CHAPTER 6 : MICRO, SMALL AND MEDIUM BUSINESS

ENTERPRISES IN INDIA

6.1

6 . 1.1

6.1.2

6. 1.3

6.2

6.3

6.4

6.5

6.6

6.7

Meaning, Definition and Classification

Meaning of MSME

Meaning of Ancillary Units

Classification of Ancillary Units

Business Structure of Small and Medium Enterprises

Role of MSMEs in Economic Development of India

Government Provisions for Assistance to MSMEs - Ancillary Units

Importance of MSMEs for the Survival and Growth of Large

Enterprises

Weaknesses of MSMEs

Survival and Growth Needs of MSMEs

CHAPTER 6 : MICRO, SMALL AND MEDIUM BUSINESS

ENTERPRISES IN INDIA

The current chapter discusses the development of MSME sector in India. It shows the

classification and business structure of MSMEs in India. This is followed with the

analysis of the role of MSMEs in economic development of India from the point of

view of growth rate in number of establishments, employment, investment, and

production output and export performance. It highlights the interest level of the

Central Government in the development and growth Indian MSME sector.

Micro, Small and Medium Enterprises (MSMEs) are widely called the back-bone of

the Indian economy. According to the online official portal of MSME, this sector is

the largest employment providing sector in India with employing more than 600 lakhs

persons in India”. In recent years, it has emerged as the most dynamic sector

displaying phenomenal growth by contributing 10% of share in GDP of India,

contributing 40% to total economy exports, producing about 7500 items and involving

in Technology Upgradation and implementation (55% of MSMEs involved) in

particular (ASSOCHAM report, 2010). This sector comprises of business units with

varying sizes that range from tiny to medium based on level of investment. Most of

these also act as ancillary units for large scale industry. The following section defines

each type of units in the small scale sector.

6.1 Meaning, Definition and Classification

This section discusses the meaning of MSME given by various international and

national bodies, followed with the evolution of the definition of MSMEs in India and

finally the classification of MSMEs in India based on various criteria is given.

6.1.1 Meaning of MSME

There are wide variations in definition regarding the size of a small company (Atkins

and Lowe, 1997; Keasey and Watson, 1993, p. 3; Storey et ah, 1987). While some

researchers define size of small company in term of number of employees, the others201

use both number of employees and annual sales (or turnover) when defining the size

of a company. Other works define enterprise size in relation to the sector within

which the firm is active. Commonly used criteria at the international level to define

SMEs are the number of employees, total net assets, sales and investment level

According to the European Union, the following classification of units is done on the

basis of number of employees.

Table 6.1: Classification of Units on the Basis of Number of Employees

Number of

Employees

Type of unit Number of

Employees

Type of unit

0 Self-

employed

10-49 Small business

2-9 Micro

business

50-249 Medium sized

business

Recognizing the contribution and potential of the sector, the definitions and coverage

of the Small Scale Industry (SSI) sector were broadened significantly under the

Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The Act

recognized the concept of “enterprise” to include both manufacturing and services

sector and separately defined medium enterprises. MSME Development Act 2006 of

India defines micro, small and medium enterprises on the basis of their investment m

plant and machinery (for manufacturing enterprise) and on equipments for enterprises

providing or rendering services. According to this act, the definitions of micro, small

and medium enterprises include the following:

202

Table 6.2: Definition of Micro, Small and Medium Enterprises

Investment in Plant and

Machinery

(Manufacturing)

Investment in Equipment

(Service)

Type of unit

Does not exceed Rs. 25 lacs Does not exceed Rs. 10 lacs Micro business

Between Rs, 25 lacs and 5 Between Rs. 10 lacs and Rs. Small business

crores 2 crores

Between Rs 5 crores and 10 Between Rs 2 crore and Rs. Medium sized

crores 5 crores business

6.1.2 Meaning of Ancillary Units

Ancillary units are a part of MSMEs. MSMED Act 2006 gave them a separate

identity because of their nature of work of being providers of materials to large/parent

enterprises. Promotion of ancillary units provides good scope for the development of

MSME sector as it facilitates off- loading of the products from the large sector, thus

providing assured market. An ancillary unit can be a micro, small or a medium sized

enterprise. Though the earlier SSI policy gave it a separate identity, now under

MSMED Act, it is considered as a part of MSMEs. Efforts have been made to define

ancillary type of enterprises also.

According to United Nations Statistics Division, Economic Statistics Branch,

National Accounts Section, Current SNA93: definition of ancillary units/activities is,

“A productive activity undertaken with the sole purpose of producing one or more

common type of service for intermediate consumption within the same enterprise is

defined as an ancillary activity. These are supporting activities undertaken within an

enterprise in order to create conditions within which the principal or secondary

activities can be earned out. Examples of ancillary activities are: headquarter activity,

keeping records, communication, purchasing of materials and equipment, personnel

management, warehousing etc ”

Online dictionary by Farlex defines ancillary as, “of secondary importance; auxiliary;

helping; subsidiary or supplementary”.203

Business definitions section of Webster’s dictionary defines ancillary business as, “Of

or relating to something that is available but not essential. For example, a study guide

is one of several ancillary materials offered for many college textbooks”.

