New Delhi, 3 March 2011

Business Session III:

“SMEs and Micro Enterprises ‘The Growth Engines for ASEAN & India'”

Mr. Uday Kumar Varma, Secretary, Micro, Small and Medium Enterprise (MSME), Government of India

Mr. Amarendra Sinha, Joint Secretary, Micro, Small and Medium Enterprise (MSME), Government of India

Distinguished Panelists, Guests and Participants

Ladies and Gentlemen,

Namaste/Good morning!

Micro-enterprises as well as their small and medium counterparts are the backbone and driving force of economic growth, social progress and broad-based development in ASEAN, India and, for that matter, in most other countries of the world. They have contributed immensely to providing employment opportunities in urban and rural areas, and to direct and indirect export earnings.

Equally important, micro and small medium enterprises (MSMEs) are an important means for greater economic empowerment and participation of the young and women in the work force. This is because MSMEs are not just the entry-level points in economic activities and processes but are also present and active in non-urban and in poorer regions of our domestic economies.

The Context in SME Development

MSMEs account for more than 96% of all enterprises, and for between 50 to 85% of domestic employment in many ASEAN Member States (AMSs). In addition, their contribution to gross domestic product (GDP) is in the range of 30 to 53 per cent and 19 to 31 per cent to total exports. They are the underlying force, and the unsung heroes, of competitiveness and dynamism which have been achieved and sustained by ASEAN economies for several decades.

As such, MSME development is crucial as these enterprises form a vital element in our strategy for sustainable and equitable economic growth in the longer term. It is for this reason that MSMEs are seen as an integral aspect of narrowing the development gap under the ASEAN Economic Community ensuring balanced and inclusive integration and growth of ASEAN economies by 2015.

Turning to India, MSMEs have also been a growth engine of the Indian economy. They constitute over 90 per cent of Indian enterprises, produce some 45 per cent of the total industrial output, add 40 per cent to total exports, and generate 70 per cent of the domestic employment opportunities.1

Indian MSMEs are making tremendous progress, as the driving force, in all major sectors and industries from agro-processing, manufacturing to technology and services. They are getting more and more opportunities for growth and diversification due to the sustained economic dynamism of the Indian economy in the recent decades. The inflow of foreign direct investment (FDI) has also increased greatly, thus opening up additional venues for growth and integration of Indian enterprises, both large and small ones, at the regional and global levels.

Ladies and Gentlemen,

ASEAN-India Partnership

In the context of growth and integration for mutual development, allow me to mention briefly the multi-faceted relationship between ASEAN and India. Among other things, such a relationship will provide another important stimulus to the economic development and integration of ASEAN and Indian industries and enterprises in the years to come.

The signing of the ASEAN-India Trade in Goods Agreement (AI-TIGA) paves the way for the creation of one of the world’s largest Free Trade Agreements (FTAs). It covers a market of almost 1.8 billion people with a combined GDP of US$ 2.8 trillion. The AI-TIGA will lead to tariff liberalisation of over 90 per cent of products traded between these two dynamic partners. Currently, ASEAN and India are working towards the early conclusion of the agreements in the areas of trade, industries and investment.

In 2009, the volume of ASEAN-India trade was US$ 39.5 billion – with ASEAN’s exports to India of US$ 26.5 billion and ASEAN’s imports from India of US$12.5 billion. Significantly between 1993 and 2008, ASEAN-India bilateral trade grew at an annual rate of 18.3 per cent, from US$ 2.9 billion in 1993 to US$ 47.5 billion in 2008.

Meanwhile, the flows of FDI between ASEAN and India have also grown steadily over the years. In 2009 for example, Indian FDI in ASEAN amounted to US$ 970 million, or 2.5 per cent of the total FDI flow to the region. Cumulatively, FDI from India in ASEAN reached US$ 3.67 billion between 2000 and 2009.2

Success Stories in SME Development

By and large, ASEAN’s share of trade and FDI with India remained relatively low compared to those shares with other dialogue partners of ASEAN. But the AI-TIGA, plus the prospective services and investment agreements between the two sides, are expected to change all that. There are certainly grounds for optimism that MSMEs in ASEAN and India could be a powerful driving force to propel our economic growth.

Increasingly, MSMEs and young startups have produced a disproportionately bigger share of employment generation and cutting-edge technological advances in many developed countries. In particular, many of these advances are among the top one per cent of innovative products with the highest commercial and technology impact.3 It is pertinent to note here that Microsoft and Apple are currently the two global giants in information and communications technology (ICT). But they were founded as a two-person micro-enterprise in April 1975 and April 1976 respectively.

Turning to ASEAN, a good case in point is the massive growth of cottage enterprises for traditional textile and silk fabrics, which are hand-made and which embody traditional colors, designs and patterns. In several AMSs, these enterprises have become a world-class industry in terms of dynamism and competitiveness. Equally significant, this industry employs a substantial number of village artisans and rural-area workers who are mostly female.

India’s export-oriented services in ICT were also largely pioneered by MSMEs and new start-ups some three decades ago. Many of these undertakings have become transnational businesses or subcontractors to such businesses, thus helping to cement India’s position as a major global player ICT services. Likewise, the dynamic and innovative pharmaceutical industry in India is populated by some 10,000 small firms. About 10 per cent of these firms are regarded as highly inventive and competitive by global standards.

