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Role of small scale industries in the economic development of

the nation
In a developing country like India, the role and
importance of small-scale industries is very
significant towards poverty eradication,
employment generation, rural development and
creating regional balance in promotion and growth
of various development activities.
It is estimated that this sector has been
contributing about 40% of the gross value of output
produced in the manufacturing sector and the
generation of employment by the small-scale
sector is more than five times to that of the large-
scale sector.
This clearly shows the importance of small-scale
industries in the economic development of the
country. The small-scale industry have been
playing an important role in the growth process of
Indian economy since independence in spite of stiff
competition from the large sector and not very
encouraging support from the government.
The following are some of the important role
played by small- scale industries in India.

1. Employment 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.
2. 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 remain untouched from 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 ;re being
mobilised by the small-scale sector for the
development of the economy.

3. Equitable distribution of income:

Small entrepreneurs stimulate a redistribution of
wealth, income and political power within societies
in ways that are economically positive and without
being politically disruptive.
Thus 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 section 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
4. Regional dispersal of industries:
There has been massive concentration of
industries m a few large cities of different states of
Indian union. People migrate from rural and semi
urban areas to these highly developed centres 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
5. 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.
6. Indigenisation:
Small-scale industries make better use of
indigenous organisational and management
capabilities by drawing on a pool of
entrepreneurial talent that is limited in the early
stages of economic development. They provide
productive outlets for the enterprising
independent people. They also provide a seed bed
for entrepreneurial talent and a testing round for
new ventures.
7. Promotes exports:
Small-scale industries have registered a
phenomenal growth in export over the years. The
value of exports of products of small-scale
industries has increased to Rs. 393 crores in 1973-
74 to Rs. 71, 244 crores in 2002-03. This
contributes about 35% India's total export. Thus
they help in increasing the country's foreign
exchange reserves thereby reduces the pressure on
country's balance of payment.
8. Supports the growth of large
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 breath vitality into the life of
large industries.
9. Better industrial relations:
Better industrial relations between the employer
and employees helps in increasing the efficiency of
employees and reducing the frequency of
industrial disputes. The loss of production and
man-days are comparatively less in small- scale
industries. There is hardly any strikes and lock out
in these industries due to good employee-employer
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.
It is encouraging to mention that the small-scale
enterprises accounts for 35% of the gross value of
the output in the manufacturing sector, about 80%
of the total industrial employment and about 40%
of total export of the country.
Causes of Industrial Sickness in

If we know what factors are responsible and

causing industrial sicknesses, it will be possible
to prevent industrial sickness in the first
instance, and if unfortunately, sickness does
affect some industrial units, a proper and correct
diagnosis would help the policy-makers to
successfully tackle the problem of industrial
From the above point of view, the following
analysis dealing with the causes of industrial
sickness in India would be found useful and
helpful to evolve and implement successfully an
appropriate policy to deal with the problem.
Industrial units may become sick due to various
(1) Internal Causes of Sickness:
Some industrial units have sickness inherent in
them; they have the potential of sickness in them
right from their inception. This would mean that
such industrial units never have a chance of
becoming viable and profitable. They generally
develop sickness within two to three years or
even earlier after they commence their activities.

Any one or more of the following factors are

responsible for such inherent sickness in
industrial units or for born in sickness among
industrial units.
(a) Certain initial thing may go wrong:
An entrepreneur may choose a wrong project; he
may lack experience; his planning may be faulty
or his entire calculations may be based on faulty
assumptions regarding his own ability. He may
be a beginner full of enthusiasm to start a new
unit and things on any of the above grounds,
may be wrong.
There has been a great increase in the number of
so-called consultancy services with
inexperienced fresh MBAs on their bodies. In
order to make quick money. These consultancy
services give a totally wrong picture about the
amount of investment involved, about projection
of demand, capital cost, recurring expenses and
so on.

Along with this, various public financial

institution and governments promotion agencies
often paint an extremely rosy picture totally or
greatly devoid of reality in the business world.
The consequence of all these developments is
the inevitable sickness right from the start.
(b) Faulty Financial Planning:
It is another serious factor. Under- capitalisation
is often a very common cause and its signs
become evident right from the time the unit
starts functioning. In some cases, capital is
adequate but a substantial part of it is
misdirected into unproductive channels such as
staff quarters and provision of ammonites for
top executives even before production has
Another reason may be inadequate provision for
various contingencies which are bound to arise
in the initial stages of a project or in fact any
stage of the functioning of an industrial unit.
This heavy outflow of funds becomes a cause of
concern right from the start.
(c) Gestation Period:

Often the gestation period becomes for too long

than anticipated specially in the case of large
scale industrial unit. This might be due to delay
in the supply of capital goods to be imported or
indigenous, defect in planning surfacing at a
later stage, falling behind schedule in various
phases of the completion of the project and so
Such delays cause cost escalations, leading to
capital shortages, liquidity problems, hike in
production costs, and rise in prices and hence
smaller than anticipated demand for the product
of the industrial unit, adversely affecting its
(d) Wrong Location:

Selection of a wrong location may create

problems for an industrial unit and may lead to
industrial sickness at an early stage. Thus, high
technology based units are established in areas
without skilled labour on supporting
infrastructure facilities industries based on
imported raw materials are established in
regions without adequate transport and
communication system.
It is necessary to take into a account a number
of factors such as availability of various
infrastructural facilities like energy, water,
transport and so on, apart from skilled labour,
climate, etc. before the choice of location of a
particular industrial unit is finalised any mistake
in respect of any one of the factors would surely
lead to industrial sickness at an early stage.
(e) Technology:

Technological factor also plays vital role.

