Entrepreneurship Development

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Module 3
Meaning and Definition of Small Business / Small enterprise
The definition of small-scale industry is an important aspect of government policy as
it identifies target groups. There is no legal or clear-cut definition of small industry
in many countries. The definition of small enterprises varies from one country to
another. In most of the countries of the world, the criterion for defining a small
enterprise is related to the size of employment. In some countries both employment
and investment are taken into account. Usually, firms may be classified as either
small, medium or large depending upon various criteria like employment, value of
total assets, sales or output, type of activities, amount of investment, etc. The two
main criteria used to define small business are as follows:

1. Size of the business:

Size of the business refers to the nature of activity and scale of operation. It may be
measured in the following ways:
a) Capital investment
b) Value of total assets
c) Investment in fixed assets
d) Number of persons employed.
e) Volume of production and sales

2. Qualitative criteria
In addition to the size of the business, qualitative characteristics may also be used
to differentiate small business from big business. The qualitative characteristics are:
a) Nature of ownership
b) Nature of management
c) Technology
d) Area of operation

In India the “size of business criterion” is used as a base of defining small scale
business units. The definition of small business in India has changed over the years.
During the year 1991, the Government of India has defined a Small Scale Industrial
Unit (SSI) as “a unit or an undertaking having an investment in plant and machinery
of not more than Rs. 60 lakhs and not more than Rs.75 lakhs in case of ancillary
units.” Now the Government of India has raised the limit to Rs.3 Crores. In 1996, the
official definition of small business was as follows:

1. 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. 60 lakhs. However, this limit will be Rs. 75 lakhs in case of
undertakings which undertake to export 30% or more of their annual production by
the third year.

2. Ancillary Industries
These are industrial undertakings having fixed investment in plant and machinery
not exceeding Rs. 75 lakhs engaged in or propose to engage in:
a) the manufacture of parts, components, sub-assemblies, etc. or
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b) the rendering of services supplying 30% of their production or services, as

the case may be to other units of production of other articles; provided that
the small scale or ancillary units shall not be a subsidiary of or owned by
another industrial undertaking.

3. Tiny Units
These refer to undertaking having fixed investment in plant and machinery not
exceeding Rs. 5 lakhs. These also include undertakings providing services such as
laundry, Xeroxing, repairs and maintenance of customer equipment and machinery,
hatching and poultry, etc. located in towns with population less than 50,000 as per
1981 census.

4. Small Scale Service Establishments

These mean enterprises engaged in personal or household services in rural areas
and towns with population not exceeding 5 lakhs and having fixed investment in
plant and machinery not exceeding Rs.2 lakhs.

5. Household Industries
These cover artisans, skilled craftsmen and technicians who can work in their own
houses if their work requires less than 300 square feet space, less than one KW
power, less than 5 workers and no pollution is caused. Eg. Handicrafts, toys, dolls,
plastic products etc.

Types of Small Business

1) Manufacturing Industries: Industries producing complete articles for direct

consumption and also processing industries, like village and cottage
industries, Handlooms and handicrafts, modem small scale industries such as
small scale units, ancillary units and tiny units.
2) Feeder industries: Specializing in certain types of products and services,
Eg. Casting, electroplating, welding, etc.
3) Servicing Industries: Covering light repair shops necessary to maintain
mechanical equipment.
4) Mining or quarrying
5) Ancillary to large industries, producing parts and components and
rendering services. Eg. Professional services, commercial services and
personal services.

Definition of Micro, Small and Medium Enterprises in India (2014-15

Annual Report)
Micro, small and medium enterprises as per MSMED Act, 2006 are defined based on
their investment in plant and machinery (for manufacturing enterprise) and on
equipment for enterprises providing or rendering services. The present ceilings on
investment for enterprises to be classified as micro, small and medium enterprises
are as follows:

Classificat Manufacturing Enterprises Service Enterprises

ion (Investment limit in Plant & (Investment limit in
Machinery) equipment)
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Micro Less than Rs. 25 lakh Rs. 10 lakh

Small More than 25 lakh less than Rs. Rs 2 crore
5 crore
Medium More than 5 crore less than Rs Rs 5 crore
10 crore

New MSME definition based on investment and turnover (June 2020)

Classificatio
n Micro Small Medium

Investment Investment
< Rs 1 < Rs 10 Investment <
crore and crore and Rs 20 crore
Manufacturing turnover < turnover < and turnover
& services Rs 5 crore Rs 50 crore < Rs 100 crore

Village industries - any industry located in a rural area which produces any goods
or renders any service with or without the use of power and in which the fixed
capital investment per head of artisan or worker does not exceed Rs. 1 lakh (Rs. 1,
50,000/- in case of village industry located in a hilly area) or such other sum as
may, by notification in the Official Gazette, be specified from time to time by the
Central Government”. (KVIC, Act, 1956)

Role of Small Scale Industries in Indian Economy

It is estimated that industries belonging to the small scale and village sectors in
India have accounted for 40% of the gross turn over in the manufacturing sector
and about 34% of the total exports. The small scale and village sector industries are
now comprising of about 25.71 lakh units.
They are providing employment to more than 146.56 lakh persons. They have
already manufactured goods valued at Rs. 2,93,990 crores and exported goods
worth Rs. 28,000 crores. Thus, it is evident that these industries are playing a
significant role in the Indian economy. The main characteristics that lead these
industries to play such a role are enumerated as follows:

