MSME Sector - Growth, Challenges & Opportunities

MSME Sector- Growth,
Challenges & Opportunities
Analysis and Report by Resurgent India
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Contents
Message from the desk of Sh. Jyoti Gadia, Resurgent India
MSME Sector Overview
MSME Sector Opportunities
 ESDM, IT& ITeS, Pharmaceuticals, Automotive
 Auto Components, Railways, Defense, Textile, Other Sectors
MSME Sector Challenges
Government Support and Policies
Key Considerations/ imperatives for MSME growth
Conclusion

Message
The MSME sector contributes in a significant way to the growth of the Indian economy
across the realms of production system, employment generation, national output,
exports etc. The MSME Sector comprises of approximately 48 million units that produce
more than 6,000 products ranging from traditional to high-tech items. The sector is
driving sustainable growth in Indian economy by providing employment to around 111
million people, accounts for 45% of the manufacturing output, 40% of the country's
exports and contributes 8-9% to the country's GDP.
‘Make in India’ campaign is driving various initiatives at national, state and district level
that are enabling growth and development of the MSME sector. Further, MSMEs are on
course to make significant impact in the area of indigenization, with both domestic and
foreign companies investing in the ‘Make in India’ initiative. MSMEs are increasingly
focusing on securing investment and technical know-how from foreign firms, which on
the other hand, would be willing to leverage existing networks / resources of the
MSMEs to get higher returns on investment.
The Indian MSME segment has the potential to emerge as a backbone for this economy
and act as an engine for growth, given the right set of support and enabling framework.
To flourish, MSMEs need a conducive business environment, adequate basic
infrastructure, access to funding at reasonable rates, equity and venture capital,
advisory assistance, knowledge about market opportunities and market linkage
avenues. To achieve this, Government and Industry must make collaborative efforts to
create a supportive ecosystem for MSMEs.
We hope the report manages to touch upon all pertinent topics for the industry, to be
taken forward for larger deliberation and action.
Jyoti Prakash Gadia
Managing Director
Resurgent India Limited

Introduction
Micro, Small and Medium Enterprises (MSME) sector is a significant contributor to the
economic growth of the country. It not only acts as the backbone of manufacturing,
agriculture & engineering and services, but also is among the top employment
generating sectors. Being complementary to large industries, it contributes enormously
to the country’s GDP besides fostering the entrepreneurial spirit. Today, the sector
produces a wide range of products, from simple consumer goods to high-precision,
sophisticated finished products; demonstrating high growth potential and stake in
manufacturing and value supply chain.
The sector is characterized by low investment requirement, operational flexibility and
location wise mobility. This enables providing employment at lower capital cost and
also helps in correcting regional imbalances through industrialization of rural and
backward areas, towards an efficient and inclusive growth model.
MSME Characteristics
1. Number of Units: As per the last MSME Census, the latest projected estimate for
2013-14 is 488.5 lakhs. Majority of the units are categorized as Micro
enterprises. In terms of manufacturing and Service based MSME, the split is 32
and 68 percent respectively.
2. Registered Units: As per the last MSME Census estimates, only about 6 percent
of all units represent registered.
3. Leading MSME Industries: Retail followed by Professional Services constitute
about 40% of the MSME sector. Manufacturing comes next at about 12%.
361.8 377.4 393.7 410.8 428.7 447.7 467.6 488.5
0.0
100.0
200.0
300.0
400.0
500.0
600.0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Working Enterprises

Source : Zinnov Research
Role and Importance to Economy:
1. MSME Share of GDP: MSME Annual Report 2014-15 pegs the estimated
contribution of MSME sector to GDP at around 8 per cent. Details below:
MSME Share in
total GDP (%)
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
2011-
12
2012-
13
Manufacturing 7.73 7.81 7.52 7.45 7.39 7.27 7.04
Services 27.40 27.60 28.60 28.60 29.30 30.70 30.50
TOTAL 35.13 35.41 36.12 36.05 36.69 37.97 37.54
Source : Annual MSME Report, 2014-15
2. Employment Contribution: Similarly for the Employment figures, the latest
Annual Report for MSMEs puts the projected estimate of employment at 1114.29
lakh, having grown at a CAGR of 4.7% over a period of 7 years ending 2013-14.
This is projected data for upwards of 2007-08.
20.0
12.0
19.010.0
9.0
8.0
8.0
6.0
8.0
Market by Vertical
Retail
Manufacturing
Professional Services
Hospitality
Education
Travel
Real Estate
Logistics
Others
805.2 842.0 880.8 921.8 965.2 1011.8 1061.5 1114.3
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Employment (in lakhs)

35.0
8.0
11.06.0
40.0
Product level share of exports for MSME
Pearls, Gems, Jewellery,
Metals, Coins
Electrical & Electronics
Equipment
Articles of Apparel
Pharmaceuticals
Others
Corresponding to increase in GDP contribution, there is a potential to
employment contribution to over 50 percent over the next decade as per KPMG
estimates. It will be critical for more units to come under the registered umbrella
of MSMEs, wherein growth incentives like direct benefits could be helpful.
Globally, employment generated by MSME as a percentage of overall
employment ranges from 15% (Argentina) to about 90% (Canada). Current
MSME employment is under 30 per cent of the overall employment for India.
3. Share of Exports: Exports are critical for the health of any economy by
influencing the level of economic growth and balance of payments. Exports help
earn prized foreign exchange, correct fiscal deficit, create self-sufficiency and
strengthen global branding and competitiveness. The government is focusing on
improving ease of doing business for MSMEs to increase exports from the
country.
The share of MSMEs in India’s total exports was estimated to be over 40 percent
in the last 3 years as per MSME Annual Survey 2013-14. As per Directorate
General of Commercial Intelligence and Statistics (DGCI&S) data, the total
exports from Micro, Small and Medium Enterprises (MSME) sector have been
provisionally estimated as:
Year MSME Exports (USD Mn)
2010-11 1,11,403
2011-12 1,31,483
2012-13 1,28,162
Details on sector split provided below:
Source: Share of MSME Exports – Ministry of MSME, Annual Report 2013-14

The current contribution reiterates the role of MSMEs in shaping economic
development of the country. While globalization has increased the competition
levels for MSMEs, it has also opened multiple avenues to shore up the growth of
the manufacturing sector. There is huge potential to diversify the export basket
and regional coverage.
Building competitive export quality also helps build self-reliance. Currently, the
country is heavily dependent on imports. While imports of crude are inevitable,
the government schemes are helping build self-sufficiency via incentivizing
investments across consumer goods and electronics, high engineering,
healthcare, automotive, defense, electronics and telecom industries. Further,
with the on-going government thrust on awareness and marketing of ‘Make in
India’ brand, schemes for MSMEs are in place to be benefited from.

MSMEs can target to increase their share in the top industry sectors by leveraging the
growth trends in these sectors. Some of them have been mentioned below -
The Electronics Systems Design and Manufacturing industry (ESDM)
The Electronics Systems Design and Manufacturing industry (ESDM) consists of four
key components- electronics products, electronics components, semiconductor design
and electronics manufacturing services. The market size of the Indian ESDM industry is
estimated at USD 80 Bn in 2014 and is expected to reach a size of USD 220 Bn by 2020.
MSMEs form the backbone of the ESDM sector not just in India but also in countries like
Taiwan, Japan, South Korea, China and Germany. Providing a favorable environment to
develop MSMEs can greatly contribute to high value-added indigenous ESDM sector.
Over the years, the government through its policies has aimed at promoting the growth
of MSMEs in the ESDM sector. The launch of National Policy on Electronics (NPE) is a
notable step towards this objective. Further, it has been proposed to establish a
‘National Electronics Mission’, a nodal agency for the electronics industry, to enable
MSMEs to play a role.
The Union Budget 2016 has introduced several changes to benefit the MSMEs in the
ESDM sector. Most of the changes are in the indirect tax structure aimed to strengthen
local manufacturing of electronics especially in the IT Hardware and mobile phones. A
number of duties have been rationalized to promote local manufacturing of a wide
range of products such as charger /adapters, battery, wired headsets/speaker, routers,
modems, set top boxes, digital video recorder (DVR), NVR, CCTV cameras, Microwave
Ovens and other electronic products. For instance, the government has imposed duty on
electronic products like charger /adapters, battery, wired headsets/speakers for
manufacture of mobile phone and waived duty on inputs / components / parts used to
manufacture them. This brings opportunities for existing MSMEs and encourages new
players to engage in local production of such products. Further, the MSMEs can also
explore opportunities in manufacturing of electronic devices needed by armed forces,
low-cost consumer electronics, consumer durables, Nano electronics and
microelectronics.

