SMALL SCALE INDUSTRIES

IN INDIA

ROLE
AND
GOVERMENT POLICY

MADE BY:
ITEE BERI
MBA 1st SEM.
ROLL NO. 16
FMS-BHU
DEFINITION OF SSIs
The definition for small-scale industrial undertakings has changed over time. Initially they
were classified into two categories- those using power with less than 50 employees and those
not using power with the employee strength being more than 50 but less than 100. However,
the capital resources invested on plant and machinery buildings have been the primary
criteria to differentiate the small-scale industries from the large and medium scale industries.
An industrial unit can be categorized as a small- scale unit if it fulfils the capital investment
limit fixed by the Government of India for the small-scale sector.

As per the latest definition which is effective since December 21, 1999, for any
industrial unit to be regarded as Small Scale Industrial unit the following condition is
to be satisfied: -

Investment in fixed assets like plants and equipments either held on ownership terms
on lease or on hire purchase should not be more than Rs 10 million.

However, the unit in no way can be owned or controlled or ancillary of any other
industrial unit.

YEAR INVESTMENT LIMITS

1960 Upto Rs 5 lacs in Plant & Machinery
1966 Upto Rs 7.5 lacs in Plant & Machinery

1975 Upto Rs 10 lacs in Plant & Machinery

1980 Upto Rs 20 lacs in Plant & Machinery

1985 Upto Rs 35 lacs in Plant & Machinery

1991 Upto Rs 60 lacs in Plant & Machinery

1997 Upto Rs 100 lacs in Plant & Machinery

1999 Upto Rs 100 lacs in Plant & Machinery

 CLASSIFICATION OF SSIs:
A common classification is between traditional small industries and modern small
industries.

Traditional small industries include khadi and handloom, village industries,

handicrafts, sericulture, coir, etc. Modern SSIs produce wide range of goods from
comparatively simple items t sophisticated products such as television sets,
electronics, control system, various engineering products, particularly as ancillaries to
the large industries..

The traditional small industries are highly labour-intensive while the modern small-
scale units make the use of highly sophisticated machinery and equipment. For
instance, during 1979-80, traditional small-scale industries accounted for only 135 of
the total output but their share in total employment was 56%. As against this, the
share of modern industries in the total output of this sector was 74% in 1979-80 but
their share in employment was only 33%. Obviously, these industrial units would be
having higher labour productivity.

One special characterstic of traditional small-scale industries is that they cannot

provide full time employment to workers, but instead can provide only subsidiary or
part time employment to agricultural laborers and artisans. Among traditional village
industries, handicrafts possess the highest labour productivity, besides handicrafts
make a significant contribution to earning foreign exchange for the country.

Nowadays Indian small-scale industries (SSIs) are mostly modern small-scale

industries. Modernization has widened the list of products offered by this industry.
The items manufactured in modern Small-scale service & Business enterprises in
India now include rubber products, plastic products, chemical products, glass and
ceramics, mechanical engineering items, hardware, electrical items, transport
equipment, electronic components and equipments, automobile parts, bicycle parts,
instruments, sports goods, stationery items and clocks and watches.

ROLE OF SMALL SCALE INDUSTRIES IN

INDIAN ECONOMY
The small-scale industrial sector plays a pivotal role in the Indian economy in terms
of employment and growth has recorded a high rate of growth since Independence
inspite of stiff competition from large-scale industries. There are several important
reasons why these industries are contributing a lot to the progress of the Indian
economy:
1. PRODUCTION:

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The small-scale industries sector plays a vital role in the growth of the country. It
contributes almost 40% of the gross industrial value added in the Indian economy. It
has been estimated that a million Rs. of investment in fixed assets in the small scale
sector produces 4.62 million worth of goods or services with an approximate value
addition of ten percentage points.

The small-scale sector has grown rapidly over the years. The growth rates during the
various plan periods have been very impressive. The number of small-scale units has
increased from an estimated 0.87 million units in the year 1980-81 to over 3 million
in the year 2000.

