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SMALL SCALE INDUSTRY IN INDIA:

A CASE STUDY ON HANDMADE PAPER INDUSTRY

TERM PAPER

SML 780
MAY, 2010

Supervised By

Dr. Seema Sharma


Assistant Professor
Department of Management Studies
IIT Delhi

Lavanya Jain 2007CH10069


Puneet Yadav 2007CH60137
Mohit Khatri 2007CH60106
1. INTRODUCTION OF MSME
In accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two
Classes:

(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production


of goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in
terms of investment in Plant & Machinery.

(b) Service Enterprises: The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment.

1.1. CLASSIFICATION

Manufacturing Enterprises Service Enterprises


Micro Upto Rs.25 lakh ($50 thousand) Upto Rs.10 lakh ($20 thousand)
Small Above Rs.25 lakh ($50 thousand) & upto Above Rs.10 lakh ($20 thousand) &
Rs.5 crore ($1 million) upto Rs.2 crore ($0.40 million)
Medium Above Rs.5 crore ($1 million) & upto Above Rs.2 crore ($0.40 million) &
Rs.10 crore ($2 million) upto Rs.5 crore ($1 million)
Source: http://www.msmefoundation.org/

1.2. SECTORS

There are about twenty-one major industry groups in the small scale sector. These are
listed below:

- Food Products
- Chemical & Chemical Products
- Basic Metal Industries
- Metal Products
- Electrical Machinery & Parts
- Rubber & Plastic Products
- Machinery & Parts Except Electrical goods
- Hosiery & Garments - Wood Products
- Non-metallic Mineral Products
- Paper Products & Printing
- Transport Equipments & Parts
- Leather & Leather Products
- Miscellaneous Manufacturing Industries
- Other Services & Products
- Beverages, Tobacco & Tobacco Products
- Repair Services
- Cotton Textiles
- Wool, Silk, Synthetic Fiber Textiles
- Jute, Hemp and Mesta Textiles
- Other Services

The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises are as under:

Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Does not exceed twenty five lakh rupees
Enterprises
Small More than twenty five lakh rupees but does
Enterprises not exceed five crore rupees
Medium More than five crore rupees but does not
Enterprises exceed ten crore rupees
Service Sector
Enterprises Investment in equipments
Micro Does not exceed ten lakh rupees:
Enterprises
Small More than ten lakh rupees but does not
Enterprises exceed two crore rupees
Medium More than two crore rupees but does not
Enterprises exceed five core rupees
Table 1.1. Classification

2. INDIA AT A GLANCE

Gross Domestic Product (GDP) $1.10 trillion


Per capita GDP $830
GDP by sector
Agriculture 17%
Industry 29%
Services 54%
GDP growth rate 6.7%
Inflation rate 8.4%
Labour force 523.5 million
Labour force by occupation
Agriculture 60%
Industry 12%
Services 28%
Unemployment rate 6.8%
Exports $169 billion
Main partners US, UAE, Singapore, China, UK
Imports $288 billion
Main partners China, Saudi Arabia, UAE, US
Foreign debt $231 billion
Forex reserves $252 billion
Source: http://www.msmefoundation.org/

2.2. MSME INDUSTRY

Quick Estimates of 4th Census (2006-07)


Number of MSMEs 26.1 million
Number of Manufacturing Enterprises 7.3 million
Number of Service Enterprises 18.8 million
Number of Women Enterprises 2.1 million (8%)
Number of Rural Enterprises 14.2 million (54.4%)
Employment 59.7 million
Per unit employment 6.24
Per unit fixed investment Rs.33.78 lakh
Per unit original value of Plant & Machinery Rs.9.66 lakh
Per unit gross output Rs.46.13 lakh
Employment per one lakh fixed investment 0.19
Source: http://www.dcmsme.gov.in/ssiindia/

2.3. MSME POLICY

The evolution of the policy framework and support measures of the Government can be
broadly grouped into the following three periods:

2.3.1. 1948-1991
In all the Policy Resolutions from 1948 to 1991, recognition was given to the micro and
small enterprises, termed as an effective tool to expand employment opportunities, help
ensure equitable distribution of the national income and facilitate effective mobilization of
private sector resources of capital and skills. The Micro, Small and Medium Enterprises
Development Organisation [earlier known as Small Industries Development Organization
(SIDO)] was set up in 1954 as an apex body for sustained and organised growth of micro,
small and medium enterprises. Within next two years, the National Small Industries
Corporation, the Khadi and Village Industries Commission and the Coir Board were also set
up. The era provided the supportive measures that were required to nurture MSEs, in the
form of reservation of items for their exclusive manufacture, access to bank credit on
priority through the Priority Sector Lending Programme of commercial banks, excise
exemption, reservation under the Government Purchase Programme and 15% price
preference in purchases, infrastructure development and establishment of institutes for
entrepreneurial and skill development.

