CHAPTER-2

Small Scale Enterprises

[SSEs]
 Small Scale Enterprises (SSE):-
Meaning:- A small scale enterprise, or a small business, is one marked by a
limited number of employees and a limited flow of finances and
materials. Examples:- Services or retail operations like grocery stores, medical
stores, Tuition centre, Khadi, bakeries, Agro-based industries, small manufacturing
units etc. Small businesses are independently owned organizations that require less
capital and less workforce and less or no machinery. These businesses are ideally
suited to operate on a small scale to serve a local community and to provide profits
to the company owners. A small-scale business is a business set up in which the
financial commitment towards infrastructure such as building & equipment,
whether made as an owner or on rental or purchase basis, does not surpass Rs. 1
crore.

Few Types of SSEs

(a). Tiny industries :
All Small-Scale units wherein investment on plant and machinery
(excluding land and building ) up to Rs. 25 lakhs are classified as
tiny industries.
(b). Export oriented units:
All small scale units which exports more than 50% of their output is
©. Small Scale Service & Business (Industry related) Enterprises
(SSSBEs):-SSSBEs industry related service/ business enterprises with
investment up to Rs 5 Lakhs in fixed assets, excluding land and
building, are called Small Scale Service/ Business Enterprises (SSSBEs).
This limit has been raised to Rs.10 Lakhs, w.e.f. September 2000.
(D). Ancillary industrial undertakings:- An industrial undertakings
are those which manufacture parts and components to be used by
larger industries. Not less than 50 per cent of its production or services,
as the case may be, are for one or more other industrial undertakings and whose
investment in fixed assets in plant and machinery whether held on ownership
terms or on lease or on hire-purchase, does not exceed Rs 10 million. The
ancillary workers in an institution are the people such as cleaners and
cooks whose work supports the main work of the institution.
(E). Cottage Industries (a small and often informally organized
industry):-An industry whose labour force consists of family units or
individuals working at home with their own equipment . A business or
manufacturing activity carried on in people's homes (ex :Handcrafts).
 *******Characteristics of SSEs
Introduction:-“Small Enterprise is Beautiful” because of its following
Important Characteristics :
1). A Small Enterprise is generally a “One Man Show”:_
Even Small Enterprises which run by a Partnership Firm or a
Private Limited Company, in most cases, the activities are mainly
carried out by one of the Partners or Directors. In Practice, the
others mainly assist in providing Capital / Funds.
2) Owner himself / herself is also a Manager of the Enterprise. A
Small Enterprise is managed in a personalized manner.
The Owner has First Hand Knowledge of all aspects of the
Enterprise & knows what is going on in the Business. He takes
effective participation in all matters of Business Decision Making.
3)A Small Enterprise has lesser development Period (Gestation
period):- The process of early development, compared to a Large
Enterprise. i.e., the period after which the return on Investment
starts.
4)Small Enterprises generally carryout their operations to cater
(provide water and food for certain peoples) to the Local &
Regional Markets.
5)Small Enterprises use indigenous(originating) resources &
therefore can be located anywhere subject to the availability of
these resources like Raw Materials, Labor, Transport Facilities etc.
6)They are Labor Intensive with comparatively smaller Capital
Investment than the Larger Units. That is, for the same
Investment, a Small Enterprise provides more jobs to the people
compared to a Large Enterprise.
7) Uses Local Resources and are decentralized & dispersed to
Rural Areas & Smaller Towns.
8. Development of Small Enterprises in Rural Areas & Smaller
towns promotes more Balanced Regional Development & thereby
prevents influx of job seekers from rural areas & smaller towns to
bigger cities & urbanizing centers.
9. They are more flexible to adapt changes like Diversification to
New Products, adopting to New Production Techniques,
substituting New Raw Materials, Changes in Organization
Structure, New Market etc.
 ****Explain the Role played by SSE in the
development of Indian Economy (Merits of
SSE):-
Role of SSE in Indian Economy:-
An overview:-Small scale industries play an important role for the
development of Indian economy in many ways. About 60 to 70
percent of the total innovations in India comes from the SSIs. Many
of the big businesses today were all started small and then
nurtured into big businesses.
SSE’s are the Backbone of the Industrial Activity in the Country &
are playing a very important role in improving the Socio – Economic
Conditions of the people.
 ****The roles of SSEs in economic development
of India are briefly explained below:-
1. Small Scale Industries Provides Employment [They create greater
Employment Opportunities through Labor Intensive processes & thereby
help in tackling the Unemployment Problem].
2. SSEs employs women & Encourage Women Entrepreneurs.
3. SSE Brings Balanced Regional Development.
4. SSE Helps in Mobilization of Local Resources.
5. They have Low Gestation Period
6. They can be set up easily in Rural & Backward Areas .
7. SSI Complements Large Scale Industries
8. SSI stimulate Exports and improves the BOP of
India. [There is a Phenomenal Growth in Exports Revenue during
the last Four Decades. During 1973 -1974, SSI Sector exported Rs.
393 Crores worth of Goods & Services & this has grown nearly 150
times to Rs. 57, 488 Crores during 1998 -1999]
9. They need Small / Local / Regional Market.
10. They create Decentralized pattern of Ownership.
11. They Innovate & Introduce New Products particularly to cater
to Local Needs
12. They influence & improve Standard of Living of Local People
13. Develops Entrepreneurship.
