THEORETICAL FRAMEWORK AND REGIONAL INDUSTRIAL...

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CHAPTER 3

THEORETICAL FRAMEWORK AND REGIONAL

INDUSTRIAL DEVELOPMENT

3.1 Regional Industrial Dispersal

Regional Industrial Development is very essential to overall growth of the

economy. However because of unfavorable infrastructure and climate the

industrial development in India had not developed equally in all over the

states. Some states are taking their natural advantages and some states are

struggling for it. It is not the problem of the region but it is a problem of

the country economic policy. Since our independence the Government of

India is trying to overcome the problem, but still the full balanced regional

industrial development has been not achieved. Though the Second Five

Year plan1 clearly admitted that “in any comprehensive plan of

development, it is axiomatic that the special needs of the less developed

areas should receive due attention. The pattern of investment must be so

devised as to lead to balanced regional development”.The same view is

continue till ninth five year plan. The statement of the Ninth Five Year

Plan,1997-20022 indicates it very clearly, “Balanced Regional Industrial

Development has always been as essential component of the Indian

development strategy in order to ensure the unity and integrity of the

nation. Since not all parts of the country are equally well endowed to take

advantage of growth opportunities and since historical inequalities have not

been eliminated planned intervention is required to ensure that large

regional imbalances do not recur”

Though at the initial stage of planning the government aimed at balanced

regional development with taking industrial development as an essential

component, the balanced regional development has not achieved yet,

because of having aggregate economic development objectives. In the third

five year plan balanced regional development was explicitly stated as its

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specific objective and the emphasis was primerly laid on industrial

development for achieving it. The efforts for developing infrastructure,

developing investment in cottage enterprises have been taken but was not

much succeeded.

Planning is depends upon region and every states regional planning is

different in its nature with considering their needs. It is rightly sated by

VLS Prakash Rao,19633 that in India the approach of regional planning

should vary according to the needs of each region he states ‘In India the

problem is not only of underdeveloped areas, but of general under

development. Hence the approach should very according to the needs of

each region. In adopting the national development policy the basic task of

planning at regional level should mainly be three fold. 1) to contribute to

the production of essentials like food clothing and shelter 2) to develop an

priority basis the resources which are national important and for which the

region has the optimum conditions and iii) to reduce inter regional

economic disparities chiefly by decentralized industrial development’. The

planning like this creates sustainable economic development which is need

of current development crises.

From the second industrial policy 1956 and onwards the Government of

India considered the regional imbalance as one of the principal objectives

of economic planning but it was not implemented seriously which results

the forward states were getting major benefits. Dr. M.J.Kurian, 20004 of

the Planning Commission has made study on ‘Widening Regional

Disparities in India’ in which he found that more than the two thirds of

investment proposals for accelerating the growth process in the post

reforms period were concentrated in better off states where as backward

states were treated unfavorably in terms of financial institution financial

aSSI`stance etc.

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Central Government at their jurisdiction conducted different programmes

and study groups were conducted to identify the backward region and to

make solution on them. National Development Council (NDC), Planning

Commission and various other departments had taken their efforts to find

solution on the regional disparities. Despite all of these economic activities

India remain imbalance in development.

Measurement of imbalance is one of the difficult tasks, there are many

issues which require to include in measurement process but including all of

these task is expensive and time consumable. The government of India has

undertaken the measurement of regional imbalance on the basis of three

important indicators these are per capital Net Domestic Product, Growth

rates of net domestic product, trends in investment and financial

aSSI`stance and infrastructure. In the point of present study it is essential to

flash over the backwardness in industrial development in various places of

India and its progress. It can help us to understand the imbalance in

industrial development. Here the backward places are treated as a neglected

places for development by the proprietors and corporate.

National Development Council (NDC) in the year 1968 considered the

problem of industrial backwardness among the states and Union territories

and recommended the criteria for identification of industrially backward

states and union territories. The NDC also appointed two working groups

i.e. (1) Pande Working Group for identification of industrially backward

states and union territories and (2) Wanchoo working group to recommend

financial and fiscal incentives for starting enterprises in backward areas.

Incentives like investment subsidy, sales tax exemption and infrastructure

are essential to remove the anomalies arising out of these unbalanced

developments. State and central government have been taking various steps

to promote these backward areas. Apart from this the planning commission

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and Reserve Bank of India had set up different committees for studying the

credit system and physical condition. Some information about the

important committees have been taken here to clear the role played by the

government in respect of flow of Credit in this area.

3.2 Recommendation of various committees:

The committies like, Wanchoo Working Group, National Committee for

the Development of Backward Areas (NCDBA), Tondon Committee

(1974), Chore Committee (1979), Nayak committee(1992), Abid Hussain

Committee(1997), Kapoor Committee(1998) and Ganguly Committee

were focused on the credit and fiscal policies implementation for the SSI

development. The review of first eight committees is summarized as

follows.

3.2.1 Wanchoo working Group

The Wanchoo Working Group5 studied the fiscal and financial incentives to

be provided for starting enterprises in backward areas and it recommended

the following measures (a) Grant of higher development rebate to

enterprises located in backward areas., (b) Grant of exemption from

corporate income tax for a period of five year, (c) exemption from import

duty on plant and machinery and components imported by a unit located in

backward district. (d) exemption from excise duty for a period of five years

(e) exemption from sales tax for a period of five years and (f) provision of

transport subsidy. These recommendations were broadly accepted by the

government and were implemented with some modifications. The planning

commission also with the consultation of nations financial institutions

constructed weighted index for all the districts in every states and union

territories and designed for backward district and were declared eligible for

consessional finance and other facilities.

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3.2.2 National Level Committee for the Development of Backward Areas

(NCDBA)

High Level National Committee for the Development of Backward Areas

(NCDBA)6 was constituted during the period (1980-85) which made the

following recommendations (a) sub plan approach for the development of

backward areas at the state and central level., (b) project fund should be

specially allotted to the local planning an implementation group to expedite

the development of backward areas. (c) financial discipline to divers funds

intended for backward and difficult areas to more forward areas and easier

programmes specific financial discipline should be imposed on the state

not to divert funds meant for the backward areas to other areas and projects

but spend them properly within the year and for the projects they were

earmarked, (d) Incentive for staff to overcome the constraints of

unwillingness of staff in backward areas due to lack of housing, health and

education facilities for children. Apart from this, NCDBA also observed

that the central investment subsidy and concessional finance scheme had

benefited to a small number of districts, mostly in close proximity to

relatively developed industrial centres. The industrial estates programme

has not helped to relocate enterprises away from metropolitan areas and

licensing policy, being negative instrument, could not by itself, promote

industrial development in backward region.

3.2.3 Tandon Committee (1974)

RBI under the chairmanship of Shri Prakash Tandon7 constituted a

committee to frame Guidelines for Follow-up of Bank Credit, in 1974. The

committee mainly dealt with the regulatory systems and procedures for

bank financing of the working capital needs of the enterprise. The

committee made following recommendations;

1. The committee suggested that in order to streamline the lending

procedure, three methods of computing the Maximum Permissible Bank

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Finance (MPBF) could be employed; Under Method I, the MPBF is

worked out equivalent to a maximum of 75 percent of the working capital

gap i.e. total current assets less current liabilities other than Bank

borrowings; Under Method II of lending, the borrower is to provide a

minimum of 25 percent of total current assets out of long-term funds;

Under method III of lending, the borrower should provide the entire core

current assets and a minimum of 25 percent of the remaining current assets

on the theory that the entire core current assets should be financed out of

long term funds,

2. The committee evolved norms for 15 major enterprises in respect of

inventory and receivables. The norms represent the maximum levels for

holding inventory and receivables in each enterprise,

3. The norms prescribed for 15 enterprises were also applicable to all

enterprises units, including small scale enterprises with aggregate limits

from the banking system in excess of Rs. 1 million,

4. The working capital gap, viz. the borrower’s requirement of finance for

current asset (based on norms) other than those financed out of other

current liabilities, could be bridged partly from the borrower’s own fund

and long-term borrowing and partly by banks borrowings,

5. In case of enterprises with a very high degree of seasonality, the

assessment of bank finance was required to be done on the basis of

monthly cash budgets.

3.2.4 Chore Committee (1979)

In order to review the cash credit system in its wider perspective, the RBI

constituted the committee under the chairmanship of Shri. K.B.Chore8 in

1979. The committee made following recommendations;

Recommendations :

1. Large borrowers should be placed under Method II of lending as

recommended by the Tandon Committee,

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2. Peak and Non-Peak limits should be set ,

3. Temporary requirements be financed through loans,

4. Introduction of a drawee bills system could be considered. The rational

behind making these recommendations, inter alia, was the redeployment of

bank credit in favor of the priority sector particularly the small scale sector,

a need for more efficient use of bank credit and reduction in the gaps

between sanction and availing a limits. The objective of the drawee bills

system was to introduce and enforce financial discipline on the buyer in the

purchase of raw materials and to encourage a bills culture thereby helping

the small scale sector.

Recommendations Accepted and Implemented by RBI

The recommendations of the Tandon and Chore Committee were, by and

large, accepted by the RBI and necessary guidelines were issued to banks

to follow the same in letter and spirit.

3.2.5 Nayak Committee (1992)

To examine the Adequacy of Institutional Credit to SSI Sector and for its

related Aspects’ committee was formed under the Chairmanship of P.C.

Nayak9 on 9th December 1991. The committee submitted its report in 1992.

The committee made following important recommendations.

Recommendations:

(1) The entire SSI sector entitled to priority sector lending by banks.

(2)Bank branches should give priority to those Village Enterprises which

can use working capital efficiently, having established production

successfully but are unable to make further progress for lack of working

capital,

(3) State Financial Corporations (SFCs) should serve as the principal

financing agencies.

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(4) Banks should adopt and implement the Single Window Scheme (SWS)

in full earnest,

(5) Bank should establish effective grievance redressal machinery to

overcome SSI problems,

(6)SIDBI should increase SLR and it should be allowed to tap resources

from alternative sources to ensure higher flow of term finance to SSI

sector.

(7) The SSI should treat as a sick if, (1) any of its borrowal accounts had

become a doubtful advance, i.e. the principal or interest in respect of any of

is borroal accounts has remained overdue for periods exceeding 2 ½ years

and (2) there was erosion in the net worth due to accumulated cash losses

the extent of 50 percent or more of its peak net worth during the preceding

two accounting years,

(8) The rehabilation packages should make more effective for alleviating

sicknesses of potentially viable SSI units .

Recommendation accepted and implemented by Government / Reserve

Bank of India (RBI)

(1) The government announced a seven point action plan in 1995-96

Budget for the effective implementation of the Nayak Committee Report.

(2) RBI issued the guidelines to Commercial Banks to grant working

capital credit limits to SSI units computed on the basis of a minimum of

20% of their estimated annual turnover, whose limit in individual cases

was upto Rs.20 million,

(3) Banks were advised to extend aSSI`stance under the Single Window

Scheme (SWSs) of SIDBI in all the districts to meet the credit

requirements of SSI`s,

(4) Banks were similarly, not to insist on a compulsory deposit as a ‘quid

proquo’ for sanctioning credit limit to SSI`s,

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(5) RBI accepted the definition of sick SSI unit as suggested by Nayak

Committee and asked the banks to identify sick units and take urgent action

to put them under nursing programme,

(6) Banks were advised to ensure that there should not be any delay in the

sanctioning of and disbursal of credit. In the case of rejection/curtailment

of the credit limit for the loan proposal, a reference to the higher authority

should be made,

(7) The standard loan application forms for SSI borrowers were devised,

(8) Banks were advised to impart training to the staff working at

specialized branches so as to bring about attitudinal change in them.

3.2.6 Abid Hussain Committee (1997)

In order to examine the relevance and impact of small enterprise policies

and to suggest measures to make the SSI sector more vibrant and

competitive Governement of India has appointed a expert committee on

small enterprise under the Chairmanship of Shri Abid Hussain10 on 1995.

