CHAPTER-2 SMALL SCALE SECTOR IN INDIA2 SMALL SCALE SECTOR IN DIA The small scale industries (SSIs) have a crucial role in a developing economy like India. ‘They play a strategic role in the Progress of the country. These industries by and large represent a stage in economic transition from traditional Segments to modern segments, The traditional nature of this Process is reflected in the diversity of these industries. Some SSIs employ simple skills and mechanism while many other units use modern and sophisticated technology, Now, our economy is facing a challenge of economic growth. It has to accelerate the productivity of many important areas like agriculture and industry by improving their techniques of production. SSIs have been assigned to fulfil these expectations in more economic and diversified way, “SSIs constitute an important part of the Indian economic structure. They integrate a continuing element in the scheme of national planning. They are a Strategic part of the Indian economy as well as a Progressive and effective decentralized sector which is closely related with agriculture and medium and large scale industries. The whole scheme of a socialistic Pattern of society with employment for all rests on the decentralization and wide distribution of economic activity,entrepreneurship and economic advantages”'. The basic social philosophy underlying Indian Planning is that to develop medium and large scale sector only to take advantage of modern technology. Over the rest of the field, SSIs will be encouraged to play their active role. If there is change jj scale, that has to be developed with the help of mutual cooperation. both horizontal and vertical. Rationale of SSIs Following are the main rationale to support SSIs in India: 1. The Factor Price Argument: It is commonly argued that for various institutional reasons, labour used in large enterprise is priced well above the levels at which it is used in small scale industries. The SSIs sector which uses more labour and less capital per unit of output will have relatively lower costs as their training and development costs are quite low. Besides, large enterprises are ready to pay more as they have to attract more stable migrants from rural areas, Cost of developing commitments among them to firm specific is also quite high. But small units make greater use of the unstable labour with high turnover because in their case the stability. efficiency relationship for the work. force is much weaker. Their labor cost is much less expensive as they generally use less expensive often second hand machines which need less training to use and whose cost of damage from misuse is less. The high labour productivity in large firms enables | Report of The Export Committee on Small Enterprises ( Abid Husain Committee Report) p.1. 23the firm specific labour to claim share of profit or rent created, The motivation of an exclusive labor force can only be sustained if management is sympathetic to profit sharing ideas. Unionization of labour force in large in large enterprises is another important variable. But these types of problems are not available in small scale enterprises. The administrative, selection and insurance costs of loans from the banking system are quite low in SSIs as compared to large enterprises. The information cost for assessing an SSI project is often a substantial lump.sum amount which works out much cheaper per unit of credit as the size of the loan increases. Besides, the size of acceptable collateral which reduces lenders risk obviously increases with firm size. For small firms, particularly new established ones, the only security available for a potential lender is its personal credit evaluation of the entrepreneur himself. Thus, process of receiving capital and loan in SSIs is quite simple and cheap. 2. The Distribution of Income Argument: There are three ways in which an economy with a larger presence of SSIs would have a more equal distribution of income: (i) Small units with a lower capital labour ratio would generally have a larger share of values added accruing to the workers; (ii) Entrepreneurial income could be expected to be more widely distributed; and 24(iii) The typically large wage differential between the small and large firms implies that when the former have a larger share in total output more of the income accruing to labour goes to lower wage groups i.e. there is a more equitable distribution of labour earnings. Equity considerations require that SSIs should be promoted. But mere horizontal growth of SSIs without rise in productivity or upward mobility will not improve distribution of labour earnings. 3. Other Argument: Following are the other reasons for promoting SSIs. @ Product Differentiation : “Small firms generally cater to the low income groups and will therefore used to concentrate on brands which emphasise basic product attributes such as cleaning powder over some cosmetic Properties such as fragrance.”' When firms of different sizes produce obstensibility the same product (for example a bar of soap) the qualities contained in different brands of soap will differ markedly. Simple technologies could be more appropriate in the production of the basic attributes meeting with demand from low income consumers . Small or micro enterprises may be able to use such technologies successfully with low capital labour ratios, while larger capital intensive firm catering to the high income segment ee" * Report of the High Level Committee on Credit to SSI 1998, p.67. 