Atul Kumar Thakur
Oct 2011

MSMED (Medium and Small Scale Industries) Act, 2006 modified the title to 'enterprise' instead of industry thus providing proper recognition to the service sector and conferred pride of place to micro – enterprises; ceilings were also redefined and now up to Rs. 25 lakhs is considered a Micro enterprise, up to Rs. 5 crore as Small enterprise and up to Rs. 10 crore as a Medium enterprise. 

These modifications necessitate for change in lending pattern of financial institutions; adjustment must be made to tap the various financial requirements of SMEs. Task force constituted by the Central government and initiation of SME Rating Agency (SMERA), (a group venture of SIDBI, Dun & Bradstreet Information Services India ltd and several leading banks of the country) are welcome initiatives for the sake of SMEs to provide the much needed boost of morale of entrepreneurs in the country.

A robust economy like India should focus on strengthening all three related components of the economy - Agriculture, Industry and Services. The uncontrolled wave of inflation that we are witnessing today is largely the by-product of non-inclusive policy lapses which needs immediate cure before the confidence of global investors will be restored and sustained by the Indian market. SMEs alone can bring the respite to falling primary sector and employment creation in skilled/ semi-skilled category besides making the double digit industrial growth dream come true in the near future.

SMEs have emerged as the most vibrant sector of the Indian economy accounting for about 95% of industrial units in the country. The sector contributes approximately 40% of value edition in manufacturing and around 45% exports. It has emerged as a panacea for providing employment to around 42 million persons and promoter of inclusive economic growth.

The Planning Commission's Working Group on SMEs for the 11th Five Year Plan had estimated that SMEs need approximately Rs. 3000 billion in working capital and term loans during the plan period. This sector remains neglected since long time; a reliable database on the sector concerning with heterogeneous range of activities is the need of hour which would boost the proper policy framing. Steps should be taken for developing a capital market exclusively for SMEs on the lines of Alternate Investment Market (AIMs) of London, NASDAQ, NSE and even NIKKEI that have separate windows for small companies. Earlier OTCEI and INDONEXT were promoted by BSE for the same purpose albeit both experiments were failed; hence optimum precaution must be put in place for any further endeavor in this regard.

In present circumstances, SMEs are unable to borrow sufficient funds that are absolutely alarming for both the immediate and long term perspectives. The share of Micro enterprise in net bank credit witnessed a sharp decline from 4.2 percent from 2002-03 to 2.8 percent in 2007-08. The share of enterprise with an investment below Rs. 5 lakhs fails more drastically from 2.2 percent to 1.6 percent of total bank credit over the same period.

Challenges are heading much faster; according to All India Census (2001-02), only 14.2 percent of the registered and 3.09 percent of the unregistered Small Scale Industries (SSIs) had availed themselves of bank finances. SMEs are vehicle of inclusive and equitable growth with huge potential for employment generation; therefore it wouldn't be viable to surpass the rudimentary requirements of this sector. Basel II &III Norms on Banking Supervision and Mandelson plan in UK could be the fine examples before Indian government to infuse financial support to SMEs.

Financing entrepreneurs should be the most active priority under the Priority Sector Lending Scheme of banks including of Regional Rural Banks that work with huge footmark in rural areas and can create a lot of positive changes in rural industrialization. With dwindling manufacturing growth, SMEs could be the only route where the Indian industry at large can find the niche against their global counterparts. India must learn from China how the mushrooming of small and medium industries in rural hubs maximized the industrial potential and rural income.

SME sector also requires dedicated Venture Capital Funds that are willing to invest anything between Rs. 2 crores to Rs. 50 crores to facilitate innovation in SMEs. Presently, Private Venture Capital funds prefer to invest Rs. 50 crore or more and are therefore largely irrelevant to a sizable chunk of SMEs. In view of the enormous demand for equity capital for SMEs in the country, a major initiative is required in this direction.

If talking in political terms, SMEs stand between the Nehruvian dream of heavy industrialization and Gandhian utopia of sustainable industrial development-in our constitution, it is beautifully placed in the Directive Principles. On policy front, there is consideration for SMEs albeit the execution is still a big challenge. Leadership must recognize that the goal of nation making is still not over. They must think for just and fair industrialization by making road smooth for SMEs. There will be no reason why India will also not meet with its potential role in manufacturing at global arena.