The committee has submitted its report on 1997. The major

recommendations are summersised in the following paragraphs

Recommendations:

1. Abolition of all 836 items reserved for SSI production and transitional

arrangement of Rs.5 billion per annum be made for rehabilitation of units

affected by de-reservation,

2. Raising the investment ceiling of small and tiny units up to Rs.30

million and Rs,.2.5 million from the then ceilings of Rs. 6.0 million and

Rs.0.5 million respectively,

3. Earmarking of 70 percent of priority sector credit going to the SSI sector

for tiny units,

4. Separate laws be enacted for the small enterprises and Inspector Raj be

removed,

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5. Restructuring and strengthening of District Inustries Centres (DICs),

State Financial Corporations, Small Enterprises Development Corporations

was necessary.,

6. Corporatisation of government extension agencies set up to support the

SSI sector was required.,

7. Financial incentives to be given to the exporting units including the

creation of a fund to aSSI`st exporting SSI`s,

8. Policy should focus on the economies of agglomeration by providing

integrated infrastructure support services through private institutions

organized around clusters,

9. Excese incentive for graduating SSI and tiny units in to medium scale

units by raising the exemption limit of excise duties for the SSI sector as

whole and permitting an exemption from excise duty on the manufacture of

other companies brand name products.

Recommendation accepted and implemented by Government / Reserve

Bank of India (RBI)

1. The Government raised the investment ceiling in Plant and Machinery of

small / ancillary enterprises from Rs. 6-7.5million to R.30 million and of

tiny units from Rs. 0.5 million to Rs.2.5 million as per recommendation.

2. Government have decided to go in only for phased dereservation for this,

first the Government dereserved 15 items, out of 836 items reserved for

SSI production , in April, 1997. Nine more items have (February, 1999)

been further dereserved and the nomenclature of two items has been

changed facilitating partial dereservation in them.

2. The export obligation for setting up new units or expanding the existing

capacity in the non –SSI units in the reserved products has been lowered to

50 % from 75%,

3. The Government set up an inter ministerial committee under the

Chairmanship of Secretary (SSI and Agro .and Rural Enterprises) to

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examine the other recommendations of the expert committee so as to

implement many more of them.

3.2.7 Kapur Committee (1998)

In order to examine banks adhered in respect of Nayak Committee

recommendation and to look in to various problems germane to the credit

flow to SSI sector and to suggest appropriate measures for their redressal,

Government of India has appointed the high level one man committee of

S.L.Kapur11 on Credit to SSI on June, 1998. The major recommendation of

the committee is summerised here in the following paragraphs.

Recommendations :

1. SIDBI Should get assured funds at a lower rate of interest to help the

SSI`s in meeting their credit requirements,

3. SIDBI should accord their status of nodal/co-coordinating agency for

financing aof small enterprises as is available to NABARD in the field of

agricultural development,

4. SIDBI might consider launching enterprise –specific Venture Funds. It

might set up immediately a few software Venture Capital Funds in

collaboration with Software Professional Associations or their expert

bodies. It should examine the setting up of such funds for other sub sectors

like food processing and enterprise related export services,

5. RBI should constitute task force to outline how credit policies and

procedure for SSI exporter

6. The limit of composite loans should be enhanced to Rs.0.5 million so

that the entire requirement of small units is met by single documentation

security, charge creation process. This facility should also be extended to

all SSI untis requiring loans upto Rs.0.5 million irrespective of their

location,

7. Bank managers should be delegated powers to grant ad hoc facilities to

the extent of 20 percent of the limit sanctioned,

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8. Banks should open more specialized SSI branches or shift/restructure

some of the existing branches and convert theme into specialized branches

for financing the small scale sector,

9. Loan application should be in English, Hindi and Local language and

Loan application should sanctioned promptly and normally within one

month,

10. The RBI might consider, in consultation with the Government of India,

the need to set up a Small Enterprise Infrastructure Development Fund for

developing industrial areas in around metropolitan cities urban and semi-

urban areas which are not covered by RIDF of NABARD. To start with a

corpus of such funds say Rs. 10 billion be kept with SIDBI for lending to

the state Government,

Recommendation accepted and implemented by RBI

The RBI accepted 40 recommendation of the committee, the important

recommendation are.

1. Banks are to delegate powers of sanctioning the ad-hoc limits upto the

extent of 20% of sanctioned loan limits by the branch manager,

2. Banks have been directed to take not of the norms of fixing eligible

working capital limits,

3. Banks have been instructed to open more specialized branches or as the

case demands, the conversion of existing branches at clusters having a high

concentration of SSI units,

4. Sponsor bank /SIDBI may provide crash training programmes for the

staff of RRBs for servicing the SSI`s in a more effective manner,

5. Banks have been advised to introduce applications in tri-lingual forms,

6. The flow of credit to SSI should be assessed on the basis of

disbursement rather than outstanding balance.

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3.2.8 Ganguly Committee (2004)

The committee on "Working Group on Flow of Credit to SSI sector" was

constituted by RBI to review credit flow in SSI`s sectors under the

chairmanship of Ganguly12 The committee made following important

recommendations;

Recommendations:

1. Setting up of a marketing development aSSI`stance fund for helping

targeted exporting units, (ii) restructuring and corporatisation of DICs,

SISIs and other development agencies, (iii) restructuring State Financial

Corporations and (iv) Promotion of Cluster level activities and facilities,

2. Considering the importance of SSI, the Committee suggests that all the

banks, including RBI, SBI and Foreign Banks should have at least one

representative from this sector on their respective Boards. Care should be

taken to ensure that the best representative of this sector is taken. Similarly,

SIDBI should have a number of representatives of SSI sector on its Board

and NABARD also should have one such member representing the small

scale enterprises. The Public Sector Banks also should have Regional

Advisory Boards and SSI should also be represented on these boards

suitably,

3. Issue regarding mortgage of land needs to be deliberated with the

various State Governments for evolving a well coordinated national

strategy for providing credit to SSI`s in rural areas and legal and procedural

difficulties in the path of such advances should be removed. Equitable

mortgages should be permitted and if registered mortgages have to be

done, these should be permitted without any stamp duty or registration fee

as in the case of agricultural loans. Recovery of such loans could be made

through attachment and sale of property as in the case of agriculture loans.

No taxes should be imposed by any state government on equitable

mortgage,

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4. A new fund called the `Reconstruction Fund' may be set up in SIDBI

and initiative thereof be taken by Government/RBI. Initial corpus should

also be provided by Government/RBI. This should be linked with all the

Public Sector Banks though appropriate lines of credit,

5. Reserve Bank of India should have dialogue with the State Governments

and the Central Government regarding delays in providing subsidies for

financing the projects of SSI units. The State Governments may be well

advised to discontinue schemes of subsidies if their financial strength do

not warrant bearing this burden. However, where there are temporary

financial problems, RBI should advise banks to consider providing bridge

loans to cover the amount of subsidy. The State Government should agree

to bear the interest cost on such bridge loans,

6. The District Enterprise Centres should be rejuvenated and rechristened

as Micro Enterprise Development Centres. These should be set up by

Business Chambers, NGOs, Technical Universities and Management

Institutes. State Government agencies/KVICs/KVIBs and entrepreneurs

can also join hands in strengthening these centres,

7. The Committee proposes the setting up of a collateral Reserve Fund with

an initial corpus of Rs. 100 crore to be contributed by Government of

India, SIDBI, NABARD, State Governments and banks with a view to

providing support to first generation entrepreneurs who find it very

difficult to furnish collateral securities or 3rd party guarantees. The support

from this fund will be limited to projects costing upto Rs. 10.00 lakh.

However, they, i.e. entrepreneurs will have to contribute to this fund by

paying some token amount of interest in addition to the PLR to avail of this

aSSI`stance,

8. The District Enterprise Centres should be rejuvenated and rechristened

as Micro Enterprise Development Centres. These should be set up by

Business Chambers, NGOs, Technical Universities and Management

Institutes. State Government agencies/KVICs/KVIBs and entrepreneurs

can also join hands in strengthening these centres,

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9. The Committee is of the view that the policy framework should

encourage Venture Capital particularly for SSI sector. The policy measures

required for popularising this concept should be got examined and decided.

A separate legislation be enacted to promote the growth of venture capital

in the country.

3.3 Industrial Location

The Location Economic thinker like, Alfred Webers,1928, F.A.Fetter,1931,

Tord Palander,1935, Goodrich Carter,1936, E.M.Hoover,1937, W.H.

Dean,1938, S.R.Dennison,1939,R.U.Retcliff,1939, Canoyer, H.G., 1945,

M.P.Fogarty,1945, August Losch,1954, Wiksells Boktryckeri, W.F.Walker,

Spooner,1972, Sant,1975, Christopher R. Bryant, 1980, Kent

Healy,1940,Wilhelm Launhardt,,1982 H.J.Mackinder,1902, etc. were

studied the industrial location on there own view. The main theme of

studying why enterprises are prefer to locate in one place than other place

was clearly indicated by them. They flashed over the factors important to

location of enterprises. It includes transfer cost, Processing cost,

availability of Labour, Communication, Technology, Political activities,

natural environment and other infrastructure etc. Giving importance to the

producer motive Hoover Edger an economic thinker had said the location

of producer is nearer to the market place to reduce the transfer cost.

According to the statement of Hoover Edger, M, 196314, ‘Every one has

some preference as to “consumer location”, i.e. where he would like to live

and spend his income. For all but and envied minority there is also the

question of “Producer Location”, i.e. the best place to earn an income.

Acting as consumers, people seek to settle where living is secure, cheap,

and agreeable. As producer, they seek to locate where earning will be large

and assured and the working conditions pleasant. These consumer and

producer motives often exert conflicting pulls on the individual, who then

has to work out some compromise location giving due weight to both

points of veiw’ ‘Producer motives are much more significant than

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consumers motives in shaping the overall distribution of activities.

Geographical differentials in wage rates or the profit prospects of particular

occupations are larger and better known than are differentials in living

costs or conditions’.

The basis of his study is geographic differences in processing costs. With

considering the fact that units of land, labor, and capital are imperfectly

mobile and imperfectly divisible to minimize this processing cost, producer

have an incentive to locate as near possible their suppliers and markets in

order to reduce transfer cost, the individual entrepreneur seeks a location

conducive to high utilization of the productive capacity of factors and scale

of output appropriate to that location.

Natural resources are largely affected to industrialization in earlier stages.

At the initial industrialization in any developed or developing nation it

plays very important role according to Sutcliffe R.B. 197115 “It is the

wealth of natural resource endowment which has enabled the Soviet Union

and the United States to reach high levels of income per head with a lower

ratio of international trade to national income than other countries”. In

England also at initial stage Iron and Coal determines the location as well

as character of industrialization similarly ‘the growth of very small

countries of the middle east producing oil is entirely due to the abundance

of a single natural resources by virtue of which in a very short period they

have achieved high national income per head’ most of the developing

countries –those well endowed with natural resources – have become

predominant producers of primary products. (Dr. Satyanarayana,1981)16

3.4 Weber’s Industrial Location Theory

To study the regional industrial development it is necessary to study the

location of enterprises. Here researcher has discussed some earlier studies

relating to the industrial location and their strategies. There is a common

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feature that the firm choose location in that place where the enterprise

maximizes their profits where as individual choose the locations where he

maximize their utility, but from earlier studies researcher has understand

that, it was not only characteristic of the location analysis there are other

important factors which can determine the industrial location such as

market, skill, resources, infrastructure etc.

The location theory has history of last two centuries, though the prominent

regional scientist Walter Isard had been called father of location theories,

some earlier thinkers i.e. Richard Cantillon, Etienne Bonnot de Condillac,

David Hume, Sir James D. Steuart, and David Ricardo were used to

develop the location theory but from Johann Heinrich Von Thunen`s first

valumme of ‘Der Isolierte Staat in 1826’ really initiated the location

theory. In his volume von Thünen notes that cost of transporting goods

consumes some of Ricordos Economic rent. He also noted that becouse the

transport cost, economic rent, vary across goods, different land uses and

use intensity results the distance from market place to the firm /enterprise.

From the time of Von Thunen through to Walter Christaller's 1933 it

seems German thinkers had taken hold in location. The book Die Zentralen

Orte in Sőddeutschland, which formulated much to todays ‘central place

theory’. An especially notable contribution was one by Alfred Weber, who

published Über den Standort der Industrien in 1909. Weber applies frieght

rates of resources and the finished goods along with production function

along to develop an algorithm that indentifies the optimal location for

manufacturing plant. He also introduced distrortions induced by labour and

both agglomerative and deglomarative forces. Weber then moves on to

discuss groupings of production units, anticipating Loschs market areas.

Carl Wilhelm Friedrich Launhardt was mostly known for his contribution

were surprisingly more modern in their analytical content than Weber.