25(ii) (iii) may use more mechanized technologies to produce the attributes demanded by wealthier consumers. Consumer Satisfaction: SSIs some times produce luxury Products, making intensive use of skilled labour, which essentially caters to the luxury segment of the market and which the large firms cannot supply. Elements to the market structure such as monopoly pricing advertising and barriers to entry accentuate product market segmentation which increases the economic distance between large and small firms. It is possible that in many lines of production, this type of product market segmentation helps to perpetuate industrial dualism. It is also argued that the welfare of low income groups is best served by promoting low quality products without the additional attributes. This would not only meet the basic needs of poor consumers but the less mechanical techniques used in the manufacture of these products would produce more income for the very same consumers because of the higher labour intensity of such techniques. If products made with less mechanized techniques are priced cheaper, then they would obviously be brought by poor. Flexibility: Generally, SSIs are better able to adopt to changing conditions of business environment. Studies Suggests that traditional mass production units have been 26(iv) less successful in this regard than small establishments based on a modern version of the craft principle that flexible tasks and machines argument the craftsmen’s skills and ability to produce even more and varied products. In India, the development of a vast network of a very small enterprises is impressive, spreading through the villages and small cities and towns. These units Tange across the entire spectrum of modem industry from shoes, agarbutti, ceramics, textiles, garments, agricultural equipments and machine parts. It is important to note that the quick Fesponse to changing economic conditions which is often the special advantage of SSIs is much more feasible in an economy undergoing liberalization, Contribution to Export Potential: Studies also suggest that a strong and viable small scale Sector is necessary for some successful export oriented growth. In the early stages of manufactured export growth. SSI comply a significant role since products are labour intensive, demand changes rapidly, due in Part to world economic fluctuations and output growth is demand driven. Small firms have the advantages of low overheads and the capacity to respond quickly to changing conditions. There is a growing international preference for high quality personalized items, often skill intensive in place of mass.produced ones. Such 27(vy) products require flexibility which often gives the smaller firm the advantage. Fostering Entrepreneurship: SSI is also expected to perform better than larger firms in contribution to decentralization and the fostering entrepreneurship, “Support of SSI has often been based in part associated with large assembly plants and large urban agglomerations. It is also important to note that very small specially house- -hold units are much more widely dispersed including a fairly high density in rural areas than the small and medium firms. SSIs also help in the promotion of a widely based class of small entrepreneurship.”! Objective of the SSIs Nu The main objectives of SSIs are as follows : To create immediate and permanent employment opportunities to public at large at a relatively small costs; To meet a major part of the increased demand for consumer goods and simple producer’s goods; To facilitate the modernization and exploitation of resources which might otherwise remain inadequately utilized; ‘ The Business Standard, December, 20,2000, p.3 284. To bring about an integration of the development of these industries with rural economy and large scale industries, >. To ensure a more equitable and justifiable distribution of national income to society at large. Importance of SSIs Importance of SSIs may be evaluated on the following grounds: 1. SSIs are much more labour intensive than large scale industry. They provide more scope for the employment of workers. 2. Electricity in technical and economic organosations in SSI sector is higher as compared to large scale concerns, Flexibility ensures better innovation. we - Small units have got better adoptability to variable production and market conditions. They have capacity to adjust themselves with the changing environment. 4. SSIs are expected to earn more quick retums on the capital invested in such industries where; gestation period is quite short in comparison to medium environment. w the social cost of developing small units specially handcratts and village industries are lower. 