Small Business in India

SMALL BUSINESS IN INDIA

INDIAN SMALL BUSINESS - At a Glance

12.3 Million SSI Units in India29.5 Million People employed in Small Businesses.4762.01 Billion Production at current prices.1215 Billion Value of exports from Micro, Small and Medium Units

What These Facts Mean…

7 % Share of small businesses in GDP

95 % The proportion of Micro, Small and Medium Units in the total industrial units in India

40 % Employment provided by small businesses.

50 % Percentage of exports accounted by small businesses in India’s total manufactured exports.

Small Business is indeed the driving force of the Indian

Economy

Definition Criteria

• The common criteria used to measure the size of business are– The number of people employed– The amount of capital invested– The value of annual sales turnover.

• In India, at present, small scale industries are defined and classified on the basis of total investment in plant and machinery.

Definition of Small Business in India

• According to the latest Micro, Small and Medium Enterprises Development Act, 2006, small enterprises are classified as –

Manufacturing Enterprises Service Enterprises

Units Investment Criteria Units Investment Criteria

Micro Enterprise < 25 Lakh Micro Enterprise < 10 Lakh

Small Enterprise 25 Lakh - 5 Crore Small Enterprise 10 Lakh - 2 Crore

Medium Enterprise 5 Crore - 10 Crore Medium Enterprise 2 Crore -5 Crore

Changes in Definition of SSIs and AncillariesYear Units Investment Criteria

The Industrial (Development and Regulation) Act, 1951

SS Rs 5 lakh and employing less than 50 people with power and less than 100 persons without power

1966 SS Not exceeding 7.5 lakh

1975 SS Rs 10 lakh

AU Rs 10 lakh

1980 SS Rs 20 lakh

AU Rs 25 lakh

1985 SS Rs 35 lakh

AU Rs 45 lakh

19990 SS Rs 60 lakh and Rs 75 lakh for EOU

1991 AU Rs 75 lakh

1997 SS Rs 3 Crore - but later reduced to 1 Crore

Tiny 25 lakh

Investment Ceilings for Small Scale Industries in the Year 2004

Type of Unit Investment Ceiling Limit in IRS

Conditions

Small Scale Industry 1 crore (10 million) Original value of plant and machinery

Ancillary 1 crore (10 million) At least 50% of its output to go together other industrial undertakings

Export Oriented Unit 1 crore (10 million) Obligation to export 50% of production

Tiny Enterprise 25 lakhs (2.5 million) No location condition

Service and Business (industry related) Enterprise

10 lakhs (1 million) No location condition

Women Enterprises 1 crore (10 million) 51% equity holding by women

High Tech and Export oriented units

5 crore (50 million) Total only for 64 items

Objectives For Periodic Changes In Definition

• To facilitate growth of this sector with changing economic scenario

• To facilitate growth within the framework of social and economic policy of the country

• To encourage technology modernization• To promote entrepreneurship among technically

qualified persons• To improve product standards• To create opportunities for in house R&D• To provide greater export thrust

Characteristics of Small Business

• Personal Character

• Independent Management

• Limited Investment

• Simple Technology

• Local Area of Operation

Scope of Small Business

• Manufacturing

• Wholesale Trade

• Retails Trade

• Services

Rationale of Small Business

• Limited Demand

• Specialized Services

• Flexibility

• Employee Relations

• Introduction of New Products

• Direct Motivation

Role of Small Business in Indian Economy

• Employment• Balanced Regional Development• Optimisation of Capital• Mobilisation of Local Resources• Exchange Earnings• Egalitarian Society• Feeder to Large Industries• Social Advantage

Comparative Growth Rates of SSI Sector and Total Industrial Sector

Year SSI Sector Growth Rate Total Industrial Sector Growth Rate

1993-94 5.65 6.00

1994-95 10.44 9.10

1995-96 11.49 13.00

1996-97 1.29 6.10

1997-98 9.19 6.70

1998-99 7.84 4.10

1999-00 7.09 6.70

2000-01 8.04 5.00

2001-02 6.06 2.70

2002-03 7.68 5.70

2003-04 8.06 6.09

2004-05 9.96 8.04

Growth of SSI SectorYear No of Units (In

lakhsOutput at Current Prices

Employment (Rs Cr)

Export Earnings (Rs Cr)

1991-92 20.82 1,78,669 129.80 13,883

1992-93 22.46 2,09,300 134.06 17,785

1993-94 23.90 2,41,648 139.40 25,307

1994-95 25.71 2,96,886 146.56 29,068

1995-96 26.60 3,62,656 152.61 36,470

1996-97 28.00 4,11,858 160.00 39,249

1997-98 29.40 4,62,641 167.20 43,946

1998-99 30.80 5,20,650 171.50 48,979

1999-00 32.10 5,72,887 178.50 53,975

2001-01 33.12 6,39,024 185.60 59,978

2001-02 34.42 6,90,316 192.23 NA

2002-03 35.72 7,42,021 199.65 NA

Problems Faced by Small Businesses

• Shortage of Material and Power

• Lack of Adequate Finance

• Outdated Technology

• Inadequate Marketing Facilities

• Weak Organisation and Management

• Lack of Trained Personnel

• Competition From Large Sector

Problems Faced by SSIs as Barriers to GrowthMarket Related 70 %

Finance Related 25 %

Government Policy Related 12.78 %

Power Related / Infrastructure

14 %

Technology 14.60 %

Sickness in SSI Units

Year No of Units Amount Outstanding (Rs Cr)

