FOR PRIVATE CIRCULATION Brief on New Publications

EXIM BANK: RESEARCH BRIEF

Export Performance of Small and
Medium Enterprises in India

October 2005 EXPORT-IMPORT BANK OF INDIA No. 18

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Introduction medium and over 500 employees as Evolution of Policies

large enterprises. However, many

T
he Small and Medium Since independence, the Government
establishments in some developing
Enterprises (SME) play a vital of India has formulated a total of six
countries with 100 to 499 employees,
role in the industrial Industrial Policy Resolutions /
are regarded as relatively ‘large’ firms.
development of any country. The Statements with a view to promote
importance of the SME sector is well Multilateral Investment Guarantee industrial growth in the country. All
recognized world over from its Agency (MIGA) has recently these policies have also covered the
significant contribution in gratifying developed a guarantee programme, small-scale sector, in general. To attain
various socio-economic objectives, called the Small Investment higher growth in SSI sector, various
such as higher growth of employment, Programme (SIP), that is specifically incentives pertaining to financial,
output, promotion of exports and designed for SMEs. MIGA defines fiscal and infrastructure related
fostering entrepreneurship. SMEs, for coverage under this measures were designed and extended
programme, as firms with not more to SSI units. Protectionist policies
Definition of SMEs in India than 300 employees, value of assets have been devised to guard the SSIs
not exceeding US $ 15 million and against competition from the large
and World
annual sales not exceeding scale sector. Later, on the lines of
In India the small and medium economic liberalization, it was decided
US $ 15 million.
enterprises are not well defined. The to phase out the reservation policy
internal group set up by the Reserve The European Union defines SMEs with the objective of enhancing the
Bank of India has recently that have employees of less than 250, potential of SSI sector in their export
recommended that the units with with a turnover not exceeding orientation. With the gradual phasing
investment in plant and machinery in Euro 50 million. Thus the definition out of reservation, the list of reserved
excess of SSI limit and upto Rs. 10 of SME varies from country to country items for the SSI sector stood at 506,
crores may be treated as medium and from region to region. as of March 2005.
enterprises.
Significance of SSI in India Realising the credit requirements of
The definitions of ‘small’ and SSI sector, the Government evolved a
‘medium’ sized enterprises differ from The SSI sector in India employs credit policy under the priority sector
one country to another. SMEs have around 26 million people and is lending. Several committees have
been defined against various criteria involved with the production of over been constituted to increase the credit
such as the number of workers 7500 industrial items with the product flow to the SSI sector. The Internal
employed, volume of output or sales, range varying from very simple items Group set up by the Reserve Bank of
value of assets employed, and the use produced with traditional technology India to review the guidelines of credit
of energy. Organisation for Economic to high tech products. At present, the flow to the SME sector recommended
Cooperation and Development SSI sector accounts for over 90% of self set targets for the commercial
(OECD) defines establishments with industrial units in the country, 40% of banks, with an increasing
upto 19 employees as ‘very small’, value addition in the manufacturing disbursement over the previous year.
between 20 and 99 employees as output and approximately 35% of The Group also advocated for
‘small, from 100 to 499 employees as India’s exports. empowering the Boards of the banks

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Brief on New Publications Export Performance of Small and Medium Enterprises in India

