Journal of Global Resources

Volume 4 (01)January 2018
ISSN: 2395-3160 (Print), 2455-2445 (Online)

Page 25-31

04
A STUDY ON THE ROLE OF MSMEs IN SUSTAINABLE DEVELOPMENT OF INDIANECONOMYMateen Ahmed Siddiqui
Professor, Deccan School of Management, Hyderabad, India
Email: mateen_ahmedsiddiqui@yahoo.com
Abstract: The MSME sector is considered as a vibrant and dynamic sector in the industrial scenario
of India and the sector acts as an engine for the economic growth of the country by means of its
involvement towards employment creation, export earnings, production and supporting in satisfying
the requirement of medium and large-scale industries. Countries like India that are densely
populated and industrially progressive are extremely depending on this sector for promotion of
employment opportunities for the masses of the country and attaining the balanced economic andregional development. The key focus areas for the growth of MSMEs are finance, technology,
infrastructure, marketing, entrepreneurship development and conducive regulatory environment.
This paper analyzes the growth and development of Indian MSME sector in the contemporary
scenario and its role in attaining sustainable development of the economy.
Keywords: MSME, Employment, GDP, Entrepreneurship and Regional Development
Introduction
MSME sector has been playing a prominent role in the sustainable development of Indian economy
for the past seven decades. This sector has emerged as a vibrant and dynamic sector and as anengine of growth. According to planning commission there are 3.6 crore micro, small and medium
enterprises (MSMEs) units in India which account for 45 per cent of total gross value of
manufacturing output, 30 per cent of direct exports and 15 per cent of indirect exports, provides
employment to nearly 10 crore people, besides having an investment of 6.2 lakhs crores. In India
Small and Medium Enterprises sector provides maximum employment next only to agricultural
sector (Sivayya & Dass 1987). The MSME sector has the potential to spread industrial growthacross the country and can be a major partner in the process of inclusive growth. In recent years,
the MSME sector has consistently registered higher growth rate compared with the overall industrial
sector. MSMEs are complementary to large industries as ancillary units. The growth of this sector
also contributes extensively in the improvement of entrepreneurial skills amongst the people,
decentralization of ownership, elimination of monopoly in the market, prevention of concentrationof wealth and power and to make sure the balanced economic, social and regional development of
the country.
Objective of the Study• To analyze the growth and performance of Indian MSMEs in present scenario• To find out the present problems faced by MSMEs• To study the contemporary scenario of financing to the MSMEs
Review of Literature
An extensive review of literature forms an important part of the study; a review of few of the studies
is discussed: Acs, Zoltan and Audretsch (1990) observed the fact that though SMEs account for avery small fraction of total business Research & Development (R&D), a large body of evidenceshows that SMEs contribute greatly to the innovation system by introducing new products andadapting existing products to the needs of customers. Small firms account for a larger share of new
product innovation given their low R&D expenditures. Maillat (1990) observed that the major
problem for Small and Medium Enterprises (SMEs) is to create a generation of true entrepreneurs,
characterized by qualities of responsibility, spontaneity, imagination, capacity to predict and toadapt to change by detecting new opportunities, development strategies, identifying new resources
and relational know-how with people and environment. Armstrong and Taylor, (2000) assessed that25

