Essay on Small Scale Industries (SSI)

In this essay we will discuss about Small Scale Industries. After reading this essay you will learn about:- 1. Meaning and Scope of Small Scale Industries 2. Rationale of Small Industries 3. Allocation Efficiency 4. Shortcomings 5. Progress 6. Problems.

Essay Contents:

1. Essay on the Meaning and Scope of Small Scale Industries
2. Essay on the Rationale of Small Scale Industries
3. Essay on the Allocation Efficiency in Small Scale Industries
4. Essay on the Shortcomings of Small Scale Industries
5. Essay on the Progress of Small Scale Industries
6. Essay on the Problems of Small Scale Industries

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Essay # 1. Meaning and Scope of Small Scale Industries:

The “small sector”, as the name implies, consists of small-scale industries.

Following Dhar and Lydall, we can divide the small-scale industries into following three categories, viz.:

(a) Cottage industries,

(b) Agro-based industries, and

(c) Small industries.

(a) Cottage Industries:

These are generally associated with agriculture and part-time and whole- time occupations in rural and semi-urban areas. (Mahalanobis had used the term ‘hand industries’ for them.)

(b) Agro-Based Industries:

These industries are based on the processing of agricultural produce, or they cater to the input needs of the agriculturist Agro-based industries may be organised on a (i) cottage scale, (ii) small scale, or (iii) large scale. Large- scale agro-based industries are generally set up in large cities, or in semi- urban areas. Rural agro-based industries are generally organised either on a cottage or small-scale basis, and possess most of their characteristics.

(c) Small Industries:

We can distinguish between two types of small industries:

(i) Modern small-scale manufacturing enterprises:

These are small-firms using ‘modem techniques to produce modern product’. Technology used by these firms is on par with or closely approximates the modem large-scale industry.

These firms, by their very nature, are located in large towns in order to take advantage of external production economies; they use hired labour and raw materials supplied by large-scale enterprises located at a long distance. Their market is also dispersed in a region or throughout the country, sometimes they operate in export markets.

(ii) Intermediate group of small enterprises:

These firms use more or less traditional techniques to produce more or less modern products’. Here machine production is substituted by labour-intensive non-mechanised (capital-saving) techniques. The orientation of these enterprises, however, is towards urban areas, rather than to villages as they have to procure their raw materials from towns, which also provide market for finished products.

(iii) Cottage Industry and Small Industry:

We can distinguish between these two types on the basis of their links with the rest of the system rather than in terms of their absolute size or technological considerations alone. These links are of the technical or input-output kind as well as of the general economic kind. Small industries are technically and economically connected with the large-scale sector while the cottage industries generally are not

(iv) Small Industry and Large Industry:

The differences between the small and the large industries arise largely because of the distinct organisational character of the former which is indicated by such factors as ownership, management, technique, flow of inputs and output, localisation, and finally the historic sequence of development.

In the official industrial policy formulation, a small industry is defined as a unit having investment up to Rs. 1 crore in plant and machinery. (It takes into account investments in plant and machinery only and does not consider money put into effluent treatment, quality control, fire-fighting equipment and safety. It also excludes the ‘stand by” investments in land and buildings) It also defines a ‘tiny unit’ as an enterprise having an investment up to Rs. 25 lakh (95% of the small scale units are within the investment range of Rs.251akhs.)

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Essay # 2. Rationale of Small Scale Industries:

IPR 1956 established the rationale of SSIs in terms of the following four arguments, viz.:

(i) Employment argument,

(ii) Decentralisation argument,

(iii) Equality argument, and

(iv) Latent resources argument.

In addition, there is also the argument relating to allocation efficiency and the on-going debate about relative merits of lean production and mass production. Let us examine each of these arguments.

