Some of the problems faced by small scale industries are:
1. Shortage of Finance 2. Shortage of Raw Materials 3. Lack of Managerial Skills 4. Incompetent Labour 5. Marketing Problems 6. Low Quality Products 7. Idle Capacity 8. Outdated Technology 9. Sickness 10. Global Competition and a Few Others.
Additionally, learn about the measures to deal with the above mentioned problems.
Problems Faced by Small Scale Industries
Problems Faced by Small Scale Industries – With Measures
In India, the small business is generally faced with the following problems:
1. Shortage of Finance – Small industries face severe shortage of adequate finance to carry out their business activities. Banks and financial institutions hesitate to grant them financial help due to their low credit worthiness and lack of collateral security. As a result, they have to depend on local financial resources and are frequently exploited by money lenders.
2. Shortage of Raw materials – Small business enterprises suffer from shortage of raw material. They are unable to buy in bulk due to their limited financial position and lack of storage facilities. Moreover, if the required materials are not available, they have to either compromise on quality or have to pay a high price to get good quality materials.
3. Lack of Managerial skills – Small business generally lacks managerial skills as it is operated by a single person, who may not possess necessary capabilities. Moreover, the enterprises are unable to hire professional experts due to shortage of funds.
4. Incompetent Labour – Small business firms are unable to attract competent and professional candidates in their firms due to inability to pay reasonable remuneration. A lot of training is needed for unskilled workers, who are recruited at low remuneration. As a result, productivity per employee is relatively low and employee turnover is generally high.
5. Marketing Problems – Small business enterprises generally face problems in marketing of their goods and services as there are hardly any funds for advertising or sales promotion. As a result, their products do not have a brand name or loyalty. They have to depend on middleman, who at times exploit them by paying low price and delayed payments. Further, direct marketing may not be feasible due to lack of necessary infrastructure.
6. Low Quality Products – Small industries are unable to supply standardized goods of high quality due to lack of modern technology and shortage of resources to invest in quality research. As a result, their products are unable to compete with products of large companies or MNCs.
7. Idle Capacity – Small business firms have to operate below the full capacity level due to shortage of demand of their products. It increases their operating costs and sometimes, also leads to closure of the business.
8. Outdated Technology – Most small businesses use outdated technology because of their inability to use modern and advanced technological methods. It leads to low productivity and high cost of production.
9. Sickness – Many of the small industries are becoming sick due to various internal and external problems. Internal problems include lack of skilled labour and poor managerial and marketing skills. External problems include delayed payment, shortage of working capital, lack of demand, etc.
10. Global Competition – The LPG (liberalisation, privatisation and globalization) policy initiated by Government in 1991 increased the following problems for small business enterprises.
(i) They have to face competition not only from medium and large domestic industries, but also from MNCs.
(ii) They are unable to withstand quality standards, technological skills and financial creditworthiness of the large domestic industries and MNCs.
(iii) They have limited access to markets of developed countries due to their stringent quality requirements.
Measures to Promote Small Business Units:
In view of the contribution made by small business, Indian Government has been undertaking various measures for establishing, promoting and developing the small business sector, especially the rural, cottage and village industries in the backward areas.
The various measures taken may be studied under two categories:
1. Institutional Support
2. Incentives for Enterprises in Rural, Backward and Hilly areas
1. Institutional Support:
The government has set up following institutions for the benefit of the small scale industries:
i. National Small Industries Corporation (NSIC):
National Small Industries Corporation Ltd. (NSIC) is an ISO 9001-2008 certified Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSME). It was set up in 1955 to promote the growth of small business units in the country.
Functions of NSIC:
The main functions of NSIC are as follows:
(i) To supply domestic and imported machines on easy hire-purchase terms.
(ii) To procure, supply and distribute indigenous and imported raw materials.
(iii) To export the products of small business units and develop export- worthiness.
(iv) To provide mentoring and advisory services.
(v) To serve as technology business incubators.
(vi) To create awareness on technological upgradation.
(vii) To develop software technology parks and technology transfer centres. NSIC has implemented a new scheme of ‘Performance and credit rating’ of small businesses to achieve two objectives –
(a) Sensitizing the small industries about the need for credit rating.