SMEs are able to create a diversified and flexible industrial base by creating a pool of entrepreneurs
willing and able to take risks leading to an energetic enterprise culture. Yoki Nikaido (2004)
evaluated that the government role of protecting Small Scale Industries (SSI) from large and foreign
firms by reserving products and ensuring them with markets has hindered the growth of SSI, as
SSI lacked any incentive to innovate, improve technologically and compete with large firms andprosper to become large. The government’s policy from “protection” to “promotion” of SSI will help
them in their growth. Constantin Mitrut & Daniela luminita (2006) emphasized that SMEs role inregional development cannot be overruled in spite of large firm’s key role in production system. It
was concluded that SMEs should utilize the funding opportunities for their development, and theregulatory bodies should remove of any administrative, financial, legal, barriers that still hinder SME
start-up and development. Armstrong and Coyle, (1999) in their study observed that the main hurdle
for lack of competitiveness of SMEs is outdated technology, unavailability of in-house humanexpertise and poor financial resources. Bhavani (2002) studied the impact of globalization on the
different sub-sectors in small enterprises and viewed that, in order to survive SSI should improve
productivity, quality, reduce cost and should substantially improve their technology. Gohill, Mike(2009) evaluated the problems faced by Indian small business sector in this transformation era, andviewed that less than 5 percent of the small businesses are successful remaining continues tofunction with various problems, prominent among them is lack of managerial experience ofentrepreneurs.
MSMEs in the Developing WorldIn much of the developing world, MSMEs are the only pragmatic employment opportunity for
millions of impecunious communities. As per the data available with the planning commission in
their eleventh five-year plan (2007-2012) A significant percentage of MSMEs in developing
countries are involved in traditional activities serving small, localized markets with little or notechnological dynamism. In reality, few ‘graduate’ into larger or more modern technologies. The
role of MSMEs in the economic growth need not be over-emphasized and their vivacity is a clear
pointer to the health of the economy. The importance of small and medium enterprises has notdiminished even in the developed economies, in fact it has found to be highly steady in many ofthem. A composition of small and medium enterprises in different economies in Asia pacific regionis shown in Table 1. It is evident from the above table that small and medium enterprises are gaining
distinction in the global developmental efforts and is not confined to one country or continent. They
constitute towards more than 90 per cent of the total units and contribute a major share in the outputof these countries.

Country
Hong KongJapan
Malaysia
Philippines
Korea
Singapore
TaiwanThailand

Table 01: Comparison of SMEs in Asia-Pacific Region
SME employees as percent of theSMEs as percent of all enterprises
total employed population
98.0
60.0
98.9
69.2
96.1
45.0 (manufacturing)
99.6
70.0
99.8
86.7
99.7
57.0
97.7
68.8
99.7
60.0

Source: White Paper on Small and Medium Enterprises in Taiwan, 2006. Taiwan Ministryof Economic Affairs http://www.moeasmea.gov.tw/eng/2006whitepaper/2006white.asp

Growth and Performance of MSMEs in India
MSMEs play a principal role in Indian economy in terms of employment, production and export
potential. These enterprises have developed appreciably since 1960, when there were only 12,000
small and medium enterprises, providing employment to nearly 10 lakh people of which, direct
employment was 1.85 lakh; annual production level was Rs. 8.75 crore. (DC MSME, 2001-02).
MSMEs recorded a high rate of growth since liberalization in spite of solid contest from large scale
sector and the multinational corporations. Employment generation is the main purpose of starting
industries. Government considers that, one of the fundamental objects of industrialization is toprovide high and stable level of employment. The survey of World Bank conducted as early as in26

1978 revealed that a big push to small scale industries is the way to generate employment
opportunities in the developing countries like India. In India Small and Medium Enterprises sector
provides maximum employment next only to agriculture sector (Sivayya & Dass 1987).The overall
performance of MSMEs is shown in Table 2.
Table 02: Overall Performance of MSMEs between 2006-07 to 2014-15
Employment Market Value of FixedYear
Total Working Enterprises(in lakh)(in lakh)
Assets (in crore)
1 2006-07
361.76805.23
868,543.79
2 2007-08
377.36842.00920,459.84
3 2008-09
393.7
880.84
977,144.72
4 2009-10
410.8
921.791,038,546.08
5 2010-11428.73965.15
1,105,934.09
6 2011-12
447.64
1,011.69
1,182,757.64
7 2012-13
467.54
1,061.40
1,268,763.67
8 2013-14
488.46
1,114.29
1,363,700.54
9 2014-15
510.57
1,171.32
1,471,912.94
Source: Ministry of MSME, Annual Report 2015-16#

