Role of Small-Scale Industry in the Emergence of Indian

Economy
Introduction
 What are Small-scale Industries?

Industries that manufacture, produce and provide services at a relatively small (micro)
scale are called Small-Scale Industries, they basically have no need to invest in heavy
duty machineries, plants, or firms for more than once. Since they operate at such a small-
scale, they run less risk of using up or rubbing out machinery for a long time.

They are the partnerships/corporations or even private proprietorships that function on a

lower scale with a smaller workforce and a revenue generated which is less than that of a
regular normal sized industry or business.

They are labor intensive and require little capital. They can either be service providers or
manufacturing industries, comprising of small enterprises which manufacture good or
provide service with the help of lesser and smaller machinery and a lot of workers and/or
employees.

Obviously, no start-up industry can just be categorized as a “Small-Scale Industry”, the

enterprise should fall under the guidelines set by the Government of India. Such
industries are the lifeline of the Indian economy by offering several job opportunities for
skilled labors and making sure that the locals have their demands met (with what the
industry mainly manufactures). This makes them an essential contributing element to the
economy from a social and financial point of view.

 Characteristics of Small-Scale Industries

1. Ownership: Owing to its small size and output, along with the ratio difference
between other normal or even big sized industries, a small-scale industry is
generally under a single ownership, i.e., it could be a individual or a firm, rarely is
the case when the ownership is under a partnership of sorts. And even in such a
case the important activities are carried out by the active partner and the rest all
are sleeping partners.

2. Management: Unlike the big shot industries working with several branches
scattered throughout different locations making it difficult for the owner to
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 personally supervise or even participate in the day-to-day proceedings. The
management and the control of a small-scale industry is overlooked and carried
out by the owner himself, in other words the owner actively participates in the
day-to-day activities of the business.

3. Labor Intensive/Requirement: A small business hardly requires state-of-the-art

technology at its disposal to achieve the daily goal of production. They rarely are
dependent on technology for this reason and rely massively on the labor force and
manpower for their daily attainment of production goals. This makes them perfect
for setting up in base locations where capital is scarce and a excessive supply of
labor.

4. Flexibility: By flexibility what is meant is that Small-Scale industries are more

adaptive in nature and are better equipped to handle and counter sudden
unforeseen developments in the course of their business, be it a minor/major
hiccup in their production process or a law or judgment passed by the government
which requires them to make effective changes to their way of business. Bigger
industries especially struggle with this owing to the massiveness of their operation
and the several branches they have established under them.

5. Optimal Usage of Resources: With being a industry at a small/local scale brings

the issue of not having excess in resources at hand. They are limited in what they
are supplied with even though they are all mostly local and readily available,
therefore small-scale industry make the best and most use of the resources they
receive with hardly any kind of wastage.

6. Limited Reach: Small-scale industries are not burdened with meeting the demands
of a high number of consumers. Their size and scale of business along with their
base location restricts them to just entertain local and regional demands, this is
actually a good thing because by having a smaller radius of supply they at least
ensure to fulfill all the demands made.

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 Classification of Small-Scale Industries

The classification of small-scale industries can be based on multiple factors and criteria’s,
one of the major parameters on which small-scale industries are classified on is the goods
and services produced. And that gives us three types of these kind of industries:

1. Manufacturing Industries: Majorly these industries are under single ownership,

i.e., overlooked by an individual. Focusing on production of finished goods which
can later be used for consumption or processing. Power looms, food processing or
even the engineering industries are some examples of these type of Small-Scale
Industry.

2. Ancillary Industries: Big companies or manufacturers manufacture finished goods

and products at a extensively large scale with their reach spreading through
multiple states and the demands proposed to them are never in any fashion less or
few. Often is the case then that even when they are the ones manufacturing the
finished goods the used to complete, finish, manufacture the final product are
outsourced to small-scale industries and these industries are called Ancillary
industry. They also manufacture machines and part goods for medium sized
industries or MNCs.

3. Service Industries: Industries which look after maintenance and basically a kind of
repair shops for bigger industries to hire them to look after and repair their
machinery or to supply them with a upgrade.

