#SMEs: #KeytoSustainableDevelopment
The #globaleconomy is teetering on the brink of another major downturn, especially in the wake of past couple of years of anaemic and uneven recovery from the global financial crisis. The year 2011 witnessed considerable slowdown in output growth, particularly in the developed world. Broadly speaking, the baseline forecast foresees continued anaemic growth during 2012 and 2013 and such growth is insufficient to tackle with the continued jobs crises in most developed economies and will drag down income growth in developing countries.
However, for some experts even this sombre outlook may be too optimistic. Persistent weaknesses in the major #developedeconomies related to problems left unresolved in the aftermath of the #GreatRecession of 2008-2009 could contribute to another serious and renewed global downturn. The problems confronting the global economy are multiple and interconnected. The persistent jobs crisis and the declining prospects for economic growth, especially in the developed countries have continued to remain the most pressing challenges thus far.
As #unemployment remains high, at nearly 9 per cent, and incomes stagnate, the recovery is stalling in the short run because of the lack of aggregate demand. But, as more and more workers remain out of a job for a long period, especially young workers, medium-term growth prospects also suffer because of the detrimental effect on workers’ skills and experience.
Is SME the Answer?
Small and Medium Enterprises (#SMEs) are fast emerging as key component of economy and main driver of #economicgrowth throughout the globe. According to broad estimates, 80% of global enterprises are SMEs with less than 250 employees. Besides, SMEs constitute 99% of EU’s business, 85% of US business, and 99% of UK’s business. The SMEs account for 70% of world’s production as well. The growing global tendency to promote SMEs attests to the fact that these contain the potential of reversing the trend of economic slowdown.
Being labour intensive, #SMEs provide more opportunities for low-skilled workers. Apart from serving as an important link in the chain supply for the large multinational companies (#MNCs), SMEs also facilitate transformation of agro-dependent economies into industrial and service-oriented economies. Besides, SMEs are potentially bright for #innovation and #sustainableinitiatives due to their flexibility and risk-taking ability.
Being an easily accessible means of providing employment at local level, SMEs are closely linked to economic growth and poverty reduction. Unlike MNCs which generate economic disparities, SMEs help in narrowing down such disparities and equitable distribution of wealth thereby contributing to #povertyreduction. Being instrumental in poverty alleviation and reduction of economic disparities, SMEs also contribute to social stability. Viewd in that perspective, SME is a viable answer to #sustainableeconomicgrowth.
Defining SME
There exists no uniform definition of a SME in the global economy. SMEs have been defined by different countries in diverse ways. In Japan, a SME in the manufacturing sector is defined in terms of upper limit of paid-up capital of 300 million Yen or 300 employees. In South Korea, SMEs are defined as firms, which are independently owned and employ less than 300 persons in the manufacturing, mining, #transportation and #construction sectors. In the #EuropeanUnion, SMEs are defined in terms of #employment and turnover/balance sheet total.
To be classified as a SME, an enterprise must satisfy the criteria for the number of employees and one of the two financial criteria, that is, either the turnover total or the balance sheet total. In addition, it must be independent.
There is no official definition of a SME in India. The Government of India has officially defined a small-scale enterprise under the #IndustriesDevelopmentandRegulation (#IDR) Act, 1951, in terms of upper limit of original investment in plant and machinery at Rs.10 million. But the Small and Medium Enterprises Bill, 2005 has proposed a definition of a medium enterprise in terms of investment in plant and machinery in the range of Rs.50 million to Rs.100 million and proposed to revise the upper investment limit for a small-scale enterprise to Rs.50 million. If this definition is accepted, then SMEs would cover all enterprises having investment in plant and machinery up to Rs.100 million.
#SMEsinIndia
The small and medium enterprises today constitute a very important segment of the Indian economy. The development of this sector came about primarily due to the vision of our late Prime Minister Jawahar lal Nehru who sought to develop core industry and have a supporting sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant sector of the #economy. Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and over 40% of the total exports from the country. In terms of value added this sector accounts for about 40% of the value added in the manufacturing sector. The sector’s contribution to #employment is second highest next to #agriculture.