to frame their own policies with competitiveness through technology curriculum on entrepreneurial skill
regard to SME financing, so that transfer. development as vocational course to
lending policies would be more liberal their citizens, which enables them to
than the existing policies. The Union Innovation start SME units and contribute to the
Minister for Finance, Government of China has an Innovation Fund for economic and social development of
India in a statement in Rajya Sabha small technology based firms to the country. Japan has SME support
on August 10, 2005 fixed a minimum promote technological innovation centers which provide over the
growth of 20% in credit to SME amongst SME units. The SME agency counter consultation, on-site
sector so that the flow of credit to of Japan supports the innovation professional assistance, business
this sector could be doubled from activities of SMEs through various feasibility assessments and
Rs. 67600 crores in 2004-05 to products and services. Direct information services. South Korea
135000 crores by 2009-10. subsidies are also given by has business incubators to increase
Government of Japan for R&D management skills of women
SME Policies in Select activities of SMEs in Japan. entrepreneurs. The Global Supplier
Countries Programme of Malaysia helps in
Information and Marketing developing critical skills in SME
Institutional framework and policy
specifications are important factors in In China, an SME network has been units and also facilitate linkages with
helping the evolution and success of established to meet the information MNCs and large scale units.
SMEs across the globe. Today, many requirement of SMEs on policies,
countries have a range of programme laws, regulations, emerging Export Performance
in diverse areas, viz., financing, technologies, emerging product lines, SSI sector in India has been exhibiting
technology, innovation, managerial sources of raw materials, trends in a striking export performance. Barring
ability, market information and supply and demand. National Bank of few years, exports have grown double
developmental assistance, aimed at Foreign Trade (BANCOMEXT), in digit in the last 10 years. Exports at
improving the working environment Mexico provide easy access to current prices in 2002-03, the latest
for SMEs. information on foreign trade to SME year for which data is available, stood
units and help them in their at Rs. 86000 crores. This works out to
Finance globalisation efforts. Czech Republic about 34% of total exports in India in
The Community Programme in Czech has a Marketing Programme aimed at the same year. Major sectors
Republic provides financial assistance supporting SME units to get subsidy contributing to SSI exports include
to SME units in areas with less than for export and marketing readymade garments (27%),
2000 population. The Credit consultation. Mexico has a Supplier engineering goods (14.5%), chemicals
Guarantee Corporation of Hungary Development Programme, which & pharmaceuticals, electronics &
plays an active role in promoting SME would help integration of SMEs in to computers, and processed foods (11%
development and improve their productive chains of large business each).
competitiveness. In Japan, Credit houses in Mexico.
In terms of export orientation, sports
Guarantee Association acts as a
Skill Development goods have 100% exports from SSI
guarantor for SMEs that are having no
Italian Government provides sector, followed by readymade
collateral security. A financial safety
net has been established in South
Korea to help SMEs to overcome the
financial shortage. South Korea also
has a facilitative bankruptcy law to
enable the exit and restructuring of
SMEs that experience financial stress.
Technology
The Czech Republic has a Technos
Programme to support research,
development and innovation in SMEs
by accelerating their rate of
technology acquisition through
realisation of R&D projects. South
Korea has established international
cooperation programmes to strengthen
Source: Economic Survey 2004-05

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Brief on New Publications Export Performance of Small and Medium Enterprises in India

garments (90%), leather (70%), capital investment to come out of the Exim Bank and SMEs
marine products (47%) and chemicals SSI net and emerge as global players. Export-Import Bank of India (Exim
& pharmaceuticals (44%). Such a trend is happening especially Bank) has been focusing on SME
in sectors like basic chemicals, exporters as a significant target group
Over the last 10 years, the share of SSI
pharmaceuticals, engineering goods, of clients. In the past, Exim Bank has
exports has increased in most of the
leather and textile sectors. implemented a number of innovative
programmes focusing primarily on
SMEs. The Bank, in the past, has
operated an Agency Line of Credit for
IFC and an Export Marketing
Programme for the World Bank,
which are targeted towards SME
sector. The Bank proactively assists
SME units in establishing their
products in international markets.
Exim Bank’s Lines of Credit help
SMEs to offer competitive credit term
to the buyers and to explore newer
geographical markets. Recently, the
Bank has signed a Memorandum of
Cooperation with the International
Source: SIDO Trade Centre (ITC), Geneva, to
implement the Enterprise
sectors. At the same time, in some There are no official data for Management Development Services
sectors, the share of SSI in total compilation of export performance (EMDS) programme, for supporting
exports has come down. The SSI by the medium scale units. However, SMEs in their globalisation efforts.
intensive sectors that have witnessed analysis has been made using the This initiative is being launched by
increase in export share include CMIE’s India Corporate Database, ITC for the first time in any country.
engineering goods, chemicals and which represents more than two-
allied products, plastic products, third of Indian manufacturing sector. Constraints and Strategies
processed foods, marine products, Analysis has been made to measure Constraints
woolen garments and knitwear, the export performance of medium The constraints faced by the SSI
processed tobacco. Sectors like basic scale units in select sectors, using sector include product reservations,
chemicals & pharmaceuticals, finished two definitions, viz., based on capital regulatory hassles – both at the entry
leather and leather products, synthetic investment, as defined by RBI, and and exit stages, insufficient finance at
and rayon products have witnessed based on sales turnover of units up affordable terms, inflexible labour
declining share in total exports. Sectors to Rs. 75 crores. The analysis markets and infrastructure related
like readymade garments and sports revealed that sectors like food and problems - like high power tariff, and
goods were observing neutral trend, beverages, chemicals, auto- insufficient export infrastructure.
with the share remaining the same. components, machinery, electronics, These are briefly elaborated below:
These 12 SSI intensive sectors metals, castings and forgings have
witnessed increasing export ● The policy of product reservations
accounted for about 95% of total SSI has restricted operation of
exports from India, in the year orientation trend over the last
decade. economies of scale and greater
1991-92. However, the share has come efficiency in the small scale sector.
down to 85% in 2002-03. While these
However, the export orientation of
sectors have improved their ● Starting a business in India
sectors like leather, textiles and
cumulative share in India’s total requires number of permits, even
readymade garments has more or less
exports from 51.6% in 1991-92 to after the initiation of liberalization
remained static over the period. It may
55.5% in 2002-03, the export share by programme, as compared to many
be inferred that these sectors, since
SSI units in these sectors have come other developing Asian nations.
they require plenty of capital
down from 58.4% in 1991-92 to ● Insufficient finance at affordable
investment to meet the global
52.4% in 2002-03. Thus, it may be terms is another challenge
challenges, need to be kept out of any
inferred that, since liberalisation, daunting the performance of
limit on capital investment, to emerge
more and more exporting units from Indian SME sector.
as global players.
SSI sector have been increasing their

