SMALL AND MEDIUM ENTERPRISES (SMEs) IN KARNATAKA: PROBLEMS AND PROSPECTS BY SANJEEV RAO JAIN UNIVERSITY 2011

BEING A DISSERTATION SUBMITTED TO THE JAIN UNIVERSITY IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF PHILOSOPHY IN MANAGEMENT JAIN UNIVERSITY 2011 DECLARATION

I, SANJEEV RAO, do hereby declare that this dissertation is entirely my own composition. All references made to works of other persons have been duly acknowledged.

----------------------------------------------------SANJEEV RAO

ACKNOWLEDGEMENT My unqualified gratitude goes to God Almighty, The Merciful and The Provider, who lavishly gave me the endurance, resilience, foresight and thoughtfulness to undertake this project and to complete it to the satisfaction of Jain University I wish to specially thank Professor Sameer Kant for his contributions and inputs, which made this work a reality. I also wish to acknowledge the motivations and contributions I got from Dr. Hederick H. P. Barlay and Dr. Raymond Okafor who inspired me to vigorously pursue the execution of this research with my utmost zeal. I wish to acknowledge the contributions of my family who gave me total support and encouragement towards my pursuit to obtain a Doctorate Degree. My special thanks go to my children, especially Obiora H. Onugu and Chuka A. Onugu who provided the secretarial support. I also wish to acknowledge the secretarial support of Mr. Celestine I. Ugwu. Lastly I wish to acknowledge the contributions of Mr. O. Jide of the University of Lagos Computer Centre who assisted with the analysis of the data for this work.

B.A.N. ONUGU Lagos, Nigeria October 2005

ABSTRACT This study, Small and Medium Scale Enterprises (SMEs) in Karnataka Problems and Prospects, was undertaken to find out if the SME sector in Karnataka is performing up to its potential if not, why, and also to identify remedial measures. The study thus investigated the performance of the Small and Medium Enterprises located at Peenya Industrial estate, its problems and prospects and recommended measures to make the SMEs of Karnataka in general and Peenya in particular achieve its potential. A total of 300 SMEs were randomly selected from a cross section of a population of 1,500 SMEs spread among all the states of Nigeria including Abuja and covering virtually all forms (Sole Proprietorship, Partnership, Private and Public Limited Companies etc) and kinds (Services, Manufacturing, Processing, Oil & Gas, Educational etc) of business took part in the study. Eleven banks were also selected for the study. Participants were selected through a simple random sampling process. Two sets of questionnaires were constructed, one set for the SMEs and the other for the Banks and administered on the participants. The responses to the questionnaires were complemented with personal interviews of the key operators by the researcher. The responses of the participants were analyzed using the statistical package for social sciences (SPSS), which generated the frequency distributions, means, standard deviations, variances, standard errors, chi-square statistics, correlations, analyses of variance, t-statistics, etc of the responses The main hypotheses of this research which were tested at 0.05 level of significance using chi-square statistics hinged on identifying the greatest problem which SMEs face in Nigeria, the identification and ranking of the top ten problems or challenges of SMEs in Nigeria and the relationship between the form and nature of the business enterprise and its sources of funding for its operations.

Introduction Statement of General Problem The small scale industries occupy a very important position in any economy. Traditionally they produce certain specialised items over which they enjoy virtual monopoly because of the skill and expertise developed over the years .Many items produced in the small scale industry are also used as raw materials in the large scale industries. Thus small scale industries contribute to large scale production in no small measure. In a controlled economy the small-scale industries are protected from competition from the large scale sector by means of subsidies, grants ,monitory incentives from the government , reservation of certain items of production in the small scale sector and so on. In a free economy however, the small scale industrial sector is not insulated from competition from the large scale sector for their survival and growth; they have to face competition from the large scale sector with their own ingenuity and resources. The problems faced by small industries may be divided into two groups external and internal. External problems are those which result from factors beyond the control of industrialist such as availability of power and other infrastructure facilities required for the smooth running of small-scale industries. Internal problems are those which are not influenced by external forces. In the changed business environment post liberalisation and globalisation, the SSI sector needs to integrate itself with the overall domestic economy and global markets by gearing itself to greater interdependence by networking and subcontracting. To satisfactorily meet the present as well as the future requirements of the sector and national economy, the policies and the projects for the ssi sector will have to be effective and growth oriented so as to achieve, competitiveness, collective approach, and capacity to upgrade.

Background to subject Matter Indias small Scale Industry The magnitude of contributions as well as the impact of SSIs on the economic growth and development of India is highly significant as evidenced by the following figures. The SSIs represent ninety-five percent (95%) of the total industrial units in India, contribute forty-five percent (45%) of the total industrial output, account for eighty percent (80%) of all employment in the industrial sector, and contribute thirty-five percent (35%) each of total exports and valueadded by the entire manufacturing sector respectively in India. As a result of commitment and focusThe magnitude of contributions as well as the impact of SSIs on the economic growth and development of India is highly significant as evidenced by the following figures. The SSIs represent ninety-five percent (95%) of the total industrial units in India, contribute forty-five percent (45%) of the total industrial output, account for eighty percent (80%) of all employment in the industrial

sector, and contribute thirty-five percent (35%) each of total exports and valueadded by the entire manufacturing sector respectively in India. In India, 40% of total advances go to the priority sector, and 60% of net bank credit to the priority sector goes to SSIs. (iv) Management of funds invested in SMEs/SSIs: . In India, the credits to SSIs are driven need-based limits on liberal terms with level and profitability as key factors and not linked to security or collateral. Flexibility is the watchword with each activity assessed on its own merit. (v) Structure of Businesses: In In India, an SSI could be a limited liability company, or a partnership or a proprietary firm (vi) Incentives and support to the SME/SSI sector: . In India, the incentive and support schemes available to SSIs are much more elaborate and include official general and organisational support as well as support by other agencies. The nature and levels of key incentives and support include but are not limited to the following: (a) General: Bank credits to SSIs are on soft lending terms There is selective exemption from and preferential treatment in excise duties, sales tax, etc. Capital funds are available for the development of the software and IT industry Credit guarantees to cover loans to SSIs are available There is capital investment and transport subsidy under specific schemes Some items are reserved for exclusive manufacture by SSIs There is a price and purchase preferential scheme for SSI products Marketing and training needs support is provided Industrial estates and parks, industrial growth centres, functional export processing zones, integrated infrastructure development centres and cluster development centres are among the infrastructural facilities provided. (b) Organisational Support (Central Government Network): There is a dedicated ministry of SSIs, agro and rural industries There is a Small-Scale Industries Board, which facilitates coordination and inter-institutional linkages and advises the government on SSI-related policies. There is a Small Industries Development Organisation (SIDO) responsible for evolving an all-India policy and programmes for the

