Unit 456 Small Scale Industries

UNIT - 6
SMALL SCALE
INDUSTRY
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VTU - Notes - Question Papers
Introduction
At present the Small Scale Industry (SSI) constitutes a
Very Important Segment of the Indian Economy & has
emerged as a Dynamic & Vibrant Sector of the Economy.
The Small Scale Industry Sector holds the Key to
Economic Prosperity of the Indian Economy, Characterized
by abundant Labor Supply, Unemployment & Under
Employment , Scarcity of Finance, Growing Modern Large
Industries providing scope for development of Ancillary
Industries & so on. The Small Scale Industry has grown
phenomenally during the last Six Decades & has acquired a
very prominent place in the Socio Economic Development
in the Country.
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This Sector accounts for about 40% of the Countrys Total Exports.
Various Policy Initiatives undertaken by the Central Govt & Various State
Govts whether by way of Incentives or protection, have helped the sector in
acquiring the Status of a Major Contributor in the Growth Process.
The Process of Liberalization & Economic Reforms, since 1991, while
creating Tremendous Opportunities for the Growth of Small Scale Industrial
Sector, have however thrown up new Challenges for the Sector. This changed
Industrial Scenario, has called for building Competitive Strengths, Improving
Quality & Productivity, Introducing Technology Up gradation, reducing
Wastages & Rejections, Intelligent Use of Resources, Employing Modern
Management Techniques etc in order to withstand growing competition & for
ensuring sustained growth.

Also, Small Scale Industries need to reposition

itself in order to meet the Growing Demands for
ancillary items, Subcontracting & Job Work from other
Industrial Units, requiring higher standards of Quality,
Economies of Scale & strict timely delivery schedules.
The emerging challenges to the Small Scale
Industries Sector are also due to the Impact of
Globalization & Agreement under the WTO (World
Trade Organization) & GATT (General Agreement on
Trade & Tariff) to which India is a Signatory along with
134 Member Countries.

Concepts & Definitions of

Small Scale Industry :
It Comprises a Variety of Undertakings.
These definitions generally relate to either the

Capital Invested or people employed or both or any other
relevant criteria.

Classification & Definition

of Industries :
The earlier concept of Industries has been changed to
Enterprises. Enterprises have been classified broadly into
Two Categories as Under :
Manufacturing Enterprises : Enterprises which are
engaged in the Manufacture / Production of Goods
pertaining to any Industry are referred to as
Manufacturing Enterprises.

2) Service Enterprises : Enterprises which are engaged

in providing / rendering of Services are referred to as
Service Enterprises.
I) Manufacturing Enterprises : They have been defined
in terms of Investment on Plant & Machinery (Excluding
Land & Buildings) & further classified into 3 Categories as
under :
a) Micro Enterprises : An Enterprise where the
Investment on Plant & Machinery is upto Rs. 25 Lakh is
referred to as a Micro Enterprise.

b) Small Enterprises : An Enterprise where the

Investment on Plant & Machinery is above Rs. 25 Lakh
upto Rs. 5 Crore is referred to as Small Enterprise.
c) Medium Enterprises : An Enterprise where the
Investment on Plant & Machinery is above Rs. 5 Crore
& upto Rs. 10 Crore is referred to as Medium
Enterprise.
II) Service Enterprises :
They have been defined in terms of their
Investment in Equipment (excluding Land & Building)
& further classified into 3 Categories as under :

1) Micro Enterprises : An Enterprise where the

Investment in Equipment is upto Rs. 10 Lakh is
referred to as Micro Enterprise.
2) Small Enterprises : An Enterprise, where the
Investment in equipment is above Rs. 10 Lakh & upto
Rs. 2 Crore is referred to as Small Enterprise.
3) Medium Enterprises : An Enterprise, where
the Investment in Equipment is above Rs. 2 Crore &
upto Rs. 5 Crore is referred to as Medium
Enterprise.

Ancillary Industrial
Undertakings :
An Industrial Undertaking which is engaged or is proposed
to be engaged in the Manufacture or Production of Parts,
Components, Sub Assemblies, Tooling or Intermediaries, or the
rendering of services & the undertaking supplies or it renders or
proposes to supply or render not less than 50 % of its production
or services, as the case may be, to one or more other Industrial
Undertakings & whose Investment in Fixed Assets in Plant &
Machinery whether held on Ownership terms or on lease or on
hire purchase, does not exceed Rs. 5 Crore in case of
Manufacturing Small Enterprises & Rs. 2 Crore in case of
Service Small Enterprises.
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As can be seen from the above definitions of Micro, Small &

Medium Enterprises, the only criteria for classification is Investment
made on Plant & Machineries in case of Manufacturing Enterprises
& Investment made on Equipment in case of Service Enterprises.
None of the following factors are considered in classifying the
enterprises.
1) Investment made on Land & Buildings.
2) Extent of Land & Built up area of the buildings.
3) Number of people employed.
4) Amount of Electric Power used & whether LT (Low Tension) or
HT(High Tension) power is used.
5) Amount of utilities like Water, Gases, Fuels etc used.
6) Working Capital Employed.
7) Annual Sales / Turn Over.
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Characteristics of Small
Enterprises :
Small Enterprise is Beautiful because of its
following Important Characteristics :
A Small Enterprise is generally a One Man Show.
Even Small Enterprises which run by a Partnership Firm
or a Private Limited Company, in most cases, the
activities are mainly carried out by one of the Partners or
Directors. In Practice, the others mainly assist in
providing Capital / Funds.
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2) Owner himself / herself is also a Manager of

the Enterprise. Thus, a Small Enterprise is managed
in a personalized manner. The Owner has First
Hand Knowledge of all aspects of the Enterprise &
knows what is actually going on in the Business. He
takes effective participation in all matters of
Business Decision Making.
3) A Small Enterprise has lesser Gestation
Period compared to a Large Enterprise. i.e., the
period after which the return on Investment starts.
13