(i) Employment Argument:

The most important argument in favour of the SSIs is that they have a potential to create large employment opportunities. These are labour-intensive in character, i.e., they use more of labour per unit of output and investment there has also been an implicit assumption in this argument that small enterprises use less capital per unit of output. Therefore, in a country where labour is surplus and capital is scarce, it is only to be expected that the production process should be decentralised and should be divided into small units.

(ii) Decentralisation Argument:

There are two aspects to this argument— first, there is the need to prevent congestion in large cities through prevention of growth of industries there; secondly, this negative measure has to be reinforced by promoting industrial growth in semi-urban and rural areas so that the local people can stay on their areas without emigrating to the nearby cities.

A third variant of this argument is that small industry helps in fostering enterprises from amongst the members of castes, classes and professions which have hitherto not contributed or contributed poorly to the entrepreneurial class in India. These include, apart from others, SCs, backward/poor classes, STs, technicians and other professionals.

(iii) Equality Argument:

Large-scale industries, generally, lead to inequalities of income and concentration of economic power. An SSI, on the other hand, it is asserted, “will lead neither to swearing nor to inequitable distribution but will result in a large and more widely distributed sharing of the productive function and therefore to a more equitable distribution of the produce of industry.” It is also held that as most of the small enterprises are either proprietary or partnership concerns, the relations between workers and employers are more harmonious in small enterprises than in large enterprises.

(iv) Latent Resources Argument:

This argument justifies the cause of SSIs on three grounds as follows: first, it presumes that there is to be found a large number of small and potential entrepreneurs who are capable of running industrial units efficiently if appropriate opportunity and help is extended to them. Secondly, there are a large number of potential enterprises whose full capacities have not been used so far. Thirdly, SSIs will be helpful in putting idle savings in productive use.

Lean Production Vs. Mass Production:

Another persuasive line of argument developed concerns the debate regarding the relative merits of mass production and lean production. The first industrial revolution had brought about mass production. It was much more efficient than the then prevailing craftsman type of production. In an effort to find a way to surpass the Americans, Japanese invented a new system of production: this came to be known as lean production.

There are two key organisational features of a lean production facility:

(i) It transfers the maximum number of tasks and responsibilities to those workers actually adding value on the line,

(ii) It has in place a system for detecting defects.

It quickly traces every problem, once discovered, to its ultimate cause. Mass production does precisely the opposite. It transfers responsibilities away from the value-adding worker. He is left with a single repetitive task. It increases the efficiency of that worker, but he then needs a battery of supporting specialists to be able to concentrate on their task. When all the support services are taken into account, the overall productivity drops.

A lean producer is able to offer greater variety and far better quality at a lower cost, such that the mass producer is simply unable to compete. A small-scale industry, rather than a range industry, is in a better position to be a lean producer.

As a result of its limited resources, it can invent lean production methods that make it cast-efficient. This largely explains why many industries like pharma, soaps and detergents, automobiles, etc., find it cheaper to sub-contract than produce all their requirements by themselves.

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Essay # 3. Allocation Efficiency in Small Scale Industries:

It is argued that small enterprises use the factors of production more efficiently, since they face factor prices that are closer to the existing scarcities, i.e., they pay lower ‘wages and incur higher capital costs.

This should then be reflected, on the one hand, in lower capital-output ratio, since a higher interest rate corresponds to a higher capital productivity, and, on the other hand, in lower capital-labour ratios, since the wage-rental ratio is lower. Other Arguments A number of other factors, both economic and sociological, lend strength to small industries.

Among the economic factors, the more important are as follows:

(i) The new feature of Internet and Communication Technologies (ICT) is that they enable a much smaller scale of efficient production, compared to the earlier factor technologies.

(ii) For minimisation of risk, a new line is opened on a small scale.

(iii) Where the material to be worked upon is not uniform, where the processes are not amenable to quick repetitions and where the products are not standardised, large-scale methods are not suitable or economical, and here small industry thrives on its own strength.

(iv) Market imperfections, due either to consumer resistance or to transport cost, also limit the size of the market and the scope of large-scale production.

