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UNIT 2

SMALL SCALE INDUSTRIES

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 Indian has taken a number of steps to promote them, However it is Recent measures,

small –scale and cottage industries are 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 industries is one which is carried on wholly or primarily With the help of the

member of family .as against this, small scale industry employs

Hired labor

Moreover industries generally associated with agricultural and provide subsidiary employment in

rural areas .as against this, small scale units are mainly located in urban areas as separate

establishment

DEFINITION :

The official definition of small scale unit is as follows

(1) Small Scale Industries:

These are the industrial undertaking having fixed investment in plant and machinery whether held

on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore

The Policy Initiatives in 1999-2000 defined small scale industry as “a unit engage in manufacturing,

repairing, processing and preservation of goods having investment in plant and machinery at an

original cost not exceeding Rs. 1 crore.”

(2) Ancillary Industries

These are industrial undertaking having fixed investment in plant and machinery not exceeding 1

crore engaged in or proposed to engaged in the manufacture of parts, components, sub-assemblies,

tooling for supply to other firms which manufacture assembled products, or the rendering of services

supplying 30 percent of their production or services as the case may be ,to other units of production

of other articles

(3) Tiny Industries:

These refers to very small undertaking having fixed investment in plant and machinery not

exceeding RS 25 lakhs. These also include undertaking providing service such as laundry,

Xeroxing, repair and maintenance of customer equipment and machinery, hatching and poultry etc.

Located in towns with population less than 50000. These units are normally operated under sole

proprietorship form of ownership.

(4) Cottage Industries:

These are also called household industries. They are organized by individuals and with the help

of members of the household (including family labour) and are pursued as full time or part time

occupation. The capital investment is small and the components used are simple. These industrial

units normally use local resources and local skills. The output produced in each industrial unit is

generally sold in the local market.

(4) Export oriented Industries:

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These are units engaged in the manufacture, service, development of software, trading, repair,

floriculture, animal husbandry and poultry. These units are allowed to import or procure without

payment of duty of all types of goods including capital goods, raw materials, components, material

handling equipments required for export production. It has an obligation to export 40 percent of its

total production.

(5) Village Industries:

Any industry that is located within a rural area, where the fixed capital investment does not exceed

rupees one lakh. “They are labour intensive in nature and are very much suited to a labour surplus

country like India. They require very less of no capital to set up, thereby making them an

economically viable option for the rural poor.

Classification of Small Scale Industries

Small scale industries are broadly classified into

1. Traditional Industries: Traditional Industries are generally artisan- based, located mostly in rural,

semi-urban areas and have a nominal investment in plant and machinery. Industries such as Khadi,

village industries, Handlooms, Coir industries, Sericulture, Cottage and Artisans come under Traditional

Industries. The share of the traditional industries in the total output on this sector is less than the modern

small industries. They are largely carried on by laborers and artisans.

2. Modern Industries: Modern SSI’s are mostly those units that use power driven machinery and

possess better production techniques as compared to traditional sector units. These units are generally

located in close proximity to large industrial centres or urban areas. These industries are export

oriented, and includes ancillaries industries, tiny industries and small scale service and business

enterprises.

CHARACTERISTICS OF SMALL SCALE INDUSTRIES

Owenership: Ownership of small scale unit is usually in sole proprietorship or it can be with few individual in

partnership

Management And Control:

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 personalized fashion. The owner’s activity involved in all the decisions concerning

business.

Areas Of Operation

The area of operation of small units is generally localized catering to the local or regional

demand. The overall resources at the disposal of small scale units are limited and as a result of these,

it is forced to confine its activities to the local level.

Use of Indigenous Raw Materials:

SSI use indigenous (local originated) raw materials and promote intermediate and capital goods.

They contribute to fast balanced economic growth in a transitional economy through decentralization

and dispersal of industries in the local areas.

Technology

Small industries are fairly labour intensive with comparatively smaller capital investment than

the larger units. Large industries concentrates more on technology than small industries. The

technology usage in SSI is very less compared to large industries.

Gestation Period: Gestation period is that period after which the return on investment starts. It is the time period

between setting the units and commencement of production. SSI usually has a small gestation period

when compared to large industries because of their low investment which helps an entrepreneur to

earn very soon after a short period of time.

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Flexiblity:

Small scale units are as compared to large scale units are more change susceptible and highly

reactive and responsive to socio economic condition, these are more flexible to adopt changes like

new method of production, introduction of new products etc.

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 material.

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 influx of job seekers from rural areas to cities

OBJECTIVES OF SMALL SCALE INDUSTRIES

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

To improve the standard of living of the people in the country

To attain self reliance and to meet the substantial part of the economy’s requirements for

consumer goods and simple producer goods

To adopt latest technology arrived at producing better quality products at lower costs

To ensure equitable distribution of income and wealth and to bring balanced regional

development in the country

To ensure optimum utilisation of unexploited resource of the country

To solve the major problem of the economy i.e., unemployment by generating immediate and

large scale employment opportunities with relatively low investment

To bring the isolated and backward areas in the mainstream of national development

ROLE PLAYED SSI IN THE DEVELOPMENT OF INDIAN ECONOMY

In a developing country like India, the role and importance of small scale industries is very

significant towards poverty eradication, employment generation, rural development and creating

regional balance in promotion and growth of various development activities.

