India Development Solutions

But, unfortunately a sizeable chunk of enterprises – all trading and welfare programme induced - remain outside any policy focus due to narrow definition of MSEs and due to the restricted mandate of the Ministry of Micro, Small and Medium Enterprises (MOMSME), the nodal agency steering the growth of the MSME sector.

 

Composition of MSEs

MSEs account for the bulk (+90%) of the total enterprise population and, thus, command a high place in the economy, accounting for almost 9 per cent of the Gross Domestic Product as per the estimates of the MOMSME.  The total MSEs’ contribution would, however, be more as MOMSME is concerned with only a section of enterprises, which no doubt is quite large.  Besides MOMSME, several other agencies, such as All India Handloom Board, Handicraft Board, Coir Board, Central Silk Board and Khadi and Village Industries Commission also have been formulating and implementing policies and programmes for their respective sections of MSEs. Several other agencies are also involved in the MSE sector. For example, Tourism Ministry oversees enterprises in hospitality and tour operating sector. With the opening doors to private participation in the social sector, one would now find a proliferation of enterprises in education and health arena.

In addition, various poverty-alleviation and other welfare programmes (women empowerment, income/employment generation, etc) enabled establishment of enterprises in different parts of the Country.  Their survival and growth, however, largely hinges on the support they receive from the authorities concerned.  

Conceptual limitation

Although several agencies, as noted earlier, are involved in the promotion, growth and development of MSEs, the sector not only lacks a uniform definition but also exclude Trading Enterprises (TEs) out of its ambit mainly due to conceptual limitations. The concept of ‘enterprise’ was/is normally taken be a manufacturing facilities. This is not surprising as the objective of the economic planning immediately after Independence was to industrialise the nation. But, unfortunately, the thrust of MSME policies still continues to be manufacturing-centric.

In addition, the MOMSME excludes from its purview all (i) power looms, (ii) those industrial units which are supported or assisted by other authority or Agencies, such as All India Handloom Board, Handicraft Board, Coir Board, Central Silk Board and Khadi and Village Industries Commission, (iii) trading enterprises and (iv) all service enterprises outside the 31 notified as Small Scale Service and Business enterprises (for list see www.laghu-udyog.com or www.smallindustryindia.com).

Different agencies that are concerned with the promotion and development of MSEs do not have a single yardstick to classify them as such or otherwise, while the MOMSME classifies them on the basis of investment, which no other agency follows.   

Size of the Sector

Given that several agencies are drawn in in the establishment and promotion of enterprises and there being no single agency that puts up the consolidated data and information on the total MSE sector, it becomes extremely difficult to get a fair idea about the actual size of MSE sector.  

 MSEs overseen and administered for policy purposes by MOMSME totaled about 13 million in 2007¹ . Included in this were several service enterprises and unregistered enterprises² .  That this number does not reflect the actual size of the sector comes out very clearly from the latest Economic Census (EC) 2005 data, recently released by the Central Statistical Organisation, Ministry of Statistics, Planning and Implementation (MOSPI). EC placed the total number of establishments at 41.83 million with non-agricultural establishments at 35.75 million, bulk of which apparently fit into the category of MSEs³.   

The problem with EC data, however, is that enterprises are not categorized on investment criterion, as done by MOMSME, but on a different measure. The National Sample Survey Organisation of MOSPI adopts employment criterion and enterprises are classified as under:

•    Own Account Enterprises (OAEs) operated without any hired worker;
•    Non-Directory Establishments (NDEs) employing up to six workers (household and hired workers); and  
•    Directory Establishments (DEs) employing more than six workers.

This classification does not group enterprises as small, medium or large, which renders it difficult to estimate the size of MSE sector.  

Numerous MSEs outside Policy Thrust

Major fallout of this ambiguity is that quite a lot of MSEs remain outside any policy focus or thrust. These include all such enterprises that have come up due to welfare and other poverty-alleviation programmes (if not registered as MSEs) and the most important segment of TEs. Even though enterprises in the power loom, handloom, handicrafts, and Coir segments are outside the focus of MOMSME, they do get support from the related agency of the Government.  But the poverty-alleviation, other welfare programme enterprises and TEs lack such support. The issue with the former is that no endeavour is made subsequent to their establishment to ensure their long-term growth as the focus is limited to fulfilling the targets set for the respective programmes. Political considerations, rather than economic, often dictate the extent of budget provided for these programmes.  But, TEs are on a different footing. Politics or no politics, they remain an integral part of the economic system; though some of them might have started off as income-generating enterprise taking advantage of some welfare programme.

Wholesale and/or retail TEs - the central component of the ‘supply chain’ process - are a vital constituent of MSE sector. These enterprises make distinctive contribution to employment generation, and also to national exchequer by of collecting sales and service taxes, besides reaching goods and services to the ultimate consumer/user.

TEs’ Status

EC 2005 has indisputably brought to the fore the important contribution that TEs make to the economy when it noted that ‘retail trade’, was the most important economic activity with close to 42 percent of non-agricultural establishments being in this. Bulks of TEs form part of the unorganised sector.

