Chapter 2: Small Business

1. Chapter 2: Small Business

2. Introduction • In most of the developing countries like India, Small Scale Industries (SSI) constitutes an important and crucial segment of the industrial sector. They play an important role in employment creation, resource utilisation and income generation and helping to promote changes in a gradual manner. In the post independence era, a strategic position has been allotted to the small scale industries in the industrial policy.

3. What are Small Scale Industries ? The industries in India which are organized in a small scale and produce goods with the help of machines, hired labour and power are considered as small scale industries. Definition • Initially, the following units were classified as a small scale business: • Those using power with less than 50 employees • Those not using power with more than 50 but less than 100 employees. Criteria

4. What are Small Scale Industries ? However, the capital investment in a unit was considered as a primary criterion to classify a small scale business. On 21st December 1999, a unit was considered to be a small scale business if: • Investment in fixed assets like plant & equipment is not more than Rs. 1 crore. The fixed assets may be owned, leased or on hire purchase basis. • The unit was not owned, controlled or an auxiliary for any other industrial unit.

5. What are Small Scale Industries ? However, now the classification is based on the Micro Small and Medium Enterprises Development (MSMED) Act, 2006 The following is the investment criteria:

6. What are Small Scale Industries ? After the MSMED Act, 2006, the small scale industries were referred to as MSME or SME. In order to promote small business units, the government offers special concession and subsidies to business units registered under MSMED Act, 2006. These concessions include exemptions from sales tax, electricity at subsidized rate, government grants, and advances at low rate of interest. TINY Tiny Sector – All small scale units whose investment in plant and machinery is not more than Rs. 25 lacs irrespective of location of the unit have been given the status of tiny enterprises.

7. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Small-scale industries are flexible in their operation. They require limited capital and are labour intensive. Due to their small size, they can change and adapt themselves to changing business trends.

8. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods There are no or few machines in the small scale industries. Therefore, the production process is substantially dependent on labourers. This makes the small scale industries labour intensive. They provide an economic solution by creating employment opportunities in urban and rural areas at a relatively low cost of capital investment. It creates 8 to 10 times more employment as compared to large scale industries. Currently, more than 2 crore people are employed in the small scale sector in India.

9. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods A small-scale unit is generally a one-man show. It is mostly set up by individuals. Even some small units are run by partnership firm or company, the activities are mainly carried out by one of the partners or directors. Therefore, they provide an outlet for expression of the entrepreneurial spirit. As they are their own boss, the decision making process is fast and at times more innovative.

10. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Small scale industries have a substantial share in India’s total exports. They contribute nearly 40% of India's total exports. Handicraft products made in India have huge demand in foreign markets.

11. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Small-scale industries generally restrict their operation to local areas in order to meet the demands of the local people. They cannot expand their business activities due to limited resources.

12. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Small Gestation Period Gestation period can be stated in general terms as period in which firms achieve profitability and a steady income is generated through the business activities. Small scale industries can be set up in a small period of time and they can increase the production at a fast pace. Thus, they have a low gestation period. The capital of the entrepreneur does not remain blocked for a longer period of time

13. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Due to formation of small scale industries, many entrepreneurs are created in an economy. They put efforts and try to make their business successful. This prevents concentration of economic power in hands of few people. Moreover, income is distributed evenly.

14. Characteristics of Small Scale Industries • Adaptability • Labour Intensive • Managed by a single individual • Export contribution • Localised operations • Low gestation period • Decentralization of economic power • Production methods Small scale industries utilize a mix of both traditional and modern methods of production. The traditional methods refer to manual operations using skills of labour. Modern methods refer to operations by use of machines. The production methods used are simple and less time consuming.

15. Types of Small Scale Industries Small Scale Industry Traditional Small Scale Industry Modern Small Scale Industry • It includes metal work, ivory, wood carpet carving, pottery, hand woven textile, goods of common use etc. • It includes producing cycle parts, sewing machines, razor blades, electrical goods etc.

16. What is Cottage Industry ? Introduction: In rural regions of India, many families engage in small production activities from their homes. There scale of operations is very miniscule and the workers are generally the family members themselves. There are rarely any machines involved and the production is carried out entirely by hand. The produce generally consists of handicraft, woolens, carpets, handloom articles, earthenware, jewellery, etc. The products are generally unique. • Definition: • Any industry where the creation of product and services are home based rather than factory based and specific skills is required is called as cottage industry.

17. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources Cottage industries are scattered all over country. They function in villages, districts and towns also. There is also no common link between them. As a result, they are unorganized.

18. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources There is hardly any use of mechanization in cottage industries. They are based on skilful production. The skill for making the product is passed on through generations in the family. Certain products made by this sector require high skill workmanship.

19. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources Cottage industries are based on skilful production. There is hardly any use of machines. Even the laborers involved are family members only. Thus, they production of cottage industry is on a small scale. Moreover, they are able to maintain quality if the production is on a small scale.

20. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources Cottage industry is regarded as a self-employed industry. It helps to provide employment to a lot of people in rural India. Thus, it has great importance for our country.

21. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources Cottage industries have helped to preserve the cultural heritage of the country. Certain products made in the cottage industry are based on skilful production. The skill for making such products is passed on through generations in the family. The products have a distinct identity of its own and bear the impression of the Indian culture.

22. Characteristics of Cottage Industry • Unorganized Sector • Use of traditional skill • Small scale production • Employment generation • Preservation of culture • Use of agricultural resources Some cottage industries are also engaged in processing of agricultural produce. They acquire the agricultural produce which is available in that particular geographical area.

23. Cottage Industry Cottage industries work with bare minimum capital and they are responsible for providing part time and full time employment to may unskilled and unemployed rural Indians. It has helped to improve the per capital income of rural India and improves the overall standard living. Cottage Industry Products • Common Consumer Goods • Footwear, garments, toys, silk, handloom, leather goods • High Skilled Production • Dress fabric, ivory carving, khadi, stone idols, jewellery etc. • Agro-based processing • Edible items, spices, oils, honey, pickles, fruit products, jams etc.

24. How does cottage Industry benefit the society? Any industry where the creation of product and services are home based rather than factory based and specific skill is required is called as cottage industry. The following are the benefits of cottage industry to the society: • Utilization of human resources • Self Sufficiency • Empowerment • Advantage to Entrepreneur

25. Benefits of Cottage Industry • Utilization of human resources Cottage industries utilize the manual skill of the people. As a result, they are engaged in the production activities and this reduces the idle man hours of the society. • Self-sufficiency • Cottage industries ensure self sufficiency of the people engaged in these industries. In villages, where there are no big industries, cottage industries help to provide livelihood to the people and it assures wealth creation.

26. Benefits of Cottage Industry • Empowerment • Cottage industry is regarded as a self-employed industry. People engaged in cottage industry generate employment for themselves. This gives them a self pride and increases their role in empowerment of the whole nation. • Advantage to entrepreneur • The cost of setting up and maintaining a cottage industry is relatively low. Therefore, it gives great advantage to entrepreneur as he can earn higher profits.

27. Relationship between cottage industries, small scale industries and large scale industries.

28. Rural Industry • Definition: • According to Khadi and Village Industry Commission (KVIC), rural industry means “Any industry located in rural areas, population of which does not exceed 10,000 or such other figure. Goods/services produced with or without use of power and in which the fixed capital investment per head of an artisan or worker does not exceed Rs. 1,000” • According to Government of India, rural industry means “Any industry located in rural area, village or town with a population of 20,000 and below with an investment of Rs. 3 crores in plant & machinery.” • Ministry of Agro and Rural Industries (MOARI) • Established: September 2001 • Aim : Develop rural industrialization by upgrading skills, supply chain management, expanding markets and introducing innovative techniques.

29. Types of Rural Industry The industries which use agricultural produce as their raw material are called as agro-based industries. E.g.: Food processing, vegetable oil, cotton textile, dairy products, leather, fruit pulp and juices, pickles, spices etc. • Agro-Based Industries The industries which use forests as their raw material are called as forest based industries. E.g.: Wood products, bamboo products, honey collection, making eating plates from leaves, coir industry, making furniture from timber, etc. • Forest-Based Industries The industries which use mineral ore as their raw material are called as mineral based industries. E.g.: Iron & Steel industries, cement, cement industries, machine tools, stone crushing, red oxide making etc. • Mineral-Based Industries

30. Types of Rural Industry The industry which is involved in growing or producing fibres, or converting fibres to threads, or converting thread to cloth or dyeing / bleaching of cloth is called as textile industry. E.g.: Spinning, weaving, bleaching, dyeing, etc. • Textile Industry The industries which provide engineering goods and services to support other rural industries are covered under this type. E.g.: Production of agricultural equipments, tractors, pumpset repairs, weaving machines, cutting tools etc. • Engineering and service rendering Industry Ministry of Agro and Rural Industries (MOARI) Established: September 2001 Aim : Develop rural industrialization by upgrading skills, supply chain management, expanding markets and introducing innovative techniques.