(b) Encouraging small business units to maintain good financial track record.
2. District Industries Centers (DICs):
DIC Programme was launched in 1978 at the district level to provide services and support facilities to the entrepreneurs for setting up small and village industries. It provides different kinds of assistance to the entrepreneurs. DIC provide guidance about the various assistance schemes of the government, prepare feasibility reports and arrange for machinery, raw materials and other extension services for the entrepreneurs of small and village industries. Thus, DIC is emerging as the focal point for economic and industrial growth at the district level.
Some more Institutional Support:
1. National Bank for Agriculture and Rural Development (NABARD):
NABARD was setup in 1982 to promote integrated rural development. It has implemented many strategies and schemes for the promotion of rural business enterprises in the country. In addition to agriculture, it also supports small industries, cottage and village industries and rural artisans. It also offers advisory services and organizes training and development programmes for rural entrepreneurs.
2. The Rural Small Business Development Centre (RSBDC):
It was set up by the World Association for Small and Medium Enterprises (WASME) and sponsored by NABARD. RSBDC aims to provide management and technical support to current and prospective micro and small entrepreneurs in rural areas.
RSBDC has organised several programmes on entrepreneurship, skill upgradation, training, awareness, etc. in various rural areas to cover large number of rural unemployed youth and women in several trades.
3. Small Industries Development Bank of India (SIDBI):
SIDBI was established in 1990 as an apex bank for the promotion, financing and development of industry in the small scale sector.
Its mains objectives are:
i. To provide direct/indirect financial assistance under different schemes to small business organisations and to meet their credit needs.
ii. To coordinate the functions of other institutions engaged in similar activities.
4. The National Commission for Enterprises in the Unorganized Sector (NCEUS):
The NCEUS was constituted in September, 2004 with the following objectives for small enterprises in the informal sector:
i. To improve their productivity.
ii. To generate large scale employment opportunities, particularly in rural areas.
iii. To enhance competitiveness in the emerging global environment.
iv. To link the sector with other institutions in the areas of credit, raw materials, infrastructure, technology upgradation, marketing.
v. To formulate suitable arrangements for skill development.
NCEUS identified the following issues for detailed consideration:
i. Growth Pole Strategy’ for the informal sector in the form of clusters/ hubs, in order to get external economic aid.
ii. Potential for public-private partnerships in imparting the skills required by the informal sector.
iii. Provision of micro-finance and related services to the informal sector.
iv. Providing social security for the workers in the informal sector.
5. Rural and Women Entrepreneurship Development (RWED):
RWED programme aims to promote a favourable business environment and to build institutional and human capacities for promotion of entrepreneurship among rural people and women.
Its mains objectives are:
(i) To create a business environment that encourages initiatives of rural and women entrepreneurs.
(ii) To foster (promote) entrepreneurial dynamism and enhance productivity.
(iii) To provide training and training manuals to women entrepreneurs.
(iv) To render any other advisory services.
6. World Association for Small and Medium Enterprises (WASME):
This International Non-Governmental Organisation (NGO) of micro, small and medium enterprises was set up as an International Committee for Rural Industrialisation. It aims at sustained growth of rural enterprises. It has designed several schemes for the promotion and development of rural industries in India.
Some of the schemes are:
i. Integrated Rural Development Programme (IRDP),
ii. Prime Minister Rozgar Yojana (PMRY).
iii. Training of Rural Youth for Self Employment (TRYSEM).
iv. Jawahar Rozgar Yozna (JRY)
v. Development of Women and Children in Rural Areas (DWCRA)
In addition to these schemes, there are schemes for specific groups of industries such as khadi, handlooms and handicrafts.
7. Scheme of Fund for Regeneration of Traditional Industries (SFURTI):
The Central Government created a special fund in 2005 (known as SFURTI) to make the traditional industries more productive and competitive.
The government started this fund by investing Rs.100 crores and uses the fund to achieve following objectives:
(i) To set up traditional industries in various parts of the country.
(ii) To improve the technology of traditional industries in order to make them competitive, profitable and sustainable.
