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Essay on Small Scale Industries
Essay Contents:
- Essay on the Introduction to Small Scale Industries
- Essay on the Role of Cottage and Small-Scale Industries in Indian Economy
- Essay on the Growth of Small Scale Industries
- Essay on the Circumstances which Favour Small Scale or Cottage Industries
- Essay on the Problems of Small Scale and Cottage Industries
Essay # 1. Introduction to Small Scale Industries:
The result of the second All-India Census of registered small- scale units conducted by the Small Industries Development Organisation (SIDO) in 1987-88 was published in August 1992. Using the Data presented in this Census and the data presented in the first Census (conducted for the year 1972 and published in 1977), one can from some idea regarding the growth and structural change in modern small industry over the 15-year period, 1972 to 1987-88.
There has been a substantial growth of small-scale units over the 15-years period, 1972 to 1987-88. The number of units in the frame of the census reports was increased by 282 per cent. Investment in fixed assets rose by 267 per cent, production by 420 per cent and net value added by 284 per cent (1972-73 prices), and employment by 122 per cent.
Productivity of capital and labour also increased in varying measures between 1972 and 1987-88. For instance, the ratio of net value added to fixed assets increased from 1.06 to 1.10 or by 38 per cent, and net value added per person employed from Rs. 5.09 thousand to Rs. 8.81 thousand or by 73 per cent.
However, capital intensity also rose considerably from Rs. 48.19 thousand to Rs. 79.83 thousand or by two-third. In other words, “a lakh of rupees investment in field assets which employed 21 persons in 1972 employed only 13 persons in 1987-88, showing a decline of 40 per cent.”
According to the Economic Survey, 1995-96, the number of small-scale units stood at 25.71 in 1994-95—indicating increase of 7.8 per cent over the previous year. The value of output of the SSI sector in 1994-95, at current prices is estimated at Rs. 2,93,990 crores—about 21.7 per cent higher than the output in 1993-94.
However, adjusted for inflation, the real growth of output of the sector in 1994-95 was 10.1 per cent. Estimated employment in the SSI sector rose from 139.38 lakh in 1993-94 to 146.56 lakh in 1994- 95, an increase of 5.2 per cent.
Essay # 2. The Role of Cottage and Small-Scale Industries in Indian Economy:
The important role being played by the small-scale sector in Indian economy would be clear from the fact this sector presently accounts for around 40 per cent of the gross turnover in the manufacturing sector, 6.9 per cent of the net domestic product and 34 per cent of the country’s exports.
The Second Plan emphasized the role of small scale and village industries on the following six grounds:
(1) Employment Generation;
(2) Efficiency of Small-Scale Industries;
(3) Equitable Distribution of National Income;
(4) Mobilisation of Capital and Entrepreneurial Skill;
(5) Less Industrial Disputes; and
(6) Contribution to Export.
Let us now discuss these arguments in favour of small- scale and village industries in some details.
1. Employment Generation:
After agriculture, small-scale and cottage industries provides employment to the largest number of people. Given the acute unemployment problem in India with backlog of unemployment estimated at around 17 million in 1992, creation of employment opportunities will depend crucially on the development of small-scale and cottage industries.
This would be clear from the fact that while employment in the factory sector as a whole (large scale, medium scale and small scale) increased by only 2.21 per cent per annum over the period 1972 to 1987-88, employment in small- scale sector grew at the rate of 5.45 per cent per annum. Thus small- scale sector was able to generate employment opportunities for about 2 million people over the period 1972 to 1987-88.
As far as future prospects are concerned, the rural non-farm sector accounting for about 22 per cent of rural employment can play a crucial role in the further expansion of employment opportunities in the rural areas.
An important constituent of this sector is the manufacturing activity consisting mainly of textile-based and agro-based products and units producing construction materials. In the urban areas employment potential seems to be the largest in the non-household, tiny sector segment of the manufacturing sector.