14. They Increase Revenue to Central & State Govts by way of
Taxes Paid by them.
 ****EXPLAIN THE DEMERITS OF SSE
1. Low wages
2. Lack of modernization
3. Inefficiency:
4. Overcrowding.
5. Sickness:
6. Less innovation capacity.
7. Low competitiveness
8. Low capacity utilization.
9. Lack of pollution control:
10.Low labor productivity
 **********Problems faced by Small Scale
Industries in India
An Overview:-Small Scale Industries do not enjoy much of the
advantages enjoyed by large scale enterprises because of their nature and
size. Though they have made significant contribution to economic
development, they have not realized their full potential. They face many
problems in their functioning and many Small Scale Industries are sick.
1.Poor capacity utilization:- In many of the Small Scale Industries, the
capacity utilization is not even 50% of the installed capacity. Nearly half
of the machinery remains idle & Capital is unnecessarily locked up.
2. Incompetent management:- Many Small Scale Industries are run in an
incompetent manner by poorly qualified entrepreneurs without much skill or
experience, and they lack knowledge in matters such as demand,
production level and techniques, financial availability, plant location, future
prospects etc.
3. Inadequate Finance:- Many Small Scale Industries face the
problem of scarcity of funds. They are not able to access the domestic
capital market to raise resources. Banks and financial institutions impose
various procedures and formalities to Finance them. Even after a long
delay, the funds allocated are inadequate.
4. Raw material shortages:- Raw materials are not available at
the required quantity and quality. Since demand for raw materials is more
than the supply, the prices of raw materials are quite high which pushes up
the cost. Scarcity of raw materials results in idle capacity, low production,
inability to meet demand and loss of customers.
5. Lack of marketing support:- Small Scale Industries lack
market knowledge with regard to competitors, consumer preferences,
market trends. Since their production volume is small and cannot meet
demand for large quantities their market is very restricted
6. Problems in Export:- They lack knowledge about the export
procedures, demand patterns, product preferences, international currency
rates and foreign buyer behavior.
7. Problem of working capital & Unsold stock:- Many Small Scale
Industries face the problem of inadequate working capital. Due to lack of
market knowledge their production exceeds demand, and capital gets locked in
unsold stock.
8. Lack of technology up-gradation:- Many Small Scale Industries still use
primitive, outdated technology leading to poor quality and low productivity.
They do not have adequate funds, skills or resources to engage in research and
development to develop new technologies. Acquiring technology from other
firms is costly. Therefore Small Scale Industries are left with no choice but to
continue with their old techniques.
9. Govt. interferences & multiplicity of labor laws:- Small Scale
Industries have to maintain a number of records (PF, ESI, Muster Rolls etc), and
face multiplicity of labor laws. There are endless government inspections. A lot
of time, money and effort is wasted in complying with various inspections and
records verification. This prevents Small Scale Industries from fully
concentrating on their business activities.
10. Inadequate dispersal:-Majority of Small-Scale Industries are in urban
areas and the aim of industrial development in rural areas has also been
defeated.
11. Inability to meet environmental standards:- The government lays
down strict environmental standards and Courts have ordered closure of
polluting industries. Small Scale Industries which are already facing
shortage of funds to carry out their business are not able to spend huge
sums on erecting chimneys, setting up effluent treatment plants etc.
12. Delayed payments:- Small Scale Industries buy raw materials on
cash but due to the intense competition have to sell their products on
credit. Buying on cash and selling on credit itself places a great strain on
finances. The greater problem is payments are delayed, sometimes even
by 6 months to one year. Delayed payments severely impact the survival
of many Small Scale Industries.
13. Poor industrial relations:-Many Small Scale Industries are
not able to match the pay and benefits offered by large enterprises,
because their revenues and profitability are low and also uncertain. This
leads to labor problems. Employees fight for higher wages and benefits
which the SSI is not able to provide. This may lead to strikes, resulting in
damage to property in case of violence by employees, production losses
etc.
14. High Concentration of industrial units:-There is high
concentration of small scale industrial units in a few states. Due to
concentration, there is high competition among them to procure raw
materials and other industrial inputs. This leads to high costs and scarcity
of raw materials and other inputs affecting their production and increasing
costs.
15. Widespread sickness:- Sickness among Small Scale Industries is
widespread. Nearly two and a half lakh SSI units are sick and as on
2001 and nearly Rs- Five thousand five hundred crores of bank funds
are locked in them. Due to this new entrepreneurs are not able to get
loans, workers in the sick units lose their jobs and industrial and
economic development is affected.
16. Lack of awareness:- The government has set up many
organizations to support and provide assistance to Small Scale Industries.
But, many of the entrepreneurs running Small Scale Industries are not
aware of the various support services.
17. Burden on government finances:- The government has to provide
high subsidies to promote sales of products produced by Khadi and Village
Industries. This places a great strain on government finances.
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 *****MEASURES TAKEN TO REMOVE DIFFICULTIES FACED BY
SMALL-SCALE INDUSTRIES IN INDIA!

