Small and medium enterprises in India

CHAPTER 1

INTRODUCTION

The Small and Medium Enterprises (SMEs) play a vital role in the industrial development of any country. The importance of the SME sector is well recognized worldwide due to its significant contribution to gratifying various socio-economic objectives, such as higher growth of employment, output, promotion of exports and fostering entrepreneurship. India has nearly three million SMEs, which account for almost 50 per cent of industrial output. They are an essential employment-generating sector with 50 per cent of the private sector employment and 30-40 per cent of value addition in manufacturing. They produce a diverse range of products (over 8000), including consumer items, capital and intermediate goods. However, SMEs in India which constitute more than 80 per cent of the total number of industrial enterprises and form the backbone of industrial development are not export competitive and contribute only about 34 per cent of exports.

SMEs form the backbone of the Indian manufacturing sector and have become engine of economic growth in India. It is estimated that SMEs account for almost 90% of industrial units in India and 40% of value addition in the manufacturing sector. This paper closely analyses the growth and development of the Indian small scale sector from opening of the economy. Small and Medium enterprises play an important role in the development of the country. However, these industries face difficulty in accessing adequate finance for their businesses. Apart from the traditional modes of financing like banks and money lenders, newer sources of Financing such as venture capital investment, can take care of their financing requirements. In the case of India, the government has taken several initiatives both at the national and international levels to improve the availability of finance. But there are still certain impediments that the SMEs face that are required to be addressed by the government. SMEs encourage entrepreneurial development and dispersal of the industries throughout the length and breadth of the country. It also generates a lot of employment opportunities and the capital cost per employee is minimum. With the service sector contributing a major share to the GDP and as this sector relies on the SMEs, the scope for SME finance by the commercial banks has increased tremendously. The government is also committed to give a fillip to the 14 sector through infrastructural development, skill development effort, technological up gradation and by expending the role of small industries Development Bank of India in SME development.

The current scenario of SMEs in India can broadly be discussed in terms of different

Factors from the point of view of contextualization as follows:

  1. The amount of investment in fixed capital assets,
  2. The extent of employment generation,
  3. The contribution to gross domestic production (GDP), and
  4. Their contribution towards exports.

Small enterprise promotion has continued to remain an important and integral part of Indian development strategy well before the First Five-Year Plan. Some of the most persisting constraints facing the sector, dominated by smaller units in the informal sector, include poor or non-availability of loan finance, low levels of technology, inadequate physical and economic infrastructure, and a policy of product reservation for small scale industries, which excludes entry of LEs. Poor monitoring of implementation and effect of various small firm policies has been an issue of concern. There has been a definite decline in the access to credit by small enterprises among SMEs. Given the large scale attempts to promote industrial clusters in the SME sector, cluster promotion in the Indian context must move beyond the 'sectoral' bind.

OBJECTIVES

  1. To analyze the concept of small and medium enterprises of India.
  2. To evaluate performance of Indian SMEs and also its effects on Indian economical status.

BACKGROUND

In the Indian context, the small and medium enterprises (SME) sector is broadly a term used for small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset of up to Rs 10 million, can be considered as an SSI unit and any investment of up to Rs 100 million can be termed as a medium unit. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned or controlled by any other industrial unit. An SME is known by different ways across the world. In India, a standard definition surfaced only in October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises, Government of India, imposed the Micro, Small and Medium enterprises Development (MSMED) Act, 2006.

This definition, however was changed according to the changing economic scenario and thus has separate definitions to it. For instance, an SME definition for manufacturing enterprises is different from what an SME definition for service enterprises has to say. Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. This sector was recognized and given importance right from independence and is being encouraged ever since then. Though, it commenced on a small scale, it gradually gained significance, because it employed a considerable number of people.

When it started gaining momentum, this sector was defined as an enterprise with investment in plant and machinery of up to Rs 1 Lakh and situated in towns and villages with strength of less than 50,000 people. The policy statement put in place special legislation to recognize and protect self employed people in cottage and home industries. District industries center's (DICs) were set up and made the focal point of SSI development, bypassing large cities and state capitals. Also, the government started providing special services akin to product standardization, quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market.

The scenario for the small-scale sector changed with the Industrial Policy of July 1991, which, for the first time in India's development history spoke of liberalization. What this meant was that medium and large enterprises would no longer need licenses to run. Export-oriented enterprises could be wholly foreign owned and foreign equity participation was selectively allowed. Industries could import capital goods with much fewer restrictions. 1996 saw the government involved in the setting up of a higher level committee, known as the Abid Hussain Committee, to review policies for small industries and recommend measures to help formulate a strong and innovative policy package for the rapid development of SMEs. With liberalization, rapid changes were seen in the Indian economy. Indian companies were no longer insulated form the global economy. In fact, there was an urgent need to make them, especially SMEs, more competitive and resilient.

In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at 3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial sector. Yet, in 1995-96, the growth rate of SSIs was slightly lower than the total industrial sector, however it increased again in 1996 and continued to be higher than the total industrial growth rate till 1999. Till 2006, the SME segment saw a lot more development and support from the government. Today, small and medium industry occupies a position of strategic importance in the Indian economic structure due to its significant contribution in terms of output, exports and employment. The small scale industry accounts for 40% of gross industrial value addition and 50% of total manufacturing exports. More than 3.2 million units are spread all over the country producing about 8000 items, from very basic to highly sophisticated products.

The introduction of an exclusive policy for small industry, which laid emphasis on imparting more vitality and growth impetus to the sector, is the sectoral dimension of the major policy changes relevant to small industry. The policy marked: (1) the beginning of the end of protective measures for small industry, and (2) promotion of competitiveness by addressing the basic concerns of the sector, namely, technology, finance and marketing. Subsequently, the number of items reserved exclusively for small industry manufacturing has been gradually brought down from 842 in 1991 to 239 in 2007. Thus policy changes that have occurred at the global, national and sectoral levels have radically changed the environment for the functioning of small industry in India. The growth of small industry in the country has to be analyzed against this backdrop.

Small enterprises in India have come up in an unplanned, uncontrolled and haphazard manner. They have emerged anywhere and everywhere - closer to the location of resources as well as markets, in clusters as well as in a dispersed manner, in industrial, commercial and residential areas. Of these, the 2000-odd small industry clusters vary in size with a population ranging from 100 to 1,000 units. Approximately, these clusters would account for 1/3 to ½ the total small industry units in the country. A considerable majority of these clusters are based on natural and traditional skills. By and large, these clusters lack reliable and efficient infrastructural facilities such as power, road, water, transportation and communications, information and technical inputs. But the infrastructural problem is more acute in case of units that are located in a dispersed manner.

The central issue of concern for the growth of small industry is how to strengthen its competitiveness. First of all, if small industry has to thrive, infrastructural bottlenecks must be overcome to enable it to compete on its inherent potential. And it is the responsibility of the government to remove any structural bottleneck in small industry performance especially when market forces are given prominence through the removal of 'protective elements'. It is essential to provide the much-needed 'level playing field' to small enterprises through infrastructure development. But overcoming infrastructural bottlenecks for small enterprises is easier said than done.

