part of enhancing investment climate, backed by better

information infrastructure, stronger skills, active public – private partnership and a

secured funding environment

Create and commercialise knowledge

Ensure diffusion and absorption of existing local and global knowledge across the

enterprise strata.

Encourage & promote formal R&D efforts, indigenous creative ideas and ‘juggads’ at the

grass root levels for an inclusive innovation culture.

Exhibit 20: Innovation Model

Source: PWC report on MSME, 2011

Historically, India has seen abundant localised examples of creativity for the lack of

resources and having to find creative means to the end. The problem has been to formalise

such creativity and give it scale. Few companies go beyond the one innovative product or

service. So, even while new technology start-ups can embark on breakthrough innovations

for building knowledge-intensive businesses, MSMEs should look at incremental innovation

to ensure competitiveness.

Further, while developing nations work with Shift and Adapt or Shift and Apply innovation

models, it is important for a country like India to have indigenous pervasive models. So any

Broad based Innovation for increased growth and welfare

Enhanced investment climate, and increased competition

Knowledge creation & commercialization

Knowledge Diffusion & Absorption

Inclusive Innovation

Supporting Pillars

Infrastructure & Technology

Stronger Skills & Education

Funding Mechanisms

Page | 41


innovation must think about sustenance and scaling up in the Indian context -- the target

segment size, price point, intended reach, cultural sensitivities etc.

The other big piece is around academia and industry partnership, which happen to be the

principal driver and source of technological innovations. The collaboration helps bridge the

gap between science and economy thereby fostering the innovation potential. Some

institutional set-ups of significance include S&T parks, technology and business incubators

and academic technology licensing offices.

Fortunately, in India, we are seeing an institutional policy shift towards attuning research

establishments to market needs. Recently, the Union Minister for MSME announced

government’s plan to encourage setting up of 500 incubation centres across the country.

Further plans should include identifying areas of collaboration, bankable projects,

addressing IPR issues and involving industry and financial experts in the process of economic

value addition to the knowledge generated through research and development.

The cluster approach could also offer a fix as thinking ’systemic’ allows selective

interventions in the weakest as well as the most critical nodes in the system. The success of

this approach is evident in India’s bio-technology industry. It is contiguous in several

innovation clusters, combining research establishments and producers. Several other

industry clusters like garments, pharma, leather etc. operate around the country.

The government must also consider strengthening of IPR implementation. The lack of it

currently impacts innovation-driven MSMEs. While the innovation gives the enterprises an

Page | 42


opportunity to develop products & services before others, but ineffective IPR

implementation cuts down the lead time towards effective monetisation.

On operations front, solving for problems of packaging and product display may remove

hurdles and allow companies to focus on their core business of innovation.

Global Case Studies#: With Aforementioned Principles

Exhibit 1: The Small Business Innovation

Research (SBIR) program, USA

A highly competitive program aimed at

developing research potential and engagement

among domestic small businesses, with the

potential for commercialization. Through a

competitive awards-based program, SBIR enables

small businesses to explore their technological

potential and provides the incentive to profit

from its commercialization. It is a double win as

high-tech innovation is stimulated and the United

States gains entrepreneurial spirit.

The program is structured in three phases: a) The

objective of phase 1 is to establish technical

merit, feasibility, and commercial potential of the

proposed R/R&D efforts. b) The objective of

phase 2 is to continue the R/R&D efforts initiated

in Phase I. Funding is based on the results

achieved in Phase I and the scientific and

technical merit and commercial potential of the

project proposed in Phase II. c) The last phase is

for the small business to pursue

commercialization objectives resulting from the

Phase I/II R/R&D activities.

Exhibit 2: Clustering Approach, Brazil

Brazil’s share of global trade in leather shoes rose

from 0.5% in 1970 to 12.3% in 1990.The export

Production doubled every three and a quarter

years for the nation. Within Brazil the most

dynamic export performance came from the state

of Rio Grande de Sul (specifically from small towns

of Sinos Valley) which, although accounting for

only 30% of Brazil’ s total leather shoe production,

manufactured 80% of its shoe exports. The 1,800

odd firms, and 150,000 persons within a radius of

50 kms in Sinos Valley’s shoe sector collectively

exported close to US$ 1billion a year (in 1995).

