ABSTRACT

Small and medium enterprises (SMEs ) also known as small

and medium scale enterprises are the essential part of
healthy economy. The SME sector represents over 90 percent
of enterprises in most of the developing countries and
contribute 40-60 percent of the total output or value added
to the national economy.

SME sector in India is the key driver of the nation's

economic growth with a contribution of over 40 percent of
the country's industrial output and about 35 percent of direct
exports and another 15 percent of indirect exports. In terms of
employment it is a very crucial sector being the second
largest sector after agriculture. In recent years the SME sector
has consistently registered higher growth rate compared to
industrial sector.
Small is beautiful but is it Powerful? Yes, say the SMEs.

The growth recorded by SSI in India is 2% more than any other

sector; it accounts for 40% of the country’s GDP, 35% of Direct
exports, 15% of Indirect Exports (through Merchant Exporters,
Trading Houses & Export Houses) and employs more than 20
million people. The SSIs needs just Rs. 60, 000 – 70, 000 to
generate employment for one man, while for the same a whopping
5-6 lakhs is required for other sectors.

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SME sector faces a number of problems - absence of adequate and
timely banking finance, limited knowledge and non-availability of
suitable technology, low production capacity, ineffective marketing
and identification of new markets, constraints on modernization
and expansions, non availability of highly skilled labour at
affordable cost, follow up with various agencies in solving regular
activities and lack of interaction with government agencies on
various matters.

SMEs have strong technological base, international business

outlook, competitive spirit and willingness to restructure them shall
withstand the present challenges and come out with shining
colours to make their own contribution to the Indian economy.

TABLE OF CONTENTS

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CHAPTER I: INTRODUCTION……………………………………………………………………
4

1.1 DEFINITION………………………………………………………………4- 5

1.2 SME’S IN DIFFERENT SECTORS OF INDIA………………………………..

………………………………………5- 6

1.3 SIGNIFICANCE OF SME’S……..

………………….............................................6 - 9

CHAPTER II:

REVIEW OF LITERATURE……………………………………………,…………10

CHAPTER III:

PROSPECTS OF SME’S IN INDIA (11th five year Plan)………………11-15

CHAPTER IV:

CHALLENGES OF SME’S IN INDIA……………………16-20

CHAPTER V:

CONCLUSION……………………………………………………………………21- 22

BIBLIOGRAPHY……………………………………………………………………23

CHAPTER I

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INTRODUCTION:

Small industry has been one of the major planks of India's

economic development strategy since Independence. India
accorded high priority to small and medium enterprises (SMEs)
from the very beginning and pursued support policies to make
these enterprises viable and vibrant and over time, these have
become major contributors to the GDP. Despite numerous
protection and policy measures for the past so many years, SMEs
have remained mostly small, technologically backward and lacking
in competitiveness. The opening of the Indian economy in 1991
added problems to the SMEs. At the beginning, small scale
enterprises found it difficult to survive. In the last decade, the
economic environment has changed in favour of SMEs. In this
context, it is important to re-look into the basic issues of SMEs,
past, present and future prospects, especially in the policy
framework.

1.1 DEFINITION:

In the Indian context, we have not so far defined medium

enterprises clearly. What is neither small nor large is being
loosely defined as medium. Further, enterprise encompasses
businesses, services and industries. In the broadband of '
small', the discussion extends to medium as well. Another

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possible connotation for the SMEs is the small manufacturing
enterprises.

ROLE OF SMES IN ECONOMY

Due to fast developing modern technologies and production scales,

the small and medium enterprises have become very critical for
economic growth. This sector is now very important for those
nations whose desire is to be prosperous as it is the starting point
of industrial development. Large Scale Enterprises (LSEs) of today
were SMEs in the past and SMEs of today would be LSEs of
tomorrow. This rule holds good for all countries of the world.

1.2 SME’S IN DIFFERENT SECTORS OF INDIAN INDUSTRY:

SMEs have been established in almost all-major sectors in the

Indian industry such as:
Food
 Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles
 and Garments
Leather and leather goods
Meat products
Bio-engineering

Sports goods
Plastics products

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 Computer Software, etc.

1.3 SIGNIFICANCE OF SMES

SMEs are considered the engine of economic growth in both

developed and developing countries as they:

 Provides low cost employment since the unit cost of persons

employed is lower for SMEs than for large sized units.
 Assists in regional and local development since SMEs accelerate
rural industrialization by linking it with more organized urban
sector.
 Help achieve fair and equitable distribution of wealth by
regional dispersion of economic activities.
 Contribute significantly to export revenues because of the low
cost labour intensive nature of its products.
 Have a positive effect on the trade balance since SMEs
generally use indigenous raw materials, reducing dependence on
imported machinery, raw material or labour.
 Assist in fostering self-help and entrepreneurial culture by
bringing together skills and capital through various lending and
skill enhancement schemes.
 Impart the resilience to withstand economic upheavals and
maintain a reasonable growth rate since being indigenous is the
key to sustainability and self-sufficiency.

