Notes on topic related to small scale industries

Note on topic related to Small Scale Industries 

  • Role of Small and Medium Scale Industries (Enterprises) in the Development of Indian Economy
  • Financial support by Government to SMEs
  • Industrial Policy for Entrepreneurship Development
  • Small Scale Industrial Policy

Role of Small and Medium Scale Industries (Enterprises) in the Development of Indian Economy

Small and medium-scale enterprises (SMEs) have emerged as an engine of growth in the new millennium. These constitute a major part of the industrial activities in both the developing and developed countries of the world. The social contribution made by SMEs in creating employment, infrastructure and better standards of living is even more significant than its economic contribution.

In the Indian context, small-scale enterprises symbolise the rich heritage and economic strength of the nation. With their continued innovations and resilience, they have shown excellent growth trends surpassing the industrials sector and the overall growth rate of the economy. In this context, SMEs financing, besides government support development of the SMEs and commitment, assumes more importance for the overall growth and Small-scale industrial units (SSIs) have a place of pride in India. These have a high potential, among others, for generating employment, dispersal of manpower to semi-urban and rural areas, promoting entrepreneurship and earning foreign exchange.

In order to assist the small-scale industries, the government of India has promoted several financial institutions such as the Small-Scale industries Development Bank of India and the State Financial Corporations. A district industry centre has been set up in each district to serve as the focal point for the development of small-scale and cottage industries:

Financial support by Government to SMEs

(Small-and Medium-scale Enterprises)

  1. Finance is a critical element for the development of small and medium-scale enterprises. Traditionally, the banks have played a key role in the financial system of pooling the liquidity risk of depositors and investing a large portion of their funds. Financing the SMEs by meeting the term loan and working capital requirements has been an important function of the banks. Banks have more information on the survival prospects of small units and they evaluate a project, whether large or small, in terms of its viability and creditworthiness.
  2. Indian banks have positively responded by providing adequate credit to the SME units in the country. It is observed that banks are now offering the best of services and a host of products, which were till now reserved for bigger companies. A few years ago, banks used to target this client base only with their retail and deposit products, but today even private-sector and foreign banks are ready to offer SMEs working capital, investment banking and advice on risk management techniques.
  3. The government of India encourages SME financing by credit institutions. The government support can be in the form of interest rate subsidies, credit-linked capital subsidy credit guarantee, credit enhancement facilities, tax incentives, etc. It has initiated a comprehensive policy package for SMEs. Union Finance Minister P. Chidambaram unveiled a major package in parliament for SMES on August 10, 2005. It envisages an annual growth of at least 20 per cent in the flow of credit to SMEs so as to double the quantum of bank loans extended to the sector to 435,000 crore by 2018-19 from 67,600 crore in 2004-2005.
  4. It is also observed that the main thrust of the government in last few year’s budgets was to develop the agriculture sector. Having achieved the desired results, the focus has been diverted to the growth of the SMEs sector. After agriculture, SMEs are concentrating high on the bank investment list. Since banks are expected to have attractive return on SME financing, they are prompted to redesign their schemes to cater to the needs of SMEs. Besides, there is a crying need for subsidies to allow them to take on international competition.
  5. India banks and financial institutions catering to the SME sector will have to focus more on providing marketing finance, venture capital, micro finance and factoring assistance at reasonable costs to make SMEs domestically and globally competitive.
  6. Institutions Supporting Small Scale Enterprises : In connection with promotion, training, finance, technology, marketing, exporting and other activities of small scale enterprises following institutions are helpful to them. The following figures give the information of various types of assistance provided by different institutions to promote entrepreneurial activities.

Industrial Policy for Entrepreneurship Development

A distinguishing feature of the Industrial Policy has been that number of items of manufacture are reserved for production in the small scale sector while preference is given to new small/ small-medium entrepreneurs and industrial co-operatives.

To mention a few policy measures that have positively created an ideal environment for entrepreneurial growth are:

  1. Identification of backward areas and announcement of a number of concessions and incentives for the entrepreneurs to start their ventures in such areas;
  2. Change in the attitude of both Central and State Governments towards private enterprises in general and promotion of small scale industries in particular;
  3. Liberalisation of Industrial Licensing Policy and announcement of special incentives for NRI investments and exporting industrial units.
  4. Promotion coordinated development of large and small industries by :
    • reserving further expansion either exclusively or partly for the small sector in certain industries.
    • developing small industries more vigorously as ancillaries to large industries, and
    • encouraging the participation of small industries in the export drive.
  5. Providing effective promotion to cottage and small industries widely dispersed rural areas and small towns.
  6. Setting up of DIC as a hallmark in the development of small scale industry.
  7. Facilities were provided for import of components, raw material and machinery under open general licenses.

Small Scale Industrial Policy

In order to give a fillip to small industries development and thereby to entrepreneurial growth, the Government for the first time announced a separate small scale industries policy in August 1991. This policy promises to meet 100 percent credit demand of small and tiny industries.

This policy high-lights:

  • The Small Industries Development Organisation (SIDO) has been re- organized as the nodal agency to support the small scale industries export promotion.
  • An export development centre would be set up in SIDO to serve the small scale units through its network of field officers to further augment export activities of the sector.
  • A Technology Development Cell (TDC) will be set up in SIDO which could private technology inputs to improve quality and competitiveness of products of small scale sector.
  • The scheme for the handloom sector which contributed 30% of the total textile production in the country would be redesigned keeping in view the local and regional needs. It would be the policy of the Government to promote handloom to sustain employment in rural areas and to improve quality of life for handloom weavers.
  • The National Small Industries Corporation (NSIC) would concentrate on marketing of mass consumption items under common brand name and organizational links between NSIC and SSIDCs would be established.
  • The scope of the national equity fund scheme will tie widened to cover projects up to Rs. 10 lakhs for Equity Support (Up to 15 per-cent).
  • The Single Window loan scheme has also been enlarged to cover projects up to Rs. 20 lakhs with working capital margin up to Rs 10 lakhs.
  • Small Scale units can have equity support to the extent of 24% of the investment from the medium and large scale industries, public undertakings, NRIs or foreign investment.
  • Limited Partnership Act was proposed to be introduced.
  • To avoid delayed payment by the large units, factoring services through SIDBI was proposed. Some of the important schemes are soft loan scheme, seed capital assistance, risk capital assistance, concessional schemes, etc. In addition, IFCI is operating different subsidy schemes for new and small entrepreneurs.
  • In conformity with the socio-economic objectives of the national development plans, the development banks have introduced a number of promotional innovational schemes to be operated either separately or jointly.

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