1) Capital intensity: Small scale industries are capital light and so they are
most suited to an economy like that of India where capital is inadequate.
2) Employment potential: They are labour intensive and so they can provide
plenty of employment opportunities. This characteristic makes them more
suitable to a country like India which is seriously being confronted with the
problem of unemployment. It is found that an investment of Rs. One lakh in a
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large scale industry will provide employment only for 4 persons, while the
same investment in small scale industry will provide employment to 45
persons. So, small scale industries are more suited to rural areas where the
problem of seasonal employment poises a very severe threat.
3) Quick yielding: The gestation period of small scale industries is considerably
shorter than that of large scale enterprises. In other words, small scale units
are quick yielding in nature than large scale units.
4) Controlled price level: The problems of inflation and deflation are faced by
small scale industries in a better way. Periods of inflation are successfully
tided over by them by providing essential commodities to customers at the
shortest possible time and thereby bringing the price level under control.
Small scale industries, having low investment, are the least affected by
depression in the economy.
5) Skill formation: Since the small scale enterprises are skill-light, inevitability
of sophisticated technology is out of question and any person with an
average basic training can become a successful entrepreneur of a small
business.
6) Low import intensity: Small scale industries are import -light. In other
words, they need mostly machines which are manufactured indigenously. So,
they are most suited to a country like India where the foreign exchange
reserves are scarce.
7) Balanced regional development: The tendency of large scale
manufacturing concerns to get concentrated in the suburbs of metropolitan
cities and big towns is a problem which causes severe head ache to the
planners of India, because it leads to non-equitable dispersal of industries
and disproportional concentration of economic power which in its turn leads
to regional imbalances. But, small scale industries are rather wide spread and
hence useful for achieving the aim of the planners to effect balanced
development and upliftment of backward rural areas. Development of small
scale industries is causative to reduce concentration of economic power.
8) Promotion of rural development: India’s economy being mainly agrarian,
people living in rural areas have a tendency to keep their savings dormant
than investing them in large scale business. Since small scale Industries are
mostly located in places where people live, they can easily tempt the people
to invest their savings profitably in those industries.
9) Proper utilization of local resources: Small industries depends mostly on
labour and raw materials that are available locally. So proper utilization of
local resources is made possible.
10) Prevention of unhealthy urbanization: Development of small scale
industries can effectively check the mass migration of rural labour from
villages to urban areas, due to seasonal unemployment and low wages in the
agricultural sector.
11) Environment protection: The most important characteristic of small
scale industries are their ability to reduce pollution and to protect
environment.
12) Creation of self-employment: SSI units have helped to develop a
class of entrepreneurs. These units facilitate self-employment and self-
reliance in the society.
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13) Support to large scale industries: Another highly useful role of SSI
in India is the great support that the development of large scale industries
can obtained from small industries.
14) Export potential: The SSI offers vast opportunities to promote
exports. These industries are capable of producing goods with high labour
contents with greater comparative cost advantage.
15) Even distribution of income and wealth: Small scale and cottage
industries have the additional advantage that, with a decentralized
industries, they secure a more even distribution of income and wealth.

Setting up of a Small Scale Industry

The procedure for setting up a small scale industrial unit is given below:
1) Selection of the product and preparation of project report.
2) Selection of site.
3) Selection of forms of ownership.
4) Direct purchase of land or obtaining land/shed in the industrial estates.
5) Registration in case of company or partnership type of organisation.
6) Agreement with collaborator, if any.
7) Obtaining letter of intent or provisional registration of SSI.
8) Preparation of detailed project feasibility report
9) Obtaining import license, customs, clearance, etc.
10) Applying for power connection to KSEB.
11) Sanction by financial institutions.
12) Start of civil Construction work after obtaining clearance from local
authority or town planning officer.
13) Obtaining letter of credit for imported machinery, etc.
14) Selection of personnel, both administrative and technical.
15) Completion of civil works.
16) Delivery of imported and indigenous machinery.
17) Erection of machinery and equipment.
18) Obtaining clearance from pollution control board.
19) Obtain industrial license or permanent SSI registration.
20) Arrangement of raw materials and unskilled labour.
21) Apply for getting grants/subsidies from the government.
22) Trial run and commissioning of plant.
23) Start of commercial production.
24) Arrangement for sale of products.
25) Registration of designs and trademarks.

A small entrepreneur can obtain the necessary information and guidance from the
Government Departments, Organizations and Agencies like Director of Industries
and Commerce, Manager of District Industries Centers Kerala State Industrial
Development Corporation, etc.