The core of the success lay in the clustering

principle, encompassing backward, forward

linkages and local support institutions. The local

competition encouraged some element of

efficiency, which provided the predominantly

small firms of the cluster with significant external

economies. Wholesalers provided technical and

organization advice and skills. Local support

institutions built for facilitating technical and skill

capacities along with global market access.

Page | 43


# Source: IIFT Report on MSME, 2012

Exhibit 3: The European Cluster Collaboration Platform

The platform provides high-quality, on-line information and networking support for clusters. The idea

is to assists clusters to improve their performance and competitiveness through the development of

transnational and international information and business cooperation network. A new online portal

has been established that bridges gap between cluster players from the same or a different sector to

facilitate inter cluster cooperation. It also builds itself as a business networking site – almost the

“LinkedIn” for cluster organizations.

Up to now 463 cluster managers haveregistered to become a part of this new cluster community. They

have access to over 150 clusterorganization profiles, becoming more each day.

Page | 44


Recommendations

Exhibit 21: Recommendation Outline

Recommendations on Credit & Finance

1. The corpus under the Credit Guarantee Fund Trust for Micro and Small Enterprises

(CGTMSE) to be increased to benefit higher number of MSMEs by offering them

collateral free credit.

2. RBI-registered ‘AAA’ and ‘AA+’ rated NBFCs should be made eligible for becoming

Member Lending Institution of CGTMSE, subject to availability of additional corpus of

CGTMSE.

3. SIDBI to play a pivotal role in developing and promoting specialized instruments that

augment the access to credit for the MSMEs. Additionally, special exercises should be

undertaken for meeting the credit gap in the MSME sector. In this regard,

modifications in the existing CGSTMSE scheme can be debated to ensure a wider

coverage. Banks can be directed to make fuller use of CGTMSE dispensation and

collaboration can be sought with other relevant institutions in the state government

and Development Institutes of Ministry of MSME so as to reach out to needy MSME

units with credit offers.

Page | 45


4. RBI should firmly enforce its guidelines to Banks for not seeking collateral up to a loan

of INR 10 lakhs. This will reduce the tendency to seek security, which is a foremost

deterrent to fostering entrepreneurship.

5. Banks to simplify loan application forms and establish a common Scoring Model for

loan up to INR 25 lakh.

6. The banks should issue directives to further enhance the awareness of CGS amongst its

branch level functionaries in different parts of the country for securing greater

coverage of MSME loans under CGS.

7. Banks should educate and clearly specify there requirements for assessing a loan

proposal, i.e. what information they require from MSMEs, what essentially they look

for while assessing a loan proposal and how they will be convinced.

8. Banks should create separate cells to provide consultancy to MSMEs to impart learning

on data / information management so that their performance can be analyzed easily

and thus expediting the loan sanctioning process.

9. Bank to establish robust credit evaluation systems and invest in training and

development of loan officers- There is a pressing need for training loan officers, credit

managers and administrative staff with an entrenched attitude of approving loans

instead of finding reasons to reject it. Additionally, proper credit evaluation systems /

frameworks will have to be developed so as to ensure that valid due diligence checks

are done with no scope for personal biases in assessment of loan proposals from

MSMEs

10. Suggestions to improve access of MSMEs to Venture capital funds –

a. Exposure by banks to dedicated MSME VC Funds be treated as priority sector

lending.

b. Permit investment up to 10% of corpus by Pension/Provident Funds in dedicated

MSME VC funds.

Recommendations on Technology Up gradation of MSMEs

1. Government should disseminate information on Technology Acquisition Scheme so as

to provide assistance in both, development of indigenous R&D products as well as

procurement of global technology. This scheme is expected to boost development of

indigenous technology and manufacturing, cost competitiveness, reduction in import,

augment exports and generate employment.

2. Ministry of MSME should organize Technology exhibitions with the assistance of

Industry associations and technical Institutes for spreading information on modern

technologies so that proven technologies can be adopted by MSMEs.

3. Increase budgetary limits under CLCSS scheme to drive technological up gradation of

MSMEs- Ministry of Finance may consider increasing the budget outlay on Credit

Linked Capital Subsidy Scheme (CLCSS) as the current budget levels are not adequate

to meet the industry demand of modernized equipment.

Page | 46


4. The Government schemes should have special focus on emerging and innovative

Sectors such as bio-tech, nano-tech, defense, civil aviation, aero-space, etc.