It is estimated that this sector has been contributing about 40 % of the gross value of output produced

in the manufacturing sector and generation of employment by the small scale sector is more than 5

times to that of the large scale sector

This clearly shows the important of small scale industries in the economic development of the

country .the small scale industry has been playing an important role in growth process of Indian

economy since independence in spite of stiff competition from the large sector and not very

encouraging support from the government.

The following are some of the important role played by small scale industries in India

1) Employment Generation:

Small scale industries employ labour intensive technology and hence generate more employment

opportunities. Small scale industries generate opportunities for self employment of technically

qualified persons, artisans and professionals. A major problem confronting our country is increasing

pressure of population on land and the need to generate more employment avenues. A given amount

of capital invested in a small scale industry provides more employment than same amount of capital

invested large scale industry. In India confronted with the twin problems of unemployment and

scarcity of capital, it is only small scale industry which can solve these problems. Small scale

industries can be located anywhere and hence can provide employment near their home.

2) Self Employment:

Small scale sector provides numerous opportunities for self employment and hence is more

suited for our country faced with the major problems of unemployment. A self employed

entrepreneur is master of his own show and he thus gets opportunity for doing something creative,

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new and different. He instead of seeking job for himself, provides employment to others working for

himself, creates personal interest and successful accomplishment of the task generate job satisfaction

and sense of attainment

3) Optimum use of capital:

Small scale enterprises require relatively lesser amount of capital as compared with large scale

enterprise in the context of Indian economy where capital is scarce. Small scale sector can act as a

stabilized force by providing high output capital ratio as well as high employment capital ratio.

Moreover due to shorter gestation period small scale units provide early returns to the entrepreneurs.

Small scale units help in capital formation by mobilizing idle and small scattered savings of the

people and put these into productive use by investment in small scale units. P.C mahalanobis has

rightly observed in view of meagreness of capital resources there is no possibility in short run for

creating much employment through the factory industries (large scale .now consider the household or

cottage industries they require very little capital about 6 or 7 hundred rupees would get an artisan

family started with any given investment employment possibility would be 10 or 15 times greater in

comparison with corresponding factory industries

4) Facilitate Entrepreneurial Development:

Small scale sector helps in entrepreneurial development. the unit provides self employment to

educated unemployed and reduces their overdependence on the government. It also generates feeling

of self reliance amongst the people. This sector generates more employment opportunities with

relatively lesser capital investment. Large scale industries cannot provide opportunities to a large

number of entrepreneurs, who are scattered over a wide territory. Small scale industries in the other

hand mobilize such entrepreneurial skills more efficiently and put these into productive use.

5) Use of Local Resources

Small scale enterprises employ local resources like raw material, saving, entrepreneurial skill more

effectively. In the absence of SSI, these resources are likely to remain unutilized. Thus on one hand

small scale sector ensures better use of the local resources and on the other generate employment

opportunities and income for local population.

6) Balanced Regional Development:

Large scale units are normally concentrated at selected places this result in generation of

employment opportunity income and development of only these places on. Whereas small scale

industries utilizes local resources and promotes decentralized development of industries. it is only

through dispersal of industries in rural and backward areas that the objective of balanced regional

development can be achieved. small scale industries by providing employment to people of rural and

backward areas helps in solving the problems of industrial slums congestion and pollution of

industrial towns. Small scale sector by generating employment and income in backward areas helps

in raising standard of living of people.

7) Conservation of Foreign Exchange:

Small scale industries help in saving precious foreign exchange. Firstly small scale industries utilize

local resources like raw material and available machinery and they are not dependent on costly

imports. These units also produce using those products which were earlier imported. secondly there

has been considerable increase in exports from the small scale sector over years and presently this

contributes about 35%to India’s total exports, thus earning precious foreign exchange for the country.

8) Supporting Large Scale Industries:

Small scale industries can facilitate growth and development of large scale industries by providing

various parts, components and accessories to large scale industries small scale units by playing a

complimentary role

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9) Equitable Spread Of Income And Wealth:

Small scale industries help in development of socialistic pattern of society by ensuring equitable

distribution of income and wealth. This sector inculcates the spirit of entrepreneurship amongst

people there by providing them self employment with limited means. Ownership of small scale

industries is widespread and offer more employment potential compared with large scale industries.

Large scale industries results in concentration of income and wealth in few hands and that too at

selected places whereas small scale industries ensure equitable spread of income and wealth amongst

all and at all places, small scale industries thus helps the objective of social justice.

10) Contributing Towards National Economy:

Small scale industries have made rapid strides over years and can produce wide range of product

consumption, more than 5000 different products are being manufactured in small scale sector. this

sector is helping realization of the objective of export promotion and import substitution, nearly 50%

of the output of the manufacturing sector in our country is produced by small scale sector the small

sector thus play very important role in economic development of our country.