As per the Government Acts related to SSI Policy of 1970s and MSME Act 2006,

definition of Ancillary has gone through many reforms. Developments in definition of

ancillary units have been abridged m Table 6.3. In 1972, the government appointed a

committee for drafting legislation regarding small scale industries and classified it

into three categories (1) Tiny Unit Industry, (2) Small Scale Industry and (3)

Ancillary Industry. The policy and Act inferred that all ancillary units were supposed

to be engaged in the manufacture of parts, components, sub-assembles, toolings or

intermediate. Apart from these criteria, the SSI and MSME policies and Acts of the

Government of India proposed reforms related to investment limits and conditions

related to supply of production to large units.

Table 6.3: Developments in Definitions of Ancillary Units

YEAR INVESTMENT LIMITS ADDITIONAL CONDITIONS

1950 Upto Rs.5 lakhs in fixed assets Less than 50/100 persons with or

without power

1960 Upto Rs.5 lakhs in plant and

machinery

No condition

1972 Capital investment in fixed assets

does not exceed Rs. 10 lakhs

Supply atleast 10% of their

production to one large unit and

50% to one or more large units

1974 investment in plant and machinery

not exceeding Rs.15 lakh

Proposes to supply 50% of its

production to one or more parent

units and further provided that it is

not a subsidiary to or controlled by

any large unit

1980 investments m fixed assets in plant

and machinery not exceeding Rs 25

lakhs

Proposes to supply 50% of their

production or the total services, as

the case may be to other units for

production of other articles

204

1985 investments in fixed assets m plant

and machinery not exceeding Rs.45

lakhs

proposes to supply or render not less

than 50 per cent of its production or

services, as the case may be, to one

or more other industrial

undertakings

1990 investment in fixed assets m plant

and machinery whether held on

ownership terms or on lease or on

hire-purchase, does not exceed Rs

10 million

proposes to supply or render not less

than 50 per cent of its production or

services, as the case may be, to one

or more other industrial

undertakings

1997

(Dec)

Upto Rs.100 lakhs in plant and

machinery

No condition

Source: Panda S.C. (1996), “Entrepreneurship Development m Small Scale Industries, Anmol Publications, New Delhi: 1st Edition: page 28

Thus, the definition related to ancillary industrial undertaking has been changing for

over five decades.

Till the Industrial Policy of 1990, an ancillary undertaking was defined separately and

was given a separate recognition. However, after the introduction of the Industrial

Policy of 1991, all industrial undertaking were divided into 3 categories namely large,

medium and small on the basis of their level of investment in plant and machinery

instead of their nature of work. Therefore, on the basis of the level of investment, an

ancillary unit could be a micro, a small, a medium or a large type of business unit.

6.1.3 Classification of Ancillary Units

In this section, classification of MSMEs is based on the following:

• Size

• Nature of activity

• Location and

205

Ownership

According to Search Marketing, an online portal for small and micro professional

businesses in India, the size of the registered MSME sector in 2010-11 was 15,63,974

number of MSMEs. Following table 6.4 gives the percentage distribution these

registered MSMEs in 2010 under the above listed classification.

206

Tab

le 6

.4: P

erce

ntag

e Dis

trib

utio

n of

Reg

iste

red

MSM

Es i

n 20

10SH3HX0 HO SXSflHx/saAixvaa<ioo3 CO

‘SaiNVdWOD CO

aaiiM iD narwcj

j l saiMvaiMoo QOr-

asaxvAiaa <N

o cDHsaatuava 4.01

a h o x r m o h h8006

LOCA

TIO

N (i

n %

)

svaavNvaan 54.7

7

svaav t v h u h 45 2

3

S.s

aDNVN31NTVtVaNvaivaaa 16

.13

<u.

aoiAaas 16 7

8

o

z

ONISS3Doaa/ONnaiMassv/OMiaruavafiMvtM

67.1

0

ivniaaiM 0.17

S

vl

TWIffi 4 89

OHDDM 94.9

4

Tota

l num

ber o

f Reg

iste

red

MSM

Es 1

5,63

,974

207

Typically, each large business unit needs two types of ancillary services. One is

common to all industries and businesses m an industry and the other is industry or

business activity specific. This classification can be explained with the help of an

example m table 6.5,

Table 6.5: Types of Ancillary Business

INDUSTRY GENERAL ANCILLARY

BUSINESSES

INDUSTRY SPECIFIC

ANCILLARY BUSINESSES

TEXTILE Warehousing, transport,

banking, insurance

Fabnc, buttons, embroidery,

stitching, etc.