4. Village Industries: Industry whose base of operation located in the rural areas,
outside the jurisdiction of any organized sector. They produce goods and services
without using minimal or no power at all.

5. Cottage Industries: Operated through private resources, a small amount of capital

investment and the use of minimal yet indigenous technology. There is no clear
distinction between cottage and small-scale industry, for the time being it is
considered that cottage industries are the ones operated and carried out by either
completely or primarily by family members whereas small-scale industry relies on
hired labor force/ employees.

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 There is better more in-depth classification of Small-Scale Industries, in the flow chart given
below. It also covers the examples/types of Small-Scale Industries.

Small-Scale Industries

Traditional With
Modern
Power

Khadi
Power Looms Small-Scale

Village Industries Without

Power

Handlooms Export-Oriented

Coir Industries Ancillaries

Sericulture Tiny

Cottage

Small-Scale Services and

Business Enterprises.
Artisans

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Contributions to the Indian Economy

Small-Scale industries may seem unimportant and insignificant to the people living in metro
cities with a hectic life and large-scale industries and heavy-duty factories all around them.
But small-scale industries play an important role in the development of the Indian Economy.
People who rely on the new and better upgrades and innovations brought into their lives more
than 50% of those innovations originate from small-scale industries. And the big, established
manufacturers and industries we see today with multiple of their subsidiary branches
scattered across our country, almost all of them started out as a small-scale industry first and
then nurtured into the manufacturing giants we see now. There are multiple ways in which
the small-scale industry has and continues to contribute to our Indian Economy and support
its growth. Some of those contributions have been listed below and discussed in detail:

1. Increase in Employment: Small-scale industries require less capital for their

production and daily work, they rely more heavily on man-power and skilled labor.
Because of this their employment ratio is very high, especially in their base of
operations. They provide employment opportunities to qualified individuals and
professionals and even people skilled in traditional arts are offered jobs. This reduces
the unemployment problem by a great deal in rural sectors and the unorganized
sectors. Not only does Small-scale industry provide job opportunities to skilled
people but it also has job openings and demand for unskilled labor.

2. Supports and Facilitates Women Growth: Has a huge chunk of employment

opportunities open to women and ensures that they are all filled by the ones who are
meant to. Instills entrepreneurial skills amongst women by giving special incentives
to the women entrepreneurs who come forth.

3. Brings Balanced/Equal Regional Development: Since most of the Small-scale

industries are set up in backward and rural areas they help in the promotion of
decentralized development of big industries. It helps wiping clean the regional
disparities between a rural and a metro area by bringing balanced regional
development i.e., help the locals in improving their living conditions by providing
them jobs and a salary. And by continuation brings about a significant growth in the
urban and rural sectors of India. By providing job opportunities in rural and sub-

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 urban areas, small-scale industry also contributes towards lessening the congestion,
slums and pollution in cities (if people get jobs in their hometown which would be in
a rural sector, they won’t have any need to shift to the cities looking for the same). So
instead of living in the slums with their families in the city, people can actually have
a better and more improved living condition by staying in the hometown and working
under these industries. This also helps distribute the entrepreneurial talent among
different sectors instead of being concentrated in one place which risks the issue of
one idea being overlooked in heed of the other, and keeps the income circulating
instead of only a few individuals or business families having all the monetary gains.

4. Mobilization of Local Resources: This is a culmination of the above points, by

sticking to just the area where they have set up their base of operation, Small-scale
industries rely and therefore utilize more of the local resources which include
entrepreneurial talent, land benefits, small savings, etc., resources which would have
otherwise remained idle and not used to their potential. This encourages and
improves the growth and nourishment of local entrepreneurs and self-
taught/employed professionals in small towns and villages.

5. Optimization of Capital: Due to its less requirement in capital per unit of output, it
supplies with quick return on investments made and that is because of the shorter
gestation period it has. All of this basically means that Small-scale industry’s
payback period is comparatively short which goads people into making more
investments and being returned with benefits almost all the time with lesser risk
involved. By providing a high employment ratio and a high output capital ratio
Small-Scale industry also works as a stabilizing factor. With so many features along
with added incentives, small-scale industries motivate people to channelize their own
resources and time into industrial activities.

