CHAPTER 5 MICRO, SMALL AND MEDIUM

ENTERPRISES (MSME)
5.1 Classification of MSME
5.1.1 Reasons for need of amendment in MSME Act, 2006
5.2 Importance of MSME
5.3 Challenges of MSME
5.4 Concept of Small Business
5.4.1 Definition of small business in India
5.4.2 Nature & characteristics of small scale industries
5.4.3 Relationship between small & large units
5.5 Rationale of small business
5.6 Role and Scope of Small Business
5.7 Problems of Small Business
5.8 Government policy towards Small Business
5.8.1 MSMED Act, 2006
5.8.2 Benefits available to enterprises registered under MSME Act, 2006
5.9 Measures for growth of Small scale industries
5.9.1 Make in India
5.9.2 Goods & service tax
 INTRODUCTION
• Micro, Small and Medium Enterprises (MSME) sector has emerged as a
highly vibrant and dynamic sector of the Indian economy over the last five
decades.
• MSMEs play crucial role in providing large employment opportunities at
comparatively lower capital cost than large industries as well as help in
industrialization of rural & backward areas, thereby, reducing regional
imbalances, assuring more equitable distribution of national income and
wealth.
• MSMEs sector is the second-largest employment provider, after
agriculture in India. At present, there are nearly 56 million such
enterprises in various industries, employing close to 124 million people.
Of these, nearly 14% are women-led enterprises, and close to 60% are
based in rural areas. In all, the MSME sector accounts for 8% of India’s
GDP and 45% of merchandise exports.
CLASSIFICATION OF MICRO, SMALL
AND MEDIUM ENTERPRISES
MANUFACTURING SECTOR

Manufacturing Sector Investment in plant & machinery

Micro Enterprises Does not exceed 25 lakh rupees

Small Enterprises More than 25 lakh rupees but does not exceed 5 crore rupees

Medium Enterprises More than 5 crore rupees but does not exceed 10crore rupees

SERVICE SECTOR

Enterprises Investment in Equipment

Micro Enterprises Does not exceed 10 lakh rupees:

Small Enterprises More than 10 lakh rupees but does not exceed 2 crore rupees

Medium Enterprises More than 2 crore rupees but does not exceed 5 core rupees
 CLASSIFICATION…
• According to the Micro, Small and Medium Enterprises development (Amendment) Bill IN
2018, the MSMEs will now be classified on the basis of “annual turnover”; earlier the
criterion being “investment in plant and machinery or equipment”.
• The bill encompassed the amendments that asserted, any unit where the annual turnover does
not exceed five crore rupees will be a micro enterprise whereas a small enterprise will be
defined as a unit where the annual turnover is between Rs. 5 crore and Rs. 75 crore. Those
businesses where the annual turnover is more than seventy five crore rupees but does not
exceed Rs. 250 crore would be deemed as medium enterprises.
• Also, additionally, the Central Government may, by notification, vary turnover limits, which
shall not exceed thrice the limits specified in Section 7 of the MSMED Act, as per the
amendments. It incentivises the tendency in the promoters of the enterprises to keep the
investment size small in a particular business entity in order to retain the benefits associated
with MSME category, it added.
IMPORTANCE OF MSME’S
LARGE SCALE EMPLOYMENT

ECONOMIC STABILITY & LEVERAGE

EXPORTS

ENCOURAGES INCLUSIVE GROWTH

CHEAP LABOR & MINIMUM

OVERHEAD

SIMPLE MENAGEMENT STRUCTURE

FOR ENTERPRISES

MAIN ROLE IN MAKE IN INDIA

MISSION
CHALLENGES OF MSME’S

EXCESSIVE REGULATION

LACK OF WORKING CAPITAL

STATUS

LACK OF REGULAR WORK

LITTLE ACCESS TO CREDIBLE DATA

 CONCEPT OF SMALL BUSINESS
• Small businesses are either services or retail operations like grocery
stores, medical stores, tradespeople, bakeries and small manufacturing
units. Small businesses are independently owned organisations that
require less capital and less workforce and less or no machinery. These
businesses are ideally suited to operate on a small scale to serve a local
community and to provide profits to the company owners.
• According to the definition provided by the government website for
business, business.gov.in, a small scale business is a business set up in
which the financial commitment towards infrastructure such as
building & equipment, whether made as an owner or on rental or
purchase basis, does not surpass Rs. 1 crore.
SMALL BUSINESS…
• Two main criteria used to define small business are as follows-
• Size of business- Size refers to the scale of operations. Size may be measured in the
following ways: total capital investment; the value of total assets or fixed assets; total
investment in plant & machinery; the number of persons employed; volume/value of
production; volume/value of sales turnover & a combination of the above.
• Qualitative criteria- Size doesn’t always reflect the true nature of the enterprise.
Qualitative characteristics may be used to differentiate small business from big
business. These characteristics are as follows-
• Ownership-A small firm is generally owned by one individual (proprietorship) or by
a few individuals (partnership).
• Nature of management-Management of small business tends to be personalized &
independent. The owner himself serves as the chief executive of the firm.
• Number of workers involved-Small business is generally labor intensive.
• Geographical area of operations-The area of operation of a small firm is often local.
DEFINITION OF SMALL BUSINESS IN INDIA
• Small scale industry- Industrial undertakings wherein investment in plant & machinery doesn’t exceed Rs. 5 crore.

