The Ministry of Micro, Small and Medium Enterprises (MSME) is the federal body responsible for all aspects of the industries within its ambit. The criterion to qualify as a MSME is financial rather than based on product. Thus, a MSME can be part of any number of industries, from textiles to electronics and pottery to chemicals. The categories of “micro, small and medium” cover manufacturing and service enterprises with fixed investments costs ranging from a minimum of $20,000 to a maximum of $2 million. Growth in the MSME sector is important to both generate employment as well as expand the national economy.
According to the latest census (2006-2007), MSMEs employ almost 60 million people. Of these, the millions employed in rural, traditional enterprises, such as weaving khadi, are often unable to find jobs in other organized sectors. MSMEs also produce some 45% of the country’s manufacturing total and account for 40% of all exports. Yet, it is generally agreed that the sector’s immense potential has not been tapped. The major barriers to growth, generally speaking, are inaccessibility to credit and financial institutions, inadequate skill training, poor information flow about raw materials and markets, and inferior technology and infrastructure systems. The Ministry of Micro, Small and Medium Enterprises is tasked with designing policy as well as on-the-ground responses to these issues.
The Ministry of Micro, Small and Medium Enterprises was established in 2007 by merging the Ministry of Agro and Rural Industries and the Ministry of Small Scale Industries. In fact, these two ministries were initially formed in 1999 as one entity with two distinct mandates – namely the Ministry of Small Scale Industries and Agro and Rural Industries (SSI & ARI) – only to be split in 2001. The re-merging of the two in a new form was a direct result of Parliament passing the October 2006 Micro, Small and Medium Enterprises Development Act. In many ways the act is a clear continuation of the emphasis placed on micro and small industries since 1948.
It is possible to look at the Indian government’s policies on MSMEs in four distinct phases, the 2006 Act establishing the most recent of them.
From independence to liberalization (1948-1991), micro and small enterprises were highlighted as crucial employment generation tools, especially in rural India. Thus, bodies still active today, such as the Coir Board and the Khadi and Village Industries Commission (KVIC), were established in this period. Federal and state credit schemes and skills training programs were also instituted. The main thrust of the government policy was, however, distinctly protectionist. At a fundamental level, many micro and small industries survived because a long list of items was reserved exclusively for their production.
In 1991, with the liberalization of the national economy, “competition” became the buzzword. Suddenly, the discourse was no longer about how to protect smaller undertakings from the market. Rather, it was now time for these businesses to learn to survive and flourish in the market. To this end, the process of steadily reducing the reserved items list was instituted. The state also intensified programs to provide training in new technologies, domestic marketing and export regulations. The most significant new development was the establishment of the Small Industries Development Bank of India (SIDBI). Today housed under the Ministry of Finance, the SIDBI is the sole body responsible for overseeing financing in the MSME sector.
In 1999, the responsibility for making micro and small industries more competitive was consolidated into one federal level body – the newly minted Ministry of Small Scale Industries and Agro & Rural Industries (SSI & ARI). Existing bodies working for the sector – Coir Board, KVIC and the Office of the Development Commissioner – were brought under the purview of the new ministry. The emphasis placed on access to credit and markets continued in this phase, now overseen by a central body committed to the promotion of small scale and rural industries. The creation of a single apex body with a cabinet seat also led to greater attention to the sector at a political or policy level.
The Micro, Small and Medium Enterprise Development Act of 2006 introduced a new framework for the MSME sector. First, it gave a legal definition to the previously fluid term “enterprise.” Second, it created the new category of a “medium” enterprise, providing clear financial guidelines to define “micro,” “small” and “medium” for both manufacturing and services. Third, it removed a significant protectionist measure still in place, doing away with the existing 24% holdings ceiling in MSMEs for both domestic and international investors. Today, there is no special across-the-board protection for MSMEs, only caps based on specific sectors.
In line with its extensive mandate, the programs of the Ministry of Micro, Small and Medium Enterprises are diverse in area and varied in scope. Broadly speaking, the majority of its activities to ease the way for MSMEs come under the following program areas:
Advocacy: Pushing for policy favoring MSMEs, whether the entire sector or specific subsections, is a central mandate of the Ministry of Micro, Small and Medium Industries. The immense on-the-ground impact of successful policy advocacy can be analyzed through two recent government decisions. First, in November 2011, the Union Cabinet adopted the “Public Procurement Policy,” which compels all ministries and public bodies to buy, at minimum, 20% of their yearly supplies from MSMEs. Within this 20%, four percent of goods must be purchased from SC/ST-run MSMEs. Considering the size of the centre’s bureaucracy, this decision will ensure significant business volume for a section of MSMEs. Second, a month later, in December 2011, the Indian Parliament passed the “Regulation of Factors” bill. Factoring is a process whereby a business can sell its invoices to another business at a cheaper rate, receiving cash up-front in return. This bill was expected to ease the liquidity crunch faced by many MSMEs.
Employment Generation: The MSME sector, with its relatively low barriers to entry, is a major part of the government’s bid to reduce a national unemployment rate hovering close to 10%. In this sense, creating jobs is an underlying goal built into all programs. Initiatives explicitly aimed at employment generation are usually tied to trainings – another major focus area in MSME promotion – and micro-finance loans. Since 2008, the ministry has also been implementing the Prime Minister’s Employment Generation Programme (PMEGP), a credit and subsidy program outlined in greater detail in the next section.
