CHAPTER - II INTRODUCTION

Transcription

1 CHAPTER - II INTRODUCTION 2.1 Introduction: Industrialization is considered as one of the most striking features of the modern civilized world. It is regarded almost axiomatic for the attainment of higher economic growth and raising the standard of living of the people. Further, an important dimension of industrialization is the evolution of, in consonance with the socio-cultural and economic environment of the country, a complex pattern of interrelations between industrial and other sectors, between different industries and undertakings having variance in size and product range. In a developing country like India, development of small scale industries (SSI) and their close relationship with large industrial units are considered essential in any scheme of industrialization. Modern manufacturing industry is neither complete and nor efficient unless it has both large and small units. Thus, modern large-scale industries and SSI s are interrelated, interdependent and complementary to each other. 2.2 History:- At a time when the western Europe, the birth place of modern industrial systems, was inhabited by uncivilized tribes, India was famous for wealth and its rulers and for high artistic skills of their craftsmen. Even at much later period, when the western merchant s adventures made first appearance in India, the industrial development of this country was not inferior at any rate to that of the more advanced European Nations. The rural and agrarian character has been dominating the Indian economy since ancient times. Some Indian industries called Urban Handicraft Industries producing certain special products enjoyed worldwide reputation. The well known handicraft product of those days include cotton textiles, Dhaka muslin, silk sarees of Banaras, shawls and carpets of Kashmir, chintzes of Luknow, dhotis and dupattas of Ahmadabad, carving of ivory, sandalwood and stone, enameled jewellery, gold and silver thread work, artistic glasses, These industries not only supplied all local wants but also enabled India to export its finished products to foreign countries Throughout the 17th and 18th centuries, European countries were the major customers of Indian manufacturers and India was maintaining favorable balance of trade. But the composition, volume and direction of foreign trade had undergone a 10

2 significant change during the British regime (from 1757 to 1947) including British East India Company (1757 to 1858). The emergence of Industrial revolution in mid-18th century reversed the pattern and character of the industrial set-up based on small-scale and cottage level in India. Consequently, domestic and foreign trade of the country followed suit. Tremendous expansion of productive capacity of manufacturing resulted in increased demand for raw materials for British industry and greater need of capturing markets. Initially attempts were made directly or indirectly to restrict or hamper Indian industries. The first victim of the restrictive measures was the textile/handicrafts. The decline of the country brought forth a chain reaction leading to the decline of Indian handicrafts. In brief, the major factors that led to the decay and decline of Indian handicrafts were disappearance of princely courts and their patronage, aggressive trade policy of East India Company and the British Government, increasing competition from British machine made goods and increasing demands for western commodities as a result of foreign influence. The process of decline of handicrafts was accelerated by the development of roads, railways, steam ships, construction of ports and post and telegraph. The destruction of Indian handicrafts created vacuum in the Indian markets which was subsequently fed by British manufactured goods. In this way British rulers crippled traditional Indian cottage and SSIs and transformed the industrial economy into agrarian economy that could only produce and export agricultural products and raw materials necessary for industries in Britain and in turn import only British manufactured products. The cottage industries and SSIs, however, did not wither away completely. The leaders of the freedom movement favored SSIs, because they provide productive employment to a large number of people without much capital investment, would ensure dispersal of industries to rural areas without much capital investment and produce the much needed consumer goods and avoid the concentration of economic power, dehumanization, pollution and various other evils inherent in the large scale industries. 2.3 Conceptual Framework of SSIs and Tiny industries:- The small scale sectors in India cover a wide spectrum of industries categorized under small, tiny and cottage segments ranging from small artisans/handicraft units to modern production units with significant investments. This sector has a prominent place in the socioeconomic development of the country as it 11