development programmes of state governments and providing facilities for upgrading technologies. There are Small Industries Services Institutes for the provision of productcumprocess development centres, establishment of regional training centres and effective operationalisation of National Small Industries Corporation (NSIC) Limited and Khadi Village Industries Commission (KVIC). (c) Sate Government Agencies: There are industrial centres at district levels, each focusing on funding SSIs There are industrial development corporations at state levels There are small industrial development corporations at state levels (d) Other Agencies: Other agencies, which contribute in the accelerated development of SSIs in India include apex-level financial institutions, commercial banks, industryspecific associations, specialized training centres, industry-specific export promotion councils, research institutes and active role of NGOs in SSIs. The new initiatives, which the government of India has also launched to consolidate and accelerate the pace of development of her SSI sub-sector, include the following: Operating a Credit Guarantee Scheme to provide collateral for interestfree loans Subsidizing capital for upgrading technologies Providing subsidies to set up tool rooms by associations in the private sector Setting up incubation centres for sunrise industries Setting up technology transfer centres and banks To provide such information and data on SMEs as to how many there are, who they are, what they do, etc. so as to assist policy formulation and also to develop linkages To develop a compendium of regulations as it affects business To set up business support centres in every state of the federation preferably in collaboration with respective state governments To set up industrial parks, preferably in partnership with the private sector The European Commission (EC) has similarly put in place top-class services and supports for businesses especially the SMEs. These include among others, the provision of: SME-specific training (start-up, growth and development, targeted training e.g. for women, etc.) Professional information services (legislation, technical, financial, etc.) SME-specific strategic measures (trade missions, cluster promotion, supply chain development, etc.) Premises and environment (incubation, technology parks, etc.) Finance (grants and subsidies, loans and loan guarantees, equity) Reception facilities, basic information and referrals (includes initial diagnosis and signposting) Other recommendations being considered include client-focus,

comprehensive, customized, coordinated, capacity building, connected and consistent quality services for the SMEs. From the above, one can categorically affirm that the incentives and support given to SSIs by the government of India are quite wholesome and formidable. The package of support and incentives provided by the government of Nigeria can in fact, be said to be insignificant when compared with those of India. It is thus less surprising, the development gap between the SSIs of India and the Nigerian SME sub-sectors and hence the significant role SSIs are playing in the economic growth and development of India. The continuous reinforcement of incentives and support to SSIs by the government of India underscores the high degree of appreciation of the importance of the SSI subsector to the future of the Indian economy. The continuous focus and impetus on SMEs are in fact not limited to developing countries. In developed and great economies like the U.S.A, Germany, Japan, Canada, U.K, Italy, France, China, etc, SMEs have remained the driving force behind them. In the words of Dr. Werner Multer, Federal Minister of Economics and Technology in Germany (2002), Small and mediumsized companies form the backbone of our economy. Our social market economy simply could not function without such competitive companies. Indeed, SMEs, called mittelstand in Germany, are playing a decisive role in shaping this powerful economy. For instance, the SMEs, which currently stand at 3.3 million in Germany, are responsible for 57% of gross net output as well as 70% of the workforce and are training 80% of all apprentices. The mittelstand companies provide 80% of all available training opportunities and about 1.3 million people are currently in some form of company training hence the SMEs hold the key to the future growth and development of Germanys economy. The men and women who run the mittelstands are mature personalities who are over 40 years of age and also own them. TABLE X

Industrialization in Karnataka Karnataka is among the leading industrial states in the country.The state is known for its capabilities in high tech industries in key sectors like telecommunication, electronics, information technology, precision engineering, machine tools, automobiles, readymade garments, biotechnology and food processing have been noteworthy. The strong base of large and medium scale industries in Karnataka has given a wide scope for promotion of a vibrant small scale sector in the state providing considerable employment opportunities. Advantages for Investment Karnataka has many inherent advantages for investors , both domestic and overseas and offers ample opportunities for investment. The state is the leader in knowledge based and technology industries like information tehnology, biotechnology ,electronics ,telecommunication, aerospace and allied areas. Karnatakas capital city Bangalore is recognised the world over as the Knowledge capital of India.

Karnatakas pre-eminent position on the industrial and business map of india is based on several factors.The state is rich in natural resources and is known for its salubrious climate.It has a strong resource base of highly educated and skilled people ,backed by extensive educational infrastructure, comprising world renowned schools ,colleges, institutes of higher learning and research and development centres.Its labour force is highly skilled, disciplined and hardworking.Above all it has farsighted, development oriented, investor-friendly governance that firmly believes in ,and actively encourages, public private partnerships. The state is widely recognised as a centre of learning with 16 universities, 141 engineering colleges, 39 medical colleges,43 dental colleges, 648 general/law colleges and 189 polytechnics.The state has over hundred R&D centres and about 300 MNCs present in the state.The state is linked by air with international centres nad also has a wide network of roads and railways.bangalore has well established institutions offering a wide gamut of educational services.The Indian institute of science,Indian institute of Management Indian institute of information technology and national centre for biological sciences are the most admired and sought-after institutions in india.

Policy support Karnataka was the first state to announce its industrial Policy way back in 1983.The State government has also announced exclusive policies for promotion of tourism, agro food processing industries, infrastructure facilities, export promotion,information technology and biotechnology industries.

