Small scale Industries in India

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MEDIUM, SMALL AND MICRO ENTERPRISES (MSMEs)

MSMEs contribute about 8 per cent of the GDP of the country, about 45 per cent of
manufactured output and about 40 per cent of exports. This, coupled with a high
labour to capital ratio, high growth and high dispersion makes them crucial for
achieving the objective of inclusive growth. As per the Quick Results of the 4th All
India Census of MSMEs (2006-07), there were 26 million MSMEs in the country,
which provided employment to about 60 million persons. Of the total, 28 per cent
were in the manufacturing sector and 72 per cent in the service sector. This is the
first Census after the enactment of the MSMED Act 2006 and includes,for the first
time, medium enterprises.

MSMEs Definition

W.e.f. From 26th oct,2006: Micro and tiny enterprises will be those having plant
and machinery of less than Rs. 25 lakh, Small enterprises will be those having plant
and machinery between Rs. 25 lakh and Rs. 5 crore, Medium enterprises- between
Rs. 5 crore and Rs. 10 crore

NEW definition 2018

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved
change in the basis of classifying Micro, Small and Medium enterprises from ‘investment
in plant & machinery/equipment’ to ‘annual turnover’ in 2018.

This will encourage ease of doing business, make the norms of classification growth
oriented and align them to the new tax regime revolving around GST (Goods & Services
Tax).

Section 7 of theMicro, Small and Medium Enterprises Development (MSMED)  Act, 2006
will accordingly be amended to define units producing goods and rendering services in
terms of annual turnover as follows:

A micro enterprise will be defined as a unit where the annual turnover does not
exceed five crore rupees;
A small enterprise will be defined as a unit where the annual turnover is more than
five crore rupees but does not exceed Rs 75 crore;
A medium enterprise will be defined as a unit where the annual turnover is more
than seventy five crore rupees but does not exceed Rs 250 crore.

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Additionally, the Central Government may, by notification, vary turnover limits, which
shall not exceed thrice the limits specified in Section 7 of the MSMED Act.

At present the MSMED Act (Section 7) classifies the Micro, Small and Medium
Enterprises (MSMEs) on the basis of investment in plant and machinery for
manufacturing units, and investment in equipment for service enterprises. The criterion
of investment in plant and machinery stipulates self declaration which in turn entails
verification if deemed necessary and leads to transaction costs.

Taking turnover as a criterion can be pegged with reliable figures available e.g. in GST
Network and other methods of ascertaining which will help in having a non discretionary,
transparent and objective criteria and will eliminate the need for inspections, make the
classification system progressive and evolutionary, help in overcoming the uncertainties
associated with the classification based on investment in plant & machinery/equipment
and employment, and improve the ease of doing business. In addition the amendment
will provide flexibility to the Government to fine-tune the classification of MSMEs in
response to changing economic scenario without resorting to the amendment of MSMED
(Micro, Small & Medium Enterprises Development) Act.

The change in the norms of classification will enhance the ease of doing business. The
consequent  growth and will pave the way for increased direct and indirect employment
in the MSME sector of the country.

MSMEs - ROLE AND IMPORTANCE

Employment
Decentralized industrial expansion
 Equitable distribution of income.
Channelization of latent resources, both financial and entrepreneurship skills
Exports
Contribution in GDP
Productivity, efficiency and profitability

PROBLEMS WITH MSMEs

Management problems
Credit constraints
Infrastructural constraints
Industrial sickness
Obsolete technology
Dereservation
External competition

GOVT POLICY REGARDING MSMEs

Policy prior to 1991

1947-setting up of cottage industries board

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 1954- small industries development organization (SIDO)
1955-national small industries corporation ltd (nsic)
1955- the programme of industrial estates was started
1967- ssi reservation was introduced
1979- the programme of district industries centre (dics) introduced (at present there
are 422 dics in india)
1982- council for advancement for rural technology(cart) introduced
1986- small industries development fund(sidf) launched(for development,
diversification, expansion and rehabilitation
1987- national equity fund(nef) launched (financial and rahabilitation support)
1988- singel window scheme (sws) launched(for working capital and fixed capital
loan)

POLICIES AFTER 2000

New three tier definition

Raising of investment limit
Enhancing of excise exemption limit
Credit gurantee fund scheme launched to provide loans up to rs. 25 lakh without
any collateral
Market development assistance (mda) launched
Scheme for technology upgradation launched
Dereservation launched in a big scale
Cluster approach
Policy initiatives recommended by Arjun Sen Gupta commission, 2004

RECENT POLICY MEASURES

1.   Focus on six major thematic areas, namely credit, marketing, labour, rehabilitation
and exit policy, infrastructure, technology and skill development, and taxation as also
special measures for the north-eastern region and Jammu and Kashmir.