Additionally, higher scale of assistance may be decided for adoption of clean

manufacturing technologies, renewable energy sources and environment friendly

processes.

5. Special focus on driving ICT adoption in MSMEs. Support to be offered to encourage

use of new concepts such as cloud computing which offers effective and affordable

solutions to MSMEs

Recommendations on Infrastructure for MSMEs

1. Provide space to MSMEs for manufacturing and industrial activity – Ministries of

Urban Development and Urban Poverty Alleviation should incentivize the State

Governments and local bodies to designate adequate areas to MSMEs. On the part of

the State Government, it should streamline and simplify internal processes for

allotment of vacant plots in industrial estates to MSMEs. Additionally, land parcels

close to urban areas can be identified and allotted to MSEs at affordable prices.

2. Special efforts to be directed towards maintenance of industrial estates /area. Entrust

Industry Associations, Local bodies, state govt. agencies, SPVs for maintenance by

empowering them to collect charges for upkeep.

3. Adequate support should be provided for development of marketing infrastructure for

MSMEs. Setting up of display halls / exhibition centers in each State capital or major

industrial center having concentration of MSMEs is recommended so as to enable

MSMEs to show case their products and capabilities to a large consumer base.

4. More packaging & designing institutes need to be set up to meet the training needs of

large number of MSMEs. Additionally, efforts should be made to increase the

awareness of these institutions among the MSMEs.

5. A mechanism should be established to assess the utilization and impact of the

Government schemes on the MSME sector - Due to the absence of an appropriate

mechanism it is difficult to determine the benefits being availed by MSMEs under the

offered schemes. A clearly established system should be in place to address these

questions - How many enterprises have benefitted and in what way? Why have others

not gained? What should be changed in the schemes to bring more people under the

umbrella of financial aid?

Recommendations on Skill Development and Training

1. Develop a labor market information system for identifying present and future skill

gaps in the various sectors of the economy and accordingly, design and conduct skill

development programs. Further, these programs should be established in close

Page | 47


collaboration with other stakeholders - MSME Associations, SIDBI, etc. so as to

ensure that skills are developed per the requirements of the local/regional MSMEs.

2. The MSME Development Institutes should be strengthened / upgraded with

equipment and training facilities for providing quality skill training so as to meet the

huge demand for skill development.

Recommendations on Legal, Tax and Labor Policies

1. Manufacturing MSMEs in the organized segment should be encouraged by offering

lower corporate tax rates, exemptions and concessions in Direct Tax in the first three

years of operations. Such a tax exemption may not lead to significant loss in

Government revenue as the first few years generally involve considerable struggle

for establishing a business.

2. State governments to be encouraged to approve public procurement policy at the

State level. The policy measure, should not only be looked as a means for enlarging

the market for MSMEs, but also as a means of building enduring professional

relationships between the government enterprises and the MSMEs

3. Government should simplify procedures and reduce paper work for processes

related to registration for VAT and other local taxes, land/property and provision of

utilities. This is critical as majority of the MSMEs do not have much of knowledge and

expertise in various company laws and taxation policies, and also do not want to

approach legal experts or CAs for consultation because of the high cost involved.

Additionally, Governments should encourage the use Information technology to

simplify and ensure greater transparency in the services.

4. Simplify legal procedures and overhaul existing bankruptcy Laws to facilitate quick

closures and exit. Ministry of MSME to conduct a detailed exercise on simplifying

procedures for closure of MSME units. The focus should be on streamlining the

procedures and improving the access and understanding of information for MSMEs.

These procedures relate to legal compliances under the company law, labor laws,

direct taxes, excise and service tax, customs and DGFT, VAT, power utility, water

utility, municipal body, creditors, financial institutions etc.

The Department of Financial Services to also look into revamping of policies on

bankruptcy laws to help viable companies survive while safeguarding the interests of

the creditors. The intervention in the existing policy should be such, that it helps

viable companies in distress, and make closing and re-starting easier.

5. Establish compliance assistance center for MSMEs in MSME Development Institutes

to create awareness on better environment management practices, policies and

procedures as well as for better compliance of environment regulations.

Page | 48


6. Establish strong legislation for IPR enforcement. Existence of weak legislative and

enforcement mechanisms on IPRs have severely dented the country’s commitment

to promoting innovation.

