Analysis on Performance Factors of Small- Scale Industry in India:

Times Series Data from 1990 to 2015

Rutuja Jagtap (1082180032)

Shruti Somani (1082180032)
Trimester 6
S.Y BSc Economics
Faculty of Economics
MIT- WPU
Index
Sr. No. Title Page No.
Acknowledgement 1
1. Abstract 2
2. Introduction 3
a. Objectives
b. Microfinance in India
3. MSMEs in India 7
a. Part 1 – MSMEs from 1995 to 2006
b. MSMEs Development Act, 2006
c. Part 2 – MSMEs from 2006 to 2019
d. An overview of MSMEs in 2020
e. SSI in India
4. Research 16
a. Review of Literature
b. Need and significance of research
c. Area of Research
d. Limitations of the study
5. Data Analysis 20
a. Source of the Data
b. Methods and Techniques of analysis
c. Results and Interpretation
6. Conclusion 26
a. Swot Analysis of SSIs
b. Suggestions and Improvements
7. Bibliography 28
8. Appendix 29
Acknowledgment

A Project usually falls short of its expectation unless guided by the right person at the right
time. Success of a project is an outcome of sincere efforts, channelled in the right direction,
efficient supervision and the most valuable professional guidance. We would like to take this
opportunity to express our gratitude to everyone who has helped us to make this project
possible.

Our sincere thanks to Doc. Amit Chatterjee and for guiding us at every step of the process of
our analysis and mentoring to make it possible for us to frame our ideas into something
concrete. Without him this project would surely have never reached the level it has.

We would also like to thank our Dean, Doc. Shailashree Haridas, for providing us with this
opportunity to come up with this project.

1
1. Abstract

The development of industries in any country has proven to benefit the economy. We see the
advanced economies like Japan, Germany, Great Britain, United Kingdom, Russia, the United
States of America are highly industrialized. Major importance is given to employment creation,
resource utilisation, income generation, reducing regional disparity, alleviating poverty,
discouraging rural-urban migration and so on by the developed nations. These effectives in
these determinants pave the way to growth and development of the country. Hence, the growth
of industrial sector is considered highly important.

The Micro, Small and Medium Enterprises are named as MSMEs. Different countries
categorize MSMEs in different ways based on nature of business, large size of population,
government policy, level of economic integration, administrative set-up and on pattern of
development of a particular country. In India the status of MSMEs has evolved and witnessed
various changes. The Ministry of MSMEs and Government of India have laid large importance
on the growth of the industries. The Development Commissioner has introduced various
schemes and programs to help finance them. This shift in focus has increased the contributions
of MSMEs, especially small- scale enterprises towards GDP of India. The resource allocation
is more efficient now. With the changes in the economy of India, the growth, employment,
production, exports, fixed investments, market value of fixed assets of the MSMEs has
changed. In this background, this research aims to analyse first, the evolution of MSMEs from
the period of 1995 to 2020 and second, the sustainability and determinants of SSIs in India. In
addition to this, the study also highlights the importance of microfinance in India since it has
encouraged the enterprises to be more efficient and productive. Microfinance is a tool to
develop MSMEs. Therefore, the role of SSIs in the economic activity of country is very
significant and pragmatic. We have analysed the impact of determinants of the growth of SSIs
in the long run and short run to find out the extent the factors affect each other is represented
in percentage using the Econometrics model like Vector Error Correction Model (VECM) and
Variation Decomposition Model (VDM). Major findings of the study are as following: First,
impact of microfinance on MSMEs. Secondly, evolution of MSMEs and change in the break-
even points, sustainability of SSIs.

Keywords: MSMEs, Employment, GDP, Small- Scale Industry, Microfinance, Ministry,

VECM and VDM

JEL Codes: C22, C51, E24, L16, L52, O40,

2
2. Introduction

As per 2011 census, out of the 121.01 crores of the total population of the country, 68.84
percent people live in villages and out of them more than 25 percent live below the poverty
line and lead a miserable life.1 Credit is vital to the poor for overcoming the inevitable and
common imbalance between income and expenditure. Credit is also crucial to the poor for
income generating activities, like investing in their marginal farms or other small-scale self-
employment ventures. Their access to formal banking channels, however, is limited due to their
low resource bases as well as due to the nature of formal credit institutions.