6. Increases Exports: The less need of expensive and complex machinery by the small-
scale industries makes them more of a asset than a liability in terms of foreign
exchange through exports. In simple words, they have little to nothing to ask from the
outside but have plenty to offer, as what they produce and manufacture has a great
demand in the market, this helps in balancing the country’s expense.

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7. Works along with large-Scale Industries: Even with the benefits and the role Small-
scale industries plays towards development and growth, they don’t pose a challenge
or threat to the Large-Scale Industries, they actually play a more complimentary role
towards them and support them. Small-Scale Industries especially the Ancillary
Industries do this by providing parts, components, accessories, etc., to the large-scale
industries helping them meet their goal of production and completing their bigger
products. Ancillary industries for these reasons i.e., transporting parts and
components to large-scale industries set up their base of operation nearer to their
larger counterparts.

8. Consumer Demands: The range of Goods supplied and produced by Small-scale

industries fall under a huge variety scale and hence supplies consumers in India with
that big a range of products. Their way of work and completing their daily production
along with minimal dependency on machinery and minimal capital investment, they
meet the demands of the consumers without ever creating a shortage for goods. In
ways like this, Small-Scale Industries serve as anti-inflationary force.

9. Nurtures and Ensures Social Advantage: This one contribution of Small-Scale

Industries is scattered across the above points but should be given equal recognition
because more than a role in the economy its one of the most important contribution
Small-Scale industries bring to the table. By simply providing employment to people,
help redistribute wealth from a few select individuals/groups and circulate it among
people, they pave the way for the independent way of life for many such lives stuck
in the backward sector of India. Most Importantly this encourages and pushes people
to participate in the process of development and believe in democracy and self-
governance.

10. Encourages Entrepreneurship: If you allow people to work, overtime they will come
up with new and better ideas to get more work done both quality and quantity wise.
What is meant here is that Small-scale industries develop and produce a class of
Entrepreneurs, eventually turning the ones seeking job into the ones giving out jobs

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to their other unemployed colleagues. This way the rural and backward sectors learn
to be more self-reliant, instead of depending on other’s riches. By accomplishing all
of the above it is quite self-explanatory on how Small-scale Industries distribute
national income in more efficient and just manner among all those who are a part of
the society.

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Conclusion

Industries are an integral part of the Economy which are mainly concerned with the
production and manufacturing of goods. The Small timers, entrepreneurs, etc., are the ones
who fall under the title of Small-scale Industries. Which remains to be a key part of the
Indian economy, while generously contributing to the GDP of India, Industrial Production,
employment number and many more. Globally, Small-Scale Industries have been recognized
and accepted as the engine of Economic growth and equitable development. How it brings
about such significance to its existence and continued growth is the major employment
potential it carries with minimal capital cost. Which makes the labor intensity higher than that
of larger enterprises. There was a change in the investment ceiling which was first capped at
Rs.3 Crores for Small-Scale Industries to merely Rs.1 Crore. This with the high competition
in the form of larger industries still didn’t hinder Small-Scale Industry’s growth and output
efficiency. This is evidenced by the quantity of registered units which went up from just
16,000 units in the year 1950 to 36,000 units (almost doubled) in 1961 and to 133.67 lakh
units in the years 2007-08. The annual average growth of the production in the Small-Scale
industry sector in the last 10 years is recorded at a growth of 8.6%. With almost 40% of the
shares in the industrial output of the country come from Small-Scale Industries. It also
massively contributes to India’s export performance by contributing a whopping 45%-50%
by themselves. Of the total exports, contributions coming directly from the Small-scale
industries account to nearly 35%. This does put things into clearer light and shines on the fact
that for a developing country such as India, small0scale industries are a very crucial part by
tackling so many more issues than any large-Scale industry and have not much to ask in
return.

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