Small Business and Entrepreneurship

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME) AND BUSINESS ENTREPRENEURSHIP

9.1 Introduction to MSME

**MSME** stands for **Micro, Small and Medium Enterprises**. These enterprises are the backbone of India's industrial economy and contribute significantly to national development through production, employment generation, and exports.

**Key Contributions of MSME:**

Contribute approximately **29.7% of GDP** to India's economy

Account for **49.66% of total exports**

Provide employment to nearly **60 million people** through **28.5 million enterprises**

Second largest employment sector after agriculture

Act as complementary units to large industries through ancillary manufacturing

Promote use of local raw materials and indigenous skills

Facilitate grassroots innovations and entrepreneurship development

**Structure of MSME Sector:**

The Indian MSME sector consists of both traditional and modern small industries divided into **eight subgroups**:

Handlooms

Handicrafts

Coir industry

Sericulture

Khadi and Village Industries

Small Scale Industries (SSI)

Powerlooms

Service sector enterprises

**Example:** Romi Bags of Manipur—Khumbongmayum Dhanachandra Singh transformed leftover fabric scraps into a successful purse-making business in 1996, which received the National Award for bag making in 2007 under Micro and Medium Enterprises category. This exemplifies how MSME encourages entrepreneurship and value creation from locally available resources.

**Global Recognition:**

MSME Tool Rooms contributed critical components to India's space missions:

Provided **10+ components for Mangalyaan** (Mars Orbiter Mission)

Supplied vital inputs for **Chandrayaan-2** moon mission

Demonstrated MSME capability in precision manufacturing and advanced technology

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9.2 Definition and Classification of MSME

The **Government of India** defines MSME based on two parameters:

1. **Investment in Plant and Machinery**

2. **Turnover**

This approach considers India's socio-economic environment where capital is scarce but labour is abundant, making employment generation the priority.

**Classification Table:**

| Type of Unit | Investment in Plant & Machinery | Turnover (Does not exceed) | % Share in MSME |

|---|---|---|---|

| **Micro Enterprises** | Up to ₹1 Crore | ₹5 Crore | 99.4% |

| **Small Enterprises** | Up to ₹10 Crore | ₹50 Crore | 0.52% |

| **Medium Enterprises** | Up to ₹50 Crore | ₹250 Crore | 0.1% |

**Important Note:** Micro enterprises dominate with **99.4%** of total MSME, indicating that the sector is primarily composed of very small units.

Related Categories

**Village Industries:**

Industries located in rural areas producing goods or rendering services with or without power. Fixed capital investment per artisan/worker is specified by the Central Government. These industries promote rural industrialisation and reduce urban migration.

**Cottage Industries:**

Also called **rural industries or traditional industries**. They are **NOT defined by capital investment criteria** like other SSI. Examples include handloom weaving, pottery, and handicrafts. These preserve traditional crafts and provide supplementary income to rural populations.

**Legislative Framework:**

The **Micro, Small and Medium Enterprises Development (MSMED) Act, 2006** came into force in **October 2006**. This landmark legislation:

Unified definition of MSME under a single legal framework

Addressed issues relating to credit availability

Provided provisions for marketing support

Ensured technology upgradation

Extended coverage to service sector enterprises

Recognized emerging small and medium enterprises transitioning into higher technology sectors

**Rationale:** As enterprises expanded from small to medium scale, they required higher technology adoption to remain globally competitive. The MSMED Act addressed these concerns comprehensively.

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9.3 Role and Contribution of MSME in Economic Development

MSME occupy a **distinct position** in India's industrial strategy due to their multifaceted contributions to socio-economic development.

Key Roles of MSME

**1. Balanced Regional Development**

Small industries account for **95% of industrial units** in India

Enable dispersed industrialisation across all regions

Prevent concentration of industries in metro areas

Utilize locally available resources without geographic constraints

Examples: Textile units in Tamil Nadu, handicrafts in Rajasthan, coir industry in Kerala

**2. Employment Generation**

**Second largest employer** after agriculture

Generate **more employment per unit of capital** compared to large industries

**Labour-intensive and less capital-intensive**—ideal for labour-surplus economy like India

Create employment opportunities with minimal formal education requirements

Provide self-employment to entrepreneurs with technical skills

**3. Diversity of Products**

MSME manufacture a **wide range of products**:

Mass consumption goods: soaps, detergents, stationery, domestic utensils

Readymade garments, hosiery, leather, plastic, and rubber goods

Processed foods and vegetables

Furniture (wood and steel)

Sophisticated items: electronic goods, televisions, calculators, electro-medical equipment, air conditioning systems

Pharmaceuticals and drugs

Agricultural tools and equipment

Engineering products

**Export value products:** handlooms, handicrafts, traditional village industry items

**4. Balanced Economic Development**

Small industries can be established anywhere without locational constraints

Benefit every region of the country through industrialisation

Enable equitable distribution of economic growth across rural and urban areas

Reduce income inequalities and regional disparities

Complement large industries through ancillary production

**5. Entrepreneurship Opportunities**

Provide platform for converting **latent skills and talents** into business ideas

Low capital investment requirements

Minimal formalities for business registration

Enable individuals to become job creators rather than job seekers

Support grassroots innovation and skill utilization

**6. Cost Advantages**

**Low cost of production**—key competitive strength

Locally available raw materials are less expensive

Low overhead expenses

Minimal establishment and running costs

Flexible payment structures with suppliers

**7. Operational Agility**

Small size enables **quick and timely decision-making**

No need to consult multiple hierarchical levels

Can capture new business opportunities at right time

Flexible operations and rapid adaptation to market changes

Personalized customer service

**Policy Objective:**

The Government of India promotes MSME as a **powerful instrument** for achieving **two twin objectives**:

1. Accelerated industrial growth

2. Creating productive employment in rural and backward areas

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9.4 Problems Associated with MSME

MSME face numerous challenges that prevent them from realizing their full potential. These problems are structural, operational, and external in nature.

Financial Problems

**Non-availability of Adequate Finance:**

Begin with small capital base

Lack creditworthiness required for capital market access

Banks require **collateral security, guarantees, and margin money**—difficult to provide

Heavy dependence on local financial resources

**Exploitation by moneylenders** at high interest rates

**Working Capital Crisis:**

Suffer from inadequate working capital

Experience delayed payment of dues from buyers

Capital locked up in unsold inventory

Difficulty in meeting operational expenses

Inadequate cash flow management

Raw Material Procurement Issues

**Material Availability and Quality:**

Difficulty in procuring required raw materials

Must compromise on quality if materials unavailable

Pay premium prices for good quality materials

**Low bargaining power** due to small purchase quantities

Cannot afford bulk purchases due to storage limitations

**Scarcity of Inputs:**

General scarcity of metals, chemicals, and extractive raw materials

Results in **wasted production capacity**

Closure and sickness of units due to unavailable inputs

Supply chain vulnerability

Loss of economic growth potential

Managerial and Skill Deficiencies

**Lack of Managerial Expertise:**

Generally operated by **single entrepreneur** lacking diverse managerial skills

Owner may possess technical knowledge but lack marketing acumen

**Cannot afford professional managers**

Inadequate time to manage all functional activities

Poor delegation and organizational structure

**Knowledge Gaps:**

Weak understanding of business management principles

Limited financial management capabilities

Inadequate human resource management

Insufficient strategic planning abilities

Marketing Challenges

**Weak Marketing Position:**

Marketing is weakest functional area

**Excessive dependence on middlemen** who exploit through:

Low prices offered to producers

Delayed payment terms

Commission deductions

Lack necessary infrastructure for direct marketing

Limited brand awareness and advertising budget

**Market Intelligence:**

Inadequate understanding of customer needs and requirements

Poor market research capabilities

Limited access to market information

Difficulty in competing with established brands

Quality and Technology Issues

**Poor Quality Standards:**

Many units **do not adhere to desired quality standards**

Focus on cost-cutting rather than quality improvement

**Weakest point when competing globally**

Lack resources for quality research and development

Inadequate expertise to upgrade technology

**Technological Backwardness:**

Use of traditional, outdated technology

High cost of technology adoption

Insufficient funds for research and development

Inability to invest in modernization and automation

Low productivity due to obsolete machinery

Operational Inefficiencies

**Capacity Utilization Problem:**

**Operate below full capacity** due to:

Inadequate marketing skills

Insufficient demand

Working capital constraints

Increased operating costs per unit

Loss of competitive advantage

Gradual decline leading to sickness and closure

Global Competition Threat

**Inability to Face Global Markets:**

Competition from medium and large industries

**Threat from multinational companies** with:

Superior financial resources

Advanced technology and R&D

Global supply chains

Brand recognition and marketing power

Exchange rate fluctuations affecting exports

Stringent international quality standards (ISO, CE marking, etc.)

