Everything you need to know about the problems of small scale industries. The organisational pattern of small scale industries places them at a disadvantage vis-a-vis their well-organised rivals, i.e., the organised urban industries and large scale industries.
This disadvantage, in turn, gives rise to a number of problems with which these industries have to contend. As a prefatory note to these problems two observations need be made.
First, most of the problems of these industries arise from their being small in size. They seem to be caught in a vicious circle. Their small size prevents them from taking advantages which can accrue only to large units; lack of these advantages prevents them from moving up the ladder.
Secondly, most of the small industries refuse to move up the ladder, primarily because that prevents them from taking advantage of many benefits and incentives that are extended by the State only to the small units.
Some of the problems of small scale industries are:-
1. Problems of Finance 2. Problem of Raw Materials 3. Problems of Marketing 4. Dealing with Government Agencies 5. Export Difficulties 6. Inefficient Labour 7. Defective System of Supply of Raw Materials 8. Absence of Credit Facility 9. Lack of Machinery and Equipment 10. Huge Number of Bogus Small Firms
11. Unsuitable Location 12. Competition from Large Scale Units 13. Obsolete Technology 14. Absence of Organised Marketing Facility 15. Poor Recoveries 16. Weak Organisation and Management 17. Lack of Trained Personnel 18. External and Internal Problems 19. Teething Troubles.
Additionally, learn about the measures to promote small-scale industries.
Problems Faced by Small Scale Enterprises: Inefficient Labour, Problems of Finance, Absence of Credit Facility and a Few Others
Problems of Small Scale Industries – Problems of Finance, Raw Materials, Power, Export Difficulties and a Few Others (With Measures to Promote Small-Scale Industries)
The organisational pattern of small scale industries places them at a disadvantage vis-a-vis their well-organised rivals, i.e., the organised urban industries and large scale industries. This disadvantage, in turn, gives rise to a number of problems with which these industries have to contend. As a prefatory note to these problems two observations need be made.
First, most of the problems of these industries arise from their being small in size. They seem to be caught in a vicious circle. Their small size prevents them from taking advantages which can accrue only to large units; lack of these advantages prevents them from moving up the ladder.
Secondly, most of the small industries refuse to move up the ladder, primarily because that prevents them from taking advantage of many benefits and incentives that are extended by the State only to the small units.
With this prefatory note we discuss the major problems being faced by these industries in India.
1. Problems of Finance:
The most important problem faced by these industries is that of finance. Partly, the financial problem of small industries is a part of the wider problem of capital scarcity in the economy as a whole, and partly because of a peculiarity of a small-industry organisation.
The creditworthiness of small borrowers is generally weak, and therefore, they find themselves face to face with reluctant creditors who may be induced to lend only at higher rates of interest. Of late, there has been some improvement with a considerable formalisation of financial assistance.
However, the impact of a wide range of facilities offered has been uneven, contingent generally upon the abilities of the entrepreneur and the discretion of the authorities in financial institutions.
2. Problem of Raw Materials:
Another major difficulty facing the cottage and small industry is the procurement of raw materials. Scarcity of raw materials means a waste of productive capacity for the economy, and a loss for the unit. The problem has assumed the shape of- (i) an absolute scarcity, (ii) a poor quality of materials, and (iii) a high cost. Because of scarcity, competition has increased, and those small units competing with the large-scale producers have suffered severely.
Though small industries get help from the Government, yet with no special staff to liaise with the official agencies these are left with inadequate supplies and often have to resort to open market purchases at very high prices. This increases their cost of production and thus puts them in an adverse position vis-a-vis their better rivals.
3. Problem of Power:
The problem of shortage of power has become so widespread that for the last few years it has been among the most glaring and telling problems of the economy. But its impact is decidedly fatal on small producers; large industries manage to escape somehow. There are two aspects of the problem, one, power supply is not always, everywhere, available to the small industry on the mere asking and wherever it is available, it is rationed out, limited to a few hours in a day.
It means that if a small unit can manage to take advantage of the supply at fixed hours, well and good, otherwise, it will have to let its capacity go unutilised, thus adding to cost. Secondly, unlike large industries the small industry cannot afford to go in for alternatives, like installing own thermal units, because of heavy costs involved. A small unit has to manage as best it can within the available means.
4. Problems of Marketing:
Another major problem being faced by small industries is that of marketing. Most of the small industries, except a few urban-based units which act as ancillaries to the large industries, are forced to restrict their sales to the local market, tailoring their supplies to the local needs.
Not infrequently, a lack of demand and accumulating stocks leave with them no working capital to produce more raw materials and other physical resources to keep the production units moving. The inability to procure clientele from distant markets compels them to restrict their scale of operation and forgo economies of scale which a unit of an optimum size can derive.
5. Problems of Dealing with Government Agencies:
What is true of raw materials is true probably of assistance granted by the State to the industries. It is an admitted fact that no type of State assistance is available in abundance, or at least adequate enough in relation to needs. Therefore, there is a general practice to ration it out.
In the process of rationing there is ample scope for discrimination, made possible by Government rules, regulations and red-tapism. The large industries with resources at their command often manipulate to have the strings moved in their favour; undoubtedly, this is at the cost of the small industries which do not possess resources enough to have their viewpoint heard with favour and with overriding priorities.
6. Export Difficulties:
The systematic evolution of the small sector in India with its economies of operation particularly in the case of labor-intensive or batch-process items has contributed in a large measure to the gradual expansion and divergence of the country’s export pattern.