The MSMEs not only generate the highest employment per capita investment, but they also
provide employment to villagers and people living in remote areas so that they do not migrate to
the urban areas. The growth in production of MSMEs has been one of the most encouraging
features of Indian industrial economy since independence. There has been a twenty-fold increasein production for MSMEs which indicates that MSMEs have faced the global challenges bravely
and have performed tremendously in the present scenario. The MSME share in the gross industrial
output as compared to manufacturing and services is shown in Table 3.
Table 03: Contribution of MSME sector in GDP and Output

#

Year

Gross value of
output of MSME
manufacturingsector(in crore)

1
2
3
4
5
6
7

2006-072007-08
2008-09
2009-10
2010-11
2011-12
2012-131198818132277713755891488352
16536221788584
1809976

Manufacturingsector MSME

Services
sector
MSME

Total

7.73
7.81
7.52
7.45
7.39
7.27
7.04

27.40
27.60
28.60
28.60
29.30
30.70
30.50

35.13
35.41
36.12
36.05
36.69
37.97
37.54

Share of MSME
manufacturing
output in total
manufacturing
output (percent)
42.02
41.98
40.79
39.63
38.50
37.47
37.33

Source: 1. Fourth All India Census of MSME 2006-07, MSME, Annual Report 2015-16.
2. National Account Statistics (2014), CSO, MoSPI. 3. ASI, CSO, MoSPI.

The MSMEs contributes extensively to the country’s manufacturing output, employment andexports and is accredited with generating the highest employment growth as well as accounting fora major share of industrial production and exports. The labour intensity of the MSME sector is muchhigher than that of large enterprises. MSMEs comprise more than 80 percent of total enterprises inmost of the economies. The MSME sector constitutes a major share in total value added in Gross
Domestic Product and there has been a structural relationship between the MSME sector’s growthand overall growth of the industry and the economy as shown in Table 4. According to the survey
carried by the ASSOCHAM, the Small and medium enterprises contribution to the Gross Domestic
Product would increase to 22 per cent in the next 3 years, on account of increased production owing
to technological up gradation. The GDP contribution of MSME sector and total industrial sector isshown in Table 4. Accordingly, the Government initiated the policy of de-reservation and thenumber of reserved items declined from 836 in 1991 to 21 in 2009 and presently there are no items
which are reserved for production for MSMEs. This policy has helped the segment in enlarging thescale of operations and also paved the way for entry of large enterprises in the manufacture ofthese products in keeping with the global standards.
27

Table 04: Contribution of Micro, Small and Medium Enterprises in GDP between
1999-2000 to 2011-12
Year

Contribution of MSMEs (percent) at 1999-2000
percent of Total industrial production
percent of GDP
1999-00
39.74
5.86
2000-01
39.71
6.04
2001-02
39.12
5.77
2002-03
38.89
5.91
2003-04
38.74
5.79
2004-05
38.62
5.84
2005-06
38.56
5.83
2006-07
42.02
7.44
2007-08
41.98
7.81
2008-09
40.79
7.52
2009-10
39.63
7.49
2010-11
38.48
7.42
2011-12
37.52
7.26
Source: Ministry of MSME Annual Report 2009-10. (The data for the period up to 2005-06 is
Only for small scale industries (SSI), Subsequent to 2005-06, data with reference tomicro, small and medium enterprises are being reflected)

MSME and total industrial Exports
One of the most significant achievements of the MSMEs has been its contribution in the exports forthe country. The share of MSME exports in overall exports of the country increased rapidly from
15.6 per cent in 1973-74 to 33.12 per cent in the year 1992-93. The exports from this sector has
increased from Rs. 17,784 crores in 1992-93 to Rs. 2,02,017 during the year 2007-08, showing
more than eleven-fold increase. Moreover, it is a fact that even after allowing MNCs due toglobalization of economy; the MSMEs were able to compete with them even in the export market.
It shows that MSMEs sector is able to face the competition boldly, and had best utilized theopportunities available on account of liberalization. The export performance of the MSME sector
could also be judged from the point that the quality of exports has improved, as the present industrial
scenario in India compels an organization to be quality conscious.
Table 05: MSME and total industrial Exports between 1992-93 to 2008-09
#