OWNERSHIP PATTERNS

SOLE PROPRIETORSHIP

Sole proprietorship also known as sole trader or simply a proprietorship is a type of business entity

owned by one individual or one legal person and in which there is no legal distinction between owner

and the business

ADVANTAGES OF SOLE PROPERIETOR FORM OF BUSINESS

Easy Formation:

The formation of sole proprietorship business is very easy and simple. No legal formalities are

involved for setting up the business except for a license or permission in certain cases. the

entrepreneur with initiative and certain amount of capital can set up such form of business.

Better Control:

The entrepreneur takes all decisions affecting business. He chalks out the plan and executes the same.

His eyes are on everything and everyone. There is no scope for laxity. This results in better control

of the business and ultimately leads to efficiency

Promptness in Decision Making:

When the decision is to be taken by one person its sure to be quick. Thus, the entrepreneur as sole

proprietor can arrive at quick decision concerning the business by which he can take advantage of

any better opportunities

Secrecy:

Each and every aspects of business is looked after by the proprietor and the business secrets are

known to him only. He has no legal obligation to publish his accounts. Thus, the maintenance of

adequate secrecy leaves no scope to his competitors to be aware of the business secret.

Tax Benefits:

The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they

will list business information and figures within their individual tax return. This can save additional

costs on accounting and tax filing. The business will be taxed at the rates applied to personal income,

not corporate tax rates.

Flexibility in Operations:

The sole proprietorship business is undertaken on small scale sector, if any change is required in

business operations, it is easy and quick to bring changes

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Scope for Personnel Touch: Since scale of operation is small and employees work under his direct supervision, the proprietor

maintains harmonious relationship with the employee’s. Similarly, the proprietor can know tastes,

likes and dislikes of the customers because of his personal rapport with the customers

Easy Dissolution:

Like that of formation ,the dissolution of sole proprietorship is very easy , since the proprietor is the

supreme authority and no regulation are applicable for closure of the business he can dissolve his

business anytime he likes.

Socially Desirable:

New and small entrepreneurs can take up business on small scale basis. There will be no scope for

concentration of wealth in few hands sole proprietorship continues its operation in each and every

area of business activity and caters to the needs of the society. Further, it provides ample

opportunities for large scale self employment for rural and less skilled personnel .thus, it is socially

desirable.

DISADVANTAGES OF SOLE PROPRIETOR FORM OF BUSINESS:

The sole proprietorship business is not free from criticism. It suffers from certain limitations and

drawbacks, because of its very nature and scope of operations. These points may be duly taken care

of while entrepreneur adopting this mode of business.

Limited resources:

The financial resources of any small entrepreneur as an individual are limited. He mainly finances

from his own savings or borrows from financial institutions, friends and relatives as per his capacity.

Thus, a limited resource is the major drawback of this form of business.

Limited managerial capability:

Modern business requires updated managerial skills in each and every sphere of activity. We cannot

hope a single individual to possess all the managerial talents necessary to carry on a business

efficiently. The limited financial resources of the sole proprietorship are a hindrance to hire the

services of managers with expertise in different areas, thereby the growth of the business.

Unlimited liability:

Since the liability of the sole proprietor is unlimited, the private properties of the proprietor are also at

risk. When the business fails, the private properties of the owner are utilized to pay off the business

debts. Thus, the entrepreneur must have to look this aspect carefully.

Uncertainty of continuity:

The continuity of the business is uncertain because the business may come to an end due to the

incapacity or death of the proprietor. It is unlike that they may possess the business is a social loss.

Not suitable for large-scale business:

The limited financial resources, limited managerial capability of the proprietor, risk to the private

property etc. Makes the sole proprietorship business unsuitable for large-scale business. This system

of business cannot afford for large scale operation.

PARTNERSHIP FIRM:

Partnership is the relation between persons who have agreed to share the profits of a business carried

on by all or any of them acting for all.

The features of Partnership firm:

Agreement: Partnership cannot be formed without the agreement. It may be oral or written.

Registration: It is not necessary that a partnership may be registered but in case of registration

many problems may be avoided

Number of Partners: In partnership there should be at least 2 partners and maximum of 20

Profit and loss distribution: The profit earned is distributed among the partners according to

their agreement and similarly the loss incurred is also equally distributed among them

Unlimited liability: The liability of the partner is not limited to his invested amount. In case

of loss the private property of the partner also is used to pay the business obligation.

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Advantages

1. Easy formation:

Formation of partnership is easy. Even the registration of a firm is optional; hence no legal

formalities are required.

2. Better capital:

As the partnership is formed by two or more persons, capital contribution is higher and there

are greater managerial abilities.

3. Credit- worthiness:

As the liability of the partner is unlimited, severally and jointly, carefully management of

business is ensured and this increases the credit-worthiness of the firm which in turn enables

to obtain credit from third parties easily.

4. Flexibility:

Partnership business is flexible, as suitable changes can be easily introduced whenever

necessary.