The SMEs are the biggest employment-providing sectors after agriculture, providing employment to 29.4 million people. However SMEs, which constitute more than 90% of total number of industrial enterprises, are now facing a tough competition from their global counterparts due to liberalization, change in manufacturing strategies, technological changes, and turbulent and uncertain market scenario. This contribution is despite the sector being exposed to intensified competition since liberalization of Indian economy in 1991. Small industry in India has been confronted with an increasingly competitive environment due to: (1) liberalization of the investment regime in the 1990s, favoring foreign direct investment (FDI); (2) the formation of the World Trade Organization (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. The cumulative impact of all these developments is a remarkable transformation of the economic environment in which small industry operates, implying that the sector has no option but to 'compete or perish'.

In the recent past, small companies have performed better than their larger counterpart. Between 2001-06, net companies with net turnover of Rs. 1 crore - 50 crore had a higher growth rate of 701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000 crores (Business World Jan. 2007). The total SSI production, which had reached the all time high of Rs. 1, 89,200 crores in 1989-90 dropped dramatically in the next 10 years and only in 2001-02 the level of production was surpassed. But after 2002, the production has risen at a faster rate. Since 2000, there is a continuous growth in number of units, production, and employment and in exports. The average annual growth in the number of units was around 4.1%. Today, some of the SMEs are acquiring companies abroad as part of the globalization process. Mostly, these units are ancillaries and are export oriented.

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 coordinating the financial activities of other institutions engaged in similar activities. Since its inception, the bank is promoting SSI sector to meet the requirement of setting up of new projects, expansion, diversification and modernization of the sector. However, after working more than 1-1/2 decades, the institution has not proved to be sufficient to meet the requirement of SMEs in India. This can be mainly attributed to the governmental clutches on the banks. The main identified sources of finance to SSI units are:

  • Public Sector/Commercial banks
  • State Financial Corporations
  • Small Industries Development Bank of India

Informal sources Out of these financial resources, banks are a preferred source of financing by virtue of their better reach and accessibility. Two-thirds of the small entrepreneurs meet financial

The SME sector have transformed to the need of large local manufacturers and suppliers to global manufacturers like Auto Industry. Today some SMEs are investing in R&D in order to compete globally. Outsourcing from multi-national companies has played a vital role in the emergence of Indian SMEs as world leaders in specified products. The advantages in labor-intensive manufacturing units, lower transport costs and lose labor policies of the small scale sector have led to major outsourcing in manufacturing and services. The Indian experience with SMEs is common to other East Asian economies also.

The SMEs are acting as entrepreneurial engines of growth in the whole of Asia. About 70% of the employment growth comes from the SMEs in the Asian region. This is the case with China, Vietnam and Indonesia, which are the rising countries in East Asia. It is expected that this phenomena is also common in Europe and the US. The SMEs will provide major employment all over the world. Even when SMEs are contributing so much to employment generation and exports, the policy support and capital supply are not so encouraging in countries like India. The way forward would be to create an environment of risk-taking by the government for providing a start-up capital to SMEs and to facilitate technology transfers and training in skill development. The Micro, Small and Medium Enterprises Act, 2006 is a legal framework for more capital investment in the SME sector. However, the implementation of the Act would need more precision and authority with different agencies.

CHAPTER 2

LITERATURE REVIEW

This part consists of the detailed literature review. Scouring journals, literature and other published materials through the web and library support. This section has also generated the list of the parameters which are considered effective in judging the level of intensity of branding in any given organization and the related sector. A complete list of referred journals and other published sources are mentioned in references section.

SMEs IN INDIA

With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small-scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. 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; labor intensive mode of production; employment generation; non-concentration 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. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives:

  • High contribution to domestic production
  • Significant export earnings
  • Low investment requirements
  • Operational flexibility
  • Location wise mobility
  • Low intensive imports
  • Capacities to develop appropriate indigenous technology
  • Import substitution
  • Contribution towards defense production
  • Technology - oriented industries
  • Competitiveness in domestic and export markets

At the same time one has to understand the limitations of SMEs, which are:

  • Low Capital base
  • Concentration of functions in one / two persons
  • Inadequate exposure to international environment
  • Inability to face impact of WTO regime
  • Inadequate contribution towards R & D
  • Lack of professionalism

In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost all-major sectors in the Indian industry such as:

  • Food Processing
  • Agricultural Inputs
  • Chemicals & Pharmaceuticals
  • Engineering; Electrical; Electronics
  • Electro-medical equipment
  • Textiles and Garments
  • Leather and leather goods
  • Meat products
  • Bio-engineering
  • Sports goods
  • Plastics products
  • Computer Software

As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of economy in India and abroad, particularly USA and European Union and enhanced competition from China and a few low cost centers of production from abroad many units have been facing a tough time. Those SMEs who have strong technological base, international business outlook, competitive spirit and willingness to restructure themselves shall withstand the present challenges and come out with shining colors to make their own contribution to the Indian economy.

Development of SME in India

SMEs can play a much bigger role in developing national economies, alleviating poverty, participating in the global economy and partnering with larger corporations. They do, however, need to be promoted. Such support requires commitments by and between governments, business and civil society.

The government contribution

Like bigger companies, SMEs require a favorable institutional framework. Most are overlooked by policy-makers and legislators, who tend to target larger corporations. SMEs often miss out on tax incentives or business subsidies. They suffer more than big companies from the large burden and cost of bureaucracy, 13 as few SMEs possess the necessary financial or human resources to deal with this.

Implement inclusive reforms

Governments need to create the necessary enabling frameworks and relax the burden of regulatory measures. They must simplify business registration procedures and paperwork to make them cheaper, simpler and speedier. Efforts are also required to tackle corruption. The World Bank report quoted below notes "reform expands the reach of regulation by bringing businesses and employees into the formal sector." The same report also concludes that the greater a country's ease of doing business, the greater the number of jobs created in the formal sector "because the benefits of being formal (such as easier access to credit and better utility services) often outweigh the costs (such as taxes)."

Provide financial and tax incentives

To encourage SMEs to join the formal sector, governments need to provide tax incentives for SMEs and subsidies similar to those available to large corporations or micro entrepreneurs, and to make provisions for start-up funds for SMEs.

Encourage friendly regulatory environments

Governments should promote public-private partnerships to attract venture capital funds and higher levels of investment, and put in place measures to create investor friendly environments. Big corporations and potential investors need guarantees that their investments and infrastructure are not going to be expropriated.

Involve business in identifying necessary reforms

Increasingly the business voice is being listened to in decisions aimed at effecting change: "In several countries, such as Mali and Mozambique, private businesses now participate in identifying the most needed reforms. The culture of bureaucrats telling bureaucrats what's good for business is disappearing."

Build capacity

Governments can contribute to capacity building through the provision of vocational training, by creating municipal-level agencies for SME start-up development and management, such as "Enterprise Advice Bureaus", and by encouraging SMEs to engage with large corporations. Procure more goods and services for the public sector from SMEs

In India reverse trade fairs are held where municipalities market their needs - such as meals for hospitals and schools, cleaning of public buildings - to prospective SMEs who can then bid for business.

