Unit 3

Small Scale Industries

A) Introduction
Industrialization does not necessarily imply the existence of huge factories spread
over hundreds of acres, churning out power and using lots of fuel. This
specifically points to large-scale industries. Industrialization also has to do with
factories and industries and organizations that operate on a much smaller scale,
but generate profits all the same.
In India, particularly, there has always been a push for small-scale
industrialization, since the disparities in income and resources will not make it
possible for all sections of the population to be engaged in large-scale industrial
work. Moreover, India is home to a large number of artisanal crafts, and these
cannot prosper under the principles of large-scale work. Even before
independence, there was a push for cottage industries to develop and become self-
sufficient.
B) What are Small Scale Industries?
To define a small-scale industry effectively, it is imperative to first learn about
the meaning of industry. The term industry refers to a group of companies that
are related to each other, based on the primary business activities they undertake.
Small scale industries, thus, refer to those partnerships, corporations, or sole
proprietorships that function on a lower scale, employing a smaller workforce and
generating less revenue than that by normal-sized industries or businesses.

Small scale enterprises can also refer to those businesses that apply for
government support or avail preferential tax policies, depending on their area of
operation. Following is an elaboration on the types, characteristics, and features
of small-scale industries, along with a few examples.
C) Characteristics of Small Scale Industries
In accordance with the small scale business meaning, such industries are
characterized by the following features:
1. Ownership
Generally, such businesses are sole proprietorships or, in some cases,
partnerships. It means that the ownership of the business rests on a single
individual, in most cases.
2. Labour Requirements
Since capital investment in such industries is comparatively lower than that of the
large-scale ones these mostly rely on manpower, to carry out production
activities.
3. Management
One of the most significant characteristics of SSI is that both the control and
management of such businesses lie with owners. The owner, thus, participates
actively in the day-to-day business conduction.
4. Flexible
Since they operate on a smaller scale, these industries are more privy to sudden
and unforeseen developments on the business front. They are more adaptable to
changes in the business environment.
5. Optimal Usage of Resources
Since they do not have excess resources at their disposal, small-scale industries
make optimal usage of the available resources without wastage.
6. Operation Restrictions
Most small-scale businesses are limited in their area of operation. As a result,
they only operate either locally or regionally. These are a few of the
characteristics of a small business that helps to effectively gauge its operation,
administration, and scope.
D) Importance of small scale industries in India:
1. Employment generation:
Small scale industries are one of the best sources of employment generation in
India. Employment is one of the most important factors that determines the
growth of a nation. Therefore, development of small scale industries should be
encouraged for the development of more employment opportunities in the nation.
2. Less Capital Requirement:
Small scale industries are less capital intensive than the large scale industries.
Capital is scarce in developing countries like India and therefore, small scale
industries are most suitable for maintaining the balance.
3. Use of resources and development of entrepreneurial skills:
Small scale industries allow for the development of entrepreneurial skills among
the rural population which is not having the scope of large scale industries. These
industries help in the appropriate use of the resources available in the rural areas,
which leads to development of rural areas.
4. Equal income distribution:
Small scale industries by generating employment opportunities create equal
income opportunities for the youth of the underdeveloped areas. This leads to the
growth of the nation in terms of employment, human development.
5. Maintains regional balance:
It has been seen that large scale industries are mostly concentrated in the large
cities or restricted to areas which leads to migration of people in search of
employment to these cities. The result of such a migration is overcrowding of the
city and damage to the environment. For sustaining a large population, more of
natural resources need to be utilised.
6. Short production time:
Small scale industries have a shorter production time than the large scale
industries which results in flow of money in the economy.
7. Supporting the large scale industries:
Small scale industries help in the growth of the large scale industries by producing
ancillary products for the large industries or producing small components that
will be useful for the assembling of final products by the large scale industries.
8. Improvement in Export:
Small scale industries contribute to around 40% of the total exports done by India,
which forms a significant part of the revenue earned from the exports. Small scale
industries work towards increasing the forex reserves of the country that reduces
the load on balance of payment of the country.
9. Reduce the dependence of agriculture:
Most of the rural population will be dependent on agriculture and this creates a
burden on the agricultural sector. Small scale industries by providing employment
opportunities to the rural population provides more avenues for growth and also
paves way for a more arranged distribution of occupation.
E) Classification of Small Scale Industries
Small-scale industries come in various forms, each serving different needs and
sectors. Here are the key types:
1. Manufacturing Industries
These industries create finished goods or semi-finished products. Examples
include food processing units, textile mills, and small electronics manufacturers.
2. Ancillary Industries
They supply parts and components for larger manufacturing processes. For
instance, they produce spare parts for automobiles, machinery, and equipment.
3. Service Industries
Provide essential services rather than products, such as repair services,
maintenance, and consultancy.
4. Retail Industries
Involve the sale of goods directly to consumers, including small shops, boutique
stores, and online retail platforms.
5. Agro-based Industries
Specialise in processing agricultural products, such as dairy, grains, and fruits,
adding value to raw materials from farms.
F) Cottage Industries
Cottage industries are small and informal industries established in cottages or
dwelling places. They are small-scale units or manufacturing businesses managed
by family members from their homes or establishments usually near their homes.
They are the backbone of the Indian economy. In India, the Khadi and Village
Industries Commission (KVIC) is the organisation that promotes village and
cottage industries.
The cottage industries rely on local labour due to a small investment in the
business. They are usually unorganised or decentralised manufacturing
businesses operated from homes using local raw materials and simple hand-
operated tools.
Some examples of cottage industries in India are as follows:
Weaving, Silverware, Pottery, Carpentry, Bamboo crafts, Stone carving, Blanket
making, Ceramics, Textiles, Handmade jewellery.
G) Ancillary Industries
Ancillary industries do the work of making parts and components used by heavy
engineering industries to shape their final product for ultimate consumption. In
this way the heavy industries get freed from the pressure of making every part
and component and in this way the capital is also saved by them so that they can
make investment somewhere else.
Some characteristics of ancillary industries are as follows:
 They supply a minimum 50 % of their production to heavy industries also
known as parent industries. The maximum capital they can invest is Rs. 1
Crore.
 The various segments which use ancillary units are for ex: - textile
machinery, agriculture machinery, railways, automobile industry,
shipbuilding industry, aircraft industry etc.
The advantages that heavy industries have due to ancillary industries are as
follows:

a. Innovation: Due to the existence of ancillary units the heavy industries save
much time for doing innovation in their products rather than simply making
smaller units.
b. Specialization: When parts or components are made by ancillary units, they
are specialized in that product but if this part is to be made in the parent
company it will be only its side-line operation.
c. No storage needed: The storage problem is solved as it is in the hands of
heavy industries to order only when they require.
d. Suppliers can be changed easily: Heavy industries can easily change the
suppliers (ancillary industries or units) of components or small parts if quality
of product decreases which is not easy in case they are made on their own. Also,
if there is a need to change their requirement, they can easily change their
suppliers.
e. Capital diversification: Heavy industries can use capital saved from while
taking off small parts from ancillary industries to research work in their product
and thus make more profit as that product will not be available in scarcity as
compared to smaller units.

H) Government Policies for Development and Promotion of Small- Scale

Industries in India
Some of the Government Policies for development and promotion of Small-Scale
Industries in India are: 1. Industrial Policy Resolution (IPR) 1948, 2. Industrial
Policy Resolution (IPR) 1956, 3. Industrial Policy Resolution (IPR) 1977, 4.
Industrial Policy Resolution (IPR) 1980
1. Industrial Policy Resolution (IPR) 1948:
It was well realized that small-scale industries are particularly suited for the
utilization of local resources and for creation of employment opportunities.
However, they have to face acute problems of raw materials, capital, skilled
labour, marketing, etc. since a long period of time. Therefore, emphasis was laid
in the IPR, 1948 that these problems of small-scale enterprises should be solved
by the Central Government with the cooperation of the State Governments. In
nutshell, the main thrust of IPR 1948, as far as small-scale enterprises were
concerned, was ‘protection.’
2. Industrial Policy Resolution (IPR) 1956:
he IPR 1956 provided that along with continuing policy support to the small
sector, it also aimed at to ensure that decentralised sector acquires sufficient
vitality to self-supporting and its development is integrated with that of large-
scale industry in the country. To mention, some 128 items were reserved for
exclusive production in the small-scale sector.
3. Industrial Policy Resolution (IPR) 1977:
and 5. Industrial Policy Resolution (IPR) 1990.
1. Cottage and Household Industries which provide self-employment on a large
scale.
2. Tiny sector incorporating investment in industrial units in plant and machinery
up to Rs. 1 lakh and situated in towns with a population of less than 50,000
according to 1971 Census.
3. Small-scale industries comprising of industrial units with an investment of up
to Rs. 10 lakhs and in case of ancillary units with an investment up to Rs. 15
lakhs.
4. Industrial Policy Resolution (IPR) 1980:
i. Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny
units, from Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs.
15 lakhs to Rs. 25 lakhs in case of ancillaries.
ii. Introduction of the concept of nucleus plants to replace the earlier scheme of
the District Industry Centres in each industrially backward district to promote the
maximum small-scale industries there.
iii. Promotion of village and rural industries to generate economic viability in the
villages well compatible with the environment.
5. Industrial Policy Resolution (IPR) 1990:
i. The investment ceiling in plant and machinery for small-scale industries (fixed
in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs and correspondingly, for
ancillary units from Rs. 45 lakhs to Rs. 75 lakhs.
ii. Investment ceiling for tiny units had been increased from Rs. 2 lakhs to Rs. 5
lakhs provided the unit is located in an area having a population of 50,000 as per
1981 Census.
iii. As many as 836 items were reserved for exclusive manufacture in small- scale
sector.
iv. A new scheme of Central Investment Subsidy exclusively for small-scale
sector in rural and backward areas capable of generating more employment at
lower cost of capital had been mooted and implemented.
v. With a view, to improve the competitiveness of the products manufactured in
the small- scale sector; programmes of technology up gradation will be
implemented under the umbrella of an apex Technology Development Centre in
Small Industries Development Organisation (SIDO).
vi. To ensure both adequate and timely flow of credit facilities for the small- scale
industries, a new apex bank known as ‘Small Industries Development Bank of
India (SIDBI)’ was established in 1990.
vii. Greater emphasis on training of women and youth under Entrepreneurship
Development Programme (EDP) and to establish a special cell in SIDO for this
purpose.
viii. Implementation of delicencing of all new units with investment of Rs. 25
crores in fixed assets in non-backward areas and Rs. 75 crores in centrally notified
backward areas. Similarly, delicensing shall be implemented in the case of 100%
Export Oriented Units (EOU) set up in Export Processing Zones (EPZ) up to an
investment ceiling of Rs. 75 lakhs.