LESSON –2

SMALL BUSINESS
Dr. Jyotsna Sethi

STRUCTURE

2.0 Introduction
2.1 Objectives
2.2 Concepts and Definitions
2.2.1 Small Scale Industries
2.2.2 Ancillary Industry
2.2.3 Tiny Industry
2.2.4 Small Scale Service and Business Enterprises (SSSBEs)
2.2.5 Women Enterprises
2.2.6 Export Oriented Unit
2.3 Nature and Characteristics
2.4 Problems of Small Business
2.5 Role of Small Business in Indian Economy
2.6 Small Business as Seedbed of Entrepreneurship
2.7 Summary
2.8 Glossary
2.9 Self Assessment Questions
2.10 Further Readings
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2.0 INTRODUCTION

You have learnt about the close linkage between entrepreneurship and economic
development in lesson 1. The Small Scale Sector is the natural habitat of
entrepreneurs. Most entrepreneurs start small and then nurture their units into
large industries. The SSI Sector provides an opportunity for them to hone their
skills and talents, to experiment, to innovate and transform their ideas into goods
and services needed by the society.
Over the last six decades the Small Scale Industry sector has emerged as a highly
vibrant and dynamic sector. It has acquired a prominent place in the socio-
economic development of the country. Mostly this sector exhibited positive
growth trends even during periods when other sectors of the economy
experienced either negative or nominal growth.
Today this sector accounts for 95 percent of the industrial units, provides nearly
80 percent of manufacturing employment and contributes around 35 percent of
exports. It produces 7500 items and provides employment to more than 195 lakh

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persons. It is a well-recognised fact that a vibrant small-scale sector holds the key
to economic prosperity in an economy like India.

Profile of SSI Sector in India

♦ 95% of Industrial Units in the Country
♦ 39.92% of Value Added in the Manufacturing Sector
♦ 34.29% of National Exports
♦ 6.86% of Gross Domestic Product
♦ Employment To 193 Lakh Persons
♦ Production of Over 7500 Items in the Industrial Sector

♦ 298 Items Reserved for Exclusive Manufacture

♦ 358 Items for Exclusive Purchase from This Sector
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2.1 OBJECTIVES

After going through this lesson you should be able

• To define a Small Scale Industry, Ancillary Industry, Tiny Unit, Small
Scale Service And Business Enterprises [SSSBEs], Women Enterprise and
Export Oriented Unit.
• Differentiate Between The Traditional and Modern Small Scale Sector
• Explain the Nature and Characteristics of SSIs
• Examine the Role of Small Business in National Economy
• Decribe how Small Industries act as Seedbed of Entrepreneurship

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2.2.CONCEPTS AND DEFINITIONS
In most parts of the world the nomenclature used is Small and Medium
Enterprises (SMEs) and the criteria for defining include the number of employees
and /or the turnover. In India the Small Scale Industry evokes different meanings
for different agencies and the financial institutions. For example for the purpose
of Excise and Sales Tax Exemption, the turnover alone is the determining
criterion. However in broader terms, currently, an SSI is defined in terms of
investment ceilings on the original value of installed plant and machinery.

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2.2.1 THE SMALL SCALE INDUSTRIAL
UNDERTAKING
An industrial undertaking in which the investment in plant and machinery,
whether held on ownership terms or on lease/hire-purchase basis, does not exceed
Rs. 10 million (Rs. 1 crore) is regarded as a small-scale undertaking. These
include manufacturing and service units.

2.2.2 ANCILLARY INDUSTRIAL UNDERTAKING

An industrial undertaking which is engaged or is proposed to be engaged in the

manufacture or producing of parts, components, sub-assemblies, tooling or
intermediates; or the rendering of services is termed as an ancillary undertaking.
The ancillary undertaking is required to supply or render or propose to supply not
less than 50 percent of its production or services, as the case may be, to one or
more other industrial undertakings as the case may be. The investment in plant
and machinery, whether held on ownership basis or on lease or on hire purchase,
should not exceed Rs. 10 million.
Over the years the following sub-sectors have been identified within the overall
small-scale sector:

2.2.3 TINY ENTERPRISE

A unit is treated as a tiny enterprise where the investment in plant and machinery
does not exceed Rs. 2.5 million (Rs. 25 Lakhs) irrespective of the location of the
unit. Many shops, schools, parlours, Photostat and STD booths in your vicinity
are all examples of tiny units.