But in all this progress, the small-scale sector still faces problems which make it difficult for it to undertake exports in an organised and appreciable manner. So far very little organised effort seems to have been made by this sector towards organising specific export-oriented industries.
In addition to the major problems mentioned above, there are a few other problems also that merit immediate attention of the policy-makers. A significant problem facing the small industries is that when they grow from small-scale size and just pass the value limit of plant and machinery the earlier protection available to them is withdrawn.
They have to face open competition in every sphere of activity. Neither the banks nor the financial institutions look upon them with the benevolent attitude which they had hitherto enjoyed, and they come face to face which large and medium sized units which have powerful benefactors in the ICICI, IFC or the World Bank.
An industry, which has passed the small-scale limit, suddenly realises that it is not on the price preferential list. It has to compete openly with the large and medium-sized units. It would, therefore, be appropriate to consider several stages in the growth of a small-scale industry whereby the unit is encouraged and nourished with greater help at the start and lesser help as it progressively grows and which is eventually terminated when the unit has grown strong enough to face open competition.
Another major problem being faced by small industries is that of determining industrial relations. In the organised sector of industry, labour is well-organised; there exist established channels of negotiations between the employer and the employees. Any disturbance in a large unit also attracts the attention of the government.
But it is not so in a small unit. The direct communication between the employer and the employees is the only source of negotiation; if their relations are strained tempers boil up, spoiling the peace of the unit. This adversely affects the production and utilisation of installed capacity.
Another problem being faced, in more recent times, is the lack of accommodation. The entrepreneurs are being forced to set up their units in rented accommodation. However, such units are very often not in authorised industrial areas. Even if these happen to be in industrial areas, these entrepreneurs are denied registration since they were not the original allottees of the plots. Denial of registration means that they cannot avail of any of the benefits applicable to small scale units.
Another major problem that the small units face all over the country is on account of delayed payments by their large-sized customers. Government undertakings and departments are just as guilty in this respect as the industrial houses in the private sector.
The general pattern on which the small units function is that they purchase their raw materials against cash and effect their supplies to large houses on credit. Any delay in payments is only a test of patience for survival for them.
Similarly, the small units are also plagued by the problem of not so up-to-date technology and management practices.
Finally, there is the problem of high rate of mortality among units. Most of these units are marginal buyers of inputs and marginal sellers of output. Any factor that adversely affects the input or output situation tends to throw out a number of existing units from existence. Sickness among small units is a widespread malady.
The fact that small industries form an integral part of the Indian economy was grasped by the Government none-too-late. The Industrial Policy Resolution, 1948, and the subsequent Policy Statements had underlined in very clear terms the significance and role of small industries in the economy.
Over the last four decades, India has built up perhaps one of the world’s most elaborate small enterprise development programmes for providing assistance to individuals and institutions for setting up small scale enterprises, both in the urban and rural areas. The programmes include both negative and positive measures for assistance and are administered by a host of institutions at different levels of the country’s administration.
We shall divide into two parts-
1. First, we shall examine the institutional structure raised by the Government to assist industry.
2. Second, we shall examine the various assistance programmes implemented by the Government.
The development of small industries is a State subject. The State Director of Industries is the nodal agency for the implementation of various assistance programmes. The director operates through regional and district officers as also extension staff operating at the development block levels.
In order to give impetus to work, a number of Central and State level institutions have also sprung up to look after different aspects of the development programmes. First, there is the Small Industries Development Organisation (SIDO) headed by the Development Commissioner (Small Scale Industries) under the Central Ministry of Industry, which acts as a policy formulating, coordinating and monitoring agency for the development of small scale industries.
It also seeks to provide technical, economic and management consultancy services to small entrepreneurs, through a network of 25 Small Industries Service Institutes (SISI), 18 Branch Institutions, 41 extension centres, 4 regional testing centres and a number of training and production centres.
Secondly, there is another central agency, the National Small Industries Corporation (NSIC) whose major contribution so far has been in the areas of providing machinery to small enterprises on a hire-purchase basis. Its other functions include promotion of schemes for supplying raw materials and components to small enterprises and also assist them in marketing their products.
In the financial field also, a number of agencies are operating to meet the credit needs of the Small enterprises, both in the modern and traditional sectors. Apart from the Central and State Governments, whose budgetary support to small enterprises (especially to the cottage and traditional industries) is channelised through the specialised agencies in charge of development and promotion of these industries, the banking system (comprising the Reserve Bank of India, the commercial banks, the regional rural banks and the cooperative banks), the State Finance Corporations and National Small Industries Corporation and the State Small Industries Corporations meet the financial needs of the small sector.
In May 1978, the scheme of District Industries Centre was introduced. The avowed objective of this scheme was to provide a “focal point” for the development of small industries. The District Industries Centre were charged with the responsibility of providing all the services and support, required at a pre-investment, and post-investment stage to the small- scale entrepreneurs and institutions setting up modern small-scale units and traditional cottage industries.
The District Industries Centre provides and arranges a package of assistance and facilities for credit guidance, raw materials, training, marketing, etc. including the necessary help to unemployed educated young entrepreneurs in general and custom services.
The centres establish close links with Development Blocks on the one hand and with specialised institutions concerned with the development of small industries on the other. Since the introduction of the scheme in 1978, 427 District Industries Centres have been set up by the end of March 1993 to cover 431 districts of the country.
The programmes for promoting small enterprise development cover both negative and positive measures.