Structure of Small scale Industrial Undertaking in karnataka Objectives of the present study Hypotheses

Objectives of the present study

Chapter 4

Industries and Economic development in Bangalore District Economic Profile of Bangalore District Location and Boundary Occupational Pattern Income Distribution Contribution to economic development Trend Analysis

The major findings of this study include the following: The process of liberalisation and globalisation which started in 1991 have on one hand created a tremendous opportunities for the growth of SSIs, and on the other hand thrown up new challenges for the sector. In the fast changing scenario building organisational competencies, technology up gradation and quality improvement and quality improvement are important issues which need to be addressed in order to build the capability to withstand emerging pressures and ensure sustained growth. Some to the problems typical to SMEs in Karnataka include Infrastructure primarily availability of power and location.

The potentials and opportunities for SMEs in Nigeria to rebound and play the crucial role of engine of growth, development and industrialization, wealth creation, poverty reduction and employment creation are enormous. The realization of this requires a paradigm shift from paying lip service to a practical radical approach and focus on this all-important sector of the economy by the government realistically addressing the identified problems. While SMEs themselves need to change their attitude and habits relating to entrepreneurship development, the governments (Local, State and Federal) need to involve the SMEs in policy formulation and execution for maximum effect. There is also the dire need to introduce entrepreneurial studies in our Universities in addition to emphasizing science, practical and technological studies at all levels of our educational system. Promoters of SMEs should thus ensure the availability or possession of managerial capacity and acumen before pursuing financial resources for the development of the respective enterprise.

*Indian Institute of Management, Bangalore -560076, India. E-mail: vidyas@iimb.ernet.in, shashidharp@iimb.ernet.in

Competitiveness of Small-Scale Industries of India Vidya Suresh* P shashidhar* Abstract The Small-Scale Industries (SSI) gathered momentum along with industrialization and economic growth in India. It started growing due to the vision of our late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a sustaining sector in the form of small-scale enterprises. Being a labor-intensive sector, they offer a higher productivity of capital than capital-intensive enterprises due to low investment per worker. The SSI today constitutes a very important segment of the Indian economy as they help in dispersal of industries, rural development, and the decentralization of economic power. The central discussion of this paper highlights the importance of small industries and their role in the economy and the impact of economic reforms on growth pattern and productivity performance of small-scale industries. However, this is not to say that there are no shortcomings within the industry, or in public policy relating to it. Small industries are faced with numerous problems major and minor, which make them either uncompetitive, or sick. An attempt is made to address some solutions that can improve their productivity by focusing on a sustainable vision. KEY WORDS Small-scale industries, growth pattern of SSI, Government incentives Biographical Note Vidya Suresh Academic Intern, Corporate Strategy and Policy Area. P. Shashidhar Academic Intern, Corporate Strategy and Policy Area. Key role of SSI in the Indian economic structure India has traditionally always had a very vibrant and competitive SSI. Even after the dawn of industrialization, British producers of textiles found hand made Indian textiles such a threat that they lobbied hard to have its import banned, succeeding in the late eighteenth century (Gupta & Sharma, 1996). During pre-economic liberalization period a wide variety of incentives, concessions and institutional facilities were extended for the development of SSIs. But these socialistic promotional policy measures, in many cases resulted in protection of weak units rather than the independent growth of units under competitive business environment (Nyati, 1988). Such situation was continued up to the mid of 1991. Under the regime of economic liberalization, the focus was shifted from protection to competitive promotion(Raja &

Rajashekar, 2002). The public policy in India had been attaching lot of importance to village and SSI on the following grounds. SSI being labor-intensive, helped to increase the volume of employment, particularly in rural areas, it is estimated that about 2 crore persons are engaged in India in these industries. The handloom industry alone employs 50 lakh people. They account for 6% of GDP, 95 % of all industrial units, and 34% of total exports. Around 39 lakhs SSIs in India has emerged versatile producing over 8000 products, from traditional handicrafts to high-end technical instruments. In developed OECD economies, about 60 % of GDP is generated by small enterprises, i.e., enterprises with a maximum of 50 employees. The reason being large number of small enterprises guarantees a high degree of competition, and variety of economic activities that require millions of enterprises to be reasonable competitive and efficient. The indirect jobs created through forward and backward linkages are no less important. In real terms, the SSI recorded a growth rate of 10.1% in 1994-95 as against 7.1% in 1993-94 and 5.6% in 1992-93. By the year 2025, if not controlled, this sector will grow even more rapidly (Parthasarathy, 1996).
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Generalizations are also difficult because though there are firms which are growing rapidly, there also exist 1,38,000 sick units within the sector in India. The contribution of SSI in India to national development was meager as compared to the contribution of SSI in other countries of the world. Indias SSI shared 95 % of all establishments, 40 % of output, 45% of employment and 35 % of exports. But Taiwan ranked first with a share of 97% of establishments, 81 % of output, 7% of employment, 48 % of exports followed by Japan contributing highly with 99 % of establishments, 52 % of output, 72 % of employment and 13 % of exports (SIDBI Report, 2000). Methodology and data sources For the purpose of the study the required information relating to number of SSI units, labor employed, production and exports at all India level were complied from various issues of Economic Survey and of Annual Survey of Industries. The data on number of sick SSI units were complied from Report on currency and Finance, RBI bulletin, various issues. The average annual growth rates, growth patterns and the number of times increase in growth of SSIs, their employment, production and exports are calculated for the reference period. Definition and historical context The small companies are defined as those with less than US $180,000 in capital equipment (USAEP, 1996). In India the definition of SSI has undergone changes over the years in terms of investment limits in the following manner. Table-I Investment limit of SSIs
Year SSI Remarks 1950 Gross Investment in Fixed Assets: not Exceeding Re. 0.5 Million Employment less than 50 Workers Per Day (with the Use of Power) or Less than 100 Workers Per Day (Without the Use of Power) 1958 Gross Investment in Fixed Assets: Less than Re. 0.5 Million Employment less than 50 Workers Per Day (with the Use of Power) or Less than 100 Workers Per Day (Without the Use of Power) except that the Criteria based on the employment per day was henceforth replaced by a per shift provision 1959 Gross Invesment in Fixed Assets: Value of Machinery (Original) Employment less than 50 Workers Per Day (with the Use of Power) or Less than 100 Workers Per Day (Without the Use of Power) except that the Criteria based on the employment per day was henceforth replaced by a per shift provision