ENGINEERING Warehousing, transport,

banking, insurance

Components, welding, etc

rr/ITES Banking Computer hardware

6.2 Business Structure of Small and Medium Enterprises

MSMEs are very typical m nature of functioning, management and governance

because of its size and financial strength. Most of the MSMEs are family owned

businesses across the world. Therefore, their functioning is quite limited to the

leadership of the head of the household. There is hardly any architecture found in its

structure. Most of the MSMEs have a simple, flat structure rather than a hierarchal

one. It is usually a ‘one man show’ and this single person, the entrepreneur or the

owner plays the role of marketing, HR, as well as finance head. Only those MSMEs

that are also involved m manufacturing may have a separate functional head to inspect

the day-to-day production activity. But even in this case, the owner has complete

involvement in the same and remains the final decision maker. Only when a firm

grows to become medium sized from small and become large from medium sized, the

structure get more and more hierarchal and less flat. Organizational structure of

MSMEs also depends on the type of business that they are involved in. For example,

trading firms have a flatter structure as compared to that at a manufactunng firm.

Most innovative firms have more developed organizational structures — in terms of

208

number of departments as compared to a routine activity firm (Sanchez and Mann,

2005; Camison, 1997).

Organizational structure concerns with work division (the distribution of tasks and

activities) and coordination mechanisms (this includes standardization and

formalization).

Studies on MSME organizational structures have also proved that the myth “small

firms are informal, unstructured and centralized” is untrue. Small firms that exhibit

specialization and centralized decision making have a more complex structure

(Meijaard et al. 2005). Meijaard, Brand and Mosselman (2005) proposed the

following nine typical organizational structures of SMEs:

a) Entrepreneur with a ‘submissive’ team (characterized by an authoritarian

entrepreneur and several quite independent employees)

b) Co-working boss with an open structure (is characterized by employees

that are highly involved m operational decision-making)

c) Entrepreneurial team (concerns firms characterized by employees closely

involved m strategic and operational decision-making)

d) Boss - loose control (concerns firms characterized by independent

employees that are relatively uncoordinated)

e) Boss - tight control (has few tasks and responsibilities defined beyond that

of the dominant entrepreneur-owner-decision maker)

f) Singular structure (has few divisional or functional departments. The

entrepreneur is important, not extremely dominant, yet employees have

limited leeway for self-coordination)

g) U-form (is simple, yet rather strongly hierarchical in structure)

h) Matrix organization (is flat, yet rather strongly functionally and

divisionally departmentalized)

209

l) M-form (is hierarchically structured and departmentalised in divisions)

j) Existence of each of these structures, depend highly on performance m

terms of sales growth and profit and innovativeness.

Thus, to sum it up there can be either a formal structure or a central structure in

MSMEs. Most MSMEs that have a formal structure have basically six broad

functional areas defined by Latem (2009) as Research and Development, Sales,

Marketing, Customer Service, Finance and Administration.

6.3 Role of MSMEs in Economic Development of India

MSMEs are vital for economic growth and development because they encourage

entrepreneurship, generate employment, and reduce poverty (Kayanula and Quartey

2000; Mead and Liedholm 1998, Fischer 1995). MSMEs have contributed

to economic development by creating employment for rural and urban growing labor

force, providing desirable sustainability and innovation in the economy as a whole

(Curran, 2007). Moreover a large number of people rely on the micro, small and

medium enterprises directly or indirectly (Curran, 2007). MSMEs in India have

employed more labor-intensive production processes than large enterprises

(Leutkenhorst, 2004) Consequently, they have contributed significantly to the

provision of productive employment opportunities, the generation of income and,

eventually, the reduction of poverty (Jasra et. al. 2011). Accordmg to an online portal

- economywatch.com, the importance of MSME to India does not only revolve

around its contribution to employment and exports alone. Other features that make

MSME’s role very important to the economy are:

• Providing various items of daily use at affordable cost. There are more

than 30 million MSMEs spread out across the length and breadth of

India. They may be touching the lives of 123.4 million directly or

indirectly which is roughly 10% of India’s population (Lokhande,

2011).

• Leading to addition m output of goods and services to economy

• Providing a platform for low capital cost of establishment.210

• Facilitates fast decision making due to less staff and more control of an

entrepreneur.

• Availability of raw material at door step.

• Providing innovative products catering to the needs of the entire and

even especially of a particular region and

• Providing reduction m income disparities and an admirable

propagation ground for entrepreneurial talent.

• Promotes entrepreneurship. According to Banerjee (2008), “This is

perhaps the only segment of economy with such huge population of

risk taking entrepreneurs entering the fray annually; during 1980-84

period 0.1622 million or more entrepreneurs started up, during 1985-

90 similarly 0.3247 million or more and during 1991-96 period 0.4215

million or more entrepreneurs started up new ventures”.