2.   The National Manufacturing Competitiveness Programme (NMCP)

3.   Skill development as a high priority area.

4.   The cluster approach

5.   The Credit Guarantee Fund Scheme

6.   The Credit Linked Capital Subsidy Scheme

7.   Under the Prime Minister’s Employment Generation Programme (PMEGP)

8.   Market Development Assistance (MDA)

9.   Financial aid from the Asian Development Bank (ADB)

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10. Scheme of fund for regeneration of traditioal   industries.

Competition act
On June 26, 2001, the union cabinet cleared the trade related Competition bill 2001.

With India moving from a regulated to a free market economy, an urgent need was felt to
replace the existing Monopolies and Restrictive Trade Practices (MRTP) act 1969 by
another that was more enabling and less restrictive. Infact, the SVS Raghavan committee
had already called for such a move. Another crucial factor that played a vital role in
bringing about this proposed act was the feeling that in the changed climate of
globalization and liberalization the vulnerable consumer needed to be protected by
ensuring fair competition among goods and services providers.

Features of the Act

The enactment of the competition bill, due to be passed in the monsoon session of
parliament will lead to

the termination of the MRTP act and the dismantling of the MRTP commission.
It will now be replaced by a ten member Competition Commission of India
(CCI), which will be empowered to fight unfair competition, restrict emergence of
monopolies and keep an eye on Mergers and Acquisitions (M&As). At the micro
level, the task of the commission would include prevention and investigation of
collusive bidding rigging of bids, unfair supply controls and territorial market
dominance.
The proposed act is quite clear on what constitutes a restrictive practice. According
to this act, mere dominance will not be considered restrictive but abuse of such
dominance will be considered as such especially if prices are rigged by restricting
supplies and skewing or distorting distribution patterns.
As far as Mergers and Acquisitions go, the government has gone against the SVS
Raghavan committee report, which had recommended mandatory notification prior
to any merger. Now according to the proposed act, no prior notification will be
required to be filed with commission for merger and acquisition and only
companies with a turnover in excess of Rs. 3000 crore or with an asset size of Rs.
1000 crore will fall under its purview, should it suspecting wrong practices, seek to
inquire into the specifies of deal. This is an encouraging move, more so, because
only 19 companies (only 9 from private sector) fall under the category of turnover
size.

Small-Scale industries

The basis of distinction between the large scale, medium scale and small and micro scale
industries is generally the size, capital resources and labour force of the individual unit.

The Differences Between The Small-Scale And Cottage Industries Are

Basically Two:

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i)    While small-scale industries are mainly located in urban centers as separate
establishments, the cottage industries are generally associated with agriculture and
provide subsidiary employment in rural areas and

ii)   While small-scale industries produce goods with partially or wholly mechanized
equipment employing outside labour, the cottage industries involve operations mostly by
hand which are carried on primarily with the help of the members of the family. The basis
for this distinction between the small scale and cottage industries was laid down by the
Fiscal Commission in 1950 when it stated that:

‘A cottage industry is thus one which is carried on wholly or primarily with the help of the
members of the family either as a whole or a part time occupation.

A small-scale industry, on the other hand, is one, which is operated mainly with hired
labour, usually 10 to 50 hands. Probably it was this definition that prompted the
Industries (Development and Regulation) Act, 1951, to exempt units employing less than
50 workers with power, and less than 100 workers without power, from registration and
this exempted sector came to be known as the small-scale sector.

While the differences between the small and large industries arise largely because of the
distinct organizational character of the former which is indicated by such factors as
ownership, management, technique, flow of input and output, localization and finally the
historical sequence of development, in the official industrial policy formation, fixed
capital investment in a unit is the most crucial criterion for differentiation.

The investment limit has continuously been enhanced over time. While in April 1991,
investment in fixed capital (plant and machinery) was Rs. 60 lakhs for small-scale units
and Rs. 75 lakhs for ancillary units (one which sells at least 50% of its single shift output
to a large firm under separate ownership or control-ancillary unit), government in 2000
enhanced the investment ceiling for plant and machinery of small scale industries (SSIs)
to Rs. 1 crore and of tiny units to Rs. 25 lakhs (enhanced from previous Rs. 5 lakhs set in
August 1991).