Credit and the Financial Sector: With over 90% of small business falling out the scope of the organized financial sector, accessing cash at reasonable interest rates is a serious challenge in the MSME sector. Consequently, there is a Priority Sector Lending Policy in place, requiring private and public banks to provide 40% of their total loan amount to priority sectors, including MSEs. Considering the complex network of mechanisms used by banks to disburse these loans, the ministry is involved in financial sector reform. To fill in the gaps left by current policy, the ministry has also implemented a Credit Guarantee Scheme, which allows borrowing for those without collateral. The program guarantees up to 75% of a loan taken by a micro or small enterprise – 80% for MSEs in the Northeast and those owned by women.
Technology: The ministry is responsible for providing technology and ICT services and trainings to make Indian MSMEs internationally competitive. A number of initiatives related to technology are in place. Key among them is a subsidy program for upgrading technology as well as funds to state governments for the creation of new ‘mini tools rooms’ to producing necessary equipment. Details on other technology-related schemes are available on the website of the Development Commissioner (MSME).
Infrastructure & Systems: The ministry’s central strategy to create efficient, systematic infrastructure is the Micro and Small Enterprises Cluster Development Programme (MSECDP). Under this initiative, MSEs will be separated into clusters in a number of different ways. One the one hand, new industrial areas will be created for specific enterprises while existing locations will be improved. This will allow for common training centers, storage depots and testing facilities, among other things. On the other hand, MSEs will be encouraged to form consortiums, giving them greater coherence in advocating for themselves.
Marketing and Export: Assisting MSEs to make inroads into domestic and global markets is a crucial aspect of the ministry’s mandate. Consequently, a number of marketing schemes are in place. The Office of the Development Commissioner has an entire division devoted to providing marketing assistance. It provides funds to MSEs looking to attending industrial fairs, exhibitions and expos as well as those using international standard practices in bar-coding products. A separate Marketing Assistance Scheme is also in place through the National Small Industries Cooperation. The Khadi and Village Industries Commission also has its own marketing assistance strategy in place.
Attached or Autonomous Bodies
Coir Board
Established in 1953 by an act of Parliament, the board is the sole official body overseeing all aspects of coir production in India. It was previously attached to the Ministry of Agro and Rural Industries. A fiber extracted from coconut husk, coir is largely used to produce items such as mats, yarns and rope for both domestic and export markets. Coir products form a significant industry in the larger coconut growing states including Kerala, Orissa, Maharashtra and Tamil Nadu, among others. Over 500,000 people, most of them in the lowest socio-economic bracket, are employed in the industry. The Coir Board implements a number of ‘schemes’ to provide skill training, expand domestic and international markets, introduce welfare benefits to workers and conduct research to identify additional uses of coir. Details on schemes, export statistics and tenders are available on the Board’s website.
Khadi and Village Industries Commission (KVIC):
Established in 1956 by an act of Parliament, the mandate of the KVIC is to develop all categories of rural industries and increase rural employment. The board was attached to the Ministry of Agro and Rural Industries till 2007. The KVIC designs and implements programs to provide subsidies to rural entrepreneurs, offer incentives to exporters and foster research on rural industries, among others. The largest of its schemes is the Prime Minister’s Employment Generation Program (PMEGP), created in 2008 by merging the Prime Minister’s Rojgar Yojana (PMRY) and the Rural Employment Generation Programme (REGP). Under the PMEGP, individuals or organizations can access loans from specified banks covering up to 90%– 95% for Scheduled Castes and Scheduled Tribes – of the cost for any given undertaking. After a period of two years, 25% of the loan – 35 for SCs and STs – is refunded to the recipient. As stated in its RTI the KVIC employs 3784 officers and staff as well as 740 trading officers and staff.
National Small Industries Corporation Limited (NSIC)
NSCI was established by the Union Government in 1955 to provide initial set-up assistance, largely in purchasing equipment, to small-scale entrepreneurs. Today, the corporation is involved in a range of activities targeted at encouraging small-scale industries. Among other services, NSIC assists small industries in bidding for government contracts, offers financial advice and supplies bulk amounts of raw materials such as coal and steel. With supervision from four regional centers in Chennai, Kolkata, New Delhi and Mumbai, NSIC run a network of 123 offices and centers across the country. For the 2009-2010 fiscal year, the NSIC declared a business volume of Rs. 4488 crore ($876.82 million USD).
National Institute of Micro, Small and Medium Enterprises (Ni-MSME)
Established in 1960 as the Central Industrial Extension Training Institute (CIETI), Ni-MSME underwent many changes in name and mandate till it came to its current form in 2007. Located in Hyderabad, the institute comes under the direct purview of the government, functioning to some degree as the official think tank for MSME activities. The Institute provides consultancy services to clients ranging from international organizations to government departments. It also publishes a journal and runs four academic programs: School of Enterprise Development, School of Enterprise Management, School of Entrepreneurship and Extension and the School of Enterprise Communication and Information. The Ni-MSME currently has 46 employees.