1) Equitable Allocation of Raw Materials, Imported Components

and Equipment: The small scale industrial units should be given adequate
degree of priority in the allocation pattern of essential, but scarce, raw
materials, imported components and equipment.
2) Improvement in the Methods and Techniques of Production: The small-
scale industrial units should be encouraged to replace their outdated
equipment with incorporating an up-to-date technology, and facilities and
incentives should be provided wherever required.
(3) Provision of Adequate Finance: Promoter’s own capital in the small-scale
industrial units is generally small and generation of internal resources small
and slow. They depend, therefore, on the external sources of finance in a
substantial measure. This requires a system of integrated credit whereby
the long-term as well as short-term finance is made available at an
affordable interest rate.

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(4) Marketing Assistance: Marketing of their products at remunerative
prices is the major problem of small-scale industrial units. There is,
therefore, a clear case for government intervention with a view to reducing
the disadvantages arising out of market imperfections. Market research,
intelligence and information systems should be strengthened and the results
made available to those units.
(5) Industrial Education and Training: Changing technique of production,
dispensation of technical knowledge, both to the small-scale entrepreneurs
as well as their workers, should form an essential element of the overall
strategy. Provision of adequate facilities for industrial education and
training, therefore cannot be over-emphasized.
(6) Demarcation of Spheres of Large-Scale and Small-Scale Industrial
Units: Once the role of small-scale industries in the national economy is
recognized, it becomes imperative that a secured berth is provided to it. In
this connection the guiding principle should be to clearly demarcate, as
possible, the spheres of production for these units. It may be pointed out
that all the measures suggested above should be viewed as a package and
applied simultaneously.

© 2012 Cengage Learning. All rights reserved.

 *******SICKNESS IN SSES
Meaning of sick Industry:-
Industry sickness refers to a situation when an industrial firm
performs poorly, incurs losses for several years and often defaults
in its debt repayment obligations.
Nature of SSE Sickness:-
Sickness among Small Scale Industries is widespread. Sickness is not
detected in the initial stages and large amount of funds are locked in
them. Nearly two and a half lakh SSI units are sick and as on 2001
and nearly Rs. Five thousand five hundred crores of bank funds
are locked in them. Due to this new entrepreneurs are not able to get
loans, workers in the sick units lose their jobs and industrial and economic
development is affected. In Maharashtra alone nearly 3 lakh units have
closed down, 38 lakh workers have lost their jobs and the loss to the
government is Rs.5,000 crore.
 *********Causes for Industrial Sickness in India.
An overview:-Due to the ease of setting up and because of the
incentives available, many unemployed youth set up SSI’s with very
little business knowledge and skills. They find it difficult to survive
in the business and close down their operations. Further because of
the problems of procuring finance, use of outdated
technology and lack of marketing expertise many SSI’s incur losses
and are forced to close down.
Causes are:- i) External, and (ii) Internal.
i). The external causes:-
(a) Delay in land acquisition and building construction;
(b) Delay in obtaining financial assistance from public financial
institutions;
(c) Delayed supply of machinery by the manufacturers,
(d) Delay on the part of the government in sanctioning licenses,
permits, etc;
(e) Shortages of basic inputs like power.
(f) Cost overruns due to factors beyond the control of
management;
(g) Lack of demand for products or shift of demand to products of
rival firms due to de­lays in project implementation;
(h) Unsatisfac­tory performance by collaborators financial and
technical; and, last but not the least.
(i) Changes in the policy of the Government relating to movement
of goods from one place to another within the country, or the
Govern­ment’s export-import policy.