Weber was mostly influenced by other notably Wilhelm Roscher and

Albert Schaffle, who seems likerly to have read Launhardths work.

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Regardles, location theoretic thoght blossomed only after Weber book was

published.

Alfred Weber (1868 -1958)17 German Economist, Sociogist, Regional

Scientist and Operational Researcher is very popular for his early model of

Industrial Location. ‘er deb standort der indstrie’(Theory of the location of

Enterprises in 1909) Alfred put forth the first developed general theory of

industrial locations. His model took in to accont several minimal cost for

manufacturing plants. Weber also applied the model to service

organisations such as investment firms and more broadly to certain

political and cultural systems. Weber began with hypothesizing that an

ideal type of enterprise as unit of analysis. He tested the model by taking

hypothesis that producation and distribution are indivisible and

independent of other enterprises. His hypothes was rejected and so he

conclude with giving attention to real world conditions in which locational

factors may bring together or draw apart various aspects of enterprise for

example the relation of raw material to labour sources. Accourding to him

‘change in locational factors can lead to three areas of change in the

enterprise : a specail or vertiual splitting of production and distribution,

diversification withing the plant of various processes and division of labour

between enterprises. Location may affect the cost of an enterprise securing

a location (e.g. cost of real estate) and obtaining raw and auxilliary

materials. General regional factors may also effect the cost of

manufacturing e.g. labor cost and transport costs in shipping to consumers.

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Webers Locational Triangle

Sources : Weber, Alfred [translated by Carl J. Friedrich from Weber's 1909 book]. Theory of the

Location of Enterprises. Chicago: The University of Chicago Press, 1929.

In the appendix to the 1909 book, Weber presented a mathematical

summary of the model developed with the help of a mathematician

colleague. It presented methods for calculating "locational triangles" in the

placing of enterprise between raw materials and markets. An example in

Figure 1, C1 and C2 are the source of raw materials and M is the market. If

equal transport costs are assumed in all directions, the least-cost location,

P, is derived from the "pull" from all three corners. In the point of our

research we found that places of industrial location is nearer to the market

and are mostly influenced by the transport and getting of fiscal and credit

benefits as a D+ zone area of the district.

3.5 Industrial Policies:

3.5.1 Background

“The three customery objectives of industrialization policies are to provide

work for growing population, to rise the standard of living increasing the

per capital net national income and often to improve balance of payment

situation” (Mountjoy, A.B.1963)18,. This statement clears the importantance

P

M

C1 C2

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of industrial policy for the economic development of the nation. But before

Independence, the policy of the British Government was against

encouraging industrial development in India. No incentives were offered to

Indian enterprises for their growth.

Since independence the government of India has started to formulate

Industrial Policy Resolutions/Statements, aimed at promoting industrial

growth and determining the pattern of aSSI`stance to enterprises. These

Industrial policies gave thrust over the years to the promotion of SSI`s

through the introduction of various incentives to fulfill policy objectives.

These incentives pertained to financial, fiscal and infrastructure related

measures targeted at achieving the growth of the sector during various plan

periods and were either extended on a “one time” basis(i.e. initiative

support for setting up of units) or in the form of sustained support for a

specific period (protectionist measures, subsidies etc.). While some

incentives were made applicable to all enterprises including the large scale

sector, others were available exclusively for the SSI`s. After the

independence the first Industrial Policy was declared on April 6,1948 by

then Union enterprise Minister Mr. Shyama Prasad Mukharjee. This policy

established a base for Mixed and controlled economy in India and clearly

divided the industrial sectors into private and public sectors.

Later on 1948 Industrial Policy was replaced by new Industrial Policy

Resolution declared on April,30, 1956 with the basic objective of

establishing ‘Socialistic Pattern of Society in the country. Industrial policy

of 1956 categorises enterprises which would be the exclusive responsibility

of the state or would progressively come under state control. Earmarking

the pre-eminent position of the public sector it envisaged private sector

coexisting with the state and thus attempted to give flexibility to the policy

framework.

101

Though the Government had declared a number of new industrial policies

after 1956, but every new policy accepted the 1956 Industrial resolution as

a base. In June 1991, Narasimha Rao government took over charge and a

wave of reforms and liberalization was observed in the economy. In this

new atmosphere of economic reforms, the Government declared broad

changes in Industrial Policy on July 24,1991. The Policy initiatives

undertaken by the government since July 1991 have been designed to build

on the past industrial achievements and to accelerate the process of making

Indian enterprise internationally competitive. It recognizes the strength and

maturity of the enterprise and attempts to provide the competitive stimulus

for higher growth. The thrust of these initiatives has been to increase the

domestic and external competition through extensive application of market

mechanisms and facilitating forging of dynamic relationship with foreign

of dynamic relationship with foreign investors and suppliers of technology.

The post-independence development policy in India evolved around

targeted efforts to foster economic growth. As discussed by Bhagwati

(1998), key strategy then was to achieve rapid industrial growth by

inducing private investment and import of newer technologies. However,

within less than a decade, the initial policy prescription was radically

altered towards “import substitution”. It was envisaged that SSI`s would

help to generate employment and expansion of industrial activity across the

country (NIPFP, 1996) (Small Sector in India : Status, Growth and De-

reservation, Study conducted by Rajiv Gandhi Institute for contemporary

Studies, August, 2006)

3.5.2 Industrial Policy, 1948

Industrial Policy of 1948 is influenced by intention for basic enterprise

development i.e. Coal, Iron and Steel, Aircraft manufacture, Ship building,

manufacture of telephone, telegraphs and mineral oils. This policy broadly

laid down the objectives of the Government’s policy in the industrial field

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and clarified enterprises and enterprises into four categories, namely: a)

Those exclusively owned by the Government, e.g. arms and ammunition,

atomic energy, railways, etc.; and in emergencies, any enterprise vital for

national defense. b) Key or basic enterprises, e.g. coal, iron and steel,

aircraft manufacture, ship building, telephone, telegraphs and

communications equipment except radio receivers, mineral oils, etc. The

undertakings already existing in this group were promised facilities for

efficient working and ‘reasonable’ expansion for a period of ten years, at

the end of which, the State could exercise the option to nationalize them. c)

The third category of 18 specified enterprises were to be subject to the

Government’s control and regulation in consultation with the then

provincial (now State) Governments. d) The rest of the industrial field was,

more or less, left open to the private sector.

Also this policy made some efforts for cottage enterprise and small scale

enterprise. The statement of the policy mentioned “Cottage and small scale

enterprises have a very important role in the national economy. Offering as

they do scope for individual, village or co-operative enterprise, and means

for the rehabilitation of displaced persons. These enterprises are

particularly suited for the better utilization of local resources and for the

achievement of the local self-sufficiency in respect of certain types of

essential consumer goods like food, cloth and agricultural implements.” It

indicates the policy has not neglected overall the ssi sector and (Enterprise

Policy Resolution, 1948 Para 8) it also further mentioned that the healthy

expansion of cottage and small scale enterprises depends upon a number of

factors. Most of these fall in the provincial sphere and are receiving the

attention of the governments of the Provinces and the States like the

provision of raw materials cheap power, technical advice, organized

marking or their produce and where necessary, safeguards against intensive

competition by large scale manufacture, as the education of the worker in

the use of the best available technique. An enterprises conference,

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convened in December 1947. recommended that the government should

establish a Cottage Enterprises Board to foster the growth of SSI`s. The

government accepted this recommendation and proposed to create suitable

machinery to implement the recommended that includes also the setting up

of a cottage and small scale enterprises directorate.

3.5.3 Industrial Development and Regulation Act, (IDR) 1951.

In 1951, the Industrial (Development and Regulation) Act was passed by

the Parliament. The main provisions of the Act were: a) All existing

undertakings at the commencement of the Act, except those owned by the

Central Government were compulsorily required to register with the

designated authority. b) No one except the central Government would be

permitted to set up any new industrial undertaking “except under and in

accordance with a licence issued in that behalf by the Central

Government.” c) Such a licence or permission prescribed a variety of

conditions, such as, location, minimum standards in respect of size and

techniques to be used, which the Central Government may approve. d)

Such licenses and clearances were also required in cases of ‘substantial

expansion’ of an existing industrial undertaking. e) The enterprises to be

brought under regulation were divided into two parts, Part I and II in the

Schedule to the Act. The IDR Act gave very wide powers to the

Government. This resulted in more or less complete control by the

bureaucracy on the industrial development of the country. They had full

control over an approval of any proposal on capacity, location, expansion,

manufacture of new products etc; approval of foreign exchange

expenditure on the import of plant and machinery and approval for the

terms of foreign collaboration.


Government of India has adopted socialist pattern of economy in there

industrial policy 1956 and for that it concentrated on overall development

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of basic and strategic enterprises in the public sector. The policy according

to the importance, enterprises were classified in to three groups i.e. A,B

and C.. In the first category enterprises for the future development and

which was the exclusive responsibility of the State. The second category

consist the enterprises, which were progressively State-owned and in which

State taken the initiative in establishing new undertakings, but in which

private enterprise were also be expected to supplement the effort of the

State. The third category included all the remaining enterprises, and their

future development was in general left to the initiative and enterprise of the

private sector. The policy was also full aware about the role of state

government in the development of this sector, which can be seen from their

policy statement “The State shall strive to promote the welfare of the

people by securing and protecting as effectively as it may a social order in

which justice, social, economic and political, shall inform all the

institutions of the national life." (para 3). The policy supported cottage,

village and small enterprises at the time of when the government decided to

initiate measures to improve the competitive strength of the small

enterprises. This policy recognized the role of SSI sector in providing

employment opportunities, mobilizing local skills and capital resources,

and integration with the large sector. For this purpose, an emphasis was

placed on the creation of facilities such as industrial Estates and rural

community workshops to provide the required production technologies,

incentives and other amenities


The Policy Statement of 1973, Large enterprises were permitted to start

operations in rural and backward areas with a view to developing those

areas and enabling the growth of small enterprises around. A Secretariat for

Industrial Approvals (SIA) was set up in November 1973, and all industrial

licenses, capital goods, import licenses, terms of foreign collaboration were

brought under the SIA. The industrial policy 1977 which is firmly known

105

as Janata policy was taken efforts from then for SSI and Tiny sector

development.

The Industrial Policy 1977 policy mostly known as Janata Policy because

the policy was initiated in the period of Janata Government. It laid

emphasis on decentralization and on the role of small scale, tiny and

cottage and industrial sector. It can be cleared according to its policy

statement that, “The main thrust of the new Industrial Policy will be on

effective promotion of cottage and small enterprises widely dispersed in

rural areas and small towns. It is the policy of the Government that

whatever can be produced by small and cottage enterprises must only be so

produced. For this purpose an exhaustive analysis of industrial products,

has been made to identify those items which are capable of being

established or expanded in the small scale sector. This list of enterprises

which would be exclusively reserved for the small scale sector has been

significantly expanded and will now include more than 500 items as

compared to about 180 items earlier. However, it must also be ensured that

production in this sector is economic and of acceptable quality. The list of

enterprises reserved for the Small Scale Sector has to be continually

reviewed so that capacity creation does not lag behind the requirements of

the economy. An annual review of reserved enterprises will be undertaken

in order to ensure that reservation accorded to the small scale is efficient

and is also continually expanded as new products and new processes

capital of being manufactured in the small scale are identified.” (Policy

statement in ssi para 2.). The Industrial Policy Statement of 1973, inter

alia, identified high priority enterprises where investment from large

industrial houses and foreign companies was permitted. But the industrial

policy 1977, changed the approach of large enterprises concentration and

neglecting the cottage enterprises and small scale enterprises.

106

The policy has suggest to the government and other sector i.e. large private

enterprises, Public enterprises and state government enterprises to use

there efforts to development the Small Scale Enterprises, Tiny Enterprises

and Khadi and Village enterprises. The policy also set out the procedure

and fixed their role for help them. The policy firstly determined the DIC at

district level for industrial development. In there statement eagerness of

developing this sector by DIC was found “In the past, there has been a

tendency to proliferate schemes, agencies and organisations which have

tended more to confuse the average small and rural entrepreneur than to

encourage and help him. The focal point of development for small scale

and cottage enterprises will be taken away from the big cities and State

capitals to the district headquarters. In each district there will be one

agency to deal with all requirements of small and village enterprises. This

will be called the District Enterprises Centre. Under the single roof of the

District Enterprises Centre, all the services and support required by small

and village entrepreneurs will be provided. These will include economic

investigation of the district’s raw materials and other resources, supply of

machinery and equipment provision or raw material, arrangements, for

credit facilities, and effective set-up for marketing and a cell for equality

control, research and extension. The Centre will have a separate wing for

looking after the special needs of cottage and household enterprises as

distinct from small enterprises. The Centre will establish close linkages

with the Development Blocks on the one hand with specialised institutions

like Small Enterprises Service Institutes on the other.”