(v) The small sector has certain inherent advantages in terms of flexibility of decision-making. This makes small firms more innovative and open to new ideas.

(vi) This sector is better placed to cater to specific and changing customer needs. It may be noted that one of the finest sports cars in the world is made on small scale.

(vii) Small industry may undercharge the consumer on the assumption that it is really a low-cost industry, by not providing for, unwillingly or otherwise, adequate depreciation or remuneration for the factors of production owned or hired from friends and relatives. And the prices so set at these costs may be competitive with that at large industry.

(viii) Not to attract the provisions of the anti-trust legislation or to war public sympathy, large industry fixes a price higher than normally warranted, and this price umbrella protects small industry.

(ix) Introduction of the new technology has increased the sophistication of products and augmented their consumer orientation. This trait of the new technology has gone counter to mass scale production of a product with a given specification. Consumer orientation and preference for change as well as individualistic consumer tastes favour flexible manufacturing systems, introduction of computer-aided designs (CAD) and computer-aided manufacturing (CAM). All these favour small firms.

(x) Small sector plays an important part in the innovation process. For example, in recent years, about 10 percent of all patents registered in India have come from the small scale sector.

(xi) Small sector has built up brands that are small, reliable, trusted and local. These tiny brands have remained small in their volume turnover but are truly big in their equity in the markets they operate in.

Above all, in view of the ongoing SAP, the social and economic pressures that the transformation of an agrarian economy often generates would be eased if large numbers of those currently involved in agriculture find a role in rural small-scale industries. This interaction has the potential to smoothen the process of liberalisation of the rural economy.

Among the sociological factors, the more important are as follows:

(xii) There exists in man a desire to gamble, so that he takes risks irrespective of consequences, and small industry provides an outlet for this desire.

(xiii) Man often enjoys the independence or status of an entrepreneur for its own sake, and this is possible for more men in small industry than in large industry.

(xiv) Man starts his own business to provide employment to members of his family who may be unemployable or less gainfully employable elsewhere.

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Essay # 4. Shortcomings of SSIs:

Before concluding the section we would also like to point out a few shortcomings from which the SSI sector suffers.

(i) It forgoes possible benefits from economies of scale. This means that the prospects of small-scale units are best in sectors where economies of scale are less important.

(ii) It may not be possible for a small firm to utilise its capacity as much as a large firm can do for a variety of operational problems related to demand/power, finance, management, etc. In some cases, this may result in sickness and eventual closure.

(iii) Small industry is an easy entry sector and is, therefore, prone to overcrowding, and this tendency is accentuated by the incentive schemes.

(iv) Small sector may not be the most promising route to technological upgradation and dynamism because in most of the new sectors technology creation has become increasingly capital-intensive. The risk involved is also much greater. Hence, an emphasis on small-scale industry may result in the loss of a major source of productivity growth, namely technological progress. Increasingly, sub-contracting and subcontracting are becoming the nature of organising production.

(v) A significant segment of this sector is engaged in polluting industries. Apart from the fact that small scale production technology is inherently more polluting compared to large scale production, the small units suffer from certain disadvantages in controlling pollution. In many units the design of the effluent treatment plant is not proper. In many locations, adequate land space is not available for installation of treatment plant Non-availability of trained technical personnel poses a big hindrance. Financial constraints inhibit modernisation of production process on the one hand, and building and operation of treatment plant on the other.

(vi) An important argument against small-scale industrial units is the difficulty in controlling them, particularly in respect of taxation and labour legislation. Wages are often below acceptable standards and work hazards occur frequently.

Notwithstanding these shortcomings, SSIs present a pattern of industrialisation which is immensely favourable to the conditions obtaining in the country. They have the potential to provide gainful employment to a fast-growing force; they can be promoted with little capital; they help in the decentralisation or the horizontal spread of economic growth; they lead to a better distribution of gains of development and are a potent instrument to mobilise latent resources. Above all, small industries go well with the level of technology indigenously available.