IT/ITES sector-
The Indian IT industry has witnessed phenomenal growth over the past decade, rising
from a market size of USD 63 Bn in 2008 to USD 118 Bn in 2014. The IT MSME sector
accounts for around 15% of the overall IT/ITES sector. The market size of the IT MSME
sector has grown from USD 7 Bn in 2008 to USD 18 Bn in 2014 and is expected to grow
at a CAGR of 17% to reach a market size of USD 45 Bn by 2020. The IT MSME segment
has played a vital role in India's transformation from a mere cost effective destination to
an innovation center.
The increasing spends across sectors such as BFSI, government, retail, education and
healthcare, will continue to offer opportunities to IT MSMEs. As per the current trends,
increasing number of IT MSMEs are developing solutions to seize the opportunities
presented in the social, mobile, analytics and cloud space. The emerging business need
to reach out to diverse consumer segments for marketing & communication / branding
via social media offers significant opportunities to IT MSMEs to develop IT solutions to
address this requirement. Further, the rapid growth in smart phone users and
increasing trend of Bring Your Own Devices (BYOD) trend in enterprises offers
opportunity to IT MSMEs to develop products in the enterprise mobility space. With the
exponential increase in capturing data and rise of social media and multimedia activity,
growing number of businesses are looking to leverage data for business insights and
value. As a result, increasing number of IT MSMEs are adding data analytics in their
service portfolio. Finally, the growing demand for cloud services has led to increasing
opportunities for the IT MSMEs. Several MSME players have already joined the
bandwagon of building and offering services in the cloud space to meet the rising
demand from industry verticals such as BFSI, healthcare, media and telecom.

Pharmaceutical sector-
MSMEs continue to play a significant role in the growth story of the Indian
pharmaceutical industry and form an integral part of the sector. They are expected to
contribute between 35-40 % to the industry in terms of production with a turnover of
about USD 7 bn. The country's pharmaceutical sector derives its strength from the
MSME sector, as it forms an essential part of the supply chain for the larger players.
MSMEs operating in the domestic pharma sector are recognized as the backbone of the
industry.
Majority of the MSMEs in this sector engage in manufacturing of formulations which
relate to medicines of mass consumption and therefore have a huge market. India is the
largest exporter of formulations with 14% market share and ranks 12th in the world in
terms of export value. Double-digit growth is expected over the next five years.
Essentially, MSMEs in the pharma sector are focusing on niche marketing, contract
research and manufacturing services including clinical trials, bio pharma, Generics and
API manufacturing, Nutraceuticals and nutra-cosmetics, etc. MSMEs have strong re-
engineering skills, which help them provide a low-cost yet high-quality value
proposition across various pharmaceutical business processes. Increasing opportunities
in the generics pharmaceutical market, both domestic and exports are fueling the
growth of this sector.
While traditionally the pharma MSMEs have been less focused on exports in comparison
to large domestic firms, however, lately, there has been a noticeable change in this
approach. MSMEs are increasingly becoming preferred partners for the supply of active
pharmaceutical ingredients (APIs) and finished dosages for Indian as well as foreign
pharmaceutical firms. Furthermore, supportive government policies such as National
Pharmaceutical Pricing Policy, 2012, and slew of tax and export incentives, coupled with
growing domestic and global demand will continue to provide immense opportunities
to pharma MSMEs and drive their future growth.

Auto Components Sector-
The Indian automotive industry is the sixth largest in the world. In spite of the volatility
in the automobile sector in the last few years, the auto component sector has grown
progressively in the last decade. The market size of the Indian auto component sector is
USD 40 billion, with a 28% share accounting in exports. Steady growth of exports in
this sector indicates the growing standing of the Indian auto components in the global
market place. Many Original Equipment Manufacturer (OEM) in the world are sourcing
auto components from India and this includes several big names like Ford, General
Motors, Toyota, Honda, Suzuki, Daimler, BMW, Volkswagen and Volvo.
MSMEs account for approximately 80% of the auto component industry in India and are
expected to play an even bigger role going forward. MSMEs will have immense
opportunities as the demand for auto components, both in the domestic and export
market is expected to grow continuously for the next few years. MSMEs can target to
build capabilities to seize opportunities in the growing electronic hardware market for
automobiles; an area which is currently dependent on imports. Supply of rubber and
chemicals to the tyre manufacturers is also an emerging prospect. Further, under the
Automotive Mission Plan 2016-26 announced recently by the Government of India, the
target for the auto component industry has been set at an impressive USD 200 billion in
turnover by 2026, with exports in the region of USD 80 billion. The achievement of this
ambitious target will require support and contribution from MSMEs.
While the MSMEs have been able to effectively leverage the advantage of low cost and
skilled engineering manpower so far, however in order to seize the opportunities going
forward, they will need to focus on prudent engineering for cost competitiveness,
innovation for product differentiation, and zero defect quality to meet the growing
needs of customers that are constantly looking for maximum value for money in a
highly competitive auto market. When the MSMEs develop a strong backbone, the entire
auto component sector will become globally competitive and contribute significantly to
the Indian economy.

Railway sector-
Indian Railways (IR) is an Indian state-owned enterprise, owned and operated by the
Government of India through the Ministry of Railways.
It is one of the world's largest railway networks comprising 115,000 km of track over a
route of 65,808 km and 7,112 stations. In 2014-15, IR carried 8.4 billion passengers
annually or more than 23 million passengers a day. In 2014–2015 IR recorded revenues
USD 24 Bn.
Essentially, Indian Railways has been a bulk buyer from MSMEs and provides several
opportunities to this sector. They are-
a) Manufacturing of coaches, diesel and electric locomotives and high speed bogies.
With the government looking to adopt SMART (Specially Modified Aesthetic Refreshing
Travel) coaches, MSMEs can explore opportunities for the production of automatic
doors, bar-code readers, bio-vacuum toilets, accessible dustbins, vending machines,
entertainment screens, LED lit boards for advertising, etc.
b) Procurement of components for manufacturing of locomotives. IR procures around
4500 locomotive components from MSMEs
c) MSMEs play a crucial role in electrification, development / construction and
maintenance of railway lines. As per the Union Budget 2016, the government plans to
complete 1,600 km of electrification this year and 2,000 km in the next year. MSMEs can
play a key role in this.
d) MSMEs can explore opportunities in manufacturing of CCTVs and other surveillance
equipment for installation at railway stations.
e) Manufacturing of electronic equipment for coaches such as GPS-based digital display
that shows upcoming stations and Track Management System (TMS) and WIFI
equipment such as router, modems, etc. for stations.
f) MSMEs can develop mobile applications for dealing / addressing ticketing issues /
receipt and redressal of complaints and suggestions through social media integration.

Defense Sector –
India has the third largest armed forces in the world and ~ 60% of the defense
equipment requirement is met through imports. There are about 6,000 MSMEs that
operate in the Indian defense sector. They comprise 20-25% of the supply chain to the
defense PSUs, Defense Research and Development Organization, Ordnance factories and
armed forces, supplying mainly components and sub-assemblies.
High government allocation for defense expenditure and the government policy of
promoting self-reliance and indigenization provide immense opportunities to the
MSMEs in the defense sector. The focus of the government is on enabling MSMEs for the
supply of equipment, machineries and high technology products and services related to
defense sector.
To develop the Indian defense industry, the government amended the defense
procurement and offset policies. The new policy provides larger opportunities and
greater benefits to the Indian MSMEs. Under the new defense procurement policy,
mandatory offset requirements of a minimum of 30% for procurement of defense
equipment in excess of INR 3 Billion have been envisaged.
The offset guidelines benefit MSMEs by allowing foreign vendors to select MSMEs as
their offset partners. Offsets give Indian MSMEs an opportunity to integrate into the
global aerospace and defense supply chain, absorb critical technologies and develop an
industrial and service delivery base locally.
Majority of the offset opportunity for MSMEs in India lies in engineering service
outsourcing (ESO), maintenance, repair and overhaul (MRO), enterprise resource
planning (ERP), information technology, control systems, research and development.
Opportunities also exist for MSMEs in the fields of avionics, military electronics, radar
electronics, electronic warfare, missile electronics and other similar segments.
As India's spending on defense procurement increases, MSMEs can look forward to
integrate themselves into the supply chains of Indian and international defense majors.

