39 Significance and Role of Small Scale Industries

Vishal Kumar

Learning Outcome

After completing this module, students will be able to:

1. Understand the concept of Small Scale Enterprises
2. Know the distinction between Micro, Small and Medium Enterprises
3. Understand the characteristics and significance of Small Scale Enterprises
4. Understand the contributions/role of SSEs in the Economic Development

    2. Introduction

Small scale sector occupies an important position in the industrial structure of our country. In a country like India, wherein on one hand there is the acute problem of unemployment and on the other hand scarcity of resources, therefore in such circumstances only the small scale sector is best suited to cater the needs of new entrepreneurs. Small scale industries play an important role in creation of employment with low capital investment. Thus, small scale industries play an important role in the development of the economy of the nation. The small-scale sector contributes around 40 percent to the total exports of the country, therefore it plays an important role in the development of Indian economy. In terms of value added it contributes to about 40 percent of the manufacturing sector and 80 percent of industrial production is from this sector.

The role of small scale industries is one of the important features of the planned economic development of India. In India this sector has been assigned with the significant role in the industrialization and economic development of the country and subs-serving the national objective of growth with justice. Its crucial role has been increasingly recognized as a solution for the country’s problems of scarce capital, wide spread unemployment, regional imbalance of industrial development, inequitable distribution of National Income etc.

3. Definition of Small Scale Enterprises

The definition of small scale Enterprises is defined in different ways depending on country’s pattern and stage of development, policy aims and administration set up. An SSE can be defined as a privately owned and operated business unit that is composed of a small number of employees and has relatively low turnover. In the words of P. Neck, “Small enterprises are those in which the management lies in the hands of one or two people who are responsible for the major decisions.”

This definition draws a critical management feature of SSE in which one or two people bear the responsibility of many functions, which is generally distributed among several people in a large-scale enterprise. This characteristic is evident in many SSEs. SSE is defined differently in different countries depending on their economies, for example, an SSE in the US may be a large-scale enterprise in India. SSE can be classified on the basis of number of employees, capital invested, turnover, and type of business. For example, in African nations, a business unit is considered to be an SSE, if it employs 5 to 50 people. On the other hand, in Asian countries, it is between 30 and 100, whereas in the US it is any number less than 500. SSEs play a significant role in creating employment, utilizing resources, generating income, which, in turn, helps in the economic development of a country.

In India, Small-scale Industry (SSI) or small-scale sector lies between the organized sector represented by large-scale industries and the unorganized sector of widely dispersed cottage industries. Small-scale sector is defined in terms of certain criteria, such as investment ceiling on the original value of the installed plant and machinery, number of workers employed, use of power, plant capacity, and volume of output. The most acceptable criterion of defining the small-scale sector in India is the ceilings on investment in plant and machinery. The small-scale sector includes the following undertakings or enterprises:

• Small-Scale Industrial Undertaking: It refers to an industrial undertaking in which the investment in capital assets, such as plant, industrial equipments, machinery etc. (whether it is acquired or taken on lease, or by hire-purchase) does not exceed Rs. 1 crore. If the industrial undertaking exports 30% of its annual production by the end of third year from the date of its commencing production, then the limit of investment in fixed assets in plant and machinery is Rs. 5 crores.
• Ancillary Industrial Undertaking: It refers to an industrial undertaking that deals with the production of small equipments or spare parts, components and tool kits or the rendering of services. An ancillary industrial undertaking needs to provide at least 50% of its products and services to other undertaking. It is important to note that the investment of an ancillary industrial undertaking in fixed assets should not exceed Rs. 1 crore.
• Micro or Tiny Enterprise: Refers to an enterprise in which investment limit in plant and machinery is Rs. 25 lakhs irrespective of location of the unit.

