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Small-Scale Industries in India: Definition, Characteristic and Objectives! In Indian economy small-scale and cottage industries occupy an important place, because of their employment potential and their contribution to total industrial output and exports. Government of India has taken a number of steps to promote them. However, with the recent measures, small-scale and cottage industries facing both internal competition as well as external competition. There is no clear distinction between small-scale and cottage industries. However it is generally believed that cottage industry is one which is carried on wholly or primarily with the help of the members of the family. As against this, small-scale industry employs hired labour. Moreover industries are generally associated with agriculture and provide subsidiary employment in rural areas. As against this, small scale units are mainly located in urban areas as separate establishments. Definition: The official definitions of a small scale unit are as follows: (i) Small-Scale Industries: These are the industrial undertakings having fixed investment in plant and machinery, whether held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore. (ii) Ancillary Industries: These are industrial undertakings having fixed investment in plant and machinery not exceeding Rs. 1 crore engaged in or proposed to engage in, (a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or (b) The rendering of services supplying 30 percent of their production or services as the case may be, to other units for production of other articles. (iii) Tiny Units: These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23 lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns with population less than 50,000. (iv) Small-Scale Service Establishments: These mean enterprises engaged in personal or household services in rural areas and town with population not exceeding 50000 and having fixed investment in plant and machinery not exceeding Rs. 25 lakhs. (v) Household Industries: These cover artisans skilled craftsman and technicians who can work in their own houses if their work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and electrical gadgets are some examples of these industries. Characteristics of Small-Scale Industries: (i) Ownership: Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few individuals in partnership. (ii) Management and control: A small-scale unit is normally a one man show and even in case of partnership the activities are mainly carried out by the active partner and the rest are generally sleeping partners. These units are managed in a personalised fashion. The owner is activity involved in all the decisions concerning business. (iii) Area of operation: The area of operation of small units is generally localised catering to the local or regional demand. The overall resources at the disposal of small scale units are limited and as a result of this, it is forced to confine its activities to the local level. (iv) Technology: Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. Therefore, these units are more suited for economics where capital is scarce and there is abundant supply of labour. (v) Gestation period: Gestation period is that period after which teething problems are over and return on investment starts. Gestation period of small scale unit is less as compared to large scale unit. (vi) Flexibility: Small scale units as compared to large scale units are more change susceptible and highly reactive and responsive to socio-economic conditions. They are more flexible to adopt changes like new method of production, introduction of new products etc. (vii) Resources: Small scale units use local or indigenous resources and as such can be located anywhere subject to the availability of these resources like labour and raw materials. (viii) Dispersal of units: Small scale units use local resources and can be dispersed over a wide territory. The development of small scale units in rural and backward areas promotes more balanced regional development and can prevent the influx of job seekers from rural areas to cities. Objectives of Small Scale Industries: The objectives of small scale industries are: 1. To create more employment opportunities with less investment. 2. To remove economic backwardness of rural and less developed regions of the economy. 3. To reduce regional imbalances. 4. To mobilise and ensure optimum utilisation of unexploited resources of the country. 5. To improve standard of living of people. 6. To ensure equitable distribution of income and wealth. 7. To solve unemployment problem. 8. To attain self-reliance. 9. To adopt latest technology aimed at producing better quality products at lower costs. Related Articles: Engineering Industries in India (Heavy Machine, Structures, Industrial Machinery and Machines tools) Small Enterprises: Meaning and Definition of Small Enterprises Third Census of the Small-scale Sector Covering both Registered and Unregistered Manufacturing Units 7 Specialised Institution for Growth of Small Scale Industries in India Small Scale and Large Scale Production (Comparison) Need for Total Quality Management (TQM) in Small-Scale Enterprises The Advantages and Disadvantages of Small Scale Production 10 Tax Benefits available to Small-Scale Industries in India A Study in the financial Problems of Small industries SMAL L scale industries do not refer to the size of the industries but to the size of the firms whic h constitute them. There has been a great deal of controversy as to wha t should constitute their distinguishing criterion—whether it should be the amount of capital assets, or the number of workers employed or the use of power. If an y one of these criteri a were used as the measuring rod, it migh t produce misleading results. A highly mechanised large-scale