The SMEs sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 6.79 million units in the year 1990-91 to over 13 million in the year 2007-08. When the performance of this sector is viewed against the growth in the manufacturing and the #industry sector as a whole, it instills confidence in the resilience of the SMEs Essector.
The Small and Medium Enterprises’ (#SMEs) contribution to Indian #GDP is expected to increase to 22 per cent by 2020, from the present 17 per cent.
There is absence of single source of data, which makes available statistics on the size and composition of #SMEs in India. Undoubtedly, the #AnnualSurveyofIndustries (#ASI) is regarded as the most comprehensive and reliable source of data on #Indianindustry covering registered factories; nevertheless this source excludes unregistered or unorganised manufacturing enterprises, which is critical to any compilation of statistics on SMEs.
According to ASI, SMEs account for a major share of registered factories, #employmentproduction and gross value added in Indian industry. In 1989/90, SMEs accounted for more than 93 per cent of registered factories, 66 per cent of employment, almost 52 per cent of the value of production and about 44 per cent of the gross value added. But by 1996/97, the share of SMEs declined marginally in terms of the number of factories and #employment, and considerably in terms of value of output and value added. Such a scenario gives rise to the question as to whether India can afford to allow the gradual dilution of SMEs when their growth and performance plays a vital role in the growth and performance of the #Indianeconomy or not.
Recent years have seen SMEs sector having performed exceedingly well and enabled Indian economy to achieve a wide measure of #industrialgrowth and #diversification. By its less capital intensive and high labour #absorptionnature, SMEs sector has made significant contributions towards #employmentgeneration and #ruralindustrialisation. SMEs sector in India creates largest #employment opportunities for the Indian populace, next only to #agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the SMEs sector generates employment for four persons.
Statistics from Ministry of Micro, Small & Medium Enterprises #MSME) also reflect the growth trajectory of SSI industry in India. The number of SSI units, which stood at 6.79 million in 1990-91 increased to 13.37 million in 2007-08 providing #employment to more than 32 million people in India.
SMEs Sector plays a major role in India’s present export performance. 45%-50% of the Indian exports is contributed by the sector. Direct exports from the sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale #industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the #production of parts and components for use for finished exportable goods. The exports from SMEs sector have shown excellent growth rates in recent decades. The product groups which dominate the exports from SMEs sector include sports goods, #readymadegarments, #woollengarments and #knitwear, #plasticproducts, #processedfood and #leatherproducts. The SMEs sector is reorienting its export strategy towards the new trade regime being ushered in by the #WTO.
Prospects for SMEs
With the exception of textile products & garments, software and auto-components, the Indian #SMEs lack a noticeable presence in the growing arena of global value-chains of #MNCs. The entry of Indian SMEs on a sizeable scale into the #globalvaluechaincircles is inhibited by various factors. Viewed in a broad perspective, the SMEs in India consist not just factory enterprises but a considerable number of predominantly rural based, un-organised manufacturing enterprises.
The SMEs in India comprise three sub-sectors: (1) predominantly rural based, traditional household industries; (2) small and medium industries, functioning with relatively obsolete technologies; and (3) modern small and medium enterprises, which are owned and operated by techno-entrepreneurs, operating in new industries such as software and bio-technology, among others.
A sizeable proportion of the traditional household enterprises usually caters to the demand of the #ruralpopulation as well as that of low-income groups in urban #India. As and when the level of income goes up, particularly in #ruralIndia, this sub-sector is bound to diminish gradually due to lack of demand on the one hand and transformation through modernisation, on the other.