The contribution of MSME sector (at 1999-2000 prices) m the GDP and total

industrial production of India during the last ten years is as per the table 6.6 below:

Table 6.6: Contribution of MSME Sector (at 1999-2000 prices) in the GDP and

Total Industrial Production

Year Contribution in Total

Industrial Production

(in %)

Share in GDP

(in %)

1999-2000 39 74 5.86

2000-2001 39.71 6.04

2001-2002 39.12 5.77

2002-2003 38.89 5.91

2003-2004 38.74 5.79

2004-2005 38 62 5.84

2005-2006 38.56 5.83

2006-2007 45.62 7.20

211

2007-2008 45.24 8.00

2008-2009 44.86 8.72

Source: Annual Report 2009-10 of MSME*This includes medium enterprises in the sector after the enactment of micro, small and medium enterprise development (MSMED) Act, 2006.

Thus, MSMEs are the major growing force behind the growing economy of India, in

terms of 10% contribution to the national GDP and 41% contribution to the industrial

production of total Indian economy.

Table 6.7 below, further justifies the importance of MSMEs in growth of Indian

economy by its increasing contribution in number of establishments, employment,

investment, production output, and export growth.

212

Tab

le 6

.7: M

SME

s Per

form

ance

: Uni

ts, E

mpl

oym

ent,

Inve

stm

ent,

Prod

uctio

n an

d E

xpor

ts

Expo

rts

(Rs.

Cro

re)

1778

4

(28

10)

2530

7

(42

30)

2906

8

(14.

86)

3647

0

(25.

46)

3924

8

(7.6

2)

4444

2

(13.

23)

4897

9

(10

21)

Prod

uctio

n {R

s. C

rore

)C

onst

ant

Pric

es

(199

3 -1

994)

9224

6

(5.6

)

9879

6

(7 1

)

1087

74

(101

)12

1175

(11

40)

1348

92

(11.

32)

1462

62.9

(8 4

3)

1575

25.1

(7.7

)

Cur

rent

Pric

es

8441

3(4

71)

9879

6(1

7 04

)

1221

54

(23.

64)

1477

12

(20

92)

1678

05

(13.

60)

1872

17(1

1 57

)

2104

54(1

2 41

)

Fixe

dIn

vest

men

t (Rs

. C

rore

)

1096

23(9

24) ON

in cnvoin'w' 12

3790

O n"

w 1257

50

00in

1305

60

(3 8

2)

1332

42

(205

)

1354

82 00vq

Empl

oym

ent

(Lak

h Pe

rson

)

174

84

(5.3

3)

182

64

(446

) 3O n (4

.79)

197

93

CO 205.

86

(4.0

0)

213

16(3

.55)

220.

55

(3 4

6)

Tota

l M

SMEs

(Lak

h N

umbe

rs)

73.5

1

(407

)

76 4

9

(4.0

7) OVOON (4.0

7) Tt00oo (4

.07)

86.2

1

(407

)

89.7

1

(4.0

7)

93.3

6(4

07)

Yea

r

1992

-199

3

1993

- 19

94

1994

-199

5

1995

- 19

96

1996

-199

7

1997

- 19

98

1998

- 19

99

Sr. N

o.

"3- m VO

21B

5420

0

(10.

66)

6979

7

(28.

78)

7124

4

(2.0

7)

At 2

001-

2001

Pric

es

8601

3

(20

73)

9764

4

(13

52)

1244

17

(27

42)

1502

42

(20.

76)

1825

38

(21.

50)

2020

17

(10

67)

1 NA

1703

79 2

(8.1

6)

1844

014

(8.2

3)

1956

13

(6,0

6)

3067

71

(8.6

8)

3363

44

(9.6

4)

3729

38

(10.

88)

4188

84

(15.

83)

NA

NA

NA

NA

NA

oNOr-cnC4 (1

1.07

)

2612

97 00 ori00cs (8

.03)

3148

50

(11

54)

3645

47

(15

78)

4297

96

(17.

90)

| 497

842

(15.

83)

7093

98

(42.

49)

7907

59

(11.

47) NQO00o0000

1399

82

(3.3

2)

1468

45

(4.9

0)

1543

49

(5.1

1)

1623

17

(5 1

6)

1702

19

(4 8

7)

1786

99

(4.9

8)

: 188

113

(5.2

7)00tnt-*oo (1

66 2

0)

5581

90

(11.

47)

6217

53orezz (3

.88)

238.

73

(4.2

1)

249.

33

(4.4

4)

260.

21

(4.3

6)

ZYILZ (431

)

2825

7

(4.1

1)

WP6Z (4

.37)

594.

61

(101

.62)

626.

34

(5.3

4)

659.

35

97.1

5

(4.0

7)

101.

1

(4.0

7)

105.

21

(4.0

7)

109.

49

(4.0

7)

113.

95

(4.0

7)

118

59

(4 0

7)

123.

42

(4.0

7) Os (1

11.4

8)

272.

79

(4.5

1)

285.