1960 Gross Investment in Fixed Assets: Value up to Re. 0.5 Million The employment condition was dropped from the definition 1966 Up to Re. 0.75 million No condition 1975 Up to Re. 1 million No condition 1977 Up to Re. 1 million No condition 1980 Up to Rs. 2 million No condition 1985 Up to 3.5 million No condition 1991 Up to Rs.6 million No condition 1997 Up to Rs. 30 million No condition 1999 Up to Rs. 10 million No condition

Source: SIDBI Report on Small Scale Industries Sector 2000, Small Industries Development Bank of India. Growth patterns of SSI during the reference period Small firms are often said to grow faster than large firms. However, empirically it is observed that though they have high growth rates, they as a group have a high death rate, that is, many firms do not last very long. This means that the total effect on the economy may not be much greater than that of relatively larger firms. This section attempts to study the direction of growth in various aspects of SSI.
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Table: II Growth pattern in the number of establishments of SSIs (in lakhs)

Year No. of SSIs Growth rate 1980-81 8.74 1981-82 9.62 10.07 1982-83 10.59 10.08 1983-84 11.55 9.07 1984-85 12.4 7.36 1985-86 13.53 9.11 1986-87 14.62 8.06 1987-88 15.83 8.28 1988-89 17.12 8.15 1989-90 18.23 6.48 1990-91 19.48 6.86 1991-92 20.82 6.88 1992-93 22.46 7.88 1993-94 23.88 6.32 1994-95 25.71 7.66 1995-96 26.58 3.38 1996-97 28.03 5.46 1997-98 29.44 5.03 1998-99 30.8 4.62 1999-00 32.12 4.29 2000-01 33.7 4.92 2001-02 34.6 2.67 2002-03 35.1 1.45 2003-04 38.6 9.97

Source: Ministry of SSIs Annual Reports of SIDO,Govt. of India New Delhi During License Raj there was 2.6 times increase in the number of SSIs with the highest growth rate of 10.08 % in the year 1982-83 and with a annual growth of 8.35 % in the country. The postreform period obtained average annual growth rate of 5.42% with the highest growth rate of 9.97 in 2003-04 but obtained only 1.84 times increase in the number of establishments of SSIs. Thus, it is clear that the government protection in many cases resulted in protection of weak units rather than the independent growth of units under competitive business environment (Nyati, 1988). Table III: Industry wise growth pattern of SSI Description of Industry Employ/Unit Working Units Working Units Working Units

1stCensus 1972-73 2nd Census 198788 3rd Census 200102 CGR Food & Food Products 6577 96123 104489 14.82 Beverages, Tobacco & Tobacco Products 469 3669 5851 13.44 Cotton Textiles - 1451 10876 Wool Silk & Synth. Fibre Textiles - 1158 Jute, Hemp & Mesta Textiles - 219 IIMK IIML Conference on Global Competition & Competitiveness of Indian Corporate 442

Hosiery & Garments 6178 39778 107565 15.35 Wood Products 12188 54975 77110 9.66 Paper Products & Printing 8332 33320 26104 5.87 Leather & Leather Products 5040 24028 17027 6.27 Rubber & Plastic Products 7688 25819 18228 4.41 Chemical & Chemical Products 11837 25941 11177 -0.28 Non-Metallic Mineral Products (Glass & Ceramic) 7794 315891 25128 6.02 Basic Metal Products 5073 14937 7876 2.22 Metal Products 34011 65868 80636 4.41 Machinery & Parts Except Electrical 12701 40802 8776 -1.83 Electrical Machinery/Apparatus 4409 12283 5626 1.22 Transport Equipment & Part 6049 11325 2100 -5.15 Misc..Manufacturing Industries 3489 8852 4726 1.52 Repair Services 7197 80412 75385 12.46 Services not e.c. - 613 1200 Other Services & Products - 9206 160222 Total 139577 582368 750102 8.77 Source: Small Scale Industries in India, Ministry of SSI, Govt. of India. A highest growth rate was observed in Hosiery & Garments following the Food & Food Products Beverages and the Tobacco Products. The growth in these sectors was mainly due to export oriented production rather than domestic sales. Table: IV Growth Rates of SSI Sector and Total Industrial Sector in India Year SSI Sector Growth Rate (%) Total Industrial Sector Growth Rate 1991-92 3.1 0.6 1992-93 5.6 2.3 1993-94 5.65 6 1994-95 10.44 9.1 1995-96 11.49 13 1996-97 11.29 6.1 1997-98 9.19 6.7 1998-99 7.84 4.1 1999-00 7.09 6.7 2000-01 8.04 5 2001-02 6.06 2.7