MSME – Development Institutes [earlier known as Small Industries Service Institute (SISI)]
were set up all over India to train youth in skills/entrepreneurship. Tool Rooms were
established with German and Danish assistance for providing technical services essential to
MSEs as also for skill-training. At the State level, District Industries Centres were set up all
over the country.

2.3.2. 1991-1999
The new Policy for Small, Tiny and Village Enterprises of August, 1991 laid the 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.

2.3.3. 1999 onwards


The Ministry of MSME [earlier known as Ministry of Small Scale Industries and Agro & Rural
Industries (SSI & ARI)] came into being from 1999 to provide focused attention to the
development and promotion of the sector. The new Policy Package announced in August,
2000 sought to address the persisting problems relating to credit, infrastructure,
technology and marketing more effectively. 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. At the same time, consultations were held
with stakeholders and the list of products reserved for production in the MSE sector was
gradually reduced each year. In 2006, the long-awaited enactment for this sector finally
became a reality with the passage of the Micro, Small and Medium Enterprises Act. In
March, 2007, a third Package for the Promotion of Micro and Small Enterprises was
announced 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.

Source: http://www.dcmsme.gov.in/ssiindia

3. PROBLEMS OF MSME IN INDIA


The micro, small and medium enterprises face problems at every stage of their operation,
whether it is buying of raw materials, manufacture of products, marketing of goods or
raising of finance. These industries are therefore not in a position to secure the internal
and external economies of scale.

The major problems confronting the sector have been identified as:

 Technology obsolescence
 Managerial inadequacies
 Delayed Payments
 Poor Quality
 Incidence of Sickness
 Lack of Appropriate Infrastructure
 Lack of Marketing Network

There is lack of trained and experienced employees because small firms cannot pay high
salaries and cannot spend much on training their employees. Small scale firms find it
difficult to recruit and motivate skilled managerial and technical personnel as they look for
better opportunities in the large scale industries. Therefore, they get the second rate talent
or have to depend on family members who do not have diversified skills.

Small scale units have to face several difficulties in the marketing and distribution of their
products. Most of them do not have their own marketing network. They find it difficult to
sell their output at remunerative prices due to higher cost of production and non-
standardized quality of products. They cannot afford to spend much on advertising, sales,
promotion, marketing research, etc. They have to sell their products at throwaway prices
due to weak bargaining power and immediate need for money. They also face stiff
competition from large firms.
4. CURRENT STATUS & PROGRESS

4.1. 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.

Year Target Achievement


1991-92 3.0 3.1
1992-93 5.0 5.6
1993-94 7.0 7.1
1994-95 9.1 10.1
1995-96 9.1 11.4
1996-97 9.1 11.3
1997-98 * 8.43
1998-99 * 7.7
1999-00 * 8.16
2000-01 (P) * 8.90

P-Projected (April-December)
* Target not fixed at constant prices
Source: http://dcmsme.gov.in/ssiindia/performance.htm
4.2. 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.

4.2.1. Generation of Employment - Industry Group-wise


Food products industry has ranked first in generating employment, providing
employment to 0.48 million persons (13.1%). The next two industry groups were Non-
metallic mineral products with employment of 0.45 million persons (12.2%) and Metal
products with 0.37 million persons (10.2%).

In Chemicals & chemical products, Machinery parts except Electrical parts, Wood
products, Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair
services and Rubber & plastic products, the contribution ranged from 9% to 5%, the total
contribution by these eight industry groups being 49%.

In all other industries the contribution was less than 5%.

4.2.2. Per unit employment


Per unit employment was the highest (20) in units engaged in beverages, tobacco &
tobacco products mainly due to the high employment potential of this industry
particularly in Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu.

Next was Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal
industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in
Repair services line.

Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural
areas.

However, in Chemicals & chemical products, Non-metallic mineral products and Basic
metal industries per unit employment was higher in rural areas as compared to
metropolitan areas/urban areas.

In urban areas highest employment per unit was in Beverages, tobacco products (31
persons) followed by Cotton textile products (18), Basic metal industries (13) and Non-
metallic mineral products (12).

4.2.3. Location-wise Employment Distribution – Rural


Non-metallic products contributed 22.7% to employment generated in rural areas. Food
Products accounted for 21.1%, Wood Products and Chemicals and chemical products
shared between them 17.5%.
4.2.4. Urban
As for urban areas, Food Products and Metal Products almost equally shared 22.8% of
employment. Machinery parts except electrical, Non-metallic mineral products, and
Chemicals & chemical products between them accounted for 26.2% of employment.

In metropolitan areas the leading industries were Metal products, Machinery and parts
except electrical and Paper products & printing (total share being 33.6%).

4.2.5. State-wise Employment Distribution

Tamil Nadu (14.5%) made the maximum contribution to employment.


This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%)
the total share being 27.7%.

Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%) and Punjab (5.6%) together
accounted for another 27.4%.

Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and
Dadra & Nagar Haveli.

It was 12 in Maharashtra, Tripura and Delhi.

Madhya Pradesh had the lowest figure of 2. In all other cases it was around the average of
6.

Year Target Achievement Growth rate


(lakh nos.) (lakh nos.)
1992-93 128.0 134.06 3.28
1993-94 133.0 139.38 3.28
1994-95 138.6 146.56 5.15
1995-96 144.4 152.61 4.13
1996-97 150.5 160.00 4.88
1997-98 165 167.20 4.50
1998-99 170.1 171.58 2.61
1999-00 175.4 177.3 3.33

P-Provisional

Source: http://dcmsme.gov.in/ssiindia/performance.htm
4.3. EXPORT

SSI Sector plays a major role in India's present export performance. 45%-50% of the
Indian Exports is contributed by SSI Sector. 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)
1994-95 29,068
(14.86)
1995-96 36,470
(25.50)
1996-97 39,249
(7.61)
1997-98 43946
(11.97)
1998-99 48979
(10.2)
1999-00 (P) 53975
(10.2)
P-Provisional

Source: http://dcmsme.gov.in/ssiindia/performance.htm
Major Export Markets

An evaluation study has been done by M/s A.C. Nielsen on behalf of Ministry of SSI. As
per the findings and recommendations of the said study the major export markets
identified having potential to enhance SSIs exports are US, EU and Japan. The potential
items of SSIs have been categorised into three broad categories.

4.3.1. Export Destinations


The Export Destinations of SSI products have been identified for 16 product groups.

5. 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 large scale sector. Small industry sector has
performed exceedingly well and enabled our country to achieve a wide measure of
industrial growth and diversification.

By its less capital intensive and high labour absorption nature, SSI sector has made
significant contributions to employment generation and also to rural industrialisation.
This sector is ideally suited to build on the strengths of our traditional skills and
knowledge, by infusion of technologies, capital and innovative marketing practices. This
is the opportune time to set up projects in the small-scale sector. It may be said that the
outlook is positive, indeed promising, given some safeguards. This expectation is based
on an essential feature of the Indian industry and the demand structures. The diversity
in production systems and demand structures will ensure long term co-existence of
many layers of demand for consumer products / technologies / processes. There will be
flourishing and well grounded markets for the same product/process, differentiated by
quality, value added and sophistication. This characteristic of the Indian economy will
allow complementary existence for various diverse types of units. The promotional and
protective policies of the Govt. have ensured the presence of this sector in an
astonishing range of products, particularly in consumer goods. However, the bugbear of
the sector has been the inadequacies in capital, technology and marketing. The process
of liberalisation coupled with Government support will therefore, attract the infusion of
just these things in the sector.

Small industry sector has performed exceedingly well and enabled our country to
achieve a wide measure of industrial growth and diversification.

By its less capital intensive and high labour absorption nature, SSI sector has made
significant contributions to employment generation and also to rural industrialization.
This sector is ideally suited to build on the strengths of our traditional skills and
knowledge, by infusion of technologies, capital and innovative marketing practices. So
this is the opportune time to set up projects in the small scale sector. It may be said that
the outlook is positive, indeed promising, given some safeguards. This expectation is
based on an essential feature of the Indian industry and the demand structures. The
diversity in production systems and demand structures will ensure long term co-
existence of many layers of demand for consumer products / technologies / processes.
There will be flourishing and well grounded markets for the same product/process,
differentiated by quality, value added and sophistication. This characteristic of the
Indian economy will allow complementary existence for various diverse types of units.
The promotional and protective policies of the Govt. have ensured the presence of this
sector in an astonishing range of products, particularly in consumer goods. However, the
bug bear of the sector has been the inadequacies in capital, technology and marketing.
The process of liberalization will therefore, attract the infusion of just these things in the
sector.
Table 5.1. Total number of MSME units functioning in different states and UTs of India

Source: http://dcmsme.gov.in/ssiindia/performance.htm
6. HANDMADE PAPER INDUSTRY

The Handmade Papermaking is a traditional industry of India. Innovation of papermaking


was taken in 105 AD by China but there is a controversy on that issue. However, recent
researches have given credit to India for this innovation of Paper from cellulose fiber even
in third century B.C. The Handmade Paper Industry has been recognized as traditional craft
of village industry under Khadi & Village Industries Commission (KVIC) Act-1957". KVIC
provides special assistance to this industry for the development of rural craft and artisan
work. In India it has been developed as cluster based industry. The most effective clusters
are situated at Kalapi(Uttar Pradesh), Sanganer in Jaipur(Rajasthan), and Mahaboobnagar(
Andhra Pradesh). Apart from these clusters there are some small clusters spread in all over
India.

The KVIC has developed separate programme for Handmade Paper (HMP) industry during
last fifty years in the association with Khadi and Village Industries Board and other Khadi
Institutions.

