SMALL SCALE INDUSTRIES IN INDIA

K AGARWAL BCOM ( HONS ) FINAL YEAR SECTION - A

PALA

ROLL NO. 533

DEFINITION OF SSIs
The definition for small-scale industrial undertakings has changed over time. Initially they were classified into two categories- those using power with less than 50 employees and those not using power with the employee strength being more than 50 but less than 100. However, the capital resources invested on plant and machinery buildings have been the primary criteria to differentiate the small-scale industries from the large and medium scale industries. An industrial unit can be categorized as a small- scale unit if it fulfils the capital investment limit fixed by the Government of India for the small-scale sector. As per the latest definition which is effective since December 21, 1999, for any industrial unit to be regarded as Small Scale Industrial unit the following condition is to be satisfied: Investment in fixed assets like plants and equipments either held on ownership terms on lease or on hire purchase should not be more than Rs 10 million. However, the unit in no way can be owned or controlled or ancillary of any other industrial unit.
YEAR 1960 1966 1975 1980 1985 1991 1997 1999 INVESTMENT LIMITS Upto Rs 5 lacs in Plant & Machinery Upto Rs 7.5 lacs in Plant & Machinery Upto Rs 10 lacs in Plant & Machinery Upto Rs 20 lacs in Plant & Machinery Upto Rs 35 lacs in Plant & Machinery Upto Rs 60 lacs in Plant & Machinery Upto Rs 100 lacs in Plant & Machinery Upto Rs 100 lacs in Plant & Machinery

CLASSIFICATION OF SSIs:
A common classification is between traditional small industries and modern small industries. Traditional small industries include khadi and handloom, village industries, handicrafts, sericulture, coir, etc. Modern SSIs produce wide range of goods from comparatively simple items t sophisticated products such as television sets, electronics, control system, various engineering products, particularly as ancillaries to the large industries.. The traditional small industries are highly labour-intensive while the modern small-scale units make the use of highly sophisticated machinery and equipment. For instance, during 1979-80, traditional small-scale industries accounted for only 135 of the total output but their share in total employment was 56%. As against this, the share of modern industries in the total output of this sector was 74% in 1979-80 but their share in employment was only 33%. Obviously, these industrial units would be having higher labour productivity. One special characterstic of traditional small-scale industries is that they cannot provide full time employment to workers, but instead can provide only subsidiary or part time employment to agricultural laborers and artisans. Among traditional village industries, handicrafts possess the highest labour productivity, besides handicrafts make a significant contribution to earning foreign exchange for the country. Nowadays Indian small-scale industries (SSIs) are mostly modern smallscale industries. Modernization has widened the list of products offered by this industry. The items manufactured in modern Small-scale service & Business enterprises in India now include rubber products, plastic products, chemical products, glass and ceramics, mechanical engineering items, hardware, electrical items, transport equipment, electronic components and equipments, automobile parts, bicycle parts, instruments, sports goods, stationery items and clocks and watches.

ROLE OF INDUSTRIES ECONOMY

SMALL IN

SCALE INDIAN

* The small-scale industrial sector plays a pivotal role in the Indian economy in
terms of employment and growth has recorded a high rate of growth since Independence inspite of stiff competition from large-scale industries. There are several important reasons why these industries are contributing a lot to the progress of the Indian economy: Indian economy is an under developed economy. Its vast resources are either unutilized or under utilized. A major section of man power is lying idle. The per capita income is low. Capital is shy and scarce and investment is lean. Production is traditional and the technique is outdated. The output is insufficient and the basic needs of the people remain unfulfilled. Industrialization is the only answer to this present state of disrupted economy. The problem is of the approach which should be direct, utilitarian and pragmatic. Such industries do not require huge capital and hence suitable for a country like India.

1.

PRODUCTION:

The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points. The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 0.87 million units in the year 1980-81 to over 3 million in the year 2000. When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the small-scale sector.

COMPARATIVE GROWTH RATES OF SSI SECTOR AND TOTAL INDUSTRIAL SECTOR

Year Total Industrial Sector Growth Rate 1994-95 10.44 9.10 1995-96 11.49 13.00 1996-97 1.29 6.10 1997-98 9.19 6.70 1998-99 7.84 4.10 1999-2000 7.09 6.70 2000-01 8.04 5.00 2001-02 6.06 2.70 2002-03 7.68 5.70 2003-04 8.06 6.09 2004-05 9.96 8.04 Source: SIDO Half Century by DCSSI, Govt. of India 2004 and Annual Report of the Ministry of SSI 2005-06 SSI Sector Growth Rate

EMPLOYMENT
SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale sector generates employment for four persons.