When the performance of this sector is viewed against the growth in the
manufacturing and the industry sector as a whole, it instills confidence in the
resilience of the small-scale sector.
COMPARATIVE GROWTH RATES OF SSI SECTOR AND
TOTAL INDUSTRIAL SECTOR

Year SSI Sector Growth Rate Total Industrial Sector

Growth Rate
1994-95 10.44 9.10
1995-96 11.49 13.00
1996-97 1.29 6.10
1997-98 9.19 6.70
1998-99 7.84 4.10
1999-2000 7.09 6.70
2000-01 8.04 5.00
2001-02 6.06 2.70
2002-03 7.68 5.70
2003-04 8.06 6.09
2004-05 9.96 8.04
Source: SIDO Half Century by DCSSI, Govt. of India 2004 and Annual Report of the
Ministry of SSI 2005-06

2. EMPLOYMENT

SSI Sector in India creates largest employment opportunities for the Indian populace,
next only to Agriculture. It has been estimated that 100,000 rupees of investment in
fixed assets in the small-scale sector generates employment for four persons.

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 Office of the Development Commissioner
M/O Micro & Small Enterprises Cluster Development Programme
(Statistics & Data Bank Division)

PERFORMANCE OF MICRO & SMALL ENTERPRISES

Number of Enterprises (Lakh Production
Empl. Growth Share In
Nos.) (Rs. Crs.)
Year (Lakh
Person) at Current Rate
Registered Unregistered Total GDP (%)
prices (%)
2002-2003 15.91 93.58 109.49 263.49 314850 8.68 5.92
2003-2004 16.97 96.98 113.95 275.30 364547 9.64 5.79
2004-2005 17.53 101.06 118.59 287.55 429796 10.88 5.84
2005-2006 18.71 104.71 123.42 299.85 497842 12.32 5.83
2006-2007 20.98 107.46 128.44 312.52 587196 12.65 5.94
2007-2008
24.68 108.99 133.67 322.28 695126 13.00 NA
(Projected)

3. EXPORT:

SSI Sector plays a major role in India's present export performance. SSI Sector
contributes 45%-50% of the Indian Exports. Direct exports from the SSI Sector
account for nearly 35% of total exports. Besides direct exports, it is estimated that
small-scale industrial units contribute around 15% to exports indirectly. This takes
place through merchant exporters, trading houses and export houses. They may also
be in the form of export orders from large units or the production of parts and
components for use for finished exportable goods.

It would surprise many to know that non-traditional products account for more than
95% of the SSI exports.

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The exports from SSI sector have been clocking excellent growth rates in this decade.
It has been mostly fuelled by the performance of garments, leather and gems and
jewellery units from this sector.

The product groups where the SSI sector dominates in exports, are sports goods,
readymade garments, woolen garments and knitwear, plastic products, processed food
and leather products.

The SSI sector is reorienting its export strategy towards the new trade regime being
ushered in by the WTO.

Year Exports
(Rs. Crores)
(at current
prices)
1994-95 29,068
(14.86)
1995-96 36,470
(25.50)
1996-97 39,249
(7.61)
1997-98 43946
(11.97)
1998-99 48979
(10.2)
1999-00 (P) 53975
(10.2)
4. OPPORTUNITY:

The opportunities in the small-scale sector are enormous due to the following factors:

• Less Capital Intensive

• Extensive Promotion & Support by Government
• Reservation for Exclusive Manufacture by small scale sector
• Project Profiles
• Funding - Finance & Subsidies
• Machinery Procurement
• Raw Material Procurement
• Manpower Training
• Technical & Managerial skills
• Tooling & Testing support
• Reservation for Exclusive Purchase by Government
• Export Promotion

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• Growth in demand in the domestic market size due to overall economic
growth Increasing Export Potential for Indian products Growth in
Requirements for ancillary units due to the increase in number of greenfield
units coming up in the large-scale sector. Small industry sector has performed
exceedingly well and enabled our country to achieve a wide measure of
industrial growth and diversification.

I. Fashion Technology:

OPPORTUNITIES

• Glamour & Limelight

• Creative
• High Value Addition
• Coverage (Extensive)
• Clothes
• Dresses
• Garments
• Textile
• Footwear
• Various Leather Products
• Jewellery
• Travel Goods

• Fashion Accessories (purses, bags, carryon, watches etc.)

• Personal Embellishment (Face, Hair, Hands, Feet, Cosmetics,
Perfumes etc.)