The concept of microfinance originated in Bangladesh in seventies through a pioneering

experience by Dr.Mohammad Yunus who was then a Professor of Economics. Dr.Yunus and
the Grameen Bank (which he founded) were awarded the Nobel Peace Prize in 20062.
Microfinance is a banking service provided to unemployed or low-income individuals or
groups who otherwise would have no other access to financial services. it is a way to provide
small business owners and entrepreneurs access to capital. Microfinance is a concept that is
helping the poor to avail of an create opportunities for economic growth. Microfinance is an
important tool to promote business development. In India, microfinance has filled the efforts
of rural development, women empowerment and wealth generation.

The microfinance has evolved due to the efforts of committed individuals and financial
agencies to promote self-employment and contribute to poverty alleviation and provision of
social security. There is a difference between ‘Microfinance’ and ‘Microcredit’. Microcredit
gives more emphasis on loans while Microfinance includes support services where channels
for thrift, market assistance, technical assistance, capacity building, social and cultural
programs are opened. Microcredit enables the poor people to be thrifty and helps them in
availing the credit and other financial services for improving their income level and raising the
living standards. India has been able to develop its own model of microfinance organizations
in the form of savings and credit groups known as the Self-Help Group (SHGs), which are
bank-linked. The microfinance loan is provided without collateral.

1
Planning Commission, ‘Estimates of Poverty 2011-12’ Government of India.
2
http://www.grameen-info.org.

3
Microfinance has emerged as a needful programme to cater to the needs of the most
underprivileged people i.e. tribal, dalits and women.

The future of the industrial development of this country depends to a large extent on the growth
and development of the potentials of small-scale industries. In fact, small scale industries are
termed as ‘nation developing motors. They make significant contribution to rural
industrialization.

4
 a. Objectives

This research has the following objectives:

1. to study and analyse the evolution of MSMEs

2. to analyse the impact of SSIs on the GDP of India
3. to check the relation of factors affecting the growth of SSIs in the long run.

b. Microfinance in India

Microfinance is a source of finance to the poor segments of society. It includes loans, savings,
credit, insurance services, money transfer and other basic financial services to the economically
weaker section of society. Delivery mechanism incorporates the systems that can be used to
ensure that micro finance products reach remote area and poor. It provides credit and other
financial services of small amount to the economically disadvantaged segment of society in
urban as well as rural areas. Micro finance institutions include N.G.Os, Credit Unions,
N.B.F.Cs. Cooperatives and banks. In India, the future of microfinance is largely depending
upon the self-help groups (S.H.G.)

Microfinance is one of the most visible innovations in anti- poverty policy in the last half-
century, and in three decades it has grown radically. The most important benefit of
microfinance in India is that it helps long-term financial independence in these poverty-stricken
areas. Microfinance help sustained impact by educating recipients on how to create their own
businesses and how to properly manage and grow their money.

There is a rapid growth in the strength of microfinance in India and several other countries.
Undoubtedly it has been successful in bringing formal financial services to the poor. People
believe that it has provided money to the poor families and it has the strength to increase
investments in health, education and empowerment of women. Microfinance institutions
(MFI’s) have created a massive social infrastructure uniquely positioned to reach millions of
clients on a regular basis. Microfinance is no more a financing channel but it has also emerged
as a strong distribution channel with numerous credit products, repayable over a longer period
of time, and solar lamps, fuel-efficient stoves are some of them.

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FINACIAL INCLUSION:

➢ Financial inclusion is the delivery of financial services at affordable costs to vast

sections of disadvantaged and low-income groups.

➢ Financial inclusion may be defined as the process of ensuring access to financial

services and timely and adequate credit where needed by vulnerable groups.

➢ The Government of India and the Reserve Bank of India have been making continuous
efforts to promote financial inclusion.

➢ The fundamental objective of promoting financial inclusion is to reach to the financially

backward Indian population.

MFIs:

➢ The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and
other mainstream Financial Institutions and provide financial and support services to
the poor.

➢ These institutions not only offer micro credit but they also provide other financial
services like savings, insurance, remittance and non-financial services like individual
counselling, training and support to start own business and the most importantly in a
convenient way.

➢ As per MFIN as on 31 March 2019, the microfinance industry has a total loan portfolio
of R187386 crore, representing a year on year growth of 38 %. The share of portfolio
outstanding of the various players indicate that the bank share was R 61046 crore (33
%) NBFC- MFIs R 68868 crore (37 %) and Small Finance Banks R 34679 crore (18%).
NBFC R20681 crore (11%) and others R 2112 crore (1.13%). The year on year growth
was NBFC MFIs (42%), Banks (36%), SFBs (25%), NBFC (59%) and Others (30%). 3

3
https://www.nabard.org/auth/writereaddata/tender/1207192354SMFI%202018-19.pdf

6
3. MSMEs in India

The micro, small and medium enterprises (MSMEs) is aptly regarded as the backbone of the
Indian economy. The small-scale sector occupies a position of prominence in the Indian
economy, contributing to more than 50% of the industrial production value accumulation
terms. The sector accounts for one third of the export revenue and employs the largest
manpower next to agriculture. MSMEs are recognized as one important constituent of the
national economies.