2.2.4 SMALL SCALE SERVICE AND BUSINESS

ENTERPRISE [SSSBES]
An industry related service/business enterprise with investment up to Re.0.5
million (5 Lakhs) in fixed assets, excluding land and building, is treated as an
SSSBE. E.g. advertising agencies, Marketing consultancy, Auto repair, services
and garages, Tailoring, Desktop printing etc. The service sector has emerged as
the major segment of the economy.

2.2.5 WOMEN’S ENTERPRISES

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A Women Entrepreneur’s Enterprise is termed as an SSI unit/industry-related
service or business enterprise, managed by one or more women entrepreneurs in
proprietary concerns, or in which she/they individually or jointly have a share
capital of not less than 51 percent as partners/shareholders/directors of a private
limited company/members of a cooperative society.

2.2.6 EXPORT ORIENTED UNIT [EOU]

A unit with an obligation to export at least 30 percent of its annual production by
the end of the third year of commencement of production and having an
investment ceiling up to Rs. 10 million (Rs. 1 crore) in plant and machinery is
termed as an export oriented SSI unit.

Key Words
SSI, Ancillary Industry, Tiny Enterprise, SSSBEs, Women’s Enterprise, EOU

Table 2.1: Investment Ceilings for Small Scale Industries (2006)

Type of SSI unit Investment limit Remarks

(1 million= 10 Lakhs)

Small Scale Industry Rs 10 million Historical cost of plant &

machinery
Ancillary Rs 10 million At least 50% of its output should
go to other industrial undertaking
Tiny Enterprise Rs 2.5 million No location limits

Service & Business Enterprise Rs 0.5 million No location limit

Women Enterprise Rs. 10 million 51% equity holding by women

Export Oriented Rs. 10 million Obligation to export 30% of

production

In India no separate definition of medium enterprises exists and as such there is

no specific definition of Small and Medium Enterprises [SMEs.]
Administratively, in the Indian context, the industry universe is divided into three
major segments

Factory Sector- Large Scale units- (Non- SSIs);

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Factory Sector-Small Scale units
Village and Small Industries sector [VSI.]

The VSI sector has further been divided into two broad sub-sectors viz: The
Modern SSI Sector and the Traditional SSI Sector.

Modern Small Scale Industries

These cover SSI units [both in the Factory and Non/Factory sectors] and power
loom units. Such units mostly use power driven machinery and possess superior
production techniques. Units in this sub-sector are generally located in close
proximity to large industrial centers or urban areas. These industries are moving
away from the traditional products to knowledge-based products.

Traditional Small Scale Industries

This sector comprises tiny and cottage industry segments like handlooms, khadi
and village industries, handicrafts, sericulture and silk, rubber and coir. These
units are labour- intensive, are generally located in rural and semi-urban areas and
are artisan based. Usually the capital invested is also nominal.

Check your progress:

Match the following:

Modern SSI Khurja Pottery

Large Scale Industry Sona Steering supplying to Maruti Udyog
SSI Laundry Services
Tiny Paper Manufacturing Unit with Rs. 10 million investment
Ancillary Photostatting Unit with Rs. 0.5 million investment
SSSBEs TELCO
Traditional SSI Call Centre

2.3 NATURE AND CHARACTERISTICS

Small-scale industries have certain unique features, which distinguish it from the
Large-scale sector. Some of the salient characteristics of small-scale businesses
are given below.
1. Personal Character: In most small businesses the owners themselves are
managers and so they can operate independently. They can give customized
service to their clients, which in many cases is their USP.
2. Flexibility: Since most small businesses are a one-man show they do not have
to go through a hierarchy to get permissions to make changes. Small business
can respond quickly to environmental trends. Nimbleness and agility are

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 characteristics that allow small entrepreneurs to understand market conditions
and rapidly respond to changes.
3. Labour Intensive: Small businesses have tremendous capacity for
employment generation through their labour intensive techniques. Small
businesses actually create more jobs than big businesses. This feature of a
small-scale unit is of great significance in a country like India where the
number of unemployed people is phenomenal.
4. Local Area of Operation: Small businesses are largely local in operation;
however the market for its products may be local, regional or even
international.
5. Short Gestation Period: The capital investment in the small sector is
generally low and the time taken for production to commence is also less. As
a result of short gestation period the units give quick returns and consequently
the pace of economic development quickens.

