World over, the Micro Small and Medium Enterprises or MSMEs have been recognized as the backbone of the country’s economic growth. MSMEs’ role in the economic and social development of the country is now well established. In most of the economies world over, the MSMEs constitute over 90% of total enterprises. The labour and capital ratio and the overall growth in the MSMEs is normally much higher than in the larger industries. The labour intensity of the MSME sector being much higher than that of the large enterprises, MSMEs generates the highest rates of employment growth. According to the Australian economist Chris Hall, SME sectors provide totally 70 % of employment worldwide.
For India, a labor abundant country, MSMEs are the major source of employment generation and foreign exchange earnings. MSMEs are the second largest source of employment after agriculture. MSMEs provide employment to about 59.7 million persons through 26.1 million enterprises. This sector contributes 8 per cent of the country’s GDP, 45 per cent of the manufactured output and 40 per cent of its exports. MSMEs in the country manufacture over 6,000 products.
Over 95 % of the country’s industries come under MSME category. And more than 94 per cent (24.5 million) of these MSMEs are in the unregistered segment, with a large number established in the informal or unorganized sector. From these MSMEs about 7.3 million are manufacturing enterprises while 18.8 million enterprises are engaged in rendering various services. And 54.4% of the MSMEs (14.2 million) are rural enterprises.
It is estimated that to create one job in the MSME sector, only Rs 72,000 is required as against Rs 5.5 lakh required in the large organised sector. By providing employment in the rural area, MSMEs help arrest migration from villages to cities. The geographic distribution of the MSMEs is also more even. In view of these factors, MSMEs are important for achieving national objectives of growth with equity and inclusion.
Realizing the significance of this sector in overall growth and progress of the country, the government has taken several initiatives over the years towards strengthening this vital sector. The MSME development organization was set up in 1954 as an apex body for sustained and organized growth of MSMEs in the country. For the first time in Indian history, the government in the year 1991 announced a separate policy for the small scale sector that focuses on further promotion of the sector. The MSME development Act 2006 came in effect from 2nd October 2006. With the objective to ensure healthy growth of this sector and to increase its competitive edge, the Government of India announced the National Manufacturing Competitiveness Programme (NMCP) during the budget speech 2005-06. Through the amendment of the Government of India (Allocation of Business) Rules, 1961, through Presidential notification dated 9th may 2007, Ministry of Agro and Rural Industries and the Ministry of Small Scale Industries were merged into the single ministry - Ministry of Micro, Small and Medium Enterprises, MSMEs.
In India, the micro, small and medium enterprises have been classified broadly into two categories; manufacturing enterprises and those engaged in providing or rendering services. As per the MSME Development Act of 2006, (India) micro, small and medium industries are defined based on their investment in plant and machinery for manufacturing enterprise, and based on their investment in equipments for enterprises providing or rendering services.
According to this act:
· A micro enterprise is where the investment in plant and machinery does not exceed twenty five lakh rupees.
· A small enterprise is where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees.
· A medium enterprise is where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees.
Accordingly in the case of the enterprises engaged in providing or rendering of services,
· A micro enterprise is where the investment in equipment does not exceed ten lakh rupees.
· A small enterprise is where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees.
· A medium enterprise is where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.