Challenges faced by SMEs in India

CONNAUGHT PLACE, India - June 20, 2013 - PRLog -- Small and Medium Enterprises (SMEs) contribute to economic development in various ways such as creating employment opportunities for rural and urban population, providing goods & services at affordable costs by offering innovative solutions and sustainable development to the economy as a whole. SMEs in India face a number of problems - absence of adequate and timely banking finance, non-availability of suitable technology, ineffective marketing due to limited resources and non availability of skilled manpower.

Small and Medium Enterprises (SME) play an important role in the development of a country. There are around 26 million MSME units in India, of which 13 million are SMEs. SMEs contribute nearly 45% share of manufactured output, accounting for 40% in overall exports of the country and providing employment to about 32 million people.

India has registered a high economic growth (6-9%) consistently over the last one decade. For the sustainability of this kind of growth proper nurturing of SME sector is imperative. The need of the hour is to empower the SME Sector so that it is able to take its rightful place as the growth engine of the economy.

Small and Medium Enterprises (SMEs) are often confronted with problems that is uncommon to the larger companies and multi-national corporations. These problems include the following:

Lack of IT Support

IT personnel are in high demand and are often attracted to bigger companies and MNCs. It is very difficult for SMEs to attract good IT personnel. It is even more difficult to retain them. Moreover, good IT personnel are expensive and may not be affordable by most SMEs. This would ensure that individual SME does not have to commit large amount of capital to have benefits of technology. In fact, the service provider – if sufficiently innovative- can structure their own costs of services to be paid be the SME around the cash flows of the SME concerned.

Lack of IT Literacy

Many of the employees in SMEs started from the ground up after working with the company for many years. Some of them are often holding supervisory and managerial positions. These employees may not be IT literate and often have high resistance to the changes in the working process that they are comfortable with after many years. This again offers a great opportunity for institutes like the NIIT etc. basic training of the SME entrepreneurs for making them technologically literate.

Lack of Formal Procedure and Discipline

Most SMEs do not have formal procedure or often these are not documented. Furthermore, there is tendency for these procedures to change frequently. This makes it difficult for third party and newcomer to understand the existing business practices and match them with the IT process.

Management Skills:

As in case if technology, there are opportunities for service providers to train entrepreneurs on issues like internal organization structure, control and delegation, emerging opportunities and review of internal skill sets.

Lack of Financial Resources

Indian entrepreneurial effort has always been substantially debt funded. With growing globalization and sustained tight money regime over last four/five years, the debit equity ratio levels need to be brought down by SMEs. SMEs today minimum 35% to 40% owned funds as against 20% to 25% in the 1980’s and 1990’s. The lack of venture and private equity funds which meet capital fund requirements for SMEs particularly in amount below Rs.100 crores has not helped. There is a dire need to supplement the efforts of SIDBI through establishment of multiple such entities under an institutional frame work in this area since the need is very large.

As a SME/SMI, financial resources are often limited. This often forces company to select a solution, which appear to be cheap initially. However, the hidden costs will start to emerge during implementation. This sometime causes the project to be abandoned or sometime sent the company into further financial crisis.

Lack of Human Resources

Implementations of some bigger scale IT project especially those that involve business process across different departments or require large amount of initial data entries require human resource during the implementation. Some SMEs are often in the stage of frequent fire fighting and shortage of manpower. This makes it very difficult for them to allocate time to carry out implementation. Furthermore, there is always a conflict between getting the daily routing work going and to do the "Extra" IT implementation.

Lack of Experience of Using Consultants

A good consultant often save time and effort, and help to prevent pitfalls during the IT projects. However, most SMEs are lacked of experience in working with consultants. The lack of knowledge in the field of IT makes them difficult in identifying good consultant for the projects. They often feel that the consultant costs are too high and they can handle it with their own staff. If the company has no staff that are experience and knowledgeable in t he IT project, avoiding external help often costs more to the company eventually.

Small and Medium Enterprises significantly contribute to industrial, economic, technological and regional developments in all economies, developed and developing, though the definitions of SMEs may vary. In India, it is estimated that there are over 1.4 million small industries, out of which about 30 per cent may relate to manufacturing. SSI sector account for about 40% of total industrial production, 35 to 40% of total exports and a significant share in employment (close to 2.5 million) and close to 8% of GDP. However SMEs or SSI sector (now called as micro, small and medium enterprises, MSMEs) are going through a transition phase including restructuring of strategies and facilities since the announcement of new policies in 1991 and thereafter progressive adoption of liberalized and globalizing policies in India. We will however continue to use 'SME' nomenclature as it is more popular, and widely accepted.

SMEs need to be vitalized for competitiveness and sustainable growth under new world trade rules and faster technological changes, including wider use of ICT (Information and Communication Technology) besides new business models. Several initiatives have been taken by the government from time to time to promote and support MSMEs, including new support measures, financing mechanisms, and gradual de-reservation of items for production. Innovations and technologies are becoming more crucial for competitiveness and sustainability of SMEs, in the emerging international trade regime. MSMEs (or SMEs) need to adopt internationalization strategies in tune with objectives and strategies and global supply chain management of transnational corporations (TNCs) or large companies