(a) The most important of the negative measures designed to promote small-scale industries is the policy of reservation of certain product lines for the small-scale sector. The policy was initiated in 1967 when 47 products were reserved for the small- scale sector and the large-scale industries were not allowed to enter the field under the industrial licensing system. With a view to giving statutory protection to the small-scale sector, the (DR) Act was amended in 1984 enabling the government to reserve and to peg the capacity of the medium and large scale units.
(b) The capacity in a few large industries has been pegged at the existing level, so as to augment labour intensive development in the small sector.
(c) Another negative measure is the Government decision not to give industrial licenses to new industrial units within the pre-specified units of large metropolitan cities so as to provide dispersal of industries to the less-congested areas.
The positive measures cover a wide range and are discussed below under the following headings:
a. Technical assistance,
b. Physical facilities,
c. Provision of raw materials,
d. Marketing assistance, and
e. Fiscal incentives.
а. Technical Assistance:
Technical assistance to small industry takes the form of identification of new lines of production, provision of operational schemes indicating therein the details of production techniques and equipment required, assistance in installing plant and machinery and in solving various production problems from time to time. For the small scale enterprise, plagued as it is by inadequate management and technical expertise, technical advice is a very vital form of assistance.
The elaborate institutional structure consisting of the State Directorate of Industries, the Small Industries Service Institutes and their associated facilities and small-scale industries development corporation provide this assistance at the local levels. The main focus of their activity is, however, on modern small-scale sector.
b. Physical Facilities:
The Industrial Estates programme under which built-up factory sheds with infrastructure facilities such as water, power and other common services are provided to small-scale entrepreneurs, have been in operation since 1955. The objective is to provide the group of industries located in an estate with the advantages of agglomeration and external economies so essential for the growth of the individual industrial units.
One of the stated objectives of the programme is to facilitate industrialisation of the economically backward and rural areas. To that extent, a number of estates have been constructed in the rural (with a population of less than 5,000) areas during the last thirty-five years.
c. Supply of Raw Materials:
The essential raw materials, particularly the scarce ones, are distributed through an allocation system. Small units have an innate handicap under this system as they have much less influence on and access to the authorities. In order to ensure the availability of the scarce raw materials to small industries the State Small-Scale Industries Corporations have been entrusted with the responsibility of distributing these materials through distribution depots located in different parts of each State.
This, by itself, does not provide any guarantee that the most efficient firms would get preference over the less efficient ones in the matter of allotment of raw materials. The new nucleus plants have now been brought in to coordinate the genuine needs of small-scale enterprises with the distribution system.
d. Marketing Assistance:
Marketing of their products is perhaps the most crucial problem facing the small-scale enterprises both in the modern and traditional sectors.
The assistance provided by the Government in the area has been in the following forms:
(1) Exclusive purchase of specific products of small-scale and cottage industries for the Government;
(2) Price preference (of a specified percentage) to small-scale enterprises in public purchase;
(3) Provision of quality control and testing facilities with a view to increasing the competitiveness of the products of small-scale units; and
(4) Assisting the products of small-scale enterprises (both modern and traditional) through opening sales emporia under the State-owned cooperatives and cooperative-assisted societies.
In spite of these facilities, the small enterprises are still plagued by the problem of marketing of their products, which is so vital for their very existence.
e. Fiscal Incentives:
Both the Central and State Governments have extended a number of fiscal incentives for the growth of small industries. Among these may be mentioned- (1) a tax holiday for new industrial undertakings; (2) investment allowance; (3) capital subsidy to industries in backward areas; (4) excise duty exemption; (5) a price preference over medium and large industries, etc.
Besides the above, the Government has implemented the rural Industries projects. The programme aimed at providing a subsidiary occupation to small and marginal farmers and upgrading the skill of the rural artisans through provision of training in the use of improved tools and equipment which were also supplied to the artisans under the scheme. The project was merged with the DIC programme.
Another very important aspect of small enterprise development in the backward areas has been the development of ancillaries around large public and private sector units. Many such large units, particularly capital intensive projects in the public sector, have been located in the rural and backward areas; basing upon their raw material resources small scale and ancillary industries have been promoted near such large projects for supplying components, spare parts, etc.
The promotion of these units has been encouraged through construction of industrial estates and by providing the entire range of assistance. Such a pattern of ancillary industries, it was originally envisaged, would prove beneficial to small industries, because the existence of a mother factory would guarantee those orders.
The other side of the picture, however, is the utter dependence of the ancillary industry for its survival on orders from the department. Indeed one’s fate is so closely tied to the moods of a single purchasing agent that industrialists’ fortunes rise and fall mercurially.
Problems of Small Scale Industries – External, Internal Problems and Teething Troubles
Small business units as compared to their large counterparts suffer from many inherent weaknesses. Although small units are relatively more flexible, they are highly vulnerable to set backs of any kind. A small unit enjoys the personal touch, but, in return, the entrepreneur has to be an all-purpose manager constantly hurried by crises after crises. Apart from these issues, there lie other fundamental weaknesses in the sector as well.
An entrepreneur has to constantly deal with problems present in business units. There is a chain of problems faced by entrepreneurs, especially the ones operating at small level. There are problems while establishing a unit, then problems confronting him when the enterprise is alive and kicking. In case it turns out to be sick, another set of problems start.
The problems confronted by industries may be divided into external and internal. As the name suggests, external problems include all those crises faced by a business unit which result from factors beyond the control of the entrepreneur, for instance regular supply of raw material, power and other infrastructural facilities is a must for smooth functioning of business units.