5. Sharing of risks:

Risk does not fall on one individual’s shoulder in this type; it is shared by all the partners.

6. Sound decision:

As the decision is taken by two or more persons collectively, it is likely to be more balanced.

Disadvantages:

1. Lack of co-operation:

As there are more than two persons in the business, unity among them becomes utmost

essential. If unity is not secured, disputes arise and disturb the smooth working of the

business.

2. Limited capital:

As there is limitation on the total number of partners, the capital that can be raised

becomes limited.

3. Lack of co-operation:

There is no government supervision over the affairs of the business of a partnership and

publishing accounts is also not necessary. Hence, public may not have full confidence in

them.

4. Unlimited liability:

The liability of the partners is unlimited, jointly and severally. This discourages many

people from becoming the partners of the firm.

5. Non transferability of interest:

A partner cannot transfer his interest to a third party without consent of other partners.

This blocks the money invested by a person and it may discourage many investors from

becoming partners of the firm.

6. Lack of faith:

Utmost good faith is the essence of partnership. If a partner acts dishonestly, it may land all

others in trouble, because he is an agent of the firm.

JOINT STOCK COMPANY

“A joint stock company (JCS) is a type of business partnership in which the capital is formed by the

individual contributions of a group of shareholders. Certificates of ownership or stock are issued by

the company in return for each contribution, and the shareholders are free to transfer their ownership

interest at any time by selling their stockholding to others.”

Advantages of Joint Stock Company:

(1) Huge resources:

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A company can raise large amount of resources from the general public by issuing shares.

Since, there is no maximum limit of the number of shareholders [ii] case of public company,

fresh shares can be issuing debentures and accepting public deposits.

(2) Limited liability:

The liability of the shareholders is limited to the extent of the face value of the shares held by

them or guarantee given by them. The shareholders are not liable personally for the payment

of debt of the company. Thus, limited liability encourages the investors to put their money in

the shares of the company.

(3) Efficient management:

A company can hire the services of professional manager for its functional areas because of

its financial strength. The directors who look after the management of the company are

generally experienced and persons of business acumen Therefore, the management of a

company is sure to be efficient.

(4) Scope for expansion:

A company can generate huge financial resources by issuing shares and debentures to finance

new projects. Companies also transfer a portion of their profit to reserve which can be utilised

for future expansion. The managerial capability a disposal of a company helps it for planning

the future expansion and growth.

(5) Public confidence:

A company submits required information to the government and other authorities at regular

intervals. The accounts of the company are audited by chartered accountants and also

published for the information of the stakeholders and others. This enables a company to enjoy

the trust and confidence of the public.

(6) Difficult risk:

The entire business risk of the company is distributed over a large number of shareholders.

Thus, the risk is reduced for each shareholder. No shareholders are burdened with more than

what he has paid as the price of share hold. No personal property will be attached for the

same.

Disadvantages of Joint Stock Company

Despite the above advantages, the company form of organisation also suffers from certain

demerits. The following are some of the important demerits of a company which every entrepreneur

should know while going for selection of type of business.

(1) Difficulty in formation:

The formation of a joint stock company is very difficult, time taken and expensive as

compared to any other form of organisation. Conceiving the very idea and getting it

implemented is very difficult process. Preparation of the basic documents like memorandum

of association and Articles of association, fulfilling legal formalities as per the act and getting

the business registered needs lot of time, money and expertise.

(2) Delay in decision-making :

The Board of directors of the company decides about the policies and strategies of the

company. Certain decisions are taken by the shareholders. The meeting of the directors or the

shareholders cannot be held at any time as and when required. Thus, the decision making

process is usually delayed. The delay in decision-making may result in losing some business

opportunities.

(3) Separation of ownership and management:

The company is not managed by the shareholders but by the directors who are the elected

representatives of the shareholders. The directors and managers may lack the personal

initiative and motivation to manage the company efficiently as the shareholders (owners)

themselves would.

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(4) Lack of secrecy:

Each and every business strategy is discussed in the meeting of the board of directors. The

annual accounts are published and compliance to government, tax authorised etc. are made

at regular intervals. Therefore, it’s very difficult to maintain business secrecy in a company

form of organisation in comparison to sole proprietorship and partnership.

(5) Fraudulent management:

The possibility of starting a bogus company, collecting huge sums of money and

subsequently bringing liquidation of the company is not ruled out. The promoters with an

intention to defraud may indulge in such practices. The directors and managers may function

for their personal gain overlooking the interest of the company.

(6) Excessive Government regulations:

A company functions under too much of regulations of the governments. Reports are to be

filled and compliance is maid at regular intervals to appropriate authorities failing which

penalty is imposed. A considerable time and money of the company is involved in the

process of regular compliance.

CO OPERATIVE SOCIETY

The co-operative society is yet another form of business organisation. It is formed in a similar

manner like a Joint Stock Company. It is a unique form of organisation. It is started with the motive

of organizing and rendering services to its members.

