UNIT 2

Small-Scale Industries in India: Definition, Characteristic and Objectives!

In Indian economy small-scale and cottage industries occupy an important place, because of their
employment potential and their contribution to total industrial output and exports.

Government of India has taken a number of steps to promote them. However, with the recent
measures, small-scale and cottage industries facing both internal competition as well as external
competition.

There is no clear distinction between small-scale and cottage industries. However it is generally
believed that cottage industry is one which is carried on wholly or primarily with the help of the
members of the family. As against this, small-scale industry employs hired labour.

Moreover industries are generally associated with agriculture and provide subsidiary
employment in rural areas. As against this, small scale units are mainly located in urban areas as
separate establishments.

Definition:
The official definitions of a small scale unit are as follows:

(i) Small-Scale Industries:

These are the industrial undertakings having fixed investment in plant and machinery, whether
held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.

(ii) Ancillary Industries:

These are industrial undertakings having fixed investment in plant and machinery not exceeding
Rs. 1 crore engaged in or proposed to engage in,

(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or

(b) The rendering of services supplying 30 percent of their production or services as the case
may be, to other units for production of other articles.

(iii) Tiny Units:

These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23
lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and
maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns
with population less than 50,000.

(iv) Small-Scale Service Establishments:

These mean enterprises engaged in personal or household services in rural areas and town with
population not exceeding 50000 and having fixed investment in plant and machinery not
exceeding Rs. 25 lakhs.

(v) Household Industries:

These cover artisans skilled craftsman and technicians who can work in their own houses if their
work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no
pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and
electrical gadgets are some examples of these industries.

Characteristics of Small-Scale Industries:

(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few
individuals in partnership.

(ii) Management and control:

A small-scale unit is normally a one man show and even in case of partnership the activities are
mainly carried out by the active partner and the rest are generally sleeping partners. These units
are managed in a personalised fashion. The owner is activity involved in all the decisions
concerning business.

(iii) Area of operation:

The area of operation of small units is generally localised catering to the local or regional
demand. The overall resources at the disposal of small scale units are limited and as a result of
this, it is forced to confine its activities to the local level.

(iv) Technology:
Small industries are fairly labour intensive with comparatively smaller capital investment than
the larger units. Therefore, these units are more suited for economics where capital is scarce and
there is abundant supply of labour.

(v) Gestation period:

Gestation period is that period after which teething problems are over and return on investment
starts. Gestation period of small scale unit is less as compared to large scale unit.

(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and highly
reactive and responsive to socio-economic conditions.

They are more flexible to adopt changes like new method of production, introduction of new
products etc.
(vii) Resources:
Small scale units use local or indigenous resources and as such can be located anywhere subject
to the availability of these resources like labour and raw materials.

(viii) Dispersal of units:

Small scale units use local resources and can be dispersed over a wide territory. The
development of small scale units in rural and backward areas promotes more balanced regional
development and can prevent the influx of job seekers from rural areas to cities.

Objectives of Small Scale Industries:

The objectives of small scale industries are:

1. To create more employment opportunities with less investment.

2. To remove economic backwardness of rural and less developed regions of the economy.

3. To reduce regional imbalances.

4. To mobilise and ensure optimum utilisation of unexploited resources of the country.

5. To improve standard of living of people.

6. To ensure equitable distribution of income and wealth.

7. To solve unemployment problem.

8. To attain self-reliance.

9. To adopt latest technology aimed at producing better quality products at lower costs.

Role and Importance of Small Scale Industries

Small scale industries are important because it helps in increasing employment and economic
development of India. It improves the growth of the country by increasing urban and rural growth.
Role of Small and medium scale enterprises are to help the government in increasing infrastructures
and manufacturing industries, reducing issues like pollution, slums, poverty, and many development
acts. Small scale manufacturing industries and cottage industries play a very important role in the
economic development of India. If any amount of capital is invested in small scale industries it will
help in reducing unemployment in India and increasing self-employment. The industry is a sector in
which the production of goods is a segment of the economy.

 Increases production
 Increases total exports

 Improves the employment rate

 Opens new opportunities

 Advances welfare
 Every small-scale industry plays a big role in the Indian economy. Apart from providing
employment to crores of people, it has the added benefit of minimum capital requirements.
The government also offers several tax benefits to SSI for this purpose.

 Furthermore, they can exist in urban as well as rural areas. Small Scale Industries have been
able to compete with large-scale industries and multinational corporations because of this.
Due to reasons like these, they are of great importance.

 The following are some specific roles that SSIs play in the Indian economy:

 1. SSI Increases Production

 India is one of the world’s fastest growing economies in the world. Consequently, its
production output is massive. It is pertinent to note that SSIs contribute almost 40% of
India’s gross industrial value.

 These industries produce goods and services worth over Rs. 40 lakhs for every investment
of Rs. 10 lakhs. Furthermore, the value addition in this output increases by over 10%.

