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Features

Role of SMEs Sector in the Emerging Indian Economy

Shaili Vadera and Nimisha Kulshreshtha
Dec 2010

The small and medium enterprises today constitute a very important segment of the Indian economy. The development of this sector came about primarily due to the vision of our late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant sector of the economy. Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and over 40% of the total exports from the country. In terms of value added this sector accounts for about 40% of the value added in the manufacturing sector. The sector's contribution to employment is second highest next to agriculture.

The SMEs sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 6.79 million units in the year 1990-91 to over 13 million in the year 2007-08. When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the SMEs Essector.

The opportunities of growth in the SMEs sector are enormous due to the following factors:

1. Less Capital Intensive

2. Extensive Promotion & Support by Government

3. Reservation for Exclusive Manufacture by small scale sector

4. Project Profiles

5. Funding - Finance & Subsidies

6. Machinery Procurement

7. Raw Material Procurement

8. Manpower Training

9. Technical & Managerial skills

10. Tooling & Testing support

11. Reservation for Exclusive Purchase by Government

12. Export Promotion

13. Growth in demand in the domestic market size due to overall economic growth

14. Increasing Export Potential for Indian products

15. Growth in Requirements for ancillary units due to the increase in number of green-field units coming up in the large scale sector.

Great Potential

SMEs sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification. By its less capital intensive and high labour absorption nature, SMEs sector has made significant contributions towards employment generation and rural industrialisation. SMEs sector in India creates largest employment opportunities for the Indian populace, next only to agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the SMEs sector generates employment for four persons.

Statistics from Ministry of Micro, Small & Medium Enterprises also reflect the growth trajectory of SSI industry in India. The number of SSI units has increased from 6.79 million in 1990-91 to 13.37 million in 2007-08 providing employment to more than 32 million people in India.

SMEs Sector plays a major role in India's present export performance. 45%-50% of the Indian Exports is contributed by the sector. Direct exports from the sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. The exports from SMEs sector have shown excellent growth rates in this decade. The product groups which dominate the exports from SMEs sector include sports goods, readymade garments, woollen garments and knitwear, plastic products, processed food and leather products. The SMEs sector is reorienting its export strategy towards the new trade regime being ushered in by the WTO.

Promising Outlook

This sector is ideally suited to build on the strengths of the traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. This is the opportune time to set up projects in the sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and the demand structures. The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units. The promotional and protective policies of the Government of India have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bottleneck of the sector has been the inadequacies in capital, technology and marketing. The process of liberalisation coupled with Government support will therefore, attract the infusion of these in this sector.

The capability of Indian MSME products to compete in international markets is reflected in its share of about 34% in national exports. In case of items like readymade garments, leather goods, processed foods, engineering items, the performance has been commendable both in terms of value and their share within the MSME sector while in some cases like sports goods they account for 100% share to the total exports of the sector. In view of this, export promotion from the small scale sector has been accorded high priority in India's export promotion strategy which includes simplification of procedures, incentives for higher production of exports, preferential treatments to MSMEs in the market development fund, simplification of duty drawback rules, etc. Products of MSME exporters are displayed in international exhibitions free of cost under SIDO Umbrella abroad.

Need of Scientific Packaging

Role of packaging for exports has gained much significance in view of trends in the world markets. The need for better and scientific packaging for exports from small sector was recognised long back. With a view to acquaint MSME Exporters of the latest Packaging standards, techniques etc. training programmes on packaging for exports are organised in various parts of the country. These programmes are organised in association with Indian Institute of Packaging which has requisite expertise on the subject. Basic objective of these programmes is to generate the much needed consciousness in the industry and to educate the entrepreneurs about the scientific techniques of packaging. Technical & managerial consultancy services to the MSME manufacturers/exporters is also provided through a network of field offices of this office so as to ensure higher level of production and generation of higher exports.

Motivation

In order to encourage the small scale units for producing Quality goods, National Awards for Quality Products are given to the outstanding small scale units, who have made significant contribution for improving quality of their products. The scheme is being operated since 1986. Winners of National Awards get a Trophy, a Certificate and a Cash Prize. National Awards encourage Small Scale Industries units to produce quality goods which further enable them to enter into export market.

The performance of the SMEs Sector has been promising till date. If adequate assistance is provided by the Government towards marketing of SSI products, this sector will increase employment opportunities as well as earn valuable foreign exchange.

(Shaili Vadera is Assistant Professor & Nimisha Kulshreshtha is Lecturer at Amity Business School, Amity University,

Lucknow Campus.)

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