Textile sector-
The textile industry in India is currently estimated at USD 74 Bn and is expected to grow
at a CAGR of 8% to reach a market size of USD 107 Bn in 2020.
The Indian textiles industry has established its supremacy in cotton based products,
especially in the readymade garments and home furnishings segment.
The readymade garment segment is the principal driver of growth even in the domestic
industry. The changing preferences of Indian consumers -- from buying cloth to
readymade garments -- have prompted several companies to move up the value chain
into the finished products segment.
Within the textile industry, the MSMEs can seize the emerging opportunities in the
technical textile industry segment.
The technical textile industry is the fastest growing segment in the textile industry.
Technical textile comprises of products manufactured for technical performance and
functional properties rather than aesthetic and decorative characteristics.
Technical textiles are widely used in several sectors ranging from Agriculture to
Defense. The technical textile industry can be classifies into 12 segments based on end
user segments – agrotech, builtech, clothtech, geotech, hometech, indutech, meditech,
mobitech, oekotech, packtech, pretech and sportech.

The government is sharpening its focus on the textile sector, which is evident from the
imminent launch of the new textile policy. Driven by an enabling environment and
supportive government policies, the textile industry is expected to offer plenty of
opportunities to the MSMEs in the above mentioned segments.
Other sectors - While we have covered some sectors which offer growth opportunities
for MSMEs, there are few other sectors which promise significant growth potential.
They are Media, Healthcare, Telecom, Biotechnology, Transport and Logistics,
Engineering and Process equipment, Retail, Tourism and Hospitality, education, civil
aviation and Real estate.

A deeper analysis of the building blocks to creating and sustaining competitive
advantage lead us to key constraints faced by the MSME Sector. Although Indian MSMEs
are a heterogeneous and diverse group, they face common set of problems, as detailed
below:
Marketing related –
With advent of globalization, the canvas has grown for MSMEs. They not only have to
produce and compete against the India’s best but also the MSMEs from around the
world to ensure they stand competitive in their mix. In India so far, small units have had
an edge in neighborhood/local markets or when they are meeting a low volume
specialized demand which no large player can effectively cater to.
Since the majority of India's MSMEs, especially the small businesses, are still anchored
in the local or neighborhood market; they rely on traditional media like telephone
directories and newspapers to reach their customer base.
The sector needs to be provided better market access facilities in order to sustain and
further enhance its contribution towards output, employment generation and exports.
There is massive headroom to diverse product portfolio and enhance market reach
through deployment of effective marketing tools and strategies:
a) Ineffective Marketing strategies - Limited understanding of new age
marketing strategies cripples MSMEs especially in smaller / Tier 3 towns.
Limited access to market intelligence and marketing tools such as packaging,
labeling, barcoding, brand building, advertisement, etc. limits the survival /
growth prospects of MSMEs. Further, lack of sufficient selling outlets and
adequate infrastructure is a key concern disrupting marketing of MSME products
to the remote parts of the country.
b) Limited Market access and inability to identify new markets - MSMEs are
primarily small family run businesses which mostly cater to domestic market.
They majorly rely on traditional media like telephone directory, customer
references and tenders floated in the newspaper to reach customers. It has been
observed that MSMEs do not respond efficiently to the evolving market trends
and innovations thereby lag behind mid and large players in the market.
c) Lack of innovation to develop new products with unique differentiators-
There is a growing need to innovate and develop products with unique
differentiators among the MSMEs to offset the rising threat from established
players and global counterparts in the marketplace. Over the years, MSMEs have
largely ignored R&D requirements and have not embarked on new product
development or technological up-gradation at the requisite pace. Though the
MSMEs realize the importance of technological innovation, most of them still
favor importing technology rather than in-house development.

d) Focusing on inherent strengths is a low-hanging fruit, not yet fully
leveraged –Building strategies around latent strengths to cover -- products
which are labor intensive, items which cater to niche markets, low volume high
margin products, sub assembly tasks, outsourcing jobs. Sub-contracting
exchanges are being established through Government and Industry associations
to promote such interface. After sales service for imported products, AMCs on
electronic equipment, reverse engineering (to the extent that it is WTO
compatible) are the other areas being encouraged.
Finance related – As per the 4th Census on MSMEs, only 5.2% of MSMEs availed credit
from financial institutions, which brings to fore systemic issues regarding:
a) Non-availability of timely and adequate funds at reasonable cost - The
banks are usually found to be averse to offer credit to the MSMEs for a several
reasons, the foremost of which originates from a wide-ranging perception that
the credit risk in lending to MSMEs is very high. Banks regard this sector as high
risk segment for different reasons like low capitalization, lack of appropriate
accounting records, and unavailability of complete financial statements and
business plans. Precisely because of this banks demand heavy collateral, charge
higher interest rates and transaction costs from MSMEs. The lack of adequate
collateral further hampers availability of funds to the sector and hinders their
competitiveness.
b) High cost of credit Interest Rates- Interest rates for non-collateral as well as
collateral backed loans to SMEs are often very high and at times prohibitive. The
reason is attributed to the high risk of lending to SMEs.
c) Non-conducive bank Policies towards lending to start-ups- It has been
observed that the Banks give undue significance to business vintage and financial
statements / track record to compute eligibility for loan. India has witnessed
significant surge in the number of start-ups in the last few years. Majority of
them fail to meet this criteria and hence, not able to meet the funding
requirements of banks.
d) Lack of sufficient collateral: Banks seek tangible assets to secure their loans
against default. MSMEs normally do not have sufficient collaterals to obtain debt
finance. MSMEs especially start-ups/early stage firms do not possess sufficient
collaterals, and in case they do, the personal assets do not meet the loan to value
norms of the bank. Lack of adequate collateral translates to lack of adequate
funds required for working capital and/or capital expansion which further leads
to a lower growth rate. In some of the cases, the entrepreneurs are mandated to
provide home/office premises/land as collateral to secure funds from the banks.
Banks typically ask for a collateral value of up to 150 per cent of the loan amount
sanctioned. For example, on a property value of INR 100 lakhs, the bank
sanctions a loan of INR 65 lakhs only.

e) Lack of equity support inhibits the growth of the MSME sector. Further, equity
also acts as a leverage for raising debt finance from Banks.
 Limited Accessibility of VCs / Angel investors – It has been observed that
MSMEs find it difficult to initiate contact with the VCs and Angel investors
in the absence of a reference or a previous relationship. VCs typically show
greater confidence in the idea/concept if it is referred by a credible
source/contact. This problem is more profound in tier 2 / tier 3 towns.
Further, entrepreneurs in these locations are not aware of the
process/mechanism to reach out to VCs.
 Funding norms not favoring early stage firms- Stringent conditions set by
VCs such as minimum funding criteria, expectation of high returns, detailed
documentation requirements and acquisition of substantial equity stake
are some of the key reasons deterring MSMEs from approaching VCs.
f) Lack of owners capital reduces eligibility to raise debt finance- It has been
seen that MSMEs typically bring in capital into the business from their own /
borrowed money from relatives, which is a normally a small amount. Lending
agencies are reluctant to fund when they discover lower risk /capital
contributed by the entrepreneur.
g) Difficulty in loan proposal evaluation and high transaction costs involved: -
It has been observed that several areas of MSME businesses are challenging to
evaluate due to lack of adequate information / absence of proper records. In
such a situation, it becomes difficult for the lending agencies to appraise the loan
proposal. Further, due to low level of technology adoption and poor record
keeping-keeping and lack of efficient systems and processes, the whole process
of evaluation of loan application is extremely resource intensive and costly for
the lending agencies.
Technology related –
Technology is one of the most important aspects in the sustenance of the MSMEs. The
personal competence of the entrepreneur can take the company uptill a performance
and sustenance level, post that when the competition increases and the market
expectations mount, the “totality” of the workings of the enterprise becomes crucial. At
this stage, use of information and communication technology becomes imperative for
the growth of SME, if not for survival. This also has cascading impact on
competitiveness:
a) Lack of awareness and skills limiting adoption - Low level of technology
adoption in the MSME sector driven by lack of awareness has been a major cause
of low competitiveness of the sector. For a country which boasts of strong IT
labor poll and world’s top most technology firms, the penetration of ICT in MSME
sector has been rather low. Consequently, large number of MSMEs misses out on
the greater benefits of increased efficiency, better market linkages, and improved
customer service.