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 II. Information Technology

OPPORTUNITIES
• Media & Entertainment

• Contents,
• Animation,
• Games,

III. Design Technology

OPPORTUNITIES
• Interiors - (Furniture & Furnishing – homes, work places, community,
hospitals, schools, shopping places, recreation, sports)
• Exteriors - (Architectural)
• Industrial products
• Textiles
• Electrical appliances
• White goods
• Leather products
• Engineering products
• Machinery
• Dies and tools
• Watches
• Jewellery
• Hospital equipments
• Medical instruments
• Electronics and Communication Products and Equipments

3. WELFARE:
These industries are also very important for welfare reasons. People of small means
can organize these industries. This in turn increases their income levels and quality of
life. As such these can help in reducing poverty in the country. Further, these
industries tend to promote equitable distribution of income. The reasons are obvious.
One, a large proportion of income generated in these enterprises is distributed among
the workers. Two, income are distributed among a vast number of persons throughout
the country. All these benefits flow from the fact that these industries are highly
labour-intensive, and that these can be set up anywhere in the country.
Distributive aspect of small-scale industries further unravels their two-fold beneficial
character. On the one hand, these industries enable a vast number of people to earn

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income, and on the other hand, the very people among whom these are distributed
generate this income.
INDIAN SME SECTOR – AT A GLANCE
2005-06

• SSI units : 12.3

million

• Employment generated in SSIs : 29.5

million

• Production : At current Prices Rs.4762.01

billion

• Exports : Rs. 1215

billion
• SSI account:
Industrial Production: 40%
Exports: 35%
(50% of Direct & Indirect)

GDP Share: 7%

• Ownership pattern :

– Proprietorships : 78%

– Partnerships : 16%

– Corporate & Others : 6%

• Industrial Units : 96%

• Service Enterprises : 3%

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 • Ancillary Units : 1%
• Produces Diverse range of products (more than 8000- consumer
items, capital goods and intermediates)

DISABILITIES
Small enterprises are presently seriously handicapped in comparison with larger
units by an inequitable allocation system for scarce raw materials and imported
components, lack of provision of credit and finance; low technical skill and
managerial ability; and marketing contracts. It is, therefore, essential to develop an
overall approach to remove these disabilities.

1. OUTPUT vs EMPLOYMENT
One argument is that the emphasis on employment is irrelevant, as the basic
thing is the output that the economy needs for its growth. From this angle, it is
contended that, since the productivity of these industries is low compared to that
that of large industries, the small industries simply waste the capital which is very
scarce, and which , if diverted to large industries, can produce more. From this
viewpoint, small industries are more capital-intensive. It is also argued that the
labour-productivity in the small industries is also small compared to large
industries.

2. ADVERSE EFFECT ON CAPITAL FORMATION

It is also contended by some that small industries have unfavorable
consequences on saving and capital formation. They argue that the establishment of
these industries will, over a period of time, reduce the availability of capital for
large-scale industries with higher productivity of capital. First, it will happen
because capital, used inefficiently in the small industries, will not be available for
large-scale industries. Second, these industries being labour-intensive, use a major
proportion of the sale proceeds of output to pay workers whose marginal propensity
to save is low. As a result, a large part of their incomes will be used for
consumption resulting in a lower rate of saving and capital formation for the
economy.

3. INEFFICIENT PRODUCTION
Another charge against these industries is that the cost of production is higher
than in the large industries, because these industries suffer from several inefficiencies.

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 No doubt, the fact of large scale entails, what is described as economies of scale,
lowering the costs.

4. LARGE SICKNESS
There are two main issues in respect of sick SSIs: (i) existence of a large
number of sick units which are non-viable; and (ii) rehabilitation of potentially
viable units. As far as former is concerned, there were 1, 67,980 sick SSI units as on
March 31,2003. These units are those that had obtained loans from banks. An
amount of Rs. 5,706 crore was blocked in these units. Of these, as many as 1,62,791
units with outstanding bank credit of Rs. 4,569 crore were identified by banks as
being non-viable. As far as the latter issue is concerned, of the 1,67,980 sick SSI
units as on March 31, 2003, only 3,626 units with outstanding bank credit of Rs.
625 crore were found to be potentially viable by the banks.

