Promoting Innovation In Indian MSMEs :

Policy Perspectives NISTADS

Yogesh Suman, Tabassum Jamal, Sanjib Pohit
Mahesh Kumar Saini, Jyotsana Pandey, Nitesh Kumar Yadav
ISTIP Policy Bulletin No. 7, December 2014

ISTIP (Indian S&T and Innovation Policy): 1. Introduction

First Study of its kind focusing on various
dimensions of innovation activity in India; Indian economic growth in recent past has been categorized
as jobless growth as it has not been able to create enough
aiming at providing valuable inputs for S&T
jobs in proportion to the growth of employable population.
and Innovation decision making. At the same time the deficit between India's import and
export has widened to over US$10 billion1. One of main
reasons for this situation is the stagnation in the country's
A two pronged strategy is needed to make manufacturing sector. At present share of India's
2
Indian MSMEs more innovative-one part manufacturing sector in GDP is 13-14% which needs to be
of strategy consists of initiatives which raised to at least 25% if problem of unemployment and
trade deficit have to be dealt with seriously. China is a prime
are within the control of individual
example of how manufacturing can really boost the GDP
MSMEs while the other part of strategy growth of a country. In 1980 India's GDP per capita of $266
consists of the initiatives required to be was comparable with China's $307 but at present China's
taken up by the Government to promote GDP per capita has shot up to $6807 which is 4.5 times
innovation higher than India's $14993 and one main reason for this is
China's highly vibrant and dynamic manufacturing sector.
Micro Small and Medium Enterprises (MSMEs) in India
constitute a major part of industrial manufacturing with 45
per cent of country's manufacturing output and 40 per cent
Contents
of total exports. They are estimated to employ about 60
1. Introduction
million persons in over 26 million units throughout the
2. Methodology country and manufacture over 6000 products ranging from
3. Patterns emerging from the data traditional to high-tech items. Because of their small size
4. Barriers to innovation and flexibility in decision making they are able to react
quickly to the changes in the surrounding environment as
5. Recommendations based on survey
findings they don't have a long chain in decision making but at the
same time they suffer from many resource constraints. One
6. Issues that need immediate attention
from policy perspective of the most significant constraints suffered by MSMEs is
the financial constraint. Other constraints include human
resource, obsolete technology and challenges in complying
This Policy Bulletin has been prepared under with Government regulatory procedures. Generally they
ISTIP project (funded by CSIR) by Yogesh
Suman, Tabassum Jamal, Sanjib Pohit, 1
Times of India, 21.12.2014, p.17
2
Times of India, 14.12.2014, p.17
Mahesh Kumar Saini, Jyotsana Pandey, 3
Economic Times, 16.09.2014, p.15
Nitesh Kumar. Authors are affiliated to CSIR
– NISTADS.
 Promoting Innovation in Indian MSMEs: Policy Perspectives

serve a narrow market by establishing a close contact with customers. MSME sector in India is highly
heterogeneous in terms of the size, variety of products & services, and levels of technology.
Keeping in view of the challenges, their diversified nature
and important role in manufacturing in India, the current
As per the Government of India definition
study on manufacturing MSMEs was undertaken with the Manufacturing MSMEs are categorized as
Micro, Small and Medium on the basis of the
aim to study emerging patterns in innovation. investments made in plant and machineries.
An enterprise having investment in plant and
2. Methodology machinery not exceeding Rs. 25 lakhs is
categorized as Micro enterprise, whereas an
A three page questionnaire containing questions on various enterprise having investment in plant and
aspects of innovation was sent to 2000 MSME units across machinery more than Rs. 25 lakhs and less
than Rs. 5 crores is categorized as Small
the country. Out of these 130 filled questionnaires were enterprise; and an enterprise having
received back and 118 questionnaires were found usable. investment in plant and machinery more than
Rs. 5 crores but less than Rs. 10 crores is
The data was analyzed using these 118 questionnaires. The categorized as Medium enterprise.
respondent firms were divided into more and less
innovative. The average number of new products introduced
during last three years by all the firms was calculated. The firms introducing higher number of new
products than this average were categorized as more innovative firms while firms introducing fewer
number of new products than this average were categorized as less innovative firms. Patterns emerging
from the analysis are shown in the following section.
3. Patterns emerging from the data
Most of the respondent firms belonged to Micro (42%) and Small (48%) category and most of these firms
are created by the owner (57%) and very few are inherited or acquired (Figure 1 and 2).

