International Journal of Business

Management & Research (IJBMR)

ISSN(P): 2249-6920; ISSN(E): 2249-8036
Vol. 4, Issue 4, Aug 2014, 57-64
TJPRC Pvt. Ltd.

DEVELOPMENT OF SMALL AND MEDIUM SCALE ENTERPRISE IN INDIA:

GROWTH AND ENTREPRENEURSHIP
C. LOGANATHAN1 & AMMANI AMMAL2
1

Research Scholar, Department of Management, Karpagam University, Coimbatore, Tamil Nadu, India
2

Research Scholar, Bharathiar University, Coimbatore, Tamil Nadu, India

ABSTRACT
Although the Government of India has taken necessary steps for the development of small and medium
enterprises, but these measures are insufficient. Therefore, the research on Development of Small and Medium Scale
Enterprise in India: growth and entrepreneurship aimed to find out the measures or programs aided by Government of
India for the growth and development of small and medium enterprise sector, and to find out the factors that has slowed
down the growth of small and medium enterprise sector in India. The research is a qualitative study where the data was
collected using secondary sources. The research concluded that despite of many schemes, the small and medium enterprise
sector still faces many issues that have slowed down its growth and development. These different issues include proper
infrastructure, finance availability, lack of skilled manpower, poor organized marketing, irregular and inadequate supply of
raw material, lack of proper equipment and machinery, competition from imported articles and large-scale units and
managerial inadequacies. The research recommends that Government of India or the relevant authorities must address
these issues for the growth and development of this sector.

KEYWORDS: Entrepreneurship, Small and Medium Scale Enterprises, Growth

INTRODUCTION
India is one of the growing economies that have attracted attention of large number of entrepreneurs. The growth
in small and medium scale enterprises therefore contributes to the overall industrial sector and its success. However, still it
is largely agreed that the country must still continue to develop the sector. In addition, one thing more is largely agreed that
this growth and development should be inclusive. Among other factors, increased jobs, better skills, increased productivity
and education contributes to inclusive and high growth. A successful small medium enterprise sector plays an important
role in developing economic growth and creating jobs. This is because the sector has potential to offers employment to
more than 70% of the people who are still part of agricultural production (Mohanty and Mahapatra, 2007). Sustaining and
achieving higher employment and growth requires an increase in services and industrial growth that is spurred by small
medium enterprises. According to Development Commissioner (MSME) Ministry of Micro, Small and Medium Scale
Enterprise there are three types of Enterprises in India i.e., Micro Enterprise, Small enterprise and Medium Enterprise.
The Micro enterprises do not spend more than 25 lakh rupees in production or manufacturing of good and do not spend
more than ten lack Indian rupees in rendering or providing services. The small enterprises spend more than 25 lakh rupees
but less than 5 crore rupees in production or manufacturing of good and spend more than ten lakh Indian rupees but less
than two crore rupees in rendering or providing services.

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C. Loganathan & Ammani Ammal

Finally, the medium enterprises spend more than 5 crore rupees but less than ten crore rupees in production or
manufacturing of good and spend more than two crore Indian rupees but less than five crore rupees in rendering or
providing services (Roy, 2013).
In order to address the issue of credit and loans, the authorities in India have adopted several measures to address
small and medium enterprises developments and financing. Moreover the World Bank has also provided assistance through
Small Medium Enterprises development and financing project. Besides this, World Bank in the year 2004 has offered loan
to the SIDBI of approximately $120 million that has assisted in channeling the long term loans (Rathakrishnan, 2010).
The borrowing under this project has served almost 927 small medium enterprise projects in more than 10 Indian states.
On average, these loans are provided for the development of the sector and have tenure of five years. Moreover, these
borrowing practices for the small medium enterprises project at the different branches of SIDBI branches have improved
largely. Besides SIDBI bank, there are also many other schemes created for the growth and development of the small and
medium enterprises. Some of these schemes are listed below (Soundarapandian, 2007):

For credit support, the Public sector banks in India are advised to increase the flow of loans to the small and
medium enterprises within 5 years. Moreover, at least 40% of the bank loan allocates loan for the small and
medium enterprises. Some specialized small and medium enterprises Bank branches are allocated for the smooth
flow of loans to this sector. Finally, there is also one time settlement scheme to settle loans for small and medium
enterprises.

For the technological Support, there is a loan scheme linked to the Capital Subsidy for the purpose of technology
up gradation. This scheme aims to increase the product quality through adoption of technology.

For the export promotion and marketing assistance, the scheme aims to support the participation of small and
medium enterprises in trade exhibitions and fairs which is held internationally and nationally. Moreover, training
programmes are also held on packaging for the purpose of exports. Moreover, the scheme also provides assistance
in the market development for market studies, publicity and adoption of most recent market practices.