Investment Limit Raised

The Government in 2005 has further raised the investment limit (within the SSI sector)
to Rs. 5 crores (from Rs. 1 crore) in plant and machinery for the following seven items of
sports goods: all types of sports net, shuttle cocks, hockey sticks, protective equipment
like pads, gloves (soft leather), dump bells and expanders, cricket and hockey balls and
covers of football/volleyball/basketball.

Industrial units included under the ‘small scale and village industries’ by virtue of
fulfilling the above capital investment requirement are a ‘hybrid’ of units of various types
arranging from the age-old household industries to modern mechanized small scale units
and MSMEs can be divided into the following two categories:

1.   Traditional industries based on traditional skills and techniques, and

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2.   Modern small-scale industries making use of modern technology as well as artisans’
workshops engaged in activities such as repairing of various implements, machinery,
vehicles, etc.

The traditional industries can be further sub-divided into two categories:

(i)   handicrafts producing highly selective goods of high-skill workmanship (wood and
ivory carving, carpet weaving, metal works, etc.), and

(ii) village and household industries producing common consumer goods and other
utilitarian products predominantly by hand or wing simple tools (pottery, leather
products, hand woven textiles, silk materials etc.).

Role of Cottage and MSMEs Industries

SSIs present an entirely distinct pattern of development. Emphasizing the importance of
SSIs in the Indian economic development, the IPR 1956 stated: ‘they provide immediate
large-scale employment; they offer methods of ensuring a more equitable distribution of
the national income and they facilitate an effective mobilization of resources of capital
and skill, which might otherwise remain, unutilized. Some of the problems that
unplanned urbanization tends to create will be avoided by the establishment of small
centres of industrial production all over the country.’

This sector presently accounts for around 40% of gross turnover in the manufacturing
sector, 6.9% of the net domestic product and 34% of the country’s exports. Some of other
distinct features are:

Employment Generation
SSI provides employment to the largest number of people after agriculture.
SSIs are generally labour intensive. The capital per person employed is much
smaller. This ideally suit for India where capital is scarce is labour is super
abundant.
India is endowed with a large fund of traditional skills SSI provides opportunity for
profitable employment of these skills.
SSI provides opportunities for entrepreneurship ship to more persons than large
scale Industries.

Equitable distributions of National Income

The owner ship of SSI is more wide spread.

They posses a much larger employment potential, so west majority of people can
share the fruits of economic development.

Mobilization of capital

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 Domestic savings and entrepreneurial skills all the country participates in
Enhancement of national income.

Regional disparities decreases

Large Scale Industries are concentrated is few states but SSI can be operated in
dispersed area.
Decentralization of Productions made Possible by SSI provides check on excessive
and premature urbanization.

Contribution to exports

The Artistic handicrafts can earn valuable forex for the country. E.g. In recent years
gems & jewelry, carpets, have grown to major export items.
Around 93% of experts of SSI consist of non-traditional Items like sports goods,
leather products garments, processed food etc.

Less capital Intensive

The starting & operating cost is much less than large-scale industry
SSI can be constructed and brought is to Production in Smaller Period.

Use of local Resources

SSI generally uses locally available Raw material or By Product of large-scale

industry, which may go waste otherwise.

Miscellaneous Reasons

The labour and personal relation ships are more peaceful and cooperative.
SSI can meet the demand of items in scarcity in country in shorter three period.
SSI has greater flexibility in operations. So, are thus better placed in catering to
changing fashion.

Financial benefits

SSI receives many other favors by way of credit subsidies, price preferences in public
procurement, sales and excise tax concessions. Excise tax exemption or reduction is often
the most important. These concessions act in a peculiar way. Luxury good, and other
‘demerit’ goods, as are naturally subject to the highest excise taxes. So SSIs producing
those goods receive the most valuable preferences. Very small producers are always
exempt from indirect taxes because it costs too much to collect revenue from them.

SME Fund

Looking to the credit needs of the SMEs in 1990, the Small Industries Development Bank
of India, (SIDBI) was launched to aid and finance for small enterprises with a corpus of
Rs. 2500 crores. To further improve credit availability, a SME Fund of Rs. 10,000 crores

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has been operationalised under SIDBI from April 2004.

