Role of SMEs in economic development of India


It’s true to say that small, medium and micro enterprises (SMEs) have always been the backbone of the Indian economy from the starting and secondary sector in later. Role of SMEs in the economic development of India like SMEs act as a panacea for numerous economic woes such as poverty, regional imbalances, unemployment, and income inequalities.

Basically, the MSME development act simplifies manufacturing units into different enterprises such as small, medium and micro depending upon the total investment made in plant and machinery industry. Plant and machinery enterprise with investment up to 50 million INR will come under medium enterprise; similarly, enterprise coming with investment between 1.0 million INR to 2.5 million INR will come under small enterprise and the one with less than 1.0 million INR will come under microenterprise. However, any enterprise coming with an investment under the limit of 1.0 million INR, between 1.0 – 20 million INR and up to 50 million INR is known as micro, small and medium enterprise.

Contribution of MSMEs

The medium, small, and micro enterprises play a vital role in ensuring the goals such as balancing regional development, and equality of income, economic. With the scanty investment in comparison to the large-scale public and private enterprises, the MSMEs turn out to be more efficient, thus providing enlargement employment opportunities at the low cost. Basically, the employment intensity of medium, small and micro enterprises is estimated to be four times greater when compared with other large enterprises. At present, somewhere around 36 million INR SMEs generate 80 million employment opportunities, which thereby contributes 8% of the GDP, and 45% of total manufacturing output, lastly 40% of the exports from the country. Basically, India is creating around 8000 value-added products.

One of the important contributions of SMEs in India is balancing the economic development. However, the effects of the large enterprise are limited as compared to the small industries wherein ‘fruits of percolation’ of economic growth are highly visible.  When the large enterprise is busy creating the island of growth and prosperity in the aspect of poverty, on the other hand, a small enterprise is successful in providing the social goals through equitable growth. This also helped in the industrialization of backward and rural areas, by assuring equal distribution and reducing imbalances. Urban area around 857,000 enterprises accounted for almost 54.7% of the total working enterprises in ‘Registered MSME’ sector whereas in rural areas somewhere around 707,000 enterprises are located. Another criterion is – small industries help the large industries by supplying them with ancillary products.

Certain challenges faced by SMEs

The majority of SMEs are resistant to grow, thus, resulting in the reduced productivity. Others grasp firmly to the basic concept of staying small and comfortable and tend to avoid any regulatory and taxation related problems.

Those who are under the concept of growth have a different set of problems which they need to deal with, especially with ‘financing’. A survey was conducted with over 15,000 listed and unlisted companies from different sectors such as power, agriculture, textile and IT, the common solution to everything showed that small and medium enterprises exposed to bank credit were immensely falling due to the high-interest rate.

Whilst the majority of big companies that buy from SMEs get the benefit of an interest-free repayment timeline for almost 120 days, whereas SMEs get only 60 days prior to pay back their interest-loaded loans. Because of this, the majority of SMEs have now chosen to do a reduction in their exposure to bank credit.

In addition to all this, individual sectors have the tendency to face their own challenges. For example real estate has seen many downfalls in past few years. Likewise, due to the disturbance in West Asian countries and fewer demands in European countries exports industries have seen the reduction in their business too which have turn unfavorably for small and medium enterprises.

These companies are not the market leader that’s why they fail to follow the concept of bargaining power in the pricing manner. Although, they try hard to maintain the high quality whilst dealing with the low profit.

Financing opportunities for SMEs

The best way to ensure the survival of SMEs is through different financial options; it can be through the following:

  • Foreign Banks
  • Debt Funding
  • Equity Funding
  • LIBOR for Exports
  • Mezzanine Debt Funding
  • Grants
  • NBFC Loans

Different measures are taken for the growth of MSMEs

  • The government has set up a Venture with SIDBI named as ‘Indian Opportunities Venture’ to provide 50 bn INR to the MSMEs.
  • To improve the capacity, productivity, and competitiveness of MSMEs, the government of India has adopted a ‘cluster-based approach’.
  • Credit disbursed to small and micro enterprises is now considered as a part of priority sector by banks.
  • Somewhere around, 20 items have been clearly reserved for an exclusive manufacturing by MSMEs. However, large-scale enterprises fail to produce these.
  • In order to build the capacity – central government had initiated a program ‘National Manufacturing Competitiveness Programme’ (NMCP) that will help in facing competition from MNCs.

Starting a business today is a bit simpler as compared to the last decade. There are numerous accelerators, investors, incubators, and mentors available to handhold a business just to ensure they see the future of every business. The ever-growing mobile/internet penetration has opened up both the rural and international markets. However, this time is perfectly right for everyone as a part of the nation to sow the seeds, water them, and build the support system; doing this will allow SMEs to achieve everything with full potential. So, all we need to do is make a decision in a vulnerable manner, and not an immediate decision.


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