National Institute for Entrepreneurship & Small Business Development (NIESBUD)
Established in 1983, the institute is a coordinating body which engages with other entities working with small businesses or entrepreneurs. Located in Noida, Uttar Pradesh, the primary goal of the Institute is to provide training on promoting entrepreneurship, whether to other government agencies, NGOs or private businesses. The existing faculty members of the institute offer a set number of standard courses ranging from mushroom cultivation to setting up a cyber café. Alongside this more technical mandate, the institute is also involved in creating standardized surveys on entrepreneurship and in organizing events, seminars and conferences. With a team of five core faculty members and 10 administrative staff, the institute has not received government grants since the 2003-2004 fiscal year. Rather, it earns its operating costs by taking on research, trainings and through work contracted by various government bodies.
Indian Institute of Entrepreneurship (IIE)
Established in 1993 as an autonomous national body of the Indian government, the Indian Institute of Entrepreneurship was initially placed under the Ministry of Industry. The mandate of the IIE is broadly similar to that of NIESBUD. The four Institute’s four main areas of activity are in providing training, consultancy and research services as well as organizing seminars. Located in Guwahati, the capital of Assam, the IIE’s geographical area of focus is the Northeast. It has regional office in Dehra Dun and branches in all seven Northeaster states as well as one in Sikkim. The institute employees 49 staff members.
Office of the Development Commissioner (MSME)
Established in 1954 as the Office of the Development Commissioner (Small Scale Industries), the office took on the MSME portfolio in 2006. As the central, apex developmental body attached to the Ministry of Micro, Small and Medium Enterprises, the office’s role spans the strategic, the technical and the academic. On the strategic side, the agency provides policy recommendations to the Union government as well as functions in linking the States to the center through its network of 70 branches and 21 autonomous bodies. On the technical front, the agency conducts testing and calibration work for industries including the chemical and mechanical. In the academic area, the Office publishes a range of items from books to trade reports to statistical data on MSME in India.
With the lack of access to financial institutions, and thus capital, the central barrier to the growth of SMEs, the largest chunk of the MSME’s funding going to credit schemes. The largest receiver of funds is the Prime Minister’s Employment Generation Programme (PMEGP) with a whopping budget of Rs. 906 crore ($177.01 million USD) for the 2010-2011 fiscal year. Indeed, the Khadhi and Village Industries Commission (KVIC), which houses the PMEGP, also receives significant financial assistance from the union ministry. Along the same lines, the next large chunk of funding goes to the Credit Guarantee Scheme implemented by the Office of the Commissioner (MSME).
After credit subsidy programs, the MSME makes large financial investments in two other areas – technology and training. In the 2010-2011 fiscal year, the ministry set aside somewhere about Rs. 335 crore ($65.45 million USD) for technology-related investments, including infrastructure such as testing stations and mini tool rooms as well as the purchase of modern communication systems. Similarly, notable funds are spent on skill developing and training, including in marking goods internationally.
India’s Microfinance Mess
In late 2010, India’s Micro Finance Institutions were in the midst of a major crisis. It began with media coverage of MFI clients unable to repay usurious loans committing suicide in Andhra Pradesh. Subsequently, the state government shut down the operations of major MFIs statewide, bringing debt repayment to a near halt. This crisis had a direct impact on MSEs as MFIs are a major source of credit for smaller businesses. Indeed banks, which provide the bulk of loans to MFIs, usually divert much of their priority sector lending obligations, of 40%, to micro finance organizations. Consequently, a strident blame-game began between the MFIs, the banks who had loaned them money and the state government. Soon after, the Reserve Bank of India entered the scene, constituting the Malegam Committee to draft a report on the MFI sector. It was evident that regulatory reforms were pending. The Ministry of Micro, Small and Medium Enterprises, with no legal power over MFIs or the Small Industries Development Bank of India, was largely a spectator in this crisis. The controversy has, however, had a significant impact on credit availability for MSEs. A projected overhaul of the sector through the Ministry of Finance’s Micro Financial Sector (Development and Regulation) Bill, 2011, has yet to materialize.
‘Andhra Crisis is Now Hurting MFIs National Interest’ (Economic Times)
‘Who’s to Blame for the Crisis in Andhra Pradesh?’ (by Beth Rhyne, Center for Financial Inclusion)
‘Money for Nothing. And Misery for Free.’ (by Rohini Mohan, Tehelka)
Foreign Direct Investment (FDI) in Retail
In late 2011, a political furor arose over the cabinet decision to allow up to 51% Foreign Direct Investment (FDI) in multi-brand retail. The anticipated outcome of this decision was the influx of large-scale retailers such as Carrefour, Costco and Walmart into Indian cities with a population larger than one million. The ruling Congress party came under great pressure to repeal the decision, with trade unions across the country staging strikes and key coalition members insisting on a roll-back. The impact on the SME sector formed an important part of the discussion on the pros and cons of FDI in multi-brand retail.