Figure 1 : Profile of respondent firms Figure 2 : Ownership patterns

Medium Owned by Acquired

10% close family 2%
member
16%
Micro Created
42% Inherited by owner
Small 25%
48% 57%

Source: Own survey Source: Own survey

Most of the enterprises exist in the form of private limited (43%) or family run business (31%) followed by
proprietorship firms (15%) very few are public limited (5%) or a part of larger group (4%). Most of the
owners are undergraduate by qualification (33%) or 10th passed (27%) followed by post graduate and 12th
pass. In case of employees most of the workers in MSMEs are below graduate level or they are skilled
workers without formal training, there are very few graduate engineers. In case of micro enterprises there
are no graduate engineers (Figure 4, 5 & 6).
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 Promoting Innovation in Indian MSMEs: Policy Perspectives

Sector-wise distribution of respondent firms is shown in figure 3.

Figure 3: Sector-wise distribution of respondent firms

Manufacture of basic metals

Manufacture of other non-metallic mineral...
Manufacture of leather and related products
Manufacture of food products
Manufacture of pharmaceuticals, medicinal...
Other Mining and quarrying
Manufacture of machinery and equipment...
Crop and animal production, hunting and...
Other manufacturing
Manufacture of electrical equipment
Manufacture of computer, electronic and...
Manufacture of fabricated metal...
Manufacture of wearing apparel
Manufacture of rubber and plastics products
Manufacture of chemicals and chemical...
Manufacture of coke and refined petroleum...
Manufacture of wood and products of wood...
Wholesale trade, except of motor vehicles...
Manufacture of beverages
Water collection , treatment and supply
Manufacture of furniture
Retail trade, except of motor vehicles and...
Remediation activities and other waste...
Manufacture of other transport equipment
Manufacture of motor vehicles, trailers and...
Manufacture of paper and paper products
Manufacture of textiles
0 5 10 15 20 25 30
Percentage of respondent firms

Source: Own survey

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

Figure 4 : Types of business Figure 5 : Educational qualification of the owner

Foreign Part of large Doctorate

Private group 4% Below
4%
2% 10th
Family Post 3%
run Graduate
business 17% 10th
31% Passed
Private 27%
Limited
43% Under
Graduate
Proprietorship 33% 12th Pass
Public Limited 15%
5% 16%

Source: Own survey Source: Own survey

Figure 6: Qualification level of workers

70
Average % of Workers

60
50
40
30
20
10
0
Skilled workers

Other graduate

Below graduate
workers-ITI certified
Graduate Engineer

Diploma Engineer

without formal
Qualification of

training

Micro Small Medium Over all MSME Sector

Source: Own survey

Attrition is maximum among contractual workers in case of micro enterprises. Micro and small
enterprises suffer more from attrition of regular workers as compared to medium enterprises (Figure 7).

4
 Promoting Innovation in Indian MSMEs: Policy Perspectives

Figure 7: Attrition rate of workers

40

30

20

10

0
Micro Small Medium Over all for
Enterprise Enterprise Enterprise MSME Sector

% of Regular workers leaving job before completion of 1 yr

% of Contractual workers leaving job before completion of 1 yr

Source: Own survey

In terms of various channels of sales most of the sales happen through regular customers but it is not
contracted.
For finances (Working capital at inception) Micro and Small enterprises mostly rely upon their own
savings and immediate family friends, while medium enterprises rely mostly on banks. Venture capital
was found to play a negligible role (Table 1).

Table 1: Sources of finance for Working Capital at inception

Micro Enterprises Small Enterprises Medium Enterprises

Rank 1 Own Savings Own Savings Banks

Rank 2 Immediate Family Friends Own Savings Suppliers and Contractors
Rank 3 Immediate Family Friends Immediate Family Friends Banks

Source: Own survey

In terms of destination of sales, while Micro Enterprises sell their products mostly within
districts, small enterprises sell their products outside districts but within same state or province.
Only medium enterprises were found to sell their products outside states.
When observed for innovating activities most of MSMEs innovate in terms of efficient use of raw
material, followed by process improvement; new product development comes at number three;
this is followed by use of alternative raw material, substantial product modification, market
development/creation/expansion and minor product differentiation. So it can be said that new
product development is not the main focus for MSMEs (Table 2).