 Here is another interesting statistic about Small scale industries. The number of Small Scale
Industries in India increased from around 8 lakhs in 1980 to over 30 lakhs in 2000.

 This figure has grown even more in recent years owing to the government’s ‘Ease of Doing
Business’ policies.

 As a result of this, the total industrial production output rose tremendously in the last few
years. SSIs are, therefore, strongly responsible for the growth of India’s economy.

 2. SSI Increases Export

 Apart from producing more goods and services, SSIs have been able to export them in large
numbers as well.

 Almost half of India’s total exports these days come from small-scale businesses.
 35% of the total exports account for direct exports by SSIs, while indirect exports amount to
15%.

 Even trading houses and merchants help SSIs export their goods and services to foreign
countries.

 3. SSI Improves Employment Rate

 It is important to note firstly that Small Scale Industries employs more people than all
industries after agriculture.

 Almost four persons can get full employment if Rs. 10 lakhs are invested in fixed assets of
small-scale sectors.

 Furthermore, SSIs employ people in urban as well as rural areas.

 Consequently, this distributes employment patterns in all parts of the country and prevents
unemployment crisis.

 4. SSI Open New Opportunities

 Small-scale industries offer several advantages and opportunities for investments.

 For example, they receive many tax benefits and rebates from the government. The
opportunity to earn profits from SSIs are big due to many reasons.

 Firstly, SSIs are less capital intensive. They even receive financial support and funding
easily.

 Secondly, procuring manpower and raw materials is also relatively easier for them. Even the
government’s export policies favour them heavily.

 5. SSI Advances Welfare

 Apart from providing profitable opportunities, Small Scale Industries play a large role in
advancing welfare measures in the Indian economy as well.

 A large number of poor and marginalized sections of the population depend on them for
their sustenance.
  These industries not only reduce poverty and income inequality but they also raise standards
of living of poor people. Furthermore, they enable people to make a living with dignity.

Problems faced by Small Scale Industries

The following are the problems faced by Small Scale Industries:

1. Poor capacity utilization

In many of the Small Scale Industries, the capacity utilization is not even 50% of the installed
capacity. Nearly half of the machinery remains idle. Capital is unnecessarily locked up and idle
machinery also occupies space and needs to be serviced resulting in increased costs.

2. Incompetent management
Many Small Scale Industries are run in an incompetent manner by poorly qualified entrepreneurs
without much skill or experience. Very little thought has gone into matters such as demand,
production level and techniques, financial availability, plant location, future prospects etc.
According to one official study, the major reason for SSI sickness is deficiency in project
Management i.e., inexperience of promoters in the basic processes of production, cash flow etc

3. Inadequate Finance
Many Small Scale Industries face the problem of scarcity of funds. They are not able to access
the domestic capital market to raise resources. They are also not able to tap foreign markets by
issuing ADR’s (American Depository Receipts) GDR’s (Global Depository Receipts) etc
because of their small capital base. Banks and financial institutions require various procedures
and formalities to be completed. Even after a long delay, the funds allocated are inadequate.

Small Scale Industries do not enjoy much of the advantages enjoyed by large scale enterprises
because of their nature and size. Though they have made significant contribution to economic
development, they have not realized their full potential. They face many problems in their
functioning and many Small Scale Industries are sick.
The government had reserved certain items for exclusive production by Small Scale Industries.
Large scale enterprises were not allowed to produce the items which were reserved for the SSI
sector. With the opening up of the economy and following the principles of liberalization and
globalization, many items have been successively De-reserved. Therefore Small Scale Industries
have to now counter the twin forces of competition from Indian large scale enterprises as well as
foreign competitors.

Problems faced by Small Scale Industries

The following are the problems faced by Small Scale Industries:

1. Poor capacity utilization

In many of the Small Scale Industries, the capacity utilization is not even 50% of the installed
capacity. Nearly half of the machinery remains idle. Capital is unnecessarily locked up and idle
machinery also occupies space and needs to be serviced resulting in increased costs.
2. Incompetent management
Many Small Scale Industries are run in an incompetent manner by poorly qualified entrepreneurs
without much skill or experience. Very little thought has gone into matters such as demand,
production level and techniques, financial availability, plant location, future prospects etc.
According to one official study, the major reason for SSI sickness is deficiency in project
Management i.e., inexperience of promoters in the basic processes of production, cash flow etc

3. Inadequate Finance
Many Small Scale Industries face the problem of scarcity of funds. They are not able to access
the domestic capital market to raise resources. They are also not able to tap foreign markets by
issuing ADR’s (American Depository Receipts) GDR’s (Global Depository Receipts) etc
because of their small capital base. Banks and financial institutions require various procedures
and formalities to be completed. Even after a long delay, the funds allocated are inadequate.

Bank credit to the small scale sector as a percentage of total credit has been declining. It fell
from 16% in 1999 to 12.5% in 2002. Small Scale Industries are not able to get funds
immediately for their needs. They have to depend on private money lenders who charge high
interest. Finance, as a whole, both long and short term, accounts for as large as 43% of the
sector’s sickness.