Therefore, this sub-sector is entails dim prospects of benefiting from the #globalisation process. Rather, it may get affected adversely. Modern SMEs, which are run by #innovativetechnoentrepreneurs and which are operating in new industries, will be able to perceive and pursue the opportunities offered by #globalisation appropriately and, therefore, prosper rapidly.
But these modern SMEs account for a minority in the vast and diversified #SME sector of India. Therefore, they alone cannot make a difference to the SME sector, at least in the near future. A major proportion of the manufacturing enterprises in the Indian SME sector operate with obsolete technology. This lack of technology sophistication will act as a constraint in exploiting the opportunities presented by #globalisation.
In addition, a sizeable number of the SME entrepreneurs are either less qualified or lack both the resources and sources of information to access #globalopportunities. If appropriate steps are not taken, they will find it difficult to hold on to the market, which they currently have within the country. This is because both consumers and large firm #producers (who currently obtain intermediate products directly or indirectly from these SMEs) might, sooner than later, become more quality conscious and look for better alternatives available #globally. Therefore, the future survival of these SMEs will be increasingly under strain.
Broadly speaking, the SME sector in India is ideally suited to build on the strengths of the traditional #skills and #knowledge, by #infusionoftechnologies, #capital and #innovative marketing practices. This is the appropriate time to set up projects in this sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the #Indianindustry and the #demandstructures.
The diversity in #productionsystems and demand structures is likely to ensure long term co-existence of many layers of demand for #consumerproducts / #technologies / #processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units.
The promotional and protective policies of the #GovernmentofIndia have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bottleneck of the sector has been the inadequacies in capital, technology and marketing. The process of liberalisation coupled with Government support will therefore, attract the infusion of these in this sector.
According to some observers, the capability of Indian SME products to compete in international markets is reflected in its share of about 34% in national exports. In case of items like readymade garments, leather goods, processed foods, engineering items, the performance has been commendable both in terms of value and their share within the SME sector while in some cases like sports goods they account for 100% share to the total exports of the sector.
In view of this, export promotion from the small scale sector has been accorded high priority in India’s export promotion strategy which includes simplification of procedures, incentives for higher #productionofexports, preferential treatments to SMEs in the market #developmentfund, simplification of duty drawback rules, etc.
Conclusion
Owing to their substantial share of enterprises, employment, production and gross value added in the industrial sector, the #SMEs have emerged as a determining factor for Indian economic growth. However, in general, Indian SMEs lack technological strength to access and exploit the benefits accruing from the intensifying process of globalisation. Therefore, technological transformation of SMEs should attract the focus of attention of policymakers.
In order to make SMEs as potent instrument of sustainable economic growth, the entry of #FDI and #MNCs should be harnessed to promote inter-firm linkages to the advantage of SMEs. There is a need to consciously guide SMEs to enter the ever-expanding global value chain of MNCs, both in manufacturing and retail sectors. Further, technological innovation and orientation of SMEs should be promoted and information access be made easy.
When SMEs are suppliers, their innovative measures can move their customers in the supply chain towards sustainable solutions and concomitantly when SMEs are buyers they can exert pressure towards sustainable supply chain management. With a view to make SMEs as engine of #sustainableeconomicgrowth, the Government should create favourable framework conditions, relaxation in institutional and regulatory procedures/barriers; introducing improvement in public policy; assisting firms to integrate EMS; making #EMS less formal for SMEs; offering benefits to SMEs with EMS, procuring goods for the public sector from SMEs, creating incentives to bring all the SMEs into formal sector, lowering transaction costs to SMEs and making available market-related information for SMEs etc.
With a view to make SMEs #ecofriendly, due emphasis needs to be stressed on designing #environmentalpolicies for the SMEs on the pattern and scale of MNCs according to the needs and requirements of the SMEs because MNCs push their burden of environmental compliance to SMEs through outsourcing. As the total impact of SMEs is huge due to their large size and illegal operations, proper #environmentalpolicy framework for SMEs is essential.
By #DrArvindKumarPresidentIndiaWaterFoundation