31. Sectors in Rural Economy • Fisheries: The occupation of raising and harvesting fishes is called as fishery. It is carried on around the main coastline and India has around 4000 fishing villages. The fish production in India doubled between 1990 and 2010. It is mainly because of the National Programme of developing fish seeds. Under this programme, various new fishing methods and processed fish products were introduced in Indian markets. As a result, productivity improved. • Horticulture: Horticulture is a part of agriculture and deals with science & technology for intensive plant cultivation. Since India has diverse climate and soils, there is a great opportunity for horticulture. This occupation has become popular over the last decade only. Some crops cultivated in horticulture comprises of vegetables, fruits, exotic flowers, aromatic plants, spices etc.

32. Sectors in Rural Economy • Sericulture: • Sericulture or silk farming is the rearing of silkworms for the production of silk. This industry is generally found in the southern parts of India. It is a highly profitable activity and is carried out by small & marginal farmers including women. • Jute Business: Jute business in India is one the major foreign exchange earner for the country. India is one of the leading producers of jute. The delta of the river Ganges in West Bengal is the ideal place for the cultivation of jute in India. Jute is one of the most popular natural fibers next only to cotton. Jute is used for a variety of uses such as gunny bags, shopping bags, handicrafts, carpets, etc. which has high demand in urban areas.

33. Sectors in Rural Economy • Tea Business: • The tea business in India is nearly a 170 years old practice. This agro-based industry is a very important contributor to the economy of India. The main tea business in India is located along the rural hills and backward areas of north eastern and southern states like Assam, West Bengal, Tamil Nadu and Kerala. The tea business in India is mainly based on cultivation of tea variants like CTC, orthodox tea and green tea. • Poultry Business: Poultry business or poultry farming refers to raising of domesticated birds like chickens for the purpose of meat or eggs for food. India is the 7th largest poultry producer all over the world. The major poultry production takes place at Andhra Pradesh, Karnataka and Kerela. Tamil Nadu contributes 45% of the total egg production and the central part of India contributes 20%.

34. Sectors in Rural Economy • Rubber Business • The rubber business is one of the oldest businesses in India. Natural rubber is cultivated in the remote areas of southwest Konkan and Malabar coast, in Kerela and in Kanyakumari. The production of rubber in 2006 was 6.49 lakh tons and has increased gradually since then. The rubber business in India has huge potential but the technique of production needs to be improved.

35. Role of small business in India Almost 75% of the population of India resides in rural areas. Therefore, small businesses play a significant role in rural India. Most importantly, it provides employment and livelihood to crores of people living in rural areas. Also, it has helped to preserve the cultural heritage of India. The following is the role of small business in rural India: Reducing gap between rural and urban areas • Equitable distribution of national income • Capital Mobilization • Rise of co-operative sector • Employment • Rural entrepreneurship • Co-ordination with agricultural sector • Self-sufficiency • Optimum utilization of local raw material • Connectivity to developed world

36. Role of small business in India • 1. Reducing gap between rural and urban areas • Due to small businesses, there has been a great amount of development in rural areas. A lot of infrastructure has developed to support these businesses. Moreover, employment is being generated for the local people. Thus, small business has helped to reduce the gap between rural and urban areas. Small business provides an answer to various problems such as poverty, unemployment and backwardness. • 2. Capital Mobilization • Small scale businesses are scattered over a large area throughout rural India. They are not concentrated in certain specific areas only like large scale industries. They are able to mobilize capital easily. They are suitable for the capital scarce and labour abundant rural parts of India.

37. Role of small business in India • 3. Employment • In rural India, small scale businesses provide largest employment opportunity after agriculture. This is mainly because small businesses are labour intensive. Moreover, agriculture is a seasonal business and it leads to seasonal unemployment. Such unemployed labourers find employment in small businesses. Thus, small businesses have been able to absorb the surplus labour in rural economy. Total contribution of small business is around 45% in area of employment. • 4. Co-ordination with agricultural sector • Small business support agricultural sector by providing processing facilities and consumer goods for consumption. This has led to a boost in agricultural production. Further, agricultural sector also provides raw material to the agro based industries. This has led to growth of agro based industries as well.

38. Role of small business in India • 5. Optimum utilization of local raw material • Small businesses utilize the raw material available locally. In absence of such small businesses, this local raw material would have not been utilized or under-utilized. Also, since local raw materials are utilized, the cost of production is reduced and the consumers get the final product at a reasonable price. • 6. Equitable distribution of national income • Small scale industries are scattered throughout the country unlike large industries which are based in urban areas only. As a result, there is decentralization of industrial expansion. People residing in rural areas also earn income. Thus, there is equitable distribution of income and wealth.