7. The compliance of labor related enactments should be simplified and be linked with

incentives so as to ensure better adherence by MSMEs.

8. The Government should initiate steps to ensure ease of setting up business. The

Government should announce additional measures to fast-track decision making,

provide quick clearances, reduce regulatory compliance burden and bring down the

cost of doing business.

Exhibit 22: Suggestions for MSMEs

Recommendations / Suggestions for MSMEs

1. Establish strong accounting system and use ICT for data management and control-

MSMEs should invest in a strong accounting and reporting system for managing

company related information. Adoption of ICT / accounting software’s should be

encouraged for better data management and control.

2. Develop managerial capabilities and establish a strong organization structure –A

clearly established organization structure with clear lines of authority will precipitate

prompt decisions and give confidence to lenders to sanction loans / enhance existing

loan limits.

3. Build strong succession practices – Strong succession planning will ensure business

continuity in case of a disaster or unforeseen conditions. This will further strengthen

lender confidence in the firm.

Page | 49


4. Establish well defined debtor mgt. practices- A clear well defined system of debtor

management should be established. There should be a process of identifying possible

risky parties and issuing internal red flags. Analysis of outstanding while processing

purchase orders should be internally set in stone in the business. This will also help the

firm seeking credit as most lenders consider cash flows while appraising loan

proposals.

5. MSMEs should adopt modern technology / lean manufacturing techniques to cut out

excess activities during the procurement, production and distribution phase.

Techniques such as Kaizen, TQM and Six Sigma would help in eliminating unnecessary

activities and result in optimum utilization of resources.

6. Identify and choose and appropriate financing option- MSMEs to evaluate the pros

and cons of each financial option before selecting the final choice. Decisions to borrow

at exorbitant rates from the grey market should be avoided.

7. MSMEs should proactively assign resources and time to gain understanding of the

applicable laws and acts. It has been witnessed, that significant number of financial

issues and business problems can be resolved with understanding and knowledge of

business linked information.

Page | 50


Conclusion

The MSMEs play a vital role in contribution to the development of Indian economy in terms

of production system, employment generation, GDP etc. MSMEs have also shown an ability

for innovation, creativity, and flexibility which qualifies them to respond promptly to

changing market conditions and to adapt the dynamic needs of the consumers.

However, the global environment has brought in newer challenges in terms of larger

volumes of mechanized production, better designs and marketing of products at lower

costs. In order to compete with the large firms and global players in the market place, it will

be imperative to develop competitiveness beyond just cost. This would also necessitate

support from the Government towards formulation of supportive and friendly policies to

provide the necessary impetus to the sector. Prime Minister’s flagship campaign ‘Make in

India’ is a progressive step in the same direction. With the right pushes, it holds key to

herald a new revolution for the identified manufacturing and service sectors.

Make In India Making MSMEs Sustainable

Mr. U. K. Joshi Director, ASSOCHAM

MSME Sector – An Overview

Micro, Small and Medium Enterprises (MSMEs) play a significant role in the development of the

industrial economy of the country. MSMEs contribute close to 8 percent of the country’s GDP,

45 percent of the manufacturing output. The major aspect of the sector is its immense

employment potential at reasonable rate after agriculture. MSMEs have a wide presence across

the country with production capacity of around 8000 diverse products and meeting needs of

local as well as international markets.

However, in past few years, statistical data indicates that the growth in manufacturing sector

has slowed down especially the share of MSMEs in GDP, manufacturing output and exports has

declined to a great extent. The prime reasons for slowdown are higher interest rates imposed

on consumer durable, several projects delayed owing to red-tapism, lack of will power in

decision-making by the government, etc. All these dormant attributes have scaled down the

confidence level, subsequently affecting the entire manufacturing sector in adverse manner.

To revitalize the bearish sentiments in manufacturing sector, government has triggered the

“Make in India” campaign to boost manufacturing sector, aiming to redesign manufacturing

sector as a key engine for India’s economic growth. If “Make in India” campaign is successfully

materialized, it will create a balanced road map and will link India into global supply chains,

reduce trade deficit and increase the investor’s confidence level at the same time.

It is believed that in order to encash upon the “Make in India” concept, there is a need to

identify existing loopholes in MSME sector with respect to financial, technical, skill set, at each

stage of manufacturing life cycle and providing requisite solution at the same time.

