Sunday, November 22, 2009

Consulting in Small & Medium Business Sector in India - Part 1 of 3

This is a 3 Part series to understand the SME sector and its importance to the economy of the country, and providing management consulting services and seven important M's of the SME sector.

Definition of a small enterprise

Till 2006, there were only two types of industries in India. They were ‘small’ and ‘large’. The definition was done with respect to investments made in Plant & Machinery only. Over the years, the limits were enhanced to keep up with the inflation. However, the liberalization saw that there is a need to make radical changes in this definition.

A new act called Micro, Small & Medium Enterprise Act 2006 was enacted which has given enhanced limits to the definition. Also, for the first time, a definition has been offered for a ‘service’ industry. The limits have been given below:
 Micro - Investment below Rs. 25 lakhs for Manufacturing and Below Rs.10 lakhs for Services
 Small - Investment between Rs.25 lakhs- Rs 5 crores for Manufacturing and Rs.10 lakhs - 2 crores for Services
 Medium - Investment between Rs. 5 crore- 10 crore for Maufacturing and Rs. 2 crore – 5 crore for Services.

This revision was necessary due to the advent of several services businesses in IT, ITES, advertising, event management, financial services and many others. Also, it became necessary to define medium size industries.

Salient features of small businesses
 The small enterprise is primarily financed from personal or family savings with limited recourses to begin with. If the business survives and grows, then, the additional financial resources are raised by getting partners or through institutional finances.
 The business usually begins with one or few products/ services and with smaller production capacities.
 The enterprise operates mainly in a limited geographical area.
 The organization begins with small manpower. The promoter usually managing several functions like operations, marketing, finance and HR.
 Many services like accounting, testing and many others are outsourced.
 Initially, there is limited attention paid to R &D, quality control, tax planning and others.

Contribution of SME sector
The SME plays an important role in the Indian economy. Consisting of around 40 lakh units, its share in the manufacturing sector is 35%. It has been consistently registering a growth of 8-9% during last 15 years. The SME sector is entirely in private sector.

Some of the major contributions of this sector are as follows:
 The SME sector produces a diverse range of more than 7500 products, a a large number of which are consumer items. They have the ability to fill limited demands in specialized markets.
 The SME sector is the biggest employment generators in the country. With the use of technology, the manufacturing sector is going for downsizing. It provides jobs for low to medium skilled workforce.
 The SME sector is also a major contributor the exports. Today, it contributes almost to 30 % of India’s exports.
 In the era of outsourcing, SME sector plays a major role as ancillary industries.
 The SME sector can help in balanced regional development thereby reducing the problems of migration from backward regions to affluent regions thereby creating civic problems.

Watch this space for Part 2 and Part 3 series for Consulting in the SME Sector
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ArunKumar Arunachalaiah

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