The business contribution

Building supply chain capacity

The many large corporations that source their supplies from developing countries require reliable suppliers. Large corporations can help SMEs become more viable business partners by providing training in basic skills such as management, bookkeeping, business planning, marketing, distribution, and quality control. They can assist through technology transfers, direct investment in infrastructure, and the sharing of knowledge. This makes SMEs more competitive and facilitates access to credit. All of this can benefit the large corporations by creating more effective and inclusive supply chains.

Rationalizing procurement procedures

Many global companies use intermediaries to identify local suppliers. This can add an extra layer of cost to the operation, a financial outlay that rarely goes to the originator of the goods. It also adds time. By building relationships with SMEs, large corporations can cut out the middlemen. This helps drive down costs, hastens delivery and improves quality.

Strengthening local distribution networks

SMEs have local knowledge, understand domestic consumer demands, and have access to remote regions. By contracting local SMEs to sell and distribute their products in these markets, large corporations can help strengthen the sales capacity and income of local SMEs. At the same time, they can strengthen their own distribution networks and open up new markets for their products.

Improving standards

Global companies are increasingly asked about the operations of their suppliers, and thus can offer transparency along their supply chains. Large corporations can help their SME suppliers to comply with international standards such as ISO 14001. Such compliance can enable SMEs to compete in international markets while at the same time improving the overall quality of suppliers to large corporations.

Improving environmental performance

Collectively SMEs have considerable environmental impact. However, given the various challenges with which they are confronted, and the perception that their individual impact is not significant, it is unlikely that environmental concerns will figure high on their business agendas. By engaging with SMEs, assisting them with capacity building, and aiding them with compliance, particularly with environmental standards, large corporations can help SMEs integrate sustainable development thinking into their production processes and operations.

Providing access to financial services

SMEs require greater access to financial services and investment capital. Large corporations have little difficulty securing sizeable bank loans and private investments. At the same time, microfinance, consisting of very small loans, tends to benefit individual entrepreneurs. SMEs fall in between and often struggle to obtain credit and loans. Many financial institutions in the developed and the developing world are reluctant to fund SMEs because of perceived risk and high transaction costs.16 SMEs in the developing world are considered high-risk, as their managers are perceived as lacking managerial expertise, credit history, and/or tangible assets to secure loans. Thus loans to SMEs, when they are able to obtain them, tend to carry higher interest rates and shorter pay-back times. However things may be changing. Many large banks are now partnering with development agencies and NGOs to serve the SME market. In 2006 for example, Citigroup and the Netherlands Development Finance Company (FMO) partnered to launch a US$ 540 million risk sharing facility to provide loans to SMEs in lower-income countries. FMO pledged to guarantee up to 65% of the risk in loans originated by Citigroup through its worldwide network.

There are two institutions that have taken up cluster development projects besides the government initiatives explained in the previous sections. These are State Bank of India (SBI) and Small Industries Development Bank of India (SIDBI). State Bank of India started the program under a project called 'SBI Project Uptech' in the year 1988-89 when they felt the need for upgrading the businesses of small enterprises including their management processes, quality, technology and markets but within the framework of what was attainable by the units. The clusters were chosen based on the criteria that there was scope for improvement and that the bank had funded a substantial number of units in those clusters. A survey was then carried out to assess the current status of the industry and the scope for improvements. Subsequently 40-50 units were selected for the up gradation. A task force comprising of 4-5 bank officers was deputed along with externally identified technical consultants who helped the entrepreneurs to modernize their units. So far 6 such projects have been carried out where the funding for the deputed consultants was made over by the bank in the first 3 projects. Subsequently, a fee has been charged from the units themselves. The clusters selected have been Agro pump-set industry in Coimbatore, Diesel engines in Kolhapur, Huller rice mills in Palghat, Foundries in Agra, Glass units in Firozabad and Auto components in Pune. Each project takes 2-3 years to complete and that leads to demonstration effect on the other units to follow and change. Small Industries Development Bank of India (SIDBI) that came into being as a subsidiary of IDBI in the year 1991 took up the initiative of cluster development during the first year of its operations under the area of Promotion & Development. The stated objectives of the program are creation of awareness on new products, processes & technologies, skill up gradation, development of technology related common facilities for the cluster, provision of unit specific modernization packages and promotion of energy conservation & introduction of environment friendly technologies. SIDBI has so far selected 20 small industry clusters for technology up gradation. The product groups covered include locks, textile processing, bicycle & parts, scientific instruments, salt and salt based chemicals, power loom, machine tools, rubber products, sea food products, glassware, gem & jewelry, brass & bell metal, black smithy, leather & leather products, foundries and hand tools. The methodology adopted for the project is based on identification of technical experts who would then identify the units for technology up gradation and then help them prepare modernization plans which could then be used for funding from the state financial corporations and commercial banks. The expertise located was among the national and state level institutions such as National productivity council, Technical consultancy organizations (TCOs) and other voluntary organizations. SIDBI played an active role in coordinating the services of consultants and helping them to get in touch with the units. SIDBI also paid for the fee of the consultants. The outcome of the modernization program has been mixed with both successes and failures attributed to difficulties in getting finance for the units and due to unprofessional working of the selected institutions.

Performance of SME in India

Exports from SSI are healthy:

The small scale sector in India contributes directly to 35% of the total exports from the country. It is estimated that another 15% of the exports are indirectly contributed by this sector. Some of the major items of exports, e.g., 'Hosiery and Garments', 'Leather and leather products', 'Diamonds, Gems & Jewelry' have large clusters in more than one location and these contribute significantly to the exports. As per the statistics of 'Center for Monitoring of Indian Economy', total exports for the year 1995-96 were USD 31,828 million. Small scale sector has been contributing significantly to the export basket.

Select major product groups contribute the most: The five top product groups in the manufacturing sector that contribute the maximum to exports are given as under; It is in these five products that small and medium sector has shown its strong presence and the specialization that has developed in each of these areas has led to the formation of clusters. 'Gems & Jewelry' exports are largely contributed from Surat which is the biggest cluster in this area. There are similar other clusters in Tiruchirapalli and Jaipur that contribute a part of the exports in this product group. It may be estimated that almost all the exports in this category are generated from the above mentioned clusters. In textiles, there are major clusters of Panipat, Sanganer, Palli, Jodhpur, Jetpur, Surat, Mysore, Sambhalpur, Bhiwandi and Bhilwara which together contribute largely to the exports. It may be difficult to quantify their contribution but a rough estimate would reflect that about two thirds of the exports are from these clusters. Ready-made garments is an exclusive preserve of small scale industry and most of its exports are generated from the clusters that are based in Ahmedabad, Bangalore, Delhi and Mumbai. The hosiery based exports are produced mainly in the clusters of Tirupur, Ludhiana, Calcutta and Delhi. In the cotton hosiery, Tirupur alone contributes 80% of the country's exports. 'Leather and leather garments' is another major export earner which is mainly concentrated in Madras, Kanpur, Agra and Howrah. Handicrafts as a product group is the preserve of small scale units which have developed sectoral specialization in selected towns e.g. for brassware in Moradabad, handmade paper in Jaipur, hand made filigree in Cuttack and textile based handicrafts in Pipli of Orissa. Based upon the analysis given above, it is conservatively estimated that the SME clusters contribute to approximately 60 % of the Indian manufacturing exports totaling to a figure of USD 19,000 million. A further break-up was made on the basis of potential for exports from the sample of 138 clusters. The high potential items would mean better international market prospects and where the Indian firms are likely to enjoy comparative advantages due to skills, raw material resources or low labor costs etc. Based on this, 72 clusters have products which have high potential for exports, 47 are with medium potential and only 19 clusters seem to have low potential for exports. When 52.17% clusters are in the group of high potential items, there is a strong possibility to intervene through different means further in developing these clusters in order to increase the exports of the country. Thus, 86.23% of the clusters produce items that have medium to high export potential.