Pro FDI:
In the early days of the debate, many SME organizations were pro-FDI because the government promised that foreign retailers were obliged to source 30% of raw material from Indian SMEs. Media reports stated that MSME Minister Virbhadra Singh had been assured on this point during a Union Cabinet meeting. Other reports, however, soon surfaced, arguing that such protection of local SMEs was illegal under WTO agreements to which India is signatory. Even so, Singh argued that small industries, which are scattered across the country, will not be affected by global giants opening a handful of stores in large cities. Overall, the pro-FDI voices focus on the investments large retailers make to ensure efficiency and minimize leakages in back-end infrastructure. These improvements, say FDI proponents, will reduce prices as well as compel SMEs to invest in better branding, renovate store spaces and increase the range of customer services – such as home delivery and acceptance of credit cards – offered.
FDI in Retail Not to Affect Small Units: Virbhadra (Press Trust of India)
FDI in Retail: A Mutually Beneficial Arrangement (by Goldie Dhama and Sahil Gupta, indiaretailing.com)
FDI in Retail to Boost SME Business: CII (Business Standard)
FDI in Retail: Govt Places Full-page Ads on ‘Myth and Reality’ (NDTV)
Small Units to Benefit from FDI in Retail: Chambers (Hindu Business Line)
Anti FDI:
From the point of view of SMEs, opposition to FDI in retail stems from a fear of being pushed aside by the flood of cheaper products offered by large retailers. The most significant fear is that the domination of large retailers will be so complete that smaller ones will be compelled to shut down entirely. In terms of employment, those opposed to FDI argue that the jobs created by the entry of global retailers will be far smaller than the number of business forced to shut down due to the competition. Responding to the increased back-end infrastructure argument, anti FDI voices note that global retailers such as Walmart only work with medium scale local producers, sidelining the smaller ones entirely. Many anti FDI proponents have also criticized the government for its error in misleading the public by announcing a 30% reservation in sourcing locally.
The Devil in the Retail? (by Lola Nayar, Arti Sharma, Smruti Koppikar and Pragya Singh, Outlook Magazine)
Scuttling Debate on FDI in Retail (by Nirmala Sitharaman, Hindu Business Line)
Allowing FDI Retail in India: Lies, Lies and Damn Lies (by Devinder Sharma, Ground Reality)
Prime Minister’s Council on Micro and Small Enterprises:
In 2010, a task force constituted to look into the needs of MSMEs in India presented its report to the Prime Minister Manmohan Singh. The report made a host of recommendations, including structural legal reforms. One of its major recommendations, however, was the formation of a Prime Minister’s Council on Micro and Small Enterprises to be housed in the Pride Ministers Office. The task force argued that such a move was necessary to adequately tackle the diverse needs of MSEs, which range from small, unorganized sector undertakings to cutting-edge technological enterprises. The Ministry of Micro, Small and Medium Enterprises would implement the recommendations with the council performing oversight twice a year.
Virbhadra Singh
Virbhadra Singh was the Union Cabinet Minister for Micro, Small and Medium Enterprises until June 2012. Singh has been a member of the Indian National Congress since 1961, joining the party shortly after completing his MA in History from Delhi University. Born in the town of Sarahan, about 130 km north of Shimla, Singh has served seven terms as member of the Himachal Pradesh Legislative Assembly and five non-consecutive terms as chief minister of the state. He is also the titular king of the once independent Bushahar State, now in northern Himachal Pradesh. Singh has been elected five times to the Lok Sabha from his constituency in Mandi. He was appointed Union Minister for Steel in 2009, serving in that ministry till January 2011 when he took up his current position. Singh has been described as non-performing and deadwood in both his ministerial capacities. Because of this, he was relegated from the relatively prestigious Ministry of Steel to Micro, Small and Medium Enterprises, considered a far lower prestige assignment.
He has battled corruption charges dating back to 1989, when he was chief minister of Himachal Pradesh. In 2007, Singh’s political rival, Vijai Singh Mankotia, leaked a taped conversation between himself, his wife Pratibha Singh, and former bureaucrat Mohinder Lal. They were alleged to have conspired with some industrialists to push through a cement plant in Himachal that was widely opposed by locals by attempting to influence then environment minister, A Raja, who was later charged in the 2G spectrum scam. Based on the evidence in the phone call, a case was registered against Singh and his wife. But Lal died by the time they were charged. Singh also was accused of witness tampering in the ongoing case, with two prospective witnesses filing subsequent cases claiming he attempted to compel them not to testify against him.
Dinsha Patel
Dinsha Patel served as Union Minister of Micro, Small and Medium Enterprises from 2009 to January 2011. A member of the Indian National Congress, Patel was pitted against Gujarat Chief Minister Narendra Modi for the Maninagar constituency during the 2007 elections in the state. After losing to Modi, he won the 2009 Lok Sabha elections from his long-standing constituency in Nadiad.
Mahabir Prasad was appointed Minister of Micro, Small and Medium Enterprises in 2007. He was Union Minister of Agro and Rural Industries from May 2004 till its dissolution in 2007. A long standing member of the Indian National Congress he was twice elected to the Lok Sabha from Bansgaon, Uttar Pradesh. Prasad was governor of Harayana from 1995 to 2000, serving two brief stints as governor of Himachal Pradesh during the same period. In February 2009, Prasad was one of the accused in a case about a 2008 murder in Ujjapur village. In November 2010, Prasad, who had been suffering under a variety of medical complications, passed away in a New Delhi hospital.
