The Economic Times released an article earlier in June mentioning the obvious relation in terms of SME Exporters profits vs SMEs who operated in the local markets. Clearly it makes sense to export your services or products rather than supply them to the local markets. The deeper questions of course are perhaps food for thought. Are SMEs not being paid their due in the local market? That certainly could be the case when it comes to manufacturing where small vendors are pressured into unfavorable terms.
A CRISIL study on 1,800 small and medium enterprises (SMEs) in India has revealed that SME exporters earn higher operating profit margins (OPM), compared to their peers, which cater only to the domestic market.
Key findings of this study indicated that a larger proportion of SME exporters have operating profit margins of more than 10 per cent than their counterparts selling in the domestic markets.
SMEs included by CRISIL belonged to four export-oriented sectors: agricultural and processed foods, engineering, leather, and textiles. CRISIL believes that the main reason behind the variation in margins arises from superior pricing power enjoyed by these SMEs in international markets.
SME exporters have been able to leverage on India’s advantages, namely access to raw material, availability of cheap labour in abundance, deepening of expertise and skills in certain key industry clusters and identification and exploitation of niche markets available across the globe for Indian goods.
Some interesting information from the article was the different sectors from which the study was conducted – Agricultural and Processed Foods, Engineering, Leather, and Textiles. These are significantly diverse sectors yet each seems to have the same result.
The MSMED Act 2006 was by far the most popular topic in the previous version of this site. Continuing from there here again are the definitions and the links below direct to the MSMED Act from the Ministry website. It would be worth to go through the entire document as the scope and detail of the Act are quite important for small scale enterprises.
Manufacturing sector refers to enterprises engaged in manufacture or production, processing or preservation of goods. The definition of Micro, Small and Medium Enterprises under the manufacturing sector is as below:
- A micro enterprise is an enterprise where investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006 does not exceed Rs. 25 lakh;
- A small enterprise is an enterprise where the investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006] is more than Rs.25 lakh but does not exceed Rs.5 crore; and
- A medium enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006) is more than Rs.5 crore but does not exceed Rs.10 crore.
Services sector refers to enterprises engaged in providing or rendering of services. These will include small road & water transport operators (owning a fleet of vehicles not exceeding ten vehicles), small business (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lakh) and professional & self employed persons (whose borrowing limits do not exceed Rs.10 lakh of which not more than Rs.2 lakh should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lakh with a sub-ceiling of Rs.3 lakh for working capital requirements). The definition of Micro, Small and Medium Enterprises under the services sector is as below:
- A micro enterprise is an enterprise where the investment in equipment does not exceed Rs.10 lakh;
- A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs.2 crore; and
- A medium enterprise is an enterprise where the investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore.
Revision in Definitions
As per a recent news article from June 25th, 2012 the Business Standard there is hint of news that the definitions may be revised to reflect the inflationary aspects since the passing of the Act in 2006.
The definition of micro, small and medium enterprises (MSME) sector might be revised by raising the ceiling for investment in each segment. It would mean investing a larger sum, than prescribed under the current definition, would keep the enterprises in the MSME fold.
Other factors likely to get a play in the new definition of MSME include the number of employees in the enterprises and the turnover …
The MSME ministry wants to change the definition of MSME in the backdrop of changing patterns in the industrial sectors and overall inflationary conditions. Also, the ministry wants to evolve a mechanism so revisions of the definition and investment limits of MSME could be decided by the ministry itself, without the requirement of going to Parliament. “The investment limits should be revised time to time considering various factors, including annual inflation,” a senior MSME ministry official said.
The last revision was with the enactment of the MSME Act, 2006 and the definition is a part of the Act. The Act defined the MSME sectors overwriting the earlier concept of small-scale industries. Sector analysts and government officials said the definition in India was not in sync with international practices.
The India Manufacturing story has progressed from a stage of struggle for global recognition – behind China – to what can be described as a necessary hedge or option for most global manufacturing majors. A strong local consumption with all the necessary fundamentals has given India a renewed image in the manufacturing scenario. The questions are now longer of when will the investments come but rather more on the lines of how much, where and how to get started with feet on the ground.
Local Indian manufacturing companies have been forced to jump on the bandwagon. Some have adapted to the new way with elan and have turned the tables around by expanding operations overseas. Some of the old regime have fallen by the side and are being replaced by newer different companies that accept a global order. Its worth noting that many of the government industries still operate on the old ways of dependence on the state but these are only in areas where huge capital outlays are required such as in the Energy and Mining areas. Other examples exist of companies like BHEL where despite being saddled with the high operating costs of government run companies have adapted to the new order quite well given their size.
Some positives on the Indian Economy from the IBEF (India Brand Equity Foundation):
India is projected to see a faster growth of 7.5 per cent this fiscal, on the back of higher savings and investment rates, even as most of the Asia-Pacific economies are likely to expand at a slower pace, as per a United Nations (UN) report. “We expect it to expand by about 7.5 per cent in 2012-13,” said Nagesh Kumar, Chief Economist, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
While it would be worth celebrating some of these good looking numbers, as all things in India, the devil is in the details. Feel free to chip in with your comments on what I’ve written so far!