The study highlights the consequence of the MSME and their role in the economy and the
impact of economic reforms on growth pattern and performance of MSMEs. The MSMEs
should be encouraged to make a sustainable contribution to the national income, employment
and exports. SMEs area major employment provider and donor to GDP, they are burdened with
the responsibility of providing employment while at the same time experiencing slow-moving
growth because of dividing agriculture sector and globalization.

a. Part 1 – MSMEs from 1995 to 2006

Till the year 1999 the MSMEs were known as Ministry of Small-Scale Industries and Agro &
Rural Industries (SSI & ARI)]. The introduction of LPG policies in India provided a framework
for government support in the context of liberalisation, which sought to replace protection with
competitiveness to infuse more vitality and growth to MSEs in the face of foreign competition
and open market. Supportive measures concentrated on improving infrastructure, technology
and quality.

Testing Centres were set up for quality certification and new Tool Rooms as well as Sub-
contracting Exchanges were established. The Small Industries Development Bank of India
(SIDBI) and a Technology Development and Modernisation Fund were created to accelerate
finance and technical services to the sector. A Delayed Payment Act was enacted to facilitate
prompt payment of dues to MSEs and an Industrial Infrastructure Development (IID) scheme
was launched to set mini industrial estates for small industries.

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A Credit Linked Capital Subsidy Scheme was launched to encourage technology upgradation
in the MSE sector and a Credit Guarantee Scheme was started to provide collateral-free loans
to micro and small entrepreneurs, particularly the first-generation entrepreneurs.

The exemption limit for relief from payment of Central Excise duty was raised to Rs.1 crore
($0.25 million) and a Market Development Assistance Scheme for MSEs was introduced.

Limits Specified under Manufacturing Enterprises Service Enterprises

MSMED act, 2006 Plant and Machinery Equipment
(excluding land and building) (excluding land and building)

Micro Enterprises < Rs 25,00,000 < Rs 10,00,000

Small Enterprises Rs 25,00,000 – Rs 1,00,00,000 <1,00,00,000

Medium Enterprises Not defined Not defined

Table 1: Definition of MSMEs before 2006

b. MSMEs Development Act, 2006

Micro, Small and Medium Enterprises Development Act, 2006 The Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006 seeks to facilitate the development of these
enterprises as also enhance their competitiveness. It provides the first-ever legal framework for
recognition of the concept of “enterprise” which comprises both manufacturing and service
entities.

It defines medium enterprises for the first time and seeks to integrate the three tiers of these
enterprises, namely, micro, small and medium. The Act also provides for a statutory
consultative mechanism at the national level with balanced representation of all sections of
stakeholders, particularly the three classes of enterprises; and with a wide range of advisory
functions.

Establishment of specific Funds for the promotion, development and enhancing

competitiveness of these enterprises, notification of schemes/programmes for this purpose,

8
progressive credit policies and practices, preference in Government procurement to products
and services of the micro and small enterprises, more effective mechanisms for mitigating the
problems of delayed payments to micro and small enterprises and assurance of a scheme for
easing the closure of business by these enterprises are some of the other features of the Act.

The Act aims at facilitating the promotion and development and enhancing the competitiveness
of small and medium scale enterprises and seeks to:-
• Provide for statutory definitions of "small enterprise" and "medium enterprise”.
• Provide for the establishment of a National Small and Medium Enterprises Board, a
high-level forum consisting of stake holders for participative review of and making
recommendations on the polices.

The MSMED act, 2006 introduced a new definition for MSMEs on the basis of Investment
(INR)

Limits Specified under Manufacturing Enterprises Service Enterprises

MSMED act, 2006 Plant and Machinery Equipment
(excluding land and building) (excluding land and building)

Micro Enterprises < Rs 25,00,000 < 10,00,000

Small Enterprises Rs 25,00,000 – Rs 5,00,00,000 Rs 10,00,000 – Rs 2,00,00,000

Medium Enterprises Rs 5,00,00,00 – Rs 10,00,00,00 RS 2,00,00,000 – Rs 5,00,00,000

Table 2: Definition of MSMEs after MSMED Act,2006

c. Part 2 – MSMEs from 2006 to 2019

As per the Public Procurement Policy, Micro and Small Enterprises having registration with
District Industries Centre or Khadi and Village Industries Commission or Khadi Village and
Industries Board or Coir Board or National Small Industries Commission or Directorate of
Handicrafts and Handlooms or any other body specified by Ministry of MSME (“Ministry”)
are provided certain benefits under the Public Procurement Policy.