- Table of Contents
- Overview
- History
- What it Does
- Where Does the Money Go
- Controversies
- Debate
- Suggested Reforms
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Ministry of Micro, Small and Medium Enterprises
The Ministry of Micro, Small and Medium Enterprises (MSME) is the federal body responsible for all aspects of the industries within its ambit. The criterion to qualify as a MSME is financial rather than based on product. Thus, a MSME can be part of any number of industries, from textiles to electronics and pottery to chemicals. The categories of “micro, small and medium” cover manufacturing and service enterprises with fixed investments costs ranging from a minimum of $20,000 to a maximum of $2 million. Growth in the MSME sector is important to both generate employment as well as expand the national economy.
According to the latest census (2006-2007), MSMEs employ almost 60 million people. Of these, the millions employed in rural, traditional enterprises, such as weaving khadi, are often unable to find jobs in other organized sectors. MSMEs also produce some 45% of the country’s manufacturing total and account for 40% of all exports. Yet, it is generally agreed that the sector’s immense potential has not been tapped. The major barriers to growth, generally speaking, are inaccessibility to credit and financial institutions, inadequate skill training, poor information flow about raw materials and markets, and inferior technology and infrastructure systems. The Ministry of Micro, Small and Medium Enterprises is tasked with designing policy as well as on-the-ground responses to these issues.
The Ministry of Micro, Small and Medium Enterprises was established in 2007 by merging the Ministry of Agro and Rural Industries and the Ministry of Small Scale Industries. In fact, these two ministries were initially formed in 1999 as one entity with two distinct mandates – namely the Ministry of Small Scale Industries and Agro and Rural Industries (SSI & ARI) – only to be split in 2001. The re-merging of the two in a new form was a direct result of Parliament passing the October 2006 Micro, Small and Medium Enterprises Development Act. In many ways the act is a clear continuation of the emphasis placed on micro and small industries since 1948.
It is possible to look at the Indian government’s policies on MSMEs in four distinct phases, the 2006 Act establishing the most recent of them.
From independence to liberalization (1948-1991), micro and small enterprises were highlighted as crucial employment generation tools, especially in rural India. Thus, bodies still active today, such as the Coir Board and the Khadi and Village Industries Commission (KVIC), were established in this period. Federal and state credit schemes and skills training programs were also instituted. The main thrust of the government policy was, however, distinctly protectionist. At a fundamental level, many micro and small industries survived because a long list of items was reserved exclusively for their production.
In 1991, with the liberalization of the national economy, “competition” became the buzzword. Suddenly, the discourse was no longer about how to protect smaller undertakings from the market. Rather, it was now time for these businesses to learn to survive and flourish in the market. To this end, the process of steadily reducing the reserved items list was instituted. The state also intensified programs to provide training in new technologies, domestic marketing and export regulations. The most significant new development was the establishment of the Small Industries Development Bank of India (SIDBI). Today housed under the Ministry of Finance, the SIDBI is the sole body responsible for overseeing financing in the MSME sector.
In 1999, the responsibility for making micro and small industries more competitive was consolidated into one federal level body – the newly minted Ministry of Small Scale Industries and Agro & Rural Industries (SSI & ARI). Existing bodies working for the sector – Coir Board, KVIC and the Office of the Development Commissioner – were brought under the purview of the new ministry. The emphasis placed on access to credit and markets continued in this phase, now overseen by a central body committed to the promotion of small scale and rural industries. The creation of a single apex body with a cabinet seat also led to greater attention to the sector at a political or policy level.
The Micro, Small and Medium Enterprise Development Act of 2006 introduced a new framework for the MSME sector. First, it gave a legal definition to the previously fluid term “enterprise.” Second, it created the new category of a “medium” enterprise, providing clear financial guidelines to define “micro,” “small” and “medium” for both manufacturing and services. Third, it removed a significant protectionist measure still in place, doing away with the existing 24% holdings ceiling in MSMEs for both domestic and international investors. Today, there is no special across-the-board protection for MSMEs, only caps based on specific sectors.
In line with its extensive mandate, the programs of the Ministry of Micro, Small and Medium Enterprises are diverse in area and varied in scope. Broadly speaking, the majority of its activities to ease the way for MSMEs come under the following program areas:
Advocacy: Pushing for policy favoring MSMEs, whether the entire sector or specific subsections, is a central mandate of the Ministry of Micro, Small and Medium Industries. The immense on-the-ground impact of successful policy advocacy can be analyzed through two recent government decisions. First, in November 2011, the Union Cabinet adopted the “Public Procurement Policy,” which compels all ministries and public bodies to buy, at minimum, 20% of their yearly supplies from MSMEs. Within this 20%, four percent of goods must be purchased from SC/ST-run MSMEs. Considering the size of the centre’s bureaucracy, this decision will ensure significant business volume for a section of MSMEs. Second, a month later, in December 2011, the Indian Parliament passed the “Regulation of Factors” bill. Factoring is a process whereby a business can sell its invoices to another business at a cheaper rate, receiving cash up-front in return. This bill was expected to ease the liquidity crunch faced by many MSMEs.
