Role and Contribution of Small Scale Industries in Economic

Development

Dr. Anna K. Patil

Asst. Professor
Dept. of Economics,
S.G. M. College, Karad,
Dist-Satara, Pin-415124
Mobile: 9822249082
Email- akpatilpune@yahoo.co.in
Abstract
Industry is the segment of economy concerned with production of goods. Small scale
industry (SSI) is a term which applies to the small entrepreneurs who are engaged in
manufacture and production on a micro scale. The SSI sector continues to remain an
integral part of Indian economy with significant contribution to GDP, industrial
production and employment generation in India. Worldwide, the SSIs have been accepted
as the engine of economic growth and for promoting equitable development. The major
advantage of the sector is its employment potential at low capital cost. The labour
intensity of the SSI sector is much higher than that of the large enterprises. In 2000, the
Union Government has reduced the investment limit in plant and machinery for small
scale units from Rs. 3 crore to Rs. 1 crore. However the investment ceilings for tiny
industries remain unchanged to Rs. 25 lakh. The small- scale industrial sector has
recorded a high growth rate since independence in spite of stiff competition from the
large sector and not so encouraging support from the government. This is evidenced by
the number of registered units which went up from mere 16,000 units in 1950 to 36,000
units in 1961 and to 133.67 lakh units in 2007-08. As far as the output of the SSI unit is
concerned, it was Rs.1,22,154 crore in 1994-95 and this has considerably risen to Rs.
695126 crore in 2007-2008 (at current prices). Production in SSI sector during the last
ten years has recorded an annual average growth rate of 8.6 percent. The share of SSI in
the countries industrial output is around 39 percent. SSI Sector plays a major role in
India's present export performance. 45% to 50% of the Indian export is being contributed
by SSI sector. Direct exports from the SSI sector account for nearly 35% of total exports.
The number of small scale units that undertake direct exports would be more than 5000.

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Introduction:
Industry is the segment of economy concerned with production of goods. Small scale
industry (SSI) is a term which applies to the small entrepreneurs who are engaged in
manufacture and production on a micro scale. It mainly refers to agro- based rural
industry which doesn't require huge capital influx and large infrastructure. These SSI also
include the indigenous cottage industry and the handicrafts industry. The development of
small scale industries is very important for a country like India which has mainly rural
economy. These SSI which are mainly agro- based in nature would provide job for
millions of Indians and would contribute largely to the overall growth of the Indian
economy. The SSI sector continues to remain an integral part of Indian economy with
significant contribution to GDP, industrial production and employment generation in
India. Worldwide, the SSIs have been accepted as the engine of economic growth and for
promoting equitable development. The major advantage of the sector is its employment
potential at low capital cost. The labour intensity of the SSI sector is much higher than
that of the large enterprises.
Scope of the Study
The SSI sectors have recorded significant growth and impressive performance. This
study aims at identifying and analyzing the growth, in employment, production and
exports of SSI, also helping the government in formulating SSI policy to revive the sick
units by promoting better performance.
Objectives of the Study
i. The main purpose of the study is to identify the role of SSI in economic
development.
ii. To examine the Role of SSI in employment generation in rural areas.

iii. To study the per unit employment generation in the SSI sector.

iv. To study the major role of SSI sector in India's present export performance.
Meaning of SSI: In 1955 Small Scale Industries Board defined small scale industry as
A unit employing less than 50 persons, if using power and less than 100 persons without
the use of power and with capital assets not exceeding rupees five lakhs

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In 2000, the Union Government has reduced the investment limit in plant and machinery
for small scale units from Rs. 3 crore to Rs. 1 crore. However the investment ceilings for
tiny industries remain unchanged to Rs. 25 lakh.
1. Small Scale Industries Provides Employment
1. SSI uses labour intensive techniques. Hence, it provides employment opportunities to a large
number of people. Thus, it reduces the unemployment problem to a great extent.

2. SSI provides employment to artisans, technically qualified persons and professionals. It also
provides employment opportunities to people engaged in traditional arts in India.

3. SSI accounts for employment of people in rural sector and unorganized sector.

4. It provides employment to skilled and unskilled people in India.

5. The employment capital ratio is high for the SSI.

2. SSI Facilitates Women Growth

1. It provides employment opportunities to women in India.

2. It promotes entrepreneurial skills among women as special incentives are given to women
entrepreneurs.

3. SSI Brings Balanced Regional Development

1. SSI promotes decentralized development of industries as most of the small scale industries are
set up in backward and rural areas.

2. It removes regional disparities by industrializing rural and backward areas and brings balanced
regional development.

3. It promotes urban and rural growth in India.

4. It helps to reduce the problems of congestion, slums, sanitation and pollution in cities by
providing employment and income to people living in rural areas. It plays an important role by
initiating the government to build the infrastructural facilities in rural areas.

5. It helps in improving the standard of living of people residing in suburban and rural areas in
India.

6. The entrepreneurial talent is tapped in different regions and the income is also distributed
instead of being concentrated in the hands of a few individuals or business families.