9
It specifically provides that where a Micro and Small Enterprise supplies any goods or renders
any services to a buyer, the buyer is required to make the payment on or before the date agreed
upon by them and in no case, the period can exceed 45 days from the date of acceptance.

Table 3: Increase in the Investments limits of MSMEs

Source: MSME Amendment Bill, 2015

d. An overview of MSMEs in 2020

Amidst the crisis of the pandemic caused due to Covid- 19 the definitions of MSMEs have
gone under a change.

The first tranche (2.97% of GDP) focused on enabling the Indian economy’s backbone –
MSMEs that employ around 11 crore people and have a GDP share of approximately 29 per
cent. The objective was to infuse liquidity in the MSME sector.

This included Rs 3 lakh crore collateral-free loans and Rs 50,000 crore equity infusion for
MSMEs through Fund of Funds. Liquidity relief measures worth Rs 30,000 crore were also
announced for NBFCs, HFCs etc. and Rs 90,000 crore for power distribution companies.
Allocation of an additional Rs 40,000 crore for the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) for job creation was done. To improve ease of doing
business among MSMEs, solvency periods were revised. The period increased from six months

10
to up to one year along with excluding Covid-19 related debt from the ‘default’ category under
the IBC Code.

The definition of MSMEs has also been revised so that they continue to receive the benefits
from the government. Under this new scheme, the definition of micro SME has been revised
upwards to Rs 1 crore from the earlier limit of Rs 25 lakh, and the investment criteria will now
be Rs 5 crore from the earlier limit of Rs 1 crore. All receivables due to MSMEs from
government and central PSUs will be cleared in the next 45 days. Small Industries
Development Bank of India (SIDBI) has announced a 5 per cent rate concession on all loans
to MSMEs.

The MSME sector, the majority of which relies on day-to-day business to stay afloat, continues
to be the most vulnerable owing to the lockdown and a decrease in demand. According to a
survey covering 5000 MSMEs, conducted by the All India Manufacturers’ Organisation
(AIMO) has revealed that 71% of the businesses weren’t able to pay salaries in March. The
survey further revealed that a whopping 43% would shut shop if panic extends beyond eight
weeks.

ECONOMIC PACKAGE OF 20 LAKH CRORE

Earlier, the MSMEs were defined on the basis of investments put in, now the revised definitions
will also include turnover of the company under the Atmanirbhar Bharat Package. The
definition being changed is done in the favour of MSMEs. There has always been this fear,
among successful MSMEs also, that if they outgrow the size of what has been defined as an
MSME, they will lose their entitled benefits. This is why MSMEs like to remain within the
definition rather than grow. With the revised definitions of MSMEs, they will not have to worry
about growing their size and can still avail benefits.4

 EPF support for businesses and workers: ₹2,800 crore

 Reduction in EPF rates: ₹6,750 crore
 Special liquidity scheme for NBFCs, HFCs and MGIS: ₹30,000 crore
 Partial credit guarantee scheme 2.0 for liabilities of NBFCs and MFIs: ₹45,000 crore

4
Finance Minister Nirmala Sitharaman on 20th May, 2020

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  DISCOMS: ₹90,000 crore reduction in TDS/TCS rates: ₹50,000 crore
 Subordinate Debt to provide equity support to stressed MSMEs, of which govt support
to CGTMSE limited to Rs 4,000 crore: Rs 20,000 crore
 Equity infusion for MSMEs through Fund of Funds, Mother Fund and few Daughter
Funds to operate it, govt contribution likely to be Rs 10,000 crore to FoF: Rs 50,000
crore
 *EPF support for business and workers for 3 months: Rs 2,500 crore
 *Liquidity injection by REC and PFC for Power Distribution Companies (Discoms):
Rs 90,000 crore

After studying all of the above relief to MSME, we can certainly say that it will boost the
liquidity in the sector and many companies will be prevented from turning bankrupt. This will
also help to secure the jobs of lakhs of people associated with MSME.