Year

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-072007-08
2008-09

Total exports(Rs. Crores)
53688
69751
82674
106353118817130100139752159561203571209018255137293367375340456418571779655864840755MSME Exports(Rs. Crores)
17784
25307
29068
36470
39248
44442
48979
54200
69797
71244
86013
97644
124417150242
182538202017NA

percent share of MSMEs
Exports
33.12
36.28
35.15
34.29
33.03
34.16
35.04
33.96
34.28
34.08
33.71
33.28
33.14
32.91
31.92
30.80
NA

Source: 1. Ministry of MSME, Annual Report 2009-10, 2. Economic Survey 2009-10.
As seen from Table 5 that MSME exports have maintained a growth rate of above 30 per
cent throughout the study period. There was a gradual increase in exports from MSME sector andalso an increase in the percentage share of MSME sector in the exports of the country. The direct28

exports of MSME sector is 30 per cent of the total exports’, apart from this nearly 15 percent exports
are indirectly contributed by them. (TANSTIA, 1995)
Comparative Growth Rates of SME Sector and Total Industrial
This contribution of SME in the total industrial sector is very impressive in view of the fact that fromthe year 1992-93, the economy on account of the liberalization, privatization and globalization has
become an open economy and the SMEs were exposed to the global environment. According to a
study by the ASSOCHAM, the MSME sector contribution will increase to 44 per cent of the totalexports if the modernized technology is taken up. Since economic reforms started in 1991, theMSMEs have achieved a consistently higher rate of growth as shown in table 6.
Table 06: Comparative Growth Rates of SME Sector and Total Industrial Sector between
1993-94 to 2007-08
Year
SME growth rate
1993-94
5.65
1994-95
10.44
1995-96
11.49
1996-97
11.29
1997-98
9.19
1998-99
7.84
1999-00
7.09
2000-01
8.04
2001-02
6.06
2002-03
8.68
2003-04
9.64
2004-05
10.88
2005-06
12.32
2006-0712.60
2007-08
13.00*
Source: Ministry of MSME Annual report 2009-10, * Projected

Industrial sector growth rate
6.00
9.10
13.00
6.10
6.70
4.10
6.70
5.00
2.70
5.70
7.00
8.40
8.10
11.5
8.0

Note: Growth rates from 2002-03 onwards are as per the Index of Industrial Production
IIIP) base 2001-02 =100 and those for earlier years are as per IIP base 1992-93=100.

Table 07: Distribution of Number of MSMEs by their Type of Formation
#.
1
2
3
4
5
6
7
8
9

Year
2007-08
2008-09
2009-10
2010-11
2011-12
2012-132013-142014-152015-16Micro
1,53,110
1,70,262
1,85,180
2,05,112
2,42,539
2,75,867
2,96,526
3,46,206
1,15,540*

Small
16,73018,792
23,87029,12534,22541,502
59,12770,933
14,582*Medium
467
702
1,409
1,263
2,949
5,449
7,338
8,219
571*

Total
1,72,703
1,93,026
2,13,206
2,38,429
2,82,428
3,22,818
3,62,991
4,25,358
2,17,854*

Source: The state/UT Directorates of industries & MSME development institutes
Problems faced by MSMEs
The MSME problems could be broadly classified into internal and external. The internal problems
are those which are the outcome of internal course of management of an enterprise and are related
to a single unit whereas external problems are those which are generally faced by all enterprisesin the industry and are beyond their control (Desai, V. 2006). The internal and external problems
as assessed from different studies are shown below in Table 8. MSMEs face a tough competition
from their global counterparts due to liberalization, change in manufacturing strategies,
technological changes, turbulent and uncertain market scenario. The central issue of concern for
the growth of small industry is how to strengthen its competitiveness. To sustain their key role,
MSMEs need support in defining their specific technological and organizational needs and in finding
the right approach to finance to these needs.