Productivity: The quantitative data for evaluation of productivity of Indian clusters is not readily available and the various research studies that have been carried out to compare the efficiency of small and large firms have proved inconclusive due to varying nature of products and diversity in factors that have a bearing on the efficiency and productivity. However the impression gained during discussions with experts is that productivity in Indian clusters leaves a high scope for improvement especially when compared to international standards. Some of the reasons that have been attributed to low productivity are the use of traditional tools, old techniques and outdated technology, poor labor productivity and bottlenecks of infrastructure in some of the product lines. Some of the clusters have developed innovative ways to increase the productivity, but the gains have not been substantially widespread.

Employment generation: It is well known that small sector is highly employment intensive which currently employs more than 14 million people. The total employment in small scale sector increased from 16.53 lakhs in 1972 to 36.66 lakhs in 1987-88 registering a cumulative growth rate of 5.1 percent per annum. The average employment per unit has however, come down from 12 to 6 in the same period. Data from second 'All India Survey of SSI' reveals that maximum employment is generated in the sectors of 'Food Products' (13.1%) followed by 'Non-metallic mineral products' (12.2%) and 'Metal products' (10.2%). The industry groups that have the maximum concentration of the clusters is 'Machinery and Parts except electrical', 'Cotton textiles' and 'Chemical and chemical products' as per the analysis in previous paragraphs which contribute to employment generation to the extent of 7.62%, 0.67 % and 8.57 % respectively of the total employment in the Small scale sector. Although it is difficult to estimate the quantum of actual employment generated by the clusters, yet it does help to provide an indicator to the fact that clusters of SMEs are highly employment intensive.

Effects of SME on Indian economy:

Since the late twentieth century, India has emerged as a dominant economic force in South Asia. Today the Indian economy has become the second fastest growing economy in the world. However, several development issues still have to be resolved if the country is to emerge as the true leader of many a developing nation. Poverty is one of the most distressing problems facing the Indian economy. The poverty line, according to the Government of India, is defined as approximately USD 9.00-13.00 per person per month. About 75% of the Indian population survives on less than USD 1.00 per day. The Indian government is committed to the United Nation's Millennium Development Goal of poverty reduction by 2015. In fact, eradication of poverty has long been an integral objective of the Indian Plan process. Since the Fifth Five Year Plan (1974-79) the government has made poverty reduction a primary goal of the Indian development process. One of the major objectives of the Sixth Five Year Plan, which commenced in 1980, was to undertake measures for progressive reduction in the incidence of poverty and unemployment. The Planning Commission in the Sixth Plan Document (1980-85) realized that "it will not be realistic to rely solely on the growth process to find a solution to this problem." It therefore suggested specific policy measures to influence the composition of output in favor of mass consumption goods in order to stimulate the labor intensive rural sector and small-scale industries. To this effect, the Sixth Plan launched the Integrated Rural Development Programme (IRDP) that aimed at distribution of several income earning assets among the poorest households in order to bring them above the poverty line. The National Rural Employment Programme (NREP) was also introduced to provide wage employment to the rural population who did not possess adequate income earning assets. Over the years the Plan process continued to upgrade and introduce better employment generation cum poverty reduction schemes. The Eleventh Plan (2007-2012) intends to generate 70 million new work opportunities and reduce educated unemployment to below 5%. The Plan document also proposes to raise the real wage rate of unskilled workers by 20% and reduce the headcount ratio of consumption poverty by 10%.

Despite the various poverty alleviation schemes, poverty reduction targets are yet to be realized in India. Widespread poverty has generated income disparity in the Indian social structure. In a socialist state each member of society is entitled to equal opportunities in occupation, education, social security, and others. Hence it is imperative for "Socialist" India to reduce income inequality and make grassroots access to employment opportunities the means by which the quality of life can be improved. One important cause for this income inequality is uneven industrialization across regions. The resultant regional disparities and income inequalities has led to conflict, which needs to be resolved if overall development is to be achieved. Therefore the challenge for India is to create employment opportunities at the grassroots level, ensure sustainable income generation schemes, and reduce spatial inequality and conflict. According to conventional wisdom on development, it is industrialization that brings about a plethora of opportunities for generating employment and income. The benefits of industrialization are characterized by both "spillover" and "cascading" effects. In India, rapid industrialization has proved to be a key constituent in economic growth and development. However, there exists a debate on whether to rely on large corporations or small and medium enterprises (SME) as engines of growth and development. With globalization, the large corporations, with access to global markets, are increasingly having the option to shift to greener pastures in the international arena. They use capital-intensive technologies—causing widespread retrenchment and lay-offs. At the same time, these economic entities are increasingly generating a demand for skilled personnel. To gain competitive advantage, most of them, reluctant to put all their eggs in one basket, are reducing dependence on any particular country or region. Trans-national corporations are diversifying their operations to more than one country to reduce country risk and leverage the cross-subsidy advantage. Thus on a closer look, it appears that the large corporations are actually situated far away from the core of the country. The possible pathway for generating employment and income among the grassroots lies in promoting the innumerable SMEs who have the ability to achieve this objective and better the socio-economic health of the country. India has to draw inspiration from the experiences of Japan, China, EU and the ASEAN tigers who had taken up SME development as a means of achieving the goals of sustainable development.