Re-igniting India’s Manufacturing Sector

The global crisis has widely impacted manufacturing sectors across the globe. India is not

immune to this global turmoil. Almost the entire manufacturing sector, ranging from metals

and automobiles to capital goods and consumer durables are struggling to find market in India.

The sluggish growth in manufacturing unit is being driven by slowdown in demand from

domestic as well as global market. Subsequently, high interest rates on consumer durables,

lackluster behavior of the government regarding land acquisition issues, stalled projects further

discourages capital expenditure in the sector. Although, estimated statistical data issued by

Central Statistics Office (CSO) indicated India’s overall GDP growth during the period 2013 -

2014 to be around 4.9%, rise of 0.4 basis points from previous period i.e. 2012-2013, but at the

same time growth rate of manufacturing sector remained negative. Manufacturing output

declined from 1.02% in FY13 to (0.68) % in FY14.

Growth rate in different sectors of Indian Economy

Source: Ministry of Statistics and Programme Implementation

Declining trend in manufacturing sector

Source: Ministry of Statistics and Programme Implementation

The manufacturing sector has been adversely affected not only through decline in consumer

spending but also through exponential fall in confidence levels of consumers. At present,

manufacturing sector contributes close to 15% of India’s GDP which clearly indicates that this

sector is highly penalized. India needs a boost in manufacturing sector to increase per-capita

income and create employment. There is no doubt that manufacturing sector employs millions

of workers, reduce country’s trade deficit, provide a stable source of foreign currency, and

create a smooth & rapid path for country’s economic development. India is an obvious source

of cheap labor and large domestic market. This wide demographic feature coupled with better

infrastructure and easier regulations vis-à-vis set up of manufacturing unit especially MSME will

surely propel manufacturing sector. By contrast, manufacturing’s share has stagnated at 15-

16% for nearly three decades with services sector share rising to 56% and agriculture to 17% in

FY14. This has hampered growth, even though the manufacturing sector grew 15% YoY during

2003-2008. Around the same time, Asian peers concentrated their efforts on expanding

manufacturing, boosting growth and keeping external imbalances in check. India’s

manufacturing value-added (MVA) as a percentage of GDP stood at 13% in 2013, compared to

24% for Indonesia and 30% in China and South Korea

“Make in India” to promote indigenisation and import substitution

In order to make India a powerful indigenous manufacturing hub and bring about economic

transformation, the government has come up with a concept of “Make in India”. With

successful implementation of “Make in India” concept, India's gross domestic product (GDP) is

expected to grow over $4.5 trillion by FY20. With the help of Make in India, the dependence on

imports can be brought down and at the same time, current account deficit can also be

controlled. “Make in India” will not only encourage the indigenous manufacturing sector but

also give tough competition to foreign rivals.

India is heavily dependent on imports for a large number of goods and services. While import of

certain goods like crude is inevitable, many other products across consumer sectors like

electronic white goods, lighting, and consumables which are not technology intensive, have a

significant potential to be substituted by local enterprises. Further, there is potential to

incentivise investments in high technology areas in order to develop capabilities in high

engineering import substitution and indigenisation in many areas of healthcare, automotive,

defence, electronics and telecom. A strong support of industry association and academia is also

needed to guide MSME foray into areas where they can substitute imports. Line

ministries/departments can help identify major imports of products of their respective domain

whose manufacturing involves low to medium end technology complexity.

Integrating Global Value Chain with MSME

MSME can be the backbone for the existing and future high growth businesses with both

domestic and foreign companies investing under the ‘Make in India’ initiative and this will

prove to be a significant step in the area of indigenisation. In recent years, India has progressed

from the production of simple consumer goods to the manufacture of complex products like

electronic control systems, electro medical equipment, microwave component etc. As a result

of globalization and alarming demands, MSMEs have adequate opportunities in sectors such as

information technology, telecom, textiles and garment, automobiles, leather products,

chemicals, pharmaceutical, food processing, petrochemical, etc.

MSME sector accounts for 36% of total exports of the country, mainly consisting of pearls,

precious stones, metals, electrical, electronic equipment, pharmaceutical products, organic

chemicals, iron and steel articles, etc. It can play a vital role in curbing import and boosting

export system in Indian economy. As per Foreign Trade Policy (2009-14) announced by the GOI,

India has an excellent opportunity to shine in technology led exports with focus shifting to

newer products. Therefore, MSMEs can be instrumental in transforming “Make in India” dream

to the next level.