This policy promote the importance of technology in enterprises

development. The policy also given importance to the balanced regional

development of the entire country, it has firm believe of the policy and

suggested to minimizing the disparities of the enterprises and reducing the

location of enterprises near the metropolitan cities. Within the SSI sector, a

new concept of tiny sector was introduced. It was defined as an industrial

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unit with investment in machinery and equipment upto Rupees one lakh,

and situated in towns with a population of less than 50,000 according to the

1971 census. This tiny sector was to be given special attention and

extended help, by way of provision for margin money aSSI`stance. The

policy statement considerably expanded the list of reserved items for

exclusive manufacture in the small-scale sector. This concept was

recommended by the Karve Committee and was introduced in 1967 with

47 products. The list of such reserved items was 504 till 1977. The new

policy expanded this list to 807.

3.5.6 Industrial Policy 1980

The Industrial Policy Statement of 1980 focused attention on the need for

promoting competition in the domestic market, technological upgradation

and modernisation. The policy laid the foundation for an increasingly

competitive export base and for encouraging foreign investment in high

technology areas. The policy emphasized the ancillarisation and creation

of nucleus plants for the growth of the sector. SSI units were redefined by

raising the ceiling of investment in plant and machinery.

3.5.7 Era of Liberalisation

After 1980, an era of liberalisation started, and the trend was gradually

increased to dilute the strict licensing system and allow more freedom to

the entrepreneurs. The steps that were taken in accordance with the policy

included: a) Re-endorsement of licenses: The capacity indicated in the

licenses could be re-endorsed, provided it was 25% more than the licensed

capacity (1984). b) Automatic re-endorsement of licensed capacities

(1988). c) Broad banding and selective delicensing (1985-86) extended to

25 enterprises. d) Liberalisation of 31 May 1990. This policy included:

Exemption from licensing for all new units and those having an investment

of Rs.2.5 crores in fixed assets, and an entitlement to import upto 30% of

the total value of plant and machinery, investment of foreign equity up to

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40% was freely allowed, location restrictions were removed., investment

ceiling for small enterprises were removed.

3.5.8 Industrial Policy, 1991.

3.5.8.1 Introduction

The government of India accepted new economic policy which is given

tremendous opportunities to the development of economy. The government

accepted Liberalization , Privatizations and Globalisation (LPG) in India.

The LPG policy induced to the economy to open, liberalize and globalize

there market in to the world market. The Industrial policy 1991 have made

also different changes in their policies implementations for enterprises

sector. Government has taken a series of measures to unshackle the

industrial economy from the cobwebs of unnecessary bureaucratic control.

These measures complement the other series of measures being taken by

government in the areas of trade policy, exchange rate management, fiscal

policy, financial sector reform and overall macro economic management.

Enterprises Licensing was abolished for all projects except for a short list

of enterprises relating to security and strategic concerns, social reasons,

hazardous chemicals and overriding environmental reasons and items of

elitists consumtion. Enterprises reserved for SSI were kept continue. The

enterprises concerns security and strategic are continued for reserved with

public sector. In location of other cities of more than 1 million populations

there was no requirement of obtaining industrials from the Central

Government except for enterprises subject to compulsory licensing. In

respect of cities with population greater then 1 million, enterprises other

than those of a non polluting nature such as electronics, computer software

and printing was located outside 25 kms of the periphery. Except in prior

designated enterprises areas. Approval was given for direct foreign

investment upto 51 percent foreign equity in high priority enterprises.

There was no bottlenecks of any kind in the process. Such Clearance was

available if foreign equity covers the foreign exchange requirement for

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imported capital goods consequential amendments to the Foreign Exchange

Regulation Act (1973) was carried out. Permission for foreign technology

agreements in high priority enterprises was also given up to a lumpsum

payment of Rs. 1 Crore 5% royalty for for modestic sales and 8% for

exports subject to total payments of 8% of sales over 10 years period from

date of agreement of 7 years from commencement of production. The

prescribed royalty rates are net of taxes and was be calculated according to

standard procedures. No permission made necessary for hiring of foreign

technicians, foreign testing of indigenously developed technologies,

payment may be made form blanket permits or free foreign exchanges

according to RBI guidelines.

The policy also mentioned for public sector that the portfolio of public

sector investment reviewed with a view to focus the public sector on

strategic, high-tech and essential infrastructure. Where as some reservation

in public sector also retained further. Public enterprise which are chronicall

sick and which are unlikely to be turned around were for the reconstruction

(BIFR) or other similar high level institutions created to protect the

interests of workers likely to be affected by such rehabilitation

packages.MRTP Act was amended to remove the threshold limits of assets

in respect of MRTP companies and dominant undertakings. This eliminates

the requirement of prior approval of central Government for establishment

for new undertaking, expansion of undertaking, mergers, amalgamation

and takeover and appointed of directors for certain circumstances.

3.5.8.2 SSI sector and Industrial Policy, 1991

Industrial policy 1991, contained for the very first time a special thrust on

measures for promoting and strengthening small, tiny and village

enterprises. The main highlights of this policy are summerises as follows.

(a) Investment limit for tiny enterprises was raised to Rs. 0.5 million and

locational conditions were withdrawn, (b) All enterprise –related services

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and business enterprises(with investment ceilings as those of tiny

enterprises) irrespective of location, were recognized as SSI`s, (c) A

separate package for the promotion of tiny enterprises was urged. The

SSI`s sector was entitled to a one-time benefits only (land allocation power

connection and skill upgradation facilities), (d) Tiny enterprises continued

to be eligible for additional support on a sustained basis (i.e.access to

institutional finance, priority in Government purchases and relaxation from

certain provision of labour laws) (e) Equity participation by other industrial

undertakings was permitted up to a limit of 24 percent of shareholding in

SSI`s to boost ancillarisation and strengthen the capital base. (f) A limited

Partnership Act (Where the liability of at least one partner is unlimited and

that of the other partners are limited to the capital invested) as a new legal

form of business organization was envisaged with the aim of attracting a

fresh influx of equity capital into SSI sector. (g) A new scheme of

Integrated Infrastructure Development (including technological back up

services) for SSI`s was provided for with the participation of State

Governments and financial institutions (h) A proactive role for non-

governmental organizations (NGOs) such as enterprise trade organizations

was mooted, (i) Several measures for strengthening the handloom and

handicrafts sectors as well as other village enterprises were listed., (j) The

package of facilities and incentives for tiny sector. As announced in August

1991, as a part of policy, a separate package of incentives was urged for

promotion of tiny enterpirses. It includes i) Launching of the Prime

Minister Rozgar Yojana in October 1993, ii) Enhancement of loan limit

under composite loan scheme of SIDBI in 1994 from Rs.0.05 million to

Rs. 0.2 million, iii) Tiny enterprises though not registered as SSI`s were

made entitled to the same rate of excise exemption since 1994-95, iv)

Upward revision in investment ceilings in plant and machinery up to Rs.2.5

million in December 1997 to re-define a tiny enterprise, v) Earmarking of

60 percent of total credit flow to SSI sector (1998), vi) Other additional

measures for promotion of tiny enterprises announced in August,1998.

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3.6 Evaluation of Definitions of SSI`s

The SSI sector in India covers a wide spectrum of enterprises categorized

under small, tiny and cottage segments ranging from small

artisans/handicrafts units to modern production units with significant

investments. This sector has acquired a prominent place in the socio-

economic development of the country as it not only acts as a ‘nursery’ for

the development of entrepreneurial talent, but also produces a wide range

of 7500 products.

The term Small Scale Enterprise evokes different meanings for different

agencies. The Planning Commission, Government of India, views the

entire Village and Small Enterprises(VSI) Sector as a part of the SSI

sector. The National Sample Survey Organization under the Central

Statistical Organisation (CSO), Government of India, defines the entire

enterprise sector in terms of organized and unorganized segments, as well

as in terms of industrial enterprises run by households and non-households.

The Central Excise Department, on the basis of the annual turnover of the

units (up to a maximum limit of Rs.30 million). The Reserve Bank of India

(RBI) adopts an expanded definition of SSI`s which includes traditional

enterprises as well. The industrial policy planners in the Small Scale

Enterprises Board define SSI on the basis of investment in plant and

machinery (an upper limit of Rs.30 million) and cover residual units which

do not fall under the SSI`s Stance Programmes of any of the Statutory

Boards.

The first official definition of SSI was made in 1950, in terms of the size of

gross investment in fixed assets (Plant and machinery, land and

building),as well as on the strength of the workforce in the unit concerned.

This criterion underwent a number of modifications over the years. In the

latter part of the fifties, the change effected in defining an SSI unit was

mainly a shift from a workforce criterion to an investment criterion. In

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1966, the original value in plant and machinery was adopted as the sole

norm for defining a unit as small scale or otherwise. Similarly, the concepts

of ancillary and tiny units were introduced in 1960 and 1977, respectively.

Small Scale Service Establishments (SSSE`s) were first classified in 1985

and later re-defined, in 1991,as Small Scale Service and Business

Enterprises (SSSBE`s). The definition of Women Entrepreneurs’

Enterprise was brought out in 1988 and modified in 1991. The periodic

revisions in the definition of SSI, as made by the Government of India, is

summarized here.

Table of Definition :

The SSI is currently defined in terms of investment ceilings on the original

value of the installed plant and machinery. Different segments of SSI have

been defined as under.

Table no 3.1 Table of Definitions

Year SSI ANC TINY EoU SSE SSBE Remarks 1 2 3 4 5 6 7 8

1950 Capital Assets not exceeding Rs. 0.5 million

- - - - - Employment less than 50 workers per day (with the use of power) or less than 100 workers per day (Without the use of power)

1958 Capital Investment of less than Rs. 0.5 million

- - - - - Same as above except that the per day employment criteria was replaced by a ‘per shift’ provision.

1959 In Capital Investment, Value of machinery to be taken at original price paid irrespective

- - - - - Do

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of it being new or old

1960 Gross Value of fixed assets up to Rs. 0.5 million

Gross value of fixed assets up to Rs. 1.00 million

- - - - Employment condition was dropped

1966 Up to Rs.0.75 million

Up to Rs. 1.00 million

- - - - -

1975 Up to Rs. 1.00 million


- - - - -

1977 - - Up to Rs.0.1 million

- - - Units located at rural areas/towns with maximum population of up to 50000 as per 1971 census.

1980 Up to Rs.2.00 million


Up to Rs.0.2 million

- - - Unit located in rural areas/towns with a maximum population of up to 50000 as per 1971 census.

1985 Up to Rs. 3.5 million


- - Up to Rs.0.2 million

- Unit located in rural areas and towns with a maximum population of up to 5 lakhs as pe 1981 census. The SSSE classification suspended from 1991 and replaced by SSSBEs.

1991 Up to Rs 6.00 million




- Up to Rs.0.5 million

The location-specific condition was removed.

1997 Up to Rs.30 million

Up to Rs.30 million


- - - -

1999 Up to Rs.10 million

- - - - - -

Notes : SSI – Small Scale Enterprise, ANC- Ancillary Enterprise, TINY – Tiny Unit, EoU- Export Oriented Unit, SSSE- Small Scale Service Establishment, SSSBE- Small Scale Service Business Establishment, Source : SIDBI Report on Small Scale Enterprises Sector,1999, SIDBI Publication, pp.24.

114

3.6.1. Small Scale Industrial Undertakings : As per Government of India

Notification No 857 (E) , on 1999. an industrial undertaking in which the

investment in plant and machinery, whether held on ownership terms or on

lease/hire –purchase bases does not exceed Rs.10 million is graded as small

scale industrial undertaking.

3.6.2. Ancillary Industrial Undertaking : As per the notification, An

industrial undertaking which is engaged or is proposed to be engaged in the

manufacture or production of parts, components, sub-assemblies, tooling or

intermediates, or the rendering of services is termed as ancillary

undertaking has to supply or render or propose to supply or render not less

than 50% of its production or services as the case may be to one or more

other industrial undertakings. The investment in plant and machinery,

whether held on ownership terms or on lease or on hire purchase, should

not exceed Rs. 30 million.