b) Low levels of modernization and technological up-gradation - Due to their
small size family driven nature, MSMEs have low access to new technology and
face challenges in modernization and technological up-gradation. This leads to
cost inefficiency and poor quality products. These result in the manufacturing
processes being cost inefficient and of poor quality standards.
c) High Cost: Given the financial tightrope, IT budgets are generally very small. In
addition, adopting IT is not only a onetime cost because it also requires ongoing
costs of maintenance, upgrade and human resource. Cost concerns are
exacerbated by low awareness of devices and solutions, such as software,
systems and processes. As a result, micro and small businesses have little faith in
their return on investment.
d) Poor Infrastructure: Further, most of MSME clusters are around Tier-2, Tier-3
cities, which completely lack adequate information and communication
infrastructure, be it high speed broadband connectivity or basic power outages.
Legal and Tax related-
a) Low relevance and innefective implementation of legislation on
Intellectual property rights (IPR)
 Low relevance of IPRs in raising funds- It has been witnessed that majority
of the MSMEs are unable to leverage IPRs to raise funding from VCs or
Banks in the absence of formal mechanisms for evaluating IPRs.
 Ineffective implementation of legislation on IPRs has adversely impacted
innovation-driven MSMEs. In the absence of stringent laws protecting
inventions, MSMEs are unable to monetize their innovation, thereby
discouraging future innovation in products.
b) No mechanism for quick revival of viable sick units and speedy shutdown
of unviable ones- At present there is no formal mechanism for systematic
handling of sick units even though financial assistance by way of debt
restructuring for rehabilitation of sick MSE is provided by primary lending
institutions.
c) Bureaucratic hurdles in setting new business- Start-ups face a major
challenge in getting themselves registered. It takes anywhere between 15 and
30 days for a company to get incorporated.
Infrastructure Related --
a) Insufficient Physical infrastructure- For MSMEs, land and infrastructure
constraints are major problem areas, especially in bigger cities and metros. The
state and maintenance of infrastructure in industrial estates (mainly
maintenance of roads, drainage, sewage, power distribution and captive power
generation, water supply, dormitories for workers, common effluent treatment
plants, common facilities, securities, etc.) is poor and unreliable.

b) Low / Low Quality network infrastructure – Lack of quality virtual and mobile
connectivity also limits business potential, especially in Tier 2 and 3 cities. E-
commerce and ICT can further the business potential by opening international
reach, however the lack of presence of quality infrastructure and then awareness
is currently limiting the scope.
c) Constraints in modernization and expansion
Human Resource Related –
In this sector, a lot of small businesses tend to be set up by first generation
entrepreneurs. They come armed with a product or service idea, some money, lot of
passion but limited knowledge about markets and procedures, cash flows, organization
structures or labor management. This is where mentoring for the founder and
development of employees becomes crucial. At times, this comes from an individual or
an NGO or a government scheme. However, this is episodic and unable to cover the
regular and complete requirements.
a) Complex labor laws – Labor policies, especially multiplicity of labor laws and
procedures for compliance of various labor regulations have added to the woes
of the MSME sector
b) Non-availability of highly skilled labour at affordable costs- In spite of the
fact, that India enjoys favorable demographic dividend with large pool of human
resources in the productive age group, the industry continues to lack skilled
manpower required for manufacturing, marketing, servicing, etc. Large firms
who are targeting high growth rates scour the market for talent and MSMEs can
never outplay large companies in terms of salary. Once the employee is hired,
ensuring he matches the skill set required for the job and continues to develop, is
a tremendous ask.
c) Continued Skill Development for increased productivity – First, the issues of
attracting and training the right talent. Second, is the issue of ensuring the
employees are continued to be trained on the job and given higher
responsibilities as the organization grows. This requires rigorous training
calendars which becomes difficult for the MSMEs to make and follow for the lack
of specific expertise. Also, the MSMEs are so heterogeneous that for the
government to be able to map each skill set against different levels and industry
verticals becomes a challenge – both to plan and execute.
d) Poor corporate governance mechanisms and weak organization structures-
Majority of the MSMEs are owner driven with lesser inclination towards formal
organizational structures. There is one (or two) owner and selected few core
people working under them co-handling key functions like accounts, production
and sales. There is no established governance mechanism with any clear process
of functioning, workflow or instruction flow. The non-corporate structure and
small size of the majority of MSMEs makes the venture capitalists and other risk
capital providers reluctant to investing in them due to higher transaction costs
and difficulties in exits out of such investments.

Others-
a) Unduly delayed payments especially from large-scale buyers- This disrupts
the cash flows and the ability of MSMEs to divert funds towards capex
requirements and R&D.
b) Low awareness of Government schemes and programs – Limited and low
levels of knowledge on key government schemes restrict their ability to avail
benefits under them.

Some of the significant government initiatives / schemes for development of
MSMEs have been summarized below:
1. Incubation Support schemes
a. Livelihood business incubator scheme aims to create jobs at local level
and reduce un-employment by creating a favorable ecosystem for
entrepreneurial development in the country. The main objective of
livelihood incubation center is to take up those commercial activities,
which are need based to create enterprises in the rural areas of the
country.
b. Technology business incubator scheme focuses on those technologies
which need support for commercialization and further proliferation. The
purpose of the scheme is to incubate technological ideas to enable them to
reach the market place. This scheme provides financial, technical and
marketing support to MSMES to enable them to achieve higher growth.
c. Support for Entrepreneurial and Management Development of SMEs
through Incubators- The Scheme aims to provide early stage funding for
nurturing innovative business ideas in select fields including electronics
and software. Under this scheme, financial assistance is provided for
setting up of business incubators. The objective of the scheme is to
promote development of knowledge based innovative start-ups and
improve the competitiveness and survival ability of the MSMEs.
2. Business development & promotion / Marketing Support schemes
a. Scheme to promote International Cooperation – This scheme offers
assistance to MSMEs for exploring new areas of technology infusion/up
gradation and identifying new markets through Joint ventures and foreign
collaborations.
b. Marketing Assistance scheme offers assistance to MSMEs for undertaking
marketing promotion activities. Under the scheme, MSMEs can avail
financial assistance for organizing exhibitions, trade fairs, buyer-seller
meets and other marketing promotion events.
c. MSME Market Development Assistance scheme offers financial assistance
to MSMEs for using Global Standards in barcoding. The scheme also has
provides funding to MSMEs for participation in the international
exhibitions / fairs, producing publicity material and sector specific
studies and for contesting anti-dumping cases.

3. Manufacturing support schemes
a. National Manufacturing Competitiveness Programme- The NMCP is the
nodal programme of the government of India to develop global
competitiveness among Indian MSMEs. There are 10 components under
the NMCP targeted at enhancing the entire value chain of the MSME
sector. It includes programmes like establishment of new tool rooms,
benchmarking of the global competitors, enhancing of product and
process quality, cost reduction through lean manufacturing techniques,
etc.
b. Lean Manufacturing Competitiveness for MSMEs aspires to enhance the
manufacturing competitiveness of MSMEs through the application of
various Lean Manufacturing (LM) techniques.
c. Enabling Manufacturing Sector to be Competitive through Quality
Management Standards and Quality Technology Tools – This scheme
seeks to encourage MSMEs to understand and adopt latest Quality
Management Standards (QMS) and Quality Technology Tools (QTT) in the
manufacturing process.
d. Design clinic scheme - The design clinic scheme is an initiative of the
Ministry of MSME and National Institute of Design. The main objective of
the scheme is to bring the MSME sector and design expertise onto a
common platform and to provide expert advice and solutions on real-time
design problems, resulting in continuous improvement and value addition
for existing products. This model brings design exposure at the doorstep
of industry clusters for design awareness, improvement, evaluation,
analysis and design-related intervention. It aims to enhance industry
competitiveness and productivity with the help of design intervention at
various functional levels.
e. Scheme of Fund for Regeneration of Traditional Industries (SFURTI) –
This scheme aims to develop and enhance the competitiveness of
traditional industries. The traditional industries are broadly categorized
into Khadi, Coir Based Industries and village Industries (including non-
timber forest produces, handmade paper, agro based goods, textiles based
products, etc. This scheme is implemented by the Ministry of MSME and
its organizations (Khadi and Village Industries Commission-KVIC and Coir
Board), in collaboration with State Governments, their organizations and
non-governmental organizations.