Identification of location
Primary Factors:

1. Availability of Raw Materials:

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2. Availability of labour:
3. Availability of Power and Fuel:
4. Availability of Transport and Communication facilities:
5. Nearness to Market:

Secondary Factors:

1. Nearness to adequate Banking and credit facilities:

2. Facilities of Repairs:
3. Firefighting facilities:
4. Soil, Climate and Topography of a place:
5. Government policies and regulations:
6. Momentum of an early start:
7. Industrial atmosphere:
8. Personal factors:
9. Tastes and preferences of people:
10.Political and economic situation:
11.Possibilities of future expansion:
12.Existence of competitive industries:
13.Availability of research facilities:

Advantages of Small Scale business

1. Close Supervision:
2. Nature of Demand:
3. More Employment:
4. Need of small Capital:
5. Direct Relation between the Workers and the Employers:
6. Direct Relation between the Customers and the Producers:
7. Easy Management:
8. Freedom of Work:
9. External Economies:
10. No Evils of Large Scale Production:
11. Other Advantages:

Disadvantages of Small Scale Business:

1. High Cost of Production:

2. Wastage of By-products:
3. Less Use of Machines:
4. Lack of Division of Labour:
5. Difficulty in Getting Loans:
6. Difficult to Face Economic Crisis:
7. Costly Raw Materials:
8. Lack of Standardized Goods:
9. Old Techniques:
10. Lack of Research:
11. Difficult to Face Competition with Large Scale Producers:
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Identification of location
Factors affecting the location of an industrial unit are:

1. Primary factors
2. Secondary factors

Decision with regard to location of an industrial unit involves a careful study of

many factors. Proper and right choice of location is instrumental in future success of
the business.

Primary Factors:

1. Availability of Raw Materials:

Raw material form major proportion of the finished product. Unrestricted and
regular supply of raw material is very necessary for carrying out unrestricted
production. Nearness to the source of raw material is very economical for an
industrial unit. On account of this consideration many industries have been set up
near the source of supply of raw material.

Sugar factories in Uttar Pradesh, Textile units in Maharashtra and Gujarat, Cement
factories in Madhya Pradesh and Jute industry in West-Bengal. Nearness to raw
material is important in case of heavy and bulky materials having lesser value such
as coal and other weight losing materials.

Raw materials can be divided into three:

(a) raw materials which are weight losing and cannot be preserved for a long time
e.g., fruits for juice making (b) raw materials which are bulky, heavy and weight
losing in nature, like iron ore etc. (c) raw materials which are not heavy and can be
preserved for a longer period of time, e.g., raw cotton.

Industry using third type of raw material can be located anywhere. Alford Weber has
given another type of raw materials called ubiquitous like clay sand and water
which are found everywhere and as such do not affect the location of an industry.

Another important point to be kept in mind that only nearness of raw materials is
not sufficient; it must also be easily accessible. Adequate transportation facilities
should be available for carrying the material from the source of supply. A guiding
principle should be followed in this regard i.e., “higher the proposition of the cost of
raw materials to the total cost, the greater is the possibility of choosing a site near
the source of raw materials.”

2. Availability of labour:

Labour cost is one of the main constituents of the total cost of production. It
influences the total cost of production. Labour implies both the skilled and unskilled
workers needed for different types of activities. The supply of un-skilled labour does
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not create any serious problem because such labour is available everywhere. Skilled
labour is available only at specific centers.

Industries requiring highly skilled labour have to select such sites which ensure
adequate and regular supply of required labour. Availability of skilled and efficient
labour is mainly responsible for the development of various industries in a particular
region e.g., cotton textile industry of Great Britain developed at Lancashire mainly
on account of availability efficient labour.

On account of mobility of labour, this factor does not materially affect the location
of an industrial unit. The labour can be attracted by providing various facilities and
incentives like housing, canteen, rest rooms, incentive wage plans etc.

In actual practice, if required skilled labour is not available in a particular region, the
available labour can be trained in the required skill or alternatively skilled and
trained labour can be migrated from other regions to the plant. But both these
methods are time consuming and involve a lot of expenditure which ultimately
increase the cost of production.

3. Availability of Power and Fuel:

Availability of cheap power and fuel supply sources is another decisive factor in
selecting proper location of an industrial unit. In the past, coal was the main sources
of power supply for various types of heavy and large scale industries like iron and
steel, cement and aluminum etc., the industrial units which used to be located near
coal supplying centers.

But at present, there are several other sources of power, e.g. electricity, gas, oil and
water power etc. On account of these various alternative sources of power supply,
coal, as a main source of power is getting lesser recognition. Rapid development of
hydro-electric power has provided wider choice for location of industrial units even
at far flung and remote areas. Modern industrialization could not have been possible
without the growth of hydroelectric generating units.

4. Availability of Transport and Communication facilities:

Adequate and quick facilities of transport must be kept in mind for quick delivery of
raw materials to the factory and finished products to the market. Kimball and
Kimball have rightly pointed out that “The ideal plant is one centrally located and
directly served by water, rail, trucking and air facilities”.

In certain type of industries transportation is the sole factor which is taken into
consideration in deciding location of an industrial unit. For example, a cement
factory is always situated near the source of lime stone which is carried usually with
the help of trolleys to the factory.

Transportation is the life line of modern industry. The basic aim of selecting a
particular mode of transportation should be minimum transportation cost with
maximum transportation service. An industry should be located in the areas where
there are already developed means of transportation.
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In modern times different modes of transportation and their increased efficiency

and flexibility have provided ample choice to the industrialists in the matter of
location. Besides transportation, communication services are also used to be of
immense importance in deciding the location of an industrial unit. A businessman
needs regular information with regard to changes in the price of raw materials and
finished products and other valuable information. On account of development of
internet, mobile phones etc., this factor does not affect the location of plant now a
days.