5. SEVERAL DIFFICULTIES:
It is thus obvious that these industries, despite their importance in the
economy, are not contributing to their full towards the development of the country
along the desirable lines. It is because these are beset with a number of problems
concerning their operations. These may be described as under:

• Inadequacy of finance: A serious problem of these industries is in

respect of credit both for long-term and short-term purposes. This is
evident from the fact that the supply of credit has not been
commensurate with their needs associated with fixed and working
capital.
TRENDS OF LENDING BY BANKING SECTOR TO SSI

Rs. in Crores
As at end Total advances by Total Advances to Proportion of SSI
March Banking Sector SSI Sector to Total Advances
1999 246203 42674 17.30
2000 292943 45788 15.63
2001 469153 56002 1.94
2002 536727 57199 10.66
2003 669534 60394 9.02
2004 764383 65855 8.62
2005* 972587 76114 7.83

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Source : RBI Report on Trend and Progress of Banking in India
* Provisional

• Difficulties of Marketing: These industries are also up against the

crucial problem of marketing their products. The problem arises from
such factors as small scale of production, lack of standardization,
inadequate market intelligence, competition from technically more
efficient units, etc. Apart from the inadequacy of marketing facilities,
the cost of promoting and selling their products too is high.

• Shortage of raw materials: Then there is the problem of raw

materials which continues to plague these industries. Raw materials
are available neither in sufficient quantity, nor of requisite quality,
nor at reasonable price. Being small purchasers, the producers are not
able to undertake bulk buying as the large industries can do. The
result is taking whatever is available, of whatever quality and at high
prices.

• Low-level technology: The methods of production, which the small

and tiny enterprises use, are old and inefficient. The result is low
productivity and high costs. There is little of research and
development in this field in the country. There is almost no agency to
provide venture capital to cover risks associated with the introduction
of new technologies.

• Competition from large-scale industries: Another serious problem,

which these industries face, is that of competition from large-scale
industries. Large-scale industries, organized as they are on modern
lines, using latest production technology and having access to many
facilities, can easily outsell the small producers.
The following table depicts the various problems that the SSIs
have to face:
AIMA –Impact Assessment Impediments To Growth

Problems Faced by SSIs as Barriers to Growth

Market Related 70%

Finance Related 25%

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 Government Policy Related 12.78%

Power Related/Infrastructure 14.0%

Technology 14.60%

MEASURES
To help the SSIs in meeting the challenges of globalization, the Government has
taken several initiatives and measures in recent years. Primarily among them is the
enactment of the ‘Micro, Small and Medium Enterprises Development Act, 2006’,
which aims to facilitate the promotion and development and enhance the
competitiveness of MSMEs. The Act came into force from 2nd October 2006. The
main features of the act are :
SALIENT FEATURES OF MSMED ACT – 2006

• Manufacturing enterprises defined in terms of investment in Machinery and

Equipment (excluding land and building) classified into
a. Micro enterprises - investment upto Rs 25 lakhs,
b. Small enterprises - investment above Rs 25 lakhs and upto Rs 5 crore
c. Medium enterprises - Investment above Rs 5 crores and upto Rs 10 crores

• Service enterprises defined in terms of their investment in equipment

(excluding land and building) classified into
a. Micro enterprises-investment upto Rs 10 lakhs
b. Small enterprises-investment above Rs 10 lakhs and upto Rs 2 crore
c. Medium enterprises-investment above Rs 2 crores and upto Rs 5
crores

MSMED Act – 2006 and its Impact

Clause Salient Features Impact
1. Establishment of Specific representation for Statutory Status, compact board and quarterly
National Small and Women meetings will address problems of SMEs
Medium Enterprises Mandatory Quarterly immediately to take corrective action
Board – Maximum Meeting
No. of members 47
2. Concept of Clear-cut demarcation of Facilitates SMEs to enter into service enterprises
Enterprises manufacturing/production aggressively
and rendering services
3. Definition of Specific ceiling limit for Existing small units can graduate into Medium
Enterprises manufacturing/production units and avail facilities under the act.
and service enterprise
definition for Medium
enterprises