2002-03 7.7 5.7 2003-04 8.6 6.9 2004-05 9.96 8.4

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Source: SIDOs Half Century, History of Small Industries Development Organization 1954-2004 and Ministry of Small Scale Industries,Govt. of India. The SSI has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of SSI has increased from an estimated 8.74 lakhs units in the year 1980-81 to an estimated 31.21 lakhs in the year 1999. The performance of SSI instills confidence when viewed against the growth in the industry sector as a whole. The estimates of growth for the year 1995-96 have shown an upswing. The growth of SSI sector has surpassed overall industrial growth from 1991 onwards except for year 1993-94 and 1995-96 and augurs a bright future. However, this has to be viewed in the background of the general recession in the economy. The transition period of the process of economic reforms was also affected for some period by adverse factors such as foreign exchange constraints, credit squeeze, demand recession, high interest rates, shortage of raw material etc. Table:V Growth patterns of production in SSIs (Rs.Crores) Production (Rs. crore) Production (Rs.crore) Year At 1993-94 prices Growth rate At current prices Growth rate 1979-80 66400 - 21600 1980-81 72200 8.73 28100 30.09 1981-82 78300 8.45 32600 16.01 1982-83 84700 8.17 35000 7.36 1983-84 93500 10.39 41600 18.86 1984-85 104600 11.87 50500 21.39 1985-86 118100 12.91 61200 21.19 1986-87 133600 13.12 72300 18.14 1987-88 150500 12.65 87300 20.75 1988-89 169900 12.89 106400 21.88 1989-90 189900 11.77 132300 24.34 1990-91 84728 -55.38 78802 -40.44 1991-92 87355 3.10 80615 2.30 1992-93 92246 5.60 84413 4.71 1993-94 98796 7.10 98796 17.04 1994-95 108774 10.10 122154 23.64 1995-96 121175 11.40 147712 20.92 1996-97 134892 11.32 167805 13.60 1997-98 146263 8.43 187217 11.57 1998-99 157525 7.70 210454 12.41 1999-00 170379 8.16 233760 11.07 2000-01 184401 8.23 261297 11.78 2001-02 195613 6.08 282270 8.03 2002-03 210636 7.68 311993 10.53 2003-04 228730 8.59 357733 14.66 2004-05 251511 9.96 418263 16.92 2005-06 (P) 275581 * 9.57 471244 ** 12.67 Source: website of Reserve Bank of India.
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It is evident from table V that growth rate has not been consistent through out the reference

period and has decreased substantially after reform. The abolition of license-quota-permit system shifted the focus from protection to competitive promotion involving a process of de reservation of product from SSI. The anti license-raj policy along with integration of Indian market with the global market has increased the problems of various SSI. Fierce competition, natural threat to indigenous technology and disadvantage to SSI of backward regions posed several threats and challenges to SSI. In this process, various SSI flourished well and several became sick. During pre-liberalization period the highest growth rate of 13 percent was achieved in 1986-87 following 11 percent during 1995-96. Table:VI Growth pattern in exports of SSI Year SSI Exports. Rs Crore Growth rate 1979-80 1200 1980-81 1600 33.33333 1981-82 2100 31.25 1982-83 2000 -4.7619 1983-84 2200 10 1984-85 2500 13.63636 1985-86 2800 12 1986-87 3600 28.57143 1987-88 4400 22.22222 1988-89 5500 25 1989-90 7600 38.18182 1990-91 9664 27.15789 1991-92 13883 43.65687 1992-93 17784 28.09911 1993-94 25307 42.30207 1994-95 29068 14.8615 1995-96 36470 25.46443 1996-97 39248 7.61722 1997-98 44442 13.2338 1998-99 48979 10.20881 1999-00 54200 10.65967 2000-01 69797 28.77675 2001-02 71244 2.073155 2002-03 86013 20.73017 2003-04 97644 13.52237 Source: Reserve Bank of India. SSI Sector plays a major role in India's present export performance. SSI is contributing almost 45% of the Indian Exports. Direct exports from the SSI account for nearly 35% of total exports. The number of small-scale units that undertake direct exports would be more than 5000. Besides direct exports, it is estimated that SSI contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. The non-traditional products account for more than 95% of the SSI
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exports. The rewarding product groups where the SSI dominates in exports are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products. Table: VII Growth pattern of employees in SSIs Year Employment (Lakh Nos.) Production per employee

(Rs. thousand) at 199394 prices 1979-80 67 99 1980-81 71 102 1981-82 75 104 1982-83 79 107 1983-84 84.2 111 1984-85 90 116 1985-86 96 123 1986-87 101.4 132 1987-88 107 141 1988-89 113 150 1989-90 119.6 159 1990-91 158.3 54 1991-92 166 53 1992-93 174.8 53 1993-94 182.6 54 1994-95 191.4 57 1995-96 197.9 61 1996-97 205.9 66 1997-98 213.2 69 1998-99 220.6 71 1999-00 229.1 74 2000-01 238.7 77 2001-02 249.3 78 2002-03 260.2 81 2003-04 271.4 84 2004-05 282.6 89 2005-06 (P) 294.9 * 93 Source: Reserve Bank of India. Small firms and enterprises are an important source of employment in many developing nations, often employing a sizable share of the labor force. However it is often suggested that small firms are more labor intensive, and therefore should be encouraged as a way of generating employment. It has been estimated that a lakh rupees of investment in fixed assets in the SSI generates employment for four persons. Table:VIII Industry-wise Distribution of Employment in SSI Employment IC Description of Industry Employ/Unit 1st Census 1972-73 2nd Census 1987-88 3rd Census 2001-02
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20/21 Food & Food Products 131220 481682 403113 22 Beverages, Tobacco & Tobacco Products 4577 73375 35863 23 Cotton Textiles - 24725 79312** 24 Wool Silk & Synth. Fibre Textiles 12314 -

25 Jute, Hemp & Mesta Textiles 2599 26 Hosiery & Garments 75346 198387 374836 27 Wood Products 94703 229061 290696 28 Paper Products & Printing 89146 199389 119658 29 Leather & Leather Products 31775 81667 65174 30 Rubber & Plastic Products 81690 188784 117934 31 Chemical & Chemical Products 159013 313986 96209 32 Non-Mettalic Mineral Products (Glass & Ceramic) 202269 446218 258627 33 Basic Metal Products 109626 202463 84830 34 Metal Products 300060 372711 358629 35 Machinery & Parts Except Electrical 145333 279292 37242 Electrical Machinery 65908 137260 33104 36 /Apparatus 37 Transport Equipment & Part 83492 100360 36208 38 Misc Manufacturing Industries 40025 65322 97 Repair Services 38995 192267 161728 99 Services not e.c. - 2720 OT Other Services & Products- 61228 895193 Total 1653178 3665810 3448356 Source: Institute of Applied Manpower Research. Food products industry has ranked first in generating employment, providing employment to 13.1%, which was followed by Non-metallic mineral products with employment of 4.46 lakh persons 12.2% and Metal products 10.2%. In Chemicals & chemical products, Machinery parts and except Electrical parts, Wood products, Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and Rubber & plastic products, the contribution ranged from 9% to 5%, the total contribution by these eight industry groups being 49%. In all other industries the contribution was less than 5%. Per unit employment was the highest in units engaged in Beverages, tobacco & tobacco products mainly due to the high employment potential of this industry particularly in Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu. Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in Repair services line. Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas. However, in Chemicals & chemical products, Non-metallic mineral products and Basic metal industries per unit employment was higher in rural areas as compared to metropolitan areas/urban
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areas. In urban areas highest employment per unit was in Beverages, tobacco products (31 persons) followed by Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral products (12).Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products accounted for 21.1%, Wood Products and Chemicals and chemical products