3.6.3. Tiny Enterprises: The concept of tiny sector was initially enunciated

in the Industrial policy statement of December 1977 defined Tiny units as

those with an investment up to Rs. 0.1 million in plant and machinery. It

was redefined in 1980 with the investment ceiling raised to Rs. 0.2 million.

Subsequently, in 1991 the investment ceiling was raised to Rs. 0.5 million.

However, taking in to account the rise in price level since 1991, and the

need for modernization and technology upgradation in the context of

ongoing economic reforms and based upon the recommendation of expert

committee on small enterprises under the Chairmanship of Shri Abid

Hussain, Government has further enhanced the limit of investment in plant

and machinery to Rs 2.5 million on 24th December,1997.

3.6.4. Export Oriented Units (EOU) : A unit with an obligation to export

at least 30% of its annual production by the end of third year of

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commencement of production and having investment ceiling in fixed assets

– plant and machinery –up to Rs. 30 million is regarded as an EOU.

3.6.5. Women Enterpreneurs Enterprises : An SSI unit/enterprise related

service or business enterprise, managed by one or more women

entrepreneurs in proprietary concerns, or in which she/ they individually or

jointly have a share capital of not les than 51% as

partners/shareholders/directors of Private Ltd. Company /Members of Co-

operative Society is treated as Women Entrepreneurs’ Enterprise. Small

Scale (Enterprise related) Service and Business Enterprises (SSSBEs) :

Enterprises rendering enterprise related service/business with investment

up to Rs.0.5 million in fixed assets, excluding land and building, are called

SSSBEs.

3.6.6. Khadi and Village Enterprise: Hand woven cloth from hand spun

yarn is known as khadi. Along with certain specific village enterprises such

as food processing, forest based raw materials and other miscellaneous

manufacturing activities, Khadi comes within the purview of the statutory

body known as the Khadi and Village Enterprises Commission(KVIC).

This agency operates under the Departement of Micro, Small and Medium

Enterprises. The Khadi and Village Enterprises (KVI) sector has much

scope for utilizing local skills and resources by providing employment to

rural artisans and women workers in the rural and semi-urban area.

3.6.7. Handicrafts: Handicrafts embody the traditional skills of artisans

who use a variety of materials –wood, metal, clay, ivory, cloth etc. to

produce consumer articles as well as decorative or artistic products. Today,

only artistic and decorative articles are classified as handicrafts. The all

India Handicrafts Board is responsible for the development of Handicrafts

enterprise. While the Handicrafts Export Promotion Corporation promotes

exports from this sub-sector.

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3.6.8. Rural Enterprises: “any enterprise located in a rural area which

produces any goods or renders any service with or without the use of

power and in which the fixed capital investment per head of artisan or

worker does not exceed rupees one lakh (Rs.1 lakh and 50 thousand in case

of village enterprise located in a hilly area) or such other sum as may, by

notification in the Official Gazette, be specified from time to time by the

Central Government”. (as per amended KVIC, Act 1956, Ministry of Agro

and Rural Enterprises)

3.7 Definition of MSME` s in India

Worldwide, the micro and small enterprises (MSEs) have been accepted as

the engine of economic growth and for promoting equitable development.

The MSEs constitute over 90% of total enterprises in most of the

economies and are credited with generating the highest rates of

employment growth and account for a major share of industrial production

and exports. In India too, the MSEs play a pivotal role in the overall

industrial economy of the country. It is estimated that in terms of value, the

sector accounts for about 39% of the manufacturing output and around

33% of the total export of the country. The MSE sector has consistently

registered higher growth rate compared to the overall industrial sector. The

major advantage of the sector is its employment potential at low capital

cost. This sector employs an estimated 31 million persons spread over 12.8

million enterprises and the labour intensity in the MSE sector is estimated

to be almost 4 times higher than the large enterprises.

The definition of medium enterprises in India was recently originated, but

before that in most of the countries it had been accepted on the basis of

both quantitative and qualitative elements, such as, the number of workers

employed and / or annual turnover or the level of fixed investment.

However to determine the size of enterprise the employment criteria is

omnipresent in those countries. The medium enterprise has been defined

117

for the first time under the Micro, Small and Medium Enterprises

Development (MSMED) Act 2006. Pursuant to this amendment, Ministry

of Agro and Rural Enterprises (Krishi Evam Gramin Udyog Mantralaya)

and Ministry of Small Scale Enterprises (Laghu Udyog Mantralaya) have

been merged into a single Ministry, namely, “Ministry of Micro, Small

and Medium Enterprises” ( Sukshma Laghu aur Madhyam Udyog

Mantralaya )”

In accordance with the provision of Micro, Small and Medium Enterprises

Development (MSMED) Act,2006, the Micro, Small and Medium

Enterprises (MSME) are classified in two classes, namely Manufacturing

Enterprises and Service Enterprises. The enterprises which are not included

in above three sector treated as large enterprises. It is summerises in the

figure no 3.1. Apart from this the Act broadened very first time the concept

of Enterprise in to enterprise.

Figure No.3.1

Definitions of MSME and Large Enterprises

3.7.1 Manufacturing Enterprises : The enterprises engaged in the

manufacturing of production of goods pertaining to any enterprise

Industries/ Enterprises

Manufacturing Sector

Services Sector

Micro >25 Lakh (Mfg) >10 Lakh (Svc)

Small 25 Lakh < 5 Crore (Mfg) 10 Lakh< 2 Crore (Svc)

Medium 5Crore< 10Crore (Mfg) 2Crore<5Crore (Svc)

Large 10 Crore < (Mfg) 5Crore< (Svc)

118

specified in the first schedule to the enterprises (Development and

Regulation) Act,1951). The Manufacturing Enterprises are defined in terms

of investment in Plant and Muchinery.

3.7.2 Service Enterprises : The enterprises engaged in providing or

rendering of services and are defined in terms of investment in equipment.

The limit for investment in plant and machinery /equipment for

manufacturing / service enterprises as notified, vide S.O. 1642 (E) dtd.29-

09-2006.

3.7.3 Micro Enterprises : Micro and Small Enterprises are those

enterprises engaged in manufacturing or rendering services. A micro

enterprise is defined as: An enterprise engaged in the manufacture or

production of goods pertaining to any enterprise where the investment in

plant and machinery does not exceed Rs.25 lakh or an enterprise engaged

in rendering services where investment in equipment does not exceed

Rs.10 lakh.

3.7.4 small enterprise : An enterprise engaged in manufacture or

production of goods pertaining to any enterprise where the investment in

plant and machinery is more than Rs.25 lakh but does not exceed Rs.5

crore Or An enterprise engaged in rendering services where investment in

equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore

3.7.5 Medium Enterprises : An enterprises engaged in Manufacturing or

production of goods pertaining to any enterprise where investment in plant

and machinery is more than five crore but does not exceed ten crore Or an

enterprise engaged in rendering services where investment in equipment is

more than Rs.two crore but does not exceed five crore rupees.

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3.8 Ministries for Industrial Development :

There are some major ministries of industrial development in India these

are

1. Small Industrial Development Organisation of India (SIDO)

2. Khadi and Village Enterprises Commission (KVIC)

3. Coil Board

3.9 Other Boards/Corporations:

1. National Small Enterprises Corporation Ltd. (NSIC)

2. Small Scale Enterprises Board (SSIB)

3. National Enterprenuership Development Institute (EDIs)

4. National Commission for Enterprises in the Unorganised Sector

(NCEUS)

3.10 Promotional packages to SME

The small scale enterprises of India (including the tiny enterprises and

small scale service and business entities) have a long history of promoting

economic growth that is employment-oriented and spatially widespread.

Over seven thousand products manufactured by these include several

sophisticated items used in high technology areas like nuclear power,

missile and space programmes, information technology, biotechnology,

etc. The level of exports by this segment also testifies to its overall

competitiveness in the global markets. Yet, the segment does not constitute

a homogeneous universe and a large majority of the units faces several

challenges. In order to aSSI`st them in fully harnessing their potential by

availing of the increasing opportunities generated by trade liberalisation, it

is necessary to build not only an enabling policy environment but also

supplement the former with a specific set of measures to address the

continuing challenges. The National Common Minimum Programme

(NCMP) declares, therefore, that a “major promotional package” for this

segment to provide full support in the areas of credit, technological

120

upgradation, marketing and infrastructural upgradation in major industrial

infrastructure. The package for promotion of Micro and Small enterprises

announced by Shri Mahabir Prasad, Minister of Small Scale Enterprises

and Agro and Rural Enterprises in Loksabha on February, 2007 under

National Common Minimum Programme (NCMP) is summarized below.

Which are classified in (i) legislative back up; (ii) credit support; (iii) fiscal

measures; (iv) support for cluster based development; (v) technological and

quality up-gradation support; (vi) marketing support; (vii) support for

entrepreneurial and managerial development; (viii) empowerment of

women owned enterprises; (ix) strengthening of Prime Minister’s Rozgar

Yajana and (x) strengthening of data base for MSME Sector

Major Promotional Package

3.10.1 Credit Support

1. The Government has announced a Policy Package for Stepping up

Credit to Small and Medium Enterprises assuring, inter alia, a 20 per

cent year-on-year growth in credit flow

2. Significant improvements have also been made in the Credit Linked

Capital Subsidy Scheme for Technological Upgradation, leading to

a spurt in the number of units availing of its benefits.

3. The Small Enterprises Development Bank of India (SIDBI) will

scale up and strengthen its credit operations for micro enterprises

and cover 50 lakh additional beneficiaries over five years beginning

from 2006-07. Government will provide grant to SIDBI to augment

SIDBI’s Portfolio Risk Fund for this purpose.

4. Government will also provide grant to SIDBI to enable it to create a

Risk Capital Fund (as a pilot scheme in 2006-07) so as to provide,

directly or through intermediaries, demand-based small loans to

micro enterprises.

5. SIDBI’s direct lending operations will be expanded by increasing

the number of branches from 56 to 100 in two years beginning

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2006-07, with a view to catering to the credit needs of more clusters

of micro and small enterprises (MSEs).

6. The eligible loan limit under the Credit Guarantee Fund Scheme

will be raised to Rs.50 lakh. The credit guarantee cover will be

raised from 75 per cent to 80 per cent for micro enterprises for loans

up to Rs.5 lakh. Accordingly, to strengthen the Credit Guarantee

Fund, the corpus of the Fund will be raised from Rs.1189 crore as

on 01 April 2006 to Rs.2500 crore over a period of five years (with

contribution by the Government and SIDBI in the existing ratio of

4:1).

7. Moreover, to encourage public sector banks and public financial

institutions to contribute to the corpus of the Fund, the feasibility of

allowing deduction of their contributions to the Fund for income tax

purposes would be examined.

8. The Fund will continue to be maintained with and managed by the

Credit Guarantee Fund Trust for Small Enterprises (CGTSI). The

Trust will be renamed as “Credit Guarantee Fund Trust for Micro

and Small Enterprises” (CGTMSE).

3.10.2 Fiscal Support

Taking into consideration all the relevant factors, including the new

definition of small manufacturing enterprises, under the Micro, Small and

Medium Enterprises Development (MSMED) Act, 2006, the Government

will examine the feasibility of

1. increase in the General Excise Exemption (GEE) limit and the

existing eligibility limit for GEE;

2. extending the time limit for payment of excise duty by micro and

small enterprises; and

3. extending the GEE benefits to small enterprises on their graduation

to medium enterprises for a limited period

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3.10.3 Support for Cluster Based Development

For comprehensive and speeder development of clusters of micro and small

enterprises, the existing guidelines of the Small Enterprises Cluster

Development Programme (SICDP, to be renamed as “Micro and Small

Enterprises Cluster Development Programme” - MSECDP) will be

reviewed during 2006-07 to accelerate holistic development of clusters,

including provision of Common Facility Centres, developed sites for new

enterprises, upgradation of existing industrial infrastructure and provision

of Exhibition Grounds/Halls and also for creation and management of

infrastructure-related assets in the public-private partnership mode. The

ceiling on project cost will be raised to Rs.10 crore.