   4. Distinguishing between Micro, Small, and Medium Enterprises

In India, enterprises are broadly grouped into two categories, namely, manufacturing enterprises and service enterprises. These two categories of enterprises are explained as follows:

• Manufacturing Enterprises: Refer to enterprises engaged in the production of goods, such as textiles, coir items, chemicals, and beauty products
• Service Enterprises: Refer to the enterprises involved in providing or rendering of services, such as tailoring, dry cleaning, and desktop publishing

  According to the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, the aforementioned two categories are further classified into MSMEs on the basis of amount invested on plant and machinery (in the manufacturing sector) and on equipment (in the service sector). The difference between MSMEs on the basis of investment ceilings are given in Table-1:

Table-1: Investment Ceilings for MSMEs

Enterprises	Investment in Plant and Machinery  in Manufacturing Sector	Investment in Equipment in Service Sector
Micro Enterprises	Does not exceed Rs. 25 lakhs	Does not exceed Rs. 10 lakhs
Small Enterprises	More than Rs. 25 lakhs, but does not exceed Rs. 5 crores	More than Rs. 10 lakhs, but does not exceed Rs. 2 crores
Medium Enterprises	More than Rs. 5 crores, but does not exceed Rs. 10 crores	More than Rs. 2 crores, but does not exceed Rs. 5 cores

   5. Characteristics and Significance of Small-Scale Enterprises

As discussed earlier, SSEs play a significant role in the economic development of a nation. Following are the characteristics of an SSE:

• Labour Intensive: SSEs provide employment opportunities to individuals in urban and rural areas, which, in turn, enhances the economic position of the country.
• Flexibility: Implies that SSEs adapt themselves as per the dynamic industrial environment.
• Innovative: SSEs use new and innovative techniques, materials, methods of production, new markets, sources of materials, and even new forms of organizations such as sole proprietorship, partnership, and co-operatives.
• Decentralization: SSEs facilitate a balanced growth of the economy as a whole due to dispersal of industries.
• Outlet of Entrepreneurial Spirit: It represents the enthusiasm, persistence, and creativity of an individual who establishes the enterprise.

   The significance and relevance of SSEs are discussed as below:

• Utilize locally available human and material resources and expertise/experience
• Create jobs at relatively low cost
• Improve the lifestyle and living standard of people
• Diversify the industrial structure
• Help in increasing the national productivity
• Contribute approximately 35 to 40 percent of export
• Prevent the creation of monopoly
• Ensure more equitable income distribution
• Attract and utilize indigenous entrepreneurship and encourage women entrepreneurs
• Develop a pool of skilled and semi-skilled workers as a basis for future industrial expansion
• Prevents regional imbalances by their presence in backward, rural, and the exterior most part of the country
• Adapt appropriate technological managerial approaches optimally
• Facilitate a favorable balance of trade
• Role of Small-Scale Enterprises in Economic Development

    SSEs constitute a vital and decisive segment of small-scale sector. They account for 40% in the manufacturing sector and contributes approximately 35% of the total direct exports. SSEs play a crucial in employment generation, resource utilization, and income generation, due to their unique economic and organizational characteristics, which, in turn, help in the economic development of a country. In India, the emphasis is given to the development of SSEs; therefore, the government formulates several policies and programs to promote SSEs.

6. Contribution/Role of SSEs in the Economic Development

The contribution of SSEs is explained as follows:

1. Employment Generation: SSEs made a significant contribution in employment generation and rural industrialization due to their high labor intensive nature. Thus, the employment growth rate of SSI is higher than that of the large sector.
2. Higher Productivity: It refers to the fact that SSEs with a lower level of investment tend to achieve a higher productivity of capital than large-scale enterprises. It has been estimated that an investment of Rs. 1 lakh in fixed assets in small-scale sector produces 4.62 lakhs worth of goods or services, which are an approximate value addition of 10% to the total investment. Due to this unique characteristic, SSEs contribute to national productivity.
3. Poverty Alleviation: SSEs contribute in mitigating poverty by providing employment opportunities to people in urban and rural areas. SSEs create a large number of job opportunities and are focused on utilizing the traditional skills and knowledge of individuals along with advanced technologies, capital, and innovative marketing practices. According to a study conducted by World Bank, small to medium enterprises sponsor projects with a noticeably higher proportion of unskilled workers in comparison to medium to large enterprises. SSEs provide job opportunities to even those individuals, who are overlooked by large or modern enterprises, which directly help in alleviating poverty.
4. Better Utilization of Local Resources: SSEs make the efficient use of locally available resources, whereas large enterprises usually have a great propensity to import raw materials and capital goods. For example, SSEs are usually focused on fulfilling the demand of domestic market, while using the local resources, such as land, labor, and raw materials. Moreover, SSEs are labor intensive in nature and make the efficient use of labor. The labor intensive techniques in large enterprises usually pose special difficulties, such as labor union demands or government regulations, which rarely create problem for SSEs. Therefore, SSEs are better able to use indigenous resources than large enterprises.
5. Tapping of Savings: SSEs generally have a potential of saving a large portion of their income. The empirical evidence shows that small-scale entrepreneurs are motivated to save for future investment purposes. By reserving a good proportion of their income, small-scale entrepreneurs can ensure their strong base and secured existence. This also helps in reducing the dependence of small-scale entrepreneurs on institutional sources of financing.
6. Utilization of Domestic Technology: It implies that SSEs are more likely to use relatively simple, general-purpose machinery that is often obsolete as per the standards of developed countries. Such machines are usually manufactured locally in small machine shops. In this way, the local industries involved in producing machinery and equipment and the local repair shops become closely familiar with the SSEs machinery and equipment requirements. Thus, SSEs promote machine building and adaptive capability evolution by using simple less efficient or elegant machines.
7. Regional Balance and Rural Development: SSEs contribute in maintaining regional balance and the development of rural areas to a large extent. In developing countries, industry is generally highly concentrated in few places resulting in regional imbalances and migration of people from rural areas and small towns. SSEs due to their locational flexibility require less infrastructure facilities and usually serve to a narrower geographical market, which results in maintaining the regional balance of the country. The relatively labor intensive technology of SSEs is appropriate for the lower wage rates prevailing outside metropolitans, that are small and medium towns and rural areas. This helps in the development and progress of small and medium towns and rural areas. Apart from this, underemployment is the major problem in rural areas due to slack agricultural seasons resulting in depressed rural incomes and increased migration of people to cities. Generally, SSEs involved in agricultural processing business create employment in rural areas. Other small scale involvements in rural areas include black-smithing, brick-making, tailoring, carpentry, and furniture-making.
8. Export Contribution: The number of small-scale undertakings involved in export is more than 5,000. The overall contribution of SSEs to the total export of India is approximately 35%. The direct export channel of SSEs includes merchant exporters, trading and export houses, and export orders of parts and components that are used in finished exportable goods by large-scale units. The major items of export by SSEs are low-skilled labor-intensive goods, such as readymade garments, leather products, gems and jewelry items, sports and plastic goods, chemicals, and processed food.
9. Contribution to Decentralization: SSEs prevent the concentration of power in few hands and ensure equitable distribution of wealth. It is evident that a number of SSEs are located in rural areas. On the other hand, large-scale industrialists take interest in locating their industries only in urban centers, which results in the accumulation of wealth in certain areas only.
10. Complementary to Large-Scale Industries: It signifies that SSEs produce various types of components, such as spare parts, tools, and accessories, which are required by the large-scale industries. In addition, SSEs also help in distributing the goods produced by large-scale industries. In this way, SSEs are complementary to large-scale industries.

    7. Small-Scale Enterprises in Indian Environment

India has experienced a noteworthy growth of SSEs post-independence. SSEs have played an important role in the creation of employment opportunities in urban and rural areas. In addition, they have contributed to the export growth of India to a large extent. In this way, SSEs have helped in the economic development of India by increasing the national income. Small-scale sector include a wide spectrum of industries categorized under small, tiny, and cottage industries, ranging from craftsmanship, ancillary undertakings, EOUs, women-run enterprises, and SSSBEs to modern productive units with large investments. The emerging needs of the small-scale sector, such as protection against large-scale industries and foreign competition, have forced the Indian government to revise the investment ceilings for this sector. The current revision in investment ceilings for plant and machinery for SSEs is Rs. 1 crore and for service-related industrial enterprises is up to Rs. 10 lakhs. The main objectives of this revision is to enhance the growth of SSEs in the private sector, promote technological upgradation, improve the quality of existing SSEs, and boost exports.

In India, the small-scale sector can be further sub-divided into two categories, namely, traditional sector and modern sector. A significant number of SSEs in the traditional small-scale sector are located in rural belt as well in urban areas. The traditional small-scale sector includes khadi, village industries, handlooms, handicrafts, sericulture, and coir industries. On the other hand, the modern small-scale sector includes textile products, wood, furniture, paper and printing, metal products, chemicals, rubber and plastic products, electrical machinery, and transport equipment.

In India, since the beginning of planning in 1950-51,considerable efforts have been made to promote small-scale sector as a part of national development plans. At the time of independence, agriculture was the main source of employment for people, but with increasing rate of population, it became impossible to employ everyone in the agricultural field. Even, large-scale sector in India was also unable to provide employment to a large number of people as the investment cost per job is usually high there. Thereby, the government has formulated several policies and schemes for the development of SSEs because of their labor intensive nature.

8. Factors Influencing Small-Scale Enterprises

An SSE can be successful if the environment in which it operates is conducive. There are several factors in the environment that affect the performance of an SSE. Some of the important factors are explained as follows:

• Political Factors: Imply that overall political environment of a country affects the performance of an SSE. An SSE needs requires constructive measures from the government and political bodies to establish and expand its business. These measures involve investment policies, creation of promotional agencies, industrial estates, and free trade zones as well as availability of low cost loans for SSEs.
• Economic Factors: Signify that an SSE should take into consideration the economic environment of the country. Analyzing the economic environment helps the SSE in making investment decisions, determining market conditions, and forecasting.
• Technological Factors: Refer to the fact that an SSE needs to adjust itself according to the changes in the technological environment. An SSE needs to introduce new technologies or update the existing technologies to keep pace with the increasing competition.
• Socio-Cultural Factors: Play a crucial role in the success of an SSE. An SSE needs to fulfill the following conditions for its survival:

1. Accepting change in the society and culture
2. Facilitating social mobility
3. Tolerating profit-making
4. Tolerating private ownership

Apart from the aforementioned factors, a stable and well developed institutional framework, such as banks, insurance, and capital market, is indispensable for the emergence and growth of SSEs. In the recent decades, the world economy has experienced an unexpected growth due to the emergence of SSEs. India is leading the way to introduce entrepreneurship development programs to identify and utilize entrepreneurial talents of individuals from all walks of life. Apart from this, entrepreneurship development programs are now being introduced in schools and colleges.

9. Summary

In this module, you have learned about SSIs and their importance in economic development. The module has mentioned differences among micro, small, and medium enterprises on the basis of investment ceilings. It has explained the characteristics and significance of SSIs. In addition, the lesson has discussed the condition of SSIs in Indian environment in detail. Further, it has detailed upon various political, economic, technological, and socio-cultural factors that influence SSIs. As small scale industries play a significant role in the development of any country’s economy, therefore the role and contributions of SSIs is also discussed in this module. Small Scale Industries can be successful if the environment in which they operate is conducive. There are several factors in the environment that affect the performance of an SSIs. Some of the important factors are also explained in this module for better understanding of the topic.

Learn More

Suggested Readings:

1. Projects: Planning, Analysis, Selection, Implementation & Review, Prasanna Chandra, Tata McGraw-Hill Publishing
2. Project Management: A Managerial Approach, Jack R. Meredith, Wiley Publications
3. Project Management: A Development Perspective, Goyal B.B., Deep & Deep Publications.
4. Project Planning and Control, Mohsin M., Vikas Publishing House.
5. Project Management, Chaudhary, S., Tata Mc Graw Hill Publications.
6. Project Management, Maylor, Pearson Education
7. United Nations Industrial Development Organization, Guide to Practical Project Appraisal–Social Benefit Cost Analysis in Developing Countries, Oxford & IBH.

Points to ponder:

1. Cottage Industries: Refer to industries where the production of goods takes place in homes. Cottage industries are managed by family members and can be pursued as full-time or part-time occupation.
2. Village Industries: Refer to industries involved in craftsmanship or small industrial activities, such as rocessing, preserving, and servicing. These industries are based in villages or small towns with a population not exceeding 50,000.
3. Export-Oriented Unit (EOU): Refers to an undertaking in which the investment in fixed assets in plant and machinery Rs.1 crore with an obligation to export 30%of the total production.
4. Small Scale Service and Business Enterprises (SSSBEs): Refers to service and business related enterprises with investment in fixed assets, excluding land and building, of up to Rs. 10 lakhs, irrespective of location.
5. Manufacturing Enterprises: Refer to enterprises engaged in the production of goods, such as textiles, coir items, chemicals, and beauty products
6. Service Enterprises: Refer to the enterprises involved in providing or rendering of services, such as tailoring, dry cleaning, and desktop publishing