Office of the Development Commissioner M/O Micro & Small Enterprises Cluster Development Programme (Statistics & Data Bank Division) PERFORMANCE OF MICRO & SMALL ENTERPRISES

Year

Number of Enterprises (Lakh Production Growth Share In Empl. Nos.) (Rs. Crs.) (Lakh Person) at Current Rate GDP Registered Unregistered Total prices (%) (%) 93.58 96.98 101.06 104.71 107.46 108.99 109.49 263.49 314850 113.95 275.30 364547 118.59 287.55 429796 123.42 299.85 497842 128.44 312.52 587196 133.67 322.28 695126 8.68 9.64 10.88 12.32 12.65 13.00 5.92 5.79 5.84 5.83 5.94 NA

2002-2003 15.91 2003-2004 16.97 2004-2005 17.53 2005-2006 18.71 2006-2007 20.98 2007-2008 24.68 (Projected)

3. EXPORT:

SSI Sector plays a major role in India's present export performance. SSI Sector contributes 45%-50% of the Indian Exports. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods.

It would surprise many to know that non-traditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jewellery units from this sector. The product groups where the SSI sector dominates in exports, are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products. The SSI sector is reorienting its export strategy towards the new trade regime being ushered in by the WTO.

Year

Exports (Rs. Crores) (at current prices) 29,068 (14.86) 36,470 (25.50) 39,249 (7.61) 43946 (11.97) 48979 (10.2) 53975 (10.2)

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 (P)

4. OPPORTUNITY:

The opportunities in the small-scale sector are enormous due to the following factors:

Less Capital Intensive Extensive Promotion & Support by Government Reservation for Exclusive Manufacture by small scale sector Project Profiles Funding - Finance & Subsidies

Machinery Procurement Raw Material Procurement Manpower Training Technical & Managerial skills Tooling & Testing support Reservation for Exclusive Purchase by Government Export Promotion Growth in demand in the domestic market size due to overall economic growth Increasing Export Potential for Indian products Growth in Requirements for ancillary units due to the increase in number of greenfield units coming up in the largescale sector. Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification.

FASHION TECHNOLOGY:
OPPORTUNITIES Glamour & Limelight Creative High Value Addition Coverage (Extensive) Clothes Dresses

 Garments Textile Footwear Various Leather Products Jewellery Travel Goods Fashion Accessories (purses, bags, carryon, watches etc.) Personal Embellishment (Face, Hair, Hands, Feet, Cosmetics, Perfumes etc.)

INFORMATION TECHNOLOGY
OPPORTUNITIES Media & Entertainment Contents, Animation, Games,

DESIGN TECHNOLOGY
OPPORTUNITIES Interiors - (Furniture & Furnishing homes, work places, community, hospitals, schools, shopping places, recreation, sports) Exteriors - (Architectural) Industrial products Textiles Electrical appliances White goods Leather products Engineering products Machinery Dies and tools Watches Jewellery Hospital equipments

 Medical instruments Electronics and Communication Products and Equipments

2.

WELFARE:

These industries are also very important for welfare reasons. People of small means can organize these industries. This in turn increases their income levels and quality of life. As such these can help in reducing poverty in the country. Further, these industries tend to promote equitable distribution of income. The reasons are obvious. One, a large proportion of income generated in these enterprises is distributed among the workers. Two, income are distributed among a vast number of persons throughout the country. All these benefits flow from the fact that these industries are highly labour-intensive, and that these can be set up anywhere in the country. Distributive aspect of small-scale industries further unravels their twofold beneficial character. On the one hand, these industries enable a vast number of people to earn income, and on the other hand, the very people among whom these are distributed generate this income.

INDIAN SME SECTOR AT A GLANCE 2005-06

 SSI units : million Employment generated in SSIs : million Production : At current Prices billion Exports : billion SSI account: Industrial Production: Exports: GDP Share:

12.3 29.5 Rs.4762.01 Rs. 1215 40% 35% (50% of Direct & Indirect) 7%

Ownership pattern : Proprietorships : 78% Partnerships : 16% Corporate & Others : 6% Industrial Units : 96% Service Enterprises : 3% Ancillary Units : 1% Produces Diverse range of products (more than 8000- consumer items, capital goods and intermediates)

DISABILITIES
Small enterprises are presently seriously handicapped in comparison with larger units by an inequitable allocation system for scarce raw materials and imported components, lack of provision of credit and

finance; low technical skill and managerial ability; and marketing contracts. It is, therefore, essential to develop an overall approach to remove these disabilities.

