Micro, Small and Medium Enterprises (MSME)

Micro, Small and Medium Enterprises (MSME) Development Act, 2006

Under this act, the central Government shall set up, for the purpose of the act, a Board known as the National Board For Micro, Small and Medium Enterprises.

Classification of Enterprises

In Case of Manufacturing Enterprise

  • A micro-enterprise is one in which the investment in plant and machinery does not exceed Rs.25 Lakhs.
  • A small enterprise one in which the investment in plant and machinery is more than Rs.25 Lakhs but does not exceed Rs. 5 crores.
  • A medium enterprise is one in which the investment in plant and machinery is more than Rs. 5 crores but does not exceed Rs. 10 crores.

In Case of Service Enterprise

  • A micro enterprise is one in which the investment in plant and machinery does not exceed Rs. 10 lakhs.
  • A small enterprise one in which the investment in plant and machinery is more than Rs.10 lakhs but does not exceed Rs. 2 crores.
  • A medium enterprise is which the investment in plant and machinery is more than Rs. 2 crores but does not exceed Rs. 5 crores.

Ancillary Units

These units provide inputs to other industries. These are engaged in the manufacture of parts, components, light engineering products like cycles, sewing machines diesels engines, machine tools, electrical application. The investment in plant and machinery should not exceed Rs. 5 crores.

Export Oriented Unit

Export oriented units are those SSI units which export at least 30% of its annual production by the end of the 3th year of commencement of production.


Characteristics of MSMEs

The important characteristics of MSMEs are summarized as follows:

  • They require less capital.

  • They are fundamentally labour-intensive units facilitating greater utilization of man power.

  • They involve the use of simple technology, intensive utilization of individual skill leading to professional specialization.

  • They cater the individual tastes and fashions and render personalized service to consumers.

  • They are highly localized industries. Using local resources MSMEs are decentralized and dispersed to rural areas.

  • They are eligible for govt. assistance and patronage and for concessional finance by banks, financial institutions etc.

  • They are flexible to a large extent. They are more susceptible to change and highly reactive and receptive to socio-economic conditions.

  • They are free from red-tapism and bureaucratic handicaps.

  • Compared to large units, a MSME has a lesser gestation period. ie, the period after which the on investment starts.

Objectives of MSMEs

The primary objectives of MSME are to play a complementary role in the socio-economic set up of a country. The other objectives are as follows:

  • To provide increased employment opportunities.
  • To provide production of a large variety of goods especially consumer goods through labor-intensive methods.
  • To bring backward areas too in the mainstream of national development.
  • To improve the level of living of people in the country.
  • To create a climate for the development of self-employed experts, professionals and small entrepreneurs.
  • To ensure more equitable distribution of national income.
  • To ensure balanced regional development as regards industries.
  • To encourage the adoption of modern techniques in the unorganised traditional sector or the industry.

Advantages of MSMEs

  1. They are relatively more environmental friendly.
  2. They are generally based on local resources.
  3. They provide ample opportunities for creativity and experimentation.
  4. They facilitate equitable distribution of income and wealth.
  5. MSME enjoys the government support and patronage.
  6. These helps in the balanced regional development.
  7. It is possible to make necessary changes as and when required.
  8. These help in reducing prices.
  9. There is a close and direct personal contact with the customer and employees.
  10. They create more employment opportunities. They are labour intensive. They offer ample scope for self employment.
  11. They require only less capital. It is a boon to a country like India where capital is deficient.
  12. MSME alone can satisfy individual tastes and offer personalized service to the customers.

Disadvantages of MSMEs

  • MSMEs suffer from lack of funds. They are financially weak.
  • They suffer from lack of managerial and other skills. They cannot employ highly paid officials.
  • MSMEs always face tough competition from large businesses.
  • They are not well equipped to make advantage of the latest technology and modern methods.
  • There is only a little scope for division of labour and specialization.
  • MSMEs cannot afford to spend large sums of money on research and experiments.
  • They cannot survive in times of adversity.
  • They cannot secure cheap credit.