**Export-Related Challenges:**

Lack of adequate foreign market data

Poor market intelligence on international demand

Compliance with international standards difficult

Pre-shipment finance unavailability

Complex customs and export documentation

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9.5 MSME and Entrepreneurship Development

Definition of Entrepreneurship

**Entrepreneurship** is the **process of setting up one's own business** as distinct from pursuing employment or practicing a profession. The person who establishes the business is called an **entrepreneur**, and the resulting business unit is called an **enterprise**.

**Key Understanding:** Entrepreneurship is not mysterious or dependent on luck—it is a **learnable process** that can be developed through education, training, and experience.

Importance of Entrepreneurship

**For Developing Countries (like India):**

Initiate the process of economic development

Generate employment opportunities

Create value and wealth

Exploit opportunities arising from globalization

Develop indigenous industries

**For Developed Countries:**

Sustain economic growth

Drive innovation and competitiveness

Create new industries and markets

**Indian Context:**

With public sector employment shrinking and massive opportunities from globalization, entrepreneurship can propel India toward becoming a **super economic power**.

Characteristics of Entrepreneurship

**1. Systematic Activity (Not Mysterious Gift)**

Entrepreneurship is:

**Systematic, step-by-step, and purposeful**

Not dependent on chance or innate talent

Possesses specific **temperamental, skill, knowledge, and competency requirements**

Can be **acquired, learnt, and developed** through:

Formal educational training

Vocational training programs

Observation and work experience

Self-study and mentorship

**Myth Dispelled:** "Entrepreneurs are born, not made" is **FALSE**. Entrepreneurship is a teachable process.

**2. Lawful and Purposeful Activity**

Object is **lawful business only**—excludes illegal activities

Purpose is **creation of value**:

Personal profit and income generation

Social gain and community benefit

Wealth creation for stakeholders

Cannot legitimize unlawful actions by comparing with business risks

**3. Innovation and Creativity**

**Innovation** refers to introduction of **something new or improvement** that brings positive change.

**From firm's perspective, innovation is welcome if it:**

**Cost-saving** (reduces production or operational expenses)

**Revenue-enhancing** (increases income and sales)

Achieves both simultaneously

Even without measurable benefit, innovation should become a habit for competitive sustainability

**Creative Aspects of Entrepreneurship:**

**Creation of value** by combining factors of production

Production of goods and services meeting societal needs and wants

**Introduction of new products** to market

**Discovery of new markets** and customer segments

**New sources of supply** for inputs and raw materials

**Technological breakthroughs** advancing efficiency

**New organizational forms** for better, cheaper, faster, and environmentally sustainable operations

**Every entrepreneurial act results in:**

Income and wealth generation

Economic value creation

Employment opportunities

**4. Organization of Production**

**Production** means creating form, place, and time utility through combined use of factors of production.

**Entrepreneur's Role:**

**Mobilizes diverse factors**: land, labour, capital, technology, enterprise

**Perceives business opportunity** in market

Combines resources efficiently to create output

Organizes operational processes for optimal results

Coordinates different functional departments

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Summary of Key Exam-Important Concepts

**MSME Definition:**

Micro (≤₹1Cr investment, ≤₹5Cr turnover, 99.4%), Small (≤₹10Cr, ≤₹50Cr, 0.52%), Medium (≤₹50Cr, ≤₹250Cr, 0.1%)

**MSME Contributions:**

29.7% GDP, 49.66% exports, 60 million employment, 28.5 million enterprises

**MSME Advantages:**

Regional balance, employment, low cost, diversified products, entrepreneurship support, operational agility, ancillary linkages

**MSME Problems:**

Finance, raw materials, managerial skills, marketing, quality, capacity utilization, global competition

**Entrepreneurship Characteristics:**

Systematic, lawful, innovative, organizational, creates value and employment

**MSMED Act 2006:**

Single legal framework for credit, marketing, technology upgradation, unified definition