shared between them 17.5%. As for urban areas, Food Products and Metal Products almost equally shared 22.8% of employment. Machinery and parts except electrical, Non-metallic mineral products, and Chemicals & chemical products between them accounted for 26.2% of employment. In metropolitan areas the leading industries were Metal products, Machinery and parts except electrical and Paper products & printing (total share being 33.6%).Tamil Nadu (14.5%) made the maximum contribution to employment.This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the total share being 27.7%.Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%), and Punjab (5.6%) together accounted for another 27.4%.Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra & Nagar Haveli.It was 12 in Maharashtra, Tripura and Delhi. Madhya Pradesh had the figure of 2. In all other cases it was around the average of 6 (exim.indiamart.com). Table:IX Expenditure on R&D by Industry Groups for SSI
R&D Expenditure (Rs. Lakhs) R&D Expenditure as % of S.T.O. Industry Group No.of R&D Units 1996-97 1997-98 1998-99 1996-97 1997-98 1998-99 Metallurgical Industries 4 120.62 131.61 136.44 2.68 2.66 3.14 Fuels 2 37.35 44.44 80.09 0.2 0.21 0.37 Boilers and Steam Generating Plants 3 73.77 81.41 81.79 11.04 12.9 11.49 Prime Movers 3 48.56 49.15 50.18 0.56 0.57 0.58 Electricals and Electronics Equipment64 1653.44 1810.63 2036.31 2.23 2.43 2.47 Telecommunications 23 460.5 590.5 536.37 0.46 0.51 0.79 Transportation 0 0 0 0 0 0 0 Industrial Machinery 9 295.8 240.58 236.27 2.93 2.01 2.5 Machine Tools 4 88.77 54.14 201.01 2.01 1.16 4.86 Agricultural Machinery 2 19.4 31.72 11.18 2.69 4.58 2.03 Earth Moving Machinery 0 0 0 0 0 0 0 Misc. Mechanical Engineering Industries 7 108.43 160.95 183.82 0.69 1.11 1.32 Commercial Offices, Household Equipment 2 10.62 11.13 12.39 0.62 0.64 0.87 Medical and Surgical Appliances 3 12.5 21.6 29.42 0.91 0.22 0.25 Industrial Instruments 11 243.17 399.16 401.49 3.83 5.29 5.34 Scientific Instruments 9 91.13 71.58 81.27 3.13 2.42 2.64 Math. Surveying & Drawing Instrument 0 0 0 0 0 0 0 Fertilisers 0 0 0 0 0 0 0 Chemicals (Other than Fertilizers) 32 546.62 572.22 483.32 0.23 0.29 0.26 Photographic Raw Film and Paper 2 40.66 29.45 40.15 0.63 0.38 0.69 Dye- Stuffs 2 14.86 14.02 14.12 0.29 0.21 0.21 Drugs and Pharmaceuticals 37 802.87 940.16 1486.01 0.53 0.51 0.67 Textiles (Dyed, Printed, Processed) 2 15.03 19.15 143.2 0.09 0.09 0.68 Paper and Pulp 1 4.94 10.86 7.87 0.41 0.92 0.64
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Sugar 0 0 0 0 0 0 0 Fermentation Industries 1 127.2 104.96 138.54 4.3 2.74 3.8 Food Processing Industries 7 1502.98 1876.13 1863.49 17.41 19.16 16.16 Vegetable Oil & Vanaspathi 0 0 0 0 0 0 0 Soaps, Cosmetics and Toilet Preparations 1 22.74 76.94 88.44 2.04 5.17 4.05 Rubber Goods 1 4.84 5.09 2.84 2.57 2.81 1.7 Leather, Leather Goods and Pickers 1 233.3 143.5 282.78 0.92 0.44 0.94 Glue and Gelatin 3 52.09 37.52 59.62 1.26 0.82 1.21 Glass 0 0 0 0 0 0 0 Ceramics 1 3 3 3 5.17 5.17 5.17 Cement and Gypsum Products 0 0 0 0 0 0 0 Timber Products 1 1.56 1.12 1.94 0.98 0.54 1.28 Defence Industries 0 0 0 0 0 0 0 Information Technology 6 324.14 376.72 449.6 2.37 2.79 3.22 Biotechnology 11 378.38 430.51 518.84 0.44 0.6 0.59

Consultancy Services 2 12 16.5 15 0.58 0.64 0.58 Miscellaneous Industries 8 214.34 172.8 136.61 1.47 1.12 0.79 Total 265 7565.61 8529.25 9813.4 0.91 1 1.15

Abbr.: S.T.O: Sale Turnover. Source: Research and Development in Industry 2000-01, Ministry of Science and Technology, Govt. of India. Competitiveness in SSI could be achieved through technological innovation, which will enable SSI to manufacture new-fangled products and achieve various economies of scale that basically accrues to large-scale sectors. The tenth plan lays emphasis on enhancing information flow about technology sources, facilitating such transfers, and funding up gradation activity through capital subsidy scheme of SIDBI- Govt. of India pattern. The Electrical and electronic sector has more number of R&D units with comparatively low expenditure in relation to its total sales. The SSI like industries transportation, sugar, vegetable oil, cement and fertilizer has absolutely no R&D activities taking place. Considering the above facts, the cluster approach helps industries to introduce innovative marketing. The facilities in cluster may include information dissemination, establishment of design center, quality awareness programmes, testing facilities technology up gradation etc which becomes a part of R&D and the diffusion of innovation takes place at a faster rate in cluster form. Chart: I Growth pattern of sick SSI units
Sickness in SSI sector
-40 -20 0 20 40 60 80 100 120 140 1975 1980 1985 1990 1995 2000 2005 Year Growth Series1

Source: CMIE database.

