India`s Growing Small Scale Industries

The Small Scale Industries sector is a major contributor to the Industrial economy of India.  The small scale sector accounts for 40 per cent of the Industrial production, more than 30% of the total exports and employs more than 192 lakhs in about 34 lakhs small scale industrial units across the country.  Despite the global and domestic recession, the small scale industries registered a higher growth rate than the overall industrial sector.

The following table depicts the growth of small scale industries since 1975-76.  It reveals that the growth of the  small scale industrial units has out paced the growth of total industrial sector.

Table 1. Comparative growth of small scale industries and industrial sector (in percentage)
Year	SSI Sector	Industrial Sector
1975-76	17.9	6.7
1976-77	10.2	9.5
1977-78	12.7	4.2
1978-79	10.2	7.6
1979-80	14.0	(-1.6)
1980-81	8.8	4.0
1981-82	8.5	9.3
1982-83	8.1	3.2
1983-84	10.3	6.7
1984-85	12.0	8.6
1985-86	12.8	8.7
1986-87	13.2	9.2
1987-88	12.7	7.3
1988-89	13.4	8.6
1989-90	NA	NA
1990-91	NA	NA
1991-92	3.1	0.6
1992-93	5.6	2.3
1993-94	7.1	6.0
1994-95	10.1	9.4
1995-96	11.4	12.1
1996-97	11.32	5.6
1997-98	8.43	6.7
1998-99	7.70	4.1
1999-2000	8.16	6.5
2000-2001	8.23	5.0

 

Government`s role

The development of the small scale industries in India has been the main focus of industrial policy since independence though the thrust of concern changed with the priorities of each five years plan. The industrial policy resolution framed ever since 1948, set out the guidelines for the country`s industrial development with different degrees of emphasis on the main objectives.  The priority of employment generation required the development of widely dispersed, mass consumption goods produced and labour intensive small scale industries.

Some of the recent policy initiatives are:

• Progressive allocations made in the  five years plan
• Policy of reservation
• Price preference(upto 15 percent) and purchase preference policy for marketing small scale industrial products
• Technical assistance through industrial extension service centers
• Provision of built up factory  accommodation in industrial estates
• Supply of machines under the hire purchase system
• Subsidy on power consumed by small industrial units
• Provision of raw material
• Policy of priority credit
• Policy of development of information technologies
• Export assistance
• Entrepreneurship development programmes conducted by various national level institutes and support to State level Institutes

Significance of SSI

In a developing country like India the small scale sector is an important hub of economic activity.  The following are the main reasons for the promotion of small scale industrial units.

1. It has proved to be a powerful instrument for a rapid and decentralized growth of a developing economy like  India with a large army of unemployed labour and scarcity of capital resources.
2. The small scale sector is considered as an important means for checking concentration of economic power in a few hands and bringing about economic dispersal and more equitable distribution of national income.
3. This sector is also considered very effective in promoting the industrial development of backward area.
4. It also helps in checking the unplanned migration from rural and semi-rural areas to the urban areas.
5. It greatly encourages the development of new entrepreneurial initiative and thereby injects competitiveness in our industrial economy.
6. Small scale sector also assumes great significance from India`s stand point since this sector accounts for more than 30 percent of India`s total exports.

In the words of V.V.Giri: "Small industries play an important role in the economic growth of our country.  They provide immense opportunities not only for employment but also for exploitation of indigenous resources".

The small scale sector occupies a pivotal position in the country`s process of development.  The small scale sector in India embraces various types of units, ranging from ancient household industries to modern small scale units.

The table below represents several parameters regarding the performance of the small scale sector in India from 1973-74 to 2001-02.  This sector has a sizeable weight in India`s index of production, employment generation and foreign exchange earnings.  Hence, it is imperative to analyse the growth of this sector under its major dimensions such as production, employment, number of units and export.

