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Small and Medium Enterprises (SMEs) | Meaning, Objectives, Characteristics, Scope & Importance

Small and Medium Enterprises (SMEs)

What is Small and Medium Enterprises ?

Small scale enterprises or small and medium-sized enterprises are companies whose headcount or turnover falls below certain limits. An industry having number of employees and gross revenue less than the specified limits is known as small-scale industry or small- and medium-sized industry.

An industrial undertaking is referred to as a small scale industry only if its investment in fixed assets like plant and machinery is not more than 75 crore (in manufacturing organisations) and 2 crore (in service organisations). No matter, whether the fixed assets are purchased, rented, or are taken on lease. Though, Government can always change these limits.

In the Small and Medium Enterprises (SMEs), booming and rational markets exist for the similar products and processes, and offerings are distinguished on the basis of their value addition, quality, and superiority over competitive products. The multiplicity in demand patterns and manufacturing practices make sure the long-term existence of demand for various technologies, procedures, consumer goods, etc. This unique feature of Indian economy creates co-existence of different products. The SMEs sector backed by various protective and promotional policies of the Government has shown its presence in a surprisingly wide variety of products (especially consumer products). But, the major problem with this sector is inadequacies in capital, marketing, and technology. However, with the help of liberalization, these deficiencies can be eliminated from SMEs sector.

Capital investment is the money which has either been invested or has been thought to be invested by an organisation for purchasing fixed assets. It is not used for daily expenses of the organisation.

MSMEs (Micro, Small, and Medium Enterprises) are categorized in two classes as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. These two classes can be described as :

1) Manufacturing Enterprises : 
Manufacturing enterprises are the ones which are involved in production of any products related to any industry listed in first schedule of industries (Development and Regulation Act, 1951). On the basis of investment in plant and machinery, manufacturing enterprises can be classified into micro, small and medium enterprise as :
  • An An enterprise in which investment on plant and machinery is up to 25 lac is a micro enterprise.
  • Art enterprise in which investment on plant and machinery is above 25 lac and up to 5 crore is a small enterprise. 
  • An enterprise in which investment on plant and machinery is above 5 crore and up to 10 crore is a medium enterprise.

2) Service Enterprises : 
Enterprises involved in delivering services are service enterprises. According to the investment in equipment's. service enterprises can be classified into micro, small and medium enterprise as :
  • An enterprise in which investment on equipment is up to 10 lac is a micro enterprise.
  • An enterprise in which investment on equipment is above 10 lac and up to 2 crore is a small enterprise.
  • An enterprise in which investment on equipment is above 2 crore and up to 5 crore is a medium enterprise.

Objectives of Small and Medium Enterprises (SME)

The small scale sector can stimulate economic activity and is entrusted with the responsibility of realizing the following objectives : 
  1. To produce job related opportunities at a faster rate with a very little amount of investment. 
  2. To provide assistance in quality improvement and promoting exports in small industries. 
  3. To eliminate regional differences by the means of calculated and purposeful policy. 
  4. To promote development in small cities and villages.
  5. To minimize inequalities in consumption, wealth, and income.
  6. To organise efficiently and utilize skills as well as capital related resources to the maximum. 
  7. To enhance the financial advancement in rural and less progressive areas of the country. 
  8. To arrange regular earning source for underprivileged people in urban and rural areas.
  9. 9) To make available the substitutes for industrial products which have to be imported. 
  10. To combine small business with rural economy as well as large scale businesses.
  11. To increase export and production along with up gradation in the quality of products produced in cottage industry.
  12. To accomplish independence and self-sufficiency by elimination of obstructions due to evolution of big cities and urbanization.

Characteristics of Small and Medium Enterprises

The characteristics or features of SMEs sector are as follows :

characteristics of SMEs

1) Born Out of Individual Initiatives and Skills : 
Generally, it is observed that SMEs are likely to develop along an individual entrepreneur or a small group of entrepreneurs supported by a specific skill set or range of abilities. There are other instances where these enterprises are established exclusively as a medium to earn basic income or livelihood. These enterprises can be retail or trading organisations, while in many countries SMEs provide manufacturing services as well as retailing activities.

2) High Operational Flexibility : 
These enterprises offer high operational flexibility as it involves less number of people, flat hierarchical structure and direct involvement of owners. Here, decisions related to product mix and price mix is made faster keeping in mind the changing market conditions.

3) Low Production Cost : 
SMEs have low overheads including fixed and operating cost. This in turn lowers the cost of production and per unit cost.

4) High Propensity to Adopt Technology : 
SMEs have the tendency to adopt and embody the technology being employed by them.