4. SSI Helps in Mobilization of Local Resources

1. It helps to mobilize and utilize local resources like small savings, entrepreneurial talent, etc., of
the entrepreneurs, which might otherwise remain idle and unutilized. Thus it helps in effective
utilization of resources.

2. It paves way for promoting traditional family skills and handicrafts. There is a great demand
for handicraft goods in foreign countries.

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3. It helps to improve the growth of local entrepreneurs and self-employed professionals in small
towns and villages in India.

5. SSI Paves for Optimisation of Capital

1. SSI requires less capital per unit of output. It provides quick return on investment due to
shorter gestation period. The pay back period is quite short in small scale industries.

2. SSI functions as a stabilizing force by providing high output capital ratio as well as high
employment capital ratio.

3. It encourages the people living in rural areas and small towns to mobilize savings and
channelize them into industrial activities.

6. SSI Promotes Exports

1. SSI does not require sophisticated machinery. Hence, it is not necessary to import the machines
from abroad. On the other hand, there is a great demand for goods produced by small scale
sector. Thus it reduces the pressure on the countrysbalance of payments.
2. SSI earns valuable foreign exchange through exports from India.

7. SSI Complements Large Scale Industries

1. SSI plays a complementary role to large scale sector and supports the large scale industries.

2. SSI provides parts, components, accessories to large scale industries and meets the
requirements of large scale industries through setting up units near the large scale units.

3. It serves as ancillaries to large Scale units.

8. SSI Meets Consumer Demands

1. SSI produces wide range of products required by consumers in India.

2. SSI meets the demand of the consumers without creating a shortage for goods. Hence, it serves
as an anti-inflationary force by providing goods of daily use.

9. SSI Ensures Social Advantage

1. SSI helps in the development of the society by reducing concentration of income and wealth in
few hands.

2. SSI provides employment to people and pave for independent living.

3. SSI helps the people living in rural and backward sector to participate in the process of
development.

4. It encourages democracy and self-governance.

10. Develops Entrepreneurship

1. It helps to develop a class of entrepreneurs in the society. It helps the job seekers to turn out as
job givers.

2. It promotes self-employment and spirit of self-reliance in the society.

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3. Development of small scale industries helps to increase the per capita income of India in
various ways.

4. It facilitates development of backward areas and weaker sections of the society.

5. Small Scale Industries are adept in distributing national income in more efficient and
equitable manner among the various participants of the society.

Role of SSI in Economic Development in India

The small- scale industrial sector has recorded a high growth rate since independence in
spite of stiff competition from the large sector and not so encouraging support from the
government. This is evidenced by the number of registered units which went up from
mere 16,000 units in 1950 to 36,000 units in 1961 and to 133.67 lakh units in 2007-08.
During the last decade alone, the SSI sector has progressed from production of simple
consumer goods to the manufacture of many sophisticated and precision products like
electronics control systems, micro-wave components, electro-medical equipments, T.V.
sets etc. Growth and contribution of SSI during the period 1994-96 to 2007-08 is given in
following table.
Table
Growth of SSI Sector (1994-95 to 2007-08)
Year No. of units Production Share In Employment Export (Rs.
(in lakh) (Rs. crore) GDP (%) (in lakh) Crores
1994-95 79.6 (4.1) 1,22,154 (23.6) - 191.4 (4.8) 29.068 (14.9)
1995-96 82.8 (4.1)) 1,47,712 (20.9 - 197.9 (3.4) 36,470 (25.5)
2000-01 101.1 (4.1) 2,61,297 (11.8) - 239.1 (4.4) 69,796 (28.8)
2001-02 105.2 (4.1) 2,82,270 (8.0) - 249.1 (4.2) 71.244 (2.1)
2002-03 109.5 (4.1) 3,11,993 (10.5) 5.92 260.2 (4.4) 86,013 (20.7)
2003-04 114.0 (4.1) 3,57,733 (14.7) 5.79 271.4 (4.3) 97,644 (13.5)
2004-05 118.6 (4.1) 4,18,263 (16.9) 5.84 282.6 (4.1) 1,24,417 (27.4)
2005-06 123.42 497842 (12.32) 5.83 299.85 150242 (20.7)
2006-07 128.44 587196 (12.65) 5.94 312.52
2007-08 133.67 695126 (13.00) NA 322.28
Source: Reserve Bank of India, Handbook of Statistics on the Indian Economy 2004- 05. Mumbai,
It is clear from the above table that the number of units in SSI sector was 79.6 lakhs. This
number has steadily risen to 133.67 lakhs during the year 2007-08. As far as the output of
the SSI unit is concerned, it was Rs.1,22,154 crore in 1994-95 and this has considerably