Source: http://www.kvic.org

6.1. DEVELOPMENT OF HANDMADE PAPER INDUSTRY BY KVIC

Phase-I
A period of 1925-1953 &1955-56 is the first phase of development of Handmade Paper
Industry. In the first phase KVIC itself was established by Govt. of India. The main objective
of Phase-I was providing assistance to traditional kagazis (Traditional Paper Maker) in
different production areas of Handmade Paper. In that period industry has small size of
production and sales. The numbers of production units were less than forty and employees
were not more than one thousand. It was era of craft, and that's why the industry became
popular in next phase.

Phase-II
The second phase is a period of 1956-57 to 1966-67. In this phase Handmade Industry has
got better position in production. The cooperative societies and registered institutions
entered in this field through KVIC and KVIB's assistance programe. In this phase the
numbers of units were increased. Production was more than rupees 39 lacks and
employment generated five times as against first phase. At the end of this phase the actual
numbers of working units were 149 and annual installed capacity was 3870 metric tons. It
was the age of development in this phase all kagazis and artisans were motivated for
producing craft paper and they innovated the different types of handmade paper using
botanical fibers.

Phase-III, IV & V
Since 1967 -68 to 1991-92 We can divide it into three phases. The period of 1967-68 to
1976-77, 1977-78 to 1986-87 and 1987-88 to 19991-92 were III, IV & V phases respectively.
In all the above phases hand made paper industry was flourished and got good sales
position. In the period of 25 years (1967-1992) of development the size of industry became
large, more than 350 production units were established in India in different states and
7000 employees / workers directly and indirectly involved in to this.

Phase-VI
The sixth phase of development was the period of 1992-93 to 1998-99. This was an age of
accelerated growth of individual and private entrepreneurs. In this phase KVIC and other
developmental agencies concentrated on research and development of handmade paper
industry. In this era KVIC started survey and study of international market and domestic
market and organized workshops, seminars and exhibition of hand made products.
Government of India organized UNDP project on this industry titled Strengthened the
handmade paper industry in India (1991-98). UNDP-KVIC-Project emphasized at consumer
behavior and value addition in handmade paper industry. At the end of sixth phase this
industry had more than 415 production units in India and the production grown up to Rs 30
crores and generated employment for 10,000 skilled and unskilled people.

Source: Dwivedi Amit Kumar, Development of handmade paper industry in India; Lecture

6.2. ACHIEVEMENT OF HANDMADE PAPER INDUSTRY

In 1953 this industry was having 35 -40 units for production but today after half century
hand made paper industry is having more than 3000 production units and increase of 35
times (1991 Rs 6 millions to Rs 210 millions in 1999-2000) recorded in hand made paper
industry and its value added items. The Handmade Paper Industry has provided gainful
employment to around 18000 direct and indirect people today. Rural artisans are benefited
through this industry.

The handmade paper units are scatter throughout the country with concentration most in
the Kalapi (Jhansi, Uttar Pradesh), Sanganer (Rajasthan), Pune (Maharastra), Kurukshetra
(Haryana), Mahaboobnagar (AndhraPradesh) and some clusters are in West Bengal. The
production capacity of the units ranges from 50 kg to 700 kg per day. Kalapi is main cluster
of handmade paper production and its value added products. This cluster has more export
oriented units. Today more than 60 production units are working. Registered institutions,
co-operative societies, entrepreneurs and individual artisans are running their units. The
capacity utilization of Handmade Paper Industry stands at 60-62 percent.

Source: Dwivedi Amit Kumar, Development of handmade paper industry in India; Lecture

6.3. MARKETING OF HANDMADE PAPER

The marketing of handmade paper is different than any other goods and products. In spite
of, so many qualities and attraction could not reach at the optimum level of its market
share. Still in this global era the handmade paper industry does not have systematic and
planned marketing strategies for its promotion at a wider level. The wide publicity about
the use of handmade paper and its promotion activities will surely increase its acceptability
and people habit to use it frequently. It has cyclical effect on the overall industry like
acceptability increases its uses or demand which leads to more employment generation as
well as increase in the income level of factors of production. The cost of production will be
decreases because at large level of production industry can obtain large production
economies and technical up-gradation in the product and this will certainly increases
quality of product. In this present scenario customer are more quality conscious. Industry
must know the customer's preferences, their perception about the products and its uses. In
customer survey we have got few factors which influence the consumer's behavior for
handmade paper products:

1. Quality of products
2. Price
3. Multiple uses
4. Availability
5. Durability
6. Advertisement and awareness
7. Substitute goods etc.

Source: Dwivedi Amit Kumar, Development of handmade paper industry in India

The handmade paper industry can produce variety of papers and its value added products
but due to lack of awareness the demand of all varieties is not sufficient at various stages.
Many countries like Philippines, Japan, Korea etc are producing handmade paper in
different varieties on the basis of colors, shades, thickness, smoothness, size etc. To the
limited extent the people are recognizing this paper for eco-friendliness.