• Ancillary small industrial unit-An undertaking that sells not less than 50 per unit of its output to other industrial undertakings & wherein
investment in plant & machinery doesn’t exceed Rs. 5 crores.

• Export-oriented units-An undertaking that exports at least 50% of its output & wherein investment in plant & machinery doesn’t exceed Rs. 5
crores.

• Tiny industrial unit-An undertaking wherein investment in plant & machinery doesn’t exceed Rs. 25 lacs.

• Micro business enterprise-An undertaking wherein investment in plant & machinery doesn’t exceed Rs. One lacs.

• Small scale service & business (industry related) enterprise-An enterprise wherein investment in plant & machinery doesn’t exceed Rs. 10
lacs.

• Small scale industries owned & managed by women entrepreneurs-An enterprise promoted by a woman entrepreneur & in which women
own not less than 51% of share capital.

• Village industries-Any industry located in a rural area which produces any goods, renders any service with or without the use of power,
investment not exceeding Rs. 50000 per head.

• Cottage industries-These traditional industries are characterized by:

• Small capital investment;

• Simple equipment;

• Individual ownership;

• Family labor & local talent;

• Production of simple products normally in residential premises.

NATURE AND CHARACTERISTICS OF
SMALL BUSINESS ENTERPRISES
PERSONAL CHARACTER/OWNER MANAGEMENT

CLOSELY HELD

LABOR INTENSIVE

DISPERSAL

UNORGANIZED LABOR

LOCAL AREA OF OPERATIONS

LIMITED STAFF

LIMITED REVENUE

INDIGINEOUS RESOURCES
RELATIONSHIP BETWEEN SMALL
AND LARGE UNITS
Competitive

Jobbing Supplementary

Servicing Complementary

Initiative
RATIONALE OF SMALL BUSINESS

THE EMPLOYMENT ARGUMENT

THE EQUALITY ARGUMENT

THE LATENT RESOURCES

ARGUMENT

THE DECENTRALIZATION ARGUMENT

THE ALLOCATION EFFICIENCY

ARGUMENT
ROLE AND SCOPE OF SMALL BUSINESS
EMPLOYMENT GENERATION

SKILL LIGHT

OPTIMIZATION OF CAPITAL

BALANCED REGIONAL DEVELOPMENT

MOBILIZATION OF LOCAL RESOURCES

EXPORT PROMOTION

COMPLEMENTS LARGE SCALE INDUSTRIES

MEETS CONSUMER DEMAND

ENSURES SOCIAL ADVANTAGE

DEVELOPMENT OF ENTERPRENEURSHIP
PROBLEMS OF SMALL BUSINESS

POOR CAPACITY UTILIZATION

INCOMPETENT MANAGEMENT

INADEQUATE FINANCE

RAW MATERIAL SHORTAGE

LACK OF MARKETING SUPPORT

PROBLEMS IN WORKING CAPITAL

PROBLEMS IN EXPORTS

LACK OF TECHNOLOGY UPGRADATION

DELAYED PAYMENTS

POOR INDUSTRIAL RELATIONS

CONCENTRATION OF INDUSTRIAL UNITS

GOVT. POLICY TOWARDS SMALL BUSINESS

ACCESS TO CREDIT

ACCESS TO MARKETS

TECHNOLOGY UPGRADATION

EASE OF DOING BUSINESS

SOCIAL SECURITY FOR MSME

EMPLOYESS

UDYAM SANGAM
BENEFITS AVAILABLE TO ENTERPRISES UNDER
MSMED ACT, 2006

Time-bound resolution of disputes with

Buyers through conciliation & arbitration

Protection against the delay in payment from

Buyers

Preference in procuring Government tenders

 MAKE IN INDIA
• Make in India has introduced multiple new initiatives, promoting foreign direct
investment, implementing intellectual property rights and developing the
manufacturing sector.
• It targets 25 sectors of the economy which range from automobile, auto-mobile
components, aviation, bio-technology, construction, chemicals, defense,
manufacturing, electric machinery, food processing, textiles & garments,
leather, pharmaceuticals to Information Technology (IT) & Business Process
Management (BPM) etc.
• The initiative is built on four pillars which are as follows-
• (1) NEW PROCESSES
• (2) NEW INFRASTRUCTURE
• (3) NEW SECTORS
• (4) NEW MINDSET
GOODS AND SERVICE TAX (GST)
• GST was launched in India to reduce the complication of taxes and
improve the system of indirect taxes and as well the problems faced like
double taxation.
• GST would combine several central and state taxes into one tax. On 12th
April 2017, the Central Government enacted four GST Bills: Central
GST (CGST), Integrated GST (IGST), Union Territory GST (UTGST),
bill to compensate states.
• The GST is an indirect tax which means that the tax is passed on till the
last stage wherein it is the customer of the goods and services who bears
the tax. This Council declares four tax rates namely viz. 5%, 12%, 18%
and 28%. Some goods and services would be exempt. There would be
separate tax rate for precious metals & cess over the peak rate of 28% on
specified luxury and sin goods .
BENEFITS OF GST

STARTING BUSINESS BECOMES EASIER

LOWER LOGISTICS OVERHEAD

IMPROVED MSME MARKET EXPANSION

SUPPORT FOR SALES & SERVICES

UNIFICATION OF MARKET

PURCHASES OF CAPITAL GOODS