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 Firms with sales less than $1 million spend 2x - 3x more on
R&D per $ of sales than the average. And result is SMEs’
producing 55 percent more innovations than LSEs’.1
 Converts the raw material within the country into semi-finished
items and later pass it on the LSEs that have capital, skill and
equipment to process these into finished goods.
 Provide rural people an opportunity for income generation and
personal growth since they can work at home. This helps to
achieve fair and equitable distribution of wealth by creating
nationwide non-discriminatory job opportunities.
 Attracts direct foreign investment since multinationals and big
conglomerates have started to outsource from countries with
strong SME sectors. The low labour cost makes production of
semi finished goods very economical for large concerns
operating in international markets.
 The SMEs act as engines through which the growth objectives
of developing countries can be achieved.

ADVANTAGES OF SMES

The advantages of SMEs in an economy, be it labour intensive or

otherwise are manifold. Therefore, the development of small and
medium industries in any country has specific effects on the
balanced and dynamic growth of a country. It has a number of
advantages over large scale industries. Some of these are
mentioned below:

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 It generates more jobs per unit of capital and is more capital
efficient.
 Similarly it is also strongly integrated into the domestic
economy.
 Small industries use a high percentage of local raw materials.
Most of local consumable products are produced by small scale
industries. It taps the resources at the grass root levels.
 The promotion of Small and medium industries induces rapid
growth of large scale manufacturing in the long run.
 It also generates cheaper goods and services to the general
population which attempts to break the cycle of the ever
increasing price hikes. The increased employment and the
goods/services produced has a positive effect on the GNP of a
country. This becomes a catalyst in breaking the poverty cycle.
 The small businesses are remarkably flexible because they
operate near the customer, thus it has the ability to adapt
according to the ever changing needs of the customer.

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 CHAPTER II:

REVIEW OF LITERATURE

This paper reviews the existing microeconomic evidence on

whether SMEs boost growth and reduce poverty. A growing body of
work suggests that SMEs do not boost the quantity and quality of
employment. Initially, Birch (1979) argued that small firms are
particularly important in job creation. He reports that over the
1970s, firms with fewer than 100 employees generated eight out of
ten new jobs in America. However, a wide array of evidence rejects
the view that small firms are the engines of job formation (Dunne,
Roberts, and Samuelson, 1989; Leonard, 1986; Brown, Hamilton,
and Medoff, 1990). For instance, Davis, Haltiwanger and Schuh

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(1993) show that while gross rates of job creation and destruction
are higher in small firms; there is no systematic relationship
between net job creation and firm size. In Sub-Saharan Africa, Biggs
and Shah (1998) find that large firms were the dominant source of
net job creation in the manufacturing sector.

CHAPTER III

PROSPECTS OF SMALL MEDIUM SCALE INDUSTRIES IN INDIA:

ROAD MAP FOR THE DEVELOPMENT OF MICRO

DEVELOPMENT UNIT IN THE 11TH PLAN
The limit set for investment in the micro units is a major hindrance
in this era of Globalization and competitiveness. The limit has been
increased to 5 crores. Steps for development of MSE in the
eleventh plan are as follows.

(1) It has been targeted to raise the production of MSE units to

13,98,803 cores for the year 2011-12. Employment has been
planned to be increased from 322.28-391.73 lakhs

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In the MSE scheme in the eleventh plan, previously the manifesto
was good for all which has been turned to development. Regarding
this, the document (VOL III p. 203) it has been informed that "The
eleventh plan approach to the MSE sector marks shift from welfare
approach to that of empowerment. The plan looks at the sector as
an engine for sustained and inclusive economic growth and
employment. The eleventh plan emphasizes on the improvement
of living standard of workers and believes that only if a worker is
physically and mentally sound, then will he be able to produce a
good output.

(3) In the eleventh plan, as the MSE sector is unorganized, the plan
aims at organizing it so that MSE sector gets maximum benefit of
all the govt. schemes and plans.

(4) In the eleventh plan, MSE groups have been taken as a cluster
and workers have been made into a group (SHGS) so that their
bargaining power is increased

(5) The MSE sector gets a loan of 5 lakh for 8 % interest without
any bailee will be encouraged a vehement drive will be undertaken,
to develop this sector.

(6) Centre and the state govt. will give prime importance to the
MSE sector. Women working in this sector, get their due rights, for
that efforts will be made.