(iii) To create sustained employment opportunities in traditional industries.
2. Incentives for Enterprises in Rural, Backward and Hilly Areas:
Indian Government has always given importance to the industrial development of backward, tribal and hilly areas in all its Five Year Plans and industrial policy statements. Government has also initiated several rural development programmes (like IRDP) to develop backward areas.
Every programme varied from state to state, but each programme offered various incentives to attract industries in backward areas.
Some of the important incentives are as follows:
1. Land – In order to encourage entrepreneurs to set up industries, every state offers developed plots of land at concessional rates and allows the payment in easy installments.
2. Power – Power is supplied to small business enterprise at concessional rates (like at 50% discount). In some cases, firms are even exempted from payment in their initial years of set up.
3. Water – Water is supplied on a no-profit, no-loss basis or at discount of 50%. In some cases, water charges are even exempted for a period of 5 years.
4. Sales Tax – Sales tax is exempted for such industries in all Union territories, while some states extend exemption for 5 years period.
5. Octroi – Several states have abolished octroi.
6. Raw Materials – Industries located in backward areas get preferential treatment in allotment of scarce raw materials like cement, iron and steel, etc.
7. Finance – Loans are given at concessional interest rates. Finance subsidy of 10-15% is given for building capital assets.
8. Industrial Estates – Some states encourage setting up of industrial estates in backward areas.
9. Tax Holiday – Industries established in backward, hilly and tribal areas are given tax exemption for a period of 5 to 10 years.
Although small business sector is getting the support of government through various institutions, still there exist vast regional disparities. There is a strong need to develop infrastructural facilities in rural, backward and hilly areas in order to have balanced regional development.
Problems Faced by Small Scale Industries – 10 Major Problems
Small-scale enterprises face a number of problems.
These are the following:
1. Shortage of Financial Resources:
Every business enterprise needs adequate funds to install plant and machinery, building and godown and purchase raw materials. Additional funds are needed to meet monthly expenses such as payment of rent, electricity bill, wages and water charges and to cover administrative and selling expenses. At times small firms are not able to raise adequate funds to make provision for fixed and working capital. The internal resources of small enterprises are so small that they have no surplus to live on in times of low business activities.
For this reason, their profits show ups and downs. This deters banks from giving them unsecured loans. In fact, considering the vital role of small industries in the industrial economy of India, the total amount of loans granted to such industries forms a very small part of the total loans granted to Indian industries. Actuate shortage of funds has led to initial sickness and ultimate closure of many small units in the past.
2. Scarcity of Raw Materials and Power:
The small scale industries do not get an assured supply of essential raw materials to be able to carry on production smoothly. For instance, due to shortage of yarn the handloom industry cannot utilise its installed capacity fully. In addition, raw materials available in the market are not of the required quality. The shortage of power also leads to idle plant capacity.
3. Lack of Specialised Managers:
In most small-enterprises the owner himself is the manager. However, in the modem age of specialisation the person who supplies finance for business may not have the required skill to efficiently perform the managerial functions such as planning, organising and controlling various operations of the enterprise.
4. Lack of Skilled and Efficient Personnel:
There is shortage of entrepreneurs with the required skill, ability, efficiency and initiative. Most entrepreneurs do not have the motivation to work hard, save, take more risk and grow through expansion and diversification. Most small entrepreneurs always look for better opportunities in large firms. Thus small industrial units are essentially residual claimants. They get those people who either lose their jobs in large enterprises or do not get any employment opportunity in such enterprises.
5. Marketing Problem:
Small scale industries face various difficulties in marketing their products. There are several reasons for this. Firstly, due to high costs they cannot closely compete with large firms. Secondly, they do not have the resources to set up specialised marketing organisations. Thirdly, there is lack of product standardisation in small-scale units. This means that most of the products manufactured in such enterprises are not of uniform quality.
So control of product quality is out of question. Finally small units are forced to sell their products at very low prices since they do not have sufficient bargaining power and their cash needs are urgent and pressing (more so because they cannot tap institutional sources of finance).