There is no doubt that the government is motivated with good intentions and is thus aiming to spend a huge amount of Rs 1,00,000 crores for developing infrastructure in roads, ports etc. which pose a serious handicap to growth. Besides, the aim of other measures is to boost exports and help sectors like textiles and small and medium industries which are labor-intensive and generate more employment. But the success of the fiscal package will depend on the quality and speed of implementation so that delays in implementation may not aggravate the economic recession to move into the dangerous zone of depression. One of the major stumbling blocks which may neutralize the positive effects of large expenditure on infrastructure is corruption. In case corruption is not simultaneously curbed to reasonably low levels, it may delay and reduce the much-desired effect in enlarging infrastructure. It may result in the Indian infrastructure network being geared into a temporary employment generation programme with much smaller impact on the economy as against the intended objectives. For reducing corruption, two things need to be ensured—transparency and avoidance of arbitrariness. By cutting arbitrariness in decision-making, corruption can be curbed to a great extent. Transparency instills confidence in the government. Secondly, there is a need to orient the fiscal package towards inclusive growth so that the weaker sections benefit. This would require special emphasis, for instance, on rural infrastructure—rural roads and housing, instead of only highways and urban housing. Similarly, a much larger expenditure on primary and secondary education, health and sanitation can also result in a more inclusive growth process. Thirdly, the chances of our exports increasing are very limited unless the G-3 economies, namely, the US, EU and Japan, are able to bring about a positive shift in their growth in the near future for which the predictions at present are not very optimistic. The World Bank has projected the world output to grow at 0.9 per cent in 2009 as against 2.5 per cent in 2008. If these predictions come out to be true, there is a fear of the recession in 2008 turning into a depression in 2009. But the Indian economy is predicted to grow at about seven per cent in 2008 and about six per cent in 2009. Since the G-3 economies of the US, EU and Japan are affected seriously by the present recession; the chances of Indian exports increasing in these countries appear to be very dim. The natural conclusion is that the Indian economy should concentrate on developing the domestic market. Thus, inward looking policies should be preferred as against the outward looking approach of integrating the Indian economy to the world economy is followed during the last decade. It is heartening that the Prime Minister intends to insulate the Indian economy from the world economy. Fourthly, although there is a demand for a much larger Fiscal Package to bail out the Indian economy, there are serious limitations faced by the government because it has to fight terrorism on the one hand and financial meltdown on the other. The government has to undertake a huge expenditure at the Central as well as State levels to enhance security. It is difficult to precisely estimate this expenditure at this stage since it entails larger recruitment of police and paramilitary forces along with equipping them with the most up to date weapons. But there is a massive increase in expenditure to combat terrorism, along with a fiscal package to boost the Indian economy; there is also likely to be shortfall in tax revenues. Consequently, the Budget deficit is bound to increase. The government will not be able to reduce the fiscal deficit to 2.5 per cent of GDP, it may increase to three to 3.5 per cent during 2008-09. But this is inevitable and the target of reducing it according to the schedule prescribed by the Fiscal Responsibility and Budget Management Act, has to be postponed. But the Finance Minister has not agreed to the abolition of the FRBM Act since it would be imprudent to relax or abrogate the FRBM. To quote Dr Ishar Ahluwalia: "The FRBM is like a chastity belt, but don't loosen it without a better alternative."

RESEARCH METHODOLOGY:

Though Indian technology based SMEs are showing a positive growth over the years, presently a major portion of industry is performing as a commodity. In a competitive field success of a product it depends largely on its top of the mind recall by its target audience. Any movement as a commodity normally creates a situation where a product category may lose its identity in the midst of clutter of brands. In this scenario, it is important to study branding opportunities of technology-based small to medium-sized enterprises (SMEs) as these players are competing in the global marketplace. Present global competition has made it mandatory for manufacturers of this industry to come out of their cocoon of conservative business procedures and transform themselves as per the need of changing market's, tastes and preferences. Branding can be crucial to a firm's long-term success. The branding process is especially important for SMEs that wish to become players outside their domicile. It is furthermore important to determine which among many variables and processes affect success in branding. The study is an attempt to understand the need for branding and why the SME's need to specifically consider it more seriously. Typically, companies which operate in markets of high clusters (large number of buyers and sellers) and with very few product differentiators, the need for branding becomes even more imperative. In technology companies the need is all the more of a requirement because they usually work in markets where the scenario is quite similar to the one mentioned above. It, therefore, tries to look at the market from the context of:

  1. Current situation analysis
  2. Need for branding
  3. Limitations to branding
  4. A workable model for SME's to apply for integrating branding as a road map to success

There have been a few research studies carried out on the industry clusters in India. The available studies are not sufficient to draw any general conclusions about the clusters. Also, there does not seem to have been any research study carried out that could provide a macro view about the clusters in India. The present study makes the first such attempt.

This project focuses on SMEs' manufacturing sector only. Although traditional cottage industries in rural areas are important in developing countries, such related analysis should come from the viewpoint of social policies and rural development. Since this project tries to find effective ways to promote industrialization, traditional cottage industries are excluded.

Data were collected through desk research of online resources, research papers, conference documents, and other publications. In addition, efforts were coordinated with ongoing initiatives of other international organizations such as the IADB and OECD. The data have been compiled from three types of sources: published documents and reports, the World Wide Web, and statistical agencies and World Bank Group country offices. All data sources are listed at the end of this note, and Web links are provided where possible. The main database provides only the most recent data point for each economy, since data from many of the sources are not comparable over time despite being published annually. We also provide historical data as a separate compilation. The database will be replaced by the new World Bank/IFC initiative to collect business registration data through secondary data research.

The following methodology has therefore been adopted for the study. The information collection has been based on;

Secondary Data Survey :

Secondary data is data which has been collected by individuals or agencies for purposes other than those of our particular research study. For example, if a government department has conducted a survey of, say, family food expenditures, then a food manufacturer might use this data in the organisation's evaluations of the total potential market for a new product. Similarly, statistics prepared by a ministry on agricultural production will prove useful to a whole host of people and organisations, including those marketing agricultural supplies. No marketing research study should be undertaken without a prior search of secondary sources (also termed desk research). There are several grounds for making such a bold statement.

Secondary data may be available which is entirely appropriate and wholly adequate to draw conclusions and answer the question or solve the problem. Sometimes primary data collection simply is not necessary. It is far cheaper to collect secondary data than to obtain primary data. For the same level of research budget a thorough examination of secondary sources can yield a great deal more information than can be had through a primary data collection exercise. The time involved in searching secondary sources is much less than that needed to complete primary data collection.

Secondary sources of information can yield more accurate data than that obtained through primary research. This is not always true but where a government or international agency has undertaken a large scale survey, or even a census, this is likely to yield far more accurate results than custom designed and executed surveys when these are based on relatively small sample sizes. It should not be forgotten that secondary data can play a substantial role in the exploratory phase of the research when the task at hand is to define the research problem and to generate hypotheses. The assembly and analysis of secondary data almost invariably improves the researcher's understanding of the marketing problem, the various lines of inquiry that could or should be followed and the alternative courses of action which might be pursued. Secondary sources help define the population. Secondary data can be extremely useful both in defining the population and in structuring the sample to be taken. For instance, government statistics on a country's agriculture will help decide how to stratify a sample and, once sample estimates have been calculated, these can be used to project those estimates to the population.

The secondary data wherever available has been used to supplement the primary data It may, however be important to mention that in India a large number of smaller of the SSI units are not registered; do not maintain financial records and have no access to the financial and other support services provided by the government and its institutions. Sectoral data has been used : There are some published reports of the Government on the statistics of Small Scale Industries and data pertaining to SMEs. This data, available on sectoral basis has been used in the absence of data on clusters as no detailed study on clusters has been carried out so far.

SMEs in India mentioned above were assessed from four viewpoints: innovativeness, market expansion, competitiveness, and networking. Innovativeness includes not only product and process innovation but also as an approach to access new business opportunity. Market expansion covers both domestic and export markets. Competitiveness is considered as a relative position of an SME in the production process by taking into account quality, price, and delivery time. Networking includes subcontracting between LEs and SMEs, collaboration among SMEs, and linkages with governments and other support agencies. The activation of agglomeration effects by promoting coordination among SMEs is becoming a major strategy of SME policies in developed countries.