2 SSIs are also sustainable as they are essential for combating Poverty and unemployment, 297. SSIs ensure balanced regional development, These industries can be developed in almost all areas. Thus, they are helpful in achieving a wider spatial dispersal of industrial activities and reducing regional economic imbalances, intensive industrial growth. Due to several Policy initiatives taken by the government this sector has helped to achieve a reasonable growth in industrial employment, specially at a time when employment in the organized sector has stagnated, Nature of SSIs Industrial units constitute small scale units, medium scale and large scale units. Industrial units constitute small scale units, medium scale and large scale units. Industrial units constitute small scale units, medium scale and large scale units. This type of categorization is generally based on the size, capital resources and the number of workers engaged upon. Similarly Village and Cottage industries are an integral part of the SSI sector. The Planning Commission considers the village and small industries in its entirely and its definition includes traditional sector such as Khadi, village industries, Handloom, sericulture Handicrafts, Coir and the modern sector including powerlooms and SSIs Generally, distinction is made between small scale industries and Cottage industries on two different issues: (i) small scale industries are 30y located in urban, centres as separate units but the cottage industries are normally associated with agriculture and provide Subsidiary employment in rural areas; and (ii) small scale industries produce goods with mechanized equipments partially or fully but the Cottage industries involve activities mostly by hand and are performed Primarily with the help of household workers. The fiscal commission also laid down the basis in 1950 for the distinction between the small scale and cottage industries, “A cottage industries thus one which is carried on wholly or primarily with the help of member 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 the hired labour usually 10 to 50 hands, Accordingly, the Industries (Development and Regulation) Act,191 exempted small scale units employing less than 50 workers with power and less than 100 workers without power from the system of registration. This exempted industries were termed as small scale industries.”! Fixed capital investment in a unit has also been adopted as the other criterion to make distinction between small scale and village industries and the large scale industries. This limit is being continuously raised upward by the Government, Conceptually, small scale industries can be of three different ‘ypes : First, there are traditional village industries and this includes ' SIDBI Report on SSI sector 1999,p, 23-25, 31handicrafts. Second, there are unregistered household and non- household units which are not covered by one Factories Act of 1948. Third, there are registered factories. The official definition laid emphasis on registration aspect. In this way small industry means the third category alone. This is the sector that is concentrated in and around urban centers. Traditional village industries are not included SSI sector. Small industry also does not include activities like handloom, powerloom, sericulture and coir making. These are under the perview of special boards and are not included in the small industry categorization. Historical Perspective of the Official Definition of SSIs The first official definition of SSIs was coined in 1950, in terms of the size of gross investment in fixed assets (plant and machinery, land, building), as well as on the strength of workforce in the unit concerned. This criterion underwent a number of modifications over the years, In the latter part of the fifties, the change effected in defining an SSI unit was mainly a shift from a workforce. criterion to an investment.criterion. In 1966, the original value in plant and machinery was adopted as a sole norm for defining a unit as small scale or otherwise. Similarly, the concepts of ancillary and tiny units were introduced in 1960 and 1977, respectively. Small Scale Service Establishments (SSEs) were first classified in 1955 and later re.defined in 1991, as Small Scale Service and Business Enterprises (SSSBEs).The SSI sector in India covers a wide spectrum of industries categorized under small, tiny and cottage segments ranging from small artisans/handicraft units to modern production units with significant investments. This sector has acquired a prominent place in the socio- economic development of the country as it not only acts as a ministry for the development of entrepreneurial talent, nut also produces a wide range of 7500 products. “The term Small Scale Industries evokes different meanings for different agencies. The Planning Commission, Government of India, views the entire Village and small industries (VSI) Sector as a part of the SSI sector. The national Sample Survey Organisation under the Central Statistical Organisation (CSO), Government of India, defines the entire industry sector in terms of Industrial enterprises run by households and non-households, The Central Excise Department, on the other hand, distinguishes SSIs on the basis of investment in pant and machinery (an upper limit of Rs. 10 million) and cover residual units which do not fail under the assistance programmes of any of the Statutory Boards,”" The SSI is currently defined in terms of investment ceilings on the original value if the installed plant and machinery, Major components of SSI have been defined as under. ’ Repor of the High Level Committee on Credit to SSI, 1998, p. 2.Small Scale Industrial Undertaking An industrial undertaking is defined as a small scale units if the investment in fixed assets in plant and machinery does not exceed Rs. 10 million. The Small Scale units can get registered with the Directorate of Industries/District Industries centre in the State government