The small scale sector now produces more than 7500 products.  It has emerged as a major supplier of mass consumption items like leather and leather goods, sheet metal goods, bicycle parts, plastic and rubber goods, stationery, soap, detergent, domestic utensils, tooth paste and tooth powder, preserved fruits and vegetables, wooden and steel furniture, flashlight torches, boot polish, paints and varnishes.  Among the sophisticated items, mention may be made of TV sets, electronic control system transistor radios, hearing aids, intercom-sets, electric carbon-register, electronic medical equipment, electronic teaching aids, digital measuring equipment, air conditioning equipment etc.

The level of output produced by the small scale industrial units went up from Rs.7200 crores in 1973-74 to Rs.6,90,522 crores.  The increase in output by nearly 95 times over a period of 29 years is commendable.  However, compound annual growth rate of production after liberalization(14.47 percent) is lower than that before liberalization (19.80 percent).  Moreover the compound annual growth rate of production after liberalization (1991-92 to 2001-02) is lower than that of the period from 1973-74 to 2001-02 (Table 3).

Employment Generation

The development of small scale industrial units has contributed substantially to employment generation, particularly for those who belong to the lower income group.  They are generally labour intensive.  According to Prof. P.C.Mahalanobis: "Household or cottage industries require little capital.  With any given investment, employment possibilities would be 10 or 15 or even 20 times greater in comparison with factory based industries."

Small Scale industries provide self-employment to artisans, technically qualified persons and professionals.  These industries also offer employment to farmers when they are idle.

The number of persons employed in small scale sector increased from 39.7 lakhs in 1973-74 to 192.23 lakhs in 2001-02.  However, the compound annual growth rate of employment after liberalization( 4.01 percent) is lower than that which was before liberalization( 6.99 percent) and compound annual growth rate during a period of 20 years from 1973-74 to 2001-02.

Number of small scale units

The total number of small scale units increased from 4.16 lakhs units in 1973-74 to 34.64 lakhs in 2001-02.  The growth in the number of small scale enterprises has been mainly the result of the Government`s policy thrust, in favour of the small scale industries which include the following measures.

1. Reservation of an increased number of products for the small units
2. Reservation of a number of items for supply to Government and its organizations
3. Price preference for specified items produced in the small scale industrial sector
4. Concessional credit on liberal terms to the small scale units

After liberalization, the Union Government modified their policy towards small scale industries.  Due to this, compound annual growth rate of number of units is 5.22%, which is lower than that of the number of units before liberalization(9.51%).

Export performance

Exports from the small scale sector has over a period of time acquired greater significance in India`s foreign trade.  The small scale sector today is one  of the largest contributors to the foreign exchange reserves of the country.  With the passage of time, it has to shoulder more challenging responsibilities in boosting the country`s exports and improving its performance in the overall trade.

India, during its early years, saw small scale units mainly catering to domestic requirements and playing an important role in import substitution.  With the expansion and diversification in the small scale sector as well as the development of favourable international trading environment, the contribution of small scale industrial units in exports has been increasing significantly.

Comparative performance of SSIs in terms of compound annual growth rate
Areas of performance	Compound annual growth rates(in  %)
	From 1973-74 to 2001-02	From 1973-74 to 1990-91	From 1991-92 to 2001-02
No.of units	7.86	9.51	5.22
Production	17.70	19.80	14.47
Employment	5.80	6.99	4.01
Exports	20.4	20.73	17.77

The small scale sector currently accounts for more than 30 percent of national exports.  Apart from direct exports, products of a large number of small scale units are exported indirectly through merchant exporters, export houses, etc.  Parts and components from small scale units which are used in the finished product are also being exported by large industries.  Exports of certain items like sports goods, processed tobacco and sanitary castings, originated exclusively from this sector.

Export of items like marine product, woolen garments and knit wear, finished leather  and leather product and semi finished leather, lac and mechanical pumps, dominated share in total export.

Exports has gone up from Rs.393 crores in 1973-74 to Rs.71,244 crores in 2001-02, with 181 times increase over a period of 29 years.  The performance of small scale sector in this area looked very bright and prosperous.  Eventhough the share of small scale sector in total export is increasing after liberalization, compound annual growth rate has declined which is lower than the growth rate has declined which is lower than the growth registered in the period of 29 years and before liberalization.  Moreover, the exports of SSI Sector account for less than 10 percent of its production.