While internal problems are those which are not affected by external influences. These relate to problems affecting the industries related organization, structure, production channel, distribution channel, technical know-how, training, industrial relations and inadequacy of management, etc. Both external and internal problems may not be regarded as mutually exclusive but correlated to each other.
Both organized and unorganized small-scale industrial units face similar set of problems. It is just that the large units possess immense financial resources to effectively combat these troubles. On the other hand, the resources of small-scale sector are limited due to their weak financial base.
While the large sector can employ trained and experienced managers, the small industry, the proprietor or the partners, or if the unit is a company, its director or directors have to take care of all the problems.
The large sector possesses dominance in its industrial relations and they can use their power to influence its raw material suppliers, its customers, and at times even the government while its policy formulation whereas small entrepreneurs are helpless in this respect. He, therefore, has to look after the entire spectrum of problems despite the great limitations under which he functions.
The small and medium-scale industrial enterprises are not, however, without their problems, which are many and varied in nature, depending partly on the level of economic and social development reached by the countries.
The views expressed here are partly on discussions with planners’ policy markets, administrators and manufacturers concerned with the development of the sector during visits to a number of countries of South Asia and South-East Asia. In Indian context, small industrial problems also have two phases. Many of the problems are internal and these are compounded with external problems.
Some of the internal problems faced by small scale industries are:
(i) Small scale business units may be considered as one man show as most of these units are set up by individual promoters or entrepreneurs. All individuals come to market with their personal egos and ideas, proprietorial attitudes and ineffective delegation.
(ii) It is the mindset, courage and vision of the owners which define the rate of progress of the company and these factors are generally influenced by personnel and family requirements.
(iii) The dealings in these units are informed in nature. Also, the production mechanism is non-systematic. There is no planned outlay to build organizational structure. Hazy, non-transparent systems and procedures are followed to achieve unclear targets in absence of proper budget allocation.
(iv) There exists no real accountability and lack of professional expertise.
(v) Small units focus on raising short-term gains even at the cost of quality. Rather, a penny wise pound foolish approach.
(vi) There exists personal loyalty in small units but logical reasoning, career planning and motivation are generally not found. Also, pay scales are lower, goodwill and job security are less existent.
(vii) In many instances, business ideas and exposures are not up to date and adequate, rules and regulations are less understood, product and market knowledge are not up to the market, business remains confined within local or regional markets.
Even after facing such severe internal challenges, some of the business units survive and grow in the market primarily because of few excellent individuals, either the owner or a trusted lieutenant. Most of the players witness limited progress due to the incorrect approach followed by them and ineffective teamwork.
Some of the external problems and issues are discussed below:
(i) Surveys of the material and human resources of the countries to identify the regions or areas for the development of small-scale and medium- scale enterprises;
(ii) Identification of industrial projects for development;
(iii) Project preparation and evaluation;
(iv) Financial or credit support and investment promotion;
(v) Consultancy and counseling services;
(vi) Technology development and applications, such as the designing of prototype machines for products identified according to country resources and requirements;
(vii) Development of infrastructure of various kinds in the appropriate areas;
(viii) Entrepreneurship development;
(ix) Industrial training and skill formation;
(x) Linkages between large industries and small industries and the creation of subcontracting facilities at the national, regional and international levels;
(xi) Quality control and testing facilities;
(xii) Market promotion, both domestic and export;
(xiii) Procurement of new materials and equipment.
(xiv) Scientific and industrial research;
(xv) Information collection and dissemination of technology, markets, etc.;
(xvi) Identification of and assistance to enterprises which are experiencing difficulties;
(xvii) Management and organization or restructuring of small and/or medium-scale enterprises through various schemes;
(xviii) Productivity increases through modernization;
(xix) Incentive measures by industry and by area;
(xx) Local initiative;
(xxi) Creation of institutions and changes in prevailing institutional arrangements;
(xxii) Regional and international technical and financial assistance;
(xxiii) Cooperation among the developing countries.
A small industrialist has to continuously work hard to survive against the odds from conceiving a business idea to finally start a unit. The first step, viz. the preparation of a project report, calls for collection of data on the marketing of the product chosen, the availability of raw materials, the manufacturing techniques involved, the choice of machinery and location.
Large units possess huge financial resources to pay for fat fee to consultant to prepare project report but small entrepreneur has to carry out the report preparation process on his own due to his inability to pay to consultants.
Once the project report is prepared, the next issue on the problem list is to obtain the permission of and license from the Industries Department of the State, local bodies, etc. The officials at these offices often show unhelpful behaviour due to their pre-conceived different ideas, even government Policy is ineffective.
Persuading these government officials to perform their duties involves a lot of cost (time, money and energy). Also, the small entrepreneurs are generally unaware of the correct approach to avail facilities announced by central and state governments to support the sector.
Alternatively, they lack the communication skills to deal with well-organised, urbanized bureaucracy. Such handicaps restrict the optimal level of growth of the sector in India. The situation becomes worse in case the production process imported machinery or raw materials.
The small individual units have to obtain additional licenses while going through import procedures. This becomes difficult for the entrepreneurs, especially of the frequent changes in the import procedure in line with government’s policy. As a result of such practices, corruption finds place to grow in the economy.
This corruption is deep-routed at each and every level in the administrative system. Hence, it is only courageous, influential entrepreneurs who are successful to emerge with an image in the market. Though the government often states its support and commitment to the rapid development of small-scale industries, it holds them to random by implementing wrong policies.