Employment Generation: The MSME sector, with its relatively low barriers to entry, is a major part of the government’s bid to reduce a national unemployment rate hovering close to 10%. In this sense, creating jobs is an underlying goal built into all programs. Initiatives explicitly aimed at employment generation are usually tied to trainings – another major focus area in MSME promotion – and micro-finance loans. Since 2008, the ministry has also been implementing the Prime Minister’s Employment Generation Programme (PMEGP), a credit and subsidy program outlined in greater detail in the next section.
Credit and the Financial Sector: With over 90% of small business falling out the scope of the organized financial sector, accessing cash at reasonable interest rates is a serious challenge in the MSME sector. Consequently, there is a Priority Sector Lending Policy in place, requiring private and public banks to provide 40% of their total loan amount to priority sectors, including MSEs. Considering the complex network of mechanisms used by banks to disburse these loans, the ministry is involved in financial sector reform. To fill in the gaps left by current policy, the ministry has also implemented a Credit Guarantee Scheme, which allows borrowing for those without collateral. The program guarantees up to 75% of a loan taken by a micro or small enterprise – 80% for MSEs in the Northeast and those owned by women.
Technology: The ministry is responsible for providing technology and ICT services and trainings to make Indian MSMEs internationally competitive. A number of initiatives related to technology are in place. Key among them is a subsidy program for upgrading technology as well as funds to state governments for the creation of new ‘mini tools rooms’ to producing necessary equipment. Details on other technology-related schemes are available on the website of the Development Commissioner (MSME).
Infrastructure & Systems: The ministry’s central strategy to create efficient, systematic infrastructure is the Micro and Small Enterprises Cluster Development Programme (MSECDP). Under this initiative, MSEs will be separated into clusters in a number of different ways. One the one hand, new industrial areas will be created for specific enterprises while existing locations will be improved. This will allow for common training centers, storage depots and testing facilities, among other things. On the other hand, MSEs will be encouraged to form consortiums, giving them greater coherence in advocating for themselves.
Marketing and Export: Assisting MSEs to make inroads into domestic and global markets is a crucial aspect of the ministry’s mandate. Consequently, a number of marketing schemes are in place. The Office of the Development Commissioner has an entire division devoted to providing marketing assistance. It provides funds to MSEs looking to attending industrial fairs, exhibitions and expos as well as those using international standard practices in bar-coding products. A separate Marketing Assistance Scheme is also in place through the National Small Industries Cooperation. The Khadi and Village Industries Commission also has its own marketing assistance strategy in place.
Attached or Autonomous Bodies
Coir Board
Established in 1953 by an act of Parliament, the board is the sole official body overseeing all aspects of coir production in India. It was previously attached to the Ministry of Agro and Rural Industries. A fiber extracted from coconut husk, coir is largely used to produce items such as mats, yarns and rope for both domestic and export markets. Coir products form a significant industry in the larger coconut growing states including Kerala, Orissa, Maharashtra and Tamil Nadu, among others. Over 500,000 people, most of them in the lowest socio-economic bracket, are employed in the industry. The Coir Board implements a number of ‘schemes’ to provide skill training, expand domestic and international markets, introduce welfare benefits to workers and conduct research to identify additional uses of coir. Details on schemes, export statistics and tenders are available on the Board’s website.
Khadi and Village Industries Commission (KVIC):
Established in 1956 by an act of Parliament, the mandate of the KVIC is to develop all categories of rural industries and increase rural employment. The board was attached to the Ministry of Agro and Rural Industries till 2007. The KVIC designs and implements programs to provide subsidies to rural entrepreneurs, offer incentives to exporters and foster research on rural industries, among others. The largest of its schemes is the Prime Minister’s Employment Generation Program (PMEGP), created in 2008 by merging the Prime Minister’s Rojgar Yojana (PMRY) and the Rural Employment Generation Programme (REGP). Under the PMEGP, individuals or organizations can access loans from specified banks covering up to 90%– 95% for Scheduled Castes and Scheduled Tribes – of the cost for any given undertaking. After a period of two years, 25% of the loan – 35 for SCs and STs – is refunded to the recipient. As stated in its RTI the KVIC employs 3784 officers and staff as well as 740 trading officers and staff.
National Small Industries Corporation Limited (NSIC)
NSCI was established by the Union Government in 1955 to provide initial set-up assistance, largely in purchasing equipment, to small-scale entrepreneurs. Today, the corporation is involved in a range of activities targeted at encouraging small-scale industries. Among other services, NSIC assists small industries in bidding for government contracts, offers financial advice and supplies bulk amounts of raw materials such as coal and steel. With supervision from four regional centers in Chennai, Kolkata, New Delhi and Mumbai, NSIC run a network of 123 offices and centers across the country. For the 2009-2010 fiscal year, the NSIC declared a business volume of Rs. 4488 crore ($876.82 million USD).
National Institute of Micro, Small and Medium Enterprises (Ni-MSME)
Established in 1960 as the Central Industrial Extension Training Institute (CIETI), Ni-MSME underwent many changes in name and mandate till it came to its current form in 2007. Located in Hyderabad, the institute comes under the direct purview of the government, functioning to some degree as the official think tank for MSME activities. The Institute provides consultancy services to clients ranging from international organizations to government departments. It also publishes a journal and runs four academic programs: School of Enterprise Development, School of Enterprise Management, School of Entrepreneurship and Extension and the School of Enterprise Communication and Information. The Ni-MSME currently has 46 employees.