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(7) Technical information will be provided to Small Industries
Development Organization now known as Micro, Small and Medium
Enterprises Development Organization which has around 3000
technicians who work in testing centres, tool rooms, etc.
(8) Ministry of MSME has been formed for the development of
Micro, Small and Medium Industries. In the eleventh plan, it has
been decided to establish Technology mission, which will help
develop dissemination of technology.

(9) In the year 2006, the govt. started the National Manufacturing
Competitiveness Programme. Under it in 5 years, at the cost of 850
crores, design clinics, steps to increase the competitiveness of
groups, and decrease the wastage will be undertaken.

(10) This sector faces basic problems like that of electricity. In the
eleventh plan it has been suggested, that these small and micro
units establish their own power plants.

(11) Owing to the industrial laws and disputes act, the worries of
this sector have increased. According to the planning commission,
it has been advised to form a third party which will investigate into
the matter.

THE NON GOVERNMENT PROMOTION STRUCTURE:

There are three national associations representing all type of
industries, small and large. These are

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'Federation of Indian Chambers of Commerce and Industries'
(FICCI), Confederation of Indian Industries (CII) and 'Associatioan of
Chambers of Commerce and Industries' (ASSOCHAM). These
associations represent mainly the interests of large scale
industries. However, these associations have membership of small
sector as well and represent mainly the policy related interests of
SSI sector.
The Indian auto component industry is poised for robust growth till
2010. There is a perceptive exuberance in the industry and growth
estimates indicate a booming industry. Going by current trends in
production and exports of auto components, indicate a doubling of
the domestic auto component industry by 2010. The production of
auto components could grow to US$22 bn by 2010. Similarly,
India’s exports of auto components could grow to US$4.5 bn as
compared to US$1.8 bn in 2005. Expected growth in production and
exports of auto components is shown in the graph below:

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This growth outlook implies opportunities for the small and medium
enterprises. The overall trend is encouraging, but remaining
competitive in this changing scenario will be the toughest
challenge. The combination of low manufacturing costs along with
quality systems would give an edge to companies in terms of
pricing and quality. Expansion and diversification will help break
into new markets. It would be imperative for these companies,
which are largely based on traditional management practices, to
imbibe technology in a big way. The SMEs can exploit these
opportunities through joint ventures, collaboration and technical tie
ups. Knowledge, specialization, innovation and networking will
determine the success of the SMEs in this globally competitive
environment

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Recent Initiatives Taken - Policy Package for SMEs:
The policy makers have recognised the need to support the SME
sector through a package of fiscal and financial incentives so as to
help them to address the challenges being faced by the sector.
Further, the Government is also keen on making the operating
environment conducive to the conduct of business by SME units.
With a view to improve the prospects of SME units, the Government
of India has recently announced a package for stepping up credit to
the SME sector.

CHAPTER IV:

CHALLENGES OF SMALL AND MEDIUM SCALE ENTERPRISES

IN INDIA:

In the current economic slowdown SME sector has been hit

very hard due to raising interest rates and financial crunch.
The small size and capacity of the firms and their lack of
awareness have bred many hindrances to their growth such
as Under-utilization of capacity, Inadequate and untimely credit
flows, Inability in technology up gradation, Insufficient raw-
material procurement Inability to market finished goods and
Ineffective monitoring and feedback mechanism. The problem
which continues to be a big hurdle for the development of the
sector is the lack of access to timely and adequate credit.

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Increasing competition and globalization, along with the need to
produce quality products at best prices, have prompted the
industry to introduce new product development methods with
modern technology. The need to evolve technologically superior
methods of product development holds true, especially for players
in the SME segment. The small and medium enterprise sector is
widely regarded as the engine of the Indian economy. Small and
medium enterprises (SME) contribute to the industrial, economic,
technological and regional development in all developed and
developing countries. The Indian SME market is valued at $5
million. The 11 million SME units, which make up the Indian SME
sector. Produce over 8000 products. These constitute 95 % of all
industrial units and contribute 40% to industrial output. The SME
sector also plays a significant role in the development of
entrepreneurial skills and forms a substantial portion of the
country’s export earnings.

The contribution of SME’s in the industrial development of the

country has been remarkable. At the state level, the government
has played the major role in ensuring growth by establishing
various institutes to support this sector. Which include small
industry Development Corporations (SIDC) and several Centers for
Entrepreneurship Development (CEDs). There are many institutes
that currently support SMEs at the national level. These include the
National Research Development Corporation (NRDC) and the
Bureau of Indian Standards (BIS).

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However, since the early 1990’s Indian SMEs have been exposed to
intense Competition due to increasing globalization. This has made
survival and growth of this sector difficult.