4. Finance and credit rating support schemes
a. Financial assistance from SIDBI – SIDBI has created a corpus Fund of INR
60 Cr for providing financial support to MSMES with special focus on
technology enterprises.
b. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
scheme was launched by the GOI in 2000 to strengthen credit delivery
system and facilitate flow of credit to the MSME sector. To operationalize
the scheme, GOI and SIDBI set up the Credit Guarantee Fund Trust for
MSMEs. The scheme provides collateral free funding up to INR 1 Crore for
individual MSMEs. The CGTMSE Scheme is operated through a network of
Banks and FIs called Member Lending Institutions (MLIs).
c. Credit Linked Capital Subsidy Scheme – This scheme aims at facilitating
technology up-gradation of MSMEs by providing 15 % capital subsidy for
purchase of Plant & Machinery / Improved technology. Maximum limit of
eligible loan for calculation of subsidy under the scheme is Rs.100 lakhs.
At present, more than 1500 well established/improved technologies
under 51 sub-sectors have been approved under the Scheme.
d. ISO 9000/ISO 14001 Certification Reimbursement scheme for MSMEs
offers reimbursement of expenses up to 75% (subject to a maximum of
INR 75,000) incurred towards the acquisition of ISO 9000/ISO
14001/HACCP certification.
5. R&D, IPR support schemes- IPR schemes were launched for building awareness
on IPRs so as to enable MSMEs to use the tools of IPR effectively for innovative
projects. The Ministry of MSME has set up an intellectual property cell which
provides a range of IP related services such as prior art-search, validity search,
patent landscape, studies on technology development, etc.
a. Building Awareness on Intellectual Property Rights scheme endeavors to
enhance awareness among the MSMEs about IPRs. Under this scheme,
financial assistance is provided for conducing awareness programs on
IPRs including seminars, workshops, training, etc. Additionally, it also
offers one time financial support limited up to INR 25,000 on grant of
domestic patent and INR 2 lakh for foreign patent to MSMEs.
6. Other MSME schemes / initiatives
a. National Small Industries Corporation (NSIC) Schemes
i. Credit Rating and Facilitation – This scheme aims to encourage
MSMEs to upgrade their competence in terms of business and
technologies by getting rated through the rating agencies
empaneled with NSIC. The scheme strives to establish

independent and trusted third party opinion on the capabilities
and credit worthiness of MSMEs so as to facilitate swift loan
approvals from Banks and FIs. Under the scheme, the MSME can
seek partial re-imbursement of the rating fee, if the credit-rating is
undertaken by an empaneled rating agency of NSIC.
ii. Raw Material Assistance scheme provides assistance to MSMEs by
way of financing the purchase of raw material (both indigenous &
imported).
iii. Single Point Registration scheme aims at increasing the share of
Govt. purchases from MSMEs. This scheme offers MSMEs a single
point of registration for participation in Govt. schemes. The units
registered under the scheme are entitled to special benefits such
as issue of tender free of cost, exemption from payment of Earnest
Money Deposit (EMD), etc.
iv. Bill Discounting scheme covers purchase/discounting of bills
arising out of genuine trade transactions i.e., sales made by
MSMEs to reputed public limited companies / State and Central
Government Departments.
v. NSIC Infrastructure scheme offers MSMEs – a) Enabling
infrastructure supporting business incubation b) Exhibition halls /
Complex in Hyderabad and New Delhi for organizing exhibitions/
conferences c) Office space to IT/ITES and non-IT/ITES MSMEs in
STP’s in New Delhi and Chennai
vi. Infomediary and Marketing Intelligence Services.
b. Prime Minister's Employment Generation Programme (PMEGP) was
launched to generate employment opportunities in rural as well as urban
areas through setting up of new self-employment ventures / projects /
micro enterprises. Under the programmed, beneficiaries can set up micro
enterprises by availing of margin money subsidy of 25% (35% for special
categories) of the project cost in rural areas.
c. Skill Development initiatives – To meet the challenge of skilling at scale
with speed and quality, the Ministry released the 'National Policy on skill
Development and Entrepreneurship 2015'. Ministry has also done 'Skill
mapping' and prepared a complete catalogue on skill requirements and
skill providers across the country.
d. Public Procurement Policy for MSMEs - The ministry of MSME formulated
the Public Procurement Policy for MSMEs, which mandates every Central
ministry/Department/PSU to achieve a procurement goal of at least 20 %

of the total annual purchases of the products or services, produced or
rendered by MSMEs. The policy seeks to promote MSMEs by improving
their market access and competitiveness through increased participation
in Government purchases and encouraging linkages between MSMEs and
large enterprises
In a move towards promoting ease of doing business, the MSME Ministry
has done away with the tedious process of submitting hard copies of
documents to avail benefits under several schemes. Now the MSMEs can
avail the benefits through the sites of the schemes by putting in the Udyog
Aadhaar Number along with the normal Aadhaar number. Some of the
schemes, whose benefits could now be availed online are Bar Code, ISO
Certified Subsidy Scheme; and Technology & Quality Upgradation Support
Scheme.
7. Union Budget 2016-17 highlights for MSME sector- The Union Budget for 2016-
17 introduced a series of policy initiatives to boost growth of Indian MSMEs.
Some of the significant initiatives have been summarized below –
a. No tax on income from Startups: In order boost economic growth and
employment a 100% deduction of profits for 3 out of 5 years for start-ups,
during April, 2016 to March 2019
b. Capital Gain Tax: The Long Term Capital Gains Tax has been a huge bone
of contention for the Startup community. While listed companies do not
attract LTCG beyond a holding period of 12 month, unlisted companies
attract 20% till a holding period of 3 years. Under the new norms, the
holding period has been reduced from three to two years to get benefits
of long term Capital Gain regime in case of unlisted companies.
c. One-day incorporation: The budget has proposed provisions that will
enable registration of a company in one day
d. Skilling India: To provide a boost to entrepreneurship, 1500 multi skill
training institutes across the country will be set up under the Pradhan
Mantri Kaushal Vikas Yojna.
e. MUDRA scheme: The Pradhan Mantri Mudra Yojna was launched for the
benefit of the bottom of the pyramid entrepreneurs.
f. Presumptive taxation scheme: Under the presumptive taxation scheme
under Section 44AD of the Income tax Act, the limit of turnover or gross
receipts has been raised to Rs. 2 crore from the exiting Rs. 1 crore rupees
to benefit about 33 lakh small business people. It frees a large number of
such assesses in the MSME category from the burden of maintaining
detailed books of account and getting audit done.

g. Service Tax exemption: Service tax on services provided under Deen
Dayal Upadhyay Grameen Kaushalya Yojana and services provided by
Assessing Bodies empanelled by Ministry of Skill Development and
Entrepreneurship are proposed to be exempted.
h. Government allocated Rs 500 crore for scheduled caste, scheduled tribes
and women entrepreneurs under the Standup India scheme. The scheme
is expected to benefit at least 2.5 lakh entrepreneurs in this category.
‘Make in India’, ‘Startup India’ and ‘Digital India’
The government's emphasis on 'Make in India', 'Start-up India' and 'Stand-up
India' is expected to strengthen Indian MSMEs and make them competitive.
'Make in India' initiative launched by the Prime Minister in 2014 is one of the
most aspiring and ambitious initiatives to raise India’s ranking up the global
value chain and make the country a promising global manufacturing hub.
Make in India initiative aims to increase the manufacturing sector
contribution in the Gross Domestic Product (GDP) from 14-15% at present to
25% by 2022. This provides an excellent opportunity for MSMEs across
several sectors including telecom, electrical, automobile, agriculture, bio
medical, paper, defense, aviation, satellite, etc, to establish unprecedented
place in the global value chain.
‘Make in India’ campaign is driving various initiatives at national, state and
district level and are enabling Indian MSMEs sector to galvanize their growth
and development. To make the campaign a success, the government is
pushing for a supportive framework through policy reforms so as to provide
holistic growth opportunities to SMEs.
Under the ‘Make in India’ initiative, the government has announced two
‘Startup India’ schemes:-
i. Self-Employment and Talent Utilization (SETU) - SETU is devoted to
strengthening incubators and setting up ‘tinkering labs’ where ideas can
be shaped into prototype before they are ripe for funding.
ii. Atal Innovation Mission (AIM) - AIM focuses on supporting aspiring
entrepreneurs to solve India’s contemporary socio-economic problems
The ‘Digital India’ revolution also provides a great opportunity to promote
MSME participation in the Information, Communication and
Telecommunication (ICT) sector, in line with the government vision.

