Small-Scale Industry, Since 1947

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SMALL-SCALE INDUSTRY, SINCE 1947 India's real gross domestic product (GDP, in 1993–1994 prices) increased from 1,405 billion rupees in 1950–1951 to 11,939 billion rupees in 2000–2001, by 8.5 times. The share of manufacturing in GDP, which was 9 percent in 1950–1951, rose to 18 percent in 2000–2001. Manufacturing is divided into two sectors: registered (factories that use power and employ 10 or more workers, or that do not use power for manufacturing and that employ 20 or more workers) and unregistered (smaller units). In 1950–1951 the two sectors had roughly an equal share; in 2000–2001 the registered sector's share increased to two-thirds and the unregistered sector's share declined to one-third.

Modern and Traditional Industries

Small-scale industries (SSI) are divided into modern and traditional industries. Traditional industries are home-based, use simple tools and equipment, depend on family labor, and are completely manual. Modern SSIs may have a separate workplace, employ outside labor, and use machines and power. Nearly all of the traditional industries and a very large number of modern SSIs fall into the unregistered category, so the GDP of these industries will be roughly equal to the GDP of the unregistered sector. The share of modern SSIs has improved greatly both in production and employment between 1973–1974 and 2002–2003: in production from 68 to 94 percent and in employment from 28 to 43 percent. Over the same period, the share of traditional industries declined: in production from 16 to 6 percent and in employment from 58 to 55 percent.

An SSI is currently defined as an enterprise with investment in plant and machinery up to 10 million rupees (original value). This sector also includes ancillary, export-oriented, and women's enterprises, with an investment limit in each of 10 million rupees and with a special condition for each, and business and service enterprises in specified lines with investment limits of 2.5 million rupees and 0.5 million rupees, respectively, without any condition.

Growth and Change

Production, employment, and exports of SSI increased by 10.0, 5.9, and 12.7 percent per annum from 1973–1974 to 2000–2001. The subperiods 1973–1974, 1980–1981, 1990–1991, and 2000–2001 witnessed deceleration of growth on all the three measures.

In 1972 SSIs producing metals and electrical equipment had the largest share in the number of units, employment, and fixed assets and production, 43–49 percent. Other manufacturing, food, textiles, and services followed, in that order. In 1987–1988, other manufacturing was first in each of the above categories, with a share of 35–42 percent, followed in each category by metals and electricals, food, textiles, and services. The share of food and textiles increased and that of metals and electricals declined, both substantially.

Support and Incentives

SSIs enjoy some advantages, but they also suffer from handicaps relative to large-scale industries in the marketplace. On balance, they are in a weak position. However, they have an appeal in terms of socioeconomic objectives and have, therefore, a strong case for state support. In India, capital is scarce and labor abundant. SSIs are thought to have lower capital-output and capital-labor ratios than large-scale industries, and to therefore better serve growth and employment objectives. Additionally, entrepreneurship has been restricted in India to certain castes, communities, and language groups, and has been male-dominated. It is the policy of the Indian government to widen this base by promoting entrepreneurs from other groups.

It is on these considerations that various assistance programs and incentives have been devised for SSI development. Since independence in 1947, especially since the late 1950s, development has been wide-ranging, both in terms of programs and regions. The programs include information and technology services, entrepreneurship development and training, modernization and technology support, industrial facilities, assistance in procurement of raw materials price preferences, finance, and nursing of "sick" industrial units. To operate these programs and to monitor their progress, new agencies and institutions have been set up, and the existing ones strengthened at the national, regional, state, and lower levels. There is also a special bank for SSIs. The SSIs have their own associations, and are also represented in the national- and state-level associations of large-scale industries.

An attempt was made to estimate the value of incentives on SSI production. The study examined nine programs or incentive schemes for six industries in seven states. It was estimated that the value varied from 70 percent in cosmetics and toiletries to 33 percent in gases.

Policy Issues

There is no doubt that the SSI sector has registered considerable progress. But there are also areas of concern in the policies and programs, arresting further progress. What are these concerns, and how do they influence the outcome? And what is needed by way of corrections?

Overcrowding and failure

The capital and skill required to start and operate an SSI are small, and product is undifferentiated. These easy entry conditions have led to overcrowding of the SSI sector. Assistance programs make entry easier. Also, officials administering assistance may tend to be overgenerous, as more assistance improves their service record, adding to overcrowding.

It is therefore not surprising that a substantial number of SSIs close their doors within a short span of operations. The 1987–1988 census reported that of some 300,000 units that closed, one-half were closed within 5 years of the start of operations: 14 percent within 1–2 years and 36 percent within 3–5 years. Evidently, there is a case for a more focused and selective approach to assistance.

A presumption of the SSI policy is that SSIs have low capital-output and low capital-labor ratios relative to large-scale industries. Thus, they are in tune with factor proportions, and thus, they serve growth and employment objectives better. Considerable evidence casts doubt on that presumption, and some studies have pointed to capital-output and capital-labor ratios being higher in SSIs than in large-scale industries.


The earliest definition of small-scale industries in 1950 had a limit of 0.5 million rupees in fixed investment, with fewer than 50 workers in units using power or fewer than 100 workers in units not using power for manufacturing. The definition has changed several times since then. In 2004 the definition had a limit of 10 million rupees for investment in plant and machinery (original value), without any additional conditions. With this amount one can now buy only an obsolete, low-grade, or secondhand plant and machinery. This limit seems to have more adversely affected the capital-intensive industries like metals and electricals. The SSI censuses show a sharp decline in the shares of this group in number of units, employment, fixed assets, and production between 1972 and 1987–1988. Also, the percentage of closed units to working units in this group was 59, against 52 for all units in 1987–1988.

There is clearly a need for raising the limit. Following the recommendation of the Expert Committee on Small Enterprises, the limit was raised to 30 million rupees in 1997, but in 1999 it was brought down to 10 million rupees. Considering inflation and the availability of better technologies since then, the limit needs to be increased substantially, perhaps to 45 million rupees.


The policy of reservation of items for exclusive production in the SSI sector was first introduced in 1967 with 47 items. The number since then has been increasing, reaching a peak of 873 in 1984. Since then, the number is being reduced. As of October 2004, the number of reserved items was 605. Since then, 108 items have been identified for de-reservation, which will bring the number to 497. Under this policy, the production of items in this list by large-scale industries is frozen to their existing capacities, giving protection to small-scale industries in those categories. As a consequence, the SSI sector, especially the reserved part, is expected to improve its efficiency and grow faster.

This policy has been criticized on various grounds such as it has been ad hoc, obstruction of technology and scale up-gradation. Moreover, such evidence as is available on efficiency, profitability, and growth shows that in general the performance of SSI in the reserved items does not outshine that of other SSI, or is it poorer. It would thus seem that the government's policy of gradual de-reservation is moving in the right direction.

J. C. Sandesara

See alsoSize and Capital Intensity of Indian Industry, since 1950


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Small-Scale Industry, Since 1947

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