5
 Promoting Innovation in Indian MSMEs: Policy Perspectives

Table 2: Innovative activities and motivational sources for innovation

Innovative activities in term of frequency Sources of motivation for innovation

1. Saving/Efficient use of Raw Material 1. Large Domestic Customers
2. Process Improvement 2. Own Initiative for Quality Improvement-Design
3. New Product Development 3. Transnational Companies Customer
4. Alternative Raw Material with Cost Cutting 4. Other Private Firms
5. Substantial Product Modification 5. Business Association
6. Market Development/Creation/Expansion 6. Public Agency
7. Minor Product Differentiation

Source: Own survey

In terms of sources for innovation large domestic customers emerged as most important source of
innovation. This was followed by own initiative for quality improvement in terms of design,
transnational companies customer, other private firms, business association and public agency
(Table 2).
Most of the outputs of innovation activities results in quality parameter or benchmark which
mean MSMEs are mostly busy in improving their products and services by achieving some
quality parameter. It was observed that Micro enterprises are not behind small or medium
enterprises. (Figure 8)

Figure 8: Output of innovative activities

Trade Secret

Know-How
New Product
Quality Parameter/ development has
Benchmark not been the main
focus for Indian
Patent
MSMEs and they
are mostly busy
Trademark in improving
their existing
Design products.

0 10 20 30 40 50 60 70 80
Number of Enterprises
Over all for MSME Sector Medium Enterprises

Source: Own survey

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

More and less Innovative Firms and Sectors

A sector-wise count based on the number of new products introduced during last three years is shown in
the figure 9.
Figure 9: Industrial sectors in terms of number of products introduced during
last three years

Manufacture of motor vehicles,

trailers and semi-... · Public limited firms were found
Manufacture of pharmaceuticals,
medicinal... more innovative than private
Crop and animal production,
hunting and related... limited or proprietary firms.
Manufacture of basic metals
· More innovative firms spend more
Manufacture of food products
on in-house R & D, joint R & D
Other manufacturing
Manufacture of machinery
with Government research
and equipment n.e.c. institutions & universities,
Other Mining and quarrying training of their manpower,
Manufacture of computer,
electronic and optical...
financial management softwares,
Manufacture of other
non-metallic mineral products
E-security and publicity through
Manufacture of leather and website while less innovative
related products
Manufacture of wearing apparel
firms spend more on joint R & D
Manufacture of chemicals
with large customers & other
and chemical products
Manufacture of electrical
private sector firms, purchase of
equipment standards, copyrights and material
Manufacture of furniture transfer, on E-banking and servers.
Wholesale trade, except
of motor vehicles and...
Manufacture of coke · For more innovative firms skilled
and refined petroleum...
Manufacture of other
workers (below the level of
transport equipment
Manufacture of fabricated
supervisor) played a more
metal products, except... prominent role in innovation than
Manufacture of wood and
products of wood and... less innovative firms
Water collection,
treatment and supply
Manufacture of rubbe · Share of banks and venture capital
and plastics products
in capital stock and working
Manufacture of textiles
capital at inception was higher for
Manufacture of beverages
more innovative firms than less
Remediation activities and
other waste... innovative firms.
Manufacture of paper and
paper products
· More innovative firms sell their
0 10 20 30 40 50 60 70 80 90 100
products mostly through
distributors and formal contracted
Totally new products introduced during last three years supply while less innovative firms
sell more through retailers and
traders
Source: Own survey
· More innovative firms sell their
products mainly outside states
It can be seen from figure 9 that five topmost innovative sectors
while less innovative firms sell
during last three years are. more within districts.
• Manufacture of motor vehicles, trailers and semi-
trailers.
• Manufacture of pharmaceuticals, medicinal chemical
and botanical products.

