The Small and Medium Enterprises (SME) sector plays a major role in today’s Indian economy. Though small in size, it caters majorly in generating employment and driving the country’s economic health. Let’s take a closer look at the meaning and progress of SMEs in India.

What is an SME?

In simple terms, an SME is a business that has limited employees, assets, and revenue. The limit is defined by the government and is amended from time to time to be in sync with changes in the economy. In 2018, it was amended to the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 to include micro businesses with an annual turnover of not more than 5 crores.

With SME loans available without much hassle, the ease of doing business has improved over the years tremendously. The SME title is generally given to businesses based on their annual turnover, investment in machinery, investment in equipment, and a number of employees. All countries set different guidelines for defining SMEs.

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What are the SME guidelines in India?

The following is the old classification of the enterprises on the basis of the industry:

Manufacturing Industry

Investment in Machinery
Small Enterprise 25 lakh – 5 crore
Medium Enterprise 5 crore – 10 crore
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Servicing Industry

Investment in Equipment
Small Enterprise 10 lakh – 2 crore
Medium Enterprise 2 crore – 5 crore

There is a new proposed definition for SMEs by the Lok Sabha based on the turnover of the company. It was taken keeping global trends in view. It states that a small enterprise will be one that has an annual turnover of 5 crores to 75 crores and a medium enterprise will be one that has an annual turnover between 75 crores and 250 crores.

This new definition is supposedly meant to bridge the gap between the manufacturing and servicing industries. The market trend shortly will confirm if this move is a success or not. An SME loan will help businesses generate these defined revenues, and they can continue availing government benefits offered to SMEs.

Before going into more detail about SMEs, let’s look at some of the government statistics on the sector to gain a better understanding.

  • Number of SMEs in India: The number is estimated to be at 42.50 million- registered & unregistered together. A staggering 95% of the total industrial units in the country.
  • SME & Employment opportunity: Employs about 106 million, 40% of India’s workforce. Next only to the agricultural sector.
  • Products: Produces more than 6000 products.
  • GDP Contribution: Currently, around 6.11% of the manufacturing GDP and 24.63% of Service sector GDP.
  • SME Output: 45% of the total Indian manufacturing output.
  • SME Exports: 40% of the total exports.
  • Bank Lending: Accounts for 16% of bank lending.
  • Fixed Assets: Current fixed assets at INR 1,471,912.94 crore.
  • SME Growth Rate: Has maintained an average growth rate of over 10%.

How do SMEs contribute to the economy?

The SME sector was recognized as an organised sector in the 1960s. Since then, it has come a long way and is now proving to be one of the fastest moving sectors in the country because of its dynamic and vibrant nature. Their capital cost is comparatively low, and these businesses are generating some great employment opportunities in urban as well as rural areas.

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Be it the servicing or manufacturing industry, SMEs are playing a major role in bridging the urban-rural gap and helping raise the per capita income. Thus, contributing to the socio-economic development of the country. It is easy to be the owner of small businesses, and the benefits include significant earnings, low investment, flexibility in operations, and dynamic technology. All you need is an idea and an MSME loan, and you will be contributing to the nation’s development. Along with generating employment, SMEs also create new young entrepreneurs since there’s knowledge, skill development, and training being provided.

What are the challenges in the SME sector?

Challenges are a part of every business, and they are overcome with the right attitude, analytical thinking, in-depth knowledge, calculative risk-taking capability, and support from external sources. Sometimes, limited finance can keep you from excelling in the field. However, getting an SME loan from a trusted source will help overcome this challenge and take you a step closer to a successful business.

Along with finance, SMEs sometimes face challenges in terms of lack of knowledge and skill as well, which can be overcome with research on global trends, the correct networking, and analysis of past cases. A poor marketing strategy due to lack of experience is another challenge. Therefore, entrepreneurs must identify the correct market, invest in the right technology, and make full use of all the benefits provided to SMEs by the government to overcome these challenges.

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Where is the SME sector headed in the future?

With the economy expected to touch 5 trillion by the year 2025, according to a recent statement by the government, there will be some revolutionary economic reforms that will surely take the SME sector to new heights. E-commerce, pharma, and food processing, to name a few, are industries that intellects are putting their money on. With the multiple tax rules abolished and registrations, tax payments, returns & refunds being done online electronically, there is transparency and ease of doing business.

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Physical interference is minimal and on its way to non-existence, which is boosting young minds to take the plunge into entrepreneurship. The market base of small businesses is expected to grow, since for a while now, there is no interstate tax hassle. Sales between states are much easier than before, and small businesses should take advantage of this.

In conclusion, the SME sector is here to stay and grow. Whether you are looking at earning a salary or running a business, the SME industry is a mountain of opportunities. According to a recent government statement, 40 lakh jobs in the industrial sector through SMEs is the focus of the state’s industrial policy 2019. With an aim to set up 20,000 units every year over the next 5 years where each unit will be having a 1 crore investment budget that is said to generate 30-35 jobs, the ultimate goal of generating 40 lakh jobs will be possible. If implemented in time and efficiently, the economy will overcome the current employment slowdown.