Need for Study

Though Indian technology based SMEs are showing a positive growth over the years, presently a major portion of industry is performing as a commodity. In a competitive field success of a product it depends largely on its top of the mind recall by its target audience. Any movement as a commodity normally creates a situation where a product category may lose its identity in the midst of clutter of brands. In this scenario, it is important to study branding opportunities of technology-based small to medium-sized enterprises (SMEs) as these players are competing in the global marketplace. Present global competition has made it mandatory for manufacturers of this industry to come out of their cocoon of conservative business procedures and transform themselves as per the need of changing market's, tastes and preferences. Branding can be crucial to a firm's long-term success. The branding process is especially important for SMEs that wish to become players outside their domicile. It is furthermore important to determine which among many variables and processes affect success in branding.

The study is an attempt to understand the need for branding and why the SME's need to specifically consider it more seriously. Typically, companies which operate in markets of high clusters (large number of buyers and sellers) and with very few product differentiators, the need for branding becomes even more imperative. In technology companies the need is all the more of a requirement because they usually work in markets where the scenario is quite similar to the one mentioned above. It, therefore, tries to look at the market from the context of:

  1. Current situation analysis
  2. Need for branding
  3. Limitations to branding
  4. A workable model for SME's to apply for integrating branding as a road map to success

Objective of the Study

The study aims to achieve the following objectives:

Building the Brand:

  • Examining the buyers' and manufacturers' mindset and readiness stage.
  • Analyzing problems relating to branding
  • Identifying potential items for branding

Communicating the Brand:

  • Exploring role of distribution behind branding.
  • Identifying the scope of communications to incorporate branding strategy
  • Analyzing the customer value proposition and loyalty of the relationship

Nurturing the Brand:

  • Formulation of specific guidelines for brand building
  • Strategic, tactical, and operational elements of brand building

Terms of Reference

Conduct literature review on global best practices in SME Branding to understand various issues faced by SMEs at the time of brand management. Existing branding strategies and underline grey areas are to be identified to chart future course of actions.

  1. Exploring secondary sources to study five important sectors of technology based Indian SME. Objective is to understand their present practices in connection of Branding. Findings to be compared with global best practices to draw strategic road map for branding.
  2. Develop parameters to identify two most important sectors of technology based Indian SMEs on which detail work will be done in the context of the study. Parameters are to be selected in line with global best practices to maintain uniformity with global best practices.
  3. Conduct cross mapping of parameters with sectors to zero down on two selected sectors. Two most important sectors will be selected after mapping parameters with primarily selected five sectors to figure out two most potential and strategic sectors for branding.
  4. Identification and study of primary sources for validation of point 1& 2. Primary work will be done after taking samples from two selected sectors and an in-depth study will be conducted to validate point 1 & 2.
  5. Sector wise classifications and analysis will be done under different parameters to evaluate Industry readiness stage in terms of branding practices.
  6. Formulating sector specific brand building roadmap after considering strategic, tactical and operational elements.

RESEARCH ANALYSIS

Impact Of SME in Indian Economy

With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for smallscale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. 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. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives:

  • High contribution to domestic production
  • Significant export earnings
  • Low investment requirements
  • Operational flexibility
  • Location wise mobility
  • Low intensive imports
  • Capacities to develop appropriate indigenous technology
  • Import substitution
  • Contribution towards defense production
  • Technology - oriented industries
  • Competitiveness in domestic and export markets

At the same time one has to understand the limitations of SMEs, which are:

  • Low Capital base
  • Concentration of functions in one / two persons
  • Inadequate exposure to international environment
  • Inability to face impact of WTO regime
  • Inadequate contribution towards R & D
  • Lack of professionalism

In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. 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
  • Computer Software, etc.

As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of economy in India and abroad, particularly USA and European Union and enhanced competition from China and a few low cost centers of production from abroad many units have been facing a tough time. Those SMEs who have strong technological base, international business outlook, competitive spirit and willingness to restructure themselves shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy.

SMEs In India

Since its inception in May 1960, (and even earlier as a part of 'Bombay State') India has been in the forefront of industrialization. The state has always followed progressive industrial policies and industry - friendly measures. Through a network of District Industries Centre (DICs), it offers maximum guidance and assistance to SMEs. Many SMEs promoted by local entrepreneurs as also by NRIs and foreigners have come up in India covering a broad spectrum of industrial activity. The quality of products of SMEs from India is high. Some of them have acquired technology from abroad. Adequate budget is provided for R & D operations. Many units are promoted by techno-entrepreneurs. In view of the objective of the study, it was considered necessary to undertake a survey of SMEs from major parts of India covering following sectors: Engineering; Electricals; Food Processing; Chemicals and Pharmaceuticals. A total of 40 units in various sectors were contacted and finally 23 units were shortlisted for inclusion in the study report. While making a final choice of the units from target sectors, following factors were considered.

  1. Set up of the unit and management
  2. Technology status and product profile
  3. Turnover & exports
  4. Scientific manpower
  5. Technology / Process / Product on offer

Review of Industrial sectors considered for SMEs in India

The industries in Chemical, Engineering, Electrical, Food Processing and Pharmaceutical sector were contacted during the field survey. A broad outline of these industrial sectors and the list of industries, which were considered for detailed study, are presented in the following sections.

ELECTRICAL INDUSTRY

The Indian Electrical Industry has a history of more than 100 years advancing through technical collaborations, joint ventures and indigenous research and development. Today, the industry has a capacity of manufacturing most of the equipment. The industry largely depends on the power programme, industrial requirements, urban and rural demand. India enjoys a competitive advantage in electrical sector viz. electrical home appliances, electrical motors, transformers, industrial equipment, switch-gears, circuit breakers, pollution control equipment, Power Capacitors, Lighting fixtures and lamps, etc. In India, the electrical industry will continue to remain a large and crucial industry segment catering to vital needs of industry & household (According to industry review of Indian Electrical Equipment Manufacturers Association [IEEMA]).

ENGINEERING INDUSTRY

The engineering industry has been titled the 'engines of growth'. The tremendous impact and influence it has on industrialization and consequently the economy can be clearly seen from the economic scenario the world over. It has catapulted many nations like Japan, Germany, USA, UK, etc into frontline industrial nations within a very short time. India too has found this industry very responsive and eager to take up any stimulus to growth. Importance of engineering industry in India can be gauged from the fact that it employs over 3 million people and accounts for nearly one-third each of productive capital, value added and output in the organized sector that contributes substantially to both the production and exports of engineering goods.