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Crop and animal production, hunting and

related service activities Barriers to Innovation

· Manufacture of basic metals • Slow, cumbersome and complex

government procedures
· Manufacture of food products • Host of old and archaic laws
On the other hand the five least innovative sectors • Hostile tax regimes
have been. • Extremely slow processing of
· Manufacture of paper and paper products patent applications
• Low level of collaboration
· Remediation activities and other waste between MSMEs and
management services Government R & D institutions
· Manufacture of beverages • Large scale dumping of Chinese
goods at rock bottom prices
· Manufacture of textiles turning many Indian
manufacturers into traders of
· Manufacture of rubber and plastics Chinese goods
products
• Slow import/export clearances

4. Barriers to Innovation
Personal interviews were conducted with Micro, Small and Medium entrepreneurs in various parts of the
country to get an in depth first hand perspective about the challenges faced by them in carrying out
innovations. It was observed that a large portion of their time is consumed in non-productive activities of
getting clearances from Government regulatory departments just to keep their enterprise operational#.
They get very little time to concentrate on the development of new or modified products. They shared their
experiences about poor infrastructure in Government offices, lack of adequate power supply, slow speed
and large downtime of computer servers. A job of 15 minutes sometimes takes the whole day as there is no
power backup in the Government department, so when current goes off, the computers are down and
whole office comes to a standstill.
As per their experience it is not easy to be and entrepreneur in India. Even in Mumbai which is considered
as financial capital of the country it takes 13 procedures and 30 days to start a business while in advanced
countries it takes average 4.8 procedures and 9.2 days to start a business. There are a vast number of other
formalities which are to be fulfilled before an entrepreneur can really start or to keep a business up and
#
running. Some of these are listed as below :
· Paying stamp duties online-5 days
· Filing incorporation documents online-5 days

# Times of India, 30.10.2014, p.1-In World Bank Report on 'ease of doing business' covering a period of June 2013 to May 2014,
India has been ranked 142nd in terms of 'ease of doing business' out of 189 countries. Rank-wise position of the India for
performing various business related activities-Getting a construction permit-184th rank; ease of starting a business-158th Rank;
getting Electricity connection -137th Rank; registering property-121st Rank.

8
 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Getting PAN Number-12 days

· Registering with Employees Provident Fund Organization(EPFO)-12 days
· Registering with VAT Online-12 days
· Registering for medical insurance-9 days
· Getting a Tax Account Number-7 days
Other difficulties related to tax, manpower etc. are given in detail as below.
· Hostile Tax Regime
Various tax related problems were conveyed by the entrepreneurs during the discussions with them.
These are described as below.
Advance tax is to be paid by the firm in three installments (in the months of September, December and
March) after the end of each quarter but one problem is that shortfall interest is not based on turnover of
that quarter only. e.g. if 70% of a firms turnover is in the March 2015 the advance liability is calculated
from back date. i.e. with effect from June 2014.
Interest received on refund of surplus tax paid in previous year is added to the taxable income for the
current year.
Government keeps on introducing various cess and private sector firms are expected to add each as
separate line item. E.g. if there is 2% higher education cess and 1% secondary higher education cess on
central excise, service, custom duty etc. then each bill will include service tax 12% education cess 2%
secondary higher education cess 1% as separate line figures.
In case of proprietary firms PAN No. is issued in the name of the owner, this might result in misuse of tax
credit.
The procedure for inter-state purchase is very complex where seller has to raise invoice in his books of
account and print multiple copies, communicating details to the buyer. After this buyer has to make entries
in his books of account after receiving the invoice, following this buyer has to feed in details in e-returns.
Same details have to be provided by the seller in his e-return independently. After these details are
accepted by sales tax authority, buyer has to generate Form C and send a signed copy to the seller, which is
submitted by the seller to his sales tax authorities.
For service providers, in some cases the tax is paid by the service providers and also by the service
recipient.
Many of the Government websites related to income tax filing and import clearance fall under the category
of untrusted or phishing connection which income tax filing firm has to enter at their own risk as these are
not https secure. Also these sites are not robust enough to handle high volume of users so they become very
slow as number of users increase. The manual forms are also not designed properly while converting them
to electronic form and the data is to be filled all over the screen.
Expenditure on in-house scientific research is considered only for computing weighted deductions under
the normal provisions of the Income Tax Act and not for computing the Minimum Alternate Tax (MAT)
liability.