3 not only acts as nursery for the development of entrepreneurial talent, but also produces a wide range of products, more than 8000 in number. The term SSI evokes different meanings for different agencies. According to the planning commission, to the Government of India, the Village and Small Industries (VSI) sector is part of the SSI. The National Sample Survey Organization under the Central Statistical Organization (CSO), Government of India, defines the entire industry sector in terms of organized and unorganized segments as well as in terms of industrial enterprises run by households and non-households. The Central Excise Department, on the other hand, distinguishes SSIs on the basis of annual turnover of the units (up to maximum limit of Rs. 3 Cr). The industrial policy planners in the SSI board define SSI on the basis of investment in plant and machinery (an upper limit of Rs. 1 Cr). 2.4 Concept of SSIs in Selected Countries:- In most of the foreign countries, the definition of small business enterprises varies. It may be noted that in India the nature of the SSIs decided on the basis of annual sales turnover or investment in plant and machinery. But in several other countries, the nature of SSIs is decided on the basis of volume of investments in plant and machinery. And in some other countries it is mainly based on number of persons employed. In his connection, it is worthwhile to mention that SSIs in foreign countries are mentioned as Small and Medium Enterprises (SMEs). For example in Australia, manufacturing and service industries employing less than 100 employees (in the case of small enterprise). In Belgium, SMEs are those which have annual staff average of 50 employees. In Canada, SMEs are independent firms providing employment to less than 200 people. In the same way, in Denmark, SMEs are decided on the basis of number of persons employed and the investment. Thus, a SME is one in which usually less than 100 persons are employed, in such an enterprise investment ceiling is $8 million. On the other hand in France, Germany, Greece, Indonesia, Italy, Netherland, Portugal, Spain, Thailand and the US, SMEs are decided on the basis of the number of persons employed. It may further be noted that in UK the SMEs have not been defined. However in most of the countries the definition given relates to both small and medium scale industries. In Hong-Kong, manufacturing enterprises with less than 100 employees and non-manufacturing enterprises with less than 50 employees are regarded as the SMEs. 12

4 All countries do not use the same definition for classifying their SME sector. Nor does universal definition appear to be necessary. The definition in use depends on the purpose these definitions are required to serve and the policies which govern the SME sector thus defined. Table No. 2.1 Definition of SMEs in different Countries Country Category of Criteria/ Country s Official Measure Industry Definition North Very small Enterprise < 20 Employees Employment America USA Small Enterprise Medium Enterprise Employees Employees Canada Manufacturing Independent Firms having < 200 Employment employees Latin America Micro Small Medium <15 employees and gross income/ sales < US$ 175,000 Employment and gross income/ sale Mexico employees and gross income/ sales < US$ 175, employees and gross income/ sales < US$ 3,500,000 Europe Belgium SME Annual Staff average of 50 employees, annual turnover (VAT Employment and annual turnover excluded) ECU 4.2 million, balance sheet total of ECU 2.1 million Denmark Manufacturing <500 employees, production units Employment with more than 5 employees France SME Employees Employment Germany SME < 500 employees Employment Greece Small Enterprises < 50 employees Employment Medium Enterprises employees Ireland SME < 500 employees Employment Italy Small Enterprises < 200 employees Employment 13

5 The three parameters generally applied by most countries, single or in combination are: (i) capital investment in plant and machinery; (ii) number of workers employed; (iii) volume of production (turnover of business). Despite the lack of universal quantitative norms, the SMEs as a class are clearly distinguishable in any country. The factors that set them apart are essentially qualitative and competitive. On the qualitative side are their internal management structures, decision making processes, financial practices, trading styles, attendant risk factor etc. The definition used by the Indian authorities is based on the level of investment in plant, machinery or other fixed assets whether held on an ownership, lease or hire purchase basis. It seeks to keep in view the socio economic environment in India, where capital is scarce and labor is abundant. The definition as recently revised places an investment limit on plant and machinery of Rs. 30 million for a small scale unit. Units with investment not exceeding Rs. 2.5 million are classified as tiny units. The Government of India notification dated December 10, 1947, classified a SSI unit as an undertaking with an investment in fixed assets in plant and machinery up to Rs. 3 crores. Within the SSIs, units with investment in plant and machinery up to Rs. 25 lakhs are termed as tiny industry. A] Definition of Micro, Small and Medium Enterprises according to Reserve Bank of India:- (SSI definition by RBI.htm) Apr (a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below: i) A micro enterprise is an enterprise where investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006 (copy enclosed)] does not exceed Rs. 25 lakhs; ii) A small enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006) is more than Rs. 25 lakhs but does not exceed Rs. 5 crores; and iii) A medium enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items specified 14