6.4. MARKET OF HANDMADE PAPER

The handmade paper industry has its own reputation for craft paper as well as its
converted products. Some HMP products have very god demand in the market like carry
bags, albums, stationery items, gift items, packaging items, drawing papers, greeting cards,
invitation cards, business cards, miscellaneous fancy and decorative items etc. The drawing
paper produced by industry has a unique demand. The handmade paper industry is having
a demand of 10,000 to 12,000 tons per year. The major consumers of handmade paper are,
Govt. Offices, Hotel Industry, Publishers, Printing Press, Craftsmen, Export Agencies, etc.
After survey in the potential consumes of handmade paper fallowing factors have came
through this industry can increase its market demand for domestic market like Price,
Shades/colors, Craftsmanship, Style, Trade visibility, Feasibility, Eco-friendliness etc.
10
8
6
4
2
0
1996 2000 2004 2008

Graph 6.1. Per capita consumption of hand-made paper; Source: www.kvic.org

6.5. HANDMADE PAPER CLUSTERS IN INDIA

Source: http://www.msmefoundation.org/

6.6. DEA ANALYSIS

6.6.1. DATA SELECTION


The following date was available for 2 units for 5 years, 2004-09:
• Total Sales
• Total Production
• Labor, Wages
• Capital Expenses
• Raw material Expenses
• Energy Expenses

Output:
Y1: Production in Kg
Input:
X1: Raw material usage (Kg)
X2: Labor (Number)
X3: Capital expenses (Rs)
X4: Energy expenses (Rs)

6.6.2. PROCESS

Since the number of firms is only 2 and the data is also avaialbel for 5 years, applying
malmquist results in efficiency as 1 for each firm. Thus DEA doesn’t produce productive
results.
However, to facilitate DEA analysis we assume each firm’s performance for each year as a
separate firm. Thus, now we have a set of 5 X 2, i.e. 10 firms. Now, efficiency can be
measured.
Raw Capital Energy
Sales Labour
S.No. Year Firm Material Expenses Expenses
(kg) (No.)
(kg) (Rs.) (Rs.)

1 2004-05 Firm1 38181 46880 19 1443482 477784

2 2004-05 Firm2 183500 262143 48 355495 1841020

3 2005-06 Firm1 47357 49785 21 1443482 418472

4 2005-06 Firm2 183000 261429 48 400000 2350150

5 2006-07 Firm1 38807 56657 19 1443482 474850

6 2006-07 Firm2 224500 320714 48 530482 2120427

7 2007-08 Firm1 36426 33047 19 1443482 475837

8 2007-08 Firm2 168500 240714 48 51025 1820486

9 2008-09 Firm1 52355 58214 19 1543482 505610

10 2008-09 Firm2 140000 200000 40 17950 1452083

6.6.2.1. Input File


6.6.2.2. Instructions File

6.6.2.3. Output File

EFFICIENCY
SUMMARY:

Firm Te
1 0.851
2 0.993
3 1.000
4 0.990
5 0.767
6 1.000
7 1.000
8 0.999
9 1.000
10 1.000

Mean 0.960

Results for firm: 1


Technical efficiency = 0.851
PROJECTION SUMMARY:
variable original Radial Slack Projected
value movement movement value
output 1 38181.000 0.000 0.000 38181.000
input 1 46880.000 -6999.274 0.000 39880.726
input 2 19.000 -2.837 0.000 16.163
input 3 1443482.000 -215514.631 0.000 1227967.369
input 4 477784.000 -71334.068 0.000 406449.932
LISTING OF PEERS:
peer lambda weight
9 0.352
6 0.005
3 0.126
7 0.346

Results for firm: 2


Technical efficiency = 0.993
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 183500.000 0.000 0.000 183500.000
input 1 262143.000 -1951.332 0.000 260191.668
input 2 48.000 -0.357 0.000 47.643
input 3 355495.000 -2646.223 0.000 352848.777
input 4 1841020.000 -13704.131 0.000 1827315.869
LISTING OF PEERS:
peer lambda weight
7 0.025
10 0.718
6 0.348
3 0.082

Results for firm: 3


Technical efficiency = 1.000
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 47357.000 0.000 0.000 47357.000
input 1 49785.000 0.000 0.000 49785.000
input 2 21.000 0.000 0.000 21.000
input 3 1443482.000 0.000 0.000 1443482.000
input 4 418472.000 0.000 0.000 418472.000
LISTING OF PEERS:
peer lambda weight
3 1.000

Results for firm: 4


Technical efficiency = 0.990
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 183000.000 0.000 0.000 183000.000
input 1 261429.000 -2507.504 0.000 258921.496
input 2 48.000 -0.460 0.000 47.540
input 3 400000.000 -3836.613 0.000 396163.387
input 4 2350150.000 -22541.537 -492390.525
1835217.937
LISTING OF PEERS:
peer lambda weight
10 0.689
7 0.132
6 0.364