9
 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Manpower Issues
Recently the salary cap to avail Employees' State Insurance (ESI) facilities has been raised from Rs.
15000/- per month to Rs. 25,000 per month. This has increased the number of employees which will be
covered under ESI Scheme. This in turn will increase the burden on ESI infrastructure which is already
crumbling and also the burden on employers.
There are a huge number of laws dealing with manpower in MSMEs which have only increased corruption
and harassment of entrepreneurs at the hands of officials. E.g. there are over 44 central and 100 state labour
laws* like Industrial Dispute Act-1947, Contract Labour Act-1970, Factories Act-1948 and
Apprenticeship Act-1961 containing many archaic and obsolete provisions which need a relook and
overhauling. Being an entrepreneur one has to deal with numerous manpower issues like labour unions,
strikes, layoffs, work time restrictions for women etc. It is impossible for an entrepreneur to comply with
all the provisions laid down in labour laws. Various central agencies carry out approximately 1.75 lakh
*
inspections of MSMEs every year with inspectors having sweeping powers and dealing with them has
always been a massive task.
All the major trade unions in India are against globalization and see it as anti-labour. Changing their
perspective is a huge challenge but it can go a long way in increasing productivity of MSMEs.
Another problem which has stagnated the manufacturing in MSMEs is the obstacles presented in the way
of big projects due to difficulties in acquiring land and environmental clearances. (Since most of the
MSMEs get their manufacturing orders from big enterprises, this harms their interests also).
· Import/Export Clearances
4
Classification of good in the Harmonized System (HS) Codes has been misused to the disadvantage of the
indigenous manufacturers. E.g. custom duty may be less for a finished imported product while it may be
higher for a component which is supposed to be used by the manufacturer for indigenous manufacturing of
the same type of product in the country. This hampers the achievement of self reliance in manufacturing.
Many a times there is sudden change in the HS Code of an item creating problems for the firm importing
that item.
In one case an entrepreneur was regularly importing one item but suddenly during one of such import he
got communication from the custom department that the item couldn't be imported and this
communication was given only after the consignment had arrived at Indian port.
In another case it took three months for a firm to get the item cleared from the customs and it had a deadline
of completing an export order using that imported component as a result of which it couldn't meet the
deadline due to delay in release of their imported component.
· Intellectual Property Rights (IPR) issues
The patent offices in the country work very slowly and MSMEs are able to get patents only after
considerable delay. In some case it has taken almost five years for a patent to be granted. This hampers the
introduction of new products developed by MSMEs into the market.

*
Times of India, 18.10.2014, p.10
4
The Harmonized Commodity Description and Coding System, or the Harmonized System (HS) of tariff nomenclature is an
internationally standardized system of names and numbers to classify traded products in order to facilitate import/export of goods
among countries.

10
 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Problems in Collaborations with Government R & D Departments

While dealing with Govt. R & D departments for technical collaborations and research grants it is
observed that there are long delays in getting clearances. Generally there are expert committees to review
the feasibility of the proposals but it is observed that there is a single committee to review many kinds of
proposals.
· Threats from China
Chinese goods arriving in India are not tested for safety and other standards compliance while Indian
goods are tested thoroughly for such compliance. Another problem arises from large scale import/
dumping of items manufactured in China which is available at rock bottom prices. As a result of this many
of Indian manufacturers have just turned into traders of Chinese goods. This has set a decline in the
country's manufacturing capabilities.
5. Recommendations Based on Survey Findings
Manufacturing sector is important sector for industrial and economical growth for any country. Since
manufacturing MSMEs make bulk of overall manufacturing sector, promotion of innovation in
manufacturing MSMEs is key factor for growth of manufacturing in them. Indian MSMEs have immense
potential to grow but this potential has to be unleashed by bringing the reforms in Government regulatory
procedures. There are a vast number of Government agencies engaged in helping the MSMEs in terms of
various business operations right from production to marketing but functioning of these agencies have to
be fine tuned and their activities have to be made more visible, transparent and simplified from the
perspective of entrepreneurs for their benefits to really reach to the target group. Other aspects include
improvement in infrastructure and power supply which may go a long way in enhancing the productivity
of their enterprises.
Based on the questionnaire survey and interviews conducted during the current study following
suggestions emerged which could help in promoting innovation among manufacturing MSMEs. These
suggestions are classified into two categories-firm level suggestions and suggestions for Government.
a) Firm level suggestions - These include initiatives on the part of individual firm which could result in
promotion of innovation. These include:

· Promote in-house R & D: Instead of spending on acquisition of external knowledge the firm
should focus on in-house R & D and knowledge generation within the firm.
· Increased role of Venture Capitalist-Involve venture capitalists as a source of finance in the
initial stages of arranging capital stocks, this will increase the flow of new ideas and venture
capitalist will create a sustained pressure for innovation in the firm.
· Take joint R & D with Government R & D institutions and universities-Taking up joint R
& D projects with Government R & D institutions and universities will help firm in getting
benefitted from the research experiences available in academia and research institutions.
· Spend more on training of manpower - This will increase the capabilities of the manpower
and help in generating new ideas.

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Increase use of financial management

softwares and electronic security systems. What firms should do to be more
· Involve junior level staff in the process of new innovative.
idea generation. • Promote in-house R & D
b) Suggestions from Entrepreneurs - These • Increase role of Venture Capital
suggestions call for the initiatives on the part of • Undertake joint R & D with
Government which could help entrepreneurs in Government R & D institutions
developing new and innovative products. A major and universities
problem is India's bureaucracy which keeps pushing files
• Spend more on training of
around without getting to final conclusions. Government
manpower
should decrease number of formalities required to start a
business and promote venture capital. Various • Increase use of financial
suggestions also emerged during the discussions with the management software and
entrepreneurs. These mainly included suggestions on tax, Electronic security systems
intellectual property rights (IPR), manpower and • Engage junior level staff in new
finances. In view of the entrepreneurs if these suggestions idea generation
are implemented, it can make life easy for entrepreneurs
and enable them to divert some of their energy for
innovative activities. These suggestions are listed in the
following section.

· Tax liability for a particular quarter may be calculated on the basis of the profit earned in that quarter
and it should be limited to that period only.
· All the entries representing separate items may be replaced by a single line entry in the bills.
· PAN No. database should be linked to proprietary firms database.
· While making payments through RTGS and NEFT there should be a cross checking of account
number against the name of the party.
· Inter-state sale purchase can be simplified by having a common Government website where seller
can feed in the details of the items to be sold; these details are made visible to the buyer and sales tax
authority.
· Charging of tax from the recipient of the service may be done away with as most of the small firms
don't have systems to take care of such complex rules.
· The form for filing tax returns online should have two columns, where questions are on the left hand
side and answers are filled on right hand side. Indian standards should be used for data format e.g. for
date Indian standard is dd/mm/yyyy while software takes date in mm/dd/yyyy format which creates
confusion other option in this case may be '06-Oct-2014' kind of format. While entering numerical
figures commas should properly come after hundreds, thousands, lakhs and crores instead of millions
which are suitable for Europe or USA but not for India.