16

1999

- 20

00

2000

- 20

01 oo

©o(N 2002

- 20

03

2003

- 20

04

2004

- 20

05

2005

- 20

06

2006

- 20

07

2007

- 20

08

2008

- 20

09

OQ Oso i—i <N cny—t -efr

r—<

*•*NO

■*#r-

214

Sour

ce. S

&D

Div

isio

n -

Off

ice

of th

e D

C (M

SME

)Th

e fig

ures

m b

rack

ets

show

the

% g

row

th o

ver t

he p

revi

ous

year

The

dat

a fo

r the

per

iod

up to

200

5 -

2006

is o

nly

for s

mal

l sca

le in

dust

ries

(SSI

) Su

bseq

uent

to 2

005

- 20

06, d

ata

with

refe

renc

e to

mic

ro, s

mal

l and

med

ium

ente

rpris

es a

re b

eing

com

plie

d **

Pro

ject

ed

NA

NA

NA

NA

i ____

____

____

____

____

____

____

____

_

(11.

39)

9829

19

(11.

59)

(113

9)

6938

35

(11.

59)

(5.3

5)

695.

38

(5.4

7)

(4.5

3)

298.

08

(453

)

2009

-10

**00

Table 6.7 above shows that the average growth of number of establishments (10%),

employment (10%), investment (15%), production output (15% at current prices) and

exports (19%) in MSMEs of India over the last two decades. However, it is noticed

that growth after 2005-06 (when micro enterprises were also included in the definition

of MSME) was remarkably more in each case of contributing items. This is because

of the sudden spurt in increase in the number of units in 2006-07 after the definition

increased the span types of units. Apart from this incident, the growth of MSMEs and

its contribution has remained consistent. Information of table 5.6 also supports this

statement. The following graphs (6.1 to 6.4) give a clearer idea on the growth pattern

of MSMEs on the basis of criteria given in table 6.7.

Graph 6.1: Number of Enterprises in MSME Sector

Source: MSME Annual Report 2009-10 * Projected data for the year 2007-08 and 2008-09.** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 the number of MSMEs increased to 298.08 lacs (Source:

www.msme.itove.in accessed on 2 February 2012).

216

The following graph 6.2 depicts growth in employment generation by MSME sector.

Source: MSME Annual Report 2009-10* Projected data for the year 2007-08 and 2008-09.** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 employment in MSMEs increased to 695.38 lacs (Source: www.msme.gove.in accessed on 2 February 2012).

The following graph 6.3 depicts the magnitude of fixed investment growth in MSME sector.

Graph 6.3: Fixed Investment in MSME Sector

Source: MSME Annual Report 2009-10 * Projected data for the year 2007-08 and 2008-09.** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 fixed investment in MSMEs increased to rupees 693835 crores (Source: www.msme.gove.in accessed on 2 February 2012).

2008 -00 * * **

Graph 6.2: Employment in MSME Sector

Employment

oZ

700

eoo500

4 0 0

300

200

T O O

282 57 294 91

626.34

217

The following graph 6.4 depicts Production Output growth in MSME sector.

Graph 6.4: Production in terms of Gross Output in MSME Sector

Source: MSME Annual Report 2009-10 * Projected data for the year 2007-08 and 2008-09.** Data for 2004-05 and 2005-06 pertain to small scale industries only.

In 2009-10 production in terms of gross output in MSMEs increased to rupees 982919

crores at current prices (Source: www.msme.gove.in accessed on 2 February 2012).

All the above criteria have shown an evidence of growth of MSMEs that has

contributed concretely to the overall economic growth and development of India.

Looking at the importance of MSMEs in economic growth and development of India,

the Government of India has taken initiatives to further boost the growth of MSMEs.

Government has taken steps to improve the functioning and growth of MSMEs since

the early Industrial Policy of 1970s. Table 5.4 shows that a huge number of MSMEs

(approximately 68%) are engaged in manufacturing, assembling and subcontracting

and (approximately 17%) are engaged in repair and maintenance type of work. Units

that are engaged in assembling, repair and maintenance, and subcontracting type of

work are called ancillary units. Banerjee (2008) highlights that according to Third All

India Census of Small Scale Industries 2001-2002, while the ancillary units constitute

of 3% of the Indian MSME sector. Considering the size of MSME sector in India, this

number is quite huge. Realizing the importance of ancillary units in terms of their

proportion, the Government of India has taken initiatives to assist their growth.

218

6.4 Government Provisions for Assistance to MSMEs - Ancillary Units

'Ancillary' developments have to be deemed as a mutually beneficial bipartite

arrangement between the parent and the ancillary units Over the last several years,

various measures have been taken by the government to promote a healthy

relationship between the ancillary small scale units and the parent unit. These

measures can be identified as under:

a) In 1980, the Industrial Policy statement recognized the ancillary units with

special emphasis on the development of rural and backward areas. The

investment ceiling was raised for SSI to Rs. 35 lakh and for ancillaries to Rs.