For the development of cluster, its formation is considered necessary for the small and medium enterprises
development. The term cluster is defined as a national agglomeration of different enterprises (SMEs mainly but
also includes large enterprises), that are selling and producing a wide range of complementary and related services
and products.

For the development of International Cooperation, the schemes give an exposure to small and medium enterprises
to the recent manufacturing practices and technologies prevalent in their respective fields. Moreover, it also
encourages the participation of small and medium enterprises in international exhibitions.

STATEMENT OF THE PROBLEM

Although many schemes have been developed for the smooth progress and development of the small and medium
enterprises, but still there are many factors that have affected the competitiveness and growth of the Indian small medium
enterprises (Charantimath, 2006). Timely financing and inadequate access to funds are one of the major reasons that has
affected the development of small and medium enterprise sector. The borrowing of funds are expensive to the small
entrepreneurs as it reduces the profit margins which holds the establishment of new enterprises or companies and results in

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

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Development of Small and Medium Scale Enterprise in India: Growth and Entrepreneurship

decrease in job creation. Besides this, the financing limitation also attributes to many different factors that include policy,
regulatory/ legal framework (contract enforcement and bankruptcy), institutional weaknesses (non-presence of better credit
assessment), and non-availability of reliable credit information regarding small and medium enterprises sector
(World Bank, n.d.). Thus, this research has analyzed the different issues faced by the small and medium enterprise sector
that has slowed down the growth of this sector.

RESEARCH OBJECTIVES
The following are the objectives of research

To find out the measures or programs aided by Government of India for the growth and development of small and
medium enterprise sector.

To find out the factors that has slowed down the growth of small and medium enterprise sector in India.

RESEARCH QUESTIONS
The following are the research questions

What programs or measures are adopted by Government of India for the growth and development of small and
medium enterprise sector in India?

What factors have slowed down the growth of small and medium enterprise sector in India?

LITERATURE REVIEW
Small and medium enterprise sector is considered as seedbed for the entrepreneurs as it helps to provides
encouraging conditions for growth and emergence of entrepreneurship (Charantimath, 2006). In India, the small and
medium enterprise sector is assigned with an important role of economic development, employment generation, equal
distribution of wealth and industrialization in the country. The development of small and medium enterprise sector is
completely dependent on the actions taken by the government and entrepreneurs (Soundarapandian, 2007). Therefore the
definition of small and medium enterprise sector varies from country to country and depend whether the country is
developing or a developed country. This is because a small enterprise in one country could be a large-scale enterprise in
another country.
In India, the small and medium enterprise sector has contributed largely to the export, employment and
manufacturing output of the country. The sectors value is estimated to be forty five percent of manufacturing output and
almost forty percent of the total exports of India. Moreover, it is also estimated that this sector provides employment to
approximately 59 million people in more than 26 million units across the India (Spence and Painter-Morland, 2010).
In addition, there are more than 6000 products that range from conventional to high-technology items that are being
produced by the small and medium enterprise sector and also provide largest opportunities for the entrepreneurship and
employment after agriculture sector. By recognizing the importance, potential and contribution of the small and medium
enterprise sector, the definition of this sector was broadened largely by the Micro, Small and Medium Enterprises
Development (MSMED)Act, 2006 that recognizes the notion of enterprise to comprise both services and manufacturing
besides, including the medium enterprises (Soundarapandian, 2007).

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C. Loganathan & Ammani Ammal

According to a report of India Brand Equity Foundation (n.d.), there are mainly two hindrances in the growth of
this sector i.e., financing and infrastructure facilities. Particularly with respect to financing, the entrepreneurs are unable to
access timely and adequate financing on satisfactory terms especially of long tenure. Besides this, they are unable to access
finances at cheaper rates. Moreover, access to credit/ loans on easy terms is also difficult that is mainly due to the ripple
effects of the current international financial crisis that has affected the growth and development of small and medium
enterprise sector. In addition to this, other factors include bankruptcy, poor recovery of finances, contract enforcement,
policies, institutional weaknesses, poor risk management, poor monitoring of credit flow and lack of authentic and up to
date credit information on small and medium enterprise sector (Committee on India Vision 2020, 2004). Moreover, due to
different issues, it is become a problem for the institutions or lenders to correctly assess the risk premiums create
differences in the real risk versus perceived risk profiles of small and medium enterprise sector.
Besides this, the small and medium enterprise sector do not have access to research and development facilities,
skilled manpower, proper marketing channel and export promotions. The entrepreneurs also lack sufficient skills and
trainings that are required for good management and accounting practices and to make good decisions (Prasad, 2004).
The entrepreneurs also do not have access to latest technology tools and equipments that could increase their production.
The entrepreneurs also face issues regarding skilled manpower, poor organized marketing, irregular and inadequate supply
of raw material, lack of proper equipment and machinery, competition from imported articles and large-scale units,
managerial inadequacies, poor project planning and implementation, orthodox and old designs, large number of unclear
concerns and obsolescence (Pooja, 2009). Even though, several schemes have been drafted and implemented to boost the
growth of the sector, but non-consideration of these issues have slowed down the growth of on small and medium
enterprise sector