6 by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006) is more than Rs.5 crores but does not exceed Rs.10 crores. (b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) are specified below. These will include small road & water transport operators (owning a fleet of vehicles not exceeding ten vehicles), retail trade (with credit limits not exceeding Rs.10 lakh), small business (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lakhs) and professional &self employed persons (whose borrowing limits do not exceed Rs.10 lakhs of which not more than Rs.2 lakhs should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lakhs with a sub-ceiling of Rs.3 lakhs for working capital requirements). B] Definitions of Micro, Small & Medium Enterprises (MSMED Act 2006) :- In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes: (a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery. (b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing service enterprises, as notified, vide S.O. 1642(E) dtd are as under: 15

7 Enterprises Micro Enterprises Small Enterprises Medium Enterprises Table No. 2.2 Manufacturing Sector Investment in plant & machinery Does not exceed twenty five lakhs rupees More than twenty five lakhs rupees but does not exceed five crores rupees More than five crores rupees but does not exceed ten crores rupees Table No. 2.3 Service Sector Enterprises Investment in equipments Micro Enterprises Does not exceed ten lakhs rupees: Small Enterprises More than ten lakhs rupees but does not exceed two crores rupees Medium More than two crores rupees but does not exceed five core rupees Enterprises In our further discussion we will adopt definition for small scale and tiny(micro) enterprises as referred above, Table No. 2.4 Manufacturing Sector Enterprises Investment in plant & machinery Micro Enterprises Does not exceed twenty five lakhs rupees Small Enterprises More than twenty five lakhs rupees but does not exceed five crores rupees 2.5 Role and Achievements of SSIs in India:- The SSI is the hub of many economic activities in a developing country like India. It has emerged over the years as a highly vibrant and dynamic sector of the Indian economy. The socioeconomic transformation of the country cannot be achieved fully without paying adequate attention to the development of this sector. The SSI serves the society in several ways. They provide immediate large-scale employment, need lower investment and require small markets. They not only offer a 16

8 method of ensuring an equitable distribution of national income, but also facilitate effective mobilization of resources, capital and skills which might otherwise be unutilized. The important fact about SSIs is that they stimulate the growth of industrial entrepreneurship and promote more diffused pattern of ownership and location. It may be noted that the specific role of small-scale industry was also recognized in the Industrial Policy Resolution of 1948 which has categorically mentioned that cottage and small scale industries are better suited for utilization of local self sufficiency in certain types of essential goods. It was Mahatma Gandhi s clarion call for protecting handicrafts against the onslaught of imports of factorymade products that strengthened the resolve to develop small industry. An elaborate structure of institutions to nurture handicrafts and small enterprises came as India decided not to wait for a phase of industrial development propelled by large companies before encouraging the growth of the former. The small-scale units produce a variety of products ranging from simple consumer goods like textile products, handicrafts to most sophisticated goods like electronics, microwave equipments and other industrial products. Simply, within a decade, the SSIs in India showed a moderate to commendable growth in terms of employment, number of units, output and export. During this period, the employment provided by SSI recorded 1.42 times rise in growth. The number of units registered 1.61 times, output presented 3.6 times and their exports about four-fold growth. In the following pages, the achievements of Indian SSIs are presented, unit-wise, production-wise, and exportwise. As stated earlier, India is a country of villages and the villages are motherland of small-scale and cottage industries. With gradual awareness about the benefits of the SSI, people with varying backgrounds are attracted towards these industries. As a result, the number of SSIs in the country has been increasing in India between and (No. of units 28.57lakh and 42.25lakh respectively) It is obvious that in the year there were about 28lakhs industrial units in the country which increased by nearly 5% in Thereafter, the growth rate of the units began to decline and as result, by it slashed to 3.3%. In , the growth of the number of units increased an all time high of 34lakhs. In , the number of units increased to but growth rate decreased to 2.1% over the previous year. Again in , the number of units increased to and growth 17