45 lakh in the Industrial Pohcy Statement of 1985 Thus, ancillanzation was

promoted in India.

b) In 1991, the Industrial Pohcy liberalized the controlled policy.

c) The Industrial Policy 1991 Statement has proposed setting up of a few

'nucleus' plants in each district identified as industrially backward to generate

as many ancillaries units as possible. The ‘nucleus’, plants would concentrate

on assembling the products of the ancillary units, producing the inputs needed

by them and making adequate marketing arrangements.

d) Under SSI pohcy, the programme of ancillansation included motivation of

public and private sector units to offload production of components, parts,

sub-assemblies, tools, intermediates, services etc., to ancillary units.

e) After 2005-06, the Ministry of MSME observed that about 98% of MSME

units in India have no channel partners or any connection with big industries

depicting that they are more or less independent entities. Therefore, for the

betterment of Indian MSME, ancillanzation was the foremost initiative of the

government of India along with other development activities (Biswas et.al.

2008). Therefore, to promote ancillary MSME units in India, the government

took the following steps:

o Inter-departmental teams set up to identify items which could be taken

up by ancillary units.219

o Plant level committees asked to work out the details of ancillary

development programme, and 25 broad groups of industries have been

identified for intensive development

o The Bureau of Public Enterprises (BPE) has issued detailed guidelines

to the public sector undertakings spelling out the measures to be

adopted for the promotion of ancillary units.

o The government insists the parent units for assistance to ancillary

business units with regard to transfer of technology and in providing

necessary technical guidance and arrange supply of quality raw

materials so that the end-product of ancillary units comes up to the

requisite specifications.

o In order to provide help to ancillary units in regard of getting timely

payments from their parent units, an Act has been passed under which

interest is payable on the delayed payments by large undertakings. As

regards timely payments by the parent umt for purchases from the

small scale units, the RBI has since evolved some measures of part

payment in advance, from out of the accounts of the parent units with

the banks.

o Small Industry Development Organisation (SIDO), a nodal agency of

the Central Government and Ancillary Division, continued its function

for the promotion of ancillarisation programme in the country. For this

constant liaison has been maintained with Administrative Ministries

both at Central & State Levels, Department of Public enterprises,

public/private sector undertakings and other industrial developmental

agencies through various programmed such as Vendor Development

Programmes, Buyer- Sellers Meet, Ancillary Exhibition, Seminars,

Workshops, State Level Ancillary Advisory Meetings, Plant Level

Committee Meetings and PSUs and visit to public/pnvate sector

undertakings for the promotion of small ancillary & sub-contracting

units.

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o Sub-contracting Exchanges (SCX) are functioning as a part of major

SISIs in the country at important cities for the promotion of fruitful and

lasting contracts between large & medium undertakings and small

scale ancillary units. These SCXs organise contacts between large units

as buyers and ancillary units as sellers by way of organising Vendor

Development Programmes, Buyers and Sellers Meet and Exhibition,

etc.

o In new Industrial Policy 2009, stress has been given on the

development of ancillary industry in the country by strengthening

existing SCXs and setting up of new SCXs by industrial associations

and other non-Govemmental organizations.

o For providing advisory assistance, State Level Ancillary Advisory

committees have been set up in almost all the States to provide

infrastructural facilities and to recommend measures for the promotion

of ancillary industry in the State and to monitor the outcome of these

efforts. SLAACs have members from SISIs, State Industries

Departments, Industrial Associations, Large Undertakings, Industrial

Development Agencies, Banks and Financial Institutions etc.

f) In response to the problems of recession, credit challenges and variety of

regulations from centre, states and local governments faced by MSMEs, the

government came up with an enactment called Micro, Small & Medium

Enterprises Development Act (MSME) 2006. As a result of this Act, the sector

has become more competitive and innovative.

g) Ever since MSME Act 2006 has been enacted, the cluster development has

been the driving force with more and more assistance both to the formal as

well as non formal clusters flowing ranging from better infrastructure,

marketing assistance, fiscal stimulus, and host of other incentives including

better technology and global sourcing of raw material.

h) The special mention of NSIC who have assisted in capacity building as well as

technology up gradation, pooling for raw material and marketing on a pool

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basis, has built up stability and better pnce realization for MSME sector of

which ancillary units are also a part.

Thus, considering the importance of MSMEs shown in section 6.3 and the measure

taken by the Government of India for growth of ancillary MSMEs show in section

6.4, though the dictionary defines ancillary business as “of secondary importance”,

the fact remains that no business unit can grow without the existence of these units.

Ancillary business units, with the help of all their respective parents units and

government aid have managed to walk an extra mile m this competitive business

scenario.

6.5 Importance of MSMEs for the Survival and Growth of Large Enterprises

Section 6.1 3 highlights that almost 17% of MSMEs are engaged in repair and

maintenance type of work and section highlights that ancillary unit constitute 3% of

the total MSME sector of India. Considering the large size of MSME sector, 3%

makes quite a huge number. It means these many ancillary units provide supporting

activities and services to the large scale business units in the Indian economy.

Therfore, the dependence of large enterprises on ancillary MSMEs cannot be ignored.