National Institute for Entrepreneurship & Small Business Development (NIESBUD)
Established in 1983, the institute is a coordinating body which engages with other entities working with small businesses or entrepreneurs. Located in Noida, Uttar Pradesh, the primary goal of the Institute is to provide training on promoting entrepreneurship, whether to other government agencies, NGOs or private businesses. The existing faculty members of the institute offer a set number of standard courses ranging from mushroom cultivation to setting up a cyber café. Alongside this more technical mandate, the institute is also involved in creating standardized surveys on entrepreneurship and in organizing events, seminars and conferences. With a team of five core faculty members and 10 administrative staff, the institute has not received government grants since the 2003-2004 fiscal year. Rather, it earns its operating costs by taking on research, trainings and through work contracted by various government bodies.
Indian Institute of Entrepreneurship (IIE)
Established in 1993 as an autonomous national body of the Indian government, the Indian Institute of Entrepreneurship was initially placed under the Ministry of Industry. The mandate of the IIE is broadly similar to that of NIESBUD. The four Institute’s four main areas of activity are in providing training, consultancy and research services as well as organizing seminars. Located in Guwahati, the capital of Assam, the IIE’s geographical area of focus is the Northeast. It has regional office in Dehra Dun and branches in all seven Northeaster states as well as one in Sikkim. The institute employees 49 staff members.
Office of the Development Commissioner (MSME)
Established in 1954 as the Office of the Development Commissioner (Small Scale Industries), the office took on the MSME portfolio in 2006. As the central, apex developmental body attached to the Ministry of Micro, Small and Medium Enterprises, the office’s role spans the strategic, the technical and the academic. On the strategic side, the agency provides policy recommendations to the Union government as well as functions in linking the States to the center through its network of 70 branches and 21 autonomous bodies. On the technical front, the agency conducts testing and calibration work for industries including the chemical and mechanical. In the academic area, the Office publishes a range of items from books to trade reports to statistical data on MSME in India.
With the lack of access to financial institutions, and thus capital, the central barrier to the growth of SMEs, the largest chunk of the MSME’s funding going to credit schemes. The largest receiver of funds is the Prime Minister’s Employment Generation Programme (PMEGP) with a whopping budget of Rs. 906 crore ($177.01 million USD) for the 2010-2011 fiscal year. Indeed, the Khadhi and Village Industries Commission (KVIC), which houses the PMEGP, also receives significant financial assistance from the union ministry. Along the same lines, the next large chunk of funding goes to the Credit Guarantee Scheme implemented by the Office of the Commissioner (MSME).
After credit subsidy programs, the MSME makes large financial investments in two other areas – technology and training. In the 2010-2011 fiscal year, the ministry set aside somewhere about Rs. 335 crore ($65.45 million USD) for technology-related investments, including infrastructure such as testing stations and mini tool rooms as well as the purchase of modern communication systems. Similarly, notable funds are spent on skill developing and training, including in marking goods internationally.
India’s Microfinance Mess
In late 2010, India’s Micro Finance Institutions were in the midst of a major crisis. It began with media coverage of MFI clients unable to repay usurious loans committing suicide in Andhra Pradesh. Subsequently, the state government shut down the operations of major MFIs statewide, bringing debt repayment to a near halt. This crisis had a direct impact on MSEs as MFIs are a major source of credit for smaller businesses. Indeed banks, which provide the bulk of loans to MFIs, usually divert much of their priority sector lending obligations, of 40%, to micro finance organizations. Consequently, a strident blame-game began between the MFIs, the banks who had loaned them money and the state government. Soon after, the Reserve Bank of India entered the scene, constituting the Malegam Committee to draft a report on the MFI sector. It was evident that regulatory reforms were pending. The Ministry of Micro, Small and Medium Enterprises, with no legal power over MFIs or the Small Industries Development Bank of India, was largely a spectator in this crisis. The controversy has, however, had a significant impact on credit availability for MSEs. A projected overhaul of the sector through the Ministry of Finance’s Micro Financial Sector (Development and Regulation) Bill, 2011, has yet to materialize.
‘Andhra Crisis is Now Hurting MFIs National Interest’ (Economic Times)
‘Who’s to Blame for the Crisis in Andhra Pradesh?’ (by Beth Rhyne, Center for Financial Inclusion)
‘Money for Nothing. And Misery for Free.’ (by Rohini Mohan, Tehelka)
Foreign Direct Investment (FDI) in Retail
In late 2011, a political furor arose over the cabinet decision to allow up to 51% Foreign Direct Investment (FDI) in multi-brand retail. The anticipated outcome of this decision was the influx of large-scale retailers such as Carrefour, Costco and Walmart into Indian cities with a population larger than one million. The ruling Congress party came under great pressure to repeal the decision, with trade unions across the country staging strikes and key coalition members insisting on a roll-back. The impact on the SME sector formed an important part of the discussion on the pros and cons of FDI in multi-brand retail.