2.4 PROBLEMS OF SMALL BUSINESS

While the small entrepreneurs can set up a unit even with less capital, enjoy quick
returns and have the flexibility to handle the vagaries of the market, they have to
face many problems like the following:
1. Paucity of Finance: The small entrepreneurs possess a weak financial
structure and find it extremely difficult to obtain credit because of lack of
collateral security. This acts as a big handicap, especially in the initial stages,
in most of their operations like their ability to hire the best workers or to
purchase the latest machinery and equipment or to acquire sophisticated
technology.
2. Poor availability of power and other infrastructure: Though infra-
structural bottlenecks are problems for big businesses too, yet they can
overcome these problems to some extent because of their financial strength
e.g. generating their own power, or even influencing the government in
framing its policies sometimes. The small entrepreneur on the other hand has
to battle with them.
3. Obsolete Technology: Most small businesses use old technologies because
they cannot afford better. As a result the quality of their goods is inferior and
the cost of production is higher than in case of other big ventures. This has
acted as a serious handicap especially after opening up of the economy when
they have had to compete with imported goods.
4. Marketing Problems: The small entrepreneur cannot supply standardized
goods of high quality and as a result cannot compete with products of large
companies or MNCs. They usually do not have a brand name or loyalty, as
there are hardly any funds for advertising or sales promotion. All these
increase their marketing woes.

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5. Poor Managerial and Organizational Skills: usually the entrepreneur has to
perform a multitude of diverse functions invariably with out having any
exposure to professional education or formal training. The large sector on the
other hand can hire the best qualified and trained people.
6. High Incidence of Sickness 7 out of 10 small businesses usually fall sick and
die within 3to5 years. Main causes for this are a wrong choice of product,
poor managerial skills, lack of experience, poor quality of products because of
the use of old technologies, etc.
Apart from the above-mentioned problems the small entrepreneur has weak
bargaining power to deal with suppliers and financial institutions, has to face
bureaucratic red tapism and is unable to invest in R & D. After the opening up of
the economy the small sector has been finding it extremely difficult to compete
with the high quality goods available in the market.

2.5 ROLE OF SMALL BUSINESS IN NATIONAL

ECONOMY

Small business has played a very crucial role in transforming the Indian economy
from a backward agrarian economy to its present stature. Its benefits range from
creating job opportunities for millions of people, including many with low levels
of formal education. It has nurtured the inherent entrepreneurial spirit in far flung
corners of the nation resulting in the growth and development of all regions. It has
been instrumental in raising the standard of living of the multitudes. The small
scale sector has contributed specifically in the following areas:

1. Employment Generation: The SSI sector in India is the second largest

manpower employer in the country next only to the agriculture sector. India is
characterized by abundant labour supply and is plagued by unemployment and
underemployment. Under these circumstances the small-scale sector is a boon
.For every Rs.0.1million of investment, the small-scale sector provides jobs to
26 people as compared to 4 jobs created in the large-scale sector.

2. Low Initial Capital Investment: Another feature of the Indian economy and
most of the developing economies is the scarcity of capital. The modern large-
scale sector requires colossal investments whereas the small sector is just the
opposite. Not only is the employment capital ratio high for the SSI but the
output capital ratio is also high.

3. Balanced Regional Development: Dispersion of small business in all parts of

the country helps in removing regional imbalances by promoting
decentralized development of industries. It helps in industrialization of rural
and backward areas. It also helps to reduce problems of congestion, pollution,
housing, sanitation etc.

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4. Equitable Distribution of Income: This is a natural corollary of the above.
When entrepreneurial talent is tapped in different regions and areas the
income is also distributed instead of being concentrated in the hands of a few
individuals or business families.

5. Promotes Inter-Sectoral Linkages: SSI units are supplementary and

complementary to large and medium scale units as ancillary units. Many small
units produce sub-parts, assemblies, components and accessories for the large-
scale sector especially in the electronic and automotive sectors.

6. Exports: The most significant contribution of the SSI has been in the field of
exports. There has been a significant increase in the exports from this sector
of both traditional and non-traditional goods including jewellery, garments,
leather, hand tools, engineering goods, soft ware etc.

7. Development of Entrepreneurship: Small business taps the latent potential

available locally. This way they facilitate the spirit of enterprise, which results
in overall growth, and development of all the regions /sectors of the nation.