ENGINEERING INDUSTRY IN INDIA

India occupies an important place in both production as well as exports of engineering goods from the country. Engineering industry in the state is highly diversified and produces a large range of parts to industrial machinery to industrial castings and forging. The state has a fairly large number of firms in the organized sector possessing world class manufacturing capabilities and cost structures, besides a vast number of small and medium engineering firms. The major engineering items of production and exports in India are textile mill machinery, machinery for sugar, cement, and chemical plants, food processing machinery, construction machinery, tractors for agriculture purposes, electric power machinery, transmission line towers and accessories, fabricated steel like freight containers, automobiles, steel forging, steel castings, bright steel bars, stainless steel product, auto parts, cutting tools and files, internal combustion (IC) engines and compressors, machine tools, mechanical pumps and ship and ship buildings. Total exports of engineering industry in India have been estimated at US$ 900 million during 1996-97. This accounts for over 21 per cent of total export of engineering products in the same year. However, the products which have high potential of exports from India include industrial castings forging, complete vehicles including two/three wheelers automobile parts, machine tools, industrial machinery, steel tubes, diesel engines, pumps, valves, compressors, seamless tubes and switch gears. These products have been identified considering current and future production technology scenario and exports. The major competing countries for most of the engineering products exported from the state are Japan, South Korea, Taiwan and China besides West European and North American countries. In overall terms, the export outlook for engineering products is bright. The shift in favour of value added items is getting pronounced from the fact that export growth of these items is high against negative growth in respect of prime iron and steel.

FOOD PROCESSING INDUSTRY

The Food Processing Industry is an important sector of the Indian economy. The food processing industry sector, which leap-frogged during the period 1990-95 has slowed its pace in the past half decade as, the manufacturers have realized that the consumer is yet to familiarize himself with the products available in the market. The food industry contributes about 18% of India's manufacturing output and around 5% of total industrial investment. The estimated turnover of this highly heterogeneous food and beverage industry exceeds Rs. 570 billion. Niche segments comprising packaged and branded food products have recently witnessed rapid growth accompanied by intense competition. Nearly 52% of the Indian household budget is spent on food items and the share of processed food entering the market is expected to rise rapidly. Both in terms of foreign investment and number of joint ventures / foreign collaborations, the consumer food segment has top priority. By last year, foreign investment of Rs. 20,870 Million had been proposed. Deep sea fishing and aquaculture, milk and milk products, meat and poultry segments attracted attention of foreign investors, interest is also growing in fruit and vegetables and grain / cereal based products. India has been one of the major producers of fruits and vegetables, milk and meat products. India has 10 to 15% production share of agro produce related to processed industry. Major units in

  1. Fruit and Vegetables India b. Bakery Products
  2. Dairy Products
  3. Cereals
  4. Meat Products
  5. Fish Products

PHARMACEUTICALS INDUSTRY

India's pharmaceutical industry is highly fragmented with over 16,000 licensed units and 250 units in the organized sector. The causes of fragmentation are historic. It was a highly controlled industry. The price of most of the drugs was regulated. The investments were not only low but also thinly spread out over a large number of companies. However, in the changing market, there is likelihood of major changes in years to come. Fragmented industry cannot continue for long and industry is sure to consolidate with acquisitions and mergers. Indian pharmaceutical industry has been nurtured to a large extent by Indian patent laws, which recognized only process patents. Though India could build a strong base and infrastructure for production of medicines, which is evident from the impressive growth in production of bulk drugs and formulations, it never cared to spend on Research and development (R & D). Expenditure on R & D in India is still less than 3 per cent of the industry's turnover. It may be seen that the Indian Pharmaceutical Industry has been growing at a healthy 16.7 per cent per annum over the last one decade. India is able to meet over 70 per cent of its requirement of bulk drugs and 95 per cent of formulations. The industry is well represented in almost all-therapeutic groups. The industry in India is in a highly competitive market environment. It is also one of those industries where foreign investment is very high. A number of Transnational Corporation (TNCs) have plants in India. The country has strong advantage because of availability of relatively low cost skilled labour and a large domestic market. So far as the future of this industry is concerned, planning commission expects this industry to grow at 12 per cent per annum. Exports of drugs and pharmaceuticals from the country are rising very fast. They have increased from Rs. 2256.6 crores in 1994-95 to Rs. 3177.7 crores in 1995-96 to record Rs. 4090.3 crores in 1996-97, registering an impressive annual growth rate of 34.4 per cent. More that 20 plants in India have USFDA validation that is considered the strictest in the industry. Many companies have also been upgrading their facilities to match internationally recognized standards such as GMP requirements and ISO 9002 certifications.

PHARMACEUTICALS INDUSTRY IN INDIA

India is a major center for both production as well as exports of basic drugs and pharmaceuticals in the country. The state accounts for about 40 percent of all India production of bulk drugs and formulations and its share in all India exports of it, is nearly 33 percent. According to the business executives in pharmaceutical industry in India, their exports may not receive a setback on account of IPR but instead of the same will have better growth, as 75 percent of the drugs will be off the patent in value. New molecules can be manufactured competitively because of availability of relatively low cost technical manpower in the country. It envisages a scenario where the West will come to East to buy the new molecules. India and Gujarat will continue to dominate this industry with more than half the nation's output and value addition. The India Government has taken the right steps by introducing stringent pollution control laws.

CHEMICAL INDUSTRY

India enjoys a competitive advantage in certain chemicals industries viz. Agro Chemicals, Fertilizes, Pesticides, Pharmaceuticals, Dyes, Plastic Processing specially chemicals and paints. In India chemical industry will continue to remain a large and a crucial industry segment catering to vital needs of agriculture, household consumption, industrial uses and other strategic and defense requirements. This means that chemicals are inevitable in many respects, but at the same time chemicals are hazardous also in many respects. 5. Suparna Chemicals Ltd., Mumbai SME Role Critical For Indian Economy

The Union Government has decided to implement a National Strategy for Manufacturing, drawn up by the National Manufacturing Competitiveness Council (NMCC), which will enable SMEs to achieve competitiveness. The Strategy has identified various priority areas for action viz., textiles & garments, food processing, IT hardware & electronics, leather & footwear, automobiles & auto-components and chemicals & petrochemicals and pharma sectors.

The Cluster Concept clearly seems to be India's answer to global competition. Last year the government had proposed to increase financial assistance to existing clusters of Micro, Small and Medium Enterprises (MSME) up to as high as 80 per cent of their financial requirements under the 11th Plan. This apart, the government proposes to build a pool of consultants under its National Manufacturing Competitiveness Programme to enable MSMEs to become competitive. The consultants would be deployed to a cluster of 8-10 companies for about one year to a year-and-a-half, with their cost being borne by the government.

In the focus on SMEs, the government is supported by the United Nations Industrial Development Organisation (UNIDO), which has proposed a five-year country strategy for India. Cluster development is one integral part of this strategy along with programmes aimed at upgrading technological capability and building social capital in the country's industrial sector. UNIDO is also exploring a new experiment of Twinning of Clusters as is seen in the India-Italy Cluster Development Cooperation. In addition, it is exploring new applications of Industrial cluster-based approaches focusing on Corporate Social Responsibility and poverty alleviation in micro enterprises.

Planning Commission Supports SMEs

The growing importance of Small and Medium Enterprises (SME) has been taken note of by the Planning Commission too. Its deputy chairman, Montek Singh Ahluwalia, said SME hold the key to the country's industrial progress, at a function organized by the Indian Merchants Chamber (IMC) to recognize the mettle of SMEs for the Ramkrishna Bajaj Award 2007.

It is strange that an award for SME was instituted three years ago and it is only now for the first time that there is a recipient. The very acknowledgement of this sector shows that the there is a dawning of realisation of the structural changes that have taken place, said the deputy chairman.