Results for firm: 5


Technical efficiency = 0.767
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 38807.000 0.000 0.000 38807.000
input 1 56657.000 -13207.579 0.000 43449.421
input 2 19.000 -4.429 0.000 14.571
input 3 1443482.000 -336496.865 -39268.987
1067716.147
input 4 474850.000 -110694.513 0.000 364155.487
LISTING OF PEERS:
peer lambda weight
9 0.448
3 0.255
6 0.015

Results for firm: 6


Technical efficiency = 1.000
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 224500.000 0.000 0.000 224500.000
input 1 320714.000 0.000 0.000 320714.000
input 2 48.000 0.000 0.000 48.000
input 3 530482.000 0.000 0.000 530482.000
input 4 2120427.000 0.000 0.000 2120427.000
LISTING OF PEERS:
peer lambda weight
6 1.000

Results for firm: 7


Technical efficiency = 1.000
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 36426.000 0.000 0.000 36426.000
input 1 33047.000 0.000 0.000 33047.000
input 2 19.000 0.000 0.000 19.000
input 3 1443482.000 0.000 0.000 1443482.000
input 4 475837.000 0.000 0.000 475837.000
LISTING OF PEERS:
peer lambda weight
7 1.000

Results for firm: 8


Technical efficiency = 0.999
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 168500.000 0.000 0.000 168500.000
input 1 240714.000 -259.315 0.000 240454.685
input 2 48.000 -0.052 0.000 47.948
input 3 51025.000 -54.968 0.000 50970.032
input 4 1820486.000 -1961.164 -73521.440
1745003.397
LISTING OF PEERS:
peer lambda weight
10 1.169
7 0.014
6 0.019

Results for firm: 9


Technical efficiency = 1.000
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 52355.000 0.000 0.000 52355.000
input 1 58214.000 0.000 0.000 58214.000
input 2 19.000 0.000 0.000 19.000
input 3 1543482.000 0.000 0.000 1543482.000
input 4 505610.000 0.000 0.000 505610.000
LISTING OF PEERS:
peer lambda weight
9 1.000

Results for firm: 10


Technical efficiency = 1.000
PROJECTION SUMMARY:
variable original radial slack projected
value movement movement value
output 1 140000.000 0.000 0.000 140000.000
input 1 200000.000 0.000 0.000 200000.000
input 2 40.000 0.000 0.000 40.000
input 3 17950.000 0.000 0.000 17950.000
input 4 1452083.000 0.000 0.000 1452083.000
LISTING OF PEERS:
peer lambda weight
10 1.000
6.6.3. RESULTS

Firms 3, 6, 9 and 10 are found to be most efficient. For those firms whose efficiency is not
1, the slack value has been given which means the amount by which input/inputs must be
reduced for obtaining the efficiency to be 1.

EFFICIENCY SUMMARY:

firm crste vrste scale

1 0.851 1.000 0.851 irs


2 0.993 0.996 0.997 drs
3 1.000 1.000 1.000 -
4 0.990 0.994 0.997 drs
5 0.767 1.000 0.767 irs
6 1.000 1.000 1.000 -
7 1.000 1.000 1.000 -
8 0.999 1.000 0.999 drs
9 1.000 1.000 1.000 -
10 1.000 1.000 1.000 -

mean 0.960 0.999 0.961

Note: crste = technical efficiency from CRS DEA


vrste = technical efficiency from VRS DEA
scale = scale efficiency = crste/vrste

Firm 1 and 5 are going through the phase of increasing returns to scale. Therefore, these
firms are under utilizing their capacity when they could they have produced more. Firms
2, 4 and 8 are having decreasing returns to scale, i.e. they are employing more inputs
for producing a given amount of input when it can be produced with lesser amount of
inputs.
6.6.4. LABOR PRODUCTIVITY

Graph 6.2. Worker efficiency over the years for Firm1

7.

Graph 6.3. Worker efficiency over the years for Firm2

The graphs show no significant increase in the worker efficiency over the years, in fact a
decrease is observed some times. The firms need to skill their workers and run training
programs from time to time to increase the worker efficiency.
6.6.5. SIGNIFICANT INFORMATION ABOUT FIRMS

6.6.5.1. HAATH KAGAZ UDYOG

The region has several units like Haath Kagaz Udyog and there are 4-5 other units in
the whole cluster. The person though himself was confused, but on conversation
with Swastik Handmade Paper Ind, they confirmed it.