5) High Capacity to Innovate Export : 
These enterprises are well-known for their proficiency in reverse engineering, innovation and spontaneity. They have the ability to fulfill niche demands and prerequisites. They are also competent enough to capture export markets with low volumes.

6) High Employment Orientation : 
SMEs acts as a source of employment generation, in few instances generating a maximum of 80 per cent jobs. Compared to the bigger and major players in the market, SMEs are likely to create more job opportunities for each unit of investment made and employ labour intensive production techniques.

7) Reduction of Regional Imbalances : 
SMEs have the flexibility of location in contrast with the large industries where decentralization of authority and operations is difficult. Hence, it is worldwide fact that, SMEs are can be established anywhere even if some locations are seen as clusters.

Importance of Small and Medium Enterprises (SMEs)

Small enterprises play an important role in the overall growth of the economy of the country. While the cost of investment in small-scale units would b comparatively low, their potential for generation of employment as a sector is relatively high. Development of small-scale units also results in dispersal of industries to backward, rural, and semi urban areas, and this eventually leads to reduction of regional imbalances in growth.

1) Large Employment Opportunities : 
They are labour-intensive and hence their employment creation potential per unit of investment is higher than that of larger industries. In countries like India which carry huge mass of unemployed small industries are a boon. Since there are more broad based and disperse than large industrial units, they facilitate : 
  • Decentralized regional development,
  • Reduction of extreme disparities in income and wealth,
  • Improvement of living standards of people,
  • Removal of poverty.

2) Prevents Concentration of Economic Power : 
They facilitate the creation of a wider entrepreneurial base consisting of small industrial owners and operators. They represent a diffusion of economic power among a large number of small entrepreneurs rather than concentration of economic power among a small number of large entrepreneurs.

3) Mobilize Local Resources : 
They permit an effective mopping-up and mobilization of small savings, scarce capital and local materials, human resources and skills. 

4) Development of Some Towns : 
They help in development of small- and medium-sized towns and cities which have more spread effects on regional industrial development.

5) Low Capital-output Ratio : 
Their capital resources are modest. They are more suitable for capital-scarce countries like India. The capital output ratio for small industries is said to be lower than for large industries.

6) Contribution to Industrial Growth : 
They contribute substantially to industrial production and industrial growth.

7) Facilitate Development of Large-scale Industries : 
They support the development of large industries by meeting their requirements of inputs of raw materials, intermediate goods, spare parts, etc., and by utilizing their output for further production. The productivity and capacity utilization of large units depends to some extent upon the fulfillment of their specialized requirements by small-scale units.

The small-scale units also help the large industries off lead certain manufacturing activities on them, and they, thus, act as auxiliary or ancillary units to their larger counterparts. This helps the large industries reduce price and use capital in more advanced areas.

Scope of Small and Medium Enterprises

There is a huge scope for the small enterprises which some includes a variety of business activities ranging from manufacturing to retailing There exist particular areas of economic processes that can be effectively managed by creating SME. The scope of SME is explained as follows :

1) Manufacturing Industries: 
These include small business units which are mainly involved in manufacturing of products consumed directly by the customers and also by other processing firms. These are of following types :

i) Village and Cottage Industries  : 
These industries are established in the homes of the workers, mostly in villages and rural regions.

ii) Hand-looms and Handicrafts : 
These industries are mainly formed with the help of craftsman, artisans, technicians, etc., who operate from their houses. Such industries are pollution-free and typically require workplace of less than 300 square feet, power consumption of less than 2KW and employees not more than 5. These industries mostly produce handicrafts, small plastic and paper products, toys, dolls, electronic and small electrical gadgets.

iii) Modern Small Industries : 
These industries include :

a) Small Enterprises : 
Small scale industry is defined by the Government of India as an undertaking which has the maximum investment of 1 crore in plants and machinery.

b) Ancillary Industries : 
According to Government of India, if the total investment in the plant and machinery of industry does not exceed more than 75 lac, then it will be termed as ancillary industry. These industries are mainly involved in the production of parts, components, sub-assemblies, tooling or intermediaries, or in offering services of production to other units supplying 30% of their production or services.

c) Tiny Units : 
Industries which have fixed investment in plant and machinery of not more than 5 lacs are called tiny units. These units include various types of service providers such as laundry. zeroing, repairs, maintenance of customer equipment and machinery. hatching, poultry, etc.

2) Trading Industries : 
Firms which are mainly involved in the sales and purchase of the goods and services are termed as trading industries. These industries act as a middleman between the consumers and producers. Wholesaler, retailer and commission agents are the typical examples of trading industries.