The small scale industries sector in India over the past 50 years has made significant contribution towards building a strong and stable national economy.

The small scale industries act as a nursery for promoting entrepreneurial talent.  It not only creates employment opportunities, but ensures better use of scarce financial resources and appropriate technology and also makes possible redistribution of economic power and income.

The overall performance of small scale industries in terms of production, employment, number of units established and export is commendable.

"SMEs -  The Economy Boosters"

In recognition of the contribution and vast potential of the small scale industrial (SSI) sector, provision of adequate credit to this sector has continued to be an important element of our banking policy.

Small and medium size enterprises(SMEs) are normally perceived in a  wider perspective as the engine of growth in both the developed and the developing countries.  Despite the extraordinary synchronization of global slump in some periods, SMEs act as prime movers, in stepping up the industrial growth, poverty allieviation and economic sustainability to rural and semi urban centers where they are located.

Like in many other developing countries, SMEs in India play a very crucial role in terms of balanced and sustainable growth, employment generation,  development of entrepreneurial skills and contribution to export earnings.  These SMEs cover a wide spectrum of items that contribute substantially in the overall economic growth of the country.  Their actual contribution is 34 percent of the total exports and 20 million jobs.

At the end of March 2004, there were around 3.6 million SSI units which produced a large number and wide variety of items with associated technology ranging from traditional to state of the art.  This dynamic and vibrant sector also acts as a nursery for promoting entrepreneurial talent and as a catalyst in industrial growth.  However, in the post  WTO era, there has been a lightened concern about the future of SMEs owing to the most favoured nation (MFN) status and freer trading systems offered for some countries. 

Country	Criteria	Description of industrial units
Australia	Employment	Manufacturing: Small enterprises<100 employees services: Medium enterprises <200 employees
Canada	Employment	Independent firms:<200 employees
Denmark	Employment	Manufacturing :<500 employees; production units with > 5 employees
Finland	No fixed definition	No fixed definition (statistics are about production units); statistics also include small companies owned by large companies
Germany	Employment	Less than 300 employees (enterprises employing fewer than 20 persons are not included in industry statistics)
Japan	Employment assets	Less than 300 employees for   Less than 450 employees (or Y 30 million in capitalization) or retailing services (<50 employees or Y 10 million in capitalization)
Sweden	Employment	Autonomous firms  with <200 employees
Switzerland	Employment	Small enterprises:< 50 employees; medium enterprises; < 500 employees
Spain	Employment	Small enterprises:<200 employees; medium enterprises: < 500 employees
UK	No fixed definition	Micro enterprises: < 10 employees; small enterprises; 20  99 employees
USA	Employment	Very small enterprise:< 20 employees; small enterprises: 20-99 employees; medium enterprises; 100-499 employees
Rep.of China	Employment	Handicraft industries; < 20 employees; heavy industries;< 100 employees
Indonesia	Employment	Less than 100 employees
Thailand	Employment capital	Labour intensive sectors: <200 employees; capital intensive sectors; < 100 employees
Malaysia	Employment	< 75  employees shareholder funds
Singapore	Fixed assets employment	Manufacturing: < 100 employees
Philippines	Assets employment	Revenue
Source: Globalisation and SMEs. Voc.1, OECD, Paris

 

These issues coalesce into the central theme of creating space for SMEs to coexist and provide an enabling environment for a level playing field, providing them  with a reasonable time frame and pace for adjustment and adequate safeguards against unfair trade and investment practices to overcome the travails of transition.

The development of SSIs continues to be imperative with incremental creation of 2.8 million jobs in the past four years and a stagnant employment in agriculture and large industry sector. Despite the world fast shrinking into a global village, because of technological advancements and closer integration of products and financial markets, India is still far from being globalised with just 0.7 percentage share in world trade and annual foreign direct inflow (FDI) at 0.3 to 0.4 percent of global FDI/FII investments.

Conceptual frame

SSI units are differently perceived in different countries because of the different meanings implicit in the term, owing to the size of the units acquiring credit under this category.  A manifold increase in the number of units blurs the distinction between small and medium enterprises in various countries.