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During the pre reform period there was 10.56 times increase in the number of sick SSI units in the country. After the liberalization period the number of sick units has decreased to .68 times. Indias obligation as a member of WTO to bring down tariff and non-tariff barriers gave another competitive environment for SSI (C Francis 1997). Thus after reform SSI has been exposed to intense competition both in domestic and international levels. The SSI, which was not able to withstand competition, has gradually become sick. According to the report of RBI (III census of SSI) the criteria to measure sickness was: delay in repayment of loan over one year; decline in net worth by 50%; and decline in output during the last three years. According to the census of RBI nearly 15% of registered SSI were identified to be sick. Lack of demand, shortage of working capital, non-availability of raw material, power shortage, labor problems and marketing problems are the main reasons for incipient sickness in SSI. The chart II & III below depicts the cause and the magnitude of the problems faced by SSI ( Economic Survey,2004). Chart: II Reasons for sickness in registered SSI
s i c k ne s s i n r e gi s t e r e d SSI

Lac k of demand S hor t age of wor king capi t a l Non- avai l abi l i t y of r aw mat e r ial powe r shor t age labour pr oblems mar k et ing pr oblems equipment problems management pr oblems

Chart: III Reasons for sickness in unregistered SSI

sickness in unregistered SSI

Lack of demand Shortage of working capital Non-availability of raw material power shortage labour problems marketing problems equipment problems management problems

The role of government towards SSI After independence, Indian planners and policy-makers felt that protection was essential to the development of a strong and indigenous economy. The Indian state played an integral role in the

industrial and economic development of the country resulting in a dominant public sector and heavily regulated private sector. Viewing this, the protection was also extended to SSI as it was an important
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tool in employment generation, value creation and poverty alleviation. These SSI also support entrepreneurial talent and skills, stimulate personal savings, and help in developing innovative and appropriate indigenous technology, providing dynamism and contributing to competition (Rajendran, 1989). Over 800 products were exclusively reserved for SSI, where some of the products produced were purchased by government agencies. Apart form this, supply of scarce materials, input price concessions like lower interest rates and numerous fiscal measures such as excise duty exemptions and other tax concessions were also given (Source-Business Today, September 10, 2006). Government has reserved certain products for manufacture in the small scale sector in areas where there is techno-economic justification for such an approach. Large/Medium units can; however, manufacture such reserved items provided they undertake to export 50% or more of their production. As on March 2005, the total number of items reserved for small-scale sector is 506. In the second plan (1956-61), the SSI was given priority due to its consequence in creation of diversified employment opportunities and wide dispersal of industrial production. The policies proposed then, were, and remain the main backbone of public policy relating to the SSI. What we see however is that this policy has been largely unhelpful, if not detrimental to the development of the sector. The policy regulations relating to the SSI are such that they ensure that units stay just small. Promotional measures aim to increase the efficiency and economic viability of small units by providing infrastructure facilities and improving access to markets. On the other hand, protective measures give small units preferential treatment. Continuous measures are those benefits which a small unit may avail of as long as it falls under that category, while one-shot are those which may be availed of only once, and tends to be discretionary in nature. Most policies like preference in government purchases; lower interest rates etc. are continuous in nature. Discretionary measures are those, which require an examination on a case-by-case basis and are not blanket measures available to all units, which fall under the definition of small. Non discretionary, by implication, are those measure which are based on some objective criteria and are applicable to all units that meet the criteria. The government has also provided measures such as greater infra-structural support, more and easier availability of credit, lower rates of duty, technology up-gradation, assistance to build entrepreneurial talent, facilities for quality improvement, and export incentives (Parthasarathy, 1996). The Ministry of Small Scale Industries (MoSSI) designs policies, programmes, projects and schemes in consultation with its organizations. It also performs the function of policy advocacy with other Ministries/Departments of the Central Government and the States and Union Territories. Implementation of the policies and programmes/projects/schemes for providing various support services to the MSEs is undertaken through its attached office, namely, the Office of Development Commissioner (Small Scale Industries) also known as Small Industries Development Organisation (SIDO) and the National Small Industries Corporation (NSIC) Ltd., a public sector undertaking of the Ministry. There are three national level Entrepreneurship Development Institutes supported by the Ministry viz. National Institute of Small Industry Extension Training (NISIET), Hyderabad, National Institute of Entrepreneurship and Small Business Development (NIESBUD), NOIDA and Indian Institute of Entrepreneurship (IIE), Guwahati. Financial aid for SSI Credit is the prime input for sustained growth of SSI and its mobilization for meeting fixed and working capital needs poses the foremost problems. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the

industry for its day-to-day requirement for purchasing raw material and other input like electricity and water etc. and for payment of wages and salaries is called short-term credit or working capital.
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The Laghu Udyami (small enterprise) Credit Card Scheme has been provided to SSI where they can credit up to Rs.10lakhs. Apart from this, credit facilities up to maximum of Rs.25lakhs are provided through Credit Guarantee Fund Trust in collaboration with SIDBI and Govt. of India. Table X provides further insight into credit related information. The SSI is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks along with working capital in the form of composite loans. The Small Industries Development Bank of India (SIDBI) provides refinance to these institutions. Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, and new debt instruments and to National Small Industries Corporation. Long-term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme. Table:X Credit Guarantee Schemes for SSI
Credit Guarantee Scheme and Guarantee Cover for Small Scale Industries Credit Guarantee Scheme Relating to Small Borrowers Claims Received Claims Disposed off Total Guaranteed Advances Claims Received Claims Disposed off Year (As at endMarch) No. Amount No. Amount No. Amount No. Amount 1981+ 1 2 - - 3716 - - - 1982$ 4 9 31 2 - 1509 25 1055 15 1983$ 9 33 7 13 - 147 28 127 20 1984$ 18 54 10 14 - 255 62 237 32 1985$ 22 72 23 25 - 454 115 467 114 1986$ 34 105 30 67 - 630 141 644 176 1987$ 45 132 40 88 - 1071 255 767 148 1988-89** 94 217 81 157 10465 # 1528 364 # 1291 281 1989-90 75 193 102 368 14094 1503 356 1599 347 1990-91 84 244 76 249 16826 2088 505 1901 427

