MSME and Business Entrepreneurship

Written and reviewed by Rohit Singh, Computer Science & Commerce faculty at UniDrill (MCA, Osmania University · 6 years teaching). Based on NCERT Business Studies Class XI, Chapter 9.

The biggest businesses in India are the smallest ones

The pickle in your kitchen, the handloom saree your aunt wears, the printer who makes your school notebooks and the workshop that repairs your cycle: all are small businesses. Individually each looks tiny. Together they form the MSME sector (Micro, Small and Medium Enterprises), which contributes about 29.7 per cent of India's GDP and about 49.66 per cent of its exports, and gives jobs to nearly 60 million people through around 28.5 million enterprises. After agriculture, it is the biggest source of employment.

It matters because it spreads industry across the country, uses local raw materials and skills, and lets ordinary people start with little capital.

The sector has eight subgroups: handlooms, handicrafts, coir, sericulture, khadi, village industries, small scale industries and powerlooms.

How India classifies an MSME

The Government of India defines an enterprise by two things together: its investment in plant and machinery and its annual turnover. This is a country where capital is scarce and labour is plentiful, so the definition looks at how much capital is committed.

By number, micro enterprises dominate: about 99.4 per cent of units are micro, 0.52 per cent are small and 0.1 per cent are medium.

The MSMED Act, 2006, in force from October 2006, dealt with definition, credit, marketing and technology up-gradation. It also brought medium enterprises and service enterprises under its purview.

Worked example. Lata's embroidery unit has Rs. 80 lakh invested in machinery and an annual turnover of Rs. 4 crore. Rs. 80 lakh is below Rs. 1 crore and Rs. 4 crore is below Rs. 5 crore, so it is a micro enterprise. If her investment were Rs. 8 crore and turnover Rs. 30 crore, both numbers would fall in the small band, so it would be a small enterprise.

Beyond the textbook. For the exam: answer with the limits in the table, and use both investment and turnover. In reality: the government revises these limits from time to time as the economy grows. The structure stays the same (investment plus turnover, three types), which is why learning the logic is more useful than memorising only the numbers.

Village and cottage industries. A village industry is any industry in a rural area that produces goods or renders services, with or without power, where the fixed capital investment per artisan or worker is within a limit set by the central government. Cottage industries, also called rural or traditional industries, are not defined by a capital investment limit as other small scale industries are.

Pause and predict: which of the two, village industry or cottage industry, is defined by a capital limit per worker?

Check your answer: The village industry. Cottage industries are not defined by a capital investment criterion.

Why small business matters, and why it struggles

Why it works this way. Most problems share one root: small size. A small unit buys little, so suppliers do not negotiate. It has little to pledge, so banks hesitate. It cannot afford professional managers, so marketing and quality suffer. Seeing the cause behind each problem helps you decide whether an option in an exam question is a problem or a strength.

Entrepreneurship: more than "starting a business"

Entrepreneurship is the process of setting up one's own business, as distinct from being an employee or following a profession. The person is the entrepreneur and the business unit they create is the enterprise.

Protecting what the mind creates: IPR

A small firm's most valuable asset is often an idea, a name or a design. Intellectual property (IP) is a creation of the human mind: an invention, a literary or artistic work, a symbol, a name, an image or a design used in business. The legal rights over such products are called intellectual property rights (IPR). IP is divided into industrial property (inventions, trademarks, industrial designs and geographical indications) and copyright (literary and artistic works).

Copyright covers literary work (books, poems, song lyrics, computer programmes), artistic work (drawings, paintings, sculpture, maps, logos) and dramatic work (screenplays, musical works, sound recordings, films).

Trademarks may be conventional (words, colours, labels, logos, packaging and shapes) or non conventional (sound and dynamic marks). Smell and taste are not recognised as trademarks in India.

Invention versus discovery. A patent can be granted only for an invention, not a discovery. Newton discovered gravity, which already existed in nature, so it cannot be patented. Alexander Graham Bell invented the telephone, creating something new, so it can be. The things that cannot be patented include scientific principles, abstract theories, frivolous inventions, inventions that are immoral or harmful to health, methods of agriculture and horticulture, methods of treatment, mere mixtures, traditional knowledge and inventions relating to atomic energy.

Pause and predict: a student finds that a certain plant extract heals wounds, a property that exists in nature. Can she get a patent for the discovery?

Check your answer: No. She has discovered something that already existed. A patent needs an invention, which is new, non obvious and capable of industrial application. A new process to make a cream from that extract could qualify.

Beyond the textbook. For the exam: a patent lasts 20 years and a design 10 years (renewable for 5), so a patent lasts longer. In reality: copyright generally lasts for the lifetime of the author plus 60 years in India, which is far longer than either. A trade secret has no fixed term at all, but it gives no protection if someone else independently works out the same formula, which is why firms choose between a patent and secrecy.

Beyond the textbook. For the exam: traditional knowledge is recorded in the Traditional Knowledge Digital Library. In reality: the library exists because patents on traditional uses of plants such as turmeric and neem were granted abroad and had to be challenged. Putting such knowledge on record gives patent examiners proof that it is old, so it cannot be claimed as new.

Startup India. The Startup India Scheme builds an ecosystem for nurturing innovation and startups, aims to trigger an entrepreneurial culture, create awareness, encourage dynamic startups and widen the supply of entrepreneurs by reaching under-represented groups. India has the third largest startup ecosystem in the world with more than 20,000 startups.

A realistic example: Greenleaf Herbals

Priya starts Greenleaf Herbals, a made-up unit that makes herbal soap, with Rs. 60 lakh of machinery and Rs. 3 crore of sales: a micro enterprise. She faces typical problems: banks want collateral (finance), she has no storage space for oils (raw materials) and she sells through a distributor who keeps a large margin (marketing). She registers her trademark for the brand name, relies on a trade secret for her blend and obtains a design registration for her soap's moulded shape. The entrepreneurial characteristics are visible too: she systematically tested the formula, tried a new product (innovation) and put her own savings at stake (risk taking).

Exam traps

60-second revision

Where this chapter connects

• Previous: Sources of Business Finance offers the answers to the first MSME problem, finance.
• Next: Internal Trade covers the small retailers and shopkeepers who are among the largest group of MSMEs.
• Also see: Forms of Business Organisation describes the legal forms a small enterprise may take.