For example, Government of Maharashtra distributed cement at Rs. 120 per bag, which was beyond the reach of small entrepreneurs. This gave impetus to stronger, financially stable entrepreneurs to procure cement at this rate and emerge as a bigger market player. Hence, the faulty policy supported the better off section instead of promoting entrepreneurial practices among the weaker section. Hence, establishing a unit involved enormous cost which cannot be borne by small players.
The industries in the country were delicensed in 1991 but the inspector raj in the sector is still prevalent as the sector is highly regulated. There are at least 40 inspectors who visit every business unit in the course of a month. These inspectors create issues to trouble the production process in order to raise bribes from producers. Producers paying for these informal fee or charges survive and others face harassment.
Small units come into existence to meet the demand of goods in the local markets, the neighboring or distant markets or in a combination of markets. Hence, they do not undertake a proper financial management procedure or a logical budget formulation. Most of the funds that are invested in the production process come either from small savings of the entrepreneurs or borrowed funds (mainly from relatives, friends or professional lenders).
Only a limited amount of loans are channelized through banks, financial institutions and the government channels. Such a pattern of borrowing funds from non-institutional sector is observed mainly due to the reluctance from the institutional set up to lend to these units, in their early stages of establishment as it involves high risk of repayment default.
Also, these small units do not possess large assets to mortgage for the loan from banking sector. The tedious, cumbersome procedure required to be fulfilled in order to obtain even a small loan discourages illiterate or semi-literate entrepreneurs to avail the facilities. And since the finance they acquire is on a small scale, entrepreneurs prefer to put in their own rather than borrowed funds.
For example, skilled persons, who become potential entrepreneurs of small industries in due course, have generally saved some money in the past while they were employed in other firms as wage workers. In fact, it is the ambition of most skilled workers that they should start their own business (especially in the engineering trade) after a few years of service, when they have gained the requisite experience, studied the market trends and accumulated some savings.
The previous employers or the masters of skilled-worker-entrepreneur generally support him in establishing himself depending upon his relationships with these masters. These mystery-entrepreneurs have already developed links in the local markets learning from their work experience in the field and market. This also helps them to procure cheap inputs and market their products.
In this way, a short description of financial resources for new entrepreneurs has been presented other than that of Government agencies. Once the unit is established and is in running condition, the entrepreneurs may then seek institutional borrowing for further expansion. However, the extent of this financial assistance sought depends highly upon the growth rate of these units and links developed with institutional lenders.
Many established small units hesitate to approach institutional lenders (including government agencies) because of their traditional tie-ups with non-institutional bodies and also because of their lack of training, especially in financial matters. This behaviour observed in small entrepreneurs is also reassured by the results of Moga study conducted under the supervision of Mrs. V.S. Mahajan.
The report of the study reveals that almost all the 300 odd small units covered under the study, engaged in production of agricultural implements were started with entrepreneur’s own funds and with funds borrowed from relatives and friends and that the nationalized banking sector and State Financial Corporations have contributed precious little.
Generally, small scale business units do not possess much financial resources to undertake investments in fixed assets. Also, since these units are not considered very credible among institutional agencies to lend money, these units can hardly raise loans from these sources. This handicaps these units to introduce modern machinery and tools in order to maintain well organized, fully-equipped factories.
This limited purchasing capacity of units restricts their purchase of good quality raw materials, use attractive packaging, own sales promotion teams or furnishes security deposits, whenever necessary. Even State Finance Corporations involve a long period of time to extend loans to them.
Even banks do not show prompt response to dispose loan applications. Even their assistance is hardly available for initial capital or for future expansion. It is only the working capital needs of the units which are met through banks’ assistance.
Apart from this, financial institutions extend loans based on a lot of information and data which these units generally fail to provide up to their satisfaction level. At various occasions, some small industrialists have been found to back out when they are unable to fulfill formalities for State Financial Corporations and banks. If only the bureaucracy were helpful, a major problem of the small industrialists would be solved.
Banks and other financial institutions have not shed their traditional attachment to liquidity and safety of resources. On their part, the small entrepreneurs have no knowledge of the availability of varied financial assistance from various sources. With proper education and training, the small entrepreneur may seek better financial assistance.
The choice of location, and getting water and power connections, also call for a great deal of effort on his part. It is not easy to decide on location, for the choice involved consideration of the availability of infrastructural facilities, the cost and tenure of acquisition, the availability of labour and proximity of the markets.
Once the location is chosen, one has to go ahead to select and purchase a plot of land and construct a shed or to take it on rent or on ownership basis. At the same time, arrangements have to be made to select and procure machinery and to get it installed.
With the increased pace of industrialization observed in country, each industrial unit has to face shortage of right type of raw materials at standard prices. The small entrepreneurs become miserable in this regard when they have to depend on the middlemen to procure raw materials on credit.
This results in higher costs, particularly in case of imported raw materials when the middlemen derive high profits from the transaction. As a result of this scenario in regard to raw materials, small entrepreneurs resort to use of cheap and inferior material that naturally affect the quality of finished products. Also, the production process is adversely affected by irregular supply of some specific raw materials.
The steel-based industries like bicycles and their spare parts, sewing machines and spare parts, automatic leaf springs, agricultural implements, etc., are the worst sufferers of problems in raw material procurement. The shortage of special steel, such as chrome-vanadium steel and chore-silicon steel is even, greater.
Manufacturers complain that since some companies supply steel only in wagonloads, they cannot obtain their requirements, liven when some limits can buy wagonloads, there have been complains of inordinate delays between placing of orders and receipt of supplies. It appears that, although the quota for small-scale industries has been raised, the actual supply has not matched the quota.