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risen to Rs. 695126 crore in 2007-2008 (at current prices). Production in SSI sector
during the last ten years has recorded an annual average growth rate of 8.6 percent. The
share of SSI in the countries industrial output is around 39 percent.
Employment Generation
Further, table shows the encouragement to small scale and cottage sector would, no
doubt, serve to counter the seasonal un-employment of the agricultural labour force and
thus utilize it which otherwise would go waste. The SSI sector has employed a total of
191.4 lakh people in 1994-95 and this number has consistently risen to 322.28 lakh
people in 2007-08. Within the manufacturing sector itself, small and cottage industrial
sector contributes about four-fifths of manufacturing employment in India. Given the
acute unemployment, underemployment and disguised unemployment problem in India,
creation of employment opportunities will depend crucially to the development of small
scale and cottage industries. SSI sector in India creates largest employment opportunities
for the Indian populace, next only to agriculture. It has been estimated that a lakh rupees
of investment in fixed assets in the SSI generates employment for four persons.
According to the SSI Sector survey conducted by the Ministry and National Informatics
Centre with the base year of 1987-88, the following interesting observations were made
related to employment in the small scale sector. Food products industry has ranked first in
generating employment, providing employment to 4.82 lakh persons (13.1%). The next
two industry groups were non-metallic mineral products with employment of 4.46 lakh
persons (12.2%) and metal products with 3.73 lakh persons (10.2%). In chemicals and
chemical products, machinery parts and except electrical parts, wood products, basic
metal industries, paper products and printing, hosiery and garments, repair services and
rubber and 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: Per unit employment was the highest (20) in units engaged in
beverages, tobacco and tobacco products mainly due to the high employment potential of
this industry particularly in Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil
Nadu. The 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

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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 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 and 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 and 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 and 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.
Production
The SSI sector plays a vital role for the growth of the country. It contributes 40% of the
gross manufacture to the Indian economy. It has been estimated that a lakh rupees of
investment in fixed assets in the small scale sector produces 4.62 lakhs worth of goods or
services with an approximate value addition of ten percentage points. The small scale
sector has grown rapidly over the years. The growth rates during the various plan periods
have been very impressive. The number of small scale units has increased from an
estimated 8.74 lakhs units in the year 1980-81 to 31.21 lakhs in the year 1999.
From the year 1990-91 this sector has exhibited a comparatively lower growth
trend (though positive) which continued during the next two years. However, this has to

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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. When the performance of this sector is
viewed against the growth in the manufacturing and the industry sector as a whole, it
instills confidence in the resilience of the small scale sector. 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. The positive trend is likely to strengthen in the
coming years. This trend augurs a bright future for the SSI.
Export contribution
SSI Sector plays a major role in India's present export performance. 45% to 50% of the
Indian export is being contributed by SSI sector. Direct exports from the SSI sector
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 small
scale industrial units 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. It would surprise many to know that non traditional
products account for more than 95% of the SSI exports. The export from SSI sector has
been clocking excellent growth rates in this decade. It has been mostly fuelled by the
performance of garment, leather and gems and jewellery units from this sector. The
lucrative product groups where the SSI sector dominates in exports are sports goods,
readymade garments, woollen garments and knitwear, plastic products, processed food
and leather products.

Conclusion
Findings

The following are some of the important role played by small- scale industries in India.

1. Employment generation:

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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 potential.

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 development.

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

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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 industries:

The small-scale industries play an important role in assisting bigger industries and projects
so that the planned activity of development work is timely attended. They support the growth
of large industries by providing, components, accessories and semi finished goods required
by them. In fact, small industries can 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 relationship.

Of course, increase in number of units, production, employment and exports of small- scale
industries over the years are considered essential for the economic growth and development
of the country. 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.

The Small Scale Industry today constitutes a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our

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late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a
supporting sector in the form of small scale enterprises. Small Scale Sector has emerged
as a dynamic and vibrant sector of the economy. Today, it accounts for nearly 35% of the
gross value of output in the manufacturing sector and over 40% of the total exports from
the country. In terms of value added this sector accounts for about 40% of the value
added in the manufacturing sector. The sector's contribution to employment is next only
to agriculture in India. It is therefore an excellent sector of economy for investment.
References:
Annual Report (2000 01) Ministry of small scale Industries and Agro & Rural
Industries, Government of India, New Delhi.
Datt, R. and Sundaram, K.P.M (2007): Indian Economy, S. Chand & Company Ltd,
New Delhi
Dhar P.N.and Lydall H. (1961): The Role of Small Enterprises in Indias Economic
Development, AsiaPublishing House, Bombay.
Ganstyam Pandov 2008, Management of working capital in small scale industries.
New Delhi: Deep and Deep publications.
Kalchetty Eresi 2008, Management of Finance in Small Scale Industry. Allahabad:
Vohra publishes and Distributions.
Mathew. P.M. 1970, Small Enterprises and Regional Development, Challenges and
Choices, Kanishka Publishers Distributors, New Delhi,
Small Scale Industries Board, quoted by Desai,Vasant(1983), Organization and
Management of SmallScale Industries. Himalaya Publishing House, New Delhi.

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