5. Nearness to Market:

Market greatly affects the establishment of an industrial unit and is in fact,

dominant factor in locating an industrial unit in modern times. The production of
goods is undertaken with the aim of selling them quickly which is possible only on
account of nearness to market.

Industries using pure raw material (which do not lose their weight when turned into
finished products) may be situated away from the source of such raw materials. For
example, wool is primarily produced in Australia, but woollen hosieries are found
throughout the world.

On the other hand, market as a factor of location will not affect much the location of
industries using heavy and weight losing raw material. For example, iron and textile
units are situated near the coal supplying centers.

Similarly sugar factories are located very near the sources of raw materials.
Nearness to market is important in case of industries producing consumer goods
rather producers’ goods, this is because production of consumer goods require
constant adjustment of manufacturing programme on account of quick changes in
the tastes, preferences and buying habits of the consumers.

Markets may be national or regional. In case where the demand of the product is on
regional basis, the factory is usually situated near the major market for the product.
For example, a publishing house publishing Punjabi books cannot be located in
Calcutta or Bombay. It’s ideal location would be Jalandhar, which is a leading
publishing centre in Punjab.

Secondary Factors:

Besides the above primary factors, there are some other factors which have bearing
on the location of industries.

Following factors can be explained under this category:

1. Nearness to adequate Banking and credit facilities:

For the efficient and smooth running of the business and for meeting working
capital requirements, banking facilities play an important role. Nearness to banks
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and other financial institutions is an important consideration now-a-days in deciding

location of an industrial unit.

This is because banking has become indispensable part of modern business. In case
of rural and small scale industries, banks and financial institutions play an important
role and provide invaluable service in order to cater their financial needs.

2. Facilities of Repairs:

In order to maintain uninterrupted production, facilities with regard to repairs of

machinery, plant and other components (in case of breakdown), must be kept in
mind before setting a factory. A large scale concern can afford to install its own
repair workshops, whereas small concerns may rely on various repair shops working
near the factory.

3. Firefighting facilities:

In order to protect the factory against the risk of fire, adequate firefighting facilities
must be provided. Internal arrangements pertaining to fire extinguishers, sand
buckets and other firefighting equipment must be arranged. In case there arises the
necessity of calling fire brigades, proper preparations must be made for the same.

4. Soil, Climate and Topography of a place:

Soil and climatic conditions are very important for the establishment of various type
of industries like tea, coffee, rubber and tobacco. On account of this factor, jute
industry developed in West- Bengal and tea industry in Assam. Similarly topography
(e.g., hilly or rocky surface) of a place also influences location of an industry.

Areas which are frequently subjected to earthquakes and other natural calamities
may not attract many industries. Climate of a place also considerably affects the
efficiency of workers. Efficient workers are found in cool climatic regions.

On the other hand workers from tropical regions are not generally so efficient. This
also affects the establishment of an industrial unit. Another important point in this
regard is that means of transportation and communication are more in plains rather
than in hilly areas. That is why industries have developed largely in plains rather
than in hilly areas.

5. Government policies and regulations:

Industrial Development and Regulation Act of 1951 laid down clearly certain rules,
regulations and formalities to be complied before setting up an industrial unit. Prior
permission and licence is necessary under the Act before the setting up of a new
industrial unit. Certain cash incentives and concessions are also given by Govt, in
order to promote a particular industry in a particular region.

A careful thought to all these rules, regulations and provisions of Act must be given
before the establishment of an industrial unit. In order to develop industries on
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sound lines, Govt, has declared certain areas as industrially backward or special
economic zones.

Certain concession and subsidies like cheap land, power and tax concession and
subsidised raw materials etc., are provided in order to develop that particular area.
Such measures are undertaken by the Govt, in order to ensure balanced and
regional growth of industries in India.

6. Momentum of an early start:

This is another important factor affecting industrial location. A few industries start at
a place and gradually other similar type of industries start at that particular place.
For example, at Manimajra (a small town near Chandigarh) a few small automobile
spare parts shops started about two decades back, but now a fully fledged
automobile market has developed in that area. Similarly, at Ludhiana a few hosiery
units started in the beginning, now Ludhiana has become a very big hosiery articles
producing centre in India.

Carpet industry developed gradually at Mirjapur district of Uttar Pradesh. There are
various reasons responsible for such a concentration of industries in a particular
region viz., (i) availability of required type of labour in a particular region, (ii)
facilities of repairs and maintenance on account of many repair shops and
workshops operating in the areas, (iii) Availability of transport, communication,
banking and insurance facilities, (iv) Facilities of managerial consultations and
advice are also available.

7. Industrial atmosphere:

This factor refers to the thinking of the people with regard to a particular industry in
a particular area. They involve themselves completely in the intricacies and various
operations of the machines and implements being used in the industry.

There is a complete industrial atmosphere. Carpet industry at Bhadohi and Mirzapur

serves a very good example of this kind. Major population of these cities is engaged
in carpet processing, carpet washing, carpet weaving and carpet finishing.

Not only men, but women and children have also engaged themselves in this
industry directly or indirectly. Similarly, at Bombay film industry has developed. It is
easier and cheaper to produce a film in Bombay than in any other part of the
country.