Pro FDI:
In the early days of the debate, many SME organizations were pro-FDI because the government promised that foreign retailers were obliged to source 30% of raw material from Indian SMEs. Media reports stated that MSME Minister Virbhadra Singh had been assured on this point during a Union Cabinet meeting. Other reports, however, soon surfaced, arguing that such protection of local SMEs was illegal under WTO agreements to which India is signatory. Even so, Singh argued that small industries, which are scattered across the country, will not be affected by global giants opening a handful of stores in large cities. Overall, the pro-FDI voices focus on the investments large retailers make to ensure efficiency and minimize leakages in back-end infrastructure. These improvements, say FDI proponents, will reduce prices as well as compel SMEs to invest in better branding, renovate store spaces and increase the range of customer services – such as home delivery and acceptance of credit cards – offered.
FDI in Retail Not to Affect Small Units: Virbhadra (Press Trust of India)
FDI in Retail: A Mutually Beneficial Arrangement (by Goldie Dhama and Sahil Gupta, indiaretailing.com)
FDI in Retail to Boost SME Business: CII (Business Standard)
FDI in Retail: Govt Places Full-page Ads on ‘Myth and Reality’ (NDTV)
Small Units to Benefit from FDI in Retail: Chambers (Hindu Business Line)
Anti FDI:
From the point of view of SMEs, opposition to FDI in retail stems from a fear of being pushed aside by the flood of cheaper products offered by large retailers. The most significant fear is that the domination of large retailers will be so complete that smaller ones will be compelled to shut down entirely. In terms of employment, those opposed to FDI argue that the jobs created by the entry of global retailers will be far smaller than the number of business forced to shut down due to the competition. Responding to the increased back-end infrastructure argument, anti FDI voices note that global retailers such as Walmart only work with medium scale local producers, sidelining the smaller ones entirely. Many anti FDI proponents have also criticized the government for its error in misleading the public by announcing a 30% reservation in sourcing locally.
The Devil in the Retail? (by Lola Nayar, Arti Sharma, Smruti Koppikar and Pragya Singh, Outlook Magazine)
Scuttling Debate on FDI in Retail (by Nirmala Sitharaman, Hindu Business Line)
Allowing FDI Retail in India: Lies, Lies and Damn Lies (by Devinder Sharma, Ground Reality)
Prime Minister’s Council on Micro and Small Enterprises:
In 2010, a task force constituted to look into the needs of MSMEs in India presented its report to the Prime Minister Manmohan Singh. The report made a host of recommendations, including structural legal reforms. One of its major recommendations, however, was the formation of a Prime Minister’s Council on Micro and Small Enterprises to be housed in the Pride Ministers Office. The task force argued that such a move was necessary to adequately tackle the diverse needs of MSEs, which range from small, unorganized sector undertakings to cutting-edge technological enterprises. The Ministry of Micro, Small and Medium Enterprises would implement the recommendations with the council performing oversight twice a year.
Virbhadra Singh
Virbhadra Singh was the Union Cabinet Minister for Micro, Small and Medium Enterprises until June 2012. Singh has been a member of the Indian National Congress since 1961, joining the party shortly after completing his MA in History from Delhi University. Born in the town of Sarahan, about 130 km north of Shimla, Singh has served seven terms as member of the Himachal Pradesh Legislative Assembly and five non-consecutive terms as chief minister of the state. He is also the titular king of the once independent Bushahar State, now in northern Himachal Pradesh. Singh has been elected five times to the Lok Sabha from his constituency in Mandi. He was appointed Union Minister for Steel in 2009, serving in that ministry till January 2011 when he took up his current position. Singh has been described as non-performing and deadwood in both his ministerial capacities. Because of this, he was relegated from the relatively prestigious Ministry of Steel to Micro, Small and Medium Enterprises, considered a far lower prestige assignment.
He has battled corruption charges dating back to 1989, when he was chief minister of Himachal Pradesh. In 2007, Singh’s political rival, Vijai Singh Mankotia, leaked a taped conversation between himself, his wife Pratibha Singh, and former bureaucrat Mohinder Lal. They were alleged to have conspired with some industrialists to push through a cement plant in Himachal that was widely opposed by locals by attempting to influence then environment minister, A Raja, who was later charged in the 2G spectrum scam. Based on the evidence in the phone call, a case was registered against Singh and his wife. But Lal died by the time they were charged. Singh also was accused of witness tampering in the ongoing case, with two prospective witnesses filing subsequent cases claiming he attempted to compel them not to testify against him.
Dinsha Patel
Dinsha Patel served as Union Minister of Micro, Small and Medium Enterprises from 2009 to January 2011. A member of the Indian National Congress, Patel was pitted against Gujarat Chief Minister Narendra Modi for the Maninagar constituency during the 2007 elections in the state. After losing to Modi, he won the 2009 Lok Sabha elections from his long-standing constituency in Nadiad.
Mahabir Prasad was appointed Minister of Micro, Small and Medium Enterprises in 2007. He was Union Minister of Agro and Rural Industries from May 2004 till its dissolution in 2007. A long standing member of the Indian National Congress he was twice elected to the Lok Sabha from Bansgaon, Uttar Pradesh. Prasad was governor of Harayana from 1995 to 2000, serving two brief stints as governor of Himachal Pradesh during the same period. In February 2009, Prasad was one of the accused in a case about a 2008 murder in Ujjapur village. In November 2010, Prasad, who had been suffering under a variety of medical complications, passed away in a New Delhi hospital.
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