The difficulties in procurement of raw materials are:

a. There is high variability in supply of raw materials, thus they need to keep large
inventory which often leads to wastage.
b. The competitors offer better price margins and give orders for larger batches of
raw materials which are more favorable to raw material suppliers and they tend
to favor them.
c. The cost of raw materials is not regulated by government but often by the large
mill owners who control the demand. Thus, high degree of variability for small
units like Handmade paper industry.
6.6.5.2. SWASTIK HAND MADE PAPER INDUSTRY

Similar to Haath Kagaz Udyog, Swastik Handmade paper is also one of the 4 units in
the region. The difficulty in procurement of raw materials is quite similar to as Haath
Kagaz Udyog
Graph 6.4. Efficiency curves for both the firms over the years

There is a sudden drop in efficiency of the Haath Kagaz Udyog in the year 2007-08. On
being asked Mr. Man Singh, Manager seemed unaware of the fact. However, he provided
an explanation that during recession government was pushing large industries to revive the
economy that included paper and textile industry. This is led to an increased competition
with the paper mills that dropped their prices significantly. The production received a
setback and there was a sense of insecurity and restlessness in the handmade paper
industry. Thus efficiency declined drastically.

6.7. PRODUCTIVITY ANALYSIS

The objective of this project is to study the productivity performance of the Handloom
paper industry by capturing TFP as well as the partial productivity measures using the
growth accounting approach. In this method, the observed growth of output is sought to
be explained in terms of growth in factor inputs. The unexplained part or the residual is
attributed to growth in productivity of factors. This approach consists of assuming a certain
functional form for the production function and then deriving an index number formula
that is consistent with the assumed functional form.
6.7.1. TPFG

6.7.2. Trend growth rate in TFP

TFPG, as mentioned in the preceding section, gives annual growth rates, which exhibit the
year-to-year fluctuations. In order to arrive at a trend growth rate over the study period,
the following relationship is estimated:

where β is the coefficient of the trend growth.

6.7.3. Partial productivity indices

PPI are calculated by dividing the output by the value of the input in the total cost. It is
obtained as follows:

6.7.4. CALCULATION:

Firm 1: Haath kagaj udyog, Khadi Aashram Yamuna Nagar, Haryana

Firm 2: The Swastik Hand Made Paper Industry, Kurukshetra, Haryana


Raw Raw Labor, Capital Investment
Production Labor,
Firm Year materials, materials, L1 Investment, on Energy,
(kg) L2 (Rs.)
R1 (kg) R2 (Rs) (no.) C (Rs) E (Rs.)
1 2004-05 38181 46880 656349 19 598272 1443482 477784
1 2005-06 47357 49785 696992 21 614232 1443482 418472
1 2006-07 38807 56657 1019836 19 493079 1443482 474850
1 2007-08 36426 33047 660950 19 713000 1443482 475837
1 2008-09 52355 58214 873203 19 813601 1543482 505610
2 2004-05 183500 262143 7128677 48 1386570 355495 1841020
2 2005-06 183000 261429 7947537 48 1505012 400000 2350150
2 2006-07 224500 320714 10100537 48 1872881 530482 2120427
2 2007-08 168500 240714 6497126 48 1788000 51025 1820486
2 2008-09 140000 200000 5125685 40 2361823 17950 1452083

Table 6.1. Output-Input values for 2 firms for 5 years

lnQt-lnQt- lnR1t - lnL1t - lnCt - lnEt - Σ (R2, L2,


Firm Year
1 lnR1t-1 lnL1t-1 lnCt-1 lnEt-1 C, E)
1 2004-05 3175887
1 2005-06 0.2153766 0.0601226 0.1000835 0 -0.13255 3173178
1 2006-07 -0.199114 0.1293018 -0.100083 0 0.126389 3431247
-
1 2007-08 0.0633178 -0.539085 0 0 0.002076 3293269
1 2008-09 0.3627646 0.5661951 0 0.06698 0.06069 3735896
2 2004-05 10711762
-
2 2005-06 0.0027285 -0.002727 0 0.11795 0.244159 12202699
2 2006-07 0.2043896 0.204387 0 0.28232 -0.10286 14624327
2 2007-08 -0.28694 -0.28694 0 -2.3415 -0.15251 10156637
-
2 2008-09 0.1852933 -0.185292 -0.182322 -1.0447 -0.2261 8957541

Table 6.2. Term 1 for TFPG calculation


Σ[(Ѳit +
(ѲRt + (ѲLt + (ѲCt + (ѲEt + Ѳit-1)/2]
Firm Year TFPG TFP
ѲRt-1)/2 ѲLt-1)/2 ѲCt-1)/2 ѲEt-1)/2 [lnit -
lnit-1]
1 2004-05 100
1 2005-06 0.2131587 0.1909747 0.454707 0.14116 0.013219 0.20215809 120.215809
-
1 2006-07 0.2584357 0.1686363 0.4377942 0.13513 0.033618 0.23273193 92.2377508
1 2007-08 0.2489587 0.1801024 0.4295001 0.14144 -0.13392 0.07059834 98.7495826
1 2008-09 0.2172152 0.2171408 0.4257309 0.13991 0.159994 0.2027705 118.773084
2 2004-05 100
-
2 2005-06 0.6583967 0.126389 0.0329835 0.18223 0.046588 0.04931667 95.0683328
2 2006-07 0.6709801 0.1257002 0.0345268 0.16879 0.129525 0.0748646 102.185585
-
2 2007-08 0.6651797 0.1520543 0.0206489 0.16212 -0.26394 0.02299927 99.8353914
2 2008-09 0.6059564 0.2198556 0.0035139 0.17067 -0.19462 0.00933124 100.766979

