Problems of Small Scale Industries

Everything you need to know about the problems faced by small scale industries in India.

Small scale industries are industries which produce goods or provide services on a small scale with the help of machines, hired labour and power.

Small businesses face various problems because of their small size. They have limited capital for expansion.

They are unable to take advantage of economies of large scale production and also lack motivation for expansion as they are unable to take benefit of the government schemes and incentives. As a result, the business units may become sick or even close down their operations.

ADVERTISEMENTS:

Some of the problems faced by small scale industries in India are:-

1. Shortage of Funds 2. Lack of Latest Technology 3. Shortage of Raw Materials 4. Shortage of Power 5. Labour Problem 6. Marketing Problem

7. Managerial Skills 8. Quality 9. Problem of Industrial Sickness 10. Production Problems 11. Technology Problems 12. Financial Problems 13. Personnel Problems

14. Problem of under Utilization of Capacity 15. Poor Project Planning 16. Inadequate Infrastructure 17. Absence of Vertical Growth 18. Global Competition 19. Export Related Problem.

Problems of Small Scale Industries in India: Shortage of Funds, Labour Problem, Technology Problems and a Few Others

Problems of Small Scale Industries – 9 Major Problems: Shortage of Funds, Lack of Latest Technology, Shortage of Raw Material, Shortage of Power and a Few Others

Small business enterprises face large number of problems in spite of their growth and development in India.

ADVERTISEMENTS:

Some of them are discussed below:

1. Shortage of Funds:

Small business entrepreneurs don’t have enough long- term or short-term funds. These are, therefore, short of both fixed assets as well as working capital. Even the banks do not come to their help in a big way. Financial institutions like ICICI, IDBI and IFCI help only large scale industries.

ADVERTISEMENTS:

2. Lack of Latest Technology:

Small business lacks funds. Latest technology is not used because it is expensive. Only old methods and techniques are being used. Due to this they earn less margin of profit.

3. Shortage of Raw Materials:

There is shortage of raw material because of less working capital. They can’t buy in bulk during the season and cannot enjoy the economies of large scale.

4. Shortage of Power:

Because of shortage of power, the small business enterprises are not able to use full capacity of the plant at their disposal. They cannot afford to have their own power generators.

5. Labour Problem:

The labour is mostly unskilled. Small business don’t have resources to provide good training. Labour are also not paid well. There is no motivation for professional growth. Small business is incapable to bargain with powerful trade unions.

6. Marketing Problem:

ADVERTISEMENTS:

Small business cannot face the competition with large scale units in marketing and selling. They cannot afford to spend much on advertising and proper distribution of goods. They have to depend on middlemen, who pay low prices and even the recovery from the middlemen is very slow.

7. Managerial Skills:

Only individuals or a small group of people own and operate the small business units. They don’t possess professional managerial skills required to run a business successfully.

8. Quality:

ADVERTISEMENTS:

Small business finds it difficult to come upto global standards of the quality. They also don’t have funds for research in order to improve upon the quality. The product quality is their weakest point as compared to the standards of the large scale units.

9. Sickness:

It is painful to see most of the small units going sick. There is a lack of planning. Skilled and trained personnel is another hurdle. They have to sell on credit. Their customers do not pay them in time. There are large scale bad debts. Thus, they fall short of working capital to keep the production process going. This leads to sickness.

Problems of Small Scale Industries – Production, Technology, Financial, Personnel and Marketing Problems

Managerial inadequacies pose serious problem for small scale units. Modern business vision, knowledge, skill, aptitude and whole hearted devotion. An entrepreneur is a pivot around whom the entire enterprise revolves. Money small scale units have turned sick due to lack of managerial competence on the part of entrepreneur.

ADVERTISEMENTS:

Competence of the is vital for the success of any venture, entrepreneurs. An entrepreneur who is required to undergo training and counselling for developing his managerial skills will add to the problems of entrepreneurs.

The small scale entrepreneurs have to encounter numerous problems relating to over dependence on institutional agencies for funds and consultancy services, lack of creditworthiness, education, training, lower profitability and host of marketing and other problems. The Government of India has initiated various schemes aimed at improving the overall functioning of these units.

An important problem faced by small scale entrepreneurs is poor project planning. These entrepreneurs do not attach much significance to viability studies i.e., both technical and economical and plunge into entrepreneurial activity out of more enthusiasm and excitement.

They do not bother to study the demand aspect, marketing problems, and sources of raw materials and even availability of proper infrastructure before starting their enterprises. Project feasibility analysis covering all these aspects in addition to technical and financial viability of the projects, is not at all given due weightage.

Inexperienced and incomplete documents which invariably results in delays in completing promotional formalities. Small entrepreneurs often submit unrealistic feasibility reports and incompetent entrepreneurs do not fully understand project details.

Moreover, due to limited financial resources they cannot afford to avail services of project consultants. This result is poor project planning and execution. There is thus adverse impact on the interests of these small scale enterprises.

