What is SME

The diversity in the industrial sector is the immediate fallout of economic growth. With the increasing influence of Liberalization, Privatization, and Globalization, the Indian industrial scenario has provided enough scope for such trends in the Indian economy. The fact that there is an emergence of enterprises of all sizes and forms is the key to understanding the impact of business friendly policies in the country. This also provides sufficient indicators for judging the quality and scope of entrepreneurship in the country. It also provides a window to the comprehension of innovation- the most significant requirement for developing as well as developed nations and economies around the globe.

What is SME?

As a country with a highly valued and burgeoning demographic dividend, India is typically characterised by the proliferation of multiple Small and Medium Enterprises (SME). Small and Medium Enterprises are defined in accordance with Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

They are classified as such on the basis of the size of investment in these sectors.  The threshold for investment in Small Enterprises sector ranges between 1 crore and 10 crores while the threshold of turnover ranges between INR 5 crore and INR 50 crores. In case of Medium Enterprises, the threshold of investment ranges between INR 10 crores and INR 50 crores while the threshold of turnover ranges between INR 50 crores and INR 100 crores. These industries form a significant component of the Secondary, Tertiary, and Quaternary Sectors of the economy and are therefore found in both Manufacturing and Service sectors.

Further, there are no restrictions imposed on the type and nature of such enterprises. Thus one can find various kinds of SMEs such as proprietorship, companies, cooperatives, Hindu Undivided Family, partnerships, and so on. The most important aspect of these provisions in India rests on the premise that the demarcation of enterprises as SMEs does not rest on considerations such as the number of persons employed or the amount of electricity consumed by the firm as was the convention of the past and as is still in vogue in various countries across the world including countries in the European Union ( EU).

A significant consequence of Liberalisation has been that the sectors that had been exclusively listed for production under the category of SMEs in the pre-liberalization period have been deserved and this sector has therefore been freed from the menacing shackles of governmental regulations.

To have a better understanding of the criteria for demarcation of SMEs in India, the following tables are provided:

Classification of CompaniesTurnover Threshold Investment Threshold
Small Enterprise1 crore-10 crore 5 crore – 50 crore
Medium enterprise10 crore – 20 crore 50 crore – 100 crore

Manufacturing Sector

EnterprisesInvestment in plant machinery
Micro Enterprises<=INR 25 L
Small Enterprises>INR 25 L and <=INR 5 Crore
Medium Enterprises>INR 5 crore and
 

Service Sector

EnterprisesInvestment in equipment’s
Micro Enterprises
Small Enterprises>INR 10 L and < INR 2 Crore
Medium Enterprises>INR 2 Crore and < INR 5 Crore

Check EligibilityMSME / SME Loan

Significance of the SME sector In India

No viable and remarkable step can be taken towards the provision of employment and enhancement of the overall prosperity of the country without a massive impetus to industrialization and liberalization. While large companies contribute significantly to the overall health of the economy, the absence of opportunities in every field to set up various other kinds of enterprises typically kills future prospects for the national economy and also fails to imbue the demography with the spirit of economic freedom and opportunities. It is to cater to these ideals that the growth and development of the SME sector is to be borne in mind.

The Confederation of Indian Industries (CII) reports that SMEs at present contribute to 24% of the total GDP in the Services Sector and around 6% of the GDP in the Manufacturing Sector. This is more than enough to gauge the paramount position that these industries occupy in the economy.

As far as the issue of employment is concerned, these industries employ around 120 million individuals. They also contribute to around 45% of the gross national export. Needless to say, this sector attains the twin outcomes of economic growth and enhancement of national income and the social responsibility of providing large scale employment. In India there are more than 63 million registered and unregistered SMEs.

Prospects and Responsibilities

The very need for the demarcation of SMEs arose from the necessity of identification and promotion of these enterprises. With their proper identification and the creation of a proper national database of such enterprises, the facilities for the provision of loans tailored to the needs and requirements of this sector could be easily advanced without the problem of leakage. Thus, this has given credit firms, the ability to make loan advancements without worries.

The retention of growth in SMEs is of national importance as they contribute significantly to the overall economic progress of the economy and generates mammoth employment in the country. Although much has been done already in the form of easing restrictions and regulations, the process of registration needs to be made smoother and more hassle-free. Regulations need to be eased further and more credit opportunities are needed in this area so as to build a new epoch for investment and industrialization in the country.

SME FAQs:

1. What is an SME?

Small and Medium Enterprises are undertakings that are classified on the basis of the size of investment and they exist in both the Manufacturing and Services Sectors of the economy.

2. What are the benefits of SMEs?

In a large demography like India, SMEs provide tremendous economic growth contributing to about 24% of Services GDP and 6% of Manufacturing GDP. Besides they also contribute to about 45% of net exports and provide tremendous employment opportunities.

3. What are the incentives behind SME investment?

One of the major incentives behind SME investment in the country pertains to the easy availability of credit that are designed specifically to cater to the needs and requirements of this sector. Also, pre-Liberalization, the easing of various restrictions has occurred including the de reservation of items to be exclusively produced. More relaxation is underway and this is a top priority for governments.