2. Efficiency of Small-Scale Industries:
A controversy has raged in this country over the issue of efficiency in the small-scale industries vis-a-vis large-scale industries. While some studies have pointed out that small-scale industries are more efficient, others point out that large-scale industries are more efficient. Thus no clear-cut answer can be given to the question “which is more efficient—small- scale industry or large-scale industry?’ The fact is that the debate has been coloured by the ideological commitments of the participants.
One of the earliest studies on the relative efficiency of small- scale industries in India was undertaken by Dhar and Lydall. They concluded that modern small-scale industry is fairly capital intensive; that is; these units do not generate more employment per units of capital than large-scale industry. Similar findings were reported in the studies of Hajra and Sandesara.
Hajra used the Census of Manufacturing Industries (CMI) data for 17 industries for 1955 and 1958 and reached the following two conclusions:
(i) Both labour and capital productivity are low in small-scale industries, and
(ii) The ratio of material cost to value added is high in small-scale industries (suggesting, thereby, inefficient use of material input).
Sandesara used CMI data for 28 industries for the period 1953-58 and reached the conclusion that, for given volume of investment, small-scale units neither generate more employment nor produce more output compared to large-scale units.
In his paper published in 1988, Bishwanath Goldar compares for 37 industries at the three-digit level the technical efficiency of small-scale and large-scale industries for the year 1976-77. He found that the SSIs (compared to the large-scale industries) generally have low labour productivity, high capital productivity, low capital intensity (measured as capital per employee) and low total factor productivity.
He inferred that the modern small-scale sector is inefficient relative to the large sector in a large number of industries. He also found that the relative efficiency of the SSIs varies directly with capital intensity, so that the SSIs cannot be relied upon as a source of efficient employment generation.
The above analysis suggests that large-scale units are more efficient than the small-scale units. However, the evidence that the small-scale industries are relatively more efficient is equally strong. Using data presented in Annual Survey of industries for 1960, 1963, 1964 and 1965, Ramsingh K Asher showed that the small-scale sector is more efficient.
After the study, it showed that the small-scale factory combined the largest number of workers with a rupee’s worth of fixed capital; that a rupee worth of fixed assets produced almost seven times an output in small as compared to large industries and that the value added by a rupee worth fixed investment in small factories was at least three times as large as that for a large factory.
Two All India Sample Surveys of small-scale industries conducted by the Reserve Bank of India in 1976-77 and the National Small Industries Corporation (NSIC) in 1979 corroborate the above conclusion. They show that the smaller units use capital more efficiently. Moreover, the profitability of the small-scale sector is greater than the profitability of the large-scale sector.
For instance, the RBI Survey found that profit after tax was 43.72 in the small- scale sector whereas it was 34.90 in the corporate sector. Profit after tax as per cent of net worth was 21.05 for the small-scale sector whereas it was only 7.90 for the corporate sector. According to R.N. Nagaraj, the plausible reasons for the relatively higher profitability in small-scale sector seem to be the lower wage and greater exploitation of labour on the one hand and fiscal concessions on the other.
After all this discussion on the efficiency of the small-scale industries vis-a-vis the large-scale industries what emerges is a totally confusing picture. While some studies show that large-scale industries are more efficient, others show that small-scale industries are more efficient. Therefore we cannot give any firm conclusion.
However, what we must add in the end is that factor endowments of a country must not be lost sight of. Since India is a labour surplus economy and since small sector (particularly village and cottage industries and traditional handicrafts) has a high employment potential, the problem of unemployment (and underemployment) can be tackled only when small-scale and cottage industries are promoted on an extensive scale.
3. Equitable Distribution of National Income:
One of the main arguments put forward in support of the small-scale and cottage industries is that they ensure a more equitable distribution of national income and wealth.
This is accomplished because of the following two considerations:
(i) The ownership of small-scale industries is more widespread than the ownership of large-scale industries, and
(ii) They possess a much larger employment potential as compared to the large industries.