Ladies and Gentlemen,

Initiatives for ASEAN SME Development

It can be said that the large majority of leading domestic or transnational corporations of today used to have a more humble start as MSMEs at the founding stage. The next question is how government policies and the various development services dedicated to SMEs have been made conducive to the continual upgrading and diversification of the MSME sector. Let me talk briefly on these matters in the specific context of ASEAN.

At the recent 17th ASEAN Summit in Ha Noi, Viet Nam, ASEAN Leaders urged the regional authorities to double their efforts to pursue a strong

, dynamic and efficient MSME Sector. Our Leaders further encouraged ASEAN’s dialogue and development partners to further support the MSME development in ASEAN.

ASEAN Leaders also endorsed the Strategic Plan of Action for ASEAN SME Development 2010-2015. This Plan covers 5 important areas of regional cooperation — namely (i) SME access to finance; (ii) internationalization of SMEs; (iii) establishing SME Service Centres; (iv) improving marketing and ICT skills of SMEs; and (v) strengthening SME human resource development and capacity building.

Concerning SME access to finance, for example, adequate institutional financing has always been a constraint for SME start up and development. The ASEAN SME Working Group has been working to improve institutional and venture capital funding for SMEs in the region by looking at SME credit schemes; and at the feasibility of establishing an ASEAN SME Regional Development Fund as well as SME-dedicated financial facilities and mechanisms at the national level.

It is gratifying to note that the above efforts have benefitted from fruitful exchange of information and experiences with the SME Rating Agency of India Ltd (SMERA), established by the Government of India in 2005. According to the International Financial Corporation, in its report of 2010, SMERA ratings had improved access to bank financing for 20 per cent of the rated enterprises, and had reduced 10 per cent of collateral requirements of the rated cases.

We appreciate the success stories of India on improving SMEs’ access to finance through several initiatives and mechanisms, including SMERA, to prove or guarantee the creditworthiness of SME borrowers. The ASEAN SME Working Group is expected to learn more from India’s experiences in the implementation of initiatives and mechanisms relating to the financing of SMEs.

Another key focus in regional cooperation is the establishment, by 2011, of comprehensive SME service centres with regional and sub-regional linkages in ASEAN. These Centers can serve SMEs in many ways. One is to improve their technological and managerial capabilities. Another area of assistance is to enable SMEs to have better access to market and other information, and to business and financial support services.

The Centers will also facilitate the formation of subcontracting networks and other business linkages with enterprises both within and outside ASEAN. Such linkages are of crucial importance to the internationalization efforts of our SMEs. They help SMEs learn form as well as gain access to the large and multinational corporations, especially on best and proven practices as regards trading, quality management, and certification processes.

Concerning human resource development, the supply of resilient, creative and innovative entrepreneurs should be part and parcel of any strategy to develop and sustain the growth of ASEAN SMEs. A Common Curriculum for Entrepreneurship in ASEAN is being developed, with the support of Japan, to promote the best practices of entrepreneurs.

A parallel and complementary initiative of the ASEAN SME Working Group is to foster and facilitate an on-going modernisation and upgrading of the domestic production structures and human resources of SMEs. This initiative is pursued by means of developing and improving Technology Incubators in the regional economies so as to nurture and support techno-entrepreneurs from infancy to commercialization stages.

Notably, several technological incubation facilities and technological consultation services have been founded with the assistance of ASEAN’s dialogue partners. In this connection, there is certainly much scope for ASEAN-India cooperation, including technical assistance from India for ASEAN SMEs especially since India has become the world’s giant in the provision of ICT-related services.

Conclusion

In closing, let me underline here that SMEs have an important and integral role to play in ASEAN, India and the global economy at large. But bold changes in business mindset and a supportive policy environment are needed to bring performance of the regional SMEs closer to, or even beyond, their potential.

For any new SME start-up, the immediate goal is to survive and maintain their independence. Nevertheless, sooner or later the new SMEs will have to expand. Growth usually means looking beyond the domestic market and entering the international market. The transition from a small domestic firm to an established and competitive international company is a major step and ultimate goal of any SME. It is ASEAN’s determination to provide support to the regional SMEs.

Besides its regional initiatives to encourage SME development, the ASEAN SME Working Group has established regular joint consultations with the SME Agencies of the ASEAN Plus-three countries (China, Japan and the Republic of Korea). This has led not only to valuable exchanges of best practices and fruitful cooperation but also greater networking leading to synergies in trade and development to the mutual benefit of the industries and enterprises in the countries concerned.

There is certainly much scope for ASEAN-India cooperation to foster MSME development. It is my hope and vision to see ASEAN and India MSMEs following a similar path in developing initiatives and mechanisms to achieve collective synergies and growth. This will help to leverage further on the development and competiveness of our MSMEs in the years to come and contribute to the growing and prospering ASEAN-India economic partnership.

Thank you very much for your kind attention.

1 Source: Ministry of MSME of India

2 Source: ASEANstats FDI Statistics as of August 2010

3 American SMEs were the source of 68 inventions of enormous commercial and technological significance in the 20th century. These inventions range from A (air-conditioning and airplane) to Z (zipper). Other listed items include audio tape recording, catalytic petroleum cracking, computerized and X-ray scanning, deoxyribonucleic acid (DNA) finger-printing, frequency modulation radio, gyro-compass, heat sensor, helicopter, integrated circuit, desktop and portable personal computers, Polaroid instant camera, computer operating systems and software applications, soft contact lens, and xerography