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Essay # 5. Progress of SSIs:

Growth in file small sector can be measured with reference to the following:

(i) Industrial units,

(ii) Production,

(iii) Employment,

(iv) Capital investment, and

(v) Exports.

Assessed by any of the criteria, the small sector has recorded a spectacular growth over the last five decades. The SSI sector presently accounts for about 40 per cent of the total industrial output and contributes about 35 per cent of the total direct exports. So far as employment is concerned it comes next only to agriculture. The sector accounts for a major chunk of fresh job-creation (3.2 million in the Ninth Plan and an expected 4.4 million in the Tenth Plan).

Employment growth rate in this sector has always been more than in any other segment of the manufacturing sector in India, as would be see from Table 1 below:

The future role of this sector would largely be determined by its ability to create more employment opportunities. With decline in agricultural employment and virtual stagnation in the organised manufacturing sector, employment in the SSI sector has emerged as the only ray of hope. Of course, it cannot be expected that this sector by itself will be able to resolve the last unemployment problem, but the sector, nevertheless, can make a significant contribution.

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Essay # 6. Problems of SSIs:

The organisational pattern of SSIs places them at a distinct disadvantage vis-a-vis well-organised real, i.e., the organised urban industries and large- sale industries. This disadvantage, in turn, gives rise to a number of problems with which these industries have to contend. As a preparatory note to these problems two observations need be made.

i. Most of the problems of these industries arise from their being small in size. They seem to be caught in a vicious circle. Their small size prevents them from taking advantages which can accrue only to large units; lack of these: advantages prevents them from moving up the ladder.

ii. Most of the SSIs refuse to move up the ladder, primarily because that prevents them from taking advantage of many benefits and incentives mat are extended by the State only to the small units. With this preparatory note, we discuss the major problems being faced by these industries in India.

(i) Problem of Finance:

The most important problem faced by these industries is that of finance. Partly, the financial problem of SSIs is a part of the wider problem of capital scarcity in the economy as a whole, and partly because of the peculiarity of small industry organisation.

It is common to find several firms involved in a related business and operating from the same office. Usually, the same people manage different firms and the multiplication is merely to get around the excise net. It is difficult to find willing lenders for unknown firms.

SSIs cannot resort to capital market, nor float CPs or tap GDR/Euro- route, they have poor capital base and are also compelled to sell their products/services on credit basis to their clients which in turn impairs their resource availability.

The creditworthiness of small borrowers is generally weak, and, therefore, they find themselves face to face with reluctant creditors who may be induced to lend only at higher rates of interest. A rough estimate would indicate that in the small-scale sector about 15 per cent manage their affairs with their own funds and about 35 per cent with funds borrowed from private sources such as friends. The remaining units depend on funds secured from institutional credit agencies.

The institutional agencies smack of a number of evils. Not only are the funds allocated by them inadequate, but also entrepreneurs are often required to furnish detailed information about many aspects. More often than not, much of the initial enthusiasm and energy of entrepreneurs is spent on proving eligibility and justifying the quantum of assistance sought.

(ii) Problem of Raw Materials:

Another major difficulty facing the SSIs is the procurement of raw materials. Scarcity of raw material means a waste of productive capacity for the economy, and a loss for the unit.

The problem has assumed the shape of:

(i) An absolute scarcity,

(ii) A poor quality of materials, and

(iii) A high cost.

A scarcity of metal, chemical and extractive raw materials is a general problem faced by the economy. Because of scarcity, competition has increased, and the small units competing with the large-scale producers have suffered severely.

(iii) Problem of Power:

The problem of shortage of power has become so widespread that for the last few years it has been among the most glaring and telling problems of the economy. But its impact is decidedly fatal on small producers; large industries manage to escape somehow.