1. OUTPUT vs EMPLOYMENT
One argument is that the emphasis on employment is irrelevant, as the basic thing is the output that the economy needs for its growth. From this angle, it is contended that, since the productivity of these industries is low compared to that that of large industries, the small industries simply waste the capital which is very scarce, and which , if diverted to large industries, can produce more. From this viewpoint, small industries are more capital-intensive. It is also argued that the labour-productivity in the small industries is also small compared to large industries.

ADVERSE EFFECT ON CAPITAL FORMATION

It is also contended by some that small industries have unfavorable consequences on saving and capital formation. They argue that the establishment of these industries will, over a period of time, reduce the availability of capital for large-scale industries with higher productivity of capital. First, it will happen because capital, used inefficiently in the small industries, will not be available for large-scale industries. Second, these industries being labour-intensive, use a major proportion of the sale proceeds of output to pay workers whose marginal propensity to save is low. As a result, a large part of their incomes will be used for consumption resulting in a lower rate of saving and capital formation for the economy.

2. INEFFICIENT PRODUCTION
Another charge against these industries is that the cost of production is higher than in the large industries, because these industries

suffer from several inefficiencies. No doubt, the fact of large scale entails, what is described as economies of scale, lowering the costs.

3. LARGE SICKNESS
There are two main issues in respect of sick SSIs: (i) existence of a large number of sick units which are non-viable; and (ii) rehabilitation of potentially viable units. As far as former is concerned, there were 1, 67,980 sick SSI units as on March 31,2003. These units are those that had obtained loans from banks. An amount of Rs. 5,706 crore was blocked in these units. Of these, as many as 1,62,791 units with outstanding bank credit of Rs. 4,569 crore were identified by banks as being non-viable. As far as the latter issue is concerned, of the 1,67,980 sick SSI units as on March 31, 2003, only 3,626 units with outstanding bank credit of Rs. 625 crore were found to be potentially viable by the banks.

4. SEVERAL DIFFICULTIES:
It is thus obvious that these industries, despite their importance in the economy, are not contributing to their full towards the development of the country along the desirable lines. It is because these are beset with a number of problems concerning their operations. These may be described as under: Inadequacy of finance: A serious problem of these industries is in respect of credit both for long-term and short-term purposes. This is evident from the fact that the supply of credit has not been commensurate with their needs associated with fixed and working capital.

TRENDS OF LENDING BY BANKING SECTOR TO SSI

Rs. in Crores As at March 1999 2000 2001 2002 2003 2004 2005* endTotal advances byTotal Advances toProportion of SSI Banking Sector SSI Sector to Total Advances 246203 42674 17.30 292943 469153 536727 669534 764383 972587 45788 56002 57199 60394 65855 76114 15.63 1.94 10.66 9.02 8.62 7.83

DIFFICULTIES OF MARKETING:
These industries are also up against the crucial problem of marketing their products. The problem arises from such factors as small scale of production, lack of standardization, inadequate market intelligence, competition from technically more efficient units, etc. Apart from the inadequacy of marketing facilities, the cost of promoting and selling their products too is high

SHORTAGE OF RAW MATERIALS:

Then there is the problem of raw materials which continues to plague these industries. Raw materials are available neither in sufficient quantity, nor of requisite quality, nor at reasonable price. Being small purchasers, the producers are not able to undertake bulk buying as the large

LOW-LEVEL TECHNOLOGY:
The methods of production, which the small and tiny enterprises use, are old and inefficient. The result is low

productivity and high costs. There is little of research and development in this field in the country. There is almost no agency to provide venture capital to cover risks associated with the introduction of new technologies.

COMPETITION FROM LARGE-SCALE INDUSTRIES:

Another serious problem, which these industries face, is that of competition from large-scale industries. Large-scale industries, organized as they are on modern lines, using latest production technology and having access to many facilities, can easily outsell the small producers.