1. Production Problems:

ADVERTISEMENTS:

The objective of an entrepreneur is achieved when he is able to dispose of his products at a price, which covers necessary profits to maintain production levels. In a competitive market, an individual producer or seller has to supply such goods as are not inferior to the goods of other competing firms. Therefore, the problem is to maintain and improve quality of production.

The inferior quality of goods produced in the small-scale industrial sector is due to certain reasons:

i. The small-scale producers tend to produce goods of poor quality for the simple reason that inferior production involves a lesser capital outlay and production time.

ii. The small-scale producers are encouraged to produce goods of poor quality because such goods are easily sold in the market as a result of their low prices.

iii. Shortage of raw materials of good quality at reasonable rates also compels the small-scale producers to utilize inferior raw materials, which are available easily at a cheaper rate.

iv. The quality of goods is inferior due to the inappropriate use of modern technology by the small-scale industrial units, which cannot afford to pay the expenditure involved in production research.

ADVERTISEMENTS:

The price of a product is determined by its quality. It is essential that quality products are produced at reasonable prices. Therefore, the main aim should be to motivate the small-scale sector to produce high quality goods by providing them necessary financial assistance, raw materials, technical guidance, marketing assistance, etc.

The Small-Scale Units are faced with the problems of scarcity of raw materials. There is shortage of raw materials like iron and steel, pig iron, ‘A’ grade coke, chemicals etc., small scale industries are weak in financial position. They have to utilize the services of intermediaries to get raw materials on credit. Such an arrangement results in higher costs and is disadvantageous when raw materials are imported, for the profit margins of intermediaries are rather high.

Different types of industries require different types of raw materials. There are industries, which use indigenous raw materials while there are also industries, which are based on imported raw materials. According to their availability, raw materials can be classified into scarce raw materials and freely available raw materials. The non-availability of raw material in sufficient quantities has been the main problem with small-scale industries.

The shortage of scarce raw materials is likely to continue in future also. Therefore, the strategy for the development of industries should be such that the industries based on indigenous and local raw materials are encouraged and those based on imported raw materials are discouraged.

However, it should be the responsibility of the state to meet all the needs of the existing industries by guaranteeing liberal distribution of raw materials from the state depots and issuing import licenses for reasonable quantities of foreign raw materials required for production.

2. Technology Problems:

ADVERTISEMENTS:

Small enterprises are often regarded for their labour intensity and the capability to work with local resources. In the past, this has often led to less emphasis on technology. Run of the mill technology coupled with functional packaging and inadequate finishing have at times led to small sector products being labelled as being of poor or substandard quality. This has a cascading impact on competitiveness. As small enterprises realize the need to link up with large ones, they are having a relook at technology options which would improve productivity, effectiveness and competitiveness.

While sourcing technology, small business needs to concentrate on the following essential issues:

i. Information about Technology:

For small units information about technology options is often through word of mouth or from a visit to an advanced unit. With the advent of internet, new vistas are opening up through electronic journey catalogue downloads and advanced search facilities. The technology bureau for small enterprise promoted with the assistance of the UN offers access to databases and information on technology.

Technology intervention in clusters offers nearby units an opportunity for a look and feel of advanced technology. Entrepreneurs are also assisted to participate in overseas trade fairs to update them with latest worldwide. Tool rooms, testing centres, production-cum-process centres and workshops also assist in this task.

ii. Actual Procurement of Technology:

ADVERTISEMENTS:

Barriers to import technology, technology transfer issues, vendor capability, after sales support, import procedures impede procurement. In India, the Asia Pacific Centre to Transfer of Technology promotes match making between buyer and seller and facilities procurement through escort services. Encouragement to import of capital goods has also helped.

iii. Finance for Technology Upgradation:

Small enterprises look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs. In India, a technology upgradation and modernization fund and a hire purchase scheme attempts to meet this requirement. These are however, funds at normal lending costs. A new scheme called the credit linked capital subsidy scheme, for reducing the cost of funds, has now been put into place.

3. Financial Problems:

Industrial finance has been one of the most important problems of the small scale industrial producers who are persons of small means and require short-term and medium- term finance to meet their business obligations.

Short-term loans are needed for meeting the current expenditure on items like purchase of raw materials, payment of wages, overheads, etc., long and medium term loans are required for purchase of fixed assets like land and building, machinery, utensils, furniture and other equipments of a permanent nature. The success of the small-scale producers is largely affected by their ability to arrange adequate money in time.

Efforts have been made to analyse the various financial problems of the small-scale sector. Small Scale Industrialists do not have sufficient funds of their own for fixed capital as well as for working capital. The shortage of funds makes it difficult for them to install modern machinery and tools and to maintain well-organized factories. Generally, the small- scale units are not in a position to offer the guarantees required by the lenders.

Working capital has been foremost problem followed by inadequate assistance from banks. It is best a corollary of the previous factor since working capital is mainly granted by banks and if the banks are not extending sufficient assistance then the shortage of working capital will be the result.