3.10.4 Technologies and Quality Up gradation Support

1.Four Training-cum-Product Development Centres (TPDCs) for agro &

food processing enterprises would be set up at identified existing Small

Enterprises Service Institutes (SISIs) to facilitate promotion and

development of micro and small enterprises in the food processing sector.

2.The two existing Central Footwear Training Institutes (CFTIs) (at

Chennai and Agra) will be further strengthened to expand their outreach

and aSSI`st the MSE in upgrading their technology.

3. Vertical Shaft Brick Kiln (VSBK) Technology would be promoted for

adoption by MSEs engaged in manufacturing bricks to make them energy

efficient and eco-friendly. For this, one-time capital subsidy (limited to 30

per cent of the cost or Rs.2 lakh, whichever is less) will be provided to

micro and small brick manufacturing enterprises.

4. With a view to promoting energy efficiency in electrical pumps and

motors manufactured by MSEs, a special programme of aSSI`stance will

be launched after a detailed technical study.

5. The existing scheme of aSSI`sting the attainment of ISO 9000 and

14001 standards will be operated as a continuing scheme during the 11th

Five Year Plan.

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6. The scope of the above-mentioned scheme will be expanded to cover

“Hazard Analysis and Critical Control Points” (HACCP) Certification

obtained by MSE.

7. A Technology Mission will be established with a view to aSSI`sting

micro, small and medium enterprises (MSMEs) in technology upgradation,

energy conservation and pollution mitigation.

3.10.5 Marketing Support

1. The National Manufacturing Competitiveness Programme (NMCP)

announced in the Budget Speech of 2006-07 will include components

relating to marketing support to MSE. Implementation of the NMCP will

be taken up soon.

3.10.6 Support for Entrepreneurial and Managerial Development

1. 20 per cent of the entrepreneurship development programmes (EDP) will

be organised for SC/ST, women and physically challenged persons with a

stipend of Rs.500 per capita per month for the duration of the training.

2. 50,000 entrepreneurs will be trained in information technology, catering,

agro and food processing, pharmaceuticals, biotechnology, etc., through

specialised courses run by SISIs, over the period co-terminus with the XI

Plan

3. A new scheme will be formulated to provide financial aSSI`stance to

select management/business schools and technical institutes, to conduct

tailor-made courses for new as well as existing micro and small

entrepreneurs.

4. A new scheme will also be formulated to provide financial aSSI`stance

to 5 select universities/ colleges to run 1200 entrepreneurial clubs.

5. A new scheme will be launched for capacity building, strengthening of

database and advocacy by Enterprise/ Enterprise Associations, after

consultation with the Associations and States.

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6. A comprehensive study will be conducted to assess the needs and scope

of Government intervention required for enhancing the competitiveness of

micro and small enterprises in the service/ business sector.

3.10.7 Empowerment of Women Owned Enterprises

1. Under the Credit Guarantee Fund Scheme, 80 per cent guarantee

cover will be provided to micro and small enterprises operated

and/or owned by women.

2. Under the SICDP/MSECDP financial aSSI`stance of up to 90 per

cent of the cost, subject to ceiling of Rs. 9 crore, will be provided

for clusters developed exclusively for micro and small enterprises

operated and/or owned by women.

3. Associations of women entrepreneurs will be aSSI`sted under the

SICDP/MSECDP in establishing exhibition centres at central places

for display and sale of products of women- owned micro and small

enterprises.

4. To encourage entrepreneurship among women, 50 per cent

concession in fees would be given to women candidates in

entrepreneurship/ management development programmes conducted

by SISIs.

5. To facilitate export by women entrepreneurs, the National Small

Enterprises Corporation Ltd. (NSIC) will aSSI`st them to participate

in 25 exhibitions over the period co-terminus with the XI Plan.

3.10.8 Strengthening of Prime Mininster Rozgar Yojana (PMRY)

1. (PMRY), introduced in 1993, has been one of the important credit-

linked subsidy schemes to generate self-employment opportunities

for the educated youth by aSSI`sting them in setting up viable micro

enterprises. A recent review has, however, established the need to

improve its effectiveness as a measure for self-employment through

this route.

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2. The design parameters of the PMRY, in terms of family income

limits for eligibility, project cost ceilings, corresponding ceilings of

subsidy, rates of aSSI`stance to States towards training of

beneficiaries before and after selection, etc., will be improved with

effect from 2007-08, keeping in view the findings of the review.

3.10.9 Strengthening of Data Base for MSME Sector

1. To strengthen the data base for the MSME sector, statistics and

information will be collected in respect of number of units,

employment, rate of growth, share of GDP, value of production,

extent of sickness/closure and all other relevant parameters of

micro, small and medium enterprises, including khadi and village

enterprise units set up under Rural Employment Generation

Programme and Prime Minister’s Rozgar Yojana as well as coir

units, through annual sample surveys and quinquennial census.

2. The quinquennial census and annual sample surveys of MSMEs will

also collect data on women-owned and/or managed enterprises.

3. A scheme will also be formulated and implemented to regularly

collect data on exports of products/services manufactured/provided

by micro, small and medium enterprises, including khadi and village

enterprises.

3.11. Policy of Reservation and Dereservation of product for exclusively Manufacturing Sector With a view to providing to the SSI opportunities for technological

upgradation, promotion of exports and economies of scale, items reserved

for exclusive manufacture by the SSI have been dereserved from time to

time. The dereservation process involves extensive consultation with all the

stake holders, including the SSI associations and various

Ministries/Departments concerned and the Planning Commission. As per

the provisions of the I (DR) Act an Advisory Committee has been

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constituted which recommends reservation/dereservation of items from

time to time. The Advisory Committee makes its recommendations on the

basis of the laid down procedure in the I(D&R) Act, 1951 which relates to

the economy of scale, the level of employment, the possibility of

encouraging and diffusing entrepreneurship in enterprise, the prevention of

concentration of economic power to the detriment of the common interest

and any other issue which the Committee may think fit. The Advisory

Committee has met 26 times so far. The last meeting of the committee was

held on 24th October 2006. During the year 2006-07, 180 items reserved

for manufacture in small scale enterprises have been dereserved. As on

date, there are 326 items reserved for exclusive manufacture in small scale

sector.

Table 3.2

Number of Enterprises Reserved for SSI`s Year Reserved Enterprise

1 2 1967 47 1976 180 1978 504 to 804 1984 873 1989 836

1998-99 821 1999-2000 812 2000-2001 812 2001-2002 799

Source : SIDBI report 1999 and Annual Report of SSI,2007-08

3.12 Scope and Limitations of MSMEs in India

Small enterprise sector has performed exceedingly well and enabled our

country to achieve industrial growth and diversification. Growth in

Requirements for Micro, Small and Medium Enterprises Small ancillary

units due to the increase in number of greenfield units coming up in the

large scale sector. By its less capital intensive and high labour absorption

nature, Micro, Small and Medium sector has made significant

contributions to employment generation and also to rural industrialisation.

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This sector is ideally suited to build on the strengths of our traditional skills

and knowledge, by infusion of technologies, capital and innovative

marketing practices.

There is a flourishing and well grounded markets for the same

product/process, differentiated by quality, value added and sophistication.

This characteristic of the Indian economy will allow complementary

existence for various diverse types of units. The promotional and protective

policies of the Govt. have ensured the presence of this sector in an

astonishing range of products, particularly in consumer goods. However,

the bugbear of the sector has been the inadequacies in capital, technology

and marketing. The process of liberalisation coupled with Government

support will therefore, attract the infusion of just these things in the sector

3.12.1 Importance of MSME in India

MSME are important in Rural India because India has large population,

less capital enterprenurs, less skilled employees, poor infrastructure, less

technology development and more undeveloped agricultural area. The

MSME will provide solution for all these problems. It can improve

employment, Skill, infrastructure and balanced growth. This will induce

the economic growth of the country. The importance of MSME is

summerised in the figure no.3.2

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Figure 3.2

Importance of MSME

3.12.2 Scope for SME Development

The opportunities in the small-scale sector are enormous due to the

following factors:

1. Extensive Promotion and Support by Government

2. Reservation for Exclusive Manufacture by small scale sector

3. Funding - Finance and Subsidies

4. Manpower Training

5. Technical and Managerial skills

6. Tooling and Testing support

7. Reservation for Exclusive Purchase by Government

8. Export Promotion

Skill Development

Better Linkage with Rural Agriculture Economy

Infrastructure Development

Stimulate Economic Growth

Balanced Growth

Less Capital

Labour Intensive

Importance of MSME

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3.12.3 Limitations of SMEs

While we look into new approaches to strengthen them effectively, one has

to understand the limitations of SMEs also, which are:

• Low Capital base

• Concentration of management functions in one / two persons

• Inadequate exposure to international environment

• Inability to face impact of WTO regime

• Inadequate Research and Development

• Lack of professionalism

3.13. Performance of SSI`s

Previously known SSI were increased widely from the last some years, it

is summerised in the table no. 3.3 with the help of various performance

parameters relating to the growth of the SSI sector such as total SSI units in

lakhs, fixed investment made in such sector, production in crores; at

current prices and constant prices (1993-94), employment generated by

these sector in lakh person and export made in that period in crore rupees

with indication of showing the performance in different year. It is

summerised in the table 3.3.

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Table 3.3 Performance of the SSI

Production in (Crore Rs.)

Sr. No

Years Total SSI Units in Lakhs

Fixed Investment (In Crores) Current

Prices Constant Prices (1993-1994)

Employment (Lakh Personnes)

Export (Rs. In Crores)

1 2 3 4 5 6 7 8 1 1990-91 67.87 93555 78802 84728 158.34 9664 2 1991-92 70.63 100351 80615 87355 165.99 13883

3 1992-93 73.51 109623 84413 92246 174.84 17784

4 1993-94 76.49 115795 98796 98796 182.64 25307

5 1994-95 79.60 123790 122154 108774 191.40 29068

6 1995-96 82.84 125750 147712 121175 197.93 36470

7 1996-97 86.21 130560 167805 134892 205.86 39248

8 1997-98 89.71 133242 187217 146262.9 213.16 44442

9 1998-99 93.36 135482 210454 157525.1 220.55 48979

10 99-2000 97.15 139982 233760 170379.2 229.10 54200

11 2000-01 101.1 146845 261297 184401.4 238.73 69797

12 2001-02 105.21 154349 282270 195613 249.33 71244

At 2001 -02 prices

13 2002-03 109.49 162317 314850 306771 260.21 86013

14 2003-04 113.95 170219 364547 336344 271.42 97644

15 2004-05 118.59 178699 429796 372988 282.57 124417

16 2005-06 123.42 188118 497842 418884 294.91 NA

(Source: Annual Report SSI,2007-08 pp.50)

After glancing the above table it is found that the total SSI units, fixed

investment made in that units , production, employment and export is

increased year by year. In the year 1990-91 the total SSI units were 67.87

lakh which were increased up to 123.42 lakhs in the year 2005-06 at the

same time fixed investment increased by 1,88,118 crore rupees in the year

2006 from 93,555 crore production increased from 78,802 crore rupees to

49,78,542, employment increased 158.34 lakh to 294.91 lakh persons and

export increased by 9,664 crore rupees to 1,74417 crore rupees up to the

year 2004-05 the all increase shows with base year of 1990-91 and last year

2005-06.

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According to this table we conclude that the SMEs going increasing year

by year which also couses to increase employment and export which earns

income for the country.

3.14. Contribution of SSI to the Gross Domestic Product (GDP)

All over the world the GDP growth treated as a indicator of economic

growth. The table 3.4 indicates the total industrial production and its

relation to the Gross Domestic Product (GDP) for seven year i.e. from

1997-98 to the year 2003-04.

Table 3.4

Contribution of SSI to the Gross Domestic Product (GDP)

(Source : Annual Report SSI, 2005-06 pp.36)

It is found from the table that the SSI industrial production in total

industrial production goes slightly increasing. The volatility between GDP

growth is very less and mean range is 39.50%. In the year 1999-2000 the

total SSI Production is higher compare any year of the selection, but at the

same time its contribution in total GDP growth is lower than any GDP of

the data, apart from this in the year 1997-98 the SSI contribution in total

industrial production is 39.70%. But it contributes 7.02% in total GDP

growth. From this analysis it can be understood that the GDP completely

not depend upon the total industrial production there are other economic

factor which can be influenced the GDP.