Key considerations / imperatives
for MSME growth

Given the current economic scenario, some of the key considerations to drive MSMEs
into the next wave of growth have been summarized below:
Fostering a culture of entrepreneurship and of innovation - With India’s growing
importance in the global market place, there is a strong need for building a nationwide
entrepreneurial ecosystem and an innovation strategy for the domestic MSMEs to help
them compete at a global level.
A holistic and integrated focus on building a nationwide entrepreneurial ecosystem can
reform India’s socio-economic landscape in the next decade and enhance its socio-
economic dimensions of growth.
Entrepreneurship helps in developing solutions to several economic problems such as
poverty, employment, skill development, affordable health care, energy dependence,
urbanization and financial inclusion, etc.
Nationwide entrepreneurship development with appropriate scale and scope can
propel MSME growth to the next level.
Global studies have indicated a positive relationship between innovation and the
growth of MSMEs.
The principal sources of innovations are the academia, R&D organizations and
individual innovators.
In India, typically the MSMEs with innovative ideas often work in isolation. Many Indian
MSMEs innovate and offer new products and services that address a multitude of
problems, but such innovations are not institutionalized.
Cooperation and linkages between the MSMEs and R&D / academic institutions remain
low despite the several government initiatives aimed at strengthening the innovation
potential of the MSMEs.
A strong culture of communication between universities and MSMEs can play a critical
role in unleashing a country’s innovation potential.
Skills development: One of the thrust areas for increasing the competitiveness of
MSMEs includes skills development.
Skills development not only helps in improving productivity but also fosters
entrepreneurship.
Hence, it is imperative for the concerned governmental agencies, trade associations and
MSMEs to come together and discuss on how to make training programmers relevant
and attractive for MSMEs.
The lack of human resources has been a long-standing problem faced by MSMEs in the
country. Despite India’s large pool of human resources, the MSMEs continue to lack
skilled manpower required for manufacturing, marketing, servicing, etc.
Majority of the graduates passing out each face difficulties in getting employed in
MSMEs due to the lack of job / role specific skills.

Also, it has never been easy for MSMEs to hire the right workers at affordable prices.
Another area of concern is low focus of MSMEs on skills development.
Even though MSMEs are investing in infrastructure, technology and manufacturing
practices, development of skilled manpower still remains a major concern.
There is evidence that suggests that MSMEs that have invested in skill development
have witnessed better business performance.
Skill development programs with a blend of industrial engineering, quality
management, general management and soft skills can enable the MSMEs to reach the
next level of growth.
Create a business environment to support and nurture startups: It is imperative for
the policymakers to create an enabling business ecosystem that fosters
entrepreneurship.
Though some initiatives have already been taken in this direction, like the recent launch
of the Startup India mission, which is expected to make it easier for Indian
entrepreneurs to set up and run their new ventures.
The new startup policy also aims at providing funding support to MSMEs, with a corpus
of INR 10,000 crores already allocated for investment in start-ups over 4 years.
However, building a thriving ecosystem will require more action on the ground and
long-term commitment for improvement from the stakeholders.
Despite holding significant talent resource, the country is not able to churn out large
number of entrepreneurs due to the lack of a proper ecosystem.
There road to building start-ups in India needs to be improved. Risk taking should be
encouraged and entrepreneurs should be supported to overcome roadblocks.
Though the country boasts of several policies and schemes for skill development,
innovation, funding, etc., aimed at the MSME sector, there is low focus on the
implementation of such schemes, which is evident from the lack of proper records to
track the performance of such schemes. Information on the success / failure of the
schemes is not easily available.
A critical step towards developing a conducive business ecosystem, is to enhance focus
on implementation of schemes that target start-ups. This can be achieved by increasing
engagement between MSMEs and government bodies.
Start-ups and existing entrepreneurs should be encouraged to approach the designated
government bodies with innovative ideas, which will help them to translate the ideas
into a reality.
Generate employment opportunities for special segments such as women
workforce and physically challenged: Recognizing the importance of
entrepreneurship, and given the Indian government’s strong push on MSMEs with
priority to reserved classes, another deserving segment is the women-owned
enterprises.

The role of women entrepreneurs is critical for a thriving Indian economy. At nearly 3
million women-owned enterprises, they represent about 10% of all MSMEs in India and
employ over 8 million people.
Women entrepreneurship is mainly inclined towards smaller sized firms, as almost 98
percent of women-owned businesses are currently micro-enterprises. As per a recent
study, India ranks much lower than its global counterparts such as United States,
Canada and Australia, when it comes to opportunities for women to start
entrepreneurial initiatives.
Even though the government has launched some initiatives aimed at promoting women
entrepreneurship, the efforts need to be further strengthened to bring about a
significant change.
Create opportunities for developing indigenous capabilities so as to reduce
dependence on imports: India depends significantly on the import of large number of
goods and services. While import of certain products like crude oil is unavoidable, there
is considerable scope to reduce import dependency on many other products by
encouraging MSMEs to develop such products.
There is a considerable scope for indigenization across many areas such as healthcare,
automotive, defense, electronics and telecom.
However, this will require significant amount of support and guidance from the policy
makers, industry associations and academia to equip the MSMEs with the necessary
capabilities so that they can develop products that can substitute imports.
Leverage new and innovative technologies to be globally competitive- Technology
is the catalyst that is required to drive growth in the Indian economy and hence, is also
an important enabler for the MSMEs.
MSMEs in India, especially in the urban areas have already started investing in
technology in order to derive the benefits of enhanced productivity, improved
performance and competitive advantage in the global marketplace. Despite the benefits
technology offers, still a large number of MSMEs have not leveraged technology in
business practices.
Therefore, it is the need of the hour to drive technology adoption in such MSMEs.
In order to achieve this, policy makers will have to create an environment that
accelerates development of indigenous technologies and facilitates partnership between
MSMEs and global businesses for technology transfer / adoption, etc.
Hence, it is imperative for the various industry stakeholders - industry bodies and
associations, academia, government, large enterprises and MSMEs to come together and
build a strategy for developing indigenous technology, across sectors like IT,
Electronics, Manufacturing, Pharmaceuticals and Biotechnology.
Further, R&D institutions and academia could collaborate with MSMEs on research
initiatives and help provide technology support to commercialize innovative products
and service ideas.

In this regard, sector specific incubation cells can be started that provide guidance to
MSMEs on technology implementation, development and scaling up.
Effectively leverage ‘Make in India’ and other government initiatives to create
opportunities for the MSME sector –The government is expected to push for more
policy reforms to drive the ‘Make in India’ agenda, which will create more opportunities
for the growth of Indian MSMEs across several sectors.
Focus on transforming SMEs into emerging enterprises - Below are some of the key
focus areas that can drive MSMEs to a higher growth trajectory.
Enhance venture capital funding opportunities for MSMEs - Venture capital /
Private Equity provide financial assistance primarily by way of equity or equity-linked
capital investment. Besides infusing capital, VCs also bring expertise, superior advice
and other skills that help the MSME to develop marketable products.
While the government has taken some recent initiatives to attract substantial capital
investments from offshore and domestic investors for start-ups, the efforts need to be
further intensified. Exemption from capital gains tax will encourage more high risk
investments into the ecosystem.
Intensify focus on Export oriented MSMEs – In the last few years, the export-oriented
businesses have witnessed a deceleration compared to the high growth seen in the
domestic-focused businesses.
It is essential to have a strategy to enhance export competitiveness of MSMEs through
capacity building, cheaper credit, better marketing, robust infrastructure, technology
and nurturing innovation and skill development and putting in place conducive
environment for their growth.
Develop factoring market for MSMEs in line with global trends- Under this mode of
finance, the MSME sells or assigns its accounts receivables to a finance company (a
factor) at a discount to meet its immediate funding requirement, thereby provides
better liquidity to the MSMEs.
This method of financing evolved so as to minimize the adverse effect of delayed
payments by large scale customers on the operations of MSMEs. Factors buy the right to
collect on invoices raised against any sales by the MSME and releases 80-90% of the
invoice value to the firm.
The Indian factoring market is still at a nascent stage, and still far from reaching the
growth witnessed in global markets. There are approximately 10 factoring companies in
India, and the oldest among them are Canbank factors and SBI Global Factors.
With a view to develop the factoring market in India, the RBI in 2014 proposed setting
up of an electronic trade receivables discounting system.
The move was made to facilitate financing of bills raised by MSMEs to corporate and
other buyers, including government departments and PSUs.
However, the proposal is still awaiting implementation.

Good Governance and Business Ethics – Empower SME Management /
Encouragement on compliances as well as improving productivity and quality – There is
an urgent need to design a simple, capacity-appropriate tax regime for SMEs. SMEs find
it particularly burdensome to comply with tax.
The Doing Business 2016 report of The World Bank Group, which measures ease of
doing business highlights India’s poor showing in the area of tax compliance: India
ranks 157th out of 189 economies on the ‘paying taxes’ indicator. It is critical to reduce
costs of tax compliance for SMEs, to free their time and resources to be deployed to
productive activities.