4) Small Enterprises generally carryout their

operations so as to cater to the Local & Regional
Markets.
5) Small Enterprises use indigenous resources &
therefore can be located anywhere subject to the
availability of these resources like Raw Materials,
Labor, Transport Facilities etc.
6) They are fairly Labor Intensive with
comparatively smaller Capital Investment than the
Larger Units. That is, for the same Investment, a Small
Enterprise provides more jobs to the people compared
to a Large Enterprise.
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7) Using Local Resources, Small Units are

decentralized & dispersed to Rural Areas & Smaller Towns.
Thus, the development of Small Enterprises in Rural Areas
& Smaller towns promotes more Balanced Regional
Development & thereby prevents influx of job seekers from
rural areas & smaller towns to bigger cities & urbanizing
centers.
8)
Small Enterprises are more susceptible & highly
reactive & receptive to Socio Economic conditions
compared to larger enterprises. They are more flexible to
adapt changes like Diversification to New Products,
adopting to New Production Techniques, substituting New
Raw Materials, Changes in Organization Structure, New
Market etc.
15

Advantages of Small
Enterprises :
They are the Back Bone of the Industrial
Activity in the Country & are playing a very
important role in improving the Socio
Economic Conditions of the people. Advantages
of these Enterprises are as follows : (12 Points)
They create greater Employment

Opportunities thro Labor Intensive processes &
thereby help in tackling the Unemployment
Problem.
16

2) They have Low Gestation Period & thereby

Expensive Financial Resources are not idled
unproductively for long periods.
3) They can be set up easily in Rural & Backward
Areas.
4) They need Small / Local / Regional Market.
5) They encourage growth of Local
Entrepreneurship.
6) They create Decentralized pattern of
Ownership.
7) They foster Diversification of Economic
Activities.
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8) They Innovate & Introduce New Products

particularly to cater to Local Needs.
9) They influence & improve Standard of
Living of Local People.
10) They provide equitable dispersal of
enterprises throughout Rural & Backward Areas.
11) They earn Vital Foreign Exchange for the
Country through their Exports of Goods / Services.
12) They Increase Revenue to Central & State
Govts by way of Taxes Paid by them.
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Need & Rationale of Small

Scale Industry Development
in India :
As per the IPR (Industrial Policy Resolution),1956, it
emphasizes the Need & Rationale as given below :
They provide immediate large scale employment, they

offer a method of ensuring a more equitable distribution of the
National Income & they facilitate an Effective Mobilization of
Resources of Capital & Skill which might otherwise remain
unutilized. Some of the problems that unplanned urbanization
tends to create will be avoided by the establishment of Small
Centers of Industrial Production all over the Country.
19

The Rationale of Small Scale Industries so established

can be broadly classified into Four Arguments as follows :
20
Employment Argument.
Equality Argument.
Decentralization Argument.
Latent Resources Argument.

1) Employment Argument :
In View of the Scarce Capital Resources of the
Country & large Manpower, the most important
argument put forth in favor of the SSIs is that they
have a potential to create immediate large scale
employment opportunities.
The increasing emphasis on SSIs originates from
the widespread concern over the Unemployment
Situation in the Country. It has been found that Small
Scale Units are more Labor Intensive than Larger
Units. i.e., Small Units use more labor per Unit of
Output than the Investment.
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It has also been found by various studies that while Output

Employment Ratio (Ratio of Output to the No. of people
employed) is the lowest in the Small Scale Sector, the
Employment Generation Capacity of Small Sector is between 8
to 15 times that of the Large Sector for the same amount of
Capital Invested for different types of Industries.
However, some Scholars have opposed this employment
argument of Small Scale Industries. They argued that
Employment should not be created for the sake of employment.
The more important problem being, how to make the best use of
the Scarce Resources like Capital, Power, Raw Materials, etc, &
not how to absorb Surplus Resources (Manpower). Then, the
Employment Argument becomes an Output Argument.
22

2) Equality Argument :
Another Argument put forward in favor of the Small
Scale Industry is that they ensure a more Equitable
Distribution of National Income & Wealth. There are 2
Major Considerations :
1) The Ownership Pattern of SSIs is more
widespread compared to the Ownership of Large Scale
Units in which Major Stake Holders are only a few.
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2) They are more Labor Intensive & their

Decentralization & Dispersal to Rural & Backward Areas
provide more Employment Opportunities to the
Unemployed. This results in more equitable distribution of
the produce of the Small Scale Units.
Here, since it is Proprietorship or Partnership, the
relations between the Labor & Management are more
harmonious & cordial in Small Enterprises than in Large
Enterprises.
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Some Authors argued that such Small Enterprises

paid less to the Workers, may be only Half of the Wages
paid to Workers of Large Enterprises. This is because
Workers in Small Enterprises are Unorganized due to
absence of Trade Unions & therefore easily exploited
by Employers.
But, However, the Workers choice is really not
between a High Paid Job & a Low Paid One, but
between a Low Paid Job or No Job at all. Thus we can
say the SSIs have great importance in an Economy like
Ours where millions are unemployed & in search of a
Livelihood.
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3) Decentralization
Argument :
This stresses the need to disperse the Industrial
Development to different regions so as to promote Balanced
Regional Development in the Country. Large Industries are
concentrated everywhere in Urban Areas. But, Small
Enterprises can be located in Rural & Semi Urban Areas to
use Local Resources & to meet Local Demands.
Decentralization of Industrial Enterprises will help
harnessing Local Resources such as Raw Materials , Idle
Capital , Local Talents , & ultimately improves the Socio
Economic Conditions & the Standard of Living of the People
even in the erstwhile backward areas.
26

4) Latent Resources
Argument :
This Argument suggests that Small Enterprises are
capable of picking up Latent & Unutilized Resources like
hoarded Wealth, & Idle Entrepreneurial Ability.
However, the Real Force of Latent Resources Argument
lies in the existence of Entrepreneurial Skill.
The impressive growth in the number of small enterprises
during the last six decades highlights the same fact that
providing the necessary conditions such as Land, Sheds,
Power, Good Transport & Communication Facilities , Credit
Facilities etc, the Latent Resources of Entrepreneurship can
be tapped by the Growth of Small Scale Industries only.
27

Objectives of Developing Small

Enterprises :
Reasons for Developing Small Enterprises in India can
be enumerated as follows :
1) To generate Large Scale Employment Opportunities
for the Unemployed speedily with relatively Low Investment.
2) To Eradicate Unemployment Problem from the
Country.
3) To encourage dispersal of enterprises to all over the
country covering Rural Areas , smaller towns & economically
backward regions.
4) To bring Backward Regions too in the mainstream of
national development.
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5) To promote balanced regional development in the Whole

