SMALL SCALE AND COTTAGE

INDUSTRIES
MANAGERIAL ECONOMICS
PROJECT

Submitted

By,

Submitted To,
Amit
Mr. Ritesh Shah

Pande

12BLL035
Assistant Professor
Institute

of

Law

Institute of Law
ABSTRACT

Small-Scale industry is defined as manufacturing and processing establishments with less

than fifty workers.1 Small-Scale industry ran the gamut from the most primitive kind of
handicraft to small mechanized factories and from independent business units to cottage
industries.2 The possible existence of Cottage industry is prehistoric. In cottage industry
production of goods by individual households is specifically for trade not for their own
consumption.
Small-Scale industry play an important role in developing countries by urban job creation
and market expansion that will affect the prospects of developing countries engaging more
actively in international trade in the future. Because of small scale industry low skill demand,
it provide women and children opportunities to supplement household income and it also
provide technical and entrepreneurial training to urban workers.
Unlike western countries, most developing economies have a small percentage of their
labour forces in large-scale manufacturing and a large share engaged in small-scale
enterprises.3 In the future, the capacity for trade in developing countries will depend
increasingly on their ability to create sufficient numbers of jobs to absorb their rapidly
growing labour forces.
This paper will focus on the role of small-scale and cottage industries in aiding to the
economy of the developing countries.
1 The term small-scale industry refers to the size of the individual production unit, not to the size of
an industry.
2 The Quarterly Journal of Economics, Vol.61, No. 4 (Aug., 1947)pp. 578
3 Small Business Economics, Vol. 4, No. 4 (Dec., 1992), pp.256

Key Words: Small Scale Industries, Cottage Industries, Challenges, Opportunities, Aiding
economy, five year plans

INTRODUCTION
The definition of small scale industries has undergone changes over the years in terms of
investment limits is as follow as, In 1977, small scale industrial unit having investment of
less than Rs. 10 lakh were defined as small scale industrial undertakings, while for ancillary
units, the investment limit was Rs. 15 lakh. Units with investment of less than Rs.1 lakh were
defined as tiny enterprises. In 2000, the investment limit for small scale industries was Rs. 1
crore, for ancillary units Rs. 1 crore, and for tiny enterprise Rs. 25 lakh. The new definition
for micro enterprises, where the investment in plant and machinery does not exceed Rs. 25
lakh, small enterprises, where the investment limit was more than Rs. 25 lakh but does not
exceed Rs. 5 crore and a medium enterprises, where the investment in plant and machinery is
more than Rs. 5 crore but not exceed Rs. 10 crore.4
The term cottage industry is used when products are manufactured on a small scale. India is
well known for its large number of traditional cottage industries. But with the advent of the
industrialization, cottage industries witnessed a sharp decline. However, the government has
taken steps to revive cottage industries and they now play an important part in contributing to
the economy of the country. The top five Indian cottage industries are cotton weaving, silk
weaving, carpet making, leather industry, metal handicrafts and small food processing
industries.5

4 Definition by Ministry of micro, small and medium enterprises(http://dcmsme.gov.in/)

5 K.B.Suri, (Ed.), Small-scale enterprises in Industrial Development The Indian Experience, (New
Delhi: Sage Publication, 1988), p.12.

Cotton weaving is a very important cottage industry in India. This skill dates back to ancient
times as cotton clothing is widely worn around the country. Indian cotton weaving is known
for traditional designs and patterns done by skilful weavers with their looms. The cotton
industry in India is concentrated in Maharashtra, Tamil Nadu, and Gujarat.
Silk weaving is another famous cottage industry in India. India is one of the major producers
and consumers of silk as it is worn on special occasions such as weddings and festivals.
Mulberry, Muga, Tassore, and Eri are the types of silk produced in India.
Carpet making was introduced in India during the Mogul era. Even though the Kashmiri
carpets are world famous for their fine quality, India also is known for its durries and coir
mats. The carpet making industry in India is in Kashmir, Rajasthan, Punjab, Uttar Pradesh
Andhra Pradesh and Punjab. The Government of India has set up the Carpet Export
Promotion Council for promoting hand-knotted rugs and all other types and styles of floor
coverings from around the country.
India is a supplier of high quality leather to the global market. The Indian tanning industry
can produce around 10% of the global demand. The major leather producing regions in India
are Tamil Nadu, West Bengal and Uttar Pradesh. Metal has always been used in India to make
figurines, utensils, jewellery.
Metal handicrafts have a distinctly Indian touch and are widely appreciated around the world.
They have been a significant contributor to the Indian economy.
Cottage Industry is a concentrated form of small scale industry where the productivity of the
goods takes place in the houses of the labourers and the workforce include the members of
the family. The equipments used to generate products are not the hi-tech ones but generally
those which are used at homes.