It has been alleged that it is the dealers who intentionally delay supplies till the expiry of the quota certificate and later sell this stock in open market at inflated prices in order to earn high profit margins. This leaves small entrepreneurs with no option but to purchase defective imported material or scrap metal from local dealers.
The irony of the situation is that they do not benefit from the quota issued to them and have to ultimately buy raw materials from black marketing at prohibitive prices thereby disturbing their cost calculations. In face of any infrastructural crises, the small sector is the first causality.
It is well evident by now that each industrialist should undertake proper study of raw material market. The immediate problems faced by an entrepreneur related to raw materials are selection of the appropriate quality and type of material as well as procuring them at economic prices. At various occasions, an industrialist has to get the quality check of each batch of the raw material in laboratory so as to maintain consistency in the product quality.
The availability of raw materials has been a great problem in our country. Some of them are chronically in short supply; some are very scarce at times and abundant at others; and there are great price variations. Besides these natural issues, manufacturers and suppliers at times create artificial scarcities in order to push up their prices.
The faulty procedure followed by government to formulate policies may also be held responsible for encouraging such practices among suppliers. The political issues and bureaucratic convenience generally lead to frequent changes in control policy that creates confusion in the system, adding to the miseries of buyers. In such circumstances, everyone tries to protect their interest by resorting or stock-piling for a rainy day or unforeseen circumstances.
The small scale rubber industry in India is facing serious troubles arising out of mismatch between demand and supply of raw materials, hence leading to unduly high prices. During the past five years, the consumption of natural rubber has gone up from 1.33 lakh tonnes to 1.73 lakh tonnes on an average by 8000 tonnes per annum; but the increase in domestic production has been for 1.43 lakh tones to 1.48 lakh tonnes-1000 tonnes an year.
Imports have been channeled through the State Trading Corporation, but they have failed to remedy the situation because of their inadequacy. The current price of RMA-1 grade, around Rs. 15,0000 tonnes, exceeds the government’s fixed price of Rs. 82,250 by a wide margin.
Unless the situation is rectified soon and concerted measure are taken on a long-term basis, widespread shortages of several consumer goods using rubber as a basic raw material would develop and exports would suffer.
Considering the serious shortages of raw materials, significant imports will have to continue from the industry for several years even after the continuous efforts of the production of natural rubber domestically. To meet these import demands, long-term arrangements should be made with some neighboring countries like Malaysia, Thailand, Indonesia, Vietnam and Sri Lanka. Besides, the industry will have to focus on creating reservoirs for these raw materials to ensure smooth flow regularly.
The rubber industry is strongly of the opinion that the State Trading Corporation has not been of much help in containing prices or in ensuring an adequate supply of rubber imports, therefore, should be canalized. Imports, by actual users, it has been stressed, ought to be exempted from custom duty.
Since domestic natural rubber does not attract any excise duty, imports too ought not to be subjected to a countervailing duty. In view of the attractive prices which the producers are able to receive for natural rubber, the case charged from the industry for the ostensible purpose of fostering the cultivation of rubber should be dispensed with.
The Estimated Committee of Parliament has revealed in its report and expressed grief on the shortages of raw materials faced by small-scale sector which obstructs the important role of employment generation and intensified development of new industries assigned to them.
Its 14th report of Industries Ministry laid emphasis the high priority to be accorded to availability of raw materials to the sector based upon its contribution to industrial production and national economy. As a matter of fact, these requirements should be the first charge on the availability of such materials, consistent with the needs of such other important and strategic sectors such as public utilities, defense and oil exploration.
According to the committee, the assessment of raw material requirement for the sector has not been properly done by government officials to whom the task was allocated. Hence, the committee recommends the government to conduct a proper survey to evaluate the demand of raw materials in the sector, especially for the scarce ones.
Also the committee reiterated the levying of excise duty at basic input stage or at the end product stage. In its 12th report on the action taken by the government on the recommendation made by it, the committee has stated that the government should try out such a scheme on an experimental basis, to begin with, for a selected number of commodities, before gradually extending it in the light of the experience gained.
It has favoured, a one-stage imposition of excise duty with a view to curb evasion of payments, reducing scope for harassment and minimizing administrative expenditure.
Technology is the case of all industries. Despite the Industrial policy in India promotes small-scale sector, the growth observed in the sector has not been up to the mark. One of the major handicaps of the small-scale sector has been the absence of latest technology which alone can ensure quality and high rate of productivity.
The small industrialist, therefore, should keep himself abreast of development in technology, so as to:
(i) Remain in the market;
(ii) Improve the quality of his products;
(iii) Lower the cost of production; and
(iv) Pass on the benefits to the consumers.
Unless he takes to this policy, he may soon find himself squeezed out of business. It is even advisable for the small entrepreneur to give a lead in research and development, which may not always be very expensive. Even without the facility of a sophisticated laboratory and gadgets, by using his intellectual capabilities and utilizing the knowledge gained by others, it is possible for him to stumble upon some new ideas, provided that he is development-oriented and is capable of innovation.
Marketing is another critical area for small-scale entrepreneurs.
Some of the problems faced by entrepreneurs while marketing these products may be enumerated below:
(i) Lack of standardization;
(ii) Poor designing;
(iii) Poor quality;
(iv) Poor quality control;
(v) Lack of precision;
(vi) Poor finish;
(vii) Lack of after-sale services;
(viii) Poor bargaining power;
(ix) Scale of production;
(x) Brand preferences;
(xi) Distribution contacts;
(xii) Lack of knowledge of marketing;
(xiv) Ignorance of potential markets;
(xv) Unfamiliarity with export activities-procedures and market know-how, and
(xvi) Financial weakness.