Country.
6) To ensure more equitable distribution of National Wealth
& Income.
7) To encourage effective mobilization of Untapped
Resources of the Country.
8) To improve Socio Economic Conditions & Standard of
Living of the people in the Country.
9) To seize the Vast Opportunities created for Small
Enterprises due to Liberalization & Globalization policies of the
Govt of India.
10) To help earn Vital Foreign Exchange for the Country thro
Exports of Goods / Services of Small Enterprises.
11) To bring more Revenue to the Central & State Govts by
way of Taxes.
29

Role of Small Enterprises in

Economic Development :
Economic Development of a Country can be defined in terms of
Increase in Real Per Capita Income of Persons resulting in Improvement
in Standard of Living. The Development of Small Enterprises
contributes to the Increase in Per Capita Income & leads to Overall
Economic Development.
It generates Vast Employment Opportunities quickly with relatively
Low Investment , Promotes more equitable distribution of National
Income, makes effective mobilization of Unutilized Capital & Skilled
Manpower & leads to dispersal of Manufacturing Activities all over the
Country , leading to Growth of Villages , Small Towns & Economically
Backward Regions. This leads to Balanced Regional Development
throughout the Country.
30

The Role of Small Enterprises in Economic

Development of our Country can be discussed with
reference to the following parameters during the last
Four Decades :
1) Increase in the Number of Small Enterprises.
2) Increase in the Value of Production in Rupee
Terms.
3) Increase in the Number of People
Employed.
4) Increase in the Export Earnings in Rupee
Terms.
31

The Small Enterprises have registered phenomenal

growth in their Number, Production, Employment & Exports
over the Last Four Decades.
In 1950, there were 16,000 Registered Small Scale
Industries & this has increased to 31.21 Lakh Registered SSIs
during 1998 1999.
During 1973 74, the Total Value of Production reported
by SSIs was Rs. 7200 Crores & this has grown phenomenally by
about 75 Times to Rs. 5,38,357 Crores during 1998 1999.
As regards Employment, about 40 Lakh People were
employed in SSI Sector during 1973 1974 & there is a Four
Fold Increase in Employment during 1998 1999, that is 175.2
Lakh People were employed in SSI Sector during 1998 1999.
32

There is a Phenomenal Growth in Exports Revenue

during the last Four Decades. During 1973 -1974, SSI Sector
exported Rs. 393 Crores worth of Goods & Services & this has
grown nearly 150 times to Rs. 57, 488 Crores during 1998 -1999.
As we can see, the SSI Sector has been contributing
tremendously in overall economic development of the Country
by creating Vast Employment Opportunities , increased Value of
Production, & increased Value of Exports & Foreign Exchange
Earnings.
Another way of looking at the SSI Sector for the
Economic Development of the Country is to look at its Relative
Position in terms of Countrys Total Production, Employment &
Exports. It is encouraging to note that Small Scale Enterprises
accounts for 35 % of the Gross Value of the Output in the
Manufacturing Sector , about 80 % of the Total Industrial
Employment & about 40 % of the Total Exports of the Country.
33

Steps for Starting a Small

Industry :
The Various Basic Steps for Starting a Small
Enterprise is as Given Below :
34

35

36

The Steps are discussed below :

1) Project Selection : Entrepreneur is the Most
Important person for the Success of a Project. In order
to set up a Small Enterprise, the Entrepreneur has to
decide or choose a suitable project.
The Entrepreneur has also to decide on a
suitable location for the project. Based on these
selections, a project feasibility study has to be
conducted & then a brief project profile has to be
prepared for the proposed project.
37

The Project Selection & the Preliminary Activities

involve the following :
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Product or Service Selection.

Location Selection.
Project Feasibility Study.
Preparation of Project Profile.
Business Plan Preparation.

a)
Product or Service Selection :

This is the first & most important step in setting up
a small enterprise. Because, the further prospects, actions &
efforts in setting up the small enterprise & commencing its
commercial activities successfully depend on this decision.
Therefore, the Entrepreneur has to be very careful
in the choice or selection of the Project. The main factors to
be considered in deciding a suitable project are as follows :
39

1) Background & Experience of Entrepreneurs.

2) Availability of the Right Technology & Know
How for the Project.
3) Marketability of the Product / Service.
4) Investment Capacity (i.e., Financial Resources.)
5) Availability of Plant & Machinery, Indigenous
or Imported.
6) Availability of Raw Materials.
7) Availability of Proper Infrastructural Facilities
Viz., Land / Shed, Power, Water, Communication,
Transport etc.
8) Availability of right kind of Labor Viz., Skilled,
Semi Skilled & Unskilled.
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Considering all above aspects & taking the help of

Governmental Support Organizations like TECSOK,
KIADB, KSSIDC etc & even private consultants , the
Entrepreneur has to choose & decide the project for
implementation.
b) Location Selection : After deciding on the Project,
the next important decision an Entrepreneur has to make is
about the Location of the Project. There are a Few factors
associated with the same :
41

1) Nearness or Proximity to Market.

2) Availability of Raw Materials.
3) Availability of Transformation &
Communication Facilities.
4) Availability of Govt Incentives / Concessions.
5) Govt Industrial Policy.
6) Availability of suitable Infrastructural facilities.
7) Availability of Labor.
8) Convenience for the Entrepreneurs.
42

c) Project Feasibility Study : The important facets of Project

Feasibility Study are as follows :
1) Market Analysis is carried out to find out the aggregate
demand of the proposed Product / Service & what would be the
Market Share of the proposed project.
2) Technical Analysis seeks to determine whether the
prerequisites for the successful commissioning of the Project
have been considered & reasonably good choices have been
made with respect to Location, Size, Process & so on.
3)
Financial Analysis seeks to ascertain whether the
proposed project will be Financially viable in the sense of being
able to meet the burden of Servicing Debt & Satisfy the return on
Investment Expectations of the Promoters.
43

4) Economic Analysis : (Social Cost Benefit

Analysis) is concerned judging a Project from the
larger, social point of view. In such an evaluation, the
focus is on the Social Costs & Benefits of the Project.
5) Project Profile : This gives a Birds Eye View
of the Proposed Project. This may be used for obtaining
Provisional Registration Certificate (PRC) from the
District Industries Centre & for making an Application
to KIADB for allotment of Land or to KSSIDC for
allotment of Shed & other Infrastructures.
A Project Profile generally contains
information about the Project under the Following
Heads :
44

1) Introduction.
2) Promoter(s) Background (Education, Experience).
3) Product(s) Service(s) Description (Specification, Uses etc.)
4) Market & Marketing.
5) Infrastructure needed.
6) Plant & Machinery (Description, Capacity, Cost etc.)
7) Process Details.
8) Raw Materials (Requirements, Specifications, Cost etc.)
9) Power, Water & other utilities required.
10) Manpower needed (type of Personnel reqd & salaries /
wages)
11) Cost of the Project & means of finance.
12) Cost of Production & Profitability.
45

e) Business Plan Preparation : This is a Document

where the Entrepreneur plans his Business to have an
Organized & effective response to a situation which may
arise in future. A Business Plan is used to make Crucial Start
Up Decisions to reassure Lenders, Investors, to measure
Operational Progress ; to Test Planning Assumptions ; to
Adjust Forecasts; & to set the standard for good Operational
Management.
A Workable Business Plan has the following features
:
46

Determines where the Company needs to go.