This help will provide sustainability to the firms in the long run. The ‘make in India’ campaign
can be successful only with the support of MSME. Post covid 19 crisis, these firms can gain
momentum and increase their production. (as the economic package was announced 15 days
ago, quantitative data and figures showing their impact on MSME are not available)

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BREAK-EVEN ANALYSIS FOR MSME:

Particulars 1 year
FIXED COST
Salaries 216000
Repairs and maintenance 5160
Insurance 2581
Administrative expenses 18000
Depreciation 25806
Interest on term loan 27704
TOTAL 295251
VARIABLE COST
Raw materials 1780800
Wages 216000
Power charges 24000
Selling 60000
Interest on WC loan 17976
TOTAL 2098776
BEP5 in % of installed capacity 56.40
DSCR6 3.95
Table 4: Break Even point for MSMEs

Source: https://my.msme.gov.in/MyMsmeMob/MsmeProjectProfile/Pages/12_16.html

The conditions for break-even point may change taking into consideration the economic
situations and pandemics.

e. SSIs in India

The small-scale industries of India is an important driving factor for the growth of Indian
Economy. The small-scale industries contribute significantly in the development of Indian
economy through export production, domestic production, low investment requirements,

5
Break Even Point
6
Debt Service Coverage Ratio

13
operational flexibility, technology-oriented enterprises etc. The advancement of small-scale
industries, therefore, becomes a major area of policy focus. It contributes significantly in the
economic and social development of the country by fostering entrepreneurship and generating
largest employment opportunities at comparatively lower capital cost. This helps in reducing
the unbalanced income distribution among the people. The significance of this sub-sector in
India is well known, as grown enormously in past two decades

Fig: Broad Classification of SSIs

Source: Vasant Desai, Management of Small- scale industry, 6th revised edition, page 2

As the changes in the Indian Economy affected MSMEs and its definition, consequently the
definition of small- scale industry also changed across years.

14
Table 5: Changes in the definition of SSIs in terms of investments

Source: Laskar, 2010

15
 4. Research
a. Review of Literature

Sr. No. Topics/Content Timeline Model/Methods Variables Data Sources

1 An empirical 1994-95 Simulation size, productivity, and Annual
study on to 2010- technique and employment Reports of the
measurement of 11 Ordinary Least Ministry of
efficiency Square MSMEs; and
productivity and regression Handbook of
competitiveness (logistic Industrial
of small-scale regression) Policy and
industries in Statistics of
India the Ministry
of Commerce
and Industry
2 Small scale 1974-75 Chi-Square Test, Interrelationship Primary Data:
engineering to 1978- Analysis of between SSI and large Interviews and
industry in 79 variance, T-test industries, qualification, questionnaire
Coimbatore and scaling employment, nature of
region a study of products,
interrelationship
with large scale
industry
3 A Study of 2008- Frequency, (1) Social status of Questionnaire,
financing small 2012. percentage, small-scale industries, observation,
scale industries comparison, (2) employment size, personal
in Raigad tables, graphs, (3) capital investment interview,
district average, charts, on land and building, (4) discussion,
correlation, and capital investment on mobile
Z-test, level of plant and dialogue,
prospect and machinery, (5) industry
differences groupwise, (6) location,
and (7) year of
registration.

16
 4 A study on 2010 Scaling Fund size, method of Questionnaire
microcredit for allocation, volume of and personal
small and savings, Amount of interview
medium loans, Interest rate
enterprises charged
SMEs in India
5 Growth and five-point Likert organizational factors,
Challenges Of scale, growth of MSMEs,
MSMEs With challenges of MSMEs
Special
Reference To
Peenya
Industrial Area
Bangalore

Sr. No. Author Findings Results

1 Avishek 1.competitiveness of the unregistered SSIs of
Chanda India in terms of efficiency and productivity 1. Technical efficiency of the
growth 2. efficiency of inter-sectoral unregistered micro and small
allocation of resources for productivity enterprises is low at various
growth of the unregistered manufacturing industries disaggregate.
sector of India. In addition, it also analyses 2. Efficiency is very low at
the key determinants of efficiency and the micro enterprise level
productivity growth and the importance of
clusters for improved competitiveness of
unregistered SSIs.

17
2 Thanulingam, Interrelationship between SSI and large-scale Interrelationship is not
N industries, Factors influencing the encouraging between the SSIs
interrelationship, benefits to SSI and Large-scale industries,

3 Kale Sonali Understand and assess the growth pattern of The growth of small-scale
Gopal small-scale industries in Raigad district, to industries in terms of units
study and assess the problems and prospects registered in Raigad district is
of financing small scale 116.67 in 2012 over 2008 and
industries in Raigad district it is not moving consistently
upward direction but shows
fluctuating pattern during
2008-2012 period.
Lokhande, Identify the effective financial service source MSEs are aware of money
4 Madhavi for MSMEs in India lending schemes, banks do
not take measures to promote
products and services to
MSEs.
5 VANDANA Verify whether the challenges faced by the six influencing challenges are
HEDGE MSMEs are affecting the growth of MSMEs negatively influencing the
or not. growth of MSMEs, influence
of governmental challenge is
higher than all the other
challenges.

f. Need and significance of research

No research has been conducted to analyse the effect of factors like units, employment,
production, production per employee and exports of SSI in India to check their effect in long
run. This research will help analyse how these factors are corelated and cointegrated in the long
run.

