India - Small scale industry (Vol. 2 of 2) : Study of selected industrial units

RESTRICTED Report No. SA-33a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION SMALL SCALE INDUSTRY IN INDIA VOLUME II STUDY OF SELECTED INDUSTRIAL UNITS May 22, 1972 South Asia Department  CUMRRICY EQUIVALENT 1 US dollar - Rs. 7.2793 1 Rupee - US $0.1374 1 Million Rupees - US $137,400 1 lakh of Rupees - 100 thousand Rupees (US $13,740.000 equivalent) 1 Crore of Rupees 10 Million (US $1,374,000 equivalent)  CONTENTS PART I SUHMARY OF FINDINGS Section I .. Introduction Section II .. The present study Section III .. Performance of the Selected Enterprises Section IV .. Problems of the Selected Enterprises   Summary of Findings i. During the last decade and a half the Government of India have attempted, by several policy measures, to foster the growth of small enter- prises. This sector has now come to occupy an important place in the country's industrial structure. According to the National Income Accounts, this sector is said to contribute over half of the product originating in the entire manufacturing sector. Because of the inherent limitations in the methods of estimation this may be open to some doubt, but it is clear that the share of this sector is substantial. ii. Although the contribution of this sector is quite large very little information is available on the operation of most of the small enterprises. Even the number of active enterprises is not precisely known. iii. The present study focusses attention on the economics of operation of 159 small enterprises selected from 22 industrial groups. iv. The study reveals that in 1969-70 the selected units - employed 7,844 persons - had a productive capital (fixed and working) of Rs.106 million - had fixed assets worth Rs.50 million - generated an output (ex-factory) of Rs. 166 million - had an added value of manufacture of Rs. 51 million - reported sales worth Rs. 192 million, a substantial portion - 92 percent - of which was domestic - consumed raw materials worth Rs. 101 million - incurred wage and salary payments amounting to Rs. 19 million - reported an operating profit (pre-tax) of Rs. 34 million. v. For a rupee invested in productive capital the selected enter- prises gave - an output of Rs. 1.56 - a net value added of Rs. 0.48 - a pre-tax return of Rs. 0.32 vi. Investment of a rupee in fixed assets resulted in - a gross output of Rs. 3.30 - a net value added of Rs. 1.01 vii. In the selected enterprises an employed person - received a total payment of Rs. 2,385 - required a productive capital investment of Rs. 13,554 - needed an investment of Rs. 6,393 in fixed assets - generated an output of Rs. 21,129 - contributed Rs. 6,456 to the value added.  - ii - viii. It should be clearly recognized that the findings of the study relate to the sample units which were purposively chosen and do not include very small units. They need therefore to be interpreted with caution particularly if comparisons with other sectors are sought to be atternpted on questions such as capital intensity or labor productivity. The figures given above represent averages for all industry groups studied. In many cases these were found to subsume wide inter- and intra-industry variations. These variations were attributable to several factors, important among which were differences in the efficiency of operation of various enter- prises, differences in the product-mix and, in some, locational advantages. ix. Gross output per rupee invested in productive capital varied from a low of Rs. 0.78 in light engineering to a high of Rs. 5.30 in soap. Electricals, rubber products and cycles and components recorded relatively higher output per unit of capital invested. x. Value added per rupee invested in productive capital ranged from Rs. 0.15 in batteries to Rs. 1.56 in rubber products with electricals, soap and utensils reporting relatively higher added value of manufacture per rupee invested in productive capital. xi. Timber-based industry, printing, paints and varnishes, sports goods and scientific instruments reported relatively high contribution of labor in the value added by manufacture. xii. The performance of selected units given above, it needs to be noted, was on a level of operation well below capacity in many cases. In hardly 15 percent of the units studied was utilization of capacity over three-fourths. xiii. Under-utilization of capacity in most of the enterprises was the result of bottlenecks in both production and marketing. xiv. In production,the problems were largely that of shortages of raw materials and inadequate finance. The intensity of raw material scarcity varied from industry to industry. xv. With indigenous materials, the problem mainly springs from the methods of allocation which often result in 'created shortages'. This had forced the genuine units to buy from the open market at higher prices, thus starting off with a cost disadvantage. The shortages that existed, and there were some, were reportedly marginal which could quite easily have been taken care of with timely imports. xvi. As regards raw materials which are wholly or partially imported, the requirement in most of the cases was reported to have been met only partially. The units had, therefore, either to pay a high premium to acquire the materials or be satisfied with domestic substitutes often not up to the standard but at higher prices or else sacrifice the trade opportunities, depending on the market situation. xvii. Added to this was the normal difficulty in satisfying procedural formalities in securing licences and the time taken to contact numerous agencies before the licences are granted, not to mention the restrictionist clauses often attached.  - iii - xviii. Dissatisfaction was also expressed in regard to materials whose imports were canalized either due to non-availability in time or escalated prices due to higher margins reportedly charged by the canalizing agencies. xix. The factors of importance regarding finance were the quantum and timeliness of credit given and the