concerned.” The RBI uses an expanded definition of SSI which includes > ; (a) Small Scale industrial, undertakings which are engaged in the manufacture, Processing of preservation of goods in Which the investment in plant and machinery does not exceed Rs. one crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery; (b) Tiny enterprises whose investment in plant and machinery does not exceed Rs. 25 lacks; (G Powerlooms; (d Traditional industries which require high workmanship and technique as also village and household industries Producing common goods of consumption, predominantly by using simple tools; (e) The decentralized and informal sectors like handlooms, handicrafts, coir etc, and(f) The industry related Sery ice/ Business Enterprises which are notified as such. The government has raised the ceiling of investment in plan and Machinery for SSI sector. Small Scale industries units are those with investments in plants and machinery upto Rs. | crore other than a few Specified industries such as pharmaceuticals, textiles and sports goods where the cutoff investment limit stands at Rs. 5 crores, Ancillary Industrial Undertaking An industrial undertaking which is engaged or its proposed to be engaged in the manufacture or production of parts, components, sub.assemblies, tooling or intermediates, or the tendering of service is termed as ancillary undertaking. The ancillary undertaking has to supply or render or propose to supply or render not less than 50 percent of its production or services, as the case may be, to one or more other industrial undertakings. The investment in plant and machinery, whether held on ownership terms on or lease or on hire purchase, should not exceed Rs. 10 million. Tiny Enterprises A unit is treated as tiny enterprise where investment in plant and machinery does not exceed Rs. 2.5 million, irrespective of the location of the unit.Medium Enterprises Medium enterprises (ME) as those units with investment in plant and machinery above the small scale industry limit and upto Rs. 10 crores. “The definition of SSI is linked to the question of ownership. SSI units cannot be controlled or owned or be a subsidiary of nay other industrial undertaking. This implies that in Proprietary/Partnership firms, the combined investment of all the units set up by the same Proprietor/partners should not exceed the total investment limit fixed for an SSI. As regards the formation of an SSI as a limited company the equity investment by other companies in SSIs should not exceed 24 per cent.”! The objectives of such classificatory changes are aimed as - (i) facilitating and boosting the growth to SSI in the private sector; (ii) Promoting SSIs within the framework of the social and economic policy of the country; Gil) encouraging technology modernisation among existing units; (iv) aiding technically qualified entrepreneurs to set up new units with advance technology. " SIDBI Report on SSI Sector, 1 999.p. 27,(v) improving product standards creating opportunities for in house R & D; (vi) Providing greater thrust to export. Small industry has been Subjected to various controls and regulations in terms of the IDR Act,1951 and other relevant statutes, The restriction on ownership is unique in the Indian context and has been introduced primarily to prevent large companies from obtaining fiscal and other concessions by Setting up of SSI units as “fronts”. This also discourages the misuse of incentives by establishing more than one SSI init. In the same line of Production, by the same set up pf entrepreneurs, Critical Evaluation An attempt has been made to analyse the quantitative increase in investment veiling in plant and machinery for the year 1966 to 1997 segregating the inflation component from the increase in current prices SO as to calculate the effective enhancement in real terms. The upper investment ceiling in plant and machinery both for the SSI and ancillary units at different Points of time are Presented in the following exhilExhibit 2.1 Investment Ceilings in Plant and Machinery a _ (Rs. in Million) | Year SSI Ancillary | yf | T! | | Nominal Real | Nominal | Real | 0.75 / 1.00 1.26 1.00 | 180 087 | 2.00 | ogs 2.50 1.05 | 3.50 Lis 134 ! | - 600 | jig 1.48 | | 30.00 3.17 | | 347 > > 10.00 1.02 10.00 | 1.92 _ TOD 2005-06 100.00 | = NA | A | (Source: Ministry of SSI, GOl) With the help of definition of nominal asset value at 1970-7] prices. It is observed that : |. The ceiling of investment in plant and machinery for SSI, in real ‘erms, has remained relatively unchanged from 1966-67 to 1991- 92. For subsequent years from 1991-92 it would further come down in real terms before increase in the ceiling in 1997-98.N - For the most part of the seventies and early eighties, in fact, the upper threshold of investment in plant and machinery for both SSI and ancillary units was below 1970-71 level in real terms. we The revision of the ceiling in 1991-92 also did not make much of a difference in real terms. 