Advantages of co-operative society

1. Easy to form:

The formation of a co-operative society is very simple as compared to the formation of any

other form of business organisations. Any ten adults can join together and form a co-operative

society. The procedure involves in the registration of a co-operative society is very simple and

easy. No legal formalities are required for the formation of co-operative society.

2. No obstruction for membership:

Unless and otherwise specifically debarred, the membership of co-operative society is open to

everybody. Nobody is obstructed to join on the basis of religion, caste, creed, sex and colour

etc. A person can become a member of a society at any time he likes and can leave the society

when he does not like to continue as; member.

3. Limited liability:

In most cases, the liabilities of the members of the society are limited to the extent of capital

contributed by them. Hence, they are relieved from the fear of attachment of their private

property, in case of the society suffers financial losses.

4. Service motive:

In co-operative society members are provided with better good and services at reasonable

prices. The society also provides financial help to its members< the concessional rates. It assists

in setting up production units and marketing of produces c small business houses so also small

farmers for their agricultural products.

5. Stability and continuity:

A co-operative society cannot be dissolved by the death insolvency, lunacy, and permanent

incapability of the members. Therefore, it has got separate legal existence. New members join

and old members may quit the society but society continues to function unless or otherwise all

members unanimously decided to close the same.

6. Surplus shared by the members:

The society sells goods to its members on a nominal profit. In some cases, the society sells

goods to outsiders. This profit is utilized for meeting the day-to-day administration cost of the

society. The procedure for distribution of profit that some portion of the surplus is spent for the

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welfare of the members, some portion are kept as reserves whereas the balance is shared among

the members as dividend on the basis of these purchases

Disadvantages of co-operative society:

Despite many advantage, the co-operative society suffers from certain limitations drawbacks.

Some of these limitations, which a co-operative from of business has, are as follows:

1. Limited resources :

Co-operative society’s financial strength depends on the cap contributed by its members and loan

raising capacity from state co-operative banks. The membership fee is limited for which they are

unable to raise large amount of resources as their members belong to the lower class. Thus, co-

operative are not suitable for the large scale business which require huge capital.

2. Inefficient management:

A co-operative society is managed by the members only. They do not possess any managerial

and special skills. This is considered as major drawbacks of this sector. Inefficiency of

management may not bring success to the societies.

3. Lack of secrecy:

The co-operative society does not maintain any secrecy in business because the affairs of the

society are openly discussed in the meetings. But secrecy is very important is very important for

the success of a business organisation. This paved the way for competitors to compete in better

manner.

4. Excessive Government interference:

Government put their nominee in the board of management of co-operative society. They

influence the decision of the Board which may or may not be favourable for the interest of the

society. Excessive state regulation, interference with the flexibility of its operation affects

adversely the efficiency of the management of the society.

5. Absence of motivations:

The members may not feel enthusiastic because the law governing the co-operatives put some

restriction on the return. Absence of relationship between work and reward disadvantage the

members to put their maximum effort in the society.

6. Disputes and differences:

The management of the society constitutes the various types of personnel from different social,

economic and academic background. Many a times they strongly differ from each other on many

important issues. This becomes detrimental to the effectiveness of the management.

PROBLEMS FACED BY SSI

Small-scale industries in India could not progress satisfactorily due to various problems that they

are confronted with while running enterprises. In spite of having huge potentialities, the major

problems, small industries face are given below.

1. Problems of skilled manpower:

The success of a small enterprise revolves around the entrepreneur and its employees, provided

the employees are skilled and efficient, because inefficient human factor and unskilled

manpower creates innumerable problems for the survival of small industries.

Non-availability of adequate skilled manpower in the rural sector poses problem to

Small-scale industries.

2. Inadequate credit assistance:

Adequate and timely supply of credit facilities is another important problem faced by small-

Scale industries. This is partly due to scarcity of capital and partly due to weak creditworthiness

of the small units in the country.

3. Irregular supply of raw material:

Small units face severe problems in procuring the raw materials whether they use locally

available raw materials or imported raw materials. The problems arise due to faulty and irregular

supply of raw materials. Non-availability of sufficient quantity of raw materials, sometimes poor

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quality of raw materials, and increased cost of raw materials, foreign exchange crisis and above

all lack of knowledge of entrepreneurs regarding government policy are other few hindrances for

small-scale sector.

4. Absence of organized marketing:

Another important problem faced by small-scale unit . They also fail to get adequate information

about consumer’s choice, taste and preferences of the type of product. The above problems do

not allow them to stay in the market

5. Lack of machinery and equipment:

Small-scale units are striving hard to employ modern machineries and equipment in their process

of production in order to compete with large industries. Most of the small units employ out dated

and traditional technology and equipment. Lack of appropriate technology and equipment create

a major stumbling lock for the growth of small-scale industries.

6. Absence of adequate infrastructure:

Indian economy in characterized by inadequate infrastructure which in a major problems for

small units to grow. Most of the small units and industrial estates found in towns and cities are

having one or more problems like lack of power supply, water and drainage problem, poor roads,

raw materials and marketing problem.

Thus absence of adequate infrastructure adversely affects the quality, quantity and production

schedule of the enterprises which ultimately results in under-utilization of capacity.