Dhar and Lydall have pointed out that this argument is wrong. According to them, workers in small-scale and village industries are unorganised and cannot fight for their rights. As such, wages paid to them are much less than the wages paid to workers in large industries (for instance, wages in small-scale industries in India are just about half-the wages paid in large-scale industries). In all countries including England, USA, West Germany, Japan and India, small industries have failed to achieve the objective of equitable distribution of income and decentralization of economic power.
This argument cannot be defined since is misses point (ii) made above. We must not forget that the small-scale industries have a high employment potential and consequently they enable a vast majority of people to share the fruits of economic development. In their absence, the only option before these people would be to remain unemployed or seek still less remunerative jobs.
4. Mobilisation of Capital and Entrepreneurial Skill:
The small-scale industries are at a distinct advantage as far as the mobilisation of capital and entrepreneurial skill is concerned. A number of entrepreneurs are spread over small towns and villages of the country. Obviously, large-scale industries cannot utilize them as effectively as the small-scale and village industries distributed over the entire length and breadth of the country. Similarly, large-scale industries cannot mobilise the savings done by people in areas far flung from the urban centers.
But this task can be effectively accomplished by setting up a network of small-scale and cottage industries. In addition, a large number of other resources spread over the country can be put to an effective use by the small-scale and cottage industries.
The rapid development of small-scale industries in the post-Independence period is a proof that given the necessary credit, power and technical knowledge a large quantity of latent resources of the economy can be mobilised for purpose of industrial development.
5. Less Industrial Disputes:
Supports of small-scale industries frequently argue that large-scale industries are ridden with more industrial disputes than the small-scale industries. Because of the ‘tensions’ in the relations between workers of large-scale industries and the mill-owners, such industries frequently face strikes and lockouts.
Against this, the small-scale industries are free from such hazards and there is consequently less loss of output. However, this viewpoint is not totally correct. In capitalistic form of production whether the unit is small or large, the mill owner does exploit the workers. This does lead to tensions and conflicts.
However, whereas the labourers working in large-scale industries are organised and resort to collective action (in the form of strike), workers in small-scale industries are not organised and have no way of expressing their resentment. Any worker who gives a vocal expression to his resentment is immediately thrown out. Therefore, apparently the relations between the employers and employees in a small-scale unit seem to be harmonious while actually they are not.
6. Contribution to Export:
With the establishment of a large number of modern small-scale industries in the post-Independence period, the contribution of the small-scale sector in export earnings has increased by leaps and bounds. What is heartening to observe is that the bulk of the exports of the small-scale industries (in fact, around 93 per cent) consists of such non-traditional items like ready- made garments, sports-goods, finished leather, leather products, woollen garments and knitwear, processed foods, chemical and allied products, and a large number of engineering goods. The total exports of the small-scale industry products increased form Rs. 155 crores during 1971-72 to Rs. 28,000 crores in 1994-95.
Essay # 3. Growth of Small Scale Industries:
Cottage and small scale industries all over the world have survived, because in many respects these have an edge over big industries e.g.,
1. In large scale industries, there is no personal contact between the employer and the employees. On the other hand here the contact is personal and each one knows every other person quite well and puts his heart and soul in the work for maintaining its quality etc.
2. In small scale and cottage industries there is always a direct touch with the consumer or what was called as customer. If the buyer wants some changes, those too can be introduced. On the other hand in large scale in industries there is no direct contact. Contact can be maintained only with the help of marketing manager, advertising manager etc. In case any changes are needed, these cannot be very quickly introduced, because many complications arise in changing a set pattern.
3. Then another edge is that in small scale and cottage industries there are no overhead charges. In large scale industries, these charges are very heavy and at times even strain the industry and result in increase in prices for which the society is the sufferer.
4. Then another edge is that it is always possible to have supervision in the case of former, whereas in the case of later, it is not at all possible, because the number of employees in former case is very low and secondly because employer in the latter case is to depend on the intermediary staff. Moreover in small scale industries the producer is always in a position to examine even minute details and there can be no wastage of material. He can check every leakage of material and ensures that every labourer is giving output and supervision that a worker finds it difficult to cheat.