Cottage industry is generally unorganized in character and falls under the category of small
scale industry. They produce consumable products through the use of conventional methods.
These types of industries originate in the country sides where unemployment and underemployment are widespread. In this way, cottage industries help the economy by engrossing a

massive amount of remaining workforce of the rural areas. But on the flip side Cottage
Industry cannot be considered as the mass producer of products. It faces major risks from
medium or large industries which demand huge amount of capital investment for all types of
hi-end technologies.
Small-scale industries requires little plant and capital equipment, since they rely on a very
high ratio of labour to the other factors of production. The mechanical equipment was simple
but sometimes highly specialized. Much emphasis is place on manual dexterity, resulting in
skills exceeding those of most workers in the more highly mechanized factories; at the same
time, the small industries has a large proportion of quite unskilled persons (including
children) to do simple preparatory or finishing tasks and heavy work. The work force,
commonly built around the family as a nucleus, is held together by close personal and
customary relationships, which recognized and adjusted for various interruptions to regular
working. An important outcome of these traits is the fact that the small industries are capable
of irregular operations, employing small and varying stocks of raw materials as well as
varying amounts of labour. Finally, the products are usually sold locally either for direct
consumption or for wider distribution by the parent firm or the merchant capitalist.

There are two types of Small-Scale Industries1. Modern Small Scale Manufacturing Enterprises:
These are small firms using Modern techniques to produce modern products. These firms,
by their very nature, are located in large towns in order to take advantage of external
production economies; they use hired labour and raw materials supplied by large scale
enterprises located at a long distance. Their market is dispersed in a region or throughout the
country. Sometimes they operate in export markets.
2. Intermediate Groups of Small Enterprises:
These firms use more or less traditional techniques to produce more or less modern
products. The orientation of these enterprises is towards urban areas, rather than villages, as
they have to procure their raw materials from towns, which also provide markets for the
finished products. They provide immediate large-scale employment and have a shorter
gestation period and relatively smaller markets.

PROBLEMS FACED BY SMALL SCALE INDUSTRIES

Cottage industry is considered for its enormous potential of providing employment. But, over
the years, employment may have increased in this industry but the income of the people has
definitely decreased as the middlemen offer low prices to the manufacturers but take heavy
chunks of money from the buyers. But, it is not only the middlemen and the dealers. The new
revised foreign policies, globalization is also responsible for the current condition of cottage
industry. The handloom weaver facing constant competition from the power looms. These
workers have given their whole life to stitching and knitting. The skill that they possess is just
unmatchable. But, still they are at the same place where they had started years ago.
An industry, providing employment to a large section of our population is in such distress.
With over 4 million people engaged in handloom industry, such a condition proves the
adversities which these people are facing. An interesting point to note is that out of the total
people engaged in this industry, around 47% are below poverty line. Also, according to the
new census6, the average annual household income of these people is just Rs 41,068. And
given the large family size among this section of the society, the per capita income is just a
little more than nothing.
Cottage industries in India face dearth of capital and large quantity of labour, which force
them to buy capital-saving techniques. Hence, there is an urgent need for implementation of
techniques which not only enhances productivity but develops skills of the labourers and
meets the requirements of the local market. Endeavours should be directed towards the
6 Annual Report (2009 2010) Ministry of Small Scale Industries.

development of technology so that labours can enjoy a decent lifestyle. Government should
also provide subsidiaries for the growth of cottage industries especially in the preliminary
stages. The labourers of cottage industry often find themselves fighting against all odds at
every stage of their business, be it buying the raw materials or promoting their products,
arranging for capital or access to insurance covers, etc.7
The various problem faced by cottage industries are-

Problem of Raw-materials
Due to their limited resources, the owners of these industries cannot afford to purchase rawmaterial in bulk. That is why they get low quality materials at high rates.
Problem of Finance
Cheap and easy finance is not available to these industries. The financing system of
government institutions and banks is such that these industries have to complete many
formalities and there are so many complications which can be followed by these less
educated entrepreneurs.
Marketing problems
These industries mainly exist in villages and due to lack of transport and communication
facilities they are handicapped in finding suitable markets for their products,
Lack of Managerial Talent
Cottage and small scale industries are mostly run by the small businessmen having no
training of management and organization. How these industries, therefore, can stand before
the large seals industries which are managed and organized by the specialists of that field?
Competition with large-scale industries