In recent years, the MSME sector has consistently registered a higher growth rate compared to

the overall industrial sector. For manufacturing output to grow, a supportive ecosystem is

required for each of the stages of the enterprises starting from promotion and creation to

expansion till closure or exit.

About ASSOCHAM

THE KNOWLEDGE ARCHITECT OF CORPORATE INDIA

Evolution of Value Creator

ASSOCHAM initiated its endeavour of value creation for Indian industry in 1920. Having in its fold more than 400 Chambers and Trade Associations, and serving more than 4,00,000 members from all over India. It has witnessed upswings as well as upheavals of Indian Economy, and contributed significantly by playing a catalytic role in s haping up the Trade, Commerce and Industrial environment of the country. Today, ASSOCHAM has emerged as the fountainhead of Knowledge for Indian industry, which is all set to redefine the dynamics of growth and development in the technology driven cyber age of ‘Knowledge Based Economy’. ASSOCHAM is seen as a forceful, proactive, forward looking institution equipping itself to meet the aspirations of corporate India in the new world of business. ASSOCHAM is working towards creating a conducive environment of India business to compete globally. ASSOCHAM derives its strength from its Promoter Chambers and other Industry/Regional Chambers/Associations spread all over the country.

VISION

Empower Indian enterprise by inculcating knowledge that will be the catalyst of growth in the barrier less technology driven global market and help them upscale, align and emerge as formidable player in respective business segments.

MISSION

As a representative organ of Corporate India, ASSOCHAM articulates the genuine, legitimate needs and interests of its members. Its mission is to impact the policy and legislative environment so as to foster balanced economic, industrial and social development. We believe education, IT, BT, Health, Corporate Social responsibility and environme nt to be the critical success factors.

MEMBERS – OUR STRENGTH

ASSOCHAM represents the interests of more than 4,00,000 direct and indirect members across the country. Through its heterogeneous membership, ASSOCHAM combines the entrepreneurial spirit and bus iness acumen of owners with management skills and expertise of professionals to set itself apart as a Chamber with a difference. Currently, ASSOCHAM has more than 100 National Councils covering the entire gamut of economic activities in India. It has bee n especially acknowledged as a significant voice of Indian industry in the field of Corporate Social Responsibility, Environment & Safety, HR & Labour Affairs, Corporate Governance, Information Technology, Biotechnology, Telecom, Banking & Finance, Company Law, Corporate Finance, Economic and International Affairs, Mergers & Acquisitions, Tourism, Civil Aviation, Infrastructure, Energy & Power, Education, Legal Reforms, Real Estate and Rural Development, Competency Building & Skill Development to mention a few.

INSIGHT INTO ‘NEW BUSINESS MODELS’

ASSOCHAM has been a significant contributory factor in the emergence of new-age Indian Corporate, characterized by a new mindset and global ambition for dominating the international business. The Chamber has add ressed itself to the key areas like India as Investment Destination, Achieving International Competitiveness, Promoting International Trade, Corporate Strategies for Enhancing Stakeholders Value, Government Policies in sustaining India’s Development, Infrastructure Development for enhancing India’s Competitiveness, Building Indian MNCs, Role of Financial Sector the Catalyst for India’s Transformation.

ASSOCHAM derives its strengths from the following Promoter Chambers: Bombay Chamber of Commerce & Industry , Mumbai; Cochin Chambers of Commerce & Industry, Cochin: Indian Merchant’s Chamber, Mumbai; The Madras Chamber of Commerce and Industry, Chennai; PHD Chamber of Commerce and Industry, New Delhi and has over 4 Lakh Direct / Indirect members.

Together, we can make a significant difference to the burden that our nation carries and bring in a bright, new tomorrow for our nation.