9 rate increased from 2.1% to 3.8% over the previous year. Then in the numbers of units were and in , the numbers of units were 40.09; they showed an increasing growth rate of 4.3% and 7.6%. Again in , the number of units increased to 42.25lakhs but growth rate showed a decline to 5.3%. Year No of units (in lakh) Table No. 2.5 No. of SSI Units year wise % Increase (+) and Decrease (-) over previous year Indices = (source Ministry of SSI Govt. of India) 2.6 Production Trends:- As mentioned earlier, the SSI sector plays a significant role in the economic growth of the country. It contributes 40% of the gross manufacture to the economy. As per an estimate, one lakh rupee of investment in fixed asset in the small-scale sector produces Rs lakhs worth of goods or services with an approximate value addition of 10 percentage points. The small-scale sector has grown rapidly over the years. When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the small-scale sector. 18

10 2.7 Employment Trends:- SSI sector in India creates the largest opportunities for the people in the country next only to agriculture. According to the SSI sector survey conducted by Ministry of SSI and National Informatics Centre with the base year , the following interesting observations were made related to employment in small-scale sector. Year Table No. 2.6 Growth Trends in Production of Small-Scale Industries Production at Current Prices (Rs. In Cr) %Increase(+)/ Decrease(-)Over Previous Year Indices = , , , , , , , , ,060, ,090, Production at Current Prices (in Rs. cr) 1,200,000 1,000, , , , , Figure No. 2.1 Growth Trends in Production of Small-Scale Industries Year Growth Trends in Production of Small-Scale Industries

11 Table No. 2.7 Year wise employment in SSI Year Employment (in lakh) % Increase(+) and Decrease(-) Over Previous Year Indices = As the analysis of the table reveals that the annual growth in overall employment in SSI sector varied between more than 2.6% (in ) and over 4% (in ) during the period under study. In absolute terms, in , SSI provided employment to lakhs persons which rose by 4.5% in , 2.6%in , which was a declined growth rate and 4.03% in However, employment showed an increase from 160 lakhs in to lakhs in , an increase of 33.9%. This was a tremendous increase over previous years. Then, as the level of employment went on increasing as in , it was which was 4.3%increase over the previous year. Again, it showed an increase upto in , which was 4.2% increase over earlier year. The above discussion and analysis reveals that SSIs play a very significant role in the economic development of a country like India. In particular, these industries have a special role to play in our country. After attaining independence, the Government of India initiated necessary policy measures to give healthy boost to different categories of enterprises termed as SSIs. The SSI serves the society by providing immediate large scale employment and ensuring an equitable distribution of 20

12 national income, facilitating effective mobilization of resources, capital and skills which might otherwise remain unutilized, stimulating the growth of industrial entrepreneurship. So it is very important to study the working of small -scale industry and its relation with entrepreneurial growth. 2.8 Export Trends SSI sector also plays a major role in India s export performance. On an average, 35% of overall export from the country is being contributed by SSI sector. More than 5000 small scale units are engaged in direct export. The overall export performance of SSI sector is demonstrated and depicted in tables below. Year SSI exports (Rs. Cr) Table No. 2.8 Trends in Exports of SSIs in India %Increase(+)/%Decrease (-) Over Previous Year Indices 1996/07= , , , , , , , , , , (Source: Economic Survey) 21

13 160, , , ,000 80,000 60,000 40,000 20,000 0 Figure No. 2.2 Trends in Exports of SSIs in India Trends in Exports of SSIs in India SSI Exports (Rs. The New Industrial Policy introduced in July 1991 marked the beginning of economic reforms in India. The basic elements of industrial liberalization comprised the elimination of all entry barriers to most industries as well as the associated countries on scale and technology. Industrial liberalization was complemented by trade liberalization in the form of drastic reduction in customs duties and renewal of restriction on imports of raw materials, intermediates and capital goods. The new policy has proposed clear guidelines to deal with the three major areas of concern for the sector: (i) finance, (ii) marketing and; (iii) technology. The major policy initiatives for SSI in the 1990 s are shown in Chart below. These measures are related to technology up gradation and modernization, finance and marketing. 22