The following table depicts the various problems that the SSIs have to face:
AIMA Impact Assessment Impediments To Growth

Problems Faced by SSIs as Barriers to Growth Market Related Finance Related Government Policy Related Power Related/Infrastructure Technology 70% 25% 12.78% 14.0% 14.60%

MEASURES

To help the SSIs in meeting the challenges of globalization, the Government has taken several initiatives and measures in recent years. Primarily among them is the enactment of the Micro, Small and Medium Enterprises Development Act, 2006, which aims to facilitate the promotion and development and enhance the competitiveness of MSMEs. The Act came into force from 2nd October 2006. The main features of the act are :

SALIENT FEATURES OF MSMED ACT 2006

Manufacturing enterprises defined in terms of investment in Machinery and Equipment (excluding land and building) classified into a. Micro enterprises - investment upto Rs 25 lakhs, b. Small enterprises - investment above Rs 25 lakhs and upto Rs 5 crore c. Medium enterprises - Investment above Rs 5 crores and upto Rs 10 crores Service enterprises defined in terms of their investment in equipment (excluding land and building) classified into a. Micro enterprises-investment upto Rs 10 lakhs b. Small enterprises-investment above Rs 10 lakhs and upto Rs 2 crore c. Medium enterprises-investment above Rs 2 crores and upto Rs 5 crores

MSMED Act 2006 and its Impact

Clause Salient Features Impact 1. Establishment of Specific representation forStatutory Status, compact board and quarterly National Small and Women meetings will address problems of SMEs Medium Enterprises Mandatory Quarterlyimmediately to take corrective action Board Maximum Meeting No. of members 47 2. Concept ofClear-cut demarcation ofFacilitates SMEs to enter into service enterprises Enterprises manufacturing/production aggressively and rendering services 3. Definition ofSpecific ceiling limit forExisting small units can graduate into Medium Enterprises manufacturing/production units and avail facilities under the act. and service enterprise definition for Medium enterprises 4. Filing of memorandaReplacement of registrationFacilitates SMEs to avail the benefits of the act optional for Micro andwith memorandum immediately after setting up of the unit. Small enterprises in manufacturing and service sector Medium enterprises in Service Sector but mandatory for Medium enterprises in manufacturing sector

Clause 5. Procurement Policies

Salient Features

Impact

Notification ofFacilitates opportunity for supply of preference policies bygoods/services without any hassles. central or State Governments for goodsPublic Procurement Policy under Section 11 of and services providedMSME Act, yet to be notified by Micro & Small enterprises 6. Delayed Period ofSMEs can plan their cash flow/financial Payment Penalty payment by therequirement & dispute procuring resolution organizations 45 days Penal interest 200% of PLR

7. Dispute Resolution Establishment of MSEEasy financial planning and no waste of human facilitation Council; 90resources for chasing/follow up. days framework for dispute resolution 8. Delayed Payment Deduction disallowed This will encourage procurement agencies to allowable deduction ensure timely payment to SMEs. under IT Act 1961 9. Closure of Business Statutory notification ofFacilitates expedition of liquidation scheme for closure

10. Notification ofStatutory guidelines or instructions for promotion of SMEs wrt. To Funds appropriation and release 11. Facilitating Credit Statutory

Mandatory on all facilitating development of SMEs ensuring fast growth

Mandatory on all providing credit. Guidelines for credit for 20% year on year growth

Other major initiatives taken by the government are setting up of National Manufacturing Competitiveness Council (NMCC) and the National Commission of Enterprises in the Unorganized Sector (NCEUS). Further, in recognition of the fact that delivery of credit

continues to be a serious problem for MSEs, a Policy Package for Stepping up Credit to Small and Medium Enterprises (SME) was announced by the government with the objective to double the credit flow within the period of five years. The government has also announced a comprehensive package for promotion of micro and small enterprises, which comprises the proposals/schemes having direct impact on the promotion and development of the micro and small enterprises , particularly in view of the fast changing economic environment, wherein to be competitive is the key of success. The Ministry of Micro, Small and Medium Enterprises (MSME) performs its tasks of formulation of policies and implementation of programmes mainly through two Central organizations. These are:

MICRO, SMALL AND MEDIUM DEVELOPMENT ORGANIZATION

ENTERPRISES

The Micro, Small and Medium Enterprises Development Organization (earlier known as Small Industries Development Organization) set up in 1954, functions as an apex body for sustained and organized growth of micro, small and medium enterprises. As an apex organ, it provides a comprehensive range of facilities and services to the MSMEs through its network of 30 Small Industries Service Institutes (SISIs), 28 branch SISIs, 4 Regional Testing Centres (RTCs), 7 Field Testing Centres (FTSs), 6 Process-cum-Product Development Centres (PPDCs)

NATIONAL SMALL INDUSTRIES CORPORATION LTD (NSIC)