Banks prefer only those industries, which could repay regularly. The small units often fail to repay the loan in the stipulated period and therefore banks are not willing to assist of the small units and therefore there is hardly any profit reinvest able in future. Most of the small units remain small due to lack of profits to plough back.

i. Sources of Finance:

Most of the entrepreneurs in the small-scale sector see shortage of finance or capital as the most important factor responsible for a host of problems. Small scale sector units generally depend on two kinds of capital, viz., – a. equity or own capital, and b. borrowed. capital consisting of – (a) long term capital for investment in equipment and other capital assets, and (b) short-term capital to meet current needs of the industry.

The industrialists themselves usually provide equity capital. The resources obtained from friends and relatives as either partners or shareholders sometimes supplement it. Small entrepreneurs generally do not encourage equity capital from outside agencies as it involves sharing of management and control. Much of this initial capital is required for the purchased of fixed assets like land, building, plants and equipments and the balance for working capital.

Owned capital may not be sufficient to meet the long-term needs. In such cases, besides owned capital, long-term capital is needed for expansion and renovation of plants, and modernization of machinery. Short-term credit is needed for working capital to buy raw materials and stores, to pay wages, to hold stocks of finished goods, etc.

Small-scale entrepreneurs cannot bank upon their own resources alone to meet their needs and the need to resort to some external resources on their part is obvious. Many industries are unable to make good progress owing to the shortage of finance. They have depended on borrowed capital.

The Micro, Small and Medium Enterprises sector (MSMEs) is an omnibus group of industries of vastly varying sizes. Based on the size of investments in plant and machinery, these enterprises are classified-as micro (not exceeding Rs.2.5 million), small (more than Rs.2.5 million but not exceeding Rs.50 million) and medium (more than Rs.50 million but not exceeding Rs.100 million).

This group of industries provides employment to 60 million persons and account, in value terms, for about 45 per cent of manufacturing output and 40 per cent of India’s total exports. The authorities have made heroic efforts to foster development of this sector, yet most of these units have limited track record and are vulnerable to cyclical fluctuations and often macroeconomic policies impinge adversely on these enterprises.

ii. Inter-Sectorial Payments:

One of the major problems of the smaller industrial units is that as a general rule, the smaller the unit, the larger the problem in collecting receivables. The problem starts with the government (Central and State), which holds back payment to public sector units (PSUs) and the PSUs, in turn, hold back payments to large and medium industry.

Large and medium industry holds back payment to the smaller units, which have nowhere to shift the burden. Even when deliveries are completed the technique used is to hold back the final inspection clearance of completion of work; this sets off a chain of dues not being paid. Invariably it is the smallest units, which suffer the most.

Following the Report of the Vaghul Working Group on the Money Market (1987), which recommended that the commercial bills system should be developed, with a minimum proportion of dues being under the bills system with a specific data of payment and defaults were not to be countenanced. The system never took off despite painstaking efforts by the Finance Secretary S. Venkitaramanan.

With the enactment of the Micro, Small and Medium Enterprises Development Act, 2006, it was felt that many of the problems of the smaller units would be alleviated. These hopes have been belied and the smaller units continue face acute problems.

iii. Bank Credit:

Bank credit to the MSME sector has increased in recent years but these units continue to experience problems in accessing credit. Banks have been directed to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent growth in the number of micro enterprise accounts. Credit by scheduled commercial banks to micro and small industries accounts for only 13 per cent of bank credit to industry.

It is argued that banks are reluctant to lend to small units as this segment has high non-performing assets (NPAs). The fact is that NPAs are prevalent across-the-board as between larger and smaller industrial units. The only difference is that there is “glamour” in lending to larger units.

There is a lot that banks can do to improve their procedures and operations to anticipate problem areas and take remedial action. R. S. Sabu of Federal Bank has written a path breaking paper on ‘Driving Profitable Growth in SME’, The Indian Banker, March 2014, Indian Banks, and Association. He sets out an in-depth analysis of the problems of SMEs and explains how best banks bring about improvements in the credit delivery system to this sector.

The Banking Codes and Standards Board of India (BCSBI) has set out two Codes viz., The Code of Bank’s Commitment to Customers (2006, revised in 2014) and The Code of Bank’s Commitment to Micro and Small Enterprises (2008, revised in 2012). All industrial units should acquaint themselves with these Codes so that they are aware of the Charter of Rights for bank customers.

Small units, which are unable to get a satisfactory redress of grievances from banks, within a month can approach the Banking Ombudsman. Furthermore, redress can be sought from the Consumer District Forum (for amounts up to Rs.2 million), the State Consumer Commission (for amounts above Rs.2 million and up to Rs.10 million) and the National Consumer Commission (for amounts of over Rs.10, million).

iv. Strategies for MSMEs in a Rapidly Changing Macroeconomic Environment:

The macroeconomic scenario in the ensuring few years will be changing rapidly and MSMEs have to preface themselves to face the turbulence. Facing up to these problems is easier said than done but the units which will better survive the rapidly changing environment would be those who use a survival kit to develop optimal strategies for their operations.