Forewarns of possible hurdles along the way.
Formulates the responses to contingencies.
Keeps the Business on Track to reach its Planned
Goals.
Start a Business Plan with describing your
Business & Product or Services. Indicate the Market
Segment you are Targeting & the Stage of Development
your Company is in.
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2) Decide on the Constitution :

To start any Enterprise, the Promoters have to
decide on the Constitution of the Unit. There are 3 Major
Alternatives :
a) Proprietary b) Partnership c) Company.
In fact, this has to be decided at the initial stages of
the Project & necessary formalities should be completed by
the time the application for Provisional Registration
Certificate (PRC) is made to DIC (District Industries
Centre).
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a) Proprietary Enterprise : A Single Individual is

the Owner of such an Enterprise. The Proprietor may
proceed to obtain PRC from the DIC.
b) Partnership Enterprise (Firm): This is an
Association of Two or more Persons, subject to a
Maximum of 20 Persons. They are governed by the
Indian Partnership Act , 1932 & rules framed there
under the State Govt. It is advisable to have a
Partnership Deed Agreement on Stamp Paper of
Appropriate Value.
49

Registration Formalities of a Partnership Firm :

For Registering a Partnership Firm, an
Application in the prescribed form has to be submitted
to the Registrar of Firms of the District , along with the
authenticated copy of the Partnership deed & the
prescribed fee & must obtain Form A & Form C
from the Registrar of Firms for having registered the
Partnership Firm.
Assistance of a Chartered Accountant may be
availed for completing the above formalities.
50

c) Company :
This may be a Private or Public Limited
Company. A Private Limited Company can be
formed with a minimum of 2 Persons & a Maximum
of 50 Persons. A Public Limited Company can be
formed with a Minimum of 7 Persons & Maximum
number of Persons is unlimited. Company is
governed by the Companies Act, 1956.
For Registering the Company, one has to
approach Registrar of Companies of the State.
51

3) Obtaining SSI Registration :

Entrepreneurs desiring to start a Small
Enterprise have to initially obtain a PRC(Provisional
Registration Certificate). Once the Unit goes into
Production, the PRC has to be converted into a
Permanent Registration Certificate (PMT).
52
a) PRC : This is the Initial Registration reqd for

starting a Micro & Small Enterprise. The Entrepreneur
has to apply & obtain a PRC after selection of the
Project & deciding on the Location of the Unit. This
Application is necessary for Infrastructural Facilities
such as Land, Shed, Power etc & Finance from the
Financial
Institutions.
b) Permanent Registration Certificate (PMT) :

A Micro or a Small Enterprise can get a Permanent Registration
Certificate when it actually commences Commercial Production / Service.
PRC would be converted to PMT when the Unit commences its Commercial
Activities.
PMT Registration will help in several ways like the following :
To apply for scarce raw materials & for imported raw materials.
To get Working Capital Loan from Banks / Financial Institutions.
To get Central Excise Duty Concessions.
For Claiming Incentives, Concessions, including Sales Tax Exemption

wherever applicable.
To apply for registration under Govt Stores purchase programs /

Ancillary Development Programme / Export Promotion Program & to get
Purchase & Price Preference.
53

4) Specific Clearances :
There are a number of Statutory Clearances reqd to start
Micro & Small Enterprises.
Some of them are given below :
a) Agricultural Land Conversion into Non Agricultural
Land (NA Conversion).
b) Building Plan approved by the Local Authorities.
c) Factories Act & Labor Dept.
d) Trade License from the Local Authorities.
e) Pollution Control Board Clearances.
f)
Food Adulteration Act License.
g)
BIS Certification wherever applicable etc.
54

5) Land or Shed Selection :

For any Industrial Project, suitable Industrial Site or a
ready Industrial shed is reqd. The Promoters of the Unit could
consider taking an Industrial Site & constructing a shed as per
their requirement, alternatively, could consider taking a ready
Industrial Shed on Ownership Basis also.
Whom to approach :
a) KIADB for Land.
b) KSSIDC for Shed requirement.
c) Alternatively, the Entrepreneur can also approach directly
the Jt. Director , DIC in the particular District also for
requirement of Land / Shed for the proposed Enterprise.
55

6) Plant & Machinery :

This requirement for a Particular Project could be
purchased from recognized manufacturers / dealers. This
could also be taken on Hire Basis operated by National
Small Industries Corporation Limited (NSIC).
This is a Govt of India promoted Corporation.
56

7)
57
Infrastructure Facilities :
For Micro or Small Enterprises the main infrastructure
facilities are Land or Shed for the Project , Power Connection ,
Water Supply & Telephone & Internet Facility.
As said earlier, for Land or Shed , the Entrepreneur can
approach either KIADB or KSSIDC as the case may be. For the
requirement of Power, an application may be made to the local
electricity company in the region. For Telephone connection &
Internet facilities, Entrepreneur has to approach BSNL or other
operators.
District level Single Window Agency (SWA) assists the
Entrepreneur in getting all the above facilities. Hence, the
Entrepreneur can forward an Application on a plain paper to the
Jt. Director , District Industries Centre of the District giving his
requirement of various infrastructural facilities for speedy
approval
& sanction.
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8) Project Report :
For any New Project or Enterprise to be set
up, Proper Planning is necessary.
A detailed Project Report provides such a
plan for the Project. The Report is useful to the
Entrepreneur for Planning & Implementing the Project.
This is essential for Obtaining Finance & other
clearances for the Project.
In fact, the Project Report gives a detailed
insight of the Techno Economic Viability of the
Project. This is generally prepared to cover the
following :
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1) Introduction.
2) Entrepreneurs (Promoters) Background
(Education, Experience, Special Achievements etc.)
3) Details of Product(s) to be manufactured & specs
/ details of Service(s) to be rendered with Technical
Details.
4) Market Potential for the Product(s) / Service(s)
& Marketing Plan.
5) Plant Capacity, Production Plan &
Manufacturing Process.
6) Infrastructure needed for the Project.
7) Raw Materials & Consumables needed for the
Project.
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8) Plant & Machinery for the Project (Description ,