There are two aspects to the problem:

i. Power supply is not always, everywhere, available to the small industry on the mere asking, and wherever it is available, it is rationed out, limited to a few hours in a day. It means that if a small unit can manage to take advantage of the supply at fixed hours, well and good, otherwise, it will have to let its capacity go un-utilised, thus adding to cost.

ii. Unlike large industries the SSIs cannot afford to go in for alternatives, like installing own thermal units, because of heavy costs involved. A small unit has to manage as best as it can within the available means.

(iv) Problem of Marketing:

Most of the SSIs, except a few urban-based units which act as ancillaries to the large industry, are forced to restrict their sales to the local market, tailoring their supplies to the local needs.

Not infrequently, a lack of demand and accumulating stocks leave with them no working capital to procure more raw materials and other physical resources to keep the production units moving. The inability to procure clientele from distant markets compels them to restrict their scale of operation, and forgo economies of scale, which a unit of an optimum size can derive.

Further on, in the post-WTO scenario SSIs would have to face increasing competition from imports. The process of removal of quantitative and non-quantitative restrictions across countries has led to agree movement of goods between countries including India. The SSIs would have to gear themselves up for these realities.

Ancillary industries have their own problems, like:

(i) Delayed payments by parent units,

(ii) Inadequacy of technological support extended and/or supply of critical raw materials by parent units,

(iii) Non-adherence to quality and delivery schedules, thus disturbing the programme of the parent units,

(iv) Frequent changes in fiscal levies, and

(v) Absence of a well-defined pricing system and regulatory agency.

(v) Export Difficulties:

The systematic evolution of the small sector in India with its economies of operation particularly in the case of labour-intensive or batch-process items has contributed in a large measure to the gradual expansion and divergence of the country’s export pattern. But the sector faces problems in exports which make it difficult for it to undertake exports in an organised and appreciable manner.

Linkages like those provided by the Shogososha in Japan and the large trading houses in Korea are lacking. So far very little organised effort seems to have been made by this sector towards organising specific export-oriented industries.

(vi) Problem of Technical Know-How:

Except for a small segment of modern small-scale industry that makes use of state of art technology, the sector is saddled with obsolete technology. With no access to latest developments in the field of knowledge and skills, productivity in this sector continues to be low.

The new policy regime, with a virtual ‘open door’ policy towards foreign investment and technology in most areas of industry and infrastructure, is likely to intensify and accelerate the process of technological polarisation between the large and small-scale sectors.

Further, there is a growing tendency for small units to go in for capital- intensive and labour-saving techniques of production, defeating the very concept and the very justification of small units. This can be attributed to the large measure to entrepreneurs’ fear of getting involved in employment- related laws and of getting victimized.

These laws warn the entrepreneur of a jungle of formalities of Factories Act, E.S.I., P.F. and so on, of penalties, damages, court proceedings, fines, convictions and even imprisonments for violating any of the innumerable provisions. The entrepreneur becomes vulnerable to all these if he employs enough people to get ‘covered’ under any of these Acts, and hence his preference to switch over from labour to capital.

(vii) Exogenous Forces:

The exogenous forces acting on SSI performance are both direct and indirect. They come from multiple sources and influence the policy environment within which the SSIs operate. Such forces are exposing SSIs to a world of intense competition, risks and uncertainties, technological progress, mandatory and voluntary standards.

Some of these exogenous forces are as under:

1. Advancement in generic technology of computers and telecommunications.

2. Rise in E-commerce

3. Globalisation and liberalisation policy including unilateral liberalisation

4. Multilateral trading rules under the WTO.

5. Bilateral/regional agreements

6. Mergers and acquisitions

7. Labour and environmental standards

8. Liberalisation of services/infrastructure

9. ‘Sourcing out’ of activities to outside firms

10. Growth in world demand for variety of services, such as web- marketing, mark, research-based advertising, customize’ products, micro retail marketing, etc.

(viii) Other Problems:

There are a few other problem also that merit immediate attention of the policy-makers.