8. Personal factors:

Sometimes personal likes had dislikes also influence location of a particular

industrial unit. Henry Ford started manufacturing motor cars in Detroit because he
belonged to that place. Certain merchants belonging to Ahmedabad have made that
place a leading textile centre of India. But such personal likes and dislikes cannot
influence location of an industrial unit in the long run.

9. Tastes and preferences of people:

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Before establishing an industrial unit in a particular region, buying habits, tastes,

likes and dislikes of people in that area must be taken into consideration.
Purchasing power of the people and composition of population in that region should
be carefully studied. These studies and surveys render valuable information which
is greatly helpful in establishing and industrial unit in particular region.

10. Political and economic situation:

Political harmony and peace in a particular region encourage the establishment of

industrial units. On the other hand, disturbed political and economic set up
discourages the growth of industries in the region.

On account of Naxalites movement in West Bengal, Industries started moving out of

West Bengal. Similarly is the case in certain other states where, on account of
political disturbances, manufacturers have started thinking to settle elsewhere and
further industrial expansion has been greatly affected.

11. Possibilities of future expansion:

The area for location should be such as to provide all possible opportunities for
future development and expansion of the industrial unit without involving extra
cost. Every industrial undertaking is established with the aim to expand in future.

12. Existence of competitive industries:

Limited and healthy competition encourages the growth of industrial units in a

particular region. On the other hand, unhealthy competition retards the industrial
growth in a region.

13. Availability of research facilities:

The main aim of any industrial undertaking is to have maximum production with
minimum cost. Constant research and experimentation is undertaken to develop
products and improved methods of production.

Large concerns can afford to have a separate research department to meet this
end, but in case of small and medium industrial units such facilities may be
provided by specialized scientific and research institutions. Existence of such
specialized institutions must be kept in mind before starting an industrial unit.

Advantages and Disadvantages of Small Scale business

Advantages of Small Scale business

1. Close Supervision:

The small producer can himself supervise the minutest details of the business.
Nobody is allowed to spoil machinery or waste materials. The master’s eye is
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everywhere. There can be no fraud or idleness. He will exercise utmost economy to

achieve the aim of maximum profits.

2. Nature of Demand:

The small producer has an advantage over the large producer, when the demand is
either small or is constantly changing. He has thus a sphere of his own where he
has an advantage over the large scale producer.

3. More Employment:

In the face of large scale unemployment existing in the country, the development of
cottage and small scale industries is of great help to create more employment
opportunities. Small scale production is more labor-intensive i.e., there is more use
of labour than machinery. Thus, many unemployed persons are employed in the
newly developed small scale industries.

4. Need of small Capital:

The small scale production can be started with small capital. Where there is
shortage of capital, the small scale industries are of great advantage for the
development of industries.

5. Direct Relation between the Workers and the Employers:

In small scale production less workers are employed. Therefore, a close relationship
exists between the employer and the workers. Because of this close relationship,
the employer can look after the well-being of his employees and employees, too,
consider their work as their own and the work goes on smoothly without any
disputes between the two parties.

6. Direct Relation between the Customers and the Producers:

The small scale producers generally cater to the local demand. Hence, they remain
in touch with their customers. A small producer personally knows his customers.
Therefore, he can produce goods according to the taste and fashion of each
individual customer.

7. Easy Management:

The management of small business is easy and economical. Simple accounts and a
few persons can manage the job well.

8. Freedom of Work:

There is complete freedom of work in a small business organisation. Workers are

more or less self-sufficient. They are not dependent on the capitalists and carry on
their jobs freely.

9. External Economies:
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The small scale production secures all kinds of external economies, which are
available to large units also. These economies are: better transport, electricity, and
communication facilities; banking and insurance services; technical workers, etc.

10. No Evils of Large Scale Production:

The small scale production cannot fall victim to the evils of the large scale
production i.e., evils of the factory system, overcrowding, etc.

11. Other Advantages:

In the small scale production, there are some important advantages over the large
scale production:

a) Whenever demand changes, the supply can be adjusted accordingly.

b) There are less possibilities of strike and lockouts and no moral degradation of
the workers is feared.
c) There are no dangers of monopolistic institutions.

Disadvantages of Small Scale Business:

The following are the demerits of small scale production:

1. High Cost of Production:

The cost of production per unit increases because there is a high cost of labour, a
very little scope for division of labour and lesser use of machinery.

2. Wastage of By-products:

In the small scale production, it is not possible to make economic use of the by-
products, as in the large scale production. By-products of the small producers
generally go waste.

3. Less Use of Machines:

In the small scale production, there is less scope for the use of machines. As a
result, these firms cannot take advantages of the use of the machinery.

4. Lack of Division of Labour:

In the small scale industries, the size of production is small, and there is lack of
division of labour and less profits to the entrepreneurs.

5. Difficulty in Getting Loans:

It cannot enjoy the financial economies. Funds are either not available and if
available, they have to pay higher rate of interest.
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6. Difficult to Face Economic Crisis:

Because of the limited resources and financial weakness, the small scale producers
cannot face economic crisis. The producers do not have the capacity to bear losses
for long. In fact, under a small economic crisis, many small factories are closed
down.

7. Costly Raw Materials:

In the small scale production, raw materials are purchased in small quantities which
are available to the small producer at higher prices.