Capacity , Cost etc.)
9) Manpower requirements.
10) Total Project Cost.
11) Means of Finance.
12) Income , Costs & Profitability Projections.
13) Financial Analysis.
14) Schedule of Implementation.
15) Conclusions & Recommendations.
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9)
Finance :
Finance for such Projects are under 2 main categories :
a) Term Loan.
b) Working Capital Loan.
a) Term Loan : For starting a Small Enterprise, Term Loan
Finance for the Fixed Assets like Land, Building, Plant &
Machinery etc ., can be availed. This Loan can be availed from
Karnataka State Financial Corporation (KSFC) & or from the
Commercial Banks.
Financial Institutions sanction up to 75 % of the Total
investment on Fixed Assets & the Balance of 25 % has to be
pooled in by the Promoters as Margin Money. At present the
Lending Interest Rates are between 13 to 14 % & also subject to
change. Promoters can also approach National Small Industries
Corporation (NSIC) for Financial Assistance.
61

b) Working Capital Loan :

It is always preferable to approach Commercial
banks for Working Capital Loan. All Commercial Banks
finance up to 75 % of the Working Capital Loan & the
remaining 25 % has to be pooled in by the Promoters.
It is important to note that Banks will release
Working Capital Loan only after the Promoters have
contributed their share of 25 % , at present the Lending
Rates are varying between 13 to 14 %.
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c) Single Window Scheme (SWS) of KSFC for both

Term Loan & Working Capital Loan :
This Loan Scheme is for providing assistance
to new Micro & Small Enterprises whose project cost
(Excluding Working Capital Margin of the Promoters)
does not exceed Rs. 50 Lakh & the Total Working
Capital Requirements at the Normal Level of Operation
is up to Rs. 20 Lakh. Term Loan for Fixed Assets &
Term Loan for Working Capital is fixed based on the
Debt Equity Ratio of 2:1 for Loans above Rs. 10 Lakh
& 3:1 for Loans up to Rs. 10 Lakh.
63

10) Implementation of the Project :

The Entrepreneurs will have to take necessary steps to
physically implement the Project after obtaining the various
Licenses, Clearances, Infrastructural Facilities etc. Following are
the Major Activities that the Entrepreneurs have to undertake for
implementing the Project.
a) Construct Shed : If the Entrepreneurs have taken a ready
shed from the KSSIDC or have made arrangements for Rental
Sheds / Premises then they need to go thro this Step. If they have
obtained Industrial Land from KIADB or they have made
arrangements for Vacant Land privately, then they have to take
steps to construct the shed for their industry. The Plan for the
Industrial Shed should be approved by the concerned authorities
like KIADB & or Local Authorities like Municipal Corporations
or Municipalities or Village Panchayats etc., as the case may be.
64

b) Order for Machinery :

The Entrepreneurs have to take necessary steps to order
the necessary Machinery, Equipments etc. thro NSIC or any
other suitable Organizations. The Terms & Conditions for
ordering Machinery, Equipments etc. will vary from dealer to
dealer, hence the Entrepreneurs have to make necessary
arrangements as per the terms & conditions of the dealers.
The delivery dates may vary upon the type of
Machinery, Equipments etc. & the dealer thro whom the
Machinery is ordered.
Keeping these Factors in mind, the Entrepreneurs
should plan to order the necessary Machinery, Equipments etc. at
the appropriate time so that they are able to obtain them in Time,
to implement the Project.
65

c) Recruit Personnel :
Depending upon the Size of the Industry & type of the
Products, the Entrepreneurs will have to hire different types of
personnel for the Industry.
Certain Managerial & Technical Personnel may be reqd in
the initial stages for the Project Planning. These Personnel may
be needed for the preliminary works, for supervision & other
related works during Planning & Implementation of the Project.
Accordingly, the Entrepreneurs should take steps to hire
the Key Managerial & Technical Personnel well in advance. Most
of the other Personnel & Office Staff will be needed as soon as
the unit is ready for Commissioning.
66

d) Arrange for Raw Materials :

Entrepreneurs should plan for reqd Raw
Materials as soon as they proceed to implement the
Project. They should try to get the necessary samples
for the Basic Raw Materials & Components that they
need to buy from outside for the Project.
During the implementation of the Project, they
should finalize the Sources of Raw Materials, the
Quality & Quantity Requirements for the Project.
Accordingly, they should Plan & Order the necessary
Raw Materials & Components so that they start
receiving the supplies from the date of expected
Commissioning of the Project.
67

e) Marketing :
The Entrepreneurs would have already
considered about the Market for their Project & the
Marketing Plan that they desire to take up for the
Products.
They should build up necessary Contacts for
marketing during the implementation stage. They have
to undertake necessary ground work of contacting the
prospective customers & preparing necessary plans for
Marketing. The Planning should cover the product(s)
design, Pricing, Promotional Activities & the
Distribution Systems.
68

f) Erection & Commissioning :

Once the Building is ready & the necessary Plant
& Machinery have arrived, the Entrepreneurs have to take
steps to erect the Machineries. The various items of Plant &
Machinery should be erected as per the Plan prepared. Some
of the sophisticated Machineries are supplied along with the
service of erection. In such cases, the erection &
commissioning will be undertaken by the Vendors of the
equipment.
69

After the Plant Machinery is erected, the

Entrepreneurs should proceed to commission the Plant.
Initially, during the trial run period, the Entrepreneurs will
have to make necessary adjustments & changes in
Production & Process so as to obtain the desired quality
products. Once, the Production / Process of the Unit is
standardized, they can proceed with Commercial
Production.
70

g) Obtain Final Clearances :

The Entrepreneurs are reqd to take several Final
Clearances when is ready for Commissioning or as it goes
into Production. Accordingly, the Entrepreneurs are advised
to refer to the various preliminary clearances they have
obtained from different Depts / Organizations & take
necessary steps to obtain Final Clearances or approvals as
reqd.
71

Government Policy towards SSI :