factory ma y appear small when judged solely on the basis of the number of workers employed. The application of the 'number of workers' criterion has to be tempered by the stage of economic development attained by a country. In an industrially advanced count r y havin g an abundant supply of capital resources and employi ng capital intensive methods of production, the average size of factories on the basis of numbers of wor k people alone would appear to be smaller than that in backward underdeveloped , countries, where scarcity of capital and large supplies of labour make for labour intensive methods. The application of a composite criterion number of persons employed together wit h the amount of capital assets possessed by the individua l units may be a more reliable guide in distinguishing between the three broad groups of small, medium and large-scale plants. If figures of horse power per worke r were available, the average horsepower per worke r could clearly indicate the technical size of an average factory of a particula r country. Criterion of Capital Assets The Boar d of the Bombay State Financia l Corporation has defined, as a workin g formula , a small scale industr y as a unit havin g capital assets upto Rs 5 lakhs and a medium scale enterprise as one havin g capit a l assets of more than Rs 5 lakhs but less than Rs 20 lakhs. In adopti n g this definition the Bomba y Corporation has been guided mainl y by the desire to demarcate the frontiers between the Directorate of Industries an d itself on the one hand and the Centra l Corporation and itself on the othe r th e criterion o f capital assets has, however, been coupled wit h number employed in relation to the gran t of some loans by the State Governments. Thus small industries have been taken to be those industries whic h have a capital investment of less than Rs 5 lakhs and employ less than 50 persons when using power and less than 100 persons when not using power. A research worke r has also combined the criterio n of capital assets wit h tha t of number of workers employed but has argued in favour of units havin g capital assets upto Rs 1 lak h and employing upto 20 labourers as constitutin g small scale industries. Whichever of the above definitions m a y be accepted, it is clear that in the industria l structure of Indi a three more or less related sections of a. particula r industry may be broadly distinguished an organised sector represented by the large scale factories, a sector of small factories and a thir d sector of widely dispersed cottage industries. It is the second group of industries whose financial problems are the subject-matter of this study. Withi n this group some industries are run on factory scale and even fall withi n the purview of the Indian Factories Act; some are worke d as small entrepreneurial enterprises; and yet others are smaller still. These units mostly operate in urban centres and some of them are even ancillary to large industries, supplying their products against occasional orders. The existence of this category has also been recognised by the Karv e Committee which, inspite of its mai n preoccupation wit h the village industries, has recommended an allocation of Rs (35 crorcs for the development of such industries out of a tota l of nearly Rs 260 crores. This is undoubtedly a very small sum and indicates a lack of awareness of the significant role these industries can play in the Second Plan period. Proprietary Concerns Predominate The types and sources of credit and capita l utilised by small industries are largely determined by their basic characteristics and have to be sharply distinguished from those of large industries. Small industries are typically unincorporated concern s under owner-management, mostly proprietary or partnership establishments. A recent survey of small engineering industries of Howra h where 75% of small industries of West Benga l are located has clearly revealed the predominance of proprietary concerns. Out of 153 firms surveyed 77.1% are proprietary concerns, 19.0% are partnerships and only 3.9'4 are found to be either private or public limite d concerns. .Problems of Small Engineering Industries Bureau of Industria l Statistic- p 10 (Statistica l Survey Report'. It was found from a survey of 49 firms in West Benga l that, the majority of the plants wit h invested capital upto Rs 1 lak h are proprietary or partnership concerns. 50% of the firms are partnership concerns and 35.7% are proprietary ones. These small businesses are generally limited to a single localit y and as such are not known outside the community in which they operate. The success of such concerns hinges on the efficiency of one or a few persons; in the event of personnel changes, continuity of efficient management can hardly be guaranteed. Detailed informatio n is not readily available about their past financial performance nor about their present earnings potential. In short, the conventional standards fo r the proper appraisal of an investment project arc not. readily available to would-be investors. In such circumstances small localized concerns are unable to obtain their requirements of long-term loan capita l or equity capital through the organized securities market. Hence they usually rely for such funds upon friends, relatives, local investors or financial institutions, The preponderance of owned capita l and the insignificance of loan capital are clearly revealed by the surveys of small industries tha t have been recently carried out in India . In the case of the small engineering industries in Howrah , amon g the 153 firms surveyed, owned capita l comprised 50.5 %, share capital 45,8% a n d loan capita l only 3.7%, equity capita l thus accounting for 96.3% of their tota l assets. (ibid). The same predominance of equity capit a l is to be witnessed in the case of the small industries