Credit Cards
LaghuUdyami Credit Card (LUCC) Scheme has been liberalized by enhancing the credit
limit from Rs. 2 lakh to Rs. 10 lakh, for borrowers who have a satisfactory track record.

Earlier Policy initiatives

The National Commission on Enterprises in the Unorganized/Informal Sector was set

up in September 2004. The commission will, inter-alia, recommend measures
considered necessary for improvement in the productivity of these enterprises,
generation of large scale employment opportunities on a sustainable basis, linkage of
the sector to institutional framework in areas like credit, raw material supply,
infrastructure, technology up-gradation, marketing facilities and skill development.

85 items reserved for exclusive manufacture in the SSI sector were de-reserved in
October 2004. The total number of reserved items now stands at 605

To facilitate technology up-gradation and enhancing competitiveness, the investment

limit (in plant and machinery) has been raised in October 2004, from Rs. 1 crore to
Rs.5 crore, in respect of 7 items of sports goods, reserved for manufacture in the small
scale sector

The small scale and Medium Enterprises (SME) Fund of Rs.10,000 crore was
operationalised by the SIDBI since April 2004. Eighty percent of the lending from this
fund will be for SSI units, at interest rate of 2 percent below the prevailing PLR of the
SIDBI.

The Reserve Bank of India enhanced the composite loan limit for the SSI sector to Rs.
1 crore from Rs. 50 lakh.

With a view to integrate small and medium enterprises, facilitating their growth and
enhancing their competitiveness (including measure for freeing is the sector from
“Inspector Raj”), a suitable legislation is being finalized.

A new “Promotional Package for small enterprises” is being formulated. This world
includes measurers to provide adequate credit, incentives for technology up-gradation,
infrastructural and marketing facili ties, etc.

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 main problems faced by SSIs and Cottage Industries
are:

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Finance and Credit

The Capital base of the small industries units is usually very weak. The artisans or
craftsmen running cottage industries either run their business with whatever little capital
they possess or take credit at usurious rates of interest from the unorganized credit
market in rural/semi-urban centres. The main institutional sources for small industries
are the following: State Directorate of Industries, State Financial Corporations, Public
Sector-Banks, Private and Cooperative Banks. Though the commercial banks have
liberalized their policy of granting credit of SSIs and cottage industries and have in fact
placed the credit to them under the mandatory priority sector lending resulting in
enormous availability of institutional credit at subsidized rate to the small sector, the
criterion of credit worthiness and willful default by past borrowers has led to excess
caution being exercised through cumbersome systems and procedures by the financial
institutions. In order to ensure that credit is available to all segments of the enlarged SSI
sector, RBI has issued instructions for compliance of 40% of total credit to priority sector
and out of the funds normally available to SSI sector 40% will be reserved for units with
investment in plant and machinery upto Rs. 5 lakhs, 20% for units with investment
between Rs. 5 lakhs and Rs. 25 lakhs and the remaining 40% for other SSI units.

Raw material availability

The majority of SSI and cottage industries depended entirely on local sources for their
raw material requirements, initially but even then many a times, raw materials were
supplied only on the condition that the finished product be supplied back to the raw
material suppliers/traders and it were the latter who actually reaped profits. Ever since
the modern SSIs have appeared on the industrial horizon manufacturing a lot of
sophisticated and new products, the raw material constraint has emerged as a significant
constraining on their production efforts. Many SSIs use imported raw materials and in
case of foreign exchange crisis or volatility, these industries have to suffer a severe
setback.

Machines and other equipment

Obsolescence has set in and so the costs of production are high and the quality, too, is
inferior as compared to the large-scale units. Hence, modernization and rationalization
are urgently required in SSIs. A well spread network of R & D and technical assistance is
required.

Under-utilization of capacity

There is a considerable under-utilization of capacity in SSIs. For instance, in 1987-88,

capacity utilization was only 41% in electrical machinery and parts, 58% in leather
products, 60% in transport equipment and parts, 30% in miscellaneous manufacturing
industries and 32% in metal products. Four small-scale units as a whole, capacity
utilization was merely 48%.

Problems of marketing

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Most of the SSIs, are forced to restrict their sales to the local markets, tailoring their
supply to the local needs. The inability to procure clientele from distant markets compels
them to restrict their scale of operations, and forego economics of scale, which a unit of
an optimum size can derive. SSI units often do not possess any marketing organization
and consequently their products compare unfavorably with the quality of the products of
the large scale industries and hence suffer from a competitive disadvantage vis-a-vis large
scale units.