Conclusion
The importance of MSME has been recognized in recent years for its significant
contribution in gratifying various socio-economic objectives such as higher growth of
employment, output, promotion of exports and fostering entrepreneurship. They play a
crucial role in the industrial development of any country. This sector even assumes
greater importance now as the country moves towards a faster and inclusive growth
agenda. MSMEs have also shown an ability for innovation, creativity, and flexibility
which qualifies them to respond promptly to changing market conditions and to adapt
the dynamic needs of the consumers.
A dynamic global economic scenario has thrown up various opportunities and
challenges to the MSME sector in India. On the one hand, numerous opportunities have
opened up for this sector to enhance productivity and look at new national and
international markets. On the other hand, these opportunities compel the MSMEs to
upgrade their competencies in terms of larger volumes of mechanized production,
better designs and marketing of products at lower costs. In order to compete with the
large firms and global players in the market place, it will be imperative to develop
competitiveness beyond just cost.
This would also necessitate support from the Government towards formulation of
supportive and friendly policies to provide the necessary impetus to the sector. Of late,
the sector has seen increased focus from the government and other government
institutions, corporate bodies and banks. Policy based changes; investments into the
sector; globalization and India’s robust economic growth have opened up several latent
business opportunities for this sector. Prime Minister’s flagship campaign ‘Make in
India’ is a progressive step in the same direction. With the right pushes, it holds key to
herald a new revolution for the identified manufacturing and service sectors.

Contemporary MSMEs
Financial Needs and Solutions
Mr. U. K. Joshi
Director, ASSOCHAM
Introduction
Indian economy is dominated by a vibrant set of enterprises, which are prestigiously
known as MSMEs for their scale of operations.
Only 1.5 million MSMEs are in registered segment while the remaining 24.5 million that
constitute 94% of the units are in unregistered segment.
The role of MSMEs in economic and social development of country is widely
acknowledged. They are nurseries for entrepreneurship, often driven by individual
creativity and innovation contributing significantly towards country’s GDP,
manufacturing output exports and employment generation.
Finance – The Essential Need
Bank lending is the most common source of external finance for many MSMEs and
entrepreneurs, which are often heavily reliant on straight debt to fulfill their start-up,
cash flow and investment needs.
While it is commonly used by small businesses, however, traditional bank finance poses
challenges to SMEs and may be ill-suited at specific stages in the firm life cycle.
There are limitations of traditional debt financing for responding to the different
financing needs that SMEs encounter along their life cycle, and for sustaining the most
dynamic enterprises. In particular, debt financing appears to be ill-suited for newer,
innovative and fast growing companies, with a higher risk-return profile.
The “financing gap” that affects these businesses is often a “growth capital gap”.
Substantial amounts of funds might be needed to finance projects with high growth
prospects, while the associated profit patterns are often difficult to forecast.
The financing constraints can be especially severe in the case of start-ups or small
businesses that rely on intangibles in their business model, as these are highly firm-
specific and difficult to use as collateral in traditional debt relations. Yet, for most
enterprises, there are few alternatives to traditional debt.
This represents an important challenge for policy makers pursuing sustainable recovery
and long-term growth, since these companies are often at the forefront in job creation,
the application of new technologies and the development of new business models.
While alternatives to traditional debt finance are particularly important for start-ups,

high-growth and innovative SMEs, the development of alternative financing techniques
may be relevant to the broader population of SMEs and micro-enterprises.
Capital gaps exist also for companies seeking to effect important transitions in their
activities, such as ownership and control changes, as well as for SMEs seeking to de-
leverage and improve their capital structures.
The thin capitalization and excessive “leverage” (excessive reliance on debt financing
compared to equity) impose costs, as loans to companies that already have considerable
amounts of debt tend to have higher interest rates, and increase the risk of financial
distress and bankruptcy.
The long-standing need to strengthen capital structures and to decrease dependence on
borrowing has become more urgent, as many firms were obliged to increase leverage in
order to survive the recent economic and financial crisis.
Indeed, the problem of SME over-leveraging may have been exacerbated by policy
responses to the crisis, which tended to focus on mechanisms that enabled firms to
increase their debt (e.g. direct lending, loan guarantees).
At the same time, banks in many countries have been contracting their balance sheets in
order to meet more rigorous prudential rules. While bank financing will continue to be
crucial for the SME sector, there is a broad concern that credit constraints will simply
become “the new normal” for SMEs and entrepreneurs.
It is therefore necessary to broaden the range of financing instruments available to
SMEs and entrepreneurs, in order to enable them to continue to play their role in
investment, growth, innovation and employment.
Alternative Financing Instruments
Asset-based finance
Asset-based finance, which includes asset-based lending, factoring, purchase-order
finance, warehouse receipts and leasing, differs from traditional debt finance, as a firm
obtains funding based on the value of specific assets, rather than on its own credit
standing. Working capital and term loans are thus secured by assets such as trade
accounts receivable, inventory, machinery, equipment and real estate.
The key advantage of asset-based finance is that firms can access cash faster and under
more flexible terms than they could have obtained from a conventional bank loan,
regardless of their balance sheet position and future cash flow prospects. Furthermore,
with asset-based finance, firms that lack credit history, face temporarily shortfalls or
losses, or that need to accelerate cash flow to seize growth opportunities, can access
working capital in a relatively short time. In addition, asset-based financiers do not
generally require any personal guarantee from the entrepreneur, nor that s/he give up
equity. On the other hand, the costs incurred and/or the complexity of procedures may

be substantially higher that those associated with conventional bank loans, including
asset appraisal, auditing, monitoring and up-front legal costs, which may reduce the
firm’s levels of profits. Also, funding limits are often lower than in the case of traditional
debt.
Across OECD countries, and increasingly also in emerging economies, asset-based
finance is widely used by SMEs, for their working capital needs, to support domestic and
international trade, and, partly, for investment purposes. In Europe especially, the
prevalence of these instruments for SMEs is on par with conventional bank lending, and
the specific financial segment has grown steadily over the last decade, in spite of
repercussions of the global financial crisis on the supply side.
Through asset-based finance, firms obtain funding based on the value of specific assets,
including accounts receivables, inventory, machinery, equipment and real estate, rather
than on their own credit standing. In this way, it can serve the needs of young and small
firms that have difficulties in accessing traditional lending. Asset-based lending, which
provides more flexible terms than collateralised traditional lending, has also been
expanding in recent years, in countries with sophisticated and efficient legal systems
and advanced financial expertise and services.
While asset-based finance is a widely used tool in the SME financing landscape,
alternative forms of debt have had only limited usage by the SME sector, even within the
larger size segment which would be suited for structured finance and could benefit from
accessing capital markets, to invest and seize growth opportunities.
In fact, alternative debt differs from traditional lending in that investors in the capital
market, rather than banks, provide the financing for SMEs.
To foster the development of a corporate bond market for SMEs, mainly mid-caps,
policy makers have especially targeted transparency and protection rules for investors,
to favour greater participation and liquidity. Recent programmes have also encouraged
the creation of SME trading venues and the participation by unlisted and smaller
companies.
In some countries, public entities participate with private investors to funds that target
the SME bond market, with the aim of stimulating its development.
Alternative external financing techniques for SMEs and entrepreneurs