39. Role of small business in India • 7. Rise of co-operative sector • Due to the growth of small businesses, there has also been an emergence of co-operative institutions at rural and district level. Co-operative institutions collect savings from people and utilize it for the benefit of the people. Co-operative sector is very active in agro based industries especially in western Maharashtra. • 8. Rural entrepreneurship • The small businesses have promoted entrepreneurship among the rural youth. A lot of people are now starting up and becoming self employed. It has also encouraged innovation in the country.

40. Role of small business in India • 9. Self-sufficiency • Small businesses brought about self sufficiency in rural areas in two ways: • Consumer goods produced by small businesses became available locally at reasonable prices • Rural people started earning their livelihood from small businesses. • 10. Connectivity to developed world • Small businesses have led to social as well as economic development of rural areas. There is an overall increase in education, general awareness and familiarity to modern techniques. Rural areas are no longer backward. Rural areas are slowly connecting to the developed world.

41. Problems of small businesses Due to their small size, small scale industries face a lot of problems. Due to limited capital, the businesses are not in a position to expand and enjoy the benefits of large scale production. They are also not able to take advantage of the government schemes. As a result, many small scale unit have turned sick. The following are the problems of small scale businesses in India:- Problems (M-M-M-M) Manufacturing Marketing Monetary Many Others

42. Problems of small businesses Monetary Problems (Funding Problem) This is one of the major problems faced by small businesses. Most of the small businesses are proprietary firms or partnership firms. Thus, their capital base is essentially weak. In order to set up and run the businesses, the owners are forced to borrow from non-institutional sources like money lenders, traders, agents, relatives and friends. The rate of interest charged is very high which becomes a burden for the business owners.

43. Problems of small businesses Manufacturing Problems SMART CODE: QUIET - N

44. Problems of small businesses • Manufacturing Problems • Quality Small businesses are not able to maintain quality for the following reasons: • They focus more on cutting costs and keeping prices low. • They do not adhere to quality standards. • They work on outdated technology and do not have funds to upgrade. • Under utilization of capacity Small scale businesses may not be able to market their products properly due to which the demand for their goods is low. As a result, they have to operate below full capacity. Also, resources are not utilized optimally which leads to increase in operating costs. Such businesses may have to face losses.

45. Problems of small businesses • Manufacturing Problems • Infrastructure • Rural areas face the major problems of water shortage, shortage of power and poor road connectivity. Such basic infrastructural problems hamper the growth of small businesses. Apart from these basic problems, transport problems, shortage of space, high rent and other labour problems also affect the working of the business. • Expenditure on R & D • Small Units have a very small capital base they do not have funds to carry out any research or development on their products. This leads to higher costs of production, shortens the product life cycle, failure to offer variety.

46. Problems of small businesses • Manufacturing Problems • Technology is outdated • Most of the small businesses are working on outdated technology. The following are the disadvantages: • Low productivity • High costs • Low quality • Difficulty to face competition. • There are very few small businesses which have access to modern technology. • Non-availability of raw materials • Small businesses obtain raw materials from local sources. They face the following problems relating to raw material: • Local traders exploit them by charging higher prices. • Shortage problems due to natural calamities, transport problems and industrial strikes. • Low quality raw materials are available.

47. Problems of small businesses Marketing Problems

48. Problems of small businesses • Marketing Problems • Involvement of middlemen • The small businesses do not have the capacity to directly market their goods to final consumers. Therefore, they involve middlemen who many times exploit them by paying low prices and delaying their payments. • Limited funds for marketing Small businesses allot limited funds for marketing due to which they are not able to undertake market research. As a result, their marketing is not effective. Also, they are not able to expand the size of their markets. They are forced to restrict their sales to local markets. • Other marketing problems • The other marketing problems faced by small businesses are as follows: • Lack of advertising • Non-branding of products • Poor quality of products • Heavy competition from large players • Lack of knowledge regarding marketing.

49. Problems of small businesses Many Other Problems

50. Problems of small businesses • Marketing Problems • Heavy Competition • Small businesses face competition not only from large scale businesses in the country but also from multinational companies (MNCs). The small businesses cannot match up to the quality standards and marketing capacity of big companies. Thus, they are not able to grow and reach out to a wider audience. • Export related problems • Various products made by small businesses have huge demand in foreign markets and are exported to all parts of the world. Infact, the government has announced various schemes to encourage exports. However, small businesses are not able to effectively market their products in foreign countries, there is demand fluctuation and also lack of organized effort to increase exports.