On the institutional front, the Trade Development Authority and the State Trading
Corporation held the SSIs in organizing their sales. The National Small Industries
Corporation set up in 1955 is also helping the small-scale units in obtaining government
orders and locating export markets.

Other Problems

In addition to the problems enumerated above, the SSI face a number of other problems
like

There has been lack of effective coordination among the various support
organizations 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.
inefficient management,
non-availability of cheap power,
unchanging and unresponsive production pattern,
burden of local taxes, and
competition from large-scale units.

WTO and SMEs

Under the World Trade Organisation (WTO) regime, new opportunities are being created
for linkages between SMEs across the globe. The dismantling of the textile quotas is being
anticipated in India with great enthusiasm. Garment export is a dominant characteristic
of Indian SMEs. Other sectors, such as Biotech, IT and IT enabled services, footwear to
name a few, have shown promising potential. Closer connectivity of India’s large
agricultural resources affords growing opportunities for new ventures. India’s vast pool of
talented and educated persons, and low-cost labour can translate into possibilities for
foreign collaborations. SMEs grew by 19% last year, faster than the overall growth of the
IT sector, and has expected SMEs to deliver better results in the coming years. SMEs are
also engaged in cutting edge research and development activities, logistics services, back-
office operations and other services.

Institutional Set Up

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Small Industries Development Organisation

The Small Industries Development Organisation (SIDO) under the Office of Development
Commissioner (SSI) is implementing promotional/catalytic programmes for the growth
and development of SSI sector.

Modernisation and technology upgradation

Incentives are given to small scale units to acquire ISO 9000 or equivalent
certification.
to equip them with modern machines and skilled manpower.
set up ten Tool Rooms in the country to assist SSI units.
The Product-Cum-Process Development Centres (PPDCs) have been established for
Foundry and Forging at Agra, for sports goods and leisure time equipment at
Meerut, for essential oils at Kannauj, for glass industry at Firozabad, and for pumps
and diesel engines at Coimbatore.
participation in international exhibitions, organisation of training programmes on
packaging to enhance the value of exports by SSI units,
provision of exports and trade related information to the target groups of export -
oriented small scale units,

Integrated Infrastructure Development Centres (IIDCS)

The IIDC scheme was taken up for augmenting the infrastructural development facilities
in rural and backward areas for promoting industrial development.

National Small Industries Corporation Limited (NSIC)

The NSIC was established in the year 1955 by the Government of India with a view to
promote, aid and foster the growth of viable small industries in the country following an
integrated approach and acting as a catalyst, particularly with emphasis on the
development of industries in backward areas and in selected lines of production
identified as priority areas from time to time.

The NSIC has been operating ‘marketing assistance’ programme which includes

1.   raw materials assistance

2.   integrated marketing support and

3.   marketing to the Government and tender marketing including consortia formation.

Khadi and Village Industries Commission (KVIC)

It is a statutory body established by an Act of Parliament in 1956. In April 1957, it took
over the work of former All India Khadi and Village Industries Board.

Objectives

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The broad objectives that the KVIC has set before it are...

The social objective of providing employment.

The economic objective of producing saleable articles.
The wider objective of creating self-reliance amongst the poor and building up of a
strong rural community spirit.

Kvic Schemes

PMEGP  (Prime Minister's Employment Generation Programme)

REGP  Rural Employment Generation Programme (REGP
SFURTI Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
RISC  Rural Industry Service Centre

Objectives Of The Programme

Provide backward forward linkages to Khadi & V.I. activities in a cluster.

To provided services like raw material support, skill up-gradation, training, Quality
Control, Testing facilities, marketing promotion, design & product development in order
to strengthen the rural clusters

•          EXPORT INCENTIVE SCHEME

•          INTEREST SUBSIDY SCHEME

Khadi Schemes

Market Development Assistance (MDA)

Khadi KarigarJanashreeBima Yojana
Interest Subsidy Eligibility Certificate (ISEC)
Strengthening of Infrastructure of Existing Weak Khadi Institutions and Assistance
for Marketing Infrastructure
Scheme for Enhancing Productivity & Competitiveness of Khadi Industry & Artisans
Workshed Scheme for Khadi Artisans.

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