Some essentials are set out below:

a. Realistic Assessment of Morale Building Assurances:

MSMEs would be well advised to cautiously assess morale building assurances such that the global financial crisis of 2008 would be transient and that the global situation would normalise in 12-18 months. In the event six years after the crisis hit the global economy, it is still not clear as to when the global economy would eventually come out of the doldrums.

Again, in India, a few years ago there were clarion calls that India was on the cusp of a 10 per cent real GDP growth rate. MSMEs, which accepted these assurances and built up capacities and kept up production levels, resulting in very high inventories, were devastated.

Furthermore, when demand for a product falls, local authorities often pressurize small enterprises not to cut output as this would eventually result in labour lay-offs. Units, which accepted such per suasion, faced disastrous outcomes.

b. Rapid Expansion of Capacity:

Quite often, MSMEs come to the erroneous conclusion that their product would experience an unrealistically high increase in demand. Units, which build up capacities on tenuous information invariably, end up with serious problems.

In a savagely competitive environment some units are unable to adjust to cyclical fluctuations and invariably there are ‘fire sales’ which are available to buyers at attractive prices. There is merit in building up financial resources to avail of such opportunities rather than increasing the capacity of their existing units.

c. Interest Rate Cycles and Excessive Dependence on Bank Credit:

During the expansionary phase of the credit cycle, banks are only too willing to lend but during the downturn small borrow are invariably the first casualties in being denied additional credit. When MSMEs seek bank credit, they have to assess whether they can service loans not only at the trough of the interest rate cycle but also at the peak level of interest rates.

Thus, as an abundantly prudent measure, MSMEs should, as a general rule, be well advised to seek bank credit essentially for inventory financing but be very cautious when using bank finance for capital expenditure. Excessive borrowing for capital expenditure generally puts MSMEs in to distress during cyclical movements in the economy.

Financing by taking recourse to Private Equity is gradually developing and investors, essentially from abroad, undertake rigorous exercises before investing in small companies. Domestic Private Equity Funds are also emerging and there is scope for such institutional investment to grow.

MSMEs need to realise that when large industrial units move from bank to non-bank sources, such as commercial paper, they are able to reduce overall costs of finance. In contrast, when small units take recourse to non-bank sources of financing, they end up facing a steep increase in interest costs.

There is enough anecdotal evidence of small units availing non-bank finance at very steep interest rates which could be as high as 3 per cent per month (36 per cent annum), or even higher if there is inadequate collateral. MSMEs must realise that availability and timeliness of bank credit is much more important than cost and often agitation by borrowers for lower rates is often misplaced.

d. Importance of an Appropriate Exchange Rate:

MSMEs account for about 40 per cent of exports. It is unfortunate that there is a widely held perception that a strong rupee exchange rate reflects good macroeconomic management. This is clearly erroneous. Large industry is generally-import intensive while small industry is export intensive.

Hence a strong exchange rate of the rupee (i.e., an overvalued rupee) helps large industry and hurts MSMEs. It is not as if the exchange rate should be excessively undervalued. As a rule of thumb, over the medium/long-term, the nominal exchange rate of the rupee vis-a-vis the major industrial country currencies should be adjusted downward based on the inflation rate differentials between India and the major industrial countries.

If interest cost is say 10 per cent of total costs a five-percentage point reduction in interest cost results in a 0.5 per cent reduction in total costs. In contrast, a 5 per cent depreciation of the rupee results in a 5 per cent increase in export earnings. Thus, an appropriate exchange rate is far more important than the cost of bank credit.

An overvalued exchange rate makes MSMEs uncompetitive in international markets. Furthermore, an overvalued exchange rate also adversely affects MSMEs, which operate essentially in the domestic market; foreign goods become cheaper in Indian markets and price out Indian products. Examples of such loss of markets are glue, toys and now even kites.

Using the long-term inflation rate differential between India and the US, the rupee US dollar rate needs to depreciate from its current level by about 10-12 per cent; this extent of overvaluation makes a very large difference to the competitiveness of Indian exports.

Indian exporters/importers are often advised by forex advisers to keep open positions in the forex markets. This is extremely risky, particularly for MSMEs. MSMEs would be well advised to be fully covered in the exchange market at all times. MSMEs should not attempt to be forex traders; they should concentrate on their own line of production.

With the Indian economy rapidly integrating into the global economy, rapid changes in the Indian macroeconomic situation are inevitable. Essential to the survival kit for Indian MSMEs would be the imperative need to follow cautionary financial operations.

4. Personnel Problems:

Labour is an active and essential factor of production. The supply of labour in the State has rapidly increased because of increase in population. It is however, important to mention that mere increase of population is not helpful in the economic advancement of a nation, which can put its material resources to better economic use only if labour of a superior quality becomes available.