Further, studies have been conducted restricted to particular states in India to analyse the
performance of SSIs in India. We have presented the break- even analysis of MSMEs to check
their self- sufficiency and sustainability.

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 g. Area of Study:

The area of this research is country of India. SSI units all situated all over India are taken to
analyse and estimate the factors in long run.

h. Limitations of the study

A reliable database is the key input in any policy decision-making process. This is more so for
the MSME sector in view of its large size and wide disparity among the enterprises within the
sector. The Ministry has so far conducted three Census in the year 1971-72, 1992-93 and 2002-
03 for strengthening/updating the database on MSE sector. However, the long gap between the
Census has limited the reliability of the MSE database.

Methodology

Research methodology is the specific procedures or techniques used to identify, select, process,
and analyse information about a topic. We have collected secondary data from reliable sources
like the government websites to carry out our research.

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5. Data Analysis

a. Source of the Data

The secondary data is taken from governments websites of India, articles, books, research
papers and so on.

b. Methods and Techniques of analysis

i. OLS
ii. Johnsen cointegration test

It is used to test plausible economic relationships, under the hypothesis of a long-run

equilibrium between non-stationary time series. It implies that the series are related and can
be combined in a linear fashion. Even if there are shocks in the short run, which may affect
movement in the individual series, they would converge with time (in the long run). If series
are cointegrated, they exhibit a long-run relationship. It is performed to check a long run
relationship between the variables.
Ho: no cointegrating equation
H1: There are cointegrating equation
To perform this test we have kept all the variables in their level form. If Trace and Max statistics
>5% critical value we reject the null hypothesis.

iii. ADF:

Before conducting Variance Decomposition Factor and VECM, we need to make the variables
stationary at the same level. Hence, we use Augmented Dicky Fuller Test to make the data
stationary. Stationarity implies that the variance and mean of the variable are constant and
independent of time. After applying ADF, we observe that all the variables in this model are
stationary at 1st difference. Here,
Ho: the series is not stationary
H1: the series is stationary
If the probability value of Augmented Dicky Fuller t-statistic is > 0.05 we reject the null
hypothesis concluding that the data is stationary.

iv. VARIANCE DECOMPOSITION FACTOR

20
Variance decomposition of the forecast error gives the percentage of unexpected variation in
each variable that is produced by shocks from other variables. It indicates the relative impact a
particular variable has on other. It enables assessment of economic significance of this impact
as a percentage of the forecast error for a variable sum to one. We have used this method to
forecast relationship between the variables in coming 10 years. We have used this method to
study whether these variables will have endogenous or exogenous impact on each other. We
consider that, first 4 periods are short run and last 6 periods are long run.

v. Vector Error Correction Model

c. Results and Interpretation

Dependent variable: GDP
Independent variable: employment, production, production per employee, export of SSI and no
of units.
i. OLS:
Coefficient Values All coefficients measure the marginal
contribution of the coefficient to the
dependent variable.
Production has an inverse relationship with
GDP since its coefficient is negative.
Std. Error Standard error explains the deviation of data
points from the mean and variance of data.
t-Statistic Here we notice that all the dependent
variables are significant at 5% confidence
interval as their probability value is <0.05.
R2 R2 tells us that independent variables explain
98% variation in dependent variable
DW stat As the Durbin-Watson Statistics is 2.1238,
there is presence of negative autocorrection
Multicollinearity As the centred variance inflation is > 10,
there is presence of multicollinearity
Heteroskedasticity The p-Value of Chi-sq > 0.05, hence there is
presence of heteroskedasticity

21
 ii. Johnsen cointegration test:

In our model, we reject null hypothesis concluding that the variables are cointegrating.

iii. Variance Decomposition Factor:

• Variance Decomposition Factor of LGDP:
In short run in year 1, 100% of forecast error variance in real GDP is explained by the
variable itself. All other variables in the model do not have any strong influence on
real GDP. These variables have strong endogenous impact.
In short run in 2nd year, 93% of forecast error variance in real GDP is explained by the
variable itself. Other variables exhibit strong exogeneity as their percentage is very
less, that is they have very weak influence on predicting GDP.
In short run in year 3 and 4 the case is almost similar to year 2.
In long run i.e in year 5,6,7,8,9,10 we observe that the forecast error variance of GDP
22
 is decreasing to some extent but still continues to be a good predictor of itself. The
remaining variables exhibit strong exogeneity in predicting GDP in long run as well.