Small Scale Enterprises have been given an important
place in the frame work of Indian Planning for both ideological &
Economic Reasons. Development of Small Scale Enterprises
have been taken up with various important objectives to be
realized. These are :
(1) The generation of Immediate Employment
Opportunities with relatively Low Investment.
(2) The promotion of more equitable distribution of
National Income.
(3) Effective mobilization of untapped Capital & Human
Skills.
(4) Dispersal of Manufacturing activities all over the
Country, leading to growth of Villages , Small Towns &
economically Backward Regions.
72

Therefore, the Govt of India as well as various State

Govts in the Country have started various programs & evolved
policies for the Development of Micro & Small Enterprises in the
Country.
Various measures taken by the Central & State Govts for
the development of Micro & Small Enterprises have included
Product Reservations, subsidies on fixed capital investment,
Sales Tax & Income Tax Concessions, Preferential allocation of
credit & interest subsidy, extension of business & Govt
purchases, Marketing Assistance including Export Promotion by
institutions such as National Small Industries Corporation, Small
Industries Development Organization & several other agencies.
73

For the purpose of administration of Indias Micro

& Small Enterprises have been divided into Seven Groups
as under into Traditional Sector & Modern Sector.
Traditional Sector :
1) Handicrafts.
2) Handlooms.
3) Khadi, Village & Cottage Industries.
4) Coir.
5) Sericulture.
74

Modern Sector :
6) Power Looms.
7) Residual Micro & Small Enterprises.
75

Governmental Support to
Small Scale Enterprises :
Immediately after independence, Govt of India
initiated various steps for promotion & development of
Small Scale & Cottage Industries. Govt of India has
attached great importance to the development of Small
Enterprises Sector in all the Five Year Plans since the
beginning in 1951.
76

Details of the same are seen below :

The Plan Expenditure on Small Enterprises Sector
has been continuously increasing. In the First Five Year Plan
(1951 56), Rs 48 Crores constituting 47.8 % of the Total
Plan Expenditure was spent in Small Scale Sector alone.
By the end of First Five Year Plan, there were Six
Statutory Boards created to help the Small Scale Sector.
77

These are :
a)
b)
c)
d)
e)
f)
78
All India Handloom Board.

All India Handicrafts Board.
All India Khadi & Village Industries Board.
Small Scale Industries Board.
Coir Board.
Central Silk Board.

The above Boards covered the entire field of Small Scale &
Cottage Industries.
Second Five Year Plan (1956 61) focused on dispersal of
Industries to all the regions in the Country. Accordingly, 60
Industrial Estates were established in different regions providing
various infrastructural facilities like Power, Water, Transport
etc., at one place. The total expenditure was 187 Crores.
The Third Five Year Plan (1961 66) stressed on extension
of Coverage of Small Scale Industries. The total expenditure on
Small Scale Sector was Rs. 248 Crores.
The Fourth Five Year Plan (1969 73) Small Scale Sector
witnessed significant Diversification & Expansion. By the end of
1973, as many as 346 Industrial Estates had been established &
Small Scale Sector provides employment to about 82,700
Persons.
79

The Fifth Five Year Plan (1974 78) outlay was Rs

611 Crores, whereas the actual expenditure on Small Scale
Sector amounted to Rs. 592 Crores.
During Sixth Five Year Plan (1980 1985), massive
development programs were initiated by the development of
most promising Small Scale Industrial Sector. Expenditure
occurred in this Plan was Rs. 1945 Crores exceeding the
Outlay of Rs. 1780 Crores.
80

Some of the important programs implemented during

Sixth Five Year Plan are as under :
1) List of items reserved for exclusive production in Small
Scale Industrial Sector increased to 836.
2) 409 items were reserved for exclusive purchase from
Small Scale Industries.
3) Provision of Consultancy Services in Technical ,
Managerial etc. thro SIDO (Small Industries Development
Organization).
81

4) For providing necessary Technical Input to Rural

Industries, Council for Advancement of Rural Technology
(CART) was established in October 1982.
By the end of 6th Five Year Plan the Annual
Production of SSIs was Rs. 65,370 Crores, Exports touched
Rs. 4557 Crores, employment reached to 31.5 Lakh Persons,
accounting for 80 % of the Total Industrial Employment
next only to employment in Agricultural Sector.
82

7th Five Year Plan (1985 90) gave a lot of

importance for Technology Up gradation to increase
Competitiveness of Small Scale Industrial Sector.
The actual expenditure during Seventh Plan was Rs.
3249 Crores & exceeded the plan outlay of Rs. 2753
Crores. Due to this, various development programs,
the Small Scale Industrial Sector witnessed
significant development in all fronts. Employed
increased substantially from 96 Lakh persons to
119.6 Lakh persons during the Seventh Plan period.
83

The 8th Five Year Plan (1992 1997) gave a lot of

stress on Employment generation as the motive force for
economic growth. As a result the number of Small Scale
Units increased from 13.56 lakh to 18.27 Lakh. The value of
Annual Production increased to Rs. 91,681 Crores. The total
expenditure in Eight Plan on Small Scale Sector was Rs.
6334 Crores.
84

Impact of Liberalization, Privatization & Globalization of

Small Enterprises :
The process of Liberalization & Economic Reforms ,
since 1991, have thrown up new challenges to the small
enterprises sector , simultaneously creating tremendous
opportunities for the growth of this sector.
In this changed scenario, building Competitive Strengths,
introducing Technology Up gradation & Quality Improvement
are important issues which need to be addressed in order to build
the capacity to withstand emerging pressures & ensure sustained
growth. Also small enterprises sector needs to reposition itself if
it has to meet the growing demands for ancillary items ,
subcontracting etc from other Medium & Large Enterprises ,
requiring higher standards of Quality, Economies of Scale &
strict delivery schedules.
85

Even before introduction of the Economic Reforms in

1991, following the inevitable Globalization, the Small
Enterprises sector was somewhat overprotected. With
Liberalization & Globalization, they are now more exposed to
severe competition from Large Domestic Private Enterprises &
from Foreign & other MNCs.
The problems of Small Enterprises in the Liberalized
Environment are many Delay in Implementation of
Projects, Lack of Timely assistance of Finance & Credit from
the Financial Institutions, Marketing Problems, Lack of
Proper Infrastructural Facilities, Delay in receiving payment
against the goods sold, outdated technology, poor quality of
raw materials & consumables & lack of managerial skills etc.
86