The quality of labour can be improved by proper education and training. General education is important for every citizen but an industry requires special type of literate persons i.e., technical and managerial personnel.

The small-scale sector is predominantly labour-intensive and it provides employment to a large number of people. The role of labour is many sided and varied in the small industrial sector. Therefore, the overall development of labourers is inevitable for the growth of this sector. The small scale units face some labour problems like absenteeism, high wage rates, work stoppages, training cost and unionization. Labour is a major contributor to industrial production. Small Scale Industrialists have to be abreast of labour laws, since the legal codes are changing from time to time.

Absenteeism is assessed the first rank. In case of small-scale industrial units, almost all the units face this problem since they engage temporary workers. Unlike large-scale industries where most of them are in direct or permanent employment provided with all benefits as per law, the small-scale units hardly provide such benefits.

They normally appoint only casual labour so every now and then there may shift from unit to another. Since they are casual or temporary in nature they tend to move to concerns where they are offered higher wages. Similarly higher wages offered by other industries and other sectors attract labour and thereby cause scarcity and increase of wages.

This would in turn compel small units to pay higher wages and return low profit margins. The majority of the units keep the workers on daily wages. Poor working conditions and low piece rate system of payment has caused dissatisfaction. Naturally the problem of labour absenteeism is acute. Most of the workers have migrated from the surrounding villages and in sowing and harvesting seasons they go home to attend to agricultural activities.

Skilled Manpower:

A small scale unit located in a remote backward area may not have problem with respect to unskilled workers, but skilled workers are not available there. The reason is Firstly, skilled workers may be reluctant to work in these areas and secondly, the enterprise may not afford to pay the wages and other facilities demanded by these workers.

Besides non-availability entrepreneurs are confronted with various other problems like absenteeism, high labour turnover indiscipline, strike etc. These labour related problems result in lower productivity, deterioration of quality, increase in wastages, and rise in other overhead costs and finally adverse impact on the profitability of these small scale units.

5. Marketing Problems:

Marketers are increasingly recognizing the importance of formal approaches to market planning, to meet the challenges of growing competition, rising material costs, declining profit margins and limited cash reserves. Market decisions made by the entrepreneurs at a particular time influence the direction and fate of the small-scale units for a number of years. Successful market planning involves an analysis of market opportunities and assessment of the firm’s ability to take advantage of these opportunities. The success of an industrial unit depends on the marketing of its finished products.

Marketing is a crucial area especially in small units whose marketing infrastructure is susceptible to frequent and chronic illnesses. Units with strong marketing set-up grow better even in rough weather. The organizational design should be so planned as to meet any marketing situation.

The marketing team should be dynamic and aggressive enough to produce and market (meet) contemporary needs and the products should be better than those of competitors. The market for a product is an external element, which cannot, in general, be controlled by small-scale industrialists. They should constantly study the trend and adjust their production to meet it. Small-scale industrialists may need to change their marketing techniques from time to time.

The marketing problems of the small-scale industrial units are identified as competition from large-scale industries, slackness in demand, price competition and competition from established brands.

The competition from large-scale units has been the greatest problem. Being organized and large in size they could have economies of scale and thereby could sell at lower rates than the small units.

In price competition is also similar to competition with large-scale units and the slackness in demand may be indirectly caused by sharing of the markets with the large- scale units, which might be providing products at lower prices. Therefore, it is possible that the second and third rank problems are also created indirectly by the competition from large units.

The problem of marketing the products of small-scale industrial units has arisen chiefly due to the reasons stated below:

i. An abnormal increase in cost production during the last few years, and increase in the selling price.

ii. Competition from the large scale firms producing similar goods at cheaper rate and selling at lower prices.

iii. Lack of advertising at national and international levels. The role of the Government in this connection has been insignificant.

iv. Absence of market research either by the private manufacturer cum traders or by the State Government. The small-scale industrial workers are not in a position to bear the cost involved in market research.

Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SME’s Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. There are approximately 30 million MSME Units in India and 12 million persons are expected to join the workforce in the next 3 years.

Despite of the importance of the MSMEs in Indian economic growth, the sector is facing challenges and does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporates which is proving to be a hurdle in the growth path of the MSMEs.

The list of the problems that are faced by existing/new companies in SME sector are as under:

i. Absence of adequate and timely banking finance

ii. Limited capital and knowledge

iii. Non-availability of suitable technology

iv. Low production capacity

v. Ineffective marketing strategy

vi. Constraints on modernisation & expansions

vii. Non availability of skilled labour at affordable cost, and

viii. Follow up with various government agencies to resolve problems due to lack of man power and knowledge etc.

It is very important to empower the SME sector to utilize the limited resources (human & economic) they have in an optimum manner. The SMEs need to be educated and informed of the latest developments taking place globally and helped to acquire skills necessary to keep pace with the global developments.

SMEs are now exposed to greater opportunities than ever for expansion and diversification across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making remarkable progress in various Industries like Manufacturing, Precision Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service sector.

To counter the challenges faced by SME sector and grab the opportunities in the market, the Chamber has developed key strategies to promote and support the SME sector. The Chamber encourages SMEs to adopt innovative ideas and concepts for the promotion of their business. The goal of the Chamber is to organise Seminars, Conferences, Workshops and Training Programs and other trade promotional activities to educate & create awareness amongst the SMEs.

Problems of Small Scale Industries – Problem of Raw Material, Finance, Marketing, Out-Dated Technology, Poor Project Planning and a Few Other Problems

Organisational pattern of these industries places them at a distinct disadvantage vis-a-vis the large sector. This disadvantage has given rise to various problems which the small scale industries have to contend with.

We discuss them below in some detail:

1. Problem of Raw Material:

A major problem that the small scale industries have to contend with is the procurement of raw material. The problem of raw material has assumed the shape of – (i) an absolute scarcity, (ii) a poor quality of raw materials, and (iii) a high cost. Earlier, the majority of small scale units mostly produced items dependent on local raw materials. Then there was no severe problem in obtaining the required raw materials.

But ever since the emergence of modern small scale industries manufacturing a lot of sophisticated items, the problem of raw material has emerged as a serious problem in their production efforts. The small units that use imported raw material face raw material problem with more severity mainly due to difficulty in obtaining this raw material either on account of the foreign exchange crisis or some other reasons.

Even the small units that depend on local resources for raw material requirements face the problem of other type. An example of this type is handloom industry that depends for its requirement of cotton on local traders. These traders often supply their cotton to the weavers on the condition that they would sell their ready cloths to these traders only.

Then what happens that the traders sell cotton to them at fairly high prices and on the contrary purchase the ready cloth at very low prices. This becomes a clearest example of how the poor weavers are subjected to double exploitation at the hands of traders.

Keeping in view the raw material problem of small scale industries, the government makes provision for making raw material available to small units. Nevertheless, small units with no special staff to laise with the official agencies are left with inadequate supplies of raw material. As a result they have to resort to open market purchases at very high prices. This, in turn, increases their cost of production, and, thus, puts them in an adverse position vis-a-vis their better and larger rivals.

2. Problem-of Finance:

An important problem faced by small scale industries in the country is that of finance. The problem of finance in small sector is mainly due to two reasons. Firstly, it is partly due to scarcity of capital in the country as a whole. Secondly, it is partly due to weak creditworthiness of small units in the country. Due to their weak economic base, they find it difficult to take financial assistance from the commercial banks and financial institutions.

As such they are bound to obtain credit from the money lenders on a very high rate of interest and are thus, exploited in practice. It is a happy augury that ever since the nationalisation of banks in 1969, the credit situation has improved. The positive change in attitude of banks would be clear from the fact that whereas the amount of credit outstanding (of public sector banks) to small scale industries stood at only Rs. 251 crores in June 1969, it rose to a staggering figure of Rs. 15,105 crores in March 1990.

It appears that the availability of institutional credit to small scale industries is certainly increasing. Nevertheless, the fact remains that the criterion of creditworthiness still weighs heavily with the nationalised commercial banks. This would be clear from this fact that of the units assisted by commercial banks up to June 1976, about 69 percent of the total credit was availed of by 11 percent of the (bigger) units in the small scale industries sector, which accounted for 55 percent of the total production. This underlines the need to change the outlook of the banks. For this, it is necessary to further liberalise the rules and practices of banking in the country.

3. Problem of Marketing:

One of the main problems faced by small scale units is in the field of marketing. These small units often do not possess any marketing organisation. In consequence, their product quality compares unfavourably with the quality of the products of the large scale industries. Therefore, they suffer from a comparative disadvantage vis-a-vis large-scale units.

In order to save small units from this competitive disadvantage, the Government of India has reserved certain items for the small scale sector. The list of reserved items has continuously expanded over the period and now stands at 837 items. Besides, the Trade Fair Authority of India and State Trading Corporation (STC) help the small scale industries in organising their sales. The National Small Industries Corporation setup in 1955 is also helping the small units in obtaining government orders and in locating export markets.

Ancillary units face the problems of their own types, like delayed payment by parent units; inadequacy of technological support extended by parent units, non-adherence to quality and delivery schedules, thus, disturbing the programme of the parent units and absence of a well- defined pricing system and regulatory laws.

4. Problem of under Utilization of Capacity:

There are studies that clearly bring out the gross underutilization of installed capacities in small scale industries. According to Arun Ghosh, on the basis of All India Census of Small Scale Industries 1972, the percentage utilization of capacity was only 47 in mechanical engineering industries, 50 in electrical equipment, 58 in automobile ancillary industries, in leather products and only 29 in plastic products. On an average, we can safely say that 50 to 40 percent of capacity was not utilized in small-scale units.

The very integral to the problem of under-utilization of capacity is power problem faced by small scale industries. In short, there are two aspects to the problem: One, power supply is not always available to the small units on the mere asking, and whenever it is available, it is rationed out, limited to a few hours in a day. Second, unlike large industries the small scale industries cannot afford to go in for alternatives, like installing own thermal units, because these involve heavy costs. Since small units are weak on economic front, they have to manage as best as they can within the available meagre means.

5. Out-Dated Technology:

Most of the small scale units depend upon old techniques and equipment. Due to limited capacity and capital, they find it very difficult to modernise their plant and machinery. In the absence of modern technology the quality of products and productivity tend to be low. Cost of production per unit remains high.

6. Poor Project Planning:

In the absence of education and experience, small scale businessmen often depend upon consultants. They do not fully understand project details. Due to poor planning of projects, cost and time overruns arise.

7. Inadequate Infrastructure:

Insufficient quality and quantity of transportation, communications and other basic services particularly in backward areas is another problem. Infrastructural gap results in underutilisation of capacity and wastages. For example, instability of voltage, unscheduled power cuts and long delays in getting power connections are common. Poor communication and transportation, low quality of civic services, etc., are detrimental to efficient and time bound production so essential in a competitive world.

8. Absence of Vertical Growth:

There is lack of widespread anciliarisation and sub-contracting which can help small scale units to grow with large units. Even the Small Scale Industrial Policy has not identified the industries which are suitable for anciliarisation and subcontracting to exploit economies of scale and to enhance the competitiveness of small scale units.

Problems of Small Scale Industries – Under Utilization of Capacity, Finance and Credit, Marketing Problems, Global Competition, Problems of Infrastructure and a Few Others

Small scale industries are industries which produce goods or provide services on a small scale with the help of machines, hired labour and power. Small businesses face various problems because of their small size. They have limited capital for expansion. They are unable to take advantage of economies of large scale production and also lack motivation for expansion as they are unable to take benefit of the government schemes and incentives. As a result, the business units may become sick or even close down their operations.

The problems faced by small business are as follows:

i. Under Utilization of Capacity:

Small businesses have less capital and lack the necessary marketing skills. Thus, the demand for their products is low. As a result, they are unable to operate their units at full capacity. Moreover, they are not in a position to use the available resources optimally. This leads to wastage of resources and increase in the operating costs for the company.

ii. Problem of Maintaining Quality of the Product:

Small businesses are not able to maintain quality of their products owing to the following reasons:

a. They are keen on cost cutting to keep the prices low.

b. They do not follow quality measurement standards.

c. They lack capital to invest in research and development activities.

d. They lack resources and expertise required to upgrade technology.

iii. Finance and Credit:

Lack of finance is one of the major problems faced by small businesses, especially cottage and village industries as they have a very weak financial base. This is because they are operated by either single owners or partnership firms. Small businesses depend on institutional sources like State Finance Corporation, SIDBI, Commercial & Co-operative banks and non-institutional sources like money lenders, traders, agents, relatives and friends for meeting their financial needs.

Although it is mandatory for banks to provide 40% of its lending to priority sector, they are reluctant to lend to small businesses due to low recovery rates and high costs of lending. Thus, small businesses are forced to borrow from the non-institutionalized sources at high rates of interest which leads to their exploitation.

iv. Outdated Technology and Old Methods of Production:

Apart from a few small industries, many do not use latest and advanced technology as they cannot afford to upgrade it. Also, they do not have easy access to such technology. Use of such low grade technology, lack of technical know-how & skills affect the quality and productivity of the finished products. Moreover, small businesses make use of traditional methods of production. This reduces the productivity and increases the cost of production. Also, small businesses often do not give importance to the changing tastes and preferences of the people.

v. Marketing Problems:

Any business unit needs to have a deep understanding of customer’s needs and requirements for effective marketing of goods. Small businesses due to limited capital, cannot implement effective marketing strategies. They face additional marketing problems as they deal in limited products. Further small businesses depend excessively on middlemen who exploit them by paying low prices for their products and delaying their payments.

Due to lack of proper infrastructure facilities, small units cannot undertake direct marketing activities. Additionally, small business units cannot compete with large scale units in the areas of marketing and product promotion and thus they are forced to sell their products in the local markets. They also face tough competition from cheap imports.

Thus, the marketing problems faced by small businesses can be summarised as under:

a. Lack of advertising,

b. Non-branding of products,

c. Poor quality of products,

d. Location difficulties,

e. Increased competition from large scale industries,

f. Complicated marketing procedures, etc.

vi. Problem of Industrial Sickness:

Industrial sickness is a major problem faced by small businesses. Industrial units who cannot sustain themselves financially are known as sick units. According to RBI, “a sick unit is that unit which has incurred a cash loss for one year, is likely to continue it for current year as well as following year and such unit has an imbalance in its financial structure”. There are various causes – both internal as well as external, that lead to sickness in industries. Sickness is widespread in small businesses like cotton, jute, sugar, and textile, small steel and engineering industries.

Internal factors that contribute to sickness in small units are lack of skilled labour, lack of managerial and marketing skills, improper planning, lack of modernization, problems in recovery of payments etc. External factors contributing towards sickness are delay in payments, working capital shortage, inadequate availability of loans, raw materials shortage, competition from large companies and imported goods. It is also costly to rehabilitate a sick industry as it involves rescheduling of capital formation, planning, technological up gradation and provision of fresh working capital.

vii. Non-Availability of Raw Materials:

Small businesses source their raw materials from local areas. The traders and agents supplying the raw materials often exploit the small businesses by selling the raw materials at higher prices. Many traders supply raw material on the condition that the finished product should be sold to them. They buy the finished products at a lower rate. Thus, the small business owners become victims of double exploitation. For e.g., Cotton traders supply cotton on the condition that the weavers will sell the cloth to them at lower rates.

Small scale units also face problems of shortage of raw materials due to various reasons like natural calamities, transport problems and industrial strikes. It is difficult for small units to import raw materials as they may find it difficult to obtain permissions due to import restrictions, foreign exchange crisis, rise in international prices etc. Also, poor quality raw materials, lack of standardization and high cost affect the productivity and profitability of small businesses.

viii. Global Competition:

Due to Liberalization, Privatization and Globalization (LPG) policies, small businesses have to face competition not only from large corporations but also from multinational companies which are huge in terms of their size and capital employed. Small companies cannot compete against the quality standards, technical skills, financial creditworthiness and managerial capabilities of large industries. Also, small businesses find it difficult to enter markets of developed countries since they have stringent requirements of quality certifications such as ISO-9000, ISO-14000 and ISO-26000.

ix. Problems of Infrastructure:

A major hindrance faced by small businesses is the lack of proper infrastructure facilities, which are required for its development.

Small businesses set up in rural areas face the following problems on account of lack of proper infrastructure:

a. Problems related to supply of power such as frequent power cuts, fluctuation in voltage levels, safety of power lines, billing & overall functioning of the system etc., have led to the closure of many small businesses.

b. Problems related to transport such as congestions, bottlenecks, strikes, rise in freight charges etc., and affect small businesses.

c. Problems related to accommodation such as inadequate space, poor state of premises, unsuitable location, and high rent etc., also affect smooth working of small businesses.

d. Water shortage and labour problems add to the woes of the small businesses.

x. Export Related Problem:

Small businesses have a significant contribution towards the exports of the country. Government has announced several policy measures in order to encourage exports of the small scale sector. Despite such efforts, business units’ still face problems in marketing their products due to lack of organized efforts to increase exports, fluctuations in demand, problems in cross cultural marketing etc.

Other Problems:

Small businesses face a host of other problems as mentioned below:

a. Labour problems such as lack of skilled staff, strikes, absenteeism, demanding employees etc.

b. Lack of proper production pattern, planning and implementation.

c. Burden of local taxes.

d. Products are not recognized as branded products.

e. Problem of delayed payment by large firms.

Problems of Small Scale Industries – 9 Common Problems Faced by Small Businesses

Small scale industries (in India) are industries which produce goods or provide services on a small scale with the help of machines, hired labour and power. Small businesses in India find it difficult to face global competition. This is because, they are small in size.

The various problems faced by small businesses are as follows:

i. Small industries face the problem of lack of finance. Even credit facilities available in India for small businesses are inadequate. This limits their capacity to improve the quality of production, introduce technological improvements and face global competition.

ii. Small businesses have to face the problem of shortages in the supply of raw materials. They do not get the benefit of bulk purchases. Apart from shortage, they also have to face problems like poor quality of raw materials, lack of standardization and high cost of raw materials. This affects the capacity utilization and profitability of the business units. This makes it difficult for them to face competition from the high quality products of foreign companies.

iii. Most of the small units use outdated and primitive methods of production, which not only affects their productivity but also increases their cost of production. The global companies on the other hand adopt modern and latest methods of production, thereby increasing their productivity and profitability.

iv. In order to face global competition, the small units should have a deep understanding of customers’ needs and follow effective marketing strategies. However, small businesses are unable to incur marketing expenses due to their limited financial capacity. This limits their market size.

v. Small units in their effort to reduce the costs do not adhere to the standards of quality. Their resources are limited and hence they do not invest in quality research and development activities. It becomes difficult for the small units to face the quality standards and- parameters followed by global companies.

vi. Also, the developed countries follow stringent requirements of quality for entry in their markets. Quality certifications like ISO-9000, ISO-14000, and ISO-26000 are required, which the small units find difficult to comply with.

vii. The small units face problems in exporting of goods, despite various measures provided by the government to encourage exports. Hence, they face difficulty in entering the foreign markets.

viii. Small units cannot afford qualified and trained personnel, nor can they afford to undertake training of their employees. This affects the quality and productivity of the units.

ix. Thus, in India small units have to face various problems which affect the quality of their products and reduce their productivity. These factors make it difficult for the small units to face global competition.