5. Much of time, money and energy in a big industry are wasted in red tapism which is involved in taking a decision. But small scale and cottage industries have an edge in this regard because there is no red tapism involved in it. The decisions are taken immediately and on the spot by the employer and are also immediately implemented.
6. Then comes ‘Labour Problem’. In this regard too, small scale and cottage industries have an edge over large scale industries. In large scale industries labour problems are really very serious and result in frequent lock outs strikes, in loss of man hours and also in lowering down of production. But there is no such problem in so far as small scale and cottage industries are concerned. There are very few labour problems and loss of man hour.
7. Still another edge is that in the case of heavy industries there is top heavy management. But in the case of small and cottage industries there is no such problem. The management is not at all heavy; there are no problems of maintaining an accounts branch for keeping accounts.
8. In the field of non-exploitation too small scale and cottage industries have an edge over large scale industries. In the latter case there is ruthless exploitation of the workers. The industrialist pays them some move and rest he keeps with himself as his profit. He goes on setting up new industries and further exploitation starts.
But in small scale and cottage industries there is no question of exploitation. The workers are either family members or work as a member of a big family. They are aware of the profit and loss and become equal participants in that.
9. Still another edge is that in cottage and small scale industries producer has dignity of labour. He is not subordinate to anyone. The workers work as colleagues. All take initiatives and try to of that of a superior and inferior, improve the quality of goods. All combined together push the sale. But in so far as large scale industries are concerned there is no dignity of labour.
The workers come to earn their livelihood. They have no concern with the product, but are concerned only with the wages. Not only this, but each product is to pass through so many stags before becoming marketable, so that no worker can claim that that has been produced by him.
10. Last but not least important point is that in the case of small scale industries decision makers take decisions on the spot and can change trade policies according to changing times, therefore, as compared with large scale industries, there is more adaptability to changes, which obviously is good for the industry as well as the society.
Essay # 4. Circumstances which Favour Small Scale or Cottage Industries:
There are certain situations under which small scale industries can find favourable atmosphere. The first consideration in this regard is the market. It is to be seen as to what type of commodities is demanded in the market. In case the types of good are such that the demand for them is uncertain then, there is no fun in producing the goods in bulk.
In large scale industries, bulk production is inevitable, but if goods of fluctuating nature are produced in bulk, then that will be more wastage and even small scale and cottage industries can be most suitable. Then another favourable circumstance can be when the nature of job is such that no division of labour is needed. Still another favourable condition can be when the capital is short and scare and it is not easy to install large scale industries and at the same time the needs of the people are urgent and pressing.
Another favourable condition can be when the nature of work is such that it cannot be put to routine and needs care and constant vigilance, on the spot action and so on. This can be the case with agriculture, where the cultivator is to see whether the time for harvesting watering and reaping is appropriate or not and he is to take on the spot and quick decision.
Essay # 5. Problems of Small Scale and Cottage Industries:
The small-scale and cottage industries are plagued by a number of problems which often force these units to close down. The second all-India census of registered small-scale industrial units conducted in 1987-88 (results published in August 1992) showed that of the 9.87 lakh registered units as on March 31, 1988. 3.05 lakh units constituting about 31 per cent of total registered units had closed down. Thus almost one-third of SSI units had closed down. Of these, 1.49 lakh units (i.e. one-half) had closed within five years of commencement of operations. Not only this, a large number of small-scale units are sick. About 2.33 lakh small-scale units were sick as at the end of September 1992 (this constituted 99 per cent of the total sick units). Let us now consider the main problems that the small- scale units have to face.
1. Finance and Credit:
The scarcity of finance and credit is the main obstacle in the development of small-scale units. The position of cottage and village industries in this regard is even worse. The capital base of the small industrial units is usually very weak since they generally have partnership or single ownership. The artisans or craftsmen running cottage industries either run their business with whatever little capital they possess or take credit from the mahajans or the traders who supply raw material to them.
In many cases such credit is obtained on a very high rate of interest and is thus exploitative in character. The small-scale industries are somewhat better placed. However, the profit earned by them is often not enough for investment purposes.