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4. Filing of memoranda Replacement of registration Facilitates SMEs to avail the benefits of the act
optional for Micro and with memorandum immediately after setting up of the unit.
Small enterprises in
manufacturing and
service sector Medium
enterprises in Service
Sector but mandatory for
Medium enterprises in
manufacturing sector

Clause Salient Features Impact

5. Procurement Notification of Facilitates opportunity for supply of
Policies preference policies by goods/services without any hassles.
central or State
Governments for goods Public Procurement Policy under Section 11 of
and services provided MSME Act, yet to be notified
by Micro & Small
enterprises
6. Delayed • Period of SMEs can plan their cash flow/financial
Payment Penalty payment by the requirement
& dispute procuring
resolution organizations –
45 days
• Penal interest
200% of PLR
7. Dispute Resolution Establishment of MSE Easy financial planning and no waste of human
facilitation Council; 90 resources for chasing/follow up.
days framework for
dispute resolution
8. Delayed Payment – Deduction disallowed This will encourage procurement agencies to
allowable deduction ensure timely payment to SMEs.
under IT Act 1961
9. Closure of Business Statutory notification of Facilitates expedition of liquidation
scheme for closure

10. Notification of Statutory Mandatory on all facilitating development of

guidelines or SMEs ensuring fast growth
instructions for
promotion of SMEs –
wrt. To Funds

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 appropriation and
release

11. Facilitating Credit Statutory Mandatory on all providing credit. Guidelines for
credit for 20% year on year growth

Other major initiatives taken by the government are setting up of National

Manufacturing Competitiveness Council (NMCC) and the National Commission of
Enterprises in the Unorganized Sector (NCEUS). Further, in recognition of the fact
that delivery of credit continues to be a serious problem for MSEs, a ‘Policy Package
for Stepping up Credit to Small and Medium Enterprises (SME)’ was announced by
the government with the objective to double the credit flow within the period of
five years.

The government has also announced a comprehensive package for promotion of

micro and small enterprises, which comprises the proposals/schemes having direct
impact on the promotion and development of the micro and small enterprises ,
particularly in view of the fast changing economic environment, wherein to be
competitive is the key of success.

The Ministry of Micro, Small and Medium Enterprises (MSME) performs its tasks of
formulation of policies and implementation of programmes mainly through two
Central organizations. These are:

 Micro, Small and Medium Enterprises Development Organization

The Micro, Small and Medium Enterprises Development Organization (earlier

known as Small Industries Development Organization) set up in 1954,
functions as an apex body for sustained and organized growth of micro, small
and medium enterprises. As an apex organ, it provides a comprehensive range
of facilities and services to the MSMEs through its network of 30 Small
Industries Service Institutes (SISIs), 28 branch SISIs, 4 Regional Testing
Centres (RTCs), 7 Field Testing Centres (FTSs), 6 Process-cum-Product
Development Centres (PPDCs)

 National Small Industries Corporation Ltd (NSIC)

NSIC, since its inception in 1955 has being working with its mission of
promoting, aiding and fostering the growth of micro and small enterprises.
The Corporation has been introducing several new schemes from time to time

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 for meeting the change aspirations of micro and small enterprises. The main
objective of all these schemes is to promote the interest of the micro and small
enterprises and to put them in competitive and advantageous position. The
information pertaining to the schemes planned to be continued/implemented
in the XI plan period by NSIC with Government support is given hereunder:

I. Performance & Credit Rating Scheme

NSIC, in consultation with Rating Agencies and Indian Banks
Association, has formulated Performance & Credit Rating Scheme for
Small Industries. The scheme is aimed to create awareness among small
enterprises about the strengths and weaknesses of their existing
operations and to provide them an opportunity to enhance their
organizational strengths and credit worthiness. The rating under the
scheme serves as a trusted third party opinion on the capabilities and
credit worthiness of the small enterprises. An independent rating by an
accredited rating agency has a good acceptance from the
Banks/Financial Institutions. Under this scheme, rating fee to be paid by
the SSIs is subsidized for the first year only and that is subject to
maximum of 75% of the fee or Rs. 40,000/-, whichever is less.