RESEARCH METHODOLOGY
The study is an exploratory research that is based on secondary sources (Cooper and Schindler, 2006).
The secondary sources for the collection of information for this research includes books, periodicals, journals, reports,
websites and newspapers (Saunders et al., 2007). A research could be qualitative or quantitative (Walliman, 2001).
The qualitative research involves data collected through questionnaire, interview, focus group or a case study approach;
whereas the quantitative study refers to the research that involves numbers and statistics. This research on Development
of Small and Medium Scale Enterprise in India: growth and entrepreneurship is a qualitative study as the research
discusses the case of Indias small and medium enterprise (Cohen, Manion, and Morrison, 2007). The research is valid and
reliable as most recent data is obtained for the purpose and analysis of this research. Moreover, the researcher has also
taken into account the ethical considerations and issues i.e., the research accurately presents the original sources of
information.

RESULTS AND DISCUSSIONS

There are different issues faced by the entrepreneurs from the small and medium enterprises. Among other issues,
one of the basic issues faced by the small and medium enterprises is the financing and credit. The entrepreneurs face
difficulty in obtaining credit for their expansion of the business. Moreover, the tenure of the credit is such that it cost much
to small entrepreneurs due to which they resist taking finances to increase their business. This resistance affects the overall
growth of the small and medium enterprise sector. In addition, the Scheduled banks in India also do not take into account

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

Development of Small and Medium Scale Enterprise in India: Growth and Entrepreneurship

61

preferred area of investment for small and medium enterprises. Conventionally, the banking sector views small and
medium enterprises industries a very risky area of investment because of the reason that the rate of growth of the small
firms are too low. Moreover, the banking sector also assumes that the firms operating in small and medium enterprises
sector follows an informal business practices and lacks credit worthiness (Spence and Painter-Morland, 2010).
Moreover, the entrepreneurs of small and medium enterprises sector do not have ability to sustain collateral securities and
have poor channel of information. Furthermore, the occurrence of Non-Performing Assets (NPA) in medium and small
enterprises sector is approximately 15 percent in comparison to approximately 9 percent in large enterprises or business
houses. Besides financing issues, the small and medium enterprises are also facing problems due to poor infrastructure.
The term lack of infrastructural facilities includes inappropriate power supply, water supply and transportation, etc.
The enterprises that are small faces difficulty in setting up as they cannot bear the cost of installation of self-regulating
power supply unit (Rathakrishnan, 2010). Therefore, they are too much dependent on the irregular power supply they
receive from the countrys electricity boards. Moreover, often the small enterprises are shut down due to power failure for
many that affect the small and medium enterprises sectors overall growth. Besides this, insufficient transportation system
also increases the cost of production that results in cost of final goods. The small and medium enterprises that produces
medicines, tobacco products, beverages, etc face the issue of water supply i.e., the enterprises that produces these products
do not receive sufficient water that is required by them to produce these goods. According to the study of Keshab Das and
Sebastian Morris (2001), the Indian small and medium enterprises sector faces issues of serious infrastructure. He surveyed
1063 firms where 716 firms or greater than sixty-seven percent firms have confessed that they do not receive proper
infrastructure facilities.
One of the other issues of the small and medium enterprises sector is that they have mindset issues. The mindset
of many small and medium enterprises has remained unchanged. The entrepreneurs are still of view that the government
should provide them preferential treatment and protection policies for the small and medium enterprises sector and do not
work out by themselves for the growth of this sector. Luckily this viewpoint is not found in new and modern generation
entrepreneurs who thinks broadly and include new methods or approaches in their enterprises for their success. Workshops,
success story based approach may help reduce this tendency even more (Mohanty and Mahapatra, 2007).
Correspondingly, another issue faced by the small and medium enterprises sector is that the globalization process favors
the countries that are from developed countries and the multinationals corporations and the small and medium enterprises
sector of the developing countries. Thus, the multinational corporations operating in India use local skilled workers,
domestic infrastructure and wealth at a low cost and send back large profits to their home countries. This has largely
affected the small and medium enterprises sector in India. Similarly, the small and medium enterprises sector is also prone
to the international fluctuations. This is because an economy that is well liberalized reacts more sharply along with the
transformation that occurs in an international market. This case is observed low in small and medium enterprises sector in
India. The supply and demand is determined by international fluctuations rather than by the needs of the local consumers
where some of the small firms in India still considers their local needs. Moreover, the as multinational corporations are
more interested in producing consumer goods to make the most of their profit which has neglected the social welfare areas.
The services such as education, health, etc that requires large investment and generates less profits are neglected.
Another important concern of the small and medium enterprises sector in India is that the entrepreneurs find difficulty in
recovering their funds from Government departments and large firms because of corruption and complex payment
procedure (Prasad, 2004). Because of lack to proper access of funds, the firms operating in small and medium enterprises
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C. Loganathan & Ammani Ammal