ASSOCHAM Corporate Office 5, Sardar Patel Marg, Chanakyapuri, New Delhi - 110 021

Phone: +91-11-46550555 (Hunting Line) • Fax: +91-11-23017008, 23017009

E-mail: [email protected] • Website: www.assocham.org

ASSOCHAM Southern Regional Office

D-13, D-14, D Block, Brigade MM,

1st Floor, 7th Block, Jayanagar,

K R Road, Bangalore-560070

Phone: 080-40943251-53

Fax: 080-41256629

Email:[email protected]

[email protected],

[email protected]

ASSOCHAM Eastern Regional Office

F-4, “Maurya Centre” 48, Gariahat Road

Kolkata-700019

Tel: 91-33-4005 3845/41

HP: 91-98300 52478

Fax: 91-33-4000 1149

E-mail: [email protected]

ASSOCHAM Western Regional Office

608, 6th Floor, SAKAR III

Opposite Old High Court, Income Tax

Ahmedabad-380 014 (Gujarat)

Tel: +91-79-2754 1728/ 29, 2754 1867

Fax: +91-79-30006352


[email protected]

ASSOCHAM Regional Office Ranchi

503/D, MandirMarg-C,

Ashok Nagar,

Ranchi-834 002

Phone: 09835040255


AUSTRALIA

Chief Representative

ASSOCHAM Australia Chapter

Suite 4, 168A Burwood Road

Burwood | NSW | 2134 | Australia

Tel: +61 (0) 421 590 791

Email: [email protected]

Website: www.assochamaustralia.org

UAE


ASSOCHAM – Middle East

India Trade & Exhibition Centre

M.E. IBPC-SHARJAH

IBPC-SHARJAH

P.O. Box 66301, SHARJAH

Tel: 00-97150-6268801

Fax: 00-9716-5304403

JAPAN


ASSOCHAM Japan Chapter

Colors of India Center

1-39-3 Ojima Koto-Ku,

Tokyo 136-0072

Japan

Email: [email protected]

[email protected]

USA


ASSOCHAM – USA Chapter

55 EAST 77th Street

Suite No 509

New York 10162

http://www.assocham.org/

mailto:[email protected]



http://www.assochamaustralia.org/


RESURGENT INDIA LIMITED

DEBT I EQUITY I ADVISORY

Resurgent India is a full service investment bank providing customized solutions in the areas of debt,

equity and merchant banking. We offer independent advice on capital raising, mergers and acquisition,

business and financial restructuring, valuation, business planning and achieving operational excellence to

our clients.

Our strength lies in our outstanding team, sector expertise, superior execution capabilities and a strong

professional network. We have served clients across key industry sectors including Infrastructure &

Energy, Consumer Products & Services, Real Estate, Metals & Industrial Products, Healthcare &

Pharmaceuticals, Telecom, Media and Technology.

In the short period since our inception, we have grown to a 100 people team with a pan-India presence

through our offices in New Delhi, Kolkata, Mumbai, and Bangalore. Resurgent is part of the Golden Group,

which includes GINESYS (an emerging software solutions company specializing in the retail industry) and

Saraf& Chandra (a full service accounting firm, specializing in taxation, auditing, management consultancy

and outsourcing).

www.resurgentindia.com

© Resurgent India Limited, 2015. All rights reserved.

Disclosures

This document was prepared by Resurgent India Ltd. The copyright and usage of the document is owned by Resurgent India Ltd.

Information and opinions contained herein have been compiled or arrived by Resurgent India Ltd from sources believed to be reliable, but Resurgent

India Ltd has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to

and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document.

Resurgent India ltd accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith.

The document is being furnished information purposes. This document is not to be relied upon or used in substitution for the exercise of independent

judgment and may not be reproduced or published in any media, website or otherwise, in part or as a whole, without the prior consent in writing of

Resurgent. Persons who receive this document should make themselves aware of and adhere to any such restrictions.

Contact Details:

Gurgaon Office: 903-904, Tower C, Unitech Business Zone, Nirvana Country, Sector 50, Gurgaon – 122018 Tel No. : 0124-4754550

Kolkata CFB F-1, 1st Floor, Paridhan Garment Park, 19 Canal South Road, Kolkata - 700015 Tel. No. : 033-64525594 Fax No. : 033-22902469

Mumbai Express Zone A-509, 5th floor Western Express Highway, Malad East, Mumbai - 400097 Telephone No. :022-29810219 Fax No. : 022-28727937 www.resurgentindia.com

Bengaluru No. 49/1, 2nd Floor, Anees Plaza, R V Road, Basavangudi, Bengaluru - 560004 Telephone No.: 080–26570757 [email protected]

Date post:	14-Jul-2015
Category:	Business
Upload:	resurgent-india
View:	496 times
Download:	1 times