Contribution of SSI (%) Year Total Industrial Production Gross Domestic Product (GDP)

1 2 3 1997-98 39.70 7.02 1998-99 39.94 6.81 1999-2000 40.02 6.69 2000-01 39.91 6.86 2001-02 39.63 6.67 2002-03 39.48 6.82 2003-04 39.42 6.71

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3.15 Comparison of the SSI with the Overall Industrial Sector

The small-scale sector has maintained a higher rate of growth than the

overall industrial sector. The comparative growth rates of production for

both the sectors are explained in the table 3.5.

Table 3.5

Comparison of the SSI with the Overall Industrial Sector

Year Growth Rate of SSI Sector (%)

Growth Rate of Overall Industrial Sector

1 2 3 1993-94 5.7 6.0 1994-95 10.0 9.1 1995-96 11.5 13.9 1996-97 11.3 6.1 1997-98 9.2 6.7 1998-99 7.8 4.1 1999-2000 7.1 6.7 2000-01 8.0 5.0 2001-02 6.1 2.7 2002-03 7.7 5.7 2003-04 8.6 6.9 2004-05 9.96 8.4

(source : Annual Report SSI, 2005-06, pp.36)

The above table shows the comparison of growth rate of enterprises

between SSI sector and overall industrial sector for the twelve years

periods i.e.from 1993-94 to 2004-05. According the table SSI growth in the

year 1993-94 is lowest where as in the year 1995-96 the growth is higher.

At the same time overall growth rate of industrial sector was lowest in

2001-2002 (2.7%) and highest in the year 1995-96 (13.9%) respectively.

The mean of SSI growth rate is higher than that of overall industrial sector.

It indicates that the SSI contributes more in the overall industrial growth.

3.16 India`s Export Destination for SSI Products

India has a bright history of export of handicrafts goods from ancient.

Though it affected in the British period, after independence the SSI sector

has also increased its export to the foreign countries. Major destination of

Indian export countries are USA, UK, Germany, Europe, Japan, China and

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UAE. Some brief information about the SSI products and its export

destination is summerised in the table no 3.6. The table shows only

selected major SSI Products and their destinations to all over the world.

Table 3.6

Export Destination (Country ) of SSI Products

Sr. No

Product Group Countries

1 2 3 1 Readymade garments USA, Europe, Canada, West Asia and North

Africa 2 Plastic Items UAE, China, Itely, Saudi Arabia, Oman 3 Marine Products Japan, USA, European Union, China, South

East Asia 4 Sports Goods UK,USA, Australia, Germany and South

Africa 5 Spices East Asia, European Union, North African

Zone, and American Zone 6 Cashew Items USA, Netherlands, UK, Japan, and UAE 7 Shellac Items Indonesia, Germany, UAE, USA, and Itely 8 Synthetic Items

(Madeups) UAE, UK, Turkey, USA and Italy

9 Leather and Leather Items

Germany, UK, Italy, USA, and Framce

10 Engineering and Electronic items

USA, Europe, Japan, Hong Kong, UAE, Germany, Belgium and France

11 Basic Chemical and Cosmetic Products

USA, Japan, Saudi Arabia, China, Singapore and Netherland

12 Chemical and Allied Products

Japan, Belgium, Italy, France, Bangladesh, USA and ULK

13 Wool and Woollen (Madeups) Knitted garment etc.

Europe, Japan, and Bangladesh

14 Processed food items USA, Europe, and Japan 15 Electronic items and

computer software USA, Hong Kong, UAE, UK, Germany, and Japan.

16 Tobacco and Tobacco items

East Europe

Source : http// www.laghu-udyog.com/ssiindia/exportdest.htm

3.17 Central Government incentive for industrial Development

Central government has object of balanced regional development for that

on 24 December 1997, the Central Government notified the North East

134

Industrial Policy (NEIP) providing a package of fiscal and other incentives

aimed at facilitating the process of industrial development in the NER.

During the Tenth Five Year Plan period, industrial incentives were

extended to some other States. On 23 December 2002, similar incentives

were extended to Sikkim, when it became a member of the North Eastern

Council. A special package for J&K was announced on 14 June 2002. On 7

January 2003, the Central Government granted incentives for industrial

investment to the States of Himachal Pradesh and Uttarakhand, which

would remain for enterprises that are set up till 31 March 2010. The NEIP,

which was originally valid until 31 March 2007, has been extended for

another period of 10 years.

All the States covered by the incentive programmes benefit from full excise

duty exemption on finished products as well as income tax exemption on

profits as also from capital subsidy on investment in plant and machinery.

The North Eastern States get additionally enhanced capital subsidy, interest

subsidy on working capital loan, reimbursement of 100% premium under

Comprehensive Insurance Schemes as well as transport subsidy of 50%–

90% of the cost of transportation of raw materials and finished products

to/from designated railheads. Jammu and Kashmir also benefits from most

of the additional incentives applicable to the North Eastern States. An

evaluation report by a professional consultant in 2004 had brought that in

the NER a total of 681 units had been set up from 1999 to September 2004,

with an investment of Rs 1067.28 crore and employment generation of

20709. Assam accounted for about 49% of the investment and Meghalaya

for about 41%. The experience of other States is much better. According to

the reports submitted by the State Governments concerned, the investment

already made up to March 2007 was Rs 5902 crore in Uttarakhand, Rs

2884 crore in Himachal Pradesh, and Rs 3403 crore in J&K, the latter

predominantly in the Jammu region.

135

RBI also suggested that the incentives have stimulated industrial activity in

Himachal Pradesh and Uttarakhand significantly. Apart from this to

infrastructure development is considered the main issue in development of

these areas. These are important step taken at central level for industrial

development which will definitely benefited to the development of these

areas and economy.

3.18. Development of Autonomous Institutions in Enterprise Sector

Over the past some Plans a number of autonomous institutions were set up

to support the enterprise to meet various needs at central level, such as

technology transfer, skill development, and introduction of advanced

technology. These institutions were designed to function in close

coordination with enterprise and the governing bodies involved all

stakeholders. Some enterprise associations set up such institutes on their

own initiative with initial government support. Some institutes such as the

Central Pulp and Paper Research Institute (CPPRI) and Institute of

Pesticides Formulation Technology (IPFT) were set up with aSSI`stance

from international organizations such as United Nations Industrial

Development Organization (UNIDO). Institutes such as the National Test

House (NTH) have the backing of statutes for some of the activities

although they work on a commercial basis also. National Automotive

Testing and R&D Infrastructure Project (NATRIP) is an important step to

meet the homologation and testing need of automotive enterprise.

The Government has assured that another seven centre of NATRIP in

different part of the country will be completed in the 11th plan period.

Apart from this the 11th Plan given emphasis to promote self-sufficiency in

these institutions so that they can operate on a self-sustaining basis without

the requirement of budgetary support. Following is the list of automous

institution working in India.

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List of Automous Institution working in India

• Quality Council of India (QCI).

• Central Manufacturing Technology Institute (CMTI), Bangalore.

• National Council for Cement and Building Materials.

• Indian Rubber Manufacturers Research Association (IRMRA).

• National Institute of Design (NID).

• National Productivity Council (NPC).

• Central Institute of Plastics Engineering and Technology (CIPET).

• National Institute of Pharmaceutical Education and Research (NIPER)

and IPFT.

• Six Textiles Research Associations (TRAs).

• National Institute of Fashion Technology (NIFT).

• Bureau of Indian Standards (BIS).

• National Test House (NTH).

• Automotive Research Association of India (ARAI), Pune.

• National Automotive Testing and R&D Infrastructure Project (NATRIP).

• Fluid Control Research Institute (FCRI).

• National Ship Design and Research Centre, Visakhapatnam.

• Biju Patnaik National Steel Institute.

• National Institute of Secondary Steel Technology.

3.19. Area Development for Enterprise:

Since the beginning of planned development, a policy has been followed

for the development of industrial areas and industrial estates within such

areas to facilitate the establishment of small and medium industrial units.

Initiative has also been taken for improving the infrastructure of existing

clusters outside of such areas. At the end of the Tenth Five Year Plan there

were a multiplicity of schemes of cluster and area development established

for the creation or upgradation of infrastructure as shown in the following

paragraph.

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Industrial Area Development Schemes

• Growth Centre Scheme—announced in June 1988 and became

operational from 1991— Department of Industrial Policy and Promotion

(DIPP).

• Industrial Park Scheme 1999–2000, DIPP.

• Industrial Infrastructure Upgradation Scheme (IIUS) 2003–04, DIPP.

• Apparel Parks for Exports 2001–02, Ministry of Textiles.

• Textile Centres Infrastructure Development Scheme (TCIDS) 2002–03,

Ministry of Textiles.

• Scheme for Infrastructure Development 2002–03, Ministry of Food

Processing Enterprises (MFPI).

• Special Economic Zones (SEZs) 2005–06, Department of Commerce.

• Provision of Urban Amenities in Rural Areas (PURA) 2004–05, Ministry

of Rural Development.

• Scheme for Integrated Textile Parks (SITP) 2005–06, Ministry of

Textiles.

• Petroleum, Chemicals, and Petrochemical Investment Regions (PCPIRs)

2006–07, Department of Chemicals and Petrochemicals.

Among these schemes the oldest is the Growth Centre Scheme of the

DIPP, which was designed for promoting the development of

manufacturing enterprises in industrially backward areas. Although as

many as 52 growth centres were established, there was a weak response

from the entrepreneurs to set up units within the centres, as a result of

which large areas within the centres were lying vacant. The scheme was

discontinued after the MTA of the Tenth Five Year Plan.

The Industrial Parks Scheme, also of DIPP, envisaged the establishment of

industrial parks for development of industrial infrastructure or built up

space with common facilities in any area allotted or earmarked for the

purposes of industrial development.. The objective of the Industrial

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Infrastructure Upgradation Scheme (IIUS) was to provide quality

infrastructure facilities in existing functional clusters/industrial locations.

Eligible activities included physical infrastructure such as water supply,

effluent treatment, solid waste management, etc. To improve the

infrastructure facilities specifically for units in textiles and clothing, the

Central Government initiated two CSS of the Ministry of Textiles in 2002,

namely, (i) Textile Centres Infrastructure Development Scheme (TCIDS)

with the objective of modernizing infrastructure facilities at major textiles

centres in the country and (ii) Apparel Parks for Exports Scheme (APES)

to promote setting up of modern apparel units at major growth centres.

Although 19 TCIDS and 12 APES projects were taken up, the progress was

slow and eventually none could be completed during the Tenth Five Year

Plan. Consequently, the Scheme for Integrated Textile Parks (SITP) was

introduced in 2005–06. The scheme for food parks was an element of the

scheme for infrastructure development begun in 2002–03 by the MFPI.

The scheme also envisaged the establishment of packaging centre,

integrated cold chain facilities, value-added centre, and irradiation

facilities. During the Tenth Five Year Plan, 18 food parks were approved,

but progress was limited as only 8 were actually established with just 28

industrial units functioning within the parks. In 2004–05, the MoRD

launched the scheme for Provision of Urban Amenities in Rural Areas

(PURA) to encourage development of identified growth centres for the

working population in the rural areas and prevent their migration to the

urban areas.

To start with, the development of clusters on a pilot basis has been

envisaged at seven locations in the country. A new scheme for SEZs has

been launched by the Department of Commerce on the basis of the SEZ

Act 2005. The objective of the scheme is to establish industrial townships

divided into processing and nonprocessing areas. Apart from the existing

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export processing zones earlier set up by the Department of Commerce,

which have been converted into SEZs, the establishment of new SEZs has

been left to the initiative of private developers.

In 2006 another area development scheme known as the Petroleum,

Chemicals, and Petrochemical Investment Regions (PCPIRs) was

announced through a policy resolution of the Ministry of Chemicals and

Petrochemicals. The PCPIR is a ‘specifically delineated investment

region/s with an area of around 250 sq km—including SEZ/s, Free Trade

and Warehousing Zones, EOU units, and other existing industrial

clusters—wherein is provided an internationally competitive and hassle-

free environment with world class infrastructure facilities to encourage

global scale investments in petroleum, chemical, and petrochemical sectors

to accelerate economic growth’. The policy provides for a duly notified

SEZ to be set up within the PCPIR. Although a number of locations are

under consideration, up to the end of August 2007, no State Government

had initiated action for notifying a PCPIR.