Table 6.3. Term 2 for TFPG calculation

6.7.5. THE ANALYSIS

TFPG-TFP

Firm Year TFPG TFP


1 2004-05 100
1 2005-06 0.20215809 120.215809
1 2006-07 -0.23273193 92.2377508
1 2007-08 0.07059834 98.7495826
1 2008-09 0.2027705 118.773084
Table 6.4. TFP and TFPG for firm 1

Firm Year TFPG TFP


2 2004-05 100
2 2005-06 -0.04931667 95.0683328
2 2006-07 0.0748646 102.185585
2 2007-08 -0.02299927 99.8353914
2 2008-09 0.00933124 100.766979
Table 6.5. TFP and TFPG for firm 2
Graph 6.1. TFP for Firm 1

Graph 6.1. TFP for Firm 1

Both the firms show a very variable pattern of TFP. With overall growth very low in the period
of 5 years is very low, there is potential for the handloom industry to grow a lot. With huge
fluctuations in production inputs and output supplies, there is not a clear pattern of TFP.
TREND GROWTH RATE IN TFP

Graph 6.3. Trend growth rate in TFP for Firm 1

Graph 6.4. Trend growth rate in TFP for Firm 2

The coefficient for trend growth rate per annum for Firm 1 is 0.014 and for Firm 2 is 0.006.
These figures confirm the sluggish growth of Handloom industry. However, the information
rules out the variability in the trend growth rates for the both the firms which again signify high
level of fluctuations.
PPI

PPIRt PPILt
Firm Year PPICt PPIEt
(Kg/Kg) (Kg/No.)

1 2004-05 100 100 100 100


1 2005-06 116.79563 112.22059 124.036 141.6121
1 2006-07 84.100272 101.63988 101.642 102.2672
1 2007-08 135.33818 95.403773 95.4057 95.79346
1 2008-09 110.42607 137.12361 128.242 129.5762
Table 6.6. PPI values for Firm 1

PPIRt PPILt
Firm Year PPICt PPIEt
(Kg/Kg) (Kg/No.)
2 2004-05 100 100 100 100
2 2005-06 99.999836 99.727955 88.6319 78.12283
2 2006-07 100.00009 122.34386 81.9869 106.2222
2 2007-08 100.00012 91.826013 639.758 92.86136
2 2008-09 100 91.553533 1510.99 96.72953
Table 6.7. PPI values for Firm 2
Graph 6.5. PPI for raw materials for Firm 1

Graph 6.6. PPI for raw materials for Firm 2


Graph 6.7. PPI for Labor for Firm 1

Graph 6.8. PPI for Labor for Firm 2


Graph 6.9. PPI for capital for Firm 1

Graph 6.10. PPI for capital for Firm 2


Graph 6.11. PPI for investment on energy for Firm 1

Graph 6.12. PPI for investment on energy for Firm 2


Graph 6.13. PPI for firm 1

Graph 6.14. PPI for firm 2

The PPIs of both the firms show an equivalent growth in its productivity through various
input factors. The arbitrary increase in PPIc for firm 2 can be explained as that the company
made huge investments in capital for the initial years but didn’t invest in the recent years,
thus the analysis shows huge increase in partial productivity.
Also when Mr. Subodh Kumar from Swastik Handmade Paper Industry was asked the
reason for decrease in capital investments, he highlights that handmade paper industry is
highly labor intensive industry and capitals investments are for initial business expansion or
setting up. As the firm was facing challenges in the market with slump in demand, further
expansion of the unit didn’t seem to be economically viable and capital investments
reduced considerably resulting in arbitrary escalation in capital partial productivity.

6.7.6. CONCLUSION

The firms show very high fluctuations in the growth patterns of its productivity on total and
partial basis. With high variability in demand and input factors availability, the growth
pattern fails to follow a general trend. The firms need to be rigorous and work on
increasing their productivities continuously over the years. There is huge scope of
development in productivity frontiers.

7. REFERENCES
Ministry of MSME website, URL: http://dcmsme.gov.in/
Micro, Small & Medium enterprises in India, An overview by Ministry of micro, small &
medium enterprises
http://www.msmefoundation.org/
Sharma Seema, Liberalisation and productivity growth: a case of Indian cement industry,
Int. J. Productivity and Quality Management
Dwivedi Amit Kumar, Development of handmade paper industry in India, Lecture; URL:
http://www.indianmba.com/Faculty_Column/FC999/fc999.html