The same Census revealed that a major chunk of the retail and wholesale TEs (nearly 85 per cent of the total 12million) were ‘OAEs’.  Together, they provided employment to 25 million, almost the same as absorbed by manufacturing establishments. In terms of employment, TEs compare favourably with total manufacturing and service enterprises covered by MOMSME. Since most TEs were OAEs, it can be deduced that they are primarily of self-employment or income-generating activity for the person(s) concerned.

Unfortunately both, wholesale and retail TEs, have always remained outside the focus of any policy for reasons already noted above. Municipal authorities, which normally are concerned with TEs, are more a regulating agencies than promotional ones. They primarily ensure compliance with provisions of Shops and Establishments Act, wherever applicable.

Absence of any official definition, as is available in European countries and others such as USA, Japan and Thailand⁴ (The Malaysian National SME Development Council approved in 2005 a new definition of Small and medium Enterprises (SMEs) which included TEs in service activities.⁵) is, perhaps, the major reason for this paradoxical situation. Unlike the Indian practice of classifying MSEs on the basis investment on plant and machinery (manufacturing) and equipment (service), these countries use a combination of parameters such as employment, annual receipts/turnover, or capital employed to define an MSE, thus covering all types.  Their including trading activity as part of MSMEs is a reflection of the importance accorded to such enterprises and also the recognition that MSE sector is incomplete without TEs.

Changing Complexion of TE Sector

While this being so, TEs, as other small enterprises, also have come under pressure due to globalization and liberalization of the Indian economy. The configuration of retail trade, consequently, is witnessing a revolution, unheard of about a decade back. Corporate entities, with profit making as sole objective, are gaining foothold in the retail trade (some estimates put the total size at about Rs.600, 000 crore), gradually dislodging OAEs - primarily income-generating ventures or survivalists. They are facing the impact, partly due to general consumers’ psyche, notwithstanding the fact that they, unlike the organised sector chain stores, often extend credit and personalized services to customers.  Though this trend presently is discernable in metros and larger cities, it is feared that it may ultimately percolate down to smaller towns and finally to villages, with adverse effect on employment opportunities. The problem would get further compounded with opening of the retail trade to foreign investment as is being contemplated.

EC 2005 data already sounded the alarm bells when it noted the decline in employment and said “Average employment per establishment which was 2.88 in 1990 had come down to 2.75 in 1998 (India introduced reforms in mid 1991) and further gone down to 2.41 in 2005.”  

A Holistic Approach Needed

That the policy makers are in know  of the plight of TEs and the possible adverse impact the opening of the retail trade sector to foreign investment would have on the predominantly unorganised sector, is reflected in its weighing several options before initiating larger reforms in the retail trade sector. Here the concern relates to more to immediate relief than the long term growth of the segment.
 
Even the Micro Small and Medium Enterprises Act, 2006, which came in existence on October 2 that year, did not address the issue, although it introduced the internationally recognised/referred concept of Small and Medium Enterprises in the Country. For a healthy development of MSE sector as a whole, it becomes imperative to formally bring TEs and also of other enterprises in to the sector and ensure their sustained growth and development. In the present scheme of things, they apparently lack even access to finance as service and manufacturing enterprises have.

For a coordinated approach in delivering MSEs’ developmental programmes to all segments, a single agency can be identified for monitoring the growth and development of the entire MSE sector.  Since the MOMSME is already tasked with the job in respect of manufacturing and select service enterprises, its mandate can be extended to all MSEs, including TEs and those administered by other agencies.  Though this proposal may not be palatable to some, it does merit examination in the interest of evolving a comprehensive policy package for the most dominant segment of economy. Within this package, issues concerning different segments such as handlooms, power looms, handicrafts, TEs, etc. can be addressed.

 To conclude, owing to the conceptual limitation a major chunk of enterprises remain outside any official patronage for no fault of theirs. TEs certainly need to have some space in policy for MSEs for more than one reason as noted above (i.e. employment generation, being vital link in supply chain, etc). Chiefly unorganised trading sector is basically an income generating activity for the entrepreneur. About 12 million enterprises surely deserve a better attention of policy makers, if not for any thing else, but  for its potential to absorb presently as many as 25 million persons. More than these, such an approach could bring these unorganised sector enterprises in to the mainstream.

¹Micro, Small and Medium Enterprises –An Overview, Ministry of MSME

²According to Third All India Census of Small Scale Industries 2001-02, Development Commissioner (SSI), Ministry of Small Scale Industries (now MSME), Government of India, service enterprises accounted for 58% of the total 10.52 million enterprises and only about15% of total SSIs were registered .

³According to EC2005, 95% of total establishments had up to five workers only.

⁴For details visit sites of U.S SBA, Japan Small Business Research Institute, http://europa.eu.int/ISPO/ecommerce/sme/definition.html, http://www.sme.go.th.

⁵See www.mime.go.kh/sme/eng/