Experience of establishing area development programmes suggest that they

can succeed only if they are demand driven and are so designed as to

ensure that the initiative comes from entrepreneurs who are willing to

commit not only to make a substantial initial capital investment on their

part but also to run the programme on a self-sustaining basis.

3.20. ISO-9000/ISO-14001 Certification Reimbursement Scheme

The process of economic liberalization and market reforms has opened up

the Indian small scale sector to global competition. In order to enhance the

competitive strength of the small scale sector, the Government introduced

an incentive scheme for their quality improvement and environment

management. The scheme provides incentive (of upto Rs. 75,000 per unit)

to SSI units which acquire ISO 9000/ISO 14001 certifications. The

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scheme, in operation since March 1994, was enlarged to include

reimbursement of expenses for acquiring ISO 14001 certification also

w.e.f. 21st November,2006. Since its inception, 13433 SSI units have been

benefited upto 21st November,2006. The year wise progress of the ISO-

9000/ISO- 14001 certification reimbursement scheme is as under.

Table 3.7

Status of the units reimbursed under ISO 9000 Incentive Scheme : Year No of Units Amount of ASSI`stance (Rs. In Crore)

1 2 3 1993-94 3 .016 1994-95 10 .043 1995-96 48 .25 1996-97 54 .39 1997-98 85 0.49 1998-99 174 0.96 1999-2000 361 2.25 2000-2001 649 4.05 2001-2002 992 6.00 2002-2003 1182 6.99 2003-2004 917 4.77 2004-05 3314 17.33 2005-06 4101 19.44 2006-07 1543 7.37 (up to 21.11.06)

Average aSSI`stance/unit = Rs. 52,765

[Source: Report of SSI 2007 ( p 45)]

3.21. 11th Plan Target of SME

The tenth five year plan officially commenced on April, 2002 and covered

the period 2002-03 to 2006-07. The plan kept the objective of achieving

8% annual growth over the plan period. As against this it has been

achieved 7.8% per annum. The main focus of the tenth plan in the

industrial sector was an providing a more conducive atmosphere to the

private sector by pulling down restrictions and barriers and disinvestement

of government equities in public sector enterprises. The tenth plan set

target at 10% per annum growth in industrial sector however the plan

achieved 8.9% annual growth. It is important to note that the growth in

overall industrial sector is quite good and also progressive. With this

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background researcher is going to focus the 11th plan target which is mostly

focused on small and medium enterprises. The government of India had

formed new 11th Five year plan on 2007 for the period of five years i.e upto

2011-12. The plan has given wide importance to the MSME sector. Some

information about the physical target for the coming years is stated in the

table no.3.8.

Table no 3.8

Year-wise Physical Targets for the Eleventh Plan

Items 2007–08

2008–09

2009–10

2010–11 2011–12

1 2 3 4 5 6 Production at current price (Rs crore)

682613 816705 977144 1169112 1398803

Employment (lakh persons) 322.28 338.39 355.31 373.08 391.73

Source: Ministry of MSME.

The above table indicates the physical target of 11th Five year Plan for

MSME sector of India. The plan was targeted to increase the production

and employment with steadily increasing rate. As par as concern of

production of MSME, the plan targeted to increase from 6,82,613 in the

year 2007-08 to 13,98,803 up to 2011-2012. At the same time the

employment is targeted to increase up to 391.73 Lakh person in 2011 -12

from 322.28 of 2007-08.

Apart from this the 11th Five year plan introduced the schemes for SMEs

development which are also summerised in the table no 3.9.

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Table no 3.9

11th Plan SCHEMES FOR SME

Scheme / Goal Eligibility Discription 1 2 3

Fiscal Incentives/Subsidies Central excise duty exemption to make MSE products price competitive

All MSEs (manufacturing), including khadi and village enterprise units

Exemption up to Rs 100 lakh from excise duty, if total annual clearances or sales do not exceed Rs 400 lakh.

Credit (Grants and Loans) Priority-sector lending to facilitate lending to MSEs

All MSEs 10% of all NBC by foreign banks to go to the MSE sector; no specific sub-target for domestic banks, which have to provide 40% of NBC to the priority sector as a whole..

CLCSS for Technology Upgradation

All (manufacturing) MSEs, including khadi and village enterprise units

Subsidy of 15% (12% prior to 29 September 2005) of capital acquired for upgrading technology or techniques for sub-sectors/products approved under the scheme upto a limit of Rs 100 lakh (Rs 40 lakh prior to 29 September 2005).

Credit Guarantee Scheme, to banks lending to MSEs

All (manufacturing) MSEs, including khadi and village enterprise units

Guarantee of 75% for loans up to Rs 25 lakh extended by member lending institutions of the Credit Guarantee Fund Trust, guarantee fee beingborne by the borrower.

Prime Minister’s Rozgar Yojana for employment generation

Educated (VIII standard pass) unemployed youth withfamily income up to Rs 40000 per annum

Loans of up to Rs 2 lakh for self-employment projects each case (Rs 1 lakh for business/service activities). Subsidy is released as a grant by the government, through the RBI, to the participating banks for crediting to the account of beneficiary, and adjusted against the repayment of last installment of loan by the

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beneficiary. The subsidy is 15% of the project cost or Rs 7500 per entrepreneur, whichever is less. The bank charges interest (not exceeding PLR) on the loan amount minus subsidy.

ISO 9000/ISO 14001 Certification Fee Reimbursement Scheme for improvingquality and business processes

Individual MSEs, including those engaged in business/service

Reimbursement of expenses incurred in acquiring Quality Management System ISO 9000 certification/ environment management ISO 14001 certification, at 75% of the cost or Rs 75000, whichever is less.

Participation in international fairs for export promotion

Individual MSEs Subsidy for renting space and partial reimbursement of air fare.

Other Schemes Credit Appraisal and Rating Tool (CART)

Scheme for reimbursement of performance and credit rating of MSMEs through reputed Credit Rating agencies. To rationalize the pricing of credit, SIDBI has developed an advanced but simplified, technology-based rating model for MSEs called CART.

Reservation of products for exclusive mfg. by MSEs

All MSEs 114 items at present.

Purchase and price preference in government procurement to help improve marketing

MSEs registered with NSIC

358 items are currently reserved for exclusive purchase by the Central Government and its PSUs from the MSEs. 15% price preference for Central Government purchases, i.e. a micro/small enterprise quoting up to 15% above the quote of a non-MSE bidder would be eligible to get the order, other conditions of quality, terms of supply being met. Tender document is also provided free of charge and

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exemption from earnest money/security deposits.

Small Enterprise Cluster Development Programme (renamed as Micro and Small Enterprises Cluster Development Programme) to enhance the productivity, and competitiveness, as well as capacity building of micro and small enterprises

Micro and small (MSE) clusters

Implemented in PPP mode, GoI aSSI`stance varies from 30% to 80% of the project cost depending on the average investment in plant and machinery, location of the cluster, level of commercial selfsufficiency, etc.

Integrated Infrastructure Development (IID) Scheme, to facilitate provision of built-up infrastructure with necessary facilities for manufacturing and related service enterprises, with reservation of 50% for rural areas

State governments,enterprise associations, and NGOs for development/disposal of plots/ sheds on commercial basis

Central Government grants aSSI`stance of up to Rs 200 lakh or 40% of the project cost, whichever is less, for setting up new industrial estates for MSEs (up to 80% or Rs 40 million for the NER, including Sikkim, Himachal Pradesh, Jammu & Kashmir, and Uttarakhand). Also available for improvements in existing estates.

Mini Tool Rooms to improve availability of quality equipment,machines, and tooling facilities, necessary for manufacturing, on payment of user charges

State Governments/State Government agencies

ASSI`stance up to 90% of the cost of plant and machinery or Rs 900 lakh, whichever is less, for setting up new mini tool rooms (75% of the cost of plant and machinery or Rs 750 lakh for upgrading existing tool rooms).

Testing centres to improve availability of quality test equipment, machines and other facilities, necessary for testing of raw material, intermediates, and finished products on payment of user charges

Enterprise associations ASSI`stance up to 50% of the cost of testing equipment and machinery or Rs 50 lakh, whichever is less, for setting up testing centres.

Sub-contracting exchanges to aSSI`st associations of MSEs track bulk orders/ tenders for bulk supplies by large enterprises to enable member MSEs to bid for parts of these orders

Enterprise associations One time grant upto Rs 4 lakh for procurement of hardware such as plain paper copier, telex, fax machine, computer, furniture. Grant paid on reimbursement basis and provides a matching

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grant on a tapering basis at 50%, 30%, and 10% for running expenses, not exceeding Rs 125000, Rs 75000, and Rs 25000, respectively, during the first three years, subject to a ceiling of Rs 157000 per exchange.

SSI Market Development ASSI`stance for export promotion

MSEs and their associations

Partial subsidization of costs of air fare, space rental, publicity, etc., to MSEs at varying rates, with preferential terms to the micro enterprises, partial financial aSSI`stance to contest anti-dumping cases, undertaking market studies, etc. Provision for reimbursement of 75% of one-time registration fee or Rs 15000, whichever is less for adoption of bar coding.

ASSI`stance to Entrepreneurship Development Institutes

State/UT governments and other agencies involved in entrepreneurship development

Financial aSSI`stance in the form of non-recurring grant for strengthening infrastructure like building, training aids/equipment, and other support services on matching (50:50 basis) of the cost or Rs 100 lakh whichever is less.

Micro Finance Programme Micro finance institutions (MFIs)

Portfolio Risk Fund provided to SIDBI for security deposit requirements of the loan amount from the MFIs.

Source: Eleventh Five Year Plan, pp. 230 -231, Government of India ( SIDO online information,

viewed at http://www.smallenterprise.india.com [4 July 2006]; RBI online information, viewed at

http://www.rbi.org.in/scripts/FAQView.aspx?Id=8; and Ministry of Finance (2006), Economic

Survey 2005–06.

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REFERENCES

1. Second Five year Plan, Planning Commision, Government of India

2. Ninth Five Year Plan, Planning CommIsion, Government of India

(1997-2002, Val.1, p.9)

3. Prakash Rao, V.L.S, Regional Planning, 1963, p.31

4. Kurian N.J., Widening Regional Disparities in India, Economic and

Political weekly, Feb, 2000, p12-18.

5. Government of India, Wanchoo Committee

6. Government of India, National Level Committee for the

Development of Backward Area, 1980-85.

7. Government of India,, Prakash Tondan Committee, `Study group to

Frame Guidlnes for Follow-up of Bank Credit` 1974

8. Government of India, K.B. Chore Committee, `Working Group to

Review the System of Cash Credit` 1979

9. Government of India, P.R. Nayak Committee,`Committee to

Examine the Adequacy of Institutional Credit to the SSI Sector and

Related Aspects` 1992.

10. Government of India, Abid Hussain Committee, `Expert Committee

on Small Enterprises` 1997

11. Government of India, S.L.Kapur Committee, `High Level

Committee on Credit to SSI`s` 1998

12. Government of India, Ganguly Committee, `Working group on flow

of credit to SSI sector`,2004

13. Government of India, SIDBI Report, 1999

14. Hoover- Edger M., The location of economic activity, Mc-Graw

Hill Book Company, Inc. NewYork, 1963, p.4-5

15. Suthiffe, R.B., ‘Enterprise and Underdeveloped Addissions –

Wesley Publishing Company, London, 1971, p.11

16. Dr. Satyanarayana, Industrial Development in Backward Region,

Chugh Publication, Allahabad, 1981.

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17. Alfred Weber, Theory of the Industrial Location of Enterprises,

1909

18. Mountjoy, A.B., Industrialisation Under Developed Countries’

Huthnson, University, Library, London, 1963, p.63.

19. Government of India, Industrial Policy, 1948.

20. Government of India, Industrial Policy, 1956



23. Government of India,Industrial Policy, 1991

24. Small Scale In India : Status, Growth, and De-reservation, Rajiv

Gandhi Institute for Contemporary Studies, August, 2006.

25. Draft of Industrial Development Regulation Act, 1951

26. Governement of India, Ministry of Finance, Economic Survey 2005-

2006,

27. Governement of India, Eleventh Five Year Plan

28. Small Scale Enterprises Annual Report 2007-2008

29. Small Scale Enterprises Annual Report 2008-2009

30. Circular Vide S.O. 1642 (E) dtd. 29/09/2006, MSME

Websites

www.laghuudyog.com

www.finmin.com

www.msme.com

www.kvic.com

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