87
Now, World over the Business Environment is changing

fast. Globalization in terms of multilateral trade liberalization &
increasing Internationalization of Production, Distribution etc has
resulted in the opening up of markets, leading to keen
competition.
For instance, the WTO regulates multilateral trade
requiring its member countries to remove restrictions on Import
Quotas & reduce the Import Tariff. Accordingly, India was asked
to remove Quantitative restrictions on Imports by 2001, & all
export subsidies by 2003. As a result, all enterprises both Big &
Small Enterprises are facing severe competition in both domestic
& export markets. Further, 643 of the 812 items reserved for
MSME Sector , have been brought under OGL (Open General
License) list of Imports as on 1st April 2001. This has opened
up stiff direct competition in the Domestic market with the
imports
of high quality
goods
from
member countries.
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Competition in the domestic market has further intensified

with the arrival of MNCs as the restrictions on Foreign Direct
Investment (FDI) have been removed. During, 1990 2000
period, many MNCs in areas such as Automobiles, Electronics,
Information Technology & Telecommunication have entered the
Indian Market.
Many sectors which were over protected earlier & where
Large Government promoted Public Undertakings were only
involved, have been thrown open to the Private Sector by the
Government of India. As a result, many Indian & MNCs have
such areas as Telecommunications, Infrastructural Development
Activities , establishment of International & National Airports ,
formation of Special Economic Zones (SEZs ) in specified areas
etc. Privatization has resulted in additional market potential for
Products / Services, of Small Enterprises Sector.
88

Thus, we can say that the with the New & Emerging
Industrial Scenario, MSMEs will have to be Competitive. Govt
is aware of these challenges & has been trying to improve the
Competitiveness thro various measures like :
a) Strengthen Existing Technological Facilities. It is
formulating a Scheme of assistance for Technology Up gradation.
b) To improve access to Latest Technology, automation of
the ministry of MSME, has been taken up.
c) In order to facilitate adequate flow of Credit, a scheme of
Credit Guarantee has been launched. Measures have been taken
to improve Infrastructure Facilities & Promote Marketing of
Products etc.
89

Effect of WTO / GATT on

Small Enterprises :
The Emerging Challenges to Micro & Small Enterprises
Sector are due to impact of the agreements under the WTO to
which India is a Signatory.
90
The setting up of WTO in 1995 has altered the Basic

structure of International Trade towards supportive, Market
Oriented Policies. This is in keeping with the Policy shift
from State Regulations / Interventions in economic Activity.
This has lead to an expansion in the Volume of International
Trade & Changes in the Pattern of Commodity Flows. The
main outcome of WTO stipulated requirements has been
brought about thro a gradual reduction in Export Subsidies,
greater market access, removal of Non Tariff Barriers, &
reduction
in Tariffs.
VTU - Notes - Question
Papers

More stringent Patent Laws have been brought into force
thro regulation of Intellectual Property Rights (IPR) under the
Trade related aspects of the Intellectual Property Rights (TRIPS)
Agreement which stipulates the Products & Processes which can
be patented for what duration of time (20 Years) & on what
terms.
Because of WTO Agreement , there will be Large Inflows

of Imports in the Domestic Market , from around 3 % of
Domestic Production to 5 %. The removal of Quantitative
Restrictions (QRs) on Imports has been speeded up & Imports of
these items will soon be freed from all restrictions in our EXIM
Policy. (Export - Import Policy.)
91


Increased Market Access under the WTO requirements will
also mean that our Small Enterprises have a bigger World Market
& can compete for Export Markets in both Developed &
Developing Countries. This requires restructuring of our Small
Enterprises to meet the demands of Quality & Global
Competitiveness for their survival & growth.
Small Enterprises contribute about 54 % of the Non

Traditional & 10 % of Traditional Exports ( Together 35 % of the
Total Exports ) of our Country. However, they have to face
Threats & also avail opportunities owing to the WTO & its
agreements.
92

The main Opportunities of WTO are classified as under :

a) Firstly, most favored nation (MFN) treatment for
exportable items across the member countries all over the World,
with better Market Access thro the Internet .
b) Secondly, enlightened Entrepreneurs have greater
Opportunities to benefit from their Comparative advantages due
to lowering of Tariffs & removal of other restrictions.
c) Finally, Enterprises that are in constant touch with the
Govt which in turn negotiates in their best interests in the On
Going dialogue with the WTO are going to benefit.
93

Summary :
India has a Good Potential to become a
Superpower in the Service Sector, particularly
Information Technology (IT) enabled services. India
has already captured 25 % of World Exports.
However, they face challenges due to competition by
way of Cheap Imports from other Countries due to
Removal of Quantitative Restrictions (QRs) on
Imports & Lowering of Tariffs. Due to this, there is
Stiff Competition for both Small & Big Enterprises
in both Domestic & Export Markets.
94

In addition, the Open General License (OGL)

opens up the possibility of Direct Competition in the
Domestic Market with the Import of High Quality
Goods from developed Nations & Cheap Products from
Less Developed Countries. Also, the entry of MNCs
has intensified Competition in the Domestic Market.
Also, these Enterprises are finding it extremely difficult
to compete due to certain inherent problems like Poor
Quality of Goods, Costly Credit, not so well developed
Infrastructure, Traditional Technology, Strict Labor
Laws, Lack of Information & International Exposure &
ineffective Small Enterprises association.
95

However, the WTO Agreements suggests ways by

which some of the adverse consequences could be
neutralized. Some of them are inbuilt safety mechanisms
like Anti Dumping & such other measures. Also WTO
prevents subsidies which directly affects the Competition of
the Product , it helps activities of Common Interest which
act indirectly act as Subsidy to the Small Enterprises.
96

Supporting Institutions /
Agencies of Govt for Small
Enterprises :
Need for Institutional Support :
Small Enterprises are playing a Very Vital Role in Economic
Development of the Country by contributing to increased Production,
increased employment generation, contributing to nearly 40 % of our
Countrys Exports thereby help earning Important Foreign Exchange for the
Country & finally giving substantial revenue to both Central & State Govts by
way of Direct & Indirect Taxes.
Therefore, Small Scale Enterprises Sector needs a lot of support &
encouragement for its rapid growth from both Central & State Govts. Setting
up of Small Enterprise requires Infrastructural Facilities & Financial Support
as Entrepreneur on his own cannot arrange all these requirements.
Entrepreneur also requires support for marketing his Product (s) / Service (s) ,
he requires Technological Inputs & also ED Training, therefore, a strong
97 Governmental Institutional Network is reqd.