Clearly, SMEs have emerged as a vibrant tier of the economy as they have already taken over as key contributors to the country's GDP. Precisely for this reason, the Planning Commission is looking into the existing policies and considering the necessary changes required to make the SMEs role more proactive to help achieve greater economic goals.

The Commission is of the firm opinion that in the drastically changing economic scenario, SMEs are the future. They are likely to play a pivotal role in immediate future, as they can carve out unit growth model for the country. The time has come to change corporate perspective and not to get swayed by financial highs.

Open Your Purses to the Smallest.

Regretting that Micro and Small Enterprises, which contribute about 40 per cent to the country's exports, remain neglected and unnoticed by lending institutions, the Union Finance Minister P Chidambaram urged bankers to 'open their purses' to help this fast-growing sector.

At a function to release one lakh Credit Guarantee Approvals, organised by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), in Bangalore last month, Chidambaram said the sector was only second to agriculture and was growing at a 'furious pace.' However, a meagre 22 lakh MSE entrepreneurs were registered as against 1.30 crore others who went untouched by lending institutions.

"A large number of young men and women are no longer looking for jobs. They are willing to take risks, become entrepreneurs and create wealth. More importantly, they are willing to create employment and share their wealth with their employees. Bankers should never ignore this class," he emphasized.

Accordingly, a radical change is being witnessed in the mindset of Young India and that the credit and lending institutions should adapt to meet the growing demands. "You (bankers) are too conservative to take risk. For every entrepreneur willing to take risk, there must be a banker at the other side of the table willing to do the same," he added.

The Finance Minister was keen that the CGTMSE should strive to achieve a bigger target and cover 50,000 more MSE entrepreneurs by year-end.

CGTMSE had a corpus fund of Rs 1,584 crore, of which Rs 1,257 crore was contributed by the Centre. "We are committed to increase this corpus to Rs 2,500 crore. As and when CGTMSE requires additional capital, we will give it immediately. But, we should ensure timely credit to smallest of small entrepreneur," he asserted.

SME Summit on Exports

A Summit to bridge the gap between the SMEs and Government policies was recently held in the Capital. Its aim: to help SMEs grow to their full potential by not only focusing on the policies initiated by the government but using these to the maximum for their benefit.

Inaugurating the Summit, the Minister of State for Industry, Ashwani Kumar was happy that a proactive step in the SME's direction had been taken and that the Summit would provide a platform to them to explore their potential. The SMEs Summit 2008 was organized by the Birla Institute of Management Technology (BIMTECH), Greater Noida.

Unhesitatingly, the SME sector is being termed as the backbone of the Indian economy. This sector accounts for 95% of the industrial units, is contributing around 40% of the value addition in the manufacturing sector, offers nearly 80% of the manufacturing employment and enjoys around 35% of exports. Over 32 lakhs units are spread over the country, producing about 7,500 items and providing jobs to more than 178 lakh persons.

The Institute is of the firm opinion that there was a need to boost the SMEs sector as it had a tremendous potential. In fact, the SMEs capability to compete in the International market is reflected in it having a 35 per cent share in national exports. However, it is being held back from achieving its full potential because of various problems, including lack of information and awareness. Undoubtedly, the SMEs, need international exposure and outlook, which is vital for successful market penetration in global markets. A flexible combination of government policies and market freedom, together with a mix of macro and micro policies are necessary for the creation of vibrant and dynamic SMEs in the export sector.

According to Dr. H.P. Kumar, CMD, NSIC, "India's SME sector has the potential of becoming an important sourcing base for MNCs. But, this requires a national strategy for the promotion of exports from this sector, including greater coordination among different wings of the government, identification of sub-sectors with high export potential and adequate infrastructural support."

The Executive, Director, ITPO, Rajiv Yadav said, "It is true that SME accounts 35% of country's total exports. However, exports from the SME sector are just 10% of its total output, which is meagre compared to figures in other competing countries. There is also a lack of diversification in the SME export basket, with just five items garments, leather goods, basic chemicals, marine and processed foods and engineering products forming 3/4 of the total exports from the sector."

Kishore Balaji, Microsoft India Ltd. said, "Unfortunately, due to a combination of circumstances, the last few years have seen this industry losing its path. It has also had to face the onslaught of globalization, when in 2003 the import tariffs and quantitative restrictions were withdrawn as per WTO commitments. All of us know very well that the appreciation of the rupee has also hit them very badly. But again how many SMEs know that sops have been announced by the Indian Government in various sectors."

The Summit dealt with issues such as Governmental infrastructure and institutional framework, environmental and social issues, sector specific issues and financial issues from SME viewpoint. It also brought out key aspects on how best to increase the capability of Indian SMEs and provide the right information to move ahead in the global arena.

Small and Medium Enterprises (SMEs)—The government has announced a guarantee cover of 50 per cent for loans between Rs 50 lakhs to Rs 1 crore for SMEs. The lockin period for loans covered under the existing schemes will be reduced from 24 months to 18 months to encourage banks to cover more loans under the scheme. Besides, the government will instruct state-owned companies to ensure prompt payment of bills of SMEs so that they do not suffer on account of delay in the payment of their bills.

In short, the fiscal package is aimed at boosting growth in exports, real estate, auto, textiles and small and medium enterprises. The aim is to encourage growth and boost employment which have been threatened by the recession in the world economy, more especially in the United States.

Just within a month, the government announced another package to bail out the Indian economy. Dr Montek Singh Ahluwalia said: "We should expect, from all global projections that the next year (2009) is going to be a very difficult year for the global economy."

The purpose of the new package announced on January 1, 2009 was to minimise the pain. With this end in view, the new package included the following measures:-

  1. To boost investment and spending to revive growth, the RBI cut the repo rate, which it charges on short-term loans to banks from 6.5 per cent to 5.5 per cent and also reduced the Cash Reserve Ratio (CRR)—the share of deposits which has to be kept with the RBI from 5.5 per cent to five per cent.
  2. To revive exports which has resulted in a contraction of industrial output, drawback benefits have been enhanced for some exporters. Export-Import Bank also gets Rs. 5000 crores as credit from the RBI.
  3. To help the realty sector, realty companies have been allowed to borrow from overseas to develop "integrated townships".
  4. To boost infrastructure, the India Infrastructure Finance Company Ltd. (IIFCL) has been allowed to raise Rs 30,000 crores from tax-free bonds. Besides, Non-Banking Finance Companies (NBFCs) need no government approval to borrow from overseas for infrastructure projects. This will sustain the growth momentum on infrastructure.
  5. To make more funds available, ceiling on foreign institutional investments (FIIs) in corporate bonds has been increased to $ 15 billion from $ 6 billion. The purpose is to seek much bigger FII investment.
  6. To stimulate the Commercial Vehicles (CVs) sector, depreciation benefit on commercial vehicles has been increased form 15 per cent to 50 per cent on purchases. Besides, the States will get one-time funding from the Centre to buy buses for urban transport. In addition, public sector banks would provide finance firms funds for commercial vehicles. It is hoped that Tata Motors and Ashok Leyland's sales would revive.

Recommendations:

To be filled later

Conclusion

To be filled later

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