7. Competition from large-scale units and imported articles:

Small-scale units find it very difficult to compete with the product of large-scale units and

imported articles which are comparatively every cheap and better quality than small unit’s

product.

8. Other Problems:

Besides the above problems, small-scale units were of constrained by a number of other

problems also. They include poor project planning, managerial inadequacies.

Old and orthodox designs, high degree of obsolescence and huge number of bogus concerns.

Due to all these problems the development of small-scale industries could not reach a prestigious

stage.

STEPS TAKEN TO SOLVE THE PROBLEM OF SSI

This growth of SSI in India has been striking feature in the economy development of the country

since independence. It has contributed to the overall growth or the GDP as well as in

employment generation and exports. Actions taken by government are based on Department-

Related Parliamentary Standing Committee on May 5th, 2005. Actions taken are:

(1) RBI has advised the banks to display in the branch premises, the limit up to which collateral-free

loans are available and other relevant information.

(2) State bank of India came out with a “Charter for SSI”. The Indian Banks’ Association (IBA) has

also issued circular dated 31st March 2003 to all member banks to come out with a similar

charter for SSI sector. All 27 public sector banks have issued “Charter for SSI”.

(3) The small industries development bank of India (SIDBI) has been disseminating information on

schemes of assistance among SSI entrepreneurs through seminars/workshops organized by

various local industries Associations, Confederation of India industries (CII), Federation of

Small and Medium Industries (FOSMI) etc. In order to create greater awareness amongst SSI

units, business campaigns/meets are organized at district headquarters, industry canters and SSI

clusters by SIDBI. SSI entrepreneurs are given information on relevant schemes on one-to-one

basis during discussion on their projects.

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(4) The CGTSI has been taking necessary steps to publicize the Credit Guarantee Fund Scheme for

Small Industries and create awareness of the scheme among member banks, lending institutions,

SSI entrepreneurs and other stakeholders. The CGTSI posters have been displayed to Zonal and

regional offices of banks for the SSI borrowers. The advertisements relating to the scheme have

also been published in Hindi.

(5) RBI through its circular has advised all banks to conduct entrepreneurship development training

programmes and also give exhaustive training to their staff members sensitizing them to the

needs of SSI sector. The feedback received from the bank show that some banks have taken

necessary steps in this regard.

(6) The committee feels that there is lack of awareness amongst SSI entrepreneur about various

schemes/ facilities being offered by the Government and financial institutions. It has largely

resulted in under financing of various schemes. The committee, therefore, recommends that the

Government and FIs should give wide publicity and conduct awareness campaigns on the loan

schemes among SSI entrepreneur so that the benefits of various schemes percolate down to grass

root level.

(7) On the recommendation of the committee, the NSIC has established a permanent display centre

to show the products of SSI units at Okhla, New Delhi. The SSI units from Khurja and adjoining

areas have been provided facilities to display their projects free of cost.

(8) The national Small Industries Corporation (NSIC) in association with SIDBI and SISI organized

an awareness campaign at Bulandshahr on 22nd September, 2003 where 150 SSI units

participated in the event. NSIC also organized Handicrafts Expo’ 2004 on 12th March to 16th

March, 2004 where built-up-stalls were provided free of cost to the participating units.

(9) The number of branches of public sector banks has increased. As on 31st March, 2004 the public

sector banks had 497 specialized SSI branches all over the country.

(10) The ministry of SSI has been taking up problems faced by SSI sector in credit flow from

banks and institutional sources with RBI’s Standing Advisory committee (SAC) from time to

time and based on the decisions taken; the banks have been advised by the RBI to take the

needful action accordingly. The flow of credit to SSI sector from the public sector banks have

gone up form Rs. 29,482 chore in March, 2004 in absolute terms.

(11) To ensure adequate flow of credit to SSI sector, the government and RBI have taken various

measures, which inter alia include simplified procedure for computing the working capital

requirements of SSI units. The calculation of working capital will be made on the basis of

minimum 20 present of projected annual turnover of the borrowing unit.

(12) The RBI has advised the banks fix self-target for growth in advances to SSI sector, fix time

frame for disposal of loan application enhancement in composite loan limit from Rs.50 lakhs to

Rs. 1 crore, to dispense with collateral security requirement for loans up to Rs.25 lakhs to SSI

having good track record financial position, enhancement of credit limit under Laugh Udhyami

Credit Card (LUCC) FROM Rs.2 lakhs to Rs.10 lakhs based on satisfactory track record etc.

(13) A Small and Medium Enterprises (SEM) Fund has been structured by SIDBI spread over two

years, i.e. FY 2005 and FY 2006 for providing impetus to growth of SME sector.

(14) The RBI has instructed the bank not to harass the entrepreneur in the guise of rules and

procedures. The procedure to apply for the loan and its sanction has been simplified. A time

frame has been fixed for disposal of loan application, viz. up to Rs.25,000 within 2 weeks and up

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to Rs.5 lakh, within 4 weeks provided the loan application are complete in all respect and

accompanied by a ‘Check List’. The banks have also been advised to extend composite loans

(the limit for which has been enhanced from Rs.50 lakhs to Rs.1 crore) through a single window

so that the entire financing requirement is met by single documentation and security creation

process to reduce the hardships faced by SSI entrepreneurs in securing loan and working capital.