6. Use of Old and Obsolete Production Techniques:
Due to paucity of financial resources small-scale unit cannot afford to use the latest techniques of production. Consequently the cost per unit of output is higher than that in large units. This means that their profit margin is very low. For this reason they cannot compete with their large counterparts nor can undertake innovative activities such as development of new products or new processes (methods of production).
7. Production of Low Quality Goods:
Due to use of old (and obsolete) technology, unskilled labour and various other factors, most small industries produce low quality goods. And there is no scope for examination of product quality and suggesting methods for product improvement. And by selling low-quality products, small units do not get satisfactory prices. So they often lose money and are forced to adopt the policy of loss minimisation rather than profit maximisation.
8. Underutilisation of Production Capacity:
Many small-scale industrial (SSI) units cannot utilise their production capacity fully mainly due to lack of demand for their products and/ or inadequate marketing facilities. Other causes of the existence of idle production capacity are shortage of raw materials, power and working capital and dearth of technically qualified and trained personnel.
9. Growing Incidence of Sickness:
The incidence of sickness in the small-scale sector is quite high. Sickness is caused by both internal and external factors. Internal factors include shortage of skilled labour, lack of managerial skills, and inadequate availability of marketing facilities. The external causes are delayed payments by buyers, shortage of working capital, inadequate availability of institutional finance and lack of demand for products.
10. Intense Competition:
Due to the adoption of the policy of liberalisation and globalisation in India since July 1991, most small-scale units have been facing strong competition from both medium and large enterprises but also from multinational corporations.
The following points may be noted is this context:
(a) The removal of import restrictions has led to a fall in the demand for the products of the small units. So they are now facing the problem of demand recession.
(b) Since small industries supply low-quality products they cannot compete closely with their large enterprises and multinational corporations.
(c) Since small industries are not able to obtain ISO- 9000 quality certification, they find it very difficult to export most of their products.
Problems Faced by Small Scale Industries – Shortage of Finance and Raw Materials, Lack of Managerial Skills, Incompetent Labour, Marketing Problems and a Few Others
These can be further discussed as follows:
SSIs face severe shortage of finance to carry out their business activities. Banks and financial institutions hesitate to grant them financial help due to their low credit worthiness and lack of collateral security. As a result, they have to depend on local financial resources and are frequently exploited by money lenders.
Small business suffers from shortage of raw material as they are unable to buy in bulk due to their limited financial position and lack of storage facilities. And if the required materials are not available, they have to either compromise on quality or have to pay a high price to get good quality materials.
Small business lacks managerial skills as it is operated by a single person, who may not possess necessary capabilities and the enterprises are unable to hire professional experts due to shortage of funds.
Small business firms cannot afford to pay higher salaries to the employees, which affects employee willingness to work hard and produce more. Thus, productivity per employee is relatively low and employee turnover is generally high.
Small enterprises face problems of marketing their goods and services as there are hardly any funds for advertising or sales promotion. As a result, their products do not have a brand name or loyalty. They have to depend on middlemen, who at times exploit them by paying low price and delayed payments. Further, direct marketing may not be feasible due to lack of necessary infrastructure.
Small businesses are unable to supply standardised goods of high quality due to lack of modern technology and shortage of resources to invest in quality research. As a result, their products are unable to compete with products of larger companies or MNCs.
Due to lack of marketing skills or lack of demand, many small business firms have to operate below full capacity due to which their operating costs tend to increase. Gradually this leads to sickness and closure of the business.
Many small enterprises use outdated technology because of their inability to use modern and advanced technological methods. It leads to low productivity and high cost of production.
The causes of sickness are both internal and external. Internal problems include lack of skilled and trained labour and managerial and marketing skills. Some of the external problems include delayed payment, shortage of working capital, inadequate loans and lack of demand for their products.
The LPG (Liberalisation, Privatisation and Globalisation) policy initiated by Government in 1991 increased the following problems for small business enterprises.
(i) They have limited access to markets of developed countries due to their stringent quality requirements.
(ii) They have to face competition not only from medium and large domestic industries, but also from MNCs.
(iii) They are unable to withstand quality standards, technological skills and financial creditworthiness of large domestic industries and MNCs.