3) Service Industries : 
Business units which provide various types of services in the rural areas (or towns having maximum population of 5 lacs) are termed as service industries. These industries must not have investment of more than 72 lacs in plant and machinery. These industries may provide the following services :
  • Professional services, e.g.. legal services. Consultancy, accounting medicine, etc. 
  • Commercial services, e.g.. real estate. transport. repair shops, constructing warehousing, etc.
  • Personal services, e.g. dry cleaning. restaurants, fashion shops, etc.

Role of SME Sector in Economic Development of India

Small and Medium Enterprises are a significant part of the Indian economy and contribute substantially in its economic growth. The process of achieving the economic growth is employment friendly, comprehensive and provides greater regional balance in levels of development. Some of the key roles of SMEs are discussed below :

1) Employment Generation : 
Besides agriculture, SMEs sector is the second largest sector which provides job opportunities to the people in India. It has been projected that an investment of nearly a lakh rupees in assets is required for the generating the employment of only four individuals.

2) Production : 
Small scale industries contribute approximately 40 per cent in the total manufacture of India. About 4,62 lacs worth of products or services are produced by the small scale sector with an investment of one lac rupees in the fixed assets. This provides at least 10 per cent points of value addition.

3) Export Contribution : 
Small scale industries also contribute largely in the export performance of Indian economy. Mostly 45-50 per cent of exports come from the SMEs sector. From the gross exports almost 35 per cent is accounted to be the direct exports from SMEs sector. Around 5000 or more small scale units are engaged in direct exports activities.

4) Innovation and Development : 
SMEs are prompt in developing modern and latest products, adapting new design trends and introducing the same in markets, leading its way through tough competition. Undoubtedly, SMEs are more experimental in establishing original or relevant technology which can be developed into pioneering technological advancements in the near future.

5) Efficient Utilization of Resources : 
The small and medium enterprises are proficient in making the best use of insufficient capital resources. They also collaborate with big enterprises by supplying semi-processed and unprocessed raw materials available in the domestic markets.

6) Developing Entrepreneurial Capacity : 
SMEs are a good source of developing entrepreneurial abilities and innovation. It aids essential services to the society. They have the potential to significantly contribute towards the development programs which conducted in different regions.

7) Increases GDP : 
SMEs contribute 40 per cent out of the total exports in the country and 45 per cent of manufactured output. Thus, contributing 9 per cent towards India's GDP. The concerned authorities from official departments and Ministers have stated that SMEs provide employment opportunities to more than 73. million people with the help of 31 million enterprises and their labour to capital ratio is quite low. They also have a capacity to manufacture around 6000 products ranging from conventional to latest high technology goods.

8) Feeder to Large Industries : 
SMEs acts as feeder or provider to large scale industries. They manufacture several types of spare parts, components, accessories, etc., to large industries: and also distribute goods produced by them.

9) Opportunity for Artisan : 
Indian villages and rural areas are rich sources of talented artisans. and skilled craftsmen. These artisans are experts in various fields and spheres. But these skills are not publicly noticed and appreciated due the lack of opportunities. SMEs create opportunities to such artisans and thus stimulate their talent and career.

10) Increase Standard of Living : 
Many small and medium scale enterprises have started their operations in rural areas and adjacent regions and towns. These enterprises have provided many types of basic and essential facilities to rural population. These facilities include electricity, educations, water, employment, proper roads, other modes of transportation, banks, etc. All these amenities enhance the standard of living of rural people.

11) Less Pressure of Population on Agriculture : 
Rural population is largely dependent on agriculture and indirectly on land for survival. As a larger portion of population depends on these lands, they are further divided into smaller pieces. Because of which, no farming activities can be conducted on that small piece of land. There are about 30 lac people who depend on agriculture and the number further increases every year. Thus, there is an urgent need to decrease this liability or burden on land and this only possible when people will start setting up their own small scale business.

12) Equitable Distribution of Income : 
Generally it is observed that the income of a country is concentrated upon few businessmen and industrialists. But with the introduction of small and medium scale enterprises this concentration of income is being distributed among other industrialists from rural areas and small towns. This enables the country to reduce the gap between the rich and the poor.

13) Social Advantage : 
People with limited or small income get an opportunity to lead their life independently through SMEs. Industries become reachable for the rural people and operative in the rural areas making all the facilities like medical amenities, education and housing and other social overheads available at cheap rates. It inevitably increases standard of living and per capital income of the nation. A structure of ownership encourages people to participate in the economic growth and development of the country. SME acts as a basis for socialism, self government and democracy.

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