1999 3,06,221 4313.48

2000 3,04,235 4608.43

2001 2,49,630 4505.54

2002 1,77,336 4818.95

2003 1,67,980 5706.35

Source : Reserve Bank of India, Handbook of Statistics on the Indian Economy, 2003-04

Closed Shops : Plagued with Problems

Reasons No of Units (In ‘000) % of Total

Labour Problems 7 2.3

Disputes among Owners 11 3.7

Raw Materials Problems 17 5.6

Finance Problem 105 34.9

Marketing Problem 43 14.3

Natural 10 3.3

More than One Reason 50 26.6

Others 58 19.3

Total 301 100

Source : Second Census of Small Industries Report

Trends Of Lending By Banking Sector To SSI

As at end March Total advances by Banking Sector

Total Advances to SSI Sector

Proportion of SSI to Total Advances

1999 2,46,203 42674 17.30

2000 2,92,943 45788 15.63

2001 4,69,153 56002 1.94

2002 5,36,727 57199 10.66

2003 6,69,534 60394 9.02

2004 7,64,383 65855 8.62

2005* 9,72,587 76114 7.83

Source : RBI Report on Trend and Progress of Banking in India* Provisional

Measures Taken by the Government

• Protective Measures

• Promotional Measures

• Institutional Measures

Protective Measures

• Reservation of products exclusively for small sector. At present, the number stands at more than 800.

• A cess imposed on certain products of the organized sector to enable the small sector industries to compete successfully in the market.

• Government proposes to provide legislative protection to small scale industries

Promotional Measures

• Providing raw materials at a reasonable prices and on priority basis.

• Setting up of Small Industries Development Bank of India (SIDBI) and Small Industries Development Fund (SIDF) for providing financial assistance.

• Increasing the money earmarked for the development of small scale industries under the successive five year plans.

• Providing technical assistance and improved tools and methods.

Institutional Measures

• National Small Industries Corporation

• Small Scale Industries Development Organisation

• All India Boards

• District Industries Centers

• Industrial Estates

• Industrial Cooperatives

Industrial Policy Resolution ( 6th August, 1991)

Objective• To impart more vitality and growth-impetus to the sector to

enable it to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports.

• Substantial delicensing of the sector.

• To deregulate and debureaucratise the sector with a view to remove all fetters on its growth potential, reposing greater faith in small and young entrepreneurs.

Tiny Enterprises• Increase in the limit of investment in plant and machinery

Small Scale Industries – up to 60 lakhs Ancillary Units – up to 75 lakhs Export Oriented Units – up to 75 lakhs

• All Industry-related service and business enterprises, irrespective of their location, would be recognised as small scale industries and their investment ceilings would correspond to those of Tiny Enterprises.

• To widen the scope of the National Equity Fund Scheme to cover projects upto Rs.10 lakh for equity support (upto 15 %).

• Single Window Loan Scheme enlarged to cover projects upto Rs.20 lakh with working capital margin upto Rs.10 lakh.

Financial Support Measures• Emphasis shifted from subsidised/cheap credit, except for

specified target groups, and efforts were made to ensure both adequate flow of credit on a normative basis, and the quality of its delivery, for viable operations of this sector.

• To provide access to the capital market and to encourage modernisation and technological upgradation, it was decided to allow equity participation by other industrial undertakings in the SSI, not exceeding 24 per cent of the total shareholding.

• Regulatory provisions relating to the management of private limited companies are being liberalized.

Small Industries Development Bank of India

• Set up as a wholly owned subsidiary of Industrial Development Bank of India by an Act of Parliament in 1989.

• Commenced its operation on 2nd April, 1990.

• The move came after establishment of Small Industrial Development Fund (SIDF) by IDBI was unsuccessful in meeting the demand of small scale sector

Functions of SIDBI• Refinancing of term loans granted by SFCs, SIDCs/banks.

• Providing assistance for development of marketing infrastructure and creating new marketing channels.

• Assistance for developing industrial estates.

• Resource support to National Small Industries Corporation and Small Industrial Development Corporations for raw material supply.

• Providing equity type of assistance to get special target groups like new promoters and women under National Equity Fund, Mahila Udyam Nidhi etc.

Small Sector : THE SWOT AnalysisSTENGTHS WEAKNESS

• Flexibility in production volumes and design changes• Faster decision making• Lower labour costs• Lower overhead costs

• Often lack in management, marketing or financial skills• Technological obsolesce• Poor financing• Lack of marketing strength

OPPOPTUNITIES THREATS

• Large companies are outsourcing more to reduce their own costs.• Promising export market• Higher investment limits mean companies can expand and modernise• Big companies can take a larger equity stake in small ones

• With concessions disappearing, inefficient units will die• With dereservation, competition will come from large companies• With import liberalisation, competition will come from MNCs and cheap units• Smaller, less aggressive companies will suffer

“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”

- Peter F Drucker