(a) A significant problem facing the small industry is that when they grow from small-scale size an just pass the value limit of in-plant and machinery, i.e., the sacrosanct ‘Lakshman Rekha ‘the ‘Sita’ of spate of concessions and protection available to them is withdrawn. They have to face open competition in every sphere of activity. A major problem that the small units face all over the country is on account of delayed payments by their large-sized customers.

Government undertakings and departments are just as guilty in this respect as the industrial houses in the private sector. The general pattern on which the small units function is that they purchase their raw materials against cash and effect their supplies to large houses on credit Any delay in payments is only a test of patience for survival for them.

This problem remains as it is despite enactment of the Interest on Delayed Payment to Small-scale and Ancillary Industrial Undertakings Act, 1999 which makes payment of interest obligatory of delayed payments.

(b) Although SSIs have been taken off from location, restrictions under the IDR Act, there are various kinds of locational bars under various land development regulations and local body laws such as Municipal Acts, Urban Land Development Act, Gram Panchayat Act, etc. In addition, site clearance and approval are also required under the Factories Act and Pollution Control Acts. A related problem being faced, in more receive times, is the lack of accommodation.

(c) The entrepreneurs are being forced to set up their unit in rented accommodation. However, such units a very often not in authorised industrial areas. Even these happen to be in industrial areas, the entrepreneurs are denied registration since they will not that original allottees of the plots. Denial of registration means that they cannot avail of any of the benefits applicable to small-scale units, this problem arises in part due to the fact that contrary to expectations SSIs have tended to concentrate at a few places only.

(d) Another major problem being faced by SSI is that of deteriorating industrial relations. In the organised sector of industry, labour is well organised; there exist established channels of negotiation between the employer and the employees.

Any disturbance in a large unit also attracts the attention of the government. But it is not so in a small unit. The direct communication between the employer and the employees is the only source of negotiation; if their relations are strained, tempers boil up spoiling the peace of the unit.

This adversely affects the production and utilisation of installed capacity. There is the problem of high rate of mortality among units. Most of these units are marginal buyers of inputs and marginal sellers of output. Any factor that adversely affects the input or output situation tends to throw out a number of existing units from existence. Sickness among small units is a widespread malady.

(e) The States worst affected are West Bengal, Tamil Nadu, Uttar Pradesh, Andhra Pradesh, Maharashtra and Madhya Pradesh in that order. The problem of sickness in SSI, as recently noted by the Small-Scale Industries Board- the highest government body dealing with policy formulation relating to SSI-is two-fold: One, the inability to detect sickness at the incipient stage; and two, incidence of large number of non-viable sick units with both the entrepreneur and the bank saddled with idle non-performing assets.

Talking about sickness in the small sector, we get confronted with a few other problems:

(a) Faulty planning and inadequate appraisal of projects. Majority of the SSI units are started without feasibility studies or detailed project reports.

(b) Problem of recoveries. It is an established practice for buyers to expect credit from sellers. This practice is forced upon the small industrialists by the large ones. A situation has developed in which buyers do not pay for fairly long and get away with it.

(c) Small sector does not have the advantage of latest technology which alone can ensure quality and a high rate of productivity.

(d) There is a lack of interest on the part of financial and banking institutions in the revival of sick units.

(e) Small industries lack resources for modernisation which is essential in many cases for rehabilitating them.

(f) In view of the difficulty in achieving rationalisation of operations, small industries find it difficult to improve quality standards and productivity.

(g) Both for rehabilitation and modernisation the small industrialists require a first rate consultancy service which is not available.

(h) The full potential of ancillary production which affords a certain measure of market security to small firms has not been exploited.

SSIs constitute an important segment of the Indian economy. It is admitted that some of the problems facing SSIs are a part of the problems being faced by the economy in general, but the other problems of SSIs are due to their peculiar character. The State’s role would very much be called for to remove the disadvantages arising out of such peculiarities.

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