4. It was only the last revision in the investment criterion of 1997- 98 that had provided Opportunities for small units to undertake higher investment for technology upgradation, product standardization. R & D facilities and sound competitiveness, But Government of India has again reduced the investment limit from Rs. 30 million to Rs. 1 million in 1999-2000. Nature of Manufacturing Sector In the Indian set up the industry universe can be divided into various segments, Factory sector (large scale units-non SSIs); Factory sector (Small Scale units); and the village and small industries sector (VSI). SSI units are defined on the basis of investment in plant and machinery with upper ceilings and no minimum investment is prescribed at the lower-end. The VSI sector covers a wide range of industries that differ from another in terms of nature of products manufactured, techniques used, scale of Production, location and marketing, ete, The VSI sector has further been divided into two broad sub- sectors, viz. 39(1) Modern Small Scale industries. (ii) Traditional Industries SSIs (both in the factory/Non-Factory sectors) and power-loom units are covered under modern small scale industries; while traditional industries include segment like handlooms, khadi, and village industries, handcrafis, sericulture, silk and coir. Traditional industries are generally nominal investment in plant and machinery. Modern SSIs are mostly those units that use power driven machinery and Possess better production techniques as compared to traditional sector units. These units are generally located in close Proximity to large industrial centres of urban areas, 40Growth and Performances of SSI Sector in India SSIs constitute an important Part of the informal sector in India. The informal sector Presents a vast potential for using factors of Production such as labour at their true Opportunity cost SSIs have, therefore, been the focus of the industrilisation Strategy geared to Senerate employment and have received a special emphasis in successive five years plans, when a policy thrust is given to SSIs, the question that arises is how will that influence overall industrial growth. It is believed that SSIs should be at least as efficient as their Counterparts in the other sectors in an efficient utilization of resources. This is specially important in developing countries like India where a Fesouree crunch is a major hurdle to economic growth. The relative emphasis on SSIs has been mainly due to two Teasons : (@) they are more labour intensive: and (ii) "they have higher capital productivity Until recently, SSIs have benefited from the Promotional and Supportive policies of the government. However, in the present scenario 4Recent Performance of Small Scale Sector The output from the small scale sector has far outstripped all expectations and hag grown by close to 200 per Cent in the nineties, The total utput from the SSI sector Which was Rs, 1,78,699 crores in 1991-92 grew to Rs, 6,45,496 in 2000-01, However, despite the growth in output, there has been no Corresponding growth in the number of small-scale units in the country. The number of small scale units have grown by just 50 Per cent in the same time Period, the nineties. The number of SSIs units grew from 20. 82 lakhs in 1991-92 to 33-7 lakhs 'n 2000-01 contributing 40 percent of the manufacturing sector growth in its number, In fact, the disparities in their respective growth curves are a lot more striking. While the number of SSIs units grew by 50 per cent, export from them grew stridently by oer 250 Per cent during the nineties, In absolute terms, exports from SSI units grew from Rs. 13]883 crores in 1991-92 to Rs, 49,41 crores in 1998-99, The disparity between the growth in numbers and Output as well as with export in further reinforced by the slower Pace of employment generation from the Sector. While output has grown by 200 percent, employment generation 42has been relatively modest at 31 Per cent Growth of small scale industries is given in Table No, Employment in the small scale sector, which was 129.80 lakhs People as on 1991-92 grew to just 185-6 lakhs in 2000-01. In effect, the discordant note is not just between growth in numbers and output” but extended to job creation and exports as well, The small scale industries (SSI) sector is estimated to have recorded growth of 8.1 Per cent in output at current Prices, despite the not an encouraging growth rate achieved by the industry as well as manufacturing sectors during 2001-02. The production of the SS] Sector, at current prices, is projected to reach Rs, 6,97,522 crore in the previous year. The number of the SSIs units is estimated to touch 34-64 lakh figure recorded as at end March 2001, while the number of Persons employed in the sector is estimated to have risen to 192.23 lakh at the end of the Previous year. Export from the SSI sector during the year 2001-02 during the year placed at Rs, 62,377 crore are projected to have recorded a growth of around 4 Per cent over the previous year’s level of Rs, 59,978 crore. The total production of village and small industries (VSI) sector in 2001-02 was higher to Rs. 8,13,262 crore during 2000-01,Performance of Village and Small Industries Sector Production Employment (Lakh |” Export (Rs. crore) | (Rs. Crore) Nos.) as at end- | LU | March T T T | Actual | Anticipate | Actual Anticipate Actual | Anticipate | s 2000- d $2001, d 8 2000-4 2001-02 | | 2001-02 __2002 a Modern SSIs | 1 SSIs 645,496 | 6,97,522 | 186 | 192 | so.97e 62,377 | | Wower- | 26,157 | 28,250 | 42 | 43 | 5.gs3 6,146 looms || | Sub-Total | 6,71,683 | 725,772 | 228 | 235 | 55,831 | 58,523 | Traditional Industries _| T Khadi 562 580 14 | 15 | Neg | Neg. | : ~ { Village | 6,273] 6775 | 53 | 56 33 35 |_ industries | | _Hendlooms | 15,197) 15,500 | 124 125 1.76) 1,796 | Sericulture 1,728) 1901 | sa) 56 2,122 | 2,298 | T —4 Handicrafts) 55,804 61,384 | 99 | 104) 9,271 10,610 | L | Coir 1,250] 1,350 | 5 5 314320 | ee __ Subtotal | 80,814 87,490 | 577 | 506 99,339 83,512 | (Source: Ministry of SSI, GOL) It is also important to note that employment in the V &S industries sector is estimated to have increased from 577 lakh persons 44as at end- March 2001 to 96 lakh as at end-March 2002. Exports from VSI_ sector estimated at Rs. 83,512 crores during 2001-2002 as compared to Rs. 79,322 crores during 2000-01. It would seem that the incremental investment into small scale sector was more for Technology upgradation, for mechanization and automation, rather than for a sheer growth in numbers. This explains the lower growth in employment as against higher growth rate in output. Performance Analysis of Industries The small scale sector has played a very important role in the socio-economic development of the country during the past 50 years. It has significantly contributed to the overall growth in terms of the gross domestic product (GDP), Employment generation and exports. The performance of the small scale sector, therefore, has a direct impact on the growth of the overall economy. The performance of the small scale sector in terms of parameters like number of units (both registered and unregistered), production, employment and export is given in exhibit en Exhibit 2.3. Performance of Small Seale Enterprises . Year | No. of Units (lakh) Production (Rs crore) | Employment | Exports | I in lakh (Rs.lakh) Regd. | Unregd. | Total (at current | (at prices) | constant | prices)* 2000+ | 13.10] 88.00 | TOTO [261,289 | 1,84,401 | 230,09 —}-ea767 Lo 1 G1) | ans) | (82) | “aay (28.8) 452001- 13.75 | 91.46 105.21 2,82,270 | 1,95,613 249.01 | 71,244 02 (4.1) | (8.0) (6.1) (4.2) | Qt) 2002- | 14.68 | 94.81 | 109.49 1 3,11,903 2,10,536 | 260.13 86,013 | 03 | (4 _| (05) | 7.7) | (44) (20.7) [2003-7554] 98aT | 113.95 3.37.73} aoe No 27136 | 97,644 04 41) | 447 | (6) (43) | 3.5) 2004- [16.57 [102.02 [118.59 | 418,263 | 251,311} aaa 97 NA. os | Lap 16.9) | (10.0) (4.3) | (Source: Development Commissioner (SSI) ) * 1993-94 Prices. Note: Figures in parentheses indicate pereentage growth over previous y r. Between 2000-01 to 2004-05, the small enterprises sector registered continuous growth in the number of. units, production, employment and exports (table No. ), During this period, the average annual growth in the number of units was around 4.1 per cent and in employment 4.3 per cent annually. Further, the annual average growth in production, at current and constant prices, was 12.4 per cent and 8.1 Per cent respectively. Thus there has been a significant increase in the contribution of this sector to the economic Development and employment generation in the country, With the increasing competition on account of globalization of the Indian economy, the size of the enterprises and the level of technology employed by them have assumed critical significant in the context of the small enterprises becoming globally competitive. Several policy initiatives have been taken to address the problems faced by the sector, which mainly relate to access to timely and adequate credit, technological obsolescence, infrastructure bottlenecks, marketing constraints and a plethora of rules and regulations. The provisions of 46the proposed SMED Bill, 2005 aim at facilitating their growth in terms of size and also the graduation of small enterprises into medium ones, thus, enhancing their global competitiveness.{The policy initiatives taken during the year are expected to help enhance the overall contribution of the sector to the national economy, especially in creating more employment potential Problems of Small Scale Industries Small Scale industries have vast potentialities but they could not progress satisfactorily. Their performance is not good as they face the following problems : () Inefficient Labour : Labour is major but active player in small scale industries. But they lack training and developmental opportunities in small scale sector. So they are unable to contribute as expected from them. Since size of small units is not always optimal so they are also unable to understand the importance of training and development, Level of education of workers working in small scale sector is also low and they fail to cope with the challenge of modern production system. Professionals and technocrats are also not interested to join small scale as this sector is not ready to compensate them properly. So small entrepreneurs are facing the constraints of inefficient labour force and unable to improve their productivity. 