Small entrepreneurs cannot spend as much as large unit does to market their products due to their weak financial base. A rare exception is the pharmaceutical industry in which the gap between the manufacturing cost and the selling price is very large.
In such special situations, different marketing techniques are used which involves high costs, particularly the marketing cost of those drugs for which there is stiff competition. Small industries, in this regard are left with no option but to follow the same trend in order to survive in global markets.
Since most of the small units do not have a developed marketing channel for themselves, they sell their products to large selling houses for further sale. For instance, Voltas markets a range of products produced by small sector. Similarly, Bata does the same practices. As a result of these practices, small units invariably get a raw deal.
On the other hand, large companies make good money by selling the cheap small-sector goods at invariably high prices in market. The need of the hour is to increase the number of marketing consortia to assist small units with marketing strategies.
One of the most difficult problems faced by small entrepreneurs today is to recover revenues from sales. An established practice in the sector is the expectations of the buyers to obtain goods on credit from sellers. This is generally enforced upon by larger units on the smaller ones.
The initial practices were to obtain goods on credit for a period of a month or two but with time and tighter money markets, the term has been extended up to 12 months. At various occasions, the buyer may just get away with the products without even paying for it.
The financial assistance availed of by the small unit with great difficulty for a bank is taken advantage by its customers who do not pay their dues in time. In case banks extend further assistance, it is time bound. This problem has not been adhered to while formulating the New Bill Market Scheme by the Reserve Bank. Hence, now it is the responsibility of the central government to introduce such measures that curb these practices and save the interests of small entrepreneurs.
Human capital or labour resources play a significant role in operation of small scale industries and handling it becomes a difficult task due to the presence of human element in it. The industrialists also have to adhere to frequently changing labour laws as the laborers in today’s world are completely aware of their rights.
Hence, managing the factor requires a lot of patience and understanding. Unfortunately, the labourers engage themselves in unions which are further influenced by political parties and often create issues unnecessarily, even in areas where it is not required. To protect their interests, politicians often prevent a settlement of a dispute between labour and employers, and thus work against the interests of both.
As a result, it is imperative to evolve a code of conduct for trade unionists in order to protect interests of both labour and employers. This, in a way will add to general prosperity and well-being of all.
Special economic and industrial surveys must be undertaken in order to identify growth points or potentially expanding areas in the country and the industrial projects that are likely to develop successfully and will contribute to the country’s development. A report must be prepared from the data collected from these surveys.
Based on this report, an appraisal of the project must be done in all aspects-economic, marketing, financial, social, commercial, managerial, technological and environmental. In other words, a cost-benefit analysis of the projects, including the likely social impact, should be prepared.
To undertake such surveys and prepare reports on the data collected require high skills of experts in more than one discipline. A normal entrepreneur would not be able to undertake such a study. Beside the skills, an important additional requirement is the availability of a group of persons or entrepreneurs willing to initiate projects, take risks and put in capital (although financing agencies, are there to help with credit).
Another serious problem confronted by intended industrialists is to obtain information about available technologies and their suitability for the prospected project. Thus, technical advice, counseling and information become very important. It is not possible to initiate a project in any area without essential infrastructure such as, transport, power supply, etc. Besides this, provision of industrial training must also be focused.
A matter of importance in facilitating the development of small and medium-scale enterprises is to ensure the mutuality of interests and the linkages between the large enterprises and the small-scale enterprises so that the former offer a demand for the products of the latter.
A lot of times small scale units have been found to supply parts, components and accessories to large units. The pre-requisite to establish such a linkage is identification of the product needed by the large-scale industries and ensure their efficient provision.
For instance, in India which is industrially and technologically advanced among the developing countries, the National Small Industries Corporation has now given priority to identification and development of the types of products needed by the large scale industries and the designing of the prototype machines for producing them.
The most important area that seeks attention of the small scale industries is the quality of goods supplied by them. Until the quality of goods is targeted, large units will not demand them. The designing of machines, has, however, to be tailored to the local needs and resources available within the country.
Small sector in Hong Kong and Singapore works to supply raw materials to the large sector. Small and medium scale enterprises in Asia and Pacific region are also following the same trend. This of course, is in addition to the traditional small-scale and cottage enterprises which play an important role in the economies of the region.
Use and development of appropriate technology along with imparting technical skills play an important role while reorienting the small units as per the demands of large-scale industries.
Other factors are extremely important for the development of traditional small-scale and cottage enterprises in such countries such as Bangladesh, Nepal and Sri Lanka. These include upgradation of skills through industrial training, promotion of markets, and the procurement of raw materials (particularly those which must be imported) and of equipment.
The requirements of developing small and medium enterprises vary across different countries due to their varied levels of economic and industrial development.
1. Difficulty in obtaining credit from commercial banks because of their general inability to provide security.
2. Inability to offer liberal credit terms in the sale-of their products
3. Absence of management expertise. Often management is by one person who performs a number of functions usually with no formal training.
4. Difficulty in competing with imported products due to high-production costs.
5. Difficulty in competition from other local entrepreneurs in the same line of business competing for the limited local market.
6. Difficulty in obtaining industrial land in towns and cities. The shortage of industrial land is giving rise to more and more backward operations.