Generally speaking, supplier reliance and supplier retention, year on year, gives an

idea about dependence of large enterprises on ancillary MSMEs. Further, the ability

of these enterprises to negotiate rate at the supplier end is also an indicator of

dependence of large enterprises on ancillary MSMEs, The following points show the

different ways m which large enterprises are dependent on ancillary MSMEs for their

survival and growth.

• They provide repair and maintenance support of machineries

(imported or non-imported) used by large manufacturing enterprises.

• They provide raw-material to large enterprises.

• They fulfill innovation needs of large enterprises. For example,

ancillary units of Bharat Heavy Electricals Ltd (BHEL) at Tiruchi have

emerged as product designers for on-site (large enterprise clients)

fabncation of materials.

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• At a macro level, they reduce overall unemployment by the way of

absorbing layoffs of manpower from large enterprises. SME gazelles

manage to absorb layoffs of manpower from large enterprises, thus

taking care of political and social ‘environmental conditions’ (McIntyre,

2001).

• Another way m which ancillary MSMEs are helpful to large enterprises

is being a source of administrative and other business services. It is

very common to find large enterprises outsourcing their administrative

and other business services like housekeeping, training, maintenance,

accounting and collections, cafeteria, health-services, payroll and such to

MSMEs.

• MSME clusters are very helpful to larger enterprises in terms of

conducting subcontracting networks with firms of their respective

cluster. Tambunan (2005) is of an opinion MSMEs m the form of

clusters also have a positive effect on large enterprises.

Thus, it is the fundamental contribution of ancillary and other MSMEs to the overall

economic growth that indirectly affects the growth of large enterprises too. This in

turn, makes MSMEs mdispensible for survival and growth of large enterprises.

6.6 Weaknesses of MSMEs

According to Solomon (2012), “If India is to attain its aspiration of double-digit

growth rates and a reduced poverty ratio, greater focus on the well being of the Small

and Medium Enterprises (SME) sector becomes a necessity. According to AIMA

Study-August 2003, the constraints faced by the MSME’s have been observed as

follows.

• Market related 25 %

• Finance related 70%

• Government Policy related 12.78%

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• Power related/ Infrastructure 14.0%

• Technology 14 6%”.

Solomon (2012) further assets that MSME sector in India has been confronted with an

increasingly competitive environment due to. (1) liberalisation of the investment

regime in the 1990s, favouring foreign direct investment (FDI); (2) the formation of

the World Trade Organisation (WTO) m 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'.

Some of the major issues and challenges of MSME growth and development are as

follows:

a) Personnel Issues

Very common problem that has been documented in case of MSMEs is

personnel issues. They face problems related to lack of technical manpower as

the most common personnel issues. While we have large pool of human

resources, this sector continues to face shortage of skilled manpower due to

lack of paying capacity and poor managerial capabilities. Another major

weakness is absence of marketing channels and brand building capacity.

b) Financial Issues

CARE in its latest report ‘Leading Small Industries, Performance and Growth

Potential” claims that the contribution of MSME’s to India’s GDP is expected

to increase to 30% by 2019-20 from its present 8% and this would not be

possible without addressing the funding constraint. Tagoe et al. (2005),

highlight that financial challenges faced by SMEs that include lack of long­

term funds and high interest rates for short term funds refrain SMEs from

growing. This is mainly because long term and short term funds are linked

with the business need of expanding, exploiting good growth opportunities,224

increasing permanent working capital needs and replacement of obsolete

machines. The units being small in size also have poor access to equity and

credit. Most of the time, the equity is coming from savings and loans from

friends and relatives rather than through banking systems. Very often, the

credit is coming from operations or domestic savings rather than established

systems of cheap banking credit for working capital. This problem is

particularly acute for the village industries as well as the lower end of micro

industries. Credit availability remains one of the most major concerns. There

is a cyclical nature of availability of funds to the MSME sector. This is

determined by larger issues of international and domestic monetary policies,

fiscal policies and other parameters beyond the pale of the sector. In times of a

liquidity crunch, lack of liquidity in the financial system, even though caused

by external factors, can quite dry up the flow of credit to the sector. The most

major dependence of the sector is for the working capital requirement which

directly impacts their production cycle.

c) Lack of Technology Transfer

The sector is heterogeneous with pockets of high technology enterprises but

majority suffering from low technology base resulting in low productivity and

poor quality of products.

d) Lack of education in terms of policy, labour laws and government

schemes

The present structure also suffers from poor delivery of services at the field

level. The schemes and programmes have limited outreach with a large

number of very small schemes. There is a lack of coordination among the

various organisations involved in the promotion of MSMEs, including

orgamsations of the State/UT Governments and poor linkages with the

institutional stakeholders in the private sector. Absence of a suitable exit

mechanism is a major constraint for the higher end entrepreneurs of the

MSME sector.