7 P.S.Lokanathan, Problems of the SSIs Sector, (New Delhi: Govt. of India, 1976), p.24.

The main problem before these industries is that they are unable to compete with large-scale
industries. The economies of large-scale production are not available to them and therefore
they fail to compete with large-scale industries.
Cottage industries are the victims when it comes to attracting the attention of modern
industry. This calls for preservation and promotion of cottage industries through formulation
of public policies directed at improving the industry both in context of income of labourers
and technological aspects. It is high time now that the Government took some initiatives.
Though in every budget, new promises are made, new policies are made. But, so far none of
them has benefitted these people much. They are almost in the same conditions as they were
decades ago. Though there is a marginal increase in their income but if at the same time, we
also notice the increase in the expenditures, then, we can say that in fact they are worse now
than they were earlier.

ROLE OF SMALL SCALE INDUSTRIES IN AIDING ECONOMY

Small-scale industries play a vital role in the development of the national economy. India is
facing the problems of unemployment and paucity of capital resources. The built in
characteristics of small scale industries, such as relatively small size of initial capital
requirement, entrepreneurship and employment generation potential, etc., render them the
ideal for balanced and decentralized development. 8 The small-scale industries assume great
importance in mitigating the problem of unemployment, in facilitating the growth of the
industrial sector and in ensuring all round development.
Cottage and small scale industries are of very special importance in India. "If we lack capital,
we do not lack manpower, and we must use this manpower both to add to the wealth of the
country and to reduce unemployment, Jawaharlal Nehru said. Besides, small-scale industries
avoid regional imbalances and facilitate decentralized development in various parts of the
country, including the remote areas, by effectively utilizing the locally available raw
materials and other resources, including work force.
Small scale industries have emerged as a vibrant and dynamic sector of the Indian economy
that contributes around 40 per cent of the total industrial production and over 34 per cent of
the national exports. At present the Small Scale Industrial sector is providing employment to
8 Deb Ranabijoy : Small Scale Industries in India, New Delhi, MittalPublication, (1993)

over 250 lakh persons9. The captains of our economy are more than aware of the importance
of the small scale industries in terms of employment potential, productivity, utilization of
indigenous resources, balanced regional development etc. The small scale sector is important
not only for its contribution to GDP but also for its stellar performance in exports and in
generating employment.
The small scale industrial sector is endowed with certain special features, which are
especially beneficial to our economy such as employment potential, indigenous nature,
balanced development of the economy.
When compared with large scale units. This sector facilitates speedy development of the
economy by providing employment opportunities to rural and less skilled masses and caters
to the consumption requirements of these people by resorting to indigenous production
making use of local resources.
Indian economy is a developing economy. Its vast resources are either unutilized or
underutilized. A major section of man power is lying idle. The per capita income is low.
Production is traditional and the technique is outdated. The output is insufficient and the basic
needs of the people remain unfulfilled. In both developed and developing countries, the
government is turning to small and medium scale industries, as a means of economic
development.

So the various roles of small scale industries in aiding of economy areEmployment generation:
The basic problem that is confronting the Indian economy is increasing pressure of
population on the land and the need to create massive employment opportunities. This
problem is solved to larger extent by small-scale industries because small- scale industries are
labour intensive in character. They generate huge number of employment opportunities.
Employment generation by this sector has shown a phenomenal growth. It is a powerful tool
of job creation.10
9 Editor N.Ravi, The Hindu, survey of Indian Industry, 2010, p.no.7.
10 Michael Froment, Smaller Enterprises Create Most New Jobs, Southern Economist, 35(9): 23,
1996.

Mobilisation of resources and entrepreneurial skill:

Small-scale industries can mobilize a good amount of savings and entrepreneurial skill from
rural and semi-urban areas which are remain untouched to the clutches of large industries and
put them into productive use by investing in small-scale units. Small entrepreneurs also
improve social welfare of a country by harnessing dormant, previously overlooked talent.
Thus, a huge amount of latent resources are being mobilised by the small-scale sector for the
development of the economy.
Equitable distribution of income:
The small-scale industries ensures equitable distribution of income and wealth in the Indian
society which is largely characterised by more concentration of income and wealth in the
organised sector keeping unorganised sector undeveloped. This is mainly due to the fact that
small industries are widespread as compared to large industries and are having large
employment potential.
Regional dispersal of industries:
There has been massive concentration of industries in few large cities of different states of
India. People migrate from rural and semi urban areas to these highly developed centers in
search of employment and sometimes to earn a better living which ultimately leads to many
evil consequences of over-crowding, pollution, creation of slums, etc. This problem of Indian
economy is better solved by small- scale industries which utilise local resources and brings
about dispersion of industries in the various parts of the country thus promotes balanced
regional development.
Provides opportunities for development of technology:
Small-scale industries have tremendous capacity to generate or absorb innovations. They
provide ample opportunities for the development of technology and technology in return,
creates an environment conducive to the development of small units. The entrepreneurs of
small units play a strategic role in commercialising new inventions and products. It also
facilitates the transfer of technology from one to the other. As a result, the economy reaps the
benefit of improved technology.
Supports the growth of large industries:

The small-scale industries play an important role in assisting bigger industries and projects so
that the planned activity of development work is timely attended. They support the growth of
large industries by providing, components, accessories and semi-finished goods required by
them. In fact, small industries can breathe vitality into the life of large industries.
Better industrial relations:
Better industrial relations between the employer and employees help in increasing the
efficiency of employees and reducing the frequency of industrial disputes. The loss of
production and man-day's are comparatively less in small- scale industries. There is hardly
any strikes and lock out in these industries due to good employee-employer relationship. Of
course, increase in number of units, production, employment and exports of small-scale
industries over the years are considered essential for the economic growth and development
of the country.

OPPORTUNITIES FOR COTTAGE INDUSTRIES IN INDIA

Cottage Industry is often characterized by its enormous potential for employment generation
and the person getting employed is basically regarded as a self-employed one. It has been
empirically found out that Cottage Industry has given economic independence to the women
in the developing as well as developed countries. Cottage industries involve all the family
members contribution for the development of the family. The most common form of support
extended by the governments towards this industry is through forwarding of capital subsidies.
Another form through self-help groups. They are very much helpful for the cottage industries.
As the women employed in the cottage industries are the members of the self-help group and
they can get financial assistance at low interest rate which is a great boon for them.

METHOD
A Doctrinal Research method has been adopted. Data has been collected from secondary
sources such as books, journals, annual reports of ministry of small scale industries and
surveys conducted by Reserve Bank of India and National Small Industries Corporation.
The collected data has been classified in a systematic manner.

FINDINGS
Cottage and small-scale industries had flourished in India in early times. They were principal
sources of income and employment and their products were identified for their excellence
and artistic skill. The decay of these industries started with the advent of the British. After
independence government of India focused heavily on industrialization of large-scale
industries and neglecting small scale industries but later the Government of India, realizing
the socio-economic significance of the role of small-scale industries, has initiated several
positive measures for their development. The industrial policy pronouncements, the
progressive allocations made in the Five-Year Plans, the creation of different promoting and
supporting organizations and the nationalization of commercial banks reflect the spirit and
effort of the Government towards the creation of a favourable climate for the growth and
working of small-scale industries.
That the small industries have a specific role to play was underlined by the Industrial Policy
Resolution of 1948, which stated that cottage, and small-scale industries are particularly
suited for the better utilization of local resources and for the achievement of local selfsufficiency in respect of certain types of essential goods. After the formulation of the First
Five Year Plan, the Planning Commission with Professor D.G. Karve as Chairman appointed
a Committee. The Committee recommended that any development Programme for small
industries should be decentralized, should aim at gradual improvement in techniques without
reducing job opportunities, should assure marketing through co-operatives, and aim at
providing promotional support rather than enforce protection or reservation.
A Small Scale Industries Board was constituted in 1954 and a number of helping schemes
such as supply of machinery on hire purchase, liberal and wider grants under State Aid, and
price preference in government purchase were initiated to provide support to the small-scale
sector.
The government announced its Second Industrial Policy in 1956, which replaced the
industrial policy resolution of 1948. This industrial policy statement explicitly made it clear
that Small scale industries provide immediate large scale employment, offer a method of
ensuring a more equitable distribution of national income and facilitate an effective
mobilization of resources of capital and skill which might otherwise remain unutilized.

The various activities undertaken by government are:

Registration and promotion of small scale and tiny industries and industrial Co-

operative societies.
Sanction and disbursement of various subsidies and incentives such as State Capital

Subsidy, Generator Subsidy, Power Tariff Subsidy.

Offering various testing facilities for chemicals, metals, metallurgical, electrical,

electronic gadgets and appliances.

Implementation of centrally sponsored schemes like Self Employment Programmes

for the Educated Unemployed Youth and Prime Ministers Rozgar Yojana schemes.
Conducting Entrepreneur Development Programmes particularly special schemes for

women.
Creating awareness about the various policies and programmes of the Government

through seminars and dissemination meets.