© 2012 Cengage Learning. All rights reserved.

(ii) The Internal Causes:
1. “Lack of experience of the promoters in the line of activity.”
2. Often projects are started without making any proper feasibility
study.
3. Defects in recruitment, staffing, training etc & differences among
various persons associated with the promotion and management of
the enterprise;
4. Mechanical defects and breakdown;
5. Inability to purchase raw materials at an economic price and at the
right time;
6. Failure to make controls effective in time in case of deficiencies in
workings;
7. Deteriorating labour management relations and the consequent fall
in capacity utilization, and, above all;
8. Faulty financial planning and lack of balance in the financial
(capital) structure.
9. Finally, most often, industrial projects are started on an ad hoc
basis without gathering much about the expertise and competence
needed for the purpose.
 *****WHAT ARE THE PREVENTIVE AND REMEDIAL MEASURES
FOR SICK INDUSTRIES
(i) Cooperation between Term-Lending Institutions and Commercial
Banks: Since commercial banks provide working capital, they are in a position to
know about the working of industrial concern. But assistance from term-lending
institutions is also essential for rescue operations.
(ii) Coordination between Various Government Agencies: All
government agencies, both regulatory and promotional, must join hands to restore
sick units to health.
(iii) Full cooperation from various suppliers, unsecured creditors and
other stakeholders, particularly from the employees, is also essential to take the
concern out of the difficulties in which it is involved.
(iv).Recovery of Outstanding: Every effort should be made to realize
outstanding advances so that the concern is able to gather funds to avoid sickness.
(v) Willing Cooperation and Clear Understanding with the Project
Promoters: Generally there is a lack of trust and confidence among the various
interests concerned. It is found that government agencies and dealing institutions
are more worried about their money and are anxious to recover them instead of
curing of the health of the sick units.
(vi) Checking Over-Valuation of Inventories: The banks should verify on
a regular basis the valuation of inventories both in terms of quantity and price.
This would prevent over-borrowing on the hypothecation of inventories.
(vii) Marketing: There should be well organized and scientific marketing by
the project promoters otherwise launching of a project will be a leap in the dark.
Good marketing arrangements will prevent industrial sickness.
(viii) Improving Labour Relations: Restrictive labour and unreasonable
trade unions are great obstacles. Improving labour relations will go a long way in
curing industrial sickness.
(ix) Modernization of Machinery: If the sick unit is to be restored to health,
old and obsolete machinery and outdated technology should be discarded
at the earliest.
(x) Efficient Management: If necessary inefficient management should be
replaced. The key to industrial health lies in alert and efficient
management. The management should show a calm approach, patience
and perseverance, courage and ability to steer in bad weather.
(xi) Performance Incentives: It is necessary to offer performance
incentives to the executives and the workers to induce them to put in
their best efforts. This will be quite helpful in curing industrial sickness.
(xii) Sympathetic Government Attitude: During periods of industrial illness
the government agencies should adopt a sympathetic and understanding
attitude so that the problem is not aggravated but moves towards a
solution instead.
(xiii) Austerity and Economy: Austerity (seriousness) and disciplines
should be enforced at all levels. Every effort should be made in raising
funds internally through the sale of excess assets, surplus machinery,
etc. Uncalled for tours, lavish entertainments, unnecessary personal
expenses should be ruthlessly cut down.
Conclusion:
In view of the large-scale industrial sickness it would be
necessary to organize a task force consisting of competent
and experienced executives in various branches of business
to go into the case and monitor recovery. Rehabilitation of
sick units is not an easy and simple affair. An all-round effort
is necessary to root out the disease, first necessary step is
the identification of sick units which can be made viable
through renovation, expansion, and diversification. Units
beyond recovery should be wound up.