12
 Promoting Innovation in Indian MSMEs: Policy Perspectives

· Expenditure on R&D activities should also be taken into account while computing the MAT liability.
This will encourage firms to report their R & D expenditure.
· There should be fewer and simpler labour laws which could actually benefit the labour force and
employers alike instead of exploitation of one and harassment of the other. A portal may be developed
containing provisions and benefits of labour laws that can be helpful in better enforcement. This new
portal can also contain information about EPFO and ESI details of employees. While a beginning has
been made by the current Government, and Union cabinet has approved changes in Factories Act, in
Apprenticeship Act and Labour Laws Act like doubling the provision of overtime, removal of
mandatory provision of absorption of at least half of the apprentices and exempting all the companies
with 10-40 employees from provisions of labour laws. But deeper initiatives are needed to boost
manufacturing.
· The condition of notice period both by employer and employee should be implemented effectively.
· Sudden changes in HS Codes should be timely updated on Directorate General of Foreign
Trade (DGFT) website.
· Delays in custom clearances for import/export must be avoided. Information technology (IT) can
play an important role in this by bringing in transparency in the clearance processes but some of the
vested interests don't allow things to flow smoothly.
· Patent granting process must be expedited. It is suggested that MSMEs should be provided
consultancy and financial support for filing patents.
· The committees in Government R & D institutions for vetting and reviewing research proposals
received from MSMEs should also have members from industry who are aware with the market
situation with regard to that particular technology or product.
· In certain areas like defence sector more Government procurement should be from indigenous
manufacturers.
· There should be time gap between loan disbursement and starting of loan recovery as the new product
takes some time to catch up with the market.
· There are numerous Government agencies established to provide financial assistance to MSMEs.
Refining and fine tuning of these agencies with able leadership in place can be very helpful for the
MSMEs. Since most of the entrepreneurs especially the micro entrepreneurs are not very well
educated, they find these procedures almost impossible to understand; sometimes they are not able to
even understand the language of the forms they need to fill up to apply in these schemes.
· Promoting venture capital is another important measure which could spur manufacturing in the
country. Recently Government has initiated Rs. 10,000 crore fund for early stage ventures. Apart
from this Government has also started working on entrepreneur friendly legal bankruptcy framework
which will help failed start-ups to shut down operations. But one problem with this is the Income Tax
provision which counts money received as Angel Investment as income for the start-up receiving it.

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

6. Issues that need immediate attention from policy perspective.

Although there is a long list of issues facing Indian MSMEs, current study brings forth following
issues which need immediate attention from policy perspective.
· Promoting in-house R & D in MSMEs
· Increasing role of Venture Capital as a viable source of finance
· Promoting joint R & D between MSMEs and Government R & D institutions
· Skill up-gradation of manpower through training
· Increasing use of financial management softwares and electronic security systems
· Involvement of junior level staff in the process of new idea generation
· Making tax regime more flexible and reasonable
· Fewer and simpler Government procedures
· Expediting import-export clearances
· Expediting patent awarding process in Indian Patent Office
· Learnings from chinese best practices

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 Promoting Innovation in Indian MSMEs: Policy Perspectives

Disclaimer : The views in this bulletin are those of the author, and do not represent those of
the CSIR - National Institute of Science Technology and Development Studies (CSIR-
NISTADS)

Bulletin should be cited as : Yogesh Suman, Tabassum Jamal, Sanjib Pohit, Mahesh Kumar
Saini, Jyotsana Pandey, Nitesh Kumar Yadav (2014). “Promoting Innovation in Indian
MSMEs: Policy Perspectives”. ISTIP Policy Bulletin No. 7, CSIR-NISTADS.
For suggestions/feedbacks, please contact: [email protected]

CSIR-NISTADS
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 Promoting Innovation in Indian MSMEs: Policy Perspectives

About ISTIP Project

The India Science Technology and Innovation Policy (ISTIP)
project is a five year project(2012-2017) being funded by
Council of Scientific and Industrial Research(CSIR) under
th
12 five year plan. The project focuses on Indian S&T─
Mapping and National Innovation Policy. It aims to
investigate capability, capacity and the outcomes of multiple
forms of knowledge in India and other relevant countries; and
intends to bring out the national knowledge status vis a vis that
of major global institutional players. Keeping in view the
Government's thrust on innovation as the key driver of
economy the project aims to underscore Indian knowledge
capability. To achieve its objectives the project will undertake
detailed mapping of the status of innovation in the country and
sectoral analysis. It will explore the various policy measures
that strengthen the innovation activity in the country and
interventions that can provide stimulus for lab to market
translation. Innovation profile in key sectors, promoting green
technologies, and areas of pressing developmental challenges
will be one of the key outcomes of the project. Another major
focus of the project would be to survey Micro Small and
Medium Enterprises (MSMEs) in different sectors, the
policies that have been articulated to strengthen their
capabilities and outcomes. Survey analysis will be
complimented through workshop, interviews and secondary
data analysis; roadmaps will be drawn for strengthening
innovative capacity of MSME in different sectors.

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