7. Under capitalization.
8. Difficulty in identifying appropriate technology and technical assistance.
9. The manner in which both the needs of the economy and linkage with existing industry can be served.
10. Bureaucratic red-tape and regulations.
11. Surveys of the material and human resources of the countries to identify the regions or areas for the development of small-scale and medium-scale industrial enterprises.
12. Identification of industrial projects for development.
13. Project preparation and evaluation.
14. Finance or credit support and investment promotion.
15. Consultancy and counseling services.
16. Technology development and applications such as, the designing of prototype machines for products identified according to country’s resources and requirements.
17. Development of infrastructure of various kinds in the appropriate areas.
18. Entrepreneurship development.
19. Industrial training and skill formation.
20. Linkages between large industries and small industries and the creation of sub-contraction facilities at the national, regional and international levels.
21. Quality control and testing facilities.
22. Market promotion, both domestic and export.
23. Scientific and industrial research.
24. Information collection and dissemination of technology, markets, etc.
25. Identification of and assistance to enterprises which are experiencing difficulties.
26. Management and reorganization or restructuring of small and/or medium- scale enterprises through various schemes.
27. Productivity increases through modernization.
28. Incentive measures, by industry and by area.
29. Local initiative.
30. Creation of institutions and changes in prevailing institutional arrangements.
31. Regional and international technical and financial assistance.
32. Cooperation among the developing countries.
Problems of Small Scale Industries – Insufficient Labour, Defective System of Supply of Raw Materials, Absence of Credit Facility, Unsuitable Location and a Few Others
Small Scale Industries have vest potentialities but they could not progress satisfactorily.
Their performance is not good as they face the following problems:
Problem # (i) 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 up with the challenges 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 constraint of inefficient labour force and unable to improve their productivity.
Problem # (ii) Defective System of Supply of Raw Materials:
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 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 utilise their full production capacity and it also increases their cost of production which adversely affect their competitive strength in the market.
Problem # (iii) Absence of Credit Facility:
Historically, SSls 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 benchmark rate of interest for banks is the price lending rates—a higher rate reflects the risks of lending to individual borrowers. Consequently, interest rates have risen sharply for small scale units. The priority sector lending scheme hardly softens the burden since not more than lakh can be borrowed under this scheme.
Besides, SSls are also unable to generate resources as they 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.
Problem # (iv) Lack of Machinery and Equipment:
SSls are also facing the problem of inferior supply of machinery and equipments etc. 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 arc engaged in the production of plant, machineries and equipments for small scale sector.
So they generally charge 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 performance of SSIs.
Problem # (v) Huge Number of Bogus Small Firms:
Government policy favours SSIs in terms of concessions, subsidy and incentives. This has prompted 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 large scale enterprises in availing raw materials, etc. at reduced rates. Availability of cheap finance also encourages the bogus firms to operate in the small scale sector.
Problem # (vi) 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 of infrastructural facility, the cost and tenure of acquisitions, availability of labour and the proximity of markets.
Small entrepreneurs are not 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.
Problem # (vii) Competition from Large Scale Units:
SSIs are facing the problem of competition from their 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 cost effective.
Problem # (viii) Obsolete Technology:
SSIs lack latest technology as they do not have any technological support from the Government and other technological institutes and laboratories. But in practice, technology alone can ensure quality and high level of productivity. R&D efforts are costly venture and SSIs 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.
Problem # (ix) Absence of Organised Marketing Facility:
Small Scale industries are unable to spend huge amount on the development of marketing facilities as they lack resources. Lack of standardisation, poor design and quality, lack of precision and proper finish, 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.
Problem # (x) Poor Recoveries:
It is general practice for buyers to avail credit facility from sellers. SSIs lack bargaining power in 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.
Problems of Small Scale Industries – Shortage of Material and Power, Lack of Adequate Finance, Out-Dated Technology, Inadequate Marketing Facilities and a Few Others
The managerial skills required for the management of small firms are not very much different from those necessary in a large scale business. The owner-manager of a small scale firm requires all the qualities of a good manager. As the business grows, the owner-manager finds it difficult to manage the firm efficiently. The lack of skilled personnel has been an important hurdle in the development of small business. Small scale firms cannot afford to train and develop specialized staff of their own.
So they have to face a number of managerial problems which are as follows:
1. Shortage of Material and Power:
Small scale units are under a handicap in obtaining raw materials of requisite quality at reasonable prices. Small scale industries also face shortage of power due to which they are unable to make full utilisation of plant capacity as they cannot afford to install their own power generating sets to ensure uninterrupted operations.
2. Lack of Adequate Finance:
All business firms require sufficient funds to meet their Fixed Capital and Working Capital requirements. Small scale units are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials and for meeting day-to-day expenses. Sometimes, they have to close down or curtail their operations due to shortage of funds.
3. Out-Dated Technology:
Majority of small scale units use old technology of production and out-dated machinery and equipment. They cannot afford new machines and cannot use new technology. They do not find it possible to conduct research and development on a continuing basis.
4. Inadequate Marketing Facilities:
Small scale units have to face several difficulties in the marketing and distribution of their products. They cannot afford to spend much on advertising, sales, personnel, transportation etc.
5. Weak Organisation and Management:
Small scale firms are generally managed by owners who very often do not possess the skills required for efficient management of the enterprise. There is lack of proper division of work.
6. Lack of Trained Personnel:
There is a dearth of small entrepreneurs who possess both motivation and competence to make a project viable and successful. They find it difficult to recruit, retain and motivate skilled managerial and technical personnel as they look for better opportunities in the large scale industries.