4. Raw material shortages

Raw materials are not available at the required quantity and quality. Since demand for raw
materials is more than the supply, the prices of raw materials are quite high which pushes up the
cost. Scarcity of raw materials results in idle capacity, low production, inability to meet demand
and loss of customers.

5. Lack of marketing support

Small Scale Industries lack market knowledge with regard to competitors, consumer preferences,
market trends. Since their production volume is small and cannot meet demand for large
quantities their market is very restricted. Now with the process of liberalization and globalization
they are facing competition from local industries as well as foreign competitors who sell better
quality products at lower prices. For e.g. heavily subsidized but better quality imports from
China has made most of the Indian SSI units producing toys, electronic goods, machine tools,
chemicals, locks and paper etc., unviable.

6. Problem of working capital

Many Small Scale Industries face the problem of inadequate working capital. Due to lack of
market knowledge their production exceeds demand, and capital gets locked in unsold stock.
They do not have enough funds to meet operational expenses and run the business.

7. Problems in Export
They lack knowledge about the export procedures, demand patterns, product preferences,
international currency rates and foreign buyer behavior. Small Scale Industries are not able to
penetrate foreign markets because of their poor quality and lack of cost competitiveness. In
countries like Taiwan, Japan etc. products produced by Small Scale Industries are exported to
many foreign countries. But in India not much thought and focus has gone into improving the
export competitiveness of Small Scale Industries.

8. Lack of technology up-gradation

Many Small Scale Industries still use primitive, outdated technology leading to poor quality and
low productivity. They do not have adequate funds, skills or resources to engage in research and
development to develop new technologies. Acquiring technology from other firms is costly.
Therefore Small Scale Industries are left with no choice but to continue with their old techniques.

9. Multiplicity of labor laws

One of the merits of Small Scale Industries are that they are labor intensive and can provide
employment to a large number of people. But the multiplicity of labor laws, need to maintain
several records (PF, ESI, Muster Rolls etc), fines and penalties for minor violations etc place
Small Scale Industries at a great disadvantage.

10. Inability to meet environmental standards

The government lays down strict environmental standards and Courts have ordered closure of
polluting industries. Small Scale Industries which are already facing shortage of funds to carry
out their business are not able to spend huge sums on erecting chimneys, setting up effluent
treatment plants etc.

11. Delayed payments

Small Scale Industries buy raw materials on cash but due to the intense competition have to sell
their products on credit. Buying on cash and selling on credit itself places a great strain on
finances. The greater problem is payments are delayed, sometimes even by 6 months to one year.
It is not only the private sector but even government departments are equally guilty. Delayed
payments severely impact the survival of many Small Scale Industries.

12. Poor industrial relations

Many Small Scale Industries are not able to match the pay and benefits offered by large
enterprises, because their revenues and profitability are low and also uncertain. This leads to
labor problems. Employees fight for higher wages and benefits which the SSI is not able to
provide. This may lead to strikes, resulting in damage to property in case of violence by
employees, production losses etc.

13. Strain on government finances

Marketing of products manufactured by Small Scale Industries is a problem area. The
government has to provide high subsidies to promote sales of products produced by Khadi and
Village Industries. This places a great strain on government finances.

14. Concentration of industrial units

There is high concentration of small scale industrial units in a few states. Of the estimated 3.37
million units as on 2000-01, nearly 60% were located in six states. West Bengal, Madhya
Pradesh and Uttar Pradesh alone account for 20% of Small Scale Industries. Due to
concentration, there is high competition among them to procure raw materials and other
industrial inputs. This leads to high costs and scarcity of raw materials and other inputs affecting
their production and increasing costs.

15. Inadequate dispersal

One of the objectives of the government in promoting Small Scale Industries was to increase
industrial development and employment opportunities throughout the country. Since nearly 60%
of the Small Scale Industries are concentrated in few states, the objective of balanced regional
development and promotion of backward areas has not been achieved. Further majority of Small
Scale Industries are located in urban areas and the aim of industrial development in rural areas
has also been defeated.

16. Widespread sickness

Sickness among Small Scale Industries is widespread. Sickness is not detected in the initial
stages and large amount of funds are locked in them. Nearly two and a half lakh SSI units are
sick and as on 2001 and nearly Rs.five thousand five hundred crores of bank funds are locked in
them. Due to this new entrepreneurs are not able to get loans, workers in the sick units lose their
jobs and industrial and economic development is affected. In Maharashtra alone nearly 3 lakh
units have closed down, 38 lakh workers have lost their jobs and the loss to the government is
Rs.5,000 crore.

17. Lack of awareness

The government has set up many organizations to support and provide assistance to Small Scale
Industries. But, many of the entrepreneurs running Small Scale Industries are not aware of the
various support services.

18. Government interference

Small Scale Industries have to maintain a number of records and there are endless government
inspections. A lot of time, money and effort is wasted in complying with various inspections and
records verification. This prevents Small Scale Industries from fully concentrating on their
business activities.