II. Marketing Assistance Scheme

This is an ongoing old scheme. Marketing, a strategic tool for business
development, is critical for the growth and survival of SSIs in today’s
intensely competitive market. One of the major challenges before the
SSIs is to market their products/services

NSIC acts as a facilitator to promote marketing efforts and enhance the

competency of the small enterprises for capturing the new marketing
opportunities by way of organizing and participating in various domestic
and international exhibitions/trade-fairs, buyers-sellers meet intensive
campaigns, seminars and consortia formation at the subsidized rates.

In addition, the Ministry has three National Level Entrepreneurship

Development Institutes namely, Indian Institute for Entrepreneurship
(IIE), Guwahati, National Institute for Entrepreneurship and Small
Business Development (NIESBUD), Noida and National Institute for
Micro, Small and Medium Enterprises (NIMSME), Hyderabad.

 Infrastructure Development
For setting up of industrial estates and to develop infrastructural facilities for
MSMEs, the Integrated Infrastructure Development Scheme (IID) was
launched in 1994. The scheme covers districts which are not covered under
the Growth Centres’ scheme. The scheme covers rural as well as urban areas
with a provision of 50% reservation for rural areas and 50% industrial plots

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 are to be reserved for tiny units. For the promotion and development of MSEs
in the country, cluster is one of the thrust areas of the Ministry in the 11th plan.

 Technology Upgradation in MSE Sector

The opening up of economy has exposed MSE sector to global and domestic
competition. With a view to enhancing the competitiveness of this sector, the
Government has taken several steps such as:

i. Assistance to industry association for setting up of testing centres and to

State Governments and to their autonomous bodies for
modernization/expansion of their Quality Marking Centres.
ii. Regional Testing Centres and Field Testing Centres to provide testing
services and services for quality upgradation.

iii. Implementation of Micro and Small Enterprise Cluster Development

Programme (MSECDP), under which 91 clusters have been taken up,
including national programme for the development of toy, stone,
machine tools and hand- tool industry in collaboration with UNIDO.
iv. A scheme of promoting ISO 9000/14001 Certification under which SSI
units are given financial support by way of reimbursing 75% of their
expenditure to obtain certification subject to maximum of Rs.75,000 per
unit
v. Setting up of Biotechnology Cell in SIDO.

Further, a scheme on Credit Linked Capital Subsidy was launched in the

year 2000 to facilitate technology upgradation of small enterprises.

 Measures for Export Promotion

Export promotion from the MSE sector has been accorded a high priority.
Following schemes have been formulated to help MSEs in exporting their
products:

i. Products of MSE exporters are displayed in international exhibitions

and the government reimburses the expenditure incurred.

ii. To acquaint MSE exporters with latest packaging standards,

techniques, etc., training programme on packaging for exporters are
organized in various parts of the country in association with the Indian
Institute of Packaging.

iii. Under the MSE Marketing Development assistance (MDA) scheme,

assistance is provided to individuals for participation in overseas

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 fairs/exhibition, overseas tours, or tours of individuals as member of a
trade delegation going abroad.

 Entrepreneurship and Skill Development

The Ministry conducts Entrepreneurship Development Progamme (EDPs) to

cultivate the skill in unemployed youths for setting up micro and small enterprises.
Further, under the management Development Programmes(MDPs), existing MSE
entrepreneurs are provided training on various areas to develop skills in
management, to improve their decision-making capabilities resulting in higher
productivity and profitability. To encourage more entrepreneurs from SC/ST,
women and physically challenged groups, the Ministry of MSME provides them a
stipend of Rs.500 per capita per month for the duration of the training.

From the above description of the government approach and measures, it is clear
that these are by and large on the right lines. If, however, the SSIs still suffer from
various handicaps, it is obviously, because these measures are not implemented
effectively. It is that the efforts are more in direction of “protection” of this sector,
and there is very little by way of raising its efficiency and competitive strength.
Unless this becomes the centre-theme of the policy, the SSIs will not become a
dynamic sector.

---------------------------------------------------------

REFERENCES

 INDIAN ECONOMY by RUDDAR DATT AND K.P.M.

SUNDHARAM

 INDIAN ECONOMY by A.N. AGRAWAL

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 INDIA 2008 by MINISTRY OF INFORMATION AND
BROADCASTING

 BUSINESS ENVIROMENT by Francis Cherunilam

 Websites:
 http://indiabudget.nic.in

 http://dcmsme.gov.in/ssiindia

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