• Variance decomposition of employment:

The case is similar to GDP. In short as well as long run, the variables exhibit strong
exogeneity. Also, the influence of employment forecast error variance with itself
decrease with 10 years. The variable strongly predicts itself.

• Variance Decomposition of Production:

Employment is a strong predictor of production in the short run but its influence
reduces as we go to the long run. Production represents itself very strongly in the
short run than in long run. GDP has significant impact and is endogenous in the long
run as compared to short run. Other variables have barely any impact on production.

• Variance decomposition of production per employment:

GDP is a strong predictor of production per employee in the long run as compared to
the impact in short run. The impact of GDP on production keeps on increasing
through the time period of 10 years. Employment also has influence on production per
employee. The influence is very less for short run but increases in long run.
Production is strong indicator in short run but its impact decreases in long run. The
variable is not a good predictor itself. Other variables show strong exogeneity.
23
• Variance decomposition of exports:
The variable is a predictor of itself in short run but its influence decreases in long run.
Units have endogeneity for exports in the 1st years as compared to other years. All other
variables have less impact on exports in short run as compared to long run. GDP is
strong indicator of exports.

• Variance decomposition of no. of units:

Employment shows very high influence on units in short run. The influence keeps
decreasing up to a certain extent in the coming years. GDP exhibits strong exogeneity
in the short run but its impact increases in the long run. The variable is not a good
predictor of itself.

24
 iv. VECM:
Vector Error Correction Estimates
Date: 05/29/20 Time: 01:42
Sample (adjusted): 3 26
Included observations: 24 after adjustments
Standard errors in ( ) & t-statistics in [ ]

Error Correction: D(LGDP) D(LEMPLOYMENT) D(LPRODUCTION) D(LPRODUCTIONPEREMPLOYEE) D(LEXPORTS) D(LUNITS)

CointEq1 0.719263 0.391892 1.153859 0.756527 4.584019 0.42391

-0.64738 -1.43218 -1.46759 -0.43729 -1.09806 -1.53982
[ 1.11104] [ 0.27363] [ 0.78623] [ 1.73003] [ 4.17464] [ 0.27530]

D(LGDP(-1)) -0.79805 -0.463981 -1.798806 -1.251297 -5.653915 -0.524379

-0.80853 -1.7887 -1.83292 -0.54615 -1.37141 -1.92313
[-0.98704] [-0.25940] [-0.98139] [-2.29113] [-4.12271] [-0.27267]

D(LEMPLOYMENT(-1)) -2.126479 1.167505 7.522978 5.885241 -7.750091 1.61272

-4.14583 -9.17172 -9.39851 -2.80043 -7.03204 -9.86105
[-0.51292] [ 0.12729] [ 0.80044] [ 2.10155] [-1.10211] [ 0.16354]

D(LPRODUCTION(-1)) 2.706471 -1.517002 -8.313577 -6.284472 8.056463 -2.014264

-4.35755 -9.6401 -9.87847 -2.94345 -7.39115 -10.3646
[ 0.62110] [-0.15736] [-0.84159] [-2.13507] [ 1.09001] [-0.19434]

D(LPRODUCTIONPEREMPLOYEE(-1)) -3.008595 1.829854 9.098063 6.722389 -7.913008 2.374233

-4.51156 -9.98081 -10.2276 -3.04747 -7.65237 -10.7309
[-0.66686] [ 0.18334] [ 0.88956] [ 2.20589] [-1.03406] [ 0.22125]

D(LEXPORTS(-1)) 0.057139 0.064423 0.214408 0.148706 0.283869 0.06724

-0.12881 -0.28497 -0.29201 -0.08701 -0.21849 -0.30638
[ 0.44359] [ 0.22607] [ 0.73424] [ 1.70908] [ 1.29926] [ 0.21946]

D(LUNITS(-1)) -0.389755 0.314109 0.733895 0.384399 0.420592 0.355465

-0.39823 -0.88099 -0.90278 -0.269 -0.67546 -0.9472
[-0.97872] [ 0.35654] [ 0.81293] [ 1.42901] [ 0.62267] [ 0.37528]

C 0.144683 0.097704 0.204296 0.10284 0.531385 0.101596

-0.05234 -0.11579 -0.11865 -0.03535 -0.08877 -0.12449
[ 2.76441] [ 0.84383] [ 1.72185] [ 2.90893] [ 5.98581] [ 0.81611]

The only cointegration equation is relevant at 4.17464. The coefficient is positive at 4.584. this
implies that previous years errors will be corrected in the following years at an adjustment rate
of 45.84%.
Now, GDP and production per employee have a relation. The t-stat absolute value of coefficient
is significant as it is greater than 2. Thus, in short run PPE will exhibit reduction on GDP by
125%. Similarly, production per employee will exhibit and increase on employment,
production and increase on itself
Again, in short run the coefficient is significant and exports will exhibit reduction in GDP.