Thus, SMEs are defined differently in different countries due to the significant differences in resource endowments, historical background and socioeconomic development in each particular country.  The parameters used by different countries for classifying small industry relate to employment, assets, sales etc.

In line with the recommendations of a study group on the development of small enterprises (Dr.S.P.Gupta Committee), the orbit of financing of enterprises in India was enhanced from small to medium enterprises; the artificial distinction between SMEs eliminated; and a three tier definition for tiny sector (upto Rs.10 lakh investment in plant and machinery (P & M), SSI sector (above Rs.10 lakh upto Rs.100 lakh) in P & M) and medium sector (Rs.1 crore to Rs.10 crore in P & M) was adopted.

Therefore, in the Indian context, the definition of the SSI sector is largely framed in terms of cumulative investment in plant and machinery while most of the countries adopt the level of employment as the criterion for defining the SSI sector.  According to the adopted definition, the investment limit upto Rs.10 million in plant and machinery is treated as the SSI sector. However, in respect of certain specified items such as hosiery, hand tools, drugs and pharmaceuticals and stationery items, the above investment limit in plant and machinery stands enhanced upto Rs.50 million.

The basic features of SMEs can as well be analysed in terms of qualitative criteria since standard quantitative yardsticks have not yet been decisively established.

Qualitative criteria for SSIs
Criterion	Salient features
Mode of production and marketing	Low degree of division of labour, craft type production
Management style	No professional management and no division between productive and management functions
Workers and skills	Large share of family members and low levels of education requirements
Product type	Low technology intensity and low production runs
Organisation structure	Relations to employees, customers and suppliers
Legal status	No formal registration
Output markets	Limited within local area
Input markets	Utilisation of locally available resources

Policy initiatives

The policy initiatives of the Government assisted the SMEs through favourable policy measures based on the industrial policy resolution of 1956.  Some of these initiatives have been taken against the backdrop of the SME financing in a cross country perspective.  In view of their financial problems, two broad approaches have been adopted at the national level, viz., facilitating access of SMEs to sources of financing and developing new sources of financing in terms of venture capital and business angle networks. 

As far as the existing sources of financing are concerned, the trend was towards reduced and more flexible loan schemes as well as loan guarantees.  With regard to newer/fresh sources of financing, India has to consider liberalizing the rules pertaining to venture capital investments  diversifying venture investors, channeling venture capital to seed firms in growth sectors and phase out government equity schemes as private markets develop. 

Among the developing countries, India was the first to display special consideration to SSIs.  The basic focus has been on employment generation in the context of India` s labour surplus economy.

Small enterprises manufacturing labour intensive products make economical use of capital and absorb the abundant labour supply available in the country.  The policy initiatives in India have always recognized SSIs contributions to the economic progress of the country.  Small firms are capable of producing a larger quantum of consumer goods to meet the possible increase in demand that would arise on account of the spurt in incomes, generated by fresh investments in heavy and basic industries.

The various measures used for the promotion and development of SSIs included product reservations, fiscal concessions, preferential allocations of credit and interest subsidy in a credit rationing framework, extension of business and technical services. SSIs have been given preferential treatment through the provision of lower interest rates as well as requirement for a minumum credit allocation from the commercial banks.

In recognition of the contribution and the vast potential of the SSI sector as well as its inherent infirmities, provision of adequate credit to this sector has continued to be an important element of banking policy, even though economic and financial policies themselves have undergone significant transformation, particularly  after the initiation of structural reforms in 1991. 

In the policy context, there has been a paradigm shift.  From an inward looking policy framework upto the 1990s.   India has adopted an outward oriented approach after globalisation, liberalization, financial and real sector reforms.  At present, both the industrial sector in general and SSI sector in particular are exposed to an international competitive environment. 

However, the most significant aspect is that India has evolved a sound institutional set up for financing of the SSI sector.  A separate industrial policy was announced as part of the structural reforms which not only eliminated various controls on the industrial sector, provided a greater role for the private sector and encouraged inflow of foreign investment and technology but also contained specific initiatives for the development of the SSI sector in the form of a comprehensive policy package which includes fiscal, credit, infrastructural and technological lops. 