INFRASTRUCTURE DEVELOPMENT

The quality of the infrastructure affects the growth prospects of

SMEs to a great extent, especially in a developing country like India
. Here, 77% of the population lives in villages. Many rural areas still
suffer due to the deplorable state of basic infrastructure like
transport, telecommunications and electricity. The integration of
rural industries with mainstream industries is proving to be difficult
for these reasons. This has been identified as a key deterrent to the
growth of SME clusters in rural areas.

TECHNOLOGICALLY HANDICAPPED

Technology plays a crucial role in the development of SMEs.

Technology not only helps in evolving a multipronged strategy but
also in maximizing business opportunities for these enterprises.
Technologies for SMEs should aim at fuelling innovation and
business agility. They should be easy to integrate with existing
systems and processes, and help in leveraging communicate and
information management. Today, most SMEs in rural areas
undertake manufacturing using old methods and outdated
technology. But today, the competition is fierce, unlike in the past,
when buyers were simply looked forward to purchasing the best
products at the lowest prices. There are additional challenges to be
met. The influx of low-cost products from china has made it even

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more difficult for Indian manufacturers to compete solely on the
price front. China is considered the world’s manufacturing
backyard, due to its low manufacturing and labour costs when
compared to those in India.

UPCOMING MARKET TRENDS AND INFORMATION

One of the factors limiting the growth of SMEs is the lack of

adequate information. Once SMEs start the business, they may be
interested in knowing about the suppliers of specific machinery that
suit their needs, technical information and market trends for their
products. This information is rarely available at the grassroots level.

NEW PRODUCT DEVELOPMENT

The SME market requires a strong new product development base.

In India, most SMEs work on the designs given to them by domestic
or foreign buyers. There is very little innovation in product design
development, and even the technology used by the SMEs in India is
Outdated. This has direct implication on the profit margins, and a
dip in productivity levels. The use of traditional tools, old
techniques, poor labour productivity, they have not been used to a
large extent, resulting in no substantial effect on the output.

MARKETING PROBLEMS:

The nature of marketing is ever changing so does the problems

associated with the marketing. The Indian SMEs are facing a lot of
problems related to marketing in the national and international
arenas. This is mainly due to the fact that these organizations

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belong to rural or semi urban areas where the resources are easily
available to them and cheap labour is associated with . But when it
comes to selling of these products the SMEs have to face a
difficulty in creating an impression and awareness in the minds of
urban and other potential buyers about the quality and related
aspects of their products and services.

THE WAY AHEAD

There e is a strong need to find ways to manage modern

technology and labour market constraints, which impede the
productivity of SMEs. Policy-makers and research institutions have
repeatedly pointed out to the need for extensive research on the
SME sector.

What these SMEs need today is knowledge and access to new

technology, adequate financial aid, high levels of R&D and
adaptability to the changing trends in their respective industries.

With the increasing competition, globalization and the uncertainty

due to the global downturn, SMEs will have to continuously
incorporate the latest technology into their production processes as
well as in their marketing and management functions, to cut costs,
gain efficiency and consistency. This will help them become
successful, and contribute to the Indian economy in the long run.
Overall, the small industry sector has performed well, and has
enabled the country to achieve considerable industrial growth and
diversification.

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 CHAPTER V

CONCLUSION:

There is an unprecedented importance of Small and

medium Enterprises in the country. This is because the number of
units is maximum in the country. This sector, contributes a major
amount in the development and employment. This sector does the
work of providing employment to minorities, backward class people
and also to women. This sector is rife with problems like shortage
of electricity and development of basic infrastructure along with the
problems related to market. In order to solve these problems and
develop the SME sector, major efforts have been done in the
eleventh plan. However these efforts are not enough. For the
development of rural and farm group, different departments should
be formed. Similarly, in the development of industrial ministry for
urban Micro and Small and Medium Industries specific efforts
should be done. SMEs always represented the model of socio-
economic policies of Government of India which emphasized
judicious use of foreign exchange for import of capital goods and
inputs; labour intensive mode of production; employment
generation; nonconcentration of diffusion of economic power in the
hands of few (as in the case of big houses); discouraging
monopolistic practices of production and marketing; and finally
effective contribution to foreign exchange earning of the nation
with low import-intensive operations.
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SMEs are the growth engine of the economy and help sustain other
sectors such as services.

BIBLIOGRAPHY

1. http://cc.iift.ac.in/sme/NEWS/02032009_SMEs%20in%20India
%20The%20Challenges%20Ahead.pdf

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 2. http://www.dnb.co.in/smes/future%20outlook.asp

3. 11th Five year Plan Document

4. Small & Medium Enterprises ( By Rajesh Dube)

5. Management of Public Enterprises (Study Material of IGNOU)

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