sector in India finds difficult to take up credit collection machineries such as factoring services. Moreover, the large firms
pressurize them to buy long credit period and also pay advances so that supply of materials on time could be ensured.
Likewise the removal of Reservation Policy has also added further to the small and medium enterprises sector in India.
The Reservation Policy that was previously introduced in the year 1967 lays more emphasis on the policy that some
products of the small and medium enterprises would be allocated for exclusive production i.e., the non- small and medium
enterprises and the small and medium enterprises can undertake production of reserved items or products only when they
acquire 50 percent export responsibility (Spence and Painter-Morland, 2010). Thus, the withdrawal of this reservation
policy allows large domestic firms and multinational corporations to manufacture reserved items or products without any
limitations. This withdrawal policy has also increased the level of competition for the firms of the small and medium
enterprises sector in India. On the other hand, many expert committees have also concluded the reservation policies that
were once framed for the support of small and medium enterprises is no longer helpful for this sector as the small and
medium enterprises without any reservation facilities have performed much better than the enterprises that operates with
the reservation support. Furthermore, many firms operating in the small and medium enterprises sector do not manufacture
the reserved products or items and many entrepreneurs of small and medium enterprises sector do not regard it as a
relevant policy (Rathakrishnan, 2010).

CONCLUSIONS AND RECOMMENDATIONS

Thus, it could be concluded that despite of many schemes, the small and medium enterprise sector still faces many
issues that has slowed down its growth and development. Among other issues, the proper infrastructure and finance
availability are the basic issues faced by the entrepreneurs. Other issues include lack of skilled manpower, poor organized
marketing, irregular and inadequate supply of raw material, lack of proper equipment and machinery, competition from
imported articles and large-scale units, managerial inadequacies, poor project planning and implementation and orthodox
methods of operations etc. Although, the Government of India has taken steps to increase growth of the small and medium
enterprise sector by financing facilities, but it is highly recommended that other issues must also be considered and
addressed by the Government of India or the relevant authorities as this sector is one of the most important sectors that
contributes to the economy.

REFERENCES
1.

Charantimath, P. M. (2006). Entrepreneurship Development and Small Business Enterprise. Pearson Education
India

2.

Cohen, L. Manion, L. and Morrison, K. R. B. (2007). Research methods in education. Routledge.

3.

Committee on India Vision 2020. (2004). India Vision 2020: The Report: Report of the Committee on India Vision
2020, Planning Commission, Government of India plus Background Papers. Academic Foundation

4.

Cooper, D. R. and Schindler, P. S. (2006). Business Research Method. Boston: McGraw-Hill Irwin.

5.

Das, K, and Morris, S. (2001). The Growth and Transformation of Small Firms in India. New Delhi:
Oxford University Press.

6.

India Brand Equity Foundation (n. d.). SMEs Role in Indias Manufacturing Sector. Retrieved from
http://www.ibef.org/download/SMEs-Role-in-Indian-Manufacturing.pdf

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

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Development of Small and Medium Scale Enterprise in India: Growth and Entrepreneurship

7.

Mohanty, A. K, and Mahapatra, D. M. (2007). Financing Of Small and Medium Enterprises in India.
Serials Publications

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Pooja. (2009). Micro, Small and Medium Enterprises (MSMEs) in the Indian Economy: Business Development
Strategies. New Century Publications

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Prasad, C. S. (2004). Small and medium enterprises in global perspective: employment generation and WTO vision
2012. New Century Publications

10. Rathakrishnan, L. (2010). Innovation and Competitiveness of Small and Medium Enterprises. Gyan Publishing
House
11. Roy, S. (2013). Small and Medium Scale Enterprises in India: Infirmities and Asymmetries in Industrial Clusters.
Routledge Publishers
12. Saunders, M. et al. (2007). Research methods for business students. London: Financial Times Prentice Hall.
13. Soundarapandian, M. (2007). Green Productivity in Small and Medium Enterprises (in 2 Vols). Concept Publishing
Company
14. Spence, L. J. and Painter-Morland, M. (2010). Ethics in Small and Medium Sized Enterprises: A Global
Commentary. Springer Science & Business Media
15. Walliman, N. (2001). Your Research Project: A Step-by-Step Guide for the First-Time Researcher.
SAGE Publications
16. World Bank (n. d.). Small and Medium Enterprises: India's Engines of Growth. Retrieved from
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:22495115~me
nuPK:158937~pagePK:2865106~piPK:2865128~theSitePK:223547,00.html

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