14 Table No. 2.9 New Small Industry Policy 1991 Sr. No. Major Features Objectives 1. Emphasis to shift from subsidized/ cheap credit to adequate credit. To meet the emerging demand for credit. 2. Equity participation by other undertaking, domestic/ foreign up to 24 per cent Introduction of forthcoming services through Banks To strengthen small industry marketing 5. Marketing of mass consumption goods under common brand name NSIC Industry association to be involved in setting up subcontracting exchanges Technology Development Cell in Small Industries Development Organization (SIDO) Industry association to establish quality counseling and common testing facilities Technology Information Centers Reoriented modernization and technology up gradation programs cluster based approach. To upgrade technology and promote modernization. (Source: Policy Measures for Promoting and Strengthening Small, Tiny and Village Enterprises, Ministry of Industry, Government of India, New Delhi.) 2.9 What is small and tiny/micro industry? Starting any industry is not easy. It calls for vision, patience, plenty of cooperation from many people and sincere disciplined hard work. Building ofany industry or business requires lot of co-ordination, indifferent business activities and with the help of strong organization and effective use of machinery and material; they have to turn it into a viable enterprise. The entrepreneur needs number of skills to setup a small industry which will grow into a giant in the years to come. According to Mr. Raman Roy (pioneer of BPO industry in India): Entrepreneurship is the backbone for small establishments, which it must have to 23

15 bring the business in existence. From the people who repair the basic appliances used at home to someone involved in a huge engineering company, they are all entrepreneurs in one way or the other. In India, entrepreneurship is present from the grass root level and is growing by leaps and bound. Many Indians are coming up with the new ideas and trying to establish themselves because they want to grow. According to early trend people were more interested in securing jobs. Now the trend is changing and self started businesses are gaining acceptance in society. This is a remarkable transformation. Shereen Bhan (Executive Editor, CNBC TV18) observe that India s emerging and existing entrepreneurs are passionate and committed. In addition, their mind set, has more risk taking ability also the stigma of failure is far less than what it used to be. People are willing to take risks. They are willing to see if an idea works and if it does not, they are ready to move to something else. This has played a crucial role in young people trying to look beyond cushy banking and private sector jobs and venturing into entrepreneurship. Further to Shereen s observations, a lot of people also prefer to take the entrepreneurial route even when they have the option of a high paying job. The trend that we see now is that the first generation entrepreneurs are turning in to angel investors. There is lot more support to entrepreneurs and the support system looks good. Entrepreneurs of India are no longer waiting for the government to act. The future for Indian entrepreneurs looks very bright. The opening up of the Indian small industry sector to competition as well as the increase in the need to cater to the global market demands fresh approaches to the radical change in the 20 th century. Consequently this sector must change first to survive as well as restructure and change to meet the new challenges through a critical evaluation. This demands an entrepreneurial culture, organization structure, employee satisfaction and team building. The organizations which can respond to these changes will be ableto survive and retain. Industries occupy a unique place in our country. They are the temples of modern India and are shouldering a big task of lifting our economy from its traditional and agrarian fold to a modern and industrialized one. Thousands of families look to the plants for support and sustenance. It is the industrial establishments which produce the various goods and services for our day to day consumption. Our incomes, living standards, wants, motives, thoughts and action etc are influenced by factories. 24

16 Study of factories helps us appreciate the role played by people in producing goods and services. When a product is turned out by a plant, it is the result of fusion of the efforts and services of scientists, engineers, technicians, managers, workers etc Success in small and tiny enterprises. Every entrepreneur and each enterprises is working for long term growth through annual, monthly and daily target and achieve success. Some of the important factors that differentiate successful organizations from the unsuccessful ones are as followsa) The most important aspect of successful business is leadership. It calls for clear vision, goals and objectives. b) Ability to derive the best from its Human Resources. This is achieved by proper communication and training. c) Adequate but well orchestrated control. d) Constant review of results. e) Setting and adherence of high standards of quality and performance. f) Planning foresight and analysis. g) Updating technology. h) Effective marketing. i) Financial planning, control and proper allocation of funds. j) Effective production system and control. Proper implementation of above aspects will definitely lead to a guaranteed success. This success largely depends on the entrepreneurs individual skills and how he functions i.e. his management skills. Hence, there is a need for adequate and well managed control of the industry i.e. industrial engineering functions, production systems and management functions. 25