8. Lack of Standardized Goods:

The quality of goods is not standardized or up to the mark in the small scale
production. It is difficult to sell goods because of their low standard and inferior
quality.

9. Old Techniques:

In the small scale industries, the production is undertaken with the help of old
techniques or old and obsolete machines. It is not within their capacity to bear the
risk of installing new machinery.

10. Lack of Research:

The small scale industries have limited means at their disposal. They cannot spend
much on research in the field of science and technology. In this way, the small scale
industries are a hurdle in the way of technical research and, industrial development.

11. Difficult to Face Competition with Large Scale Producers:

If some large scale producers enter the market, the small producers find it difficult
to compete with them. The small producers perish at the hands of the large scale
producers.

External and Internal Problems Faced by Small-scale Industries

Internal
1. Choice of Idea
2. Feeble structure
3. Faulty planning
4. Poor project implementation
5. Poor management
6. Poor production
7. Quality
8. Marketing
9. Inadequate finance
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10.Labour problems
11.Capacity utilization
12.Lack of vertical and horizontal Integration
13.Inadequate training in skills
14.Poor and loose organisation
15.Lack of strategies

External
1. Infrastructure
a. Location
b. Power
c. Water
d. Post Office and so on
e. Communication
2. Financial
a. Capital
b. Working capital
c. Long-term funds
d. Recovery
3. Marketing
4. Taxation
5. Raw Material
6. Industrial and financial regulations
7. Inspections
8. Technology
9. Policy
10.Competitive and volatile environment

Problems Faced by Small-scale Industries

 Difficulty in obtaining credit from commercial banks because of their general
inability to provide security.
 Inability to offer liberal credit terms in the sale of their products.
 Absence of management expertise. Often managed by one person who
performs a number of functions usually with no formal training.
 Difficulty in competing with imported products due to high production costs.
 Competition from other local entrepreneurs in the same line of business
competing for the limited local market.
 Difficulty in obtaining industrial land in towns and cities. The shortage of
Industrial land is giving rise to more and more backward operations.
 Under capitalization.
 Difficulty in identifying appropriate technology and technical assistance.
 The manner in which both the needs of the economy and linkage with the
existing industry can best be served.
 Bureaucratic red tape and regulations.
 Surveys of material and human resources of the countries are not available to
identify the regions or areas for the development of small-scale and medium-
scale industrial enterprises.
 Identification of Industrial projects for development.
 Project preparation and evaluation.
 Financial or credit support and Investment promotion.
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 Consultancy and counselling services.

 Technology development and applications such as the designing of prototype
machines for products identified according to country resources and
requirements.
 Development of infrastructure of various kinds in the appropriate areas.
 Entrepreneurship development.
 Industrial training and skill formation.
 Linkages between large industries and small Industries and the creation of
subcontracting facilities at the national, regional, and international levels.
 Quality control and testing facilities.
 Market promotion, both domestic and export.
 Procurement of raw materials and equipment.
 Scientific and Industrial research; information collection and dissemination on
technology, markets and so on.
 Identification of and assistance to enterprises, which are experiencing
difficulties.
 Management and reorganization or restructuring of small- and/or medium
scale enterprises through various schemes.
 Productivity increases through modernization.
 Incentive measures, by Industry and by area.
 Local Initiative.
 Creation of institutions and changes in prevailing Institutional arrangements.
 Regional and international technical and financial assistance.
 Cooperation among developing countries.

Industrial sickness
Definition according to Sick Industrial Companies Act, 1985
A unit is defined as sick industrial company where:
 a company is registered for not less than seven years
 Incurred losses in previous and current year
 Due to cumulative losses 50% or more of its peak net worth during past 5 years
should be eroded.
 They must have continuously defaulted 4 consecutive installment of interest or 2
half yearly installment of principal.
Definition according to companies Act, 2002
Sick industrial company means an industrial company which has –
 Accumulated losses in any financial year which are equal to 50 percent or more
of its average net worth during four year immediately preceding such financial
year
 Failed to repay its debts within any three consecutive quarter on demand made
in writing for its repayment by a creditor of such company.

Causes of Industrial Sickness

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Industrial units may become sick at different stages and due to different reasons. Indeed, some
industrial units are Born sick, some units Achieve sickness.

Causes of Born Sickness

Born sick industrial units are those which destined for disaster right from their conception due to various
causes. A study conducted by the Institute of Economics. Hyderabad, found that 50 % of the dead units
dosed within three years of opening. This proves that these units never had any reasonable survival
prospect right from the birth. Out of the following factors, one or more may be the cause of born sick
units.

(1) Wrong Location: lithe place where the unit has been set up, lacks infrastructural facilities, the unit is
likely to face difficulties e.g. if an Industry is set up in an area without skilled labour, raw materials,
adequate transport, communication system, banking, warehousing etc. then there are more chances of
its becoming sick.

(2) Inexperienced Promoters: Inexperienced promoters may go for wrong selection of project and may
make faulty project planning e.g. some small-scale entrepreneurs do not possess technical knowledge of
the product that they want to manufacture. They do not know the exact cost of their product, have no
knowledge of accounts and they start production without bothering to find out market potential of their
product. This may give birth to sick units.