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Brief on New Publications Export Performance of Small and Medium Enterprises in India

in any developing country.

Strengthening National
Entrepreneurship Development
Board, devising comprehensive
plan for promotion of rural
entrepreneurship, fostering close
linkages with premier institutions
engaged in management and
entrepreneurial training may be
considered on priority basis.
● Access and integration into local,
national and global markets
require substantial investments.
Partnerships between various
Source: Compiled From Prowess Database stakeholders, viz., Government,
society and industry, foster such
● Infrastructural bottlenecks such enterprises in India. investment.
as transportation / ● The small and medium scale
communication facility and enterprises could be defined as one
insufficient export infrastructure entity for policy purposes, with the
increases the transaction cost of objective of facilitating higher
SME units in India. investment and thereby
● Problems in assessing adequate encouraging the technology
and reliable power at affordable upgradation.
price is another key constraint of ● Reservation of items should be
Indian SMEs. phased out substituting with
Strategies promotional support to strengthen
SME development requires a cross- their globalisation efforts.
cutting strategy, that touches upon ● Reengineering the entire gamut of
many areas. Apart from conducive regulatory processes, especially at
policies, there is a need for simplified the state and local levels, with the The contents of the publication are based on
legal and regulatory framework, good objective of installing transparent information available with Export-Import Bank of
governance, abundant and accessible policies would bring down the cost India and primary desk research through published
finance, suitable infrastructure, of investment related delays. information of various agencies. Due care has been
entrepreneurial skill development taken to ensure that the information provided
● SMEs should be encouraged to
in the publication is correct. However, Export-Import
infrastructure and competitive work in a cluster environment Bank of India accepts no responsibility for the
environment. Some of the strategies ensuring complementarities, authenticity, accuracy or completeness of such
are highlighted below: common activities, collective information.
● Conducive WTO compatible goods and institutional stability. Note: Indian Rupees are referred in crore
policies are required for this sector This strategy requires sector and lakhs:
to decide on various issues such as specific actions, aimed at 1 crore : 10 million
cap on capital investment, ceiling increasing the competitiveness of 1 lakh : 100 thousand
on FDI, interest subsidy, de- the cluster, promoting networks Publication is available at:
reservation of items, creation of and cooperation amongst firms. Dharmendra Sachan
technology upgradation fund. ● There is a need for development Chief Knowledge Officer
EXPORT-IMPORT BANK OF INDIA
● Existence of adequate institutional of a comprehensive programme for Centre One Building, Floor 21,
framework and efficient improving the technology base World Trade Centre Complex,
administrative system, along with and strengthening of innovation Cuffe Parade, Mumbai - 400 005, India.
Phone : +91 22 2218 2837
deregulation of economic culture in SMEs. Fax : +91 22 2218 3070
activities, would facilitate ● Management skills are very E-mail : [email protected]
restructuring of small and medium necessary for the success of SMEs Website : www.eximbankindia.com

Contact Numbers: Ahmedabad: 2657 6852, Bangalore: 2558 5755, Chennai: 2522 4714, Guwahati: 259 9135, Hyderabad : 2330 7816,
Kolkata: 2229 3416, Mumbai: 2283 0761, New Delhi: 2332 6625, Pune: 2645 8599
Budapest: (361) 338 2833, Johannesburg: (2711) 442 8010, Singapore: (65) 653 26464, Washington D.C.: (202) 223-3238

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