of Calcutta. In the case of 28 firms surveyed, having capital assets of not more tha n Rs 1 lakh, equity capital comprised 86% of the total of. business •assets. In the case of 22 medium sized concerns wit h capital assets between Rs 100,001 and Rs 15 lakhs it was 72%. Fo r the small concerns loan capital accounted for 8% of the total raised capital; whil e for t h e medium sired enterprises it was 25.6%. Some of the 22 medium sized concerns surveyed were public limite d companies but even then none of them raised its capital throug h sale of stocks and shares to the general public. Equity vs Debt Funds The size of a business has generall y been an importan t factor determining the relative use of equity and debt financing, Large sized concerns have greater accessibility to equity funds tha n small businesses. They can make public offerings of "equities" fa r more readily than smaller concerns. They can also build up equity through retention of earnings for they have a higher and steadier profitability. Hut the small concerns have high proportions of equity capital for entirely different reasons. Their inabilit y and reluctance to borrow on the terms currentl y quoted generally account for the insignificance of loan capital in such businesses. Various factors govern the nature of financing an enterprise and therefore the equity-dept relationship. The choice between equity and debt funds is influenced not only by the degree of accessibility to the securities markets but also by taxation policy and entrepreneuria l expectations regarding the future earnings of the enterprise. The wide range of options available to large concerns wit h respect, to the adjustment of their financial structure is inevitably denied to the small industries. (Jacoby and Saulnier, Business Finance and Bunkin g pp. 33-37.) The type of credit obtained by the small businesses is also determined by their ability or otherwise to satisfy the standards of creditworthiness as conceived by the lenders. Unsecured bank credit is easily available to customers who are considered by the banks to be the best credit risks. Large companies wit h their detailed balance sheets, frequent income statements and country-wide basis of operations are sometimes able to obtain bank loans withou t any security . Lenders may not insist upon collatera l because they realize tha t too much insistence wil l drive the valued customer into the arms of a riva l source of credit. Wit h inadequate financial statements, limite d Sources of credit and no extended, record of successful working , small industria l concerns are in a difficult position in this respect. They find it impossible to secure a loan of the desired amount withou t sufficient collateral. Hence otherwise sound a n d profitable concerns are unable to obtain their requirements from banks on as favourable terms as their conditions ma y warrant. They have to depend on more expensive types of secured bank loans, whil e the large concerns are often able to obtain low cost unsecured loans. The degree of risk is not the only, or necessarily the major factor in determining the interest cost of bank loans to small industry. Highe r lending cost rathe r than greater lending risk is often the crucial factor in this interest differential. The cost of keeping track of small loans or small investments in small business is very high. The cost of in - vestigating and servicing many small loans is greater than tha t of a single large loan. Bank Loans in USA In our country the available data relatin g to business loans of commercia l banks throw no light on the amount or number of such loans to various sizes of business. In the USA interesting studies have been made wit h reference to the business loans of member banks where breakdown figures in respect of various sizes of industry have been obtained. According to a survey carried out in 1946 it is found tha t advances to small business accounted for ¾ the of the number and 1/ath of the amount of all business loans of member banks. In the case of the smaller banks 92%; of the number and 82% of all outstanding business loans represented advances to small business. (C H Schmidt. Member Hank Loans to Small Business Federal Reserve Bulletin, August 1947.) An important aspect of bank lending to business as revealed by these studies in the USA is that the character of business lending of banks of different sizes is related to the size of the business of the borrower. Large banks are inclined to whil e small banks nave the small concerns as their principa l customers. The different economic and geographical characteristics of small and large lenders and borrowers account to a considerable extent for this direct variation of size of bank wit h size of business. The credit needs of small local enterprises are best met by the smaller banks in the particula r localities; while the larger banks located in the metropolitan areas have the necessary equipment to handle the credit needs of large companies operatin g throughout, the country. More than 70% of the dollar volume of loans of banks wit h tota l depostis of less than $2 millio n each was made to business enterprises wit h assets of less than $50,000, while 75% of the dollar volume of loans of banks wit h tota l deposits of $500 millio n went to business concerns wit h tota l assets of $5 millio n or more. The size factor is also found to affect the industria l distribution of the loans of different size banks. Smaller banks generally lend to small manufacturers of food, tobacco etc.. small service establishments and small retailers, while large manufacturers in ,the food, liquor, automobile, tobacco, petroleum industries and public utilities are serviced! by the larger banks. (A R Koch, Business Loans by Member Banks, Federal Reserve Bulletin, March, 1947.). |
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