POLICIES GOVERNING SSI

1. INDUSTRIAL POLICY RESOLUTION OF 1948:

After gaining independence on August 15 1947 it was necessary to give new policy for industrial

development, decide priority areas and clear doubts in the minds of private entrepreneurs

regarding nationalization of existing industries.

The Government of India announced its Industrial Policy Resolution (IPR) on April 6,1948

whereby both public and private sectors were involved towards industrial development.

Accordingly, the industries were divided into four broad categories:

(a) Exclusive State Monopoly- This includes the manufacture of arms and ammunition,

production and control of automatic energy and the ownership and management of railway

transport. These industries were the exclusive monopoly of the Central Government.

(b) State Monopoly for New Units- This category included coal, iron and steel, aircraft

manufacture, ship building, manufacture of telephone, telegraphs and wireless (apparatus

excluding radio receiving sets) and mineral oils. New undertakings in this category could

henceforth be undertaken only by the State.

(c) State Regulation- This category included industries of such basis importance like machine

tools, chemicals, fertilizers, non-ferrous metals, rubber manufactures, cement, paper,

newsprint, automobiles, electric engineering etc. which the Central Government would feel

necessary to plan and regulate.

(d) Unregulated private enterprise- The industries in this category were left open to the private

sector, individual as well as co-operative.

2. INDUSTRIAL POLICY RESOLUTION OF 1956:

In a short period of operation of the 1948 Industrial Policy, some significant changes took

place in the economic and political spheres that called for changes in industrial policy as well.

The country hand launched a programme of planned economic development with the five-year

plan.

The second five-year plan gave high priority to industrial development aimed at setting up a

number of heavy industries such as steel plants, capital goods industries, etc., for which direct

government participation and state involvement was needed.

Further in December 1954, the parliament adopted the ’Socialistic Pattern of Society’ as the

goal of economic policy which called for the state or the public sector to increase its sphere of

activity in industrial sector and thus prevent concentration of economic power in private hands.

In view of all these developments, a new industrial policy was announced in April 1956. The

main features of this Industrial Policy Resolution of 1956 were as follows:

A. New classification of industries:

The industrial policy of 1956 adopted the classified of industries into three categories viz .,

(I)Schedule A industries, (ii) Schedule B industries, and (iii) Schedule C industries

according to the degree of state ownership and participation in their development:

(i) Schedule A, which contained 17 industries. All new units in these industries, such where their

establishment in the private sector has ready been approved, would be set up only be the state.

(ii) Schedule B which contained 12 industries, such industries would be progressively state owned,

but private enterprise is expected to supplement the efforts of the state in these fields.

(iii) Schedule C. All remaining industries fell in this categories; the future development of these

industries had been left to the initiative and enterprise of the private sector.

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B. Assistance to private sector:

While the industrial policy of 1956 sought to give a dominant role to public sector, at the

same time it assured a fair treatment to the private sector. The ‘policy’ said that the state would

continue to strengthen and expand financial institutions that extend financial assistance to

private industry and co-operative enterprises. The state would also strengthen infrastructure

(power, transport etc.) to help private sector.

C. Balanced Industrial Growth among Various Regions:

The industrial policy, 1956 helped to reduce regional disparities in industrial development. The

policy started that facilities for development will be made available to industrially backward

areas. The state, apart from setting up more public sector industries in these backward areas,

will provide incentives such as tax concessions, subsidized loans etc., to the private sector to

start industries in these backward regions.

The industrial policy1956 thus provided a comprehensive framework for industrial

development in India. However, this policy has been criticized on the grounds that by

enormously expanding the field of public sector it had drastically reduced the area of activity

for the private sector.

3. INDUSTRIAL POLICY OF 1991:

With the gradual liberalization of the 1956 industrial policy in the mid-eighties the tempo of

industrial development started picking up. But the industry was still feeling the burden of

many controls and regulations.

For a faster growth of industry, it was necessary that even these impediments should be

removed. The new package of liberalization measures under its industrial policy on July 24,

1991.

Objectives:

(1) Abolition of industrial licensing:

The new industrial policy abolishes the system of industrial licensing for most of the industries

under this policy no licenses are required for setting up new industrial units or for substantial

expansion in the capacity of the existing units, except for a short list of industries relating to

country’s security and strategic concerns, hazardous industries causing environment

degradation. To begin with, 18 industries were placed in this list of industries that require

licences. Through later amendment to the policy, this list was reduced. It now covers only five

industries relating to health security and strategic concerns that require compulsory licensing.

(2) De-reservation of Industries for Public Sector:

The public sector which was conceived as a vehicle for rapid industrial development, largely

failed to do the job assigned to it. Most public sector enterprises became symbols of

inefficiency and imposed heavy burden on the government through their perpetual losses.