29

Table0 8: Internal and External Problems of MSMEs
Problems

External

FinanceNon-availability of finance
Access to finance
Excessive collateral security

Managerial

Locational disadvantage
Government price controls.

MarketingMarket saturation.
Weak market demandCompetitive environment of market

Raw material

Raw material not available
Imports are difficult

Technological

LabourDelay in delivery of machines

Unavailability of skilled Labour

Internal
High cost of borrowings
Inadequate finance
Recovery from debtors
Low promoters’ contribution
Lack of technical know-how
Absence of long term planning
Lack of management skills
Lack of sales promotion
Limited local market
Price of the product is highDependency on large scale industries
Lack of marketing research
Poor inventory management
Obsolete Plant and Machinery
Poor capacity utilization.
Inadequate maintenanceTransport bottleneck
Labour Absenteeism / turnoverHigh rates of wages / salaries
Inefficient handling of labour problems

Financing of MSMEs Sector
From a financial institution point of view the purpose of extending developmental credit facility to
the MSMEs is to ensure that these enterprises utilize the amount for the productive purposes,
generate surplus profits and repay the loans to the banks and financial institutions from the surplus
generated. Since the liberalization of the Indian economy in 1991, MSME financing has broadened
and its services intensified. With the entry of private banks, local area banks, foreign banks, regional
rural banks and cooperative banks, increased competition has led to a rush for lending to small andmedium sector. The rapidity and extent of financial assistance granted by banks and financial
institutions in meeting the term requirements of industrial sector over the years has become a huge
structure of credit arrangement spread over the length and breadth of the country as shown in table
9. Industrial financing has thus been envisaged as a long term and continuous strategy forchanneling the flow of credit for the expansion of the MSME sector. Though, the institutional
network for industrial credit has grown substantially in quantitative terms but not qualitatively.
Table 09: Outstanding Bank Credit to MSMEs
Year
2005
2006
2007
2008
2009
2010
2011
2012
2012 P

Public Sector
banks
67800
82434
(21.6)
102550(24.2)
151137(47.4)
191408(26.6)
278398(45.4)
376625(35.3)
396343(5.24)
500250(26.22)

Private Sector banks

Foreign banks

8592
10421
(21.3)
13138(26.1)
46912(257.1)
46656
(0.0)
64534
(38.3)
87857(36.1)
110514(25.79)152554(38.04)6907
8430(22.1)
11637(38.0)
15489(33.1)
18063(16.6)
21089(16.6)
21535
(2.2)
21760
(1.05)
31993(47.03)

Source: Annual Report 2012-13 Ministry of MSME

30

All Scheduled commercial
banks
83498
101285(21.3)
127323(25.7)
213538(67.7)
256127(19.9)
364001(42.1)
486017(33.5)
528617(8.77)
684797(29.55)

Conclusion
It can be concluded that MSMEs play a mounting role in sustainable development of Indian
economy. This role could be evaluated from their mammoth contribution in terms of GDP,
employment, output, turnover, and exports. Indian economy which was sheathing at the time ofindependence, could gain adequate thrust on account of the increasingly role of MSMEs. This
sector provides employment next to agriculture with 62 per cent of the population dependent on it.
The government of India has given top priority to this sector as by increasing the investment limit
for MSMEs and revising the policy of reservations which has given a boost to this sector. Though
globalization has produced plentiful opportunities for this sector, but the severe competition has
also brought up the risk of survival. One the biggest problem of Indian MSME sector is lack ofadequate finance resulting in large sale sickness. It is true that much of the problems of the MSMEs
could be healed if finances are available on time to SME sector. The government must instigate
more steps for encouragement and development of the MSME sector, as they are labour intensive
and their conception period is small.
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