25
6. Conclusion

SWOT ANALYSIS OF SSI IN INDIA

STRENGHTS WEAKNESS

• EXTENSIVE PROMOTION AND • LOW PRODUCTION CAPACITY

SUPPORT FROM GOVERNMENT • LIMITED CAPITAL
• LACK OF TECHNICAL
KNOWLEDGE
• SCARCITY OF SKILLED
LABOUR
• HIGH COST OF RAW
MATERIALS
• LACK OF KNOWLEDGE OF
FOREIGN MARKETS
OPPORTUNITIES THREATS

• EXPORT PROMOTION • LABOUR INCONSISTENCY

• INEFFECTIVE MARKETING
STRATEGIES
• POOR INFRASTRUCTURE
• SEVERE COMPETION
• ABSENCE OF TARGET
MARKETS FOR PRODUCED
GOODS

India aims to become a USD 5 trillion economy by 2025 and the microfinance industry will
play a leading role in uplifting the lives of millions of low-income households and enabling
them to contribute to the country’s economic growth. As the microfinance industry tackles the
current set of challenges, it is imperative for the industry to establish strong governance and
regulatory practices.

26
 a. Suggestions of the study

Small scale industries play a crucial role in economic development of India. The SSI sectors
have recorded significant growth and impressive performance. The Govt. of India has taken
number of initiatives & is in the process of gearing up the growth of these Micro, Small &
Medium Enterprises in the country. The results demonstrate that MSMEs face many problems
but access to proper finance can solve their problems. The furtherance and advancement of
SSIs is essential for the development of Indian economy to achieve impartial distribution of
income and wealth, economic self-dependence and economic sustainable developments. To
boost the SSI sector so that it can take deserved place in the growth mechanism of Indian
economy, it is essential to support MSMEs by educating them to make optimum utilisation of
inbuilt capacity to be successful both under human and economic activity.

b. SCOPE OF FURTHER STUDY:

Further study can be carried out assessing the impact of coronavirus on small scale industries
after the new economic package. The changes in definition will affect the further investments
and revenues of MSMEs. Researchers can again forecast the performance of MSMEs in India.

Studies can further suggest various policy measures to come out of crisis.

27
7. Bibliography

1. https://msme.gov.in/
2. https://shodhganga.inflibnet.ac.in/bitstream/10603/5387/10/10_chapter3.pdf
3. https://www.nabard.org/auth/writereaddata/tender/1207192354SMFI%202018-
19.pdf
4. file:///C:/Users/user/Downloads/SmallScaleIndustriesandEconomicDevelopment.p
df
5. https://msme.gov.in/relatedlinks/annual-report-ministry-micro-small-and-medium-
enterprises
6. https://www.pwc.in/assets/pdfs/consulting/financial-services/vision-of-
microfinance-in-india.pdf
7. https://www.sidbi.in/en/micro-finance
8. https://mfinindia.org/mfin-publications
9. http://dcmsme.gov.in/
10. https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=18814
11. https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications
12. http://www.mospi.gov.in/search/node/
13. Tables
Annual Reports: msme.gov.in
14. Performance and consequences of gst for micro, small & medium enterprises,
(SHETTY DEEPA THANGAM GEETA, Dr.SP.MATHIRAJ, R. SAROJA DEVI,
N. NAGALAKSHMI , M. VINOTH)
15. Role of Small-Scale Industries In Economic Development (Munjpara, Kantilal B.)
sg.inflibnet.ac.in/handle/10603/90257
16. Role of Financing Policies and Financial Institutions for Micro, Small and Medium
Entrepreneurs (Abhijeet Biswas, Research Scholar, Faculty of Management
Studies, Banaras Hindu University)
https://docplayer.net/11246800-Role-of-financing-policies-and-financial-
institutions-for-micro-small-and-medium-entrepreneurs.html
17. https://udyogaadhaar.gov.in/

28
8. Appendix

29