47(ii) (iii) Defective System of Supply of Raw Materi Small scale industries are facing the problem of short supply of raw materials. Small size and weak financial position also force them to unutilise the services of middlemen to get raw materials on credit from suppliers. Canalising agencies like the state level small industries corporations STC, MMTC and Handloom Development corporations are not providing much help in arranging adequate supply of raw materials at right price in right time. So they fail to utilize their full production capacity and it also increases their cost of production which adversely affect their competitive strength in the market. Absence of Credit Facility: Historically, SSIs have had privileged access to bank finance through cheap priority sector lending. Since interest rates were fixed lower for them than the market rates, they did not reflect the higher risks and costs of investing in small borrowers. SSIs also benefited from the subsidies implicit in the tax standards for provisioning for bad and doubtful debts. The deregulation of interest rates in present scenario forces them to pay more. The bench mark rate of interest for banks is the rice lending rates- a higher rate interest rates have been risen sharply for small scale units. The Priority sector lending scheme hardly softens the burden since not more than Rs. 2 lakh can be borrowed under this scheme. Besides, SSIs are also unable to generate resources as they 48(iv) (vy) lack systematic way to communicate their work to the capital markets and muster support from the intermediaries. Due to poor financial image, they generally fail to get their credit facility at reasonable costs. Lack of Machinery and Equipment: SSIs are also facing the problem of inferior supply of machinery and equipments ete. Most of companies which are engaged in production of plants and machineries, are meant for medium and large scale companies. Only selected companies or few producers are engaged in the production of plant, machineries and equipments for small scale sector, So they generally change high price for their capital goods supplies from small scale units. Besides, bargaining power of SSIs_is not so much and they have to work with available machinery and equipments in the market. They have also been forced to use second-hand machines. It also affects the production of performance of SSIs. Huge Number of Bogus Small firms: Government policy favours SSIs in terms of concessions, subsidy and incentives This has promoted the so called entrepreneurs to develop bogus firms on paper to avail government subsidies and incentives. It makes impossible for the genuine firms to get due concessions, subsidies etc. from the government. They indirectly help the medium and iarge scale enterprises in 49(vi) (vii) availing raw materials etc. at reduced rates. Availability of cheap finance also encourages the bogus firms to operate in the small scale sector, Unsuitable Location: Selection of location for the development of plants etc. also creates problem before the SSIs. The Choice of location is generally governed by different consideration like availability or infrastructural facility, the cost of tenure of acquisitions, availability of labour and the proximity of markets. Small entrepreneurs are hot properly trained in deciding about suitable location. Actually, they select their location due to other considerations like availability of cheap land, family business, sentimental attachment to their traditional ancestral Property etc. Competition from large Units: SSIs are facing the problem of competition from other counterparts- medium and large scale industries. Since 1991, a large number of items reserved for small industries are now freely importable. The Government has also announced that it is considering a phased removal of quantity restrictions on consumer goods imports over a period of five years. Medium and large scale industries are also producing goods which are competing with the goods being produced by the SSIs. So in practice, SSIs are unable to compete with large scale units as their size is small and products are not effective. 50(viii) Obsolete Technology: SSIs lack latest technology as they do (ix) &) not have any technological Support from the Government and other technological institute and laboratories, But in practice, technology alone can ensure quality and high level of productivity. R & D efforts are costly venture and §SIs do not have resources to finance these Programmes individually and internally. Small enterprises have a very limited choice with regard to foreign collaboration and technological support too. Their potential partners overseas have a better reputation for innovation but the investment climate in India is not yet hospitable enough to attend them in small scale sector, Special steps have not yet been taken to address the issues of collaboration between Indian and overseas small industries. Absence of Organised Marketing Faci lity: Small Scale industries are unable to spend huge amount on the development of marketing facilities as they lack resources, Lack of standardization, poor design and quality, lack of Precision and proper finis, absence of after sales service, ignorance about potential market, financial weaknesses are some of the problems which constitute the marketing Problems as such and SSIs are facing these problems in their selling process, Poor Recoveries: It is general practice for buyers 0 avail credit facility from sellers. SSIs lack bargaining power to 5dictating their terms to the potential buyers for their products. Provision for credit facility with regard to sales is forced upon the SSIs by potential Purchasers. Initially, credit period ranges between one month to three months. But purchasers generally avoid timely payments, A situation has now developed in which buyers do not pay their dues to SSIs for more than 12 months. It created working capital problems before the SSIs, Thus SSIs are facing different types of problems However, efforts are required to solve these problems in an effective way. Then we can hope a better tomorrow for them.