1991-92 78 217 81 256 17362 1652 410 1591 360 1992-93 130 260 118 243 19162 3681 883 2492 566 1993-94 144 323 123 288 15503 4673 1168 3359 1026 1994-95 190 379 193 409 14177 4793 1348 3912 1100 1995-96 191 524 155 308 13847 6265 1841 3510 @ 1031 @ 1996-97 118 270 101 292 11271 5997 1842 1312 403
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1997-98 32 120 52 221 3376 541 184 1179 401 1998-99 14 34 44 225 2813 757 218 4245 1188 1999-00 14 26 71 139 39 889 219 4536 1195 2000-01 3 14 17 54 5 75 22 679 171 2001-02 1 1 4 5 1 - - 5 @@1 @@ 2002-03 2 - 2 1 - - - - 2003-04 - - - - - - - - (No.in ' 000, Amount: Rs. in Crore) Source: Handbook of Statistics on Indian Economy, Reserve Bank of India, 2003. Table XI gives the position with regard to flow of credit to SSI Sector. It depicts that there is a marginal increase in share of credit to SSI sector as a percentage of net bank credit. Table:XI Credit to SSI Sector from Public Sector Banks At the end of March 1995 At the end of March 1996 At the end of March 1997 At the end of March 1998 At the end of March 1999 Net Bank Credit 1,69,038 1,84,381 1,89,684, 2,18,219 2,46,203 Credit to SSI 25,843 29,485 31,542 38,109 42,674 No. of SSI Accounts (in lakhs) 32.25 33.77 N.A. 29.64 N.A. SSI Credit as percentage of Net Bank Credit 15.29 15.99 16.6 17.5 17.33 Source: Handbook of Statistics on Indian Economy, Reserve Bank of India, 2003.

Conclusion Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification. By its less capital intensive and high labor absorption nature, SSI sector has made significant contributions to employment generation and also to rural industrialization. Under the changing economic scenario, SSI has both the challenges and opportunities before them. The business can compete on cost, quality and products at domestic and international level only if ideal investment in technology production process, R&D and marketing are made. Infrastructure bottlenecks are not completely solved. The promotional activities for SSI in India need to concentrate on improved credit flows, human resource development, appropriate technology and funds for modernization. So, this is the appropriate time to set up projects in the small-scale sector. It may be said that the stance is optimistic, indeed promising, given some protection. This expectation is based on an essential feature of the Indian industry and the demand structures. The variety in the demand structures will ensure long-term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units. References
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Rajendran, S. (1989). Institutional support to SSIs. In The Hindu Survey of Indian Industry, M/s (pp. 279283). Madras, India: Kasturi & Sons. Roberts, Michael. (1995). Indian public demands industry responsibility. Chemical Week, 157(1), 89. Schoemaker, P. & Schoemaker, J. (1995, spring). Estimating environmental liability?Quantifying the unknown. California Management Review, 29-61. Shaman, D. (1996). India?s pollution regulatory structure and background. U.S.A.: The World Bank. Retrieved from the World Wide Web: www.worldbank.org SIDBI report on small-scale industries sector, 1999. (1999). Lucknow, India: Small Industries Development Bank of India. Tiwary, J. & Singh, B. (1990). Industrial development and its changing pattern in India during the Plan Period. In The Indian Economic Association, conference volume, 73rd Annual Conference Muzaffarpur. (pp. 46-54). N.p. United States-Asia Environmental Partnership. (1996). Industry & environment in Asia: US-Asia Environmental Partnership. Retrieved from the World Wide Web: www.usaep.org Vedantam, V. (2000). India?s billionth. The Christian Century, 117(26), 945. Welford, R. & Bhargava, S. (1996). Corporate strategy and the environment: The theory. In Richard Welford (Ed.), Corporate environmental management: systems and strategies (pp. 13-32). London: Earthscan. Cornell, B. & Shapiro, A. (1987). Corporate stakeholders and corporate finance. Financial Management, 16, 5-14. Dasgupta, S., Laplante, B., & Mamingi, N. (1998). Capital market responses to environmental performance in developing countries (World Bank Policy Research Working Paper # 1909). Retrieved from the World Wide Web: www.worldbank.org Dwivedi, O. P. & Khator, R. (1995). India's environmental policy, programs and politics. In O.P. Dwivedi & D. K. Vajpeyi (Eds.), Environmental policies in the third world: A comparative analysis (pp. 47-70). Westport, CT: Greenwood Press. Ehrlich, P. & Ehrlich, A. (1990). The Population Explosion. London: Arrow Ltd. Gupta, M. & Sharma, K. (1996, third quarter). Environmental operations management: An opportunity for improvement. Production and Inventory Management Journal, 40-46. Hart, S. (1997, Jan./Feb.). Beyond greening: Strategies for a sustainable world. Harvard Business Review, 67-76. Johannson, L. (1994). Profits from green ventures. The Management Accounting Magazine (CMA), 68(7), 17-21. Lau, R. & Srinivasan, R. (1997). Strategic issues of environmental management. South Dakota Business Review; 56(2), 1,4. Mani, M., Pargal, S., & Huq, M. (1996). Does environmental regulation matter? Determinants of the location of new manufacturing plants in India in 1994 (World Bank Policy Research Working Paper # 1718). Retrieved from the World Wide Web: www.worldbank.org Nyati, K. (1988). Problems of pollution and its control in small-scale industries. www.exim.indiamart.com

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