2.6 SMALL BUSINESS AS SEEDBED OF

ENTREPRENEURSHIP
Small business is the natural habitat of an entrepreneur. They are really found in
Giant Industries. Small businesses provide goods as services as well as serve as a
nursery of entrepreneurial and managerial talent. Initially the capital investment in
small ventures is nominal and the technology used is low, so it becomes easy for
first time entrepreneurs to set up a venture. In the beginning usually these
ventures are a “one man show” where the entrepreneur looks after the myriad
functions of production, marketing, finance, legal etc. The entrepreneur gets a
chance to increase his knowledge, skill and competence. He takes decisions
independently and it is in these circumstances that entrepreneurial talent
blossoms.
In developing economies it is through a large number of such small enterprises
started by these imitator entrepreneurs that a chain reaction is set into motion,
which leads to cumulative progress. It is pertinent to note that nearly 70 percent of
the total innovations in the world have come from the Small Scale Sector. Many
of the big businesses today for example, Siemens, Ford, Eastman Kodak, Lever
Brothers, Reliance, Nirma, Rasna were all started small and then nurtured into
big businesses. Narayan Moorthy of Infosys spent 20 years in founding, building
and nurturing Infosys.
Small business mobilizes small savings, taps the latent entrepreneurial talent
across regions and provides a platform for them to develop and fine-tune their

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entrepreneurial spirit. In the process the entire country benefits in the form of
goods and services and higher standard of living.

2.7 SUMMARY
The small-scale sector has emerged as an engine of growth in most of the
developing and newly industrialized countries of the world. In India the SSI has
played a catalytic role in socio-economic transformation of the country. This
sector has exhibited tremendous capacity for employment generation, greater
resource use efficiency, and technical innovation, promoting inter-sectoral
linkages, raising exports and reducing regional imbalances.
Small business has low capital investment and therefore the risk of the
entrepreneur is limited and he can afford to be venturesome. Moreover small
businesses have a small gestation period so returns are also quick. The flexibility
inherent in this sector allows the entrepreneur to work aggressively if a project
seems promising or change course in case things do not work out. In his manner
the small business functions as a nursery for developing entrepreneurial talent.
The cumulative effect of these innumerable entrepreneurs leads to economic
growth and higher standards of living, which transform the society. What
motivates these enterprising young men and women is the subject of your study in
the next chapter.

2.8 GLOSSARY
Gestation Period The period between the time of initial investment and
commercial production.
Large Scale Industries These are units, which are not small scale and usually
with an investment of more than Rs. 100 million.
Seedbed A concept borrowed from agriculture to denote small business as the
training ground for entrepreneurship and management at larger scale.
SMEs Small and Medium Enterprises, usually with an investment between Rs.10
to 100 million
USP Unique Selling Proposition, basic or core strength of a product/firm for
asserting its position at the market place; e.g. electronic major Sony’s USP lies in
minaturisation.

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2.9 SELF ASSESSMENT QUESTIONS
1. List the advantages that a Small Business has over a Large Business

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2. In your view is it important to develop ancillary units? Give reasons.
3. Differentiate between a Modern SSI and a Traditional SSI.
4. Define a SSSBE and give some examples of such enterprises.
5. Write a short note on Small Business as seedbed of entrepreneurship.

2.10 FURTHER READINGS AND SOURCES

1. Charantimath Poornima, 2006. Entrepreneur Development Small Business

Enterprise. Darling Kindersley (India) Pvt.Ltd, New Delhi.
2. Gupta C.B, Khanka S.S. 2003. Entrepreneurship and Small Business
Management. Sultan Chand & Sons, New Delhi, 4th Edition.
3. Hatten S Timothy, 1997. Small Business Entrepreneurship and Beyond.
Prentice Hall, New Jersey.
4. Laghu Udyog Samachar, 50 Years of SIDO, Commemorative Issue on Golden
Jubilee of Small Industries Development Organisation [1954-2004], A
Publication of Development Commissioner [SSI], Ministry of SSI,
Government of India.
5. Report of the Expert Committee on Small Scale Enterprises, [Abid Hussain
Committee], Ministry of Industries, Government of India, 1997.
6. Report of the Study Group on Development of Small Scale Enterprises,
Planning Commission, Government of India, New Delhi March 2001.
7. SIDBI 13th Annual Report 2002—2003 Small Industries Development Bank
of India.
8. SIDBI Report on Small Scale Industries 2000, Small Industries Development
Bank of India, April 2000.

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