The main institutional sources for small industries are the following: State directorate of industries, State Financial Corporations, Public Sector Banks and other banks. Ever since the introduction of the social control of banks in 1967, the commercial banks have liberalised their policy of granting credit to small-scale and cottage industries. After the nationalisation of banks in 1969, the situation has improved still further.
The 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 Rs. 21,440 crores in March 1994.
2. Raw Material Availability:
The majority of the small-scale and cottage industries depend on local sources for their raw material requirements. The handloom industry depends for its requirement of cotton on local traders. These traders often supply cotton on the condition that the weavers would sell the cloth only to them when it is ready. Thus the weavers are subjected to double exploitation at the hands of the traders. The traders sell cotton to them at high prices and purchase the ready cloth at low prices.
Earlier the small industries mostly produced items dependent on local raw materials. Hence there was no significant problem in obtaining the necessary raw material. However, ever since the modern small-scale industries have appeared on the industrial horizon manufacturing a lot of sophisticated and new products, the raw material constraint as emerged as a significant constraint on their production efforts.
Many small-scale industries used imported raw material. Whenever there was a difficulty in obtaining this raw material either on account of the foreign exchange crisis or some other reason, these industries had to suffer a severe setback.
3. Under-Utilization of Capacity:
Data presented in the second-all India Census point to considerable under-utilisation of capacity in the small-scale sector. For instance, in 1987-88, capacity utilisation was only 41 per cent in electrical machinery and parts, 58 per cent in leather products, 60 per cent in transport equipment and parts, 30 per cent in miscellaneous manufacturing industries and 32 per cent in metal products. For small-scale units as a whole, capacity utilisation was merely 48 per cent. This shows that half of the capacity of small-scale units is not utilised.
4. Machines and Other Equipments:
Machinery and other equipments in many small industries have grown obsolescent. On account of this reason while their costs of production are high, the quality is inferior as compared to the large-scale units. Moreover, the small-scale units often do not care about the changing tastes and fashions of the people. Accordingly, modernisation and rationalisation are urgently required in small-scale industries.
This task can be accomplished only by a network of technical assistance. Improved technology can help in increasing the productive efficiency of s- all-scale units and encourage new product lines in response to the change in attitudes and fashions of the people.
5. Problems of Marketing:
One of the main problems faced by the small-scale units is in the field of marketing. These units often do not possess any marketing organization and consequently their products compare unfavourably with the quality of the products of the large-scale industries. Therefore, their suffer from a competitive disadvantage vis-a-vis large-scale. Because of the shortage of capital and financial resources, these units do not have adequate ‘staying capacity’ and are often forced to sell their products at unremunerated prices.
To save small-scale units from competition from large-scale units the government has reserved certain items for the small-scale sector. The list of reserved items has continuously expanded from 77 to 124 in the Fourth Plan to 500 in 1977 and subsequently to 836. The Trade Development Authority and the State Trading Corporation help the small-scale industries in organising their sales.
6. Other Problems:
In addition to the problems enumerated above, the small-scale industries face a number of other problems like inefficient management non-availability of cheap power, unchanging and unresponsive production pattern, burden of local taxes, competition from large-scale industries, etc.
Data given by the second-all India Census of registered small- scale industrial units shows that of the 3.05 lakh units closed down as on March 31, 1988, 1.48 lakh units (i.e., one-half of closed units) were closed because of finance and marketing problems.
According to the Seventh Five Year Plan, growth of the small-scale and village industries has been constrained by a number of factors including technological obsolescence, inadequate and irregular supply of raw materials, lack of organised market channels, imperfect knowledge of market conditions, unorganised nature of operations, inadequate availability of credit, constraint of infrastructure facilities including power etc. and deficient managerial and technical skills.
There has been lack of effective co-ordination among the various support organisations set up over the period for the promotion and development of these industries. Quality consciousness has not been generated to the desired level despite various measures taken in this regard. Some of the fiscal policies pursued have resulted in unintended splitting up of these capacities into uneconomic operations and have inhabited their smooth transfer to the medium sector.