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e) Lack of fundamental mannerisms of doing business

One most common issue that hinders MSME growth is that the small business

owners lack the fundamental mannerisms of doing routine business. These

small things can really help them be big. For example they lack the art of

record keeping and building other infrastructure needs. Like it is done in large

enterprises, it is essential for small businesses to establish or update systems

for monitoring cash flow, tracking inventories and delivenes, managing

finances and tracking human resources information.

f) Lack of good Customer Service

Good customer service is often a significant factor in small business success,

but ironically it is also one of the first things that tend to fall by the wayside

when business growth takes on a hectic flavor.

g) Issues related to Ownership Arrangements

In many MSMEs, ownership arrangements that functioned fairly effectively

during the early stages of a firm’s life becomes increasingly problematic as

business issues become more complex and divergent philosophies emerge

after the firm is well established. These issues even worsen when the firm is a

family business. This may be because as the size of the firm grows, so does

the size of the cofounders family. Cofounders with young children may feel

pressure to spend more time at home, but their absence will significantly cut

their ability to make a continuous, valuable contribution to the firm’s growth.

h) Moreover, out of 2.6 crore MSMEs in India, a predominant number is still in

the unorganized sector, often located in non-conforming urban zones (Source:

online MSME Bulletin 2012). This leads to difficulties m purchase of inputs

such as raw materials, machinery and equipments, finance, consulting

services, new technology, highly skilled labor etc.

However, all these weaknesses can be covered up if there is a strong willingness on

behalf of the entrepreneur and an opportunity for the same.

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6.7 Survival and Growth Needs of MSMEs

MSMEs are important for achieving the national objective of growth with equity and

inclusion. Thus, it is important from them to grow and have a bright future. But this is

possible only if they are able to overcome the weakness listed in section 6.6. Most of

these weaknesses can be overcome with the help of two broad strengths - MSME

owner’s entrepreneurial abilities and government pohcy or intervention The factor of

entrepreneurial ability is unit specific. Only those units that are owned by

entrepreneurs with very high level of business development skills will experience

growth. The factor of government policy and intervention support small business

growth in the form a window of opportunity With this opportunity, the entrepreneur

plans to expand the business and take advantage of the current and prospective

marketshare. An online portal on small business expansion methods

(www.referenceforbusmess.com) suggests the following common routes of taking the

size of MSMEs from small to large:

1. Building organic growth

Organic growth can be built by developing a new product that gives the firm

the best understanding of the market and the product. By genuine

technological innovations, orgamc growth can be planned more meticulously.

It is more convenient since it is financed from the firms own cashflows along

with maintaining its own style of management and corporate culture. It can be

a method of expansion as the economies of scale can be achieved by efficient

use of head office functions such as finance, purchasing, personnel and

management services.

2. Growth through acquisition of another existing business(almost always

smaller in size)

3. Offering franchise ownership to other entrepreneurs

4. Licensing of intellectual property to third parties

5. Joining industry cooperatives to achieve savings in certain common areas of

operation, including advertising and purchasing227

6. public stock offerings

7. Employee stock ownership plans

8. Spreading the costs and risks

Over and above these industry related and macro level methods of achieving growth,

MSMEs need to optimally utilize various business functions, so that they lead to

reduced costs and risks. Weaknesses related to business functional aspects can be

overcome by proper management of those business functions. These efforts of

MSMEs will lead to gaimng functional advantages that they can use for further

growth prospects in the following ways:

a. Marketing advantages

i. Buy in a new product range

ii. Buy a market presence

iii. Unify sales departments or to rationalize distribution and advertising

iv. Eliminate competition or to protect an existing market

b. Production advantage

i. Gain a higher utilization of production facilities

ii. Buy in technology and skills

in. Obtain greater production capacity

iv. Safeguard future supplies of raw materials

v. Improve purchasing by buying in bulk

c. Finance and management

i. Buy a high quality management team - which exists in the acquired

company

ii. Obtain cash resources where the company acquired is liquid

iii. Gam undervalued assets or surplus assets that can be sold off

iv. Obtain tax advantage

To overcome the basic weaknesses of record keeping and the similar, many software

programs currently available in the market can help small businesses implement

systems designed to address these recordkeeping requirements. In addition, growing

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enterprises often have to invest m more sophisticated communication systems in order

to provide adequate support to various business operations.

An overall mechanism to survive and grow should include strategies related to

marketing development, skill development, technology upgradation, infrastructure

development (may be with the help of state government and local authorities) and

looking for better options for availability of credit (Solomon, 2012).

Discussion and figures related to the overall status and performance of MSME sector

m India shows that MSME sector has been amply supported by the Government of

India. Information related to composition of SEZ (in chapter 4) and composition of

industry (in chapter 5) m India shows that most textile SEZs and ancillary units

belong to MSME sector. Thus, government assistance to the overall MSME has a

spillover effect on these textile SEZ and ancillary units, leading to then- individual

development and growth. On the other hand, the economic position of these textile

SEZ and ancillary umts has an impact on overall performance of MSME sector. Thus,

government provisions have an impact at macro as well as micro level of the industry.

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