(3) Technological Factors: If technology adopted by entrepreneur is obsolete and inappropriate, then
production with the help of such technology is bound to be inferior in quality and also suffer cost
disadvantage, as compared to a unit using modern technology. If plant and machinery finally selected
turns out to be defective or obsolete, then units are bound to be sick.

(4) Investment in Unproductive Capital Assets: In case of some companies, investment is made in
unproductive capital assets like staff housing projects, company guest houses, even before they
commence production. Such projects involve huge capital expenditure, but do not generate any returns.
Such decisions distort the liquidity and profitability of the unit, which lead to industrial sickness.

(5) Long Gestation Period: If gestation period is more than the expected gestation period, it will lead to
increase in cost. Gestation period is the time period between the date of start of a project and date of
its actual completion / becoming ready for commercial production. Gestation period is likely to be more
in large projects due to delay in project commissioning, due to delay in supply of equipment, delay in
completion of civil works etc. Such delays cause increase in costs which lead to capital shortage, liquidity
problem, and increase in breakeven point etc.

(6) False Rosy Picture Presented by Consultancy Firms: The mushroom growth of the so called
consultancy firms has been regarded as a factor contributing to industrial sickness because the primary
interest of such consultancy firms is to make money by selling some ideas or project report to the
aspirants who may be misguided or made over-enthusiastic. These consultancy firms sometimes show
rosy hopes by high sounding promises. But when the project is actually started, it is not found as
profitable as shown by consultancy firms.
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(7) Faulty Demand Forecasting: Wrong assessment of market potential or faulty demand forecasting is
also a factor responsible for sickness of a unit. Similarly fault in assessment of market conditions,
consumer tastes, preferences and competitive situation etc. can also cause birth of sick units.

Causes of Achieved Sickness

There are some industries which achieve sickness after becoming operational. These units were not
born sick, these operated for some time, but due to some internal or external causes, these units
became sick. The internal causes originate within the unit while external causes originate outside the
unit and are not under the control of unit.

(A) Internal Causes

(1) Management Problems: The most important internal cause of sickness is management problems.
Faulty managerial decision in the fields of production, finance, marketing, personnel management etc.
can ruin a business. If decision-making is done without careful analysis of various components of
environment, then such decisions may turn wrong and may lead the business unit towards sickness.

(2) Financial Problems: Equity base of small-scale units is very weak. Often these units finance their
projects from borrowed funds from banks and financial institutions. A slight disturbance in the market
make them unable to meet the repayment schedules. The burden of debt accumulates and the unit
turns sick, inefficient management of working capital will also lead the unit toward sickness.

(3) Labour Problems: In some cases, acute labour problems have resulted in strikes, lock-out and even
closure of industrial unit. These problems start with conflict over the issue of wages, bonus, working
conditions etc. If these, problems are not tackled in time, these problems can cause sickness. Similarly,
defects in personnel management like kick of manpower planning and bad industrial relations may also
lead the unit towards sickness.

(4) Diversion of Resources: Diversion of resources means investing funds of the business unit in some
new ventures. Some entrepreneurs divert their resources in the new ventures without in-depth analysis
of such new ventures. If these new ventures do not succeed then it results in losses and lead the unit
towards sickness.

(5) Failure to Modernize: If the business unit fails to adopt the advanced technology, fails to change the
product-mix and other elements of marketing-mix to suit the changing environment, then such unit may
lag behind in comparison to other units, and in the long run, it may lead to sickness.

(6) Personal Unproductive Expenditure: Sometimes directors of the company acquire unproductive
capital assets and incur wasteful expenditures like luxurious air conditioned cars, domestic equipment’s,
unnecessary air travels, family excursion trips, etc. These unproductive assets and wasteful expenditures
have no contribution in the betterment of industrial unit. These arc only for the personal benefit of
directors. It may lead to liquidity problem and adversely affect the profitability of the unit.

(7) Over-capitalization: Over-capitalization is one of the causes leading to sickness. Over-capitalization

means capital invested in the business owned or borrowed is more than the required capital. It
unnecessarily puts burden in the form of interest and dividend. It increases cost of production, affects
profitability and leads to sickness.
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(8) Other Internal Causes: Besides above causes, there are other causes which are responsible for
sickness. These are:

a) poor utilization of fixed assets

b) Inadequate attention towards maintenance management, leading to frequent breakdowns of
machinery.
c) Absence of proper costing methods and pricing techniques
d) Lack of quality control and quality assurance
e) Inadequate emphasis on research & development
f) Inadequate material control
g) Lack of market research and market survey
h) Inadequate promotional activities.

(B) External Causes

(1) Government Policy: Sudden changes in the government policy relating to imports, exports, industrial
licensing, taxation, etc. can make viable units sick. For example, liberal import policy for a particular
product can cause serious damage to the domestic units producing similar products, particularly if the
imported product is cheaper and is of a better quality as compared to their products. Similarly change in
taxation policy may increase the cost of a product in comparison to the cost calculated in feasibility
report, so the actual cost will be more than expected cost. It may leads the unit towards sickness.

(2) Increased Competition from MNCs: In recent past, our government has allowed free entry to
multinational corporations (MNCs). Now our domestic companies are facing acute competition from
MNCs. This has made the survival of domestic units difficult because multinational corporations have
better technology, more financial resources, better managerial expertise and have low cost of
production. For example entry of multinationals in the field of electronics like LG, Samsung has made big
loss to the domestic units like Videocon, Onida, Beltek, Texla, etc.