Adoption of inappropriate technology or
obsolete technology or installation of
sophisticated machinery for which spare parts
are not easily available or of defective machinery
may all lead to sickness of an industrial unit.
(f) Collaboration:

Unsatisfactory collaboration agreements leading

to legal complications may result in industrial
sickness right from the start or at any later
(g) Demand Forecast:

Wrong demand forecasts sudden appearance of

competing substitutes on the market, radical and
sudden change in the tastes of people as
production of a commodity is being taken up
may all cause industrial sickness.
(2) Achieved Sickness:

An industrial unit may start functioning and after

some years may fall sick due to various internal
causes that begin to affect the unit. Some of the
important internal causes or factors that may
result in industrial sickness are as follows:
(a) bad management
lack of professional expertise, internal
squabbles, indifference and inefficiency may
result in industrial sickness after a unit
starts functioning.
(b) Expansion
not warranted by available resources and
beyond managements capacity
unwarranted diversification and diversion of
units resources, setting up new subsidiary
concern or acquiring interest in another
industrial unit, personal extravagance.
Indulgences in corporate luxuries like
having a fleet of air-conditioned cars, luxury
guest houses with air-conditioning, etc. may
contribute to industrial sickness.
(c) Unsatisfactory materials,
especially inventory mismanagement, may
contribute to industrial sickness unnecessarily
heavy inventory would mean locking up a
substantial amount of funds in an unproductive
way for the time being and lack of scientific
management of inventory may cause trouble to
an industrial unit and affect its health.
(d) Failure in the field of marketing
(which is an essential element in the processes
of production), faulty change in production-mix,
failure to modernise production processing
these days when rapid technological changes in
all spheres of production are taking place, may
all cause industrial sickness.
In modern time where quick changes are taking
place in all spheres like technology,
advertisement and media handling, marketing
etc. it is absolutely essential for any industrial
unit to be adequately flexible so that it can adapt
itself fairly quickly to the ever changing
Failure to do so or incapacity to do so many
results in sickness of an industrial unit. Large
industrial units with heavy capital equipment (as
for example, in the case of Bombay textile
industry) may face problems of adaptability and
may fall an easy prey to industrial sickness.
(e) unsatisfactory labour-management relations.
Inflexible and unhelpful attitude of management,
politicalisation of labour-management in a
factory, rivalry among trade unions in the same
factory, leading to strikes or lockouts or
resorting to go-slow tactics, may all result in low
morale and inefficiency of workers, sabotage by
workers, etc. all of which may cause industrial
sickness. Estranged management-labour
relations have caused sickness in the case of
many large-scale industrial units.
(3) External Factors Causing Industrial
It is quite possible that an industrial unit may fall
sick far no fault of the entrepreneur and due to
reasons entirely beyond his control the
entrepreneur may be a practical and very careful
man with adequate expertise and resources and
the project may have been very carefully
prepared, and yet the unit may fall sick far no
fault of his. This is because various external
factors influence the health of industrial unit.
Following are some of the important external
factors that may cause industrial sickness.
(a) Energy scarcity:
In the case of India, energy crisis, coal
shortages and steeply rising petroleum
prices have caused sickness among many
industrial units. Energy shortages have
become endemic and often anywhere from
25 to 50 per cent of electricity requirements
are not met, with extremely adverse effect
on production and revenue of industrial
establishments, forcing many of them to
fall sick.
(b) Lack in utilization of capacity:
In a number of cases the installed capacity of an
industrial unit cannot be used to the maximum
possible extent but only partly because of
shortages of essential raw materials due to
production setbacks in supply industries; or due
to failure of monsoon, agricultural production
and incomes have received a setback with
adverse effect on demand from the agricultural
sector for products like diesel pumps fertilizers,
etc., and industrial units producing these goods
continually for two or three years may find
themselves in a condition of sickness, or import
policies of some countries may change so that
demand for certain goods produced for export
purposes declines steeply. If this persists for
some years, it would mean a great setback to the
concerned industrial units making them sick as a
(c) Infrastructural problems
(such as heavy demand for railway services)
may cause immense problems for industrial
units in getting necessary raw materials in time
and in sending out manufactured goods to
different markets in the country and also abroad
according to schedule. This would upset the
smooth working of the industrial unit.
(d) Non-availability of adequate credit
due to depressed conditions in capital and
money markets of credit squeeze policy of the
government may upset the working of an
industrial unit making it sick. The policy of credit
squeeze followed by the Government of India for
some time during 1970s was responsible for
sickness of many industrial units, ultimately
forcing some of them to close down.
(e) Unfavourable government policies:
such as in respect of taxation, export imports,
controls, rate of interest, foreign competition etc.
may produce unfavourable environment for
working of some industrial units, some of which
for failure to successfully cope with all these
constraints may fall sick or may close down