Since a large field of industry was reserved exclusively for public sector where it remained a

virtual non performer (except for a few units like the ONGC).The industrial development was

thus the biggest casualty.

(i) Reduced reservation for public sector:

Out of the 17 industries reserved for the public sector under the 1956 industrial policy, the new

policy de-reserved 9 industries and thus limited the scope of public sector to only 8 industries.

Later, a few more industries were de-reserved and now the exclusive area of the public sector

remains confide to only 4 industrial sectors which are: (i) defence production, (ii) atomic

energy, (iii) railway and (iv) minerals used in generation of atomic energy.

(ii) Efforts to revive loss making enterprise:

Those public enterprises which are chronically sick and making persistent losses would be

returned to the Board of Industrial Reconstruction (BIFR) or similar other high level

ED Unit 2 15

institutions created for this purpose. The BIFR or other such institutions will formulate

schemes for rehabilitation and revival of such industrial units.

(iii) Disinvestment in selected public sector industrial units:

As a measure to raise large resources and introduce wider private participation in public sector

units, the government would sell a part of its share holding of these industries to Mutual

Funds, financial institutions, general public and workers.

For this purpose, the Government of India set up a ‘Disinvestment Commission’ in august

1996 which works out the modalities of disinvestment .

(3) Relaxation in upper limit of Foreign Investment:

The maximum limit of foreign equity participation was placed at 40 per cent in the total equity

capital of industrial units which were open to foreign investments under the 1991 policy; this

limit was raised to 51 per cent. 34 specified more industries were added to this list of 51 per

cent foreign equity participation.

In some industries the ratio of foreign was raised to 74 present. Foreign Direct Investment

(FDI) was further liberalised and now 100 per cent foreign equity is permitted the case of

mining, including coal and lignite, pollution control related equipment, projects for electricity

generation, transmission and distribution, ports, harbours etc.

Recent decision taken to further liberalise FDI include permission for 100 per cent FDI in oil

refining, all manufacturing activities in Special Economic Zones (SEZ’s), some activities in

telecom see tor etc.

4. COMPREHENSIVE POLICY PACKAGE 2000-2006

With a view to provide more focused attention on the development of MSME, the Government of India

created a new Ministry of Small Scale Industries & Agro and Rural Industries in October 1999. Immediately

after the formation of the Ministry, a Mission for the Millennium giving a blue print for small scale and village

industries was announced. To carve out a road map for this sector in the New Millennium, the Hon'ble Prime

Minister constituted a Group of Ministers under the Chairmanship of Shri L.K. Advani the Home Minister of

India in June 2000. The background material for the consideration of the Group of Ministers was provided by

the Interim Report of the S.P. Gupta Study Team constituted by the Planning Commission.

The Group of Ministers considered the recommendations and came out with a Comprehensive Policy Package

for the Small Scale and Tiny Sector which was announced by the Hon'ble Prime Minister Shri Atal Bihari

Vajpayee at first ever National Conference on the Small Scale Industries organised by the Ministry of MSME

& ARI at Vigyan Bhavan, New Delhi on 30th August 2000. The various provisions included for the ssi are:

(1) The small scale and village industries were to be provided incentives and support to facilitate their growth

and employment. It was to be ensured that foreign investment did not displace such industries.

(2) The list of items reserved for SSIs were reviewed with a view to achieve the benefits of economies of

scale, technological upgradation, export capabilities, etc.

(3) Credit flow to SSI was augmented. The financial institutions were motivated to offer factoring services to

SSI in addition to the present system of discounting bills.

(4) The coverage of programmes such as the Prime Minister’s Rozgar Yojna (PMRY) were enlarged to create

new employment opportunities.

(5) The KVIC was organizationally and financially strengthened to be able to generate more job opportunities

under the 2 million jobs programme in KVIS.

(6) Technology development and upgradation in the VSI sector, especially in the case of SSIs, handlooms,

powerlooms, coir, handicrafts, wool etc. received special attention.

(7)integrated Infrastructure Development (IID) Scheme for setting up industrial estates exclusively for SSI

units.

(8) Prime Minister’s Rozgar Yojna for Educated Unemployed Youth.

(9) Enactment of a Delayed Payment Act.

(10) Setting up Testing Centres by Government and Industries Associations.

(11) Setting up & upgradation of Tool Rooms.

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(12) Reimbursement scheme in respect of ISO 9000 Quality Certification for individual SSI units.

(13) Technology upgradation in industry specific clusters.

(14) Focus on the tiny sector.

(15) IT based initiatives for information sourcing.

(16) Setting up of Sub-Contracting Exchanges to facilitate buyer-seller interaction.

(17) Strengthening of entrepreneurship development institutes.

(18) Training programmes on export packaging.

CAPITAL INVESTMENT

Capital Investment refers to funds invested in a firm or enterprise for the purpose of furthering its

business objectives. Capital investment may also refer to a firm’s acquisition of capital assets or fixed

assets such as manufacturing plants and machinery that is expected to be productive over many years.