NSIC, since its inception in 1955 has being working with its mission of promoting, aiding and fostering the growth of micro and small enterprises. The Corporation has been introducing several new schemes from time to time for meeting the change aspirations of micro and small enterprises. The main objective of all these schemes is to promote the interest of the micro and small enterprises and to put them in competitive and advantageous position. The information pertaining to the schemes planned to be continued/implemented in the XI plan period by NSIC with Government support is given hereunder:

PERFORMANCE & CREDIT RATING SCHEME

NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated Performance & Credit Rating Scheme for Small Industries. The scheme is aimed to create awareness among small enterprises about the strengths and weaknesses of their existing operations and to provide them an opportunity to enhance their organizational strengths and credit worthiness. The rating under the scheme serves as a trusted third party opinion on the capabilities and credit worthiness of the small enterprises. An independent rating by an accredited rating agency has a good acceptance from the Banks/Financial Institutions. Under this scheme, rating fee to be paid by the SSIs is subsidized for the first year only and that is subject to maximum of 75% of the fee or Rs. 40,000/-, whichever is less.

MARKETING ASSISTANCE SCHEME

This is an ongoing old scheme. Marketing, a strategic tool for business development, is critical for the growth and survival of SSIs in todays intensely competitive market. One of the major challenges before the SSIs is to market their products/services NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small enterprises for capturing the new marketing opportunities by way of organizing and participating in various domestic and international exhibitions/trade-fairs, buyers-sellers meet intensive campaigns, seminars and consortia formation at the subsidized rates. In addition, the Ministry has three National Level Entrepreneurship Development Institutes namely, Indian Institute for Entrepreneurship (IIE), Guwahati, National Institute for Entrepreneurship and Small Business Development (NIESBUD), Noida and National Ins

INFRASTRUCTURE DEVELOPMENT
For setting up of industrial estates and to develop infrastructural facilities for MSMEs, the Integrated Infrastructure Development Scheme (IID) was launched in 1994. The scheme covers districts which are not covered under the Growth Centres scheme. The scheme covers rural as well as urban areas with a provision of 50% reservation for rural areas and 50% industrial plots are to be reserved for tiny units. For the promotion and development of MSEs in the country, cluster is one of the thrust areas of the Ministry in the 11th plan.

TECHNOLOGY UPGRADATION IN MSE SECTOR

The opening up of economy has exposed MSE sector to global and domestic competition. With a view to enhancing the competitiveness of this sector, the Government has taken several steps such as: i. Assistance to industry association for setting up of testing centres and to State Governments and to their autonomous bodies for modernization/expansion of their Quality Marking Centres. Regional Testing Centres and Field Testing Centres to provide testing services and services for quality upgradation. Implementation of Micro and Small Enterprise Cluster Development Programme (MSECDP), under which 91 clusters have been taken up, including national programme for the development of toy, stone, machine tools and hand- tool industry in collaboration with UNIDO. A scheme of promoting ISO 9000/14001 Certification under which SSI units are given financial support by way of reimbursing 75% of their expenditure to obtain certification subject to maximum of Rs.75,000 per unit Setting up of Biotechnology Cell in SIDO.

ii. iii.

iv.

v.

MEASURES FOR EXPORT PROMOTION

Export promotion from the MSE sector has been accorded a high priority. Following schemes have been formulated to help MSEs in exporting their products: i. Products of MSE exporters are displayed in international exhibitions and the government reimburses the expenditure incurred. ii. To acquaint MSE exporters with latest packaging standards, techniques, etc., training programme on packaging for exporters are organized in various parts of the country in association with the Indian Institute of Packaging. iii. Under the MSE Marketing Development assistance (MDA) scheme, assistance is provided to individuals for participation in overseas fairs/exhibition, overseas tours, or tours of individuals as member of a trade delegation going abroad.

ENTREPRENEURSHIP AND SKILL DEVELOPMENT

The Ministry conducts Entrepreneurship Development Progamme (EDPs) to cultivate the skill in unemployed youths for setting up micro and small enterprises. Further, under the management Development Programmes(MDPs), existing MSE entrepreneurs are provided training on various areas to develop skills in management, to improve their decision-making capabilities resulting in higher productivity and profitability. To encourage more entrepreneurs from SC/ST, women and physically challenged groups, the Ministry of MSME provides them a stipend of Rs.500 per capita per month for the duration of the training. From the above description of the government approach and measures, it is clear that these are by and large on the right lines. If, however, the SSIs still suffer from various handicaps, it is obviously, because these measures are not implemented effectively. It is that the efforts are more in direction of protection of this sector, and there is very little by way of raising its efficiency and competitive strength. Unless this becomes the centre-theme of the policy, the SSIs will not become a dynamic sector.