Trade Credit
Trade credit is also an important source of finance for many SMEs and start-ups, which
can substitute or supplement short-term bank lending. This mainly consists of the
extension of traditional credit instruments and credit-mitigation tools, such as loans
and guarantees, to sustain import and export activities. Guarantees can take the form of
letters of credit (L/C), which represent a bank obligation to pay, thereby reducing an
export's payment risk on an importer/buyer.
Hybrid Instrument
The market for hybrid instruments, which combine debt and equity features into a
single financing vehicle, has developed unevenly in OECD countries, but has recently
attracted interest of policy makers across the board.
These techniques represent an appealing form of finance for firms that are approaching
a turning point in their life cycle, when the risks and opportunities of the business are
increasing, a capital injection is needed, but they have limited or no access to debt
financing or equity, or the owners do not want the dilution of control that would
accompany equity finance.
This can be the case of young high-growth companies, established firms with emerging
growth opportunities, companies undergoing transitions or restructuring, as well as
companies seeking to strengthen their capital structures.
At the same time, these techniques are not well-suited for many SMEs, as they require a
well-established and stable earning power and market position, and demand a certain
level of financial skills. In recent years, with the support of public programmes, it has
become increasingly possible to offer hybrid tools to SMEs with lower credit ratings and
smaller funding needs than what would be the practice in private capital markets.
Governments and international organisations mainly intervene through: i) participation
in the commercial market with investment funds that award mandates to private
investments specialists; ii) direct public financing to SMEs under programmes managed
by public financial institutions; iii) guarantees to private institutions that offer SMEs the
financial facility and; iv) funding of private investment companies at highly attractive
terms.
Equity Finance
Equity finance is key for companies that seek long-term corporate investment, to
sustain innovation, value creation and growth. Equity financing is especially relevant for
companies that have a high risk-return profile, such as new, innovative and high growth
firms. Seed and early stage equity finance can boost firm creation and development,
whereas other equity instruments, such as specialised platforms for SME public listing,
can provide financial resources for growth-oriented and innovative SMEs.
Factoring
Factoring is a supplier short-term financing mechanism, whereby a firm (‘seller’)
receives cash from a specialised institution (‘factor’), in exchange for its accounts

receivable, which result from the sales of goods or provision of services to customers
(‘buyers’). In other terms, the factor buys the right to collect a firm’s invoices from its
customers, by paying the firm the face value of these invoices, less a discount.
The factor then proceeds to collect payment from the firm’s customers at the due date of
the invoices. The difference between the face value of invoices and the amount
advanced by the factor constitute the “reserve account”.
This is paid to the seller when the receivables are paid to the factor, less interest and
service fees. Typically, the interest ranges from 1.5% to 3% over base rate and service
fees range from 0.2% to 0.5% of the turnover.
Factoring is thus a transactions funding technology, based on ‘hard’ data, similar to
asset-based lending, as the financing depends on the value of an underlying asset, rather
than on the creditworthiness of the firm.
However, it is different from asset-based lending in the following aspects:
i) it involves exclusively the financing of accounts receivable, rather than a broader
range of assets;
ii) the underlying asset is sold to the factor at a discount, rather than collateralized;
iii) it is a bundle of three financial services, i.e. a financing component, a credit
component, and a collections component, as in most cases the borrower outsources to
the factor its credit and collection activities.
Conclusion
Broadening the finance options available and accessible to SMEs is a key challenge for
policy makers in the quest for fostering their development and sustaining the most
dynamic enterprises, in a credit constrained environment. It also represents a long-term
challenge to improving the SMEs’ capital structure and investment capacity, and
reducing their over-reliance – and vulnerability – to the traditional lending channels.

About ASSOCHAM
THE KNOWLEDGE ARCHITECT OF CORPORATE INDIA
Evolution of Value Creator
ASSOCHAM initiated its endeavour of value creation for Indian industry in 1920. Having in its fold more than
400 Chambers and Trade Associations, and serving more than 4,00,000 members from all over India. It has
witnessed upswings as well as upheavals of Indian Economy, and contributed significantly by playing a catalytic
role in s haping up the Trade, Commerce and Industrial environment of the country. Today, ASSOCHAM has
emerged as the fountainhead of Knowledge for Indian industry, which is all set to redefine the dynamics of
growth and development in the technology driven cyber age of ‘Knowledge Based Economy’. ASSOCHAM is
seen as a forceful, proactive, forward looking institution equipping itself to meet the aspirations of corporate
India in the new world of business.
ASSOCHAM is working towards creating a conducive environment of India business to compete globally.
ASSOCHAM derives its strength from its Promoter Chambers and other Industry/Regional
Chambers/Associations spread all over the country.
VISION
Empower Indian enterprise by inculcating knowledge that will be the catalys t of growth in the barrier less
technology driven global market and help them upscale, align and emerge as formidable player in respective
business segments.
MISSION
As a representative organ of Corporate India, ASSOCHAM articulates the genuine, legitimate needs and
interests of its members. Its mission is to impact the policy and legislative environment so as to foster
balanced economic, industrial and social development. We believe education, IT, BT, Health, Corporate Social
responsibility and environment to be the critical success factors.
MEMBERS – OUR STRENGTH
ASSOCHAM represents the interests of more than 4,00,000 direct and indirect members across the country.
Through its heterogeneous membership, ASSOCHAM combines the entrepreneurial spirit and bus iness
acumen of owners with management skills and expertise of professionals to set itself apart as a Chamber with
a difference. Currently, ASSOCHAM has more than 100 National Councils covering the entire gamut of
economic activities in India. It has been especially acknowledged as a significant voice of Indian industry in the
field of Corporate Social Responsibility, Environment & Safety, HR & Labour Affairs, Corporate Governance,
Information Technology, Biotechnology, Telecom, Banking & Finance, Company Law, Corporate Finance,
Economic and International Affairs, Mergers & Acquisitions, Tourism, Civil Aviation, Infrastructure, Energy &
Power, Education, Legal Reforms, Real Estate and Rural Development, Competency Building & Skill
Development to mention a few.
INSIGHT INTO ‘NEW BUSINESS MODELS’
ASSOCHAM has been a significant contributory factor in the emergence of new-age Indian Corporate,
characterized by a new mindset and global ambition for dominating the international business. The Chamber
has add ressed itself to the key areas like India as Investment Destination, Achieving International
Competitiveness, Promoting International Trade, Corporate Strategies for Enhancing Stakeholders Value,
Government Policies in sustaining India’s Development, Infrastructure Development for enhancing India’s
Competitiveness, Building Indian MNCs, Role of Financial Sector the Catalyst for India’s Transformation.
ASSOCHAM derives its strengths from the following Promoter Chambers: Bombay Chamber of Commerce &
Industry , Mumbai; Cochin Chambers of Commerce & Industry, Cochin: Indian Merchant’s Chamber, Mumbai;
The Madras Chamber of Commerce and Industry, Chennai; PHD Chamber of Commerce and Industry, New
Delhi and has over 4 Lakh Direct / Indirect members. Together, we can make a significant difference to the
burden that our nation carries and bring in a bright, new tomorrow for our nation.

ASSOCHAM Corporate Office
5, Sardar Patel Marg, Chanakyapuri, New Delhi - 110 021
Phone: +91-11-46550555 (Hunting Line) • Fax: +91-11-23017008, 23017009
E-mail: assocham@nic.in • Website: www.assocham.org
ASSOCHAM Southern Regional Office
D-13, D-14, D Block, Brigade MM,
1st Floor, 7th Block, Jayanagar,
K R Road, Bangalore-560070
Phone: 080-40943251-53
Fax: 080-41256629
Email:events@assocham.com
events.south@assocham.com,
director.south@assocham.com
ASSOCHAM Eastern Regional Office
F-4, “Maurya Centre” 48, Gariahat Road
Kolkata-700019
Tel: 91-33-4005 3845/41
HP: 91-98300 52478
Fax: 91-33-4000 1149
E-mail: Debmalya.banerjee@assocham.com
ASSOCHAM Western Regional Office
608, 6th Floor, SAKAR III
Opposite Old High Court, Income Tax
Ahmedabad-380 014 (Gujarat)
Tel: +91-79-2754 1728/ 29, 2754 1867
Fax: +91-79-30006352
E-mail: assocham.ahd1@assocham.com
assocham.ahd2@assocham.com
ASSOCHAM Regional Office Ranchi
503/D, Mandir Marg-C,
Ashok Nagar,
Ranchi-834 002
Phone: 09835040255
E-mail: Head.RORanchi@assocham.com
AUSTRALIA
Chief Representative
ASSOCHAM Australia Chapter
Suite 4, 168A Burwood Road
Burwood | NSW | 2134 | Australia
Tel: +61 (0) 421 590 791
Email: yateen@assochamaustralia.org
Website: www.assochamaustralia.org
UAE
ASSOCHAM – Middle East
India Trade & Exhibition Centre
M.E. IBPC-SHARJAH
IBPC-SHARJAH
P.O. Box 66301, SHARJAH
Tel: 00-97150-6268801
Fax: 00-9716-5304403
JAPAN
ASSOCHAM Japan Chapter
Colors of India Center
1-39-3 Ojima Koto-Ku,
Tokyo 136-0072
Japan
Email: international@assocham.com
tceindo@hotmail.com
USA
ASSOCHAM – USA Chapter
55 EAST 77th Street
Suite No 509
New York 10162

RESURGENT INDIA LIMITED
DEBT I EQUITY I ADVISORY I TRAINING
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