The Governmental Institutional Support Network
can be broadly be classified into Two Categories as under :
a) Central Level Institutions / Agencies.
b) State Level Institutions / Agencies.
List of these support organizations & salient features
of these support organizations is given below :
98

a) Central Level Support

Institutions / Agencies :
Important Central Level Support Agencies for
Promotion & Development of Small Scale
Enterprises are as under :
1) Development Commissioner, Micro, Small &
Medium Enterprises (DC MSME) under the
Central Ministry of Micro, Small & Medium
Enterprises in which Ministry of Agro & Rural
Industries has also been merged.
2) National Board for Micro, Small & Medium
Enterprises (NBMSME).
99

3) Small Industries Development Organization (SIDO).

4) National Small Industries Corporation (NSIC).
5) Small Industries Development Bank of India (SIDBI).
6) Khadi & Village Industries Commission (KVIC).
7) National Science & Technology Entrepreneurship Development Board
(NSTEDB).
8) National Productivity Council (NPC).
9) National Institute for Small Industry Extension & Training (NISIET).
10) National Institute for Entrepreneurship & Small Business Development
(NIESBUD).
11) Indian Institute of Entrepreneurship (IIE).
12) Entrepreneurship Development Institute of India (EDII).
13) National Bank for Agricultural & Rural Development (NABARD).
14) Council of Scientific & Industrial Research (CSIR).
100

Khadi & Village

Industries Commission
(KVIC ) :
This is a Statutory Body created by an act of the
Parliament in 1956. It is concerned with Planning,
Promotion, Organization, & Implementation of the
Programme for the Development of Khadi & other
Village Industries in the Rural Areas in Coordination
with other agencies engaged in Rural Development
whenever necessary. The Various Functions are :
101


Build up a Reserve of Raw Materials & implements for
supply to rural industries.
Create common service facilities for converting Raw

Materials into Semi Finished goods to be used as inputs by the
Rural Industries.
To market the Products of KVIC.
To Organize Training of Artisans engaged in Rural

Industries & to encourage Co-operative efforts amongst them.
To Provide Financial Assistance to Institutions or Persons

engaged in the Development & Operation of Khadi & Village
Industries.
To Provide necessary Technical Information & Guidance

thro supply of Designs & Prototypes etc. to Khadi & Village
Industries.
102

National Productivity
Council (NPC) :
This is an Autonomous Institution functioning under
the Overall Supervision of the Ministry of Industry, Govt
of India. Its Head Office is at New Delhi. It has got
Regional Directorates at almost all the State Capitals. Its
Primary Objective is to Act as a Catalyst in enhancing
the Productivity of all the Sectors of the Economy ,
including Industry & Agriculture.
103

The Main Activities of NPC is to provide

Consultancy & Training in Various areas related to
Industrial Engineering , Plant Engineering, Energy
Management, Human Resources Development, Informal
Sector etc. about 200 Professionals specialized in
various fields work under NPC.
In order to provide expertise of NPC to Small
Scale & Informal Sector. SIDBI has entered into a tie up
with NPC. The Collaboration aims at promoting the
concept of productivity in Small Industry Clusters &
improving the Technology Level of Small Enterprises.
104

Indian Institute of
Entrepreneurship (IIE) :
IIE was established in the year 1993 as an Autonomous
National Institute at Guwahati by the Ministry of Industry,
(Now , Ministry of MSME), Govt of India. The Institute
started its Operations from April 1994 with NEC (North East
Council) , India. The Main Objectives are :
1) To Organize & Conduct Training for Entrepreneurship
Development.
2) To Conduct Training Program for the Functionaries of
the Govt & Non Governmental Organizations engaged in
promoting Entrepreneurship.
3) To identify, Design & Conduct Training Programmes
for the existing Entrepreneurships.
105

4) To Act as a Catalyst for the Development of Self

Employment / Entrepreneurship , Enterprise / Business.
5) To Organize Workshops, Seminars etc. for the
Promotion of Entrepreneurship.
106

b) State Level Support

Institutions / Agencies :
This is done for the Promotion & Development
of Small Scale Enterprises are as under :
1) Directorate of Industries & Commerce (DI &
C).
2) District Industries Centers (DICs).
3) State Financial Corporation , in Karnataka it is
called as KSFC.
4) KSSIDC.
5) KIADB.
6) TECSOK (Technical Consultancy Services
Organization of Karnataka).
7) Centre for Entrepreneurship Development of
Karnataka (CEDOK).
107

8) Karnataka State Industrial Investment &

Development Corporation (KSIIDC).
9) Council for Technological Up gradation. In
Karnataka State it is named as Karnataka Council for
Technological Up gradation (KCTU).
Directorate of Industries & Commerce (DI
& C) :
At the State Level, the Commissioner / Director of
Industries & Commerce implements Policies for the
Promotion & Development of MSME & Large Scale
Enterprises. The Central Policies for the MSME Sector
serve as guidelines but each State evolves its own Policy
& Package of Incentives. The Commissioner / Director of
Industries & Commerce in all the States & UTs , oversee
the Activities of Field Offices, that is, the District
Industries Centers (DICs) at the District Level.
108

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UNIT - 6

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Also, Small Scale Industries need to reposition

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Concepts & Definitions of

These definitions generally relate to either the

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Classification & Definition

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2) Service Enterprises : Enterprises which are engaged

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b) Small Enterprises : An Enterprise where the

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1) Micro Enterprises : An Enterprise where the

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As can be seen from the above definitions of Micro, Small &

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2) Owner himself / herself is also a Manager of

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4) Small Enterprises generally carryout their

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7) Using Local Resources, Small Units are

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They create greater Employment

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2) They have Low Gestation Period & thereby

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8) They Innovate & Introduce New Products

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Need & Rationale of Small

They provide immediate large scale employment, they

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The Rationale of Small Scale Industries so established

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It has also been found by various studies that while Output

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2) They are more Labor Intensive & their

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Some Authors argued that such Small Enterprises

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Objectives of Developing Small

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5) To promote balanced regional development in the Whole

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Role of Small Enterprises in

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The Role of Small Enterprises in Economic

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The Small Enterprises have registered phenomenal

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There is a Phenomenal Growth in Exports Revenue

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Steps for Starting a Small

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