Importance of MSME in Developing Countries

  • Large Employment Opportunities: MSMEs are generally labor-intensive. For every Rs. 1 lakh of fixed investment, MSME sector provides employment for 26 persons as against 4 persons in the large scale sector. Thus in a country like India where capital is scarce and labour is abundant, MSMEs are especially important.

  • Economical Use of Capital: MSMEs need relatively small amount of capital. Hence it is suitable to a country like India where capital is deficient.

  • Balanced Regional Development: Generally small enterprises are located in village and small towns. Therefore it is possible to have a balanced regional growth of industries. India is a land of villages.

  • Equitable Distribution of Income and Wealth: It removes the drawbacks of capitalism, abnormal profiteering, the concentration of wealth and economic power in the hands of few, etc.

  • Higher Standard of Living: MSMEs bring higher national income, higher purchasing power of people in rural and semi-urban areas.

  • Mobilization of Locals Resources: The spreading of industries even in small towns and villages would encourage the habit of thrift and investment among the people of rural areas.

  • Simple Technology: New but simple techniques of production can be adopted more easily by MSMEs without much investment.

  • Less Dependence on Foreign Capital: MSMEs use a relatively low proportion of imported equipment and materials. The machinery needed for these industries can be manufactured within the country.

  • Promotion of Self Employment: MSMEs foster individual skill and initiative and promote self-employment particularly among the educated and professional class,

  • Promotion of Exports: With the establishment of a large number of modern MSMEs in the post-independence period, the contribution of the small scale sector in the export earnings has increased much.

  • Protection of Environment: MSMEs help to protect the environment by reducing the problem of pollution.

  • Shorter Gestation Period: In these enterprises the time-lag between the execution of the investment project and the start of flow of consumable goods is relatively short.

  • Facilitate Development of Large Scale Enterprises: MSMEs support the development of large enterprises by meeting their requirements of inputs of raw materials, intermediate goods, spare parts, etc. and by utilizing their output for further production.

Problems of MSMEs

Some of the more important problems faced by MSMEs are as follows:

  1. Lack of Managing Experience: They may not be having specialised knowledge in the different fields of management. At the time of initiating the project, they are not in a position to anticipate correctly their financial requirements and the size of market for their products.

  2. Inadequate Finance: Generally MSMEs are not in a position to arrange full finance from their own sources. They obtain finance from unorganized finance sector at higher rate of interest.

  3. Lack of Proper Machinary and Equipment: Many MSMEs use inefficient and outdated machinery and equipment. This affects the quality of production.

  4. Lack of Technical Know-how: Do not have the knowledge about different alternative technologies and processes available for manufacturing their products to improve the quality of products and reduce costs.

  5. Run on Traditional Lines: They have not yet adopted modern methods and techniques of production. They have not taken adequate interest in research and development efforts. Hence they cannot be run efficiently.

  6. Irregular Supply of Raw Materials: The majority of MSMEs depends on local sources for their raw material requirements. Small entrepreneurs are forced to pay high prices for materials because they purchase materials in small quantity.

  7. Problem of Marketing: The brand name of the products of MSMEs is acute due to tough competition from large industries. It cannot afford to costly advertisement and network of a distribution system. There are delays in the payment of bills by large purchasers resulting in inadequate working capital.

  8. Personnel Problems: It is difficult for them to get qualified persons to run the business. They cannot provide much training facilities to employees.

  9. Lack of Clear-cut Policy of the Govt: The Govt. may take decisions relating to MSMEs on the basis of political consideration rather than on economic consideration.

  10. Bogus Units: The government should look into this aspect seriously, break the stronghold of such vested-interested and promote only genuine entrepreneurship in the country.

  11. Other Problems: Like inefficient management, non-availability of cheap power, burden of local taxes etc.

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