The Small Scale Industry (SSI) has been one of the major planks of India's development strategy and consequentially, it has been accorded a high priority status from the very beginning. The Indian governments have been pursuing support policies since independence to make these enterprises viable and vibrant over time. Apart from making significant contributions to output, employment and exports, the small and medium enterprises (SME) have led to social developments in terms of nursing entrepreneurship and drawing fresh talent.
 

Currently, the sector accounts for 8% of GDP, 45% of manufactured output and 40% of exports. More importantly, it promises jobs to 60 million people producing 8000 commodities annually both for the domestic and the international market.

The quick results of the fourth census of Micro, Small and Medium Enterprises (MSME) for the reference year 2006-07 give a further insight into the accomplishments of the sector. However, because of the vast legislative and structural differences in the two eras of survey originating from the enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, its growth analysis with respect to the third census (conducted in 2001-02) presents an exaggerated picture of the SSI performance in a short span of five years. The total size of the sector increases by an enormous 150%, per unit value of plant and machinery by 253%, number of exporting units by 450% and total employment by 140%.

Definition

During the period of third census (2001-02), the small scale sector was under the purview of two separate ministries - Ministry of Small Scale Industries and Ministry of Agro and Rural Industries (SSI & ARI). Both these ministries served as the nodal agencies for formulating policies, assisting states and implementing the initiatives of the Centre to promote growth and development of small scale units in an increasingly market-led economy. These two were bifurcated in 2001 from a combined set up of Ministry of Small Scale Industries and Agro and Rural Industries (SSI & ARI) established in 1999. Throughout this time frame, tiny and small units were constrained by an upper limit on investment in plant & machinery. The tiny units were defined as those with an investment of up to Rs. 25 lakhs and small units as ones with an investment of more than Rs. 25 lakhs but less than Rs. 1 crore. The inflow of foreign direct investment (FDI) was permitted only up to a cap of 24%. Further, the ministry identified a separate list of medium enterprises belonging to high-tech and export oriented industries, allowing them investment in plant & machinery up to Rs. 5 crore for technological upgradation.


 

In 2006, the definition of SSI was elaborated with the passage of the Micro, Small and Medium Enterprises Development (MSMED) Act. The Act aimed at providing an exclusive comprehensive legislation for facilitating development and competitiveness of small scale enterprises. Following the world-wide practice, this Act administered the concept of “enterprise” constituting of manufacturing units as well as service entities to address the concerns of the composite sector jointly. Moreover, it pioneered the task of bringing medium along with micro and small segments under a single umbrella with the aim of integrating the three grades of enterprises.

Comparative analysis

The impact of these structural changes has been reflected in the comparative analysis of Fourth with the Third Census in terms of size, employment, exports and gross output. The inclusion of service enterprises has added more than 180 lakh new units employing 49% of total labour in the sector. With the increase in investment limit, 70,038 units registered under section 2m(i) and 2m(ii) of the Factory Act have been included in the data, increasing the number of registered enterprises by 13% and consequentially escalating the per unit employment, per units gross output and per unit fixed investment. The increase in these ratios can also be attributed to the emergence of certain service activities like retail trade, hotels & restaurants, wholesale & commission trade, construction, real estate activities etc. In case of exports, the previous census did not include enterprises exporting their product through export/merchant houses located in export zones like ports. To overcome this underestimation, the latest census has collected data from units exporting their goods/services directly/indirectly or both.  

While a relative evaluation of the MSME based on statistics of the two censuses fail to warrant a comprehensible picture of performance of the sector, it does not falter to highlight that even after almost a decade of progressive policy attention, the basic issues impeding growth are still pertinent. The small scale sector of India presently is at crossroads and there is a constant discussion amongst economists on the survival of the SME. In this context, it is vital to re-look at the hassles of shortage of credit, obsolescence of technology and lack of skilled workforce under the lens of the policy framework. 

Lets us first discuss the credit constraints faced by SSI. The lack of accessibility of institutional credit is one of the prime impediments to MSME growth especially for those at the start-up mode. According to the fourth census, only 7% of the total MSME use finance from institutional/non-institutional sources whereas a majority (92%) either do not use credit or self-finance their establishments.

The institutional channel comprises of banks, microfinance institutions (MFI) and credit cooperative societies and the non-institutional channel is formed by the landlords, money lenders, local shopkeepers and traders. Both these channels exist in the rural and urban areas of India. However, the non-institutional channels continue to have control over micro-credit in rural areas.

Where the financial sector policies of India have always been driven by the objective of financial inclusion, the goal of universal inclusion is still a distant dream. Nationalization of banks, setting up cooperative banks, expanding branches of institutional financial units, and establishing special purpose government sponsored institutions (like RRB) have all been ingredients of a state-led approach to engulf larger section of the population in the realms of the financial system.

In respect to the SSI, the prime ingredient of financial assistance has been priority sector lending, mandating banks and NBFCs to advance at least 40% of their total lending to the priority sector at subsidized interest rates. However, the table below shows that MSME credit has a share of only a little above 11% in the Net Bank Credit of SCB. The reluctance of banks and financial institutions to lend can be attributed to their high risk perception of the micro and small enterprises (MSE) and high transaction cost for loan appraisal. The imposition of interest rate ceiling further reduces the desire of banks to service the credit requirement of the very poor. When the banks are obliged to charge a lower interest rate than what it should be, it has three repercussions. The borrower ends up borrowing at the market-determined interest rate as the banks start recovering the actual cost of lending by way of hidden fees and bribes. This increase in administrative cost pushes away the rural micro enterprises who can not afford these additional charges. In order to counter the likelihood of bribes, a cumbersome procedure of paperwork is inflicted on loan officers, which reduces flexibility and attractiveness of institutional loan. This articulates that to increase the commercial viability of facilitating credit to the SSI, especially the micro enterprises, there is a need to go a step further from subsidized lending norms.

To read full article please subscribe SME WORLD