Providing Escort Services to the Entrepreneurs.
Maintenance of Special purpose Industrial Estates for Electrical and Electronics

Industries.
Providing entrepreneurial guidance through Data Bank and Information Centre and

technical information sections attached to various District Industrial Centers.

Identification of new areas with growth potential and providing familiarization and

Incubator facilities to promising entrepreneurs.

Conducting Techno-Economic Surveys.
Conducting sample and comprehensive surveys.
Development and promotion of cottage and handicrafts industries.
Training facilities in the field of light engineering, tool and die designing.
Assistance for import of capital goods machineries and scarce raw materials.
Implementation of Quality Control Act on Electrical household appliances, etc.
Export Promotion.

Supervision of implementation of special assistance schemes announced by

Government in favour of small and tiny sector units.

CONCLUSION

The balanced and sustainable growth of Indian economy calls for certain minimum level of
diversification of the economy in the direction of the industrial sector. Hence, small scale
industries have an important place in the economic life of a developing country like India.
After implementation of 1991 new industrial policy resolution, there was a threat for the very
survival of small scale industry in India during the post reform periods. The government apart
from encouraging high rate of foreign investment in the Indian industries it has been also
liberal in extending relatively more number of foreign good is available everywhere in India
at cheaper rate. Small scale industrial sector to contribute to increase of industrial
productivity, rise of exports, generate more employment opportunity and also contribute very
impressive of the GDP. In view of this, the government of India has rightly recognised small
scale industries as the engine of growth in the present millennium. For sustainable higher
growth of the small scale industrial sector, top priority should be given to financial support
state and central government should facilitate the growth of small scale industry mainly
through creating conducive environment for producing and marketing of products and
services of small scale sectors.
Cottage Industries are of cultural and economic importance to India. They keep the age old
traditions alive and also provide employment to a number of people. Support should be
provided by the community to prevent exploitation and further develop these industries as
they face stiff competition from other economies. In the over-populated countries like ours,
the only way to fight the monster of unemployment is the development of cottage and small
scale industries. They will bring about a more equitable distribution of wealth.

Suggestions

For the promotion and development of cottage and small scale industries which has been
recognized as important and appropriate means for accelerating economic development,
necessary steps be taken by entrepreneurs, bankers educational institutions, training institutes,
Government, N.G.O.s for the socio-economic development of the town in particular and the
district, the state and the nation in general in respect of the following.
Improving finance facilities: It is suggested that the banks can eliminate the avoidable
delays, guiding the entrepreneurs to overcome initial hurdles at the time of launching their
enterprise, effective monitoring and follow-up of utilisation, easy way of receiving loans.
Rescheduling of loan repayment in case of genuine difficulty of entrepreneurs to overcome
financial problem. Various Schemes launched by the Government from time to time for shortterm and long- term credit at cheaper rate of interest be made available to the entrepreneurs to
gear up entrepreneurship.
Improving Power Supply Position: Adequate and uninterrupted power supply is one of the
basic requirements for industrial development. The power supply position of Abhayapuri
should be improved to assist the enterprises.
Developing Management Knowledge and Skill: Managerial problems like absenteeism,
negative work culture, etc. can be removed by participation of the entrepreneurs in the
seminars, workshops training programmes, etc.
Market Survey: Periodic market survey, surveying the competitive pricing nature, collecting
periodic feedback from dealers, customers, etc. is done for upgrading their products,
diversifying their product lives, improving the quality, etc.
Training Facilities: Arrangements are to be made for setting up of training institutes at
Central place for the said purpose.
Marketing Hat: Marketing arrangements should be developed in the area for the smooth
marketing of the products of Cottage sector and elimination of middle man.

REFERNCES

Rajkumar.S.Topandasani, Performance of Small scale Industry in India, Southern

Economist, (Oct 2, 2013), pg no.5-7
Dutta A. and Singh M.K. : Contribution of Small Scale Industries (SSI) Sector
in Indian Economy. The ICFAI Journal of Applied Economics, Vol. 2, No. 4, (2003)
Deb Ranabijoy : Small Scale Industries in India, New Delhi, Mittal Publication,

(1993)
Annual Report (2000 01) Ministry of Small Scale Industries & Rural Industries,

Government of India, New Delhi.

http://www.tn.gov.in/spc/tenthplan/CH_10_2.PDF.
http://www.economywatch.com/world-industries/c.ottage.html
Aditi Swami, Cottage Industries in India, The Viewspaper , March 5, 2010.
Durgesh Shanker, Crafts of India and Cottage Industries, Indusvista Editions (Oct2,

2013).