(3) Power Cuts: A large number of industrial units face power cuts from time-to-time. These power cuts
are imposed by state governments as the generation of power is considerably below its actual
requirements. Drought situation during some years in a number of States, has further aggravated the
problem and acute power shortage has resulted in frequent power cuts. Similarly, shortage of coal, and
oil has been a serious problem for many industrial units in India.

(4) Shortage of Raw Material: In a number of cases, the units are not able to achieve optimum capacity
due to shortage of raw materials. This results in disturbing the production schedule, causing losses to
the unit. This often happens in case of units depending upon the supply of imported inputs.

(5) Recession in the Market: Recession in the market may cause steep decline in the demand. It results
in decrease in sales and profits of business units. Decreased sales result in stocks accumulation. All this
leads to sickness of business units.

(6) De-reservation: Earlier a large number of products were exclusively reserved for small scale
industries. But now many items have been made open for large scale industries also. This dereservation
policy has badly affected the small scale industries, as small scale industries cannot face open
competition with large scale industries. Large scale industries are at a greater advantage in comparison
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to small scale units because these have better technology, better managerial expertise, reputed
trademarks, brand image etc.

(7) Credit Squeeze: At present most of the industrial units depend on the banks for their borrowings.
Once a unit starts making losses, then no bank is ready to give loan to such unit. It leads to shortage of
working capital and liquidity problems. The liquidity problems lead the unit towards sickness.

(8) Other External Causes:

a) Customer resistance to the unit’s product

b) Infrastructural problems
c) Poor Law and order situation
d) Political Interference

Remedial Measures for Industrial Sickness

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Preventive and Curative Measures/Remedial Measures Adopted to Prevent Industrial Sickness in India

Industrial sickness is a serious problem faced by the country at present. This has affected the health of
industries working in both public and private sector. Several steps have, therefore, been taken by the
government and financial Institutions to detect the symptoms of sickness, and to prevent or cure
sickness to the extent possible. These measures are discussed below:

Measures Taken by Banks

The commercial banks granted various concessions to sick industrial units and took other steps to
prevent sickness which are as follows:

a) Recovery of interest at reduced rates.

b) Grant of additional working capital to overcome the shortage of working capital.
c) Rescheduling the payment of loans.
d) Writing off the whole or a part of accrued interest.
e) Setting up a Sick Industrial Undertakings Cell in Reserve Bank of India to obtain timely
information regarding sick units.
f) Setting up a special cell in Industrial Development Bank of India (IDBI) to identify and solve the
problem areas of sick units.
g) Reserve Bank issued guidelines to the banks with a view to ensure that the potentially viable sick
units in small-scale industries sector get due attention and timely support.

Measures Taken by the Government

Several steps have been taken by the government for the revival and rehabilitation of sick units which
are as follows:

1) Takeover of Management: If government feels that the main cause of industrial sickness is
mismanagement, and the unit can be revived, then government takes over the management of
such sick unit (or a period of six months under the provisions of Industries Development and
Regulation Act, 1951 (IDRA). Government took over the management of 15 Industrial
undertakings on January, 1989, under provisions of Industries Development Regulation Act. But
this measure failed to revive these sick units.
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2) Amalgamation with Healthy Units: For the revival of sick units, Choksi Committee
recommended the amalgamation of sick units with the healthy units, and to encourage the
healthy units to takeover sick units, tax benefits should be given to such healthy units.
Government accepted the recommendations of Choksi Committee for revival of sick units and
amended the provision of Income Tax Act, by introducing section 72A which provides tax
benefits to healthy units taking over sick units.
3) Excise Loan: For providing financial assistance to sick units, government introduced the scheme
for grant of excise loans to sick units. As per this scheme, the sick units will become eligible for
excise loans up to 50 per cent of the excise duty paid by the unit for last 5 years.
4) Setting up Industrial Investment Bank of India (IIBI): In order to revive and rehabilitate sick
units, Industrial Reconstruction Corporation of India (IRCI) was set up in the year 1971. In 1984.
IRCI was given the name of Industrial Reconstruction Bank of India (IRBI). In year 1995 IRBI was
given a full-fledged development financial institution status, and it was given a new name
Industrial Investment Bank of India (IIBI). Following are the main objectives of IIBI:
a) Financial assistance to sick units.
b) Managerial and technical assistance to sick units.
c) Coordinating assistance of other financial institutions and government agencies.
d) Providing merchant banking services (or amalgamation, merger, etc.

In 2006-07, IIBI sanctioned assistance worth Rs 11,184 crore to sick units.

5) Enacting Sick Industrial Companies Act. 1985 (SICA) and Establishing Board for Industrial and
Financial Reconstruction (BIFR): for dealing with industrial sickness and for taking preventive
and remedial measures, Government has enacted SICA and established BIFR to timely detect
sick units and providing suitable remedial measures.
6) Margin Money Scheme: In June 1987, government introduced a scheme known as Margin
Money Scheme. Under this scheme, liberal financial assistance was granted to small sick
industrial units, at low rate of interest and at lesser security.