The Reserve Bank of India (RBI), has also been emphasizing on the flow of bank credit to micro enterprises in rural and semi-urban areas set up by vulnerable sectors of society including women. A number of initiatives have been taken in this regard and banks have been advised to provide maximum support to self help groups (SHGs). 

Small Industries Development Bank of India (SIDBI) was set up as the principal financial institution for promotion, financing and development of the SSI sector and for coordinating the activities of other institutions engaged in similar activities.  A credit guarantee fund scheme was launched and SIDBI set up the Credit Guarantee Fund Trust for Small Industries (CGTSI) to implement the scheme. The SIDBI has also encouraged the growth of the venture capital industry for hi tech SME units in India by promoting 13 State/Regional level funds and setting up an all India venture fund.

The Government of India has launched many schemes for technological upgradation and modernization, protection of workers affected by technological upgradation and modernization, infrastructure development, entrepreneurship development, as well as increase in the investment limit (up to Rs.50 million) for SSI units producing certain items.

It also set up a new Ministry for more focus on the development of the SSI sector.  Several expert committees had also been set up over the 1990s to assess the problems of the SSI sector.  Most of the recommendations of these committees related to the simplification of loan application forms, launching of a new credit guarantee scheme, raising of composite loans, etc., which have been accepted and implemented. 

Credit dispensation and the needs of SSI sector. 

Small-scale entrepreneurs require short, medium and long term finances.  The conventional mechanisms for financing SSIs in India stressed on the provision of term and working capital requirements of the industrial units.  There are multiple institutions (in the public, private and cooperative sectors) that cater to the credit needs of the SSI sector, both for fixed asset creation as well as for working capital.  However, the overall framework of the credit dispensation was inadequate in meeting the credit needs of this sector.

Credit Flow to SSI sector
Bank category	1999	2000	2001	2002	2003
Public sector banks	42,591 (16.1)	46,045 (14.6)	48,445 (14.2)	49,743 (12.5)	52,988 (11.1)
Private Banks Indian Foreign	6,451 (18.9)	8,000 (16.5)	8,158 (14.4)	8,613 (13.7)	6,857 (8.3)
	2,460 (11.0)	2,990 (10.6)	3,716 (11.0)	4,561 (11.6)	3,809 (8.7)
Total	51,502	57,035	60,319	62,917	63,654

Note: figures in brackets indicate percentage share of net bank credit

Source: compiled from RBI reports on trends and progress of banking in India.

The public sector banks(PSBs), which were conceived and functioned as instruments of social change and emancipation, also  played a pivotal role in developing SSIs.  Regional rural Banks(RRBs) and State financial corporations(SFCs) increased their flow of credit to the SSI sector through various bankable schemes.

While an outstanding credit to the SSI sector by PSBs rose from Rs.42,591 crore in 1999 to Rs.48,445 crore in 2001 and further to Rs.52,988 crore in 2003, the percentage share of SSIs in net bank credit (NBC) progressively declined 16.1 percent in 1998 to 14.2 percent in 2001 and further to 11.1 in 2003.

However, banks are still not fully equipped to promote SMEs since credit assessment and appraisal are not oriented for lending to this sector.  Therefore banks are asked to recast and reorient their activities to the SSI sector with standard products with the help of technological upgradation.   It is high time that banks should realize that SMEs must not always be equated with high risks. 

Conclusion:  

The formal banking system provides a range of modalities and terms for loans aimed at developing the SSIs. The sub-sector specific promotional institutions incorporate credit programmes as an integral part of their portfolio.  Finally, the informal credit channels/markets, though charging exorbitant rates of interest, provide a more efficient service. 

All these virtually parallel systems sub served the progressively larger credit needs of SSIs in expanding output, employment opportunities and export, besides influencing both the development of forces of production and the relations of production in a chain of  cumulative causation .  Moreover, the significance of credit and technology to produce globally competitive goods and services increased in the post reform period.