Purchasing power parity


The economy of India is the twelfth largest economy in the world by nominal value and fourth largest by purchasing power parity(PPP). The First Quarter Review of Monetary Policy by Reserve bank of India(RBI) for 2009-10 placed the projection for GDP growth at 6.0 per cent, with an upward bias, one of its main contributors being service industry. Reserve bank therefore had modify the definition of small and medium enterprise where service industry is also included and also has extended the scope of medium enterprise which was not the case until the enactment of Micro, Small and Medium Enterprises Development (MSMED) Act 2006 on June 16, 2006. Micro or small scale industries are also included in the SME sector of India by RBI. Small and medium enterprises across the globe are not uniform in their size and shape. According to a World Bank study, there are more than sixty definitions of small and medium enterprise used in 75 countries surveyed (cited in Kim Seung Jin and Suh Jang-Won, 1992, 9).

RBI defines the micro, small and medium Enterprises as follows.

Business enterprises under manufacturing or production, processing or preservation of goods as below:

  • Enterprises in which investment in plant and machinery does not exceed Rs. 25 lakh is a Micro enterprise;
  • Enterprises in which investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore is categorised as small enterprises; and
  • A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

Business Enterprises that are engaged in providing or rendering of services.

  • Where the investment in equipment does not exceed Rs. 10 lakh, then the enterprise is categorise as a micro enterprise;
  • A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and
  • A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

MSMED act makes provision to ensure medium enterprises achieve economies of scale. According to the newsletter published by RBI on September 21, 2006, the MSMED act, by defining the SMEs provides statutory basis to Purchase Preference Policy for goods and services provided by micro and small enterprises. Legal provisions to check delayed payments to micro & small enterprises are also strengthen. Statutory basis to the National Board for Micro, Small & Medium Enterprises is also provided. One of primary objectives of these is also to check the timely and easy flow of credit to SMEs. To simplify and classify the process for achieving these objectives SMEs are defined as above.

However SME chamber of India criticise the act as it states that the entrepreneurs faced problems regarding few provisions like licensing policies for the sector and the reservation of products. The definition of SMEs sector is mainly in terms of investment ceilings which have changed over since 2006 to keep pace with economic development. According to the Kapur Committee appointed by RBI to recommend on measures for the development of SME sector, SMEs in different countries have been defined against various criteria such as the number of workers employed, volume of output or sales, value of assets employed, and the use of energy. Therefore, the contribution of SME sector to the GDP in different countries is not on comparable parameter.


P. Chidambaram former finance minister of India in his interview to 'The Hindu' said "small and Medium Enterprises (SMEs) play a vital role in the industrial development of any country, performance of a region is largely based on the performance of SMEs in that area".

Small and Medium Enterprises play a vital role for the growth of Indian economy as it contributes 45% of the total industrial output, 40% of exports, 42 millions are employed by this sector, creates one million jobs every year and there are more than 8000 quality products ranging from traditional to high-tech items produced for Indian and international markets.

The Indian market is growing in size rapidly and moreover Indian industry is making significant progress in various sectors like Manufacturing, Service sectors, Textile & Garments, Food Processing, IT, Precision Engineering, Agro, Pharmaceuticals and Retail. SMEs are finding ever-increasing opportunities to enhance their business activities in core sectors.


According to the '4th All India Census of MSMEs' with reference to year 2006-07, there were about 2.61 crore micro, small and medium enterprises (MSMEs) in India in 2006-07, while the current figure that is projected is 1.3 crore.

Under those 2.16 crore MSMEs 0.15 crore MSMEs are registered units and 2.46 crore are unregistered units, as per the data available from 4th All India Census of MSMEs.

These units are mostly in apparels which has a 14.03% share of the total industries while food products and beverages have 13.53% share and that of maintenance of personal and household goods have 9.25%.

MSME sector is said to of great importance for the developing countries like India as it provides good employment opportunities. It also provides self employment. In India MSME sector provides employment to 5.97 crore persons. Registered units accounts for 0.95 crore persons while the unregistered units accounts for 5.03 crore persons.

In India the most important units of MSME sector are the micro and small scale in nature(MSEs). According to RBI MSEs has a huge potential to grow and can solve core problems of the country some of them being unemployment, trade deficits etc. Thus MSEs are studied as a separate sector in India.

This sector has maximum number of units throughout the country producing range of around 6000 different products(appendix-pie chart). Recognizing the potential of MSE sector, the definition and coverage of the sector were broadened in MSMED act 2006.

It is evident from the table 1(appendix) projected on the basis of the data available from 4thAll India census of MSMEs, that the growth rate of MSE sector is much higher than the overall industrial growth rate in past six years.MSE sector also contributes to a great extend towards GDP of India. (Table 2).

Employment provided by MSE sector has increased from 249.33 lakhs to 322.28 lakhs persons. Thus it provides 34.93% employment among the other sectors.(Table3). Fixed investment in MSE sector was also increased to around 240000 crore in year 2007-2008.(table 4).


Though SMEs are growing at commendable pace, there are many problems encountered by this sector. Government has dealt with many of these problems and are making provisions for the solving the unresolved problems.

The common and basic problems faced by the SME sector are :- insufficient finance at affordable terms, markets and infrastructure related problems - like high power tariff, regulatory hassles - both at the entry and exit stages, inflexible labour insufficient export infrastructure. The policy of product reservations has restricted operation of economies of scale. Starting a business in India requires number of permits, even after the initiation of liberalization programme, as compared to many other developing Asian nations.

India is facing a major problem of maintaining the records of the units. In India there are about 2.46 crore unregistered units. One important factor to be noted in the statistics on small industries is the mortality rate. While the industries may get registered at the entry point, there is no record of their exit. Hence, it is difficult to find out exact number of sick units. It is evident from the data from the census that sickness in MSMEs has increased marginally from 13.98 per cent in 2001-02 to 14.47 per cent in 2006-07. However, the closure among the MSMEs registered units has reduced from 39% 2001-02 to 21.64% in 2006-07.

Though MSME sectors contributed commendably towards the nation's economy, the concerned government departments and financial institution fails to provide the necessary support to this sector. Due to non availability of the required funds this sector is unable to sustain the competition both from large firms in domestic markets and also in international market. Other major problems that question the sustainability of the firms in this sector are limited knowledge about the market, competition, technology. There is also lack of suitable technology that gives a competitive advantage. Thus this causes low production capacity, ineffective marketing, lack of skilled labour at affordable cost and lack of interaction with government agencies on various matters. SMEs find it difficult to match the wage rate, job security and career development opportunities, available in larger organizations and therefore are not in a position to hire skilled and competent manpower.

Small industry in India is encountered with an increasingly competitive environment due to: liberalisation of the investment regime in the 1990s, favouring foreign direct investment (FDI); (2) the formation of the World Trade Organisation (WTO) in 1995, forcing its member-countries (including India) to drastically scale down quantitative and non-quantitative restrictions on imports, and (3) domestic economic reforms.

Steps by the government:

Recognising the importance and the contribution of the MSMEs towards the economy, the government of India took few vital steps for developing and promoting the SMEs especially Small industries.

The Small Industries Development Bank of India (SIDBI) was set up in 1990 under the Act of Indian Parliament as the principal financial institution for promotion, financing, development of industry in the small sector and organising the financial activities of other institutions engaged in similar activities.

The MSMED act simplifies the registration process for the MSEMs. The Act stipulates that the central government may timely take steps for encouraging and promoting the competitiveness and making the firms more efficient. This may include- provision for upgrading the technology, infrastructure facilities and cluster development with a view to strengthening backward and forward linkages which is necessary for the development of MSMEs in the rural areas, assistance in marketing development of skills in the employees, management and entrepreneurs.

News letter published by the RBI on January 16, 2007, RBI provides timely guidelines to ensure timely and smooth flow of credit to the enterprise.

The government has initiated various institutions for the development of the MSMEs Some of the institution that play a vital role in the development of MSMEs are:

  • Small industries Development Bank of India
  • Small Industries Development Organization
  • Small Industry Service Institute
  • Gujarat Institute for Development Research
  • Gujarat Small Industries Corporation Limited
  • Entrepreneurship Development Institute of India
  • District industries centre
  • Centre for entrepreneurship development
  • SME chamber of India

These institutions were primarily focused in finding out the different ways to solve the problems faced by the MSMEs and providing necessary support and help at all times. Apart from that the government has also run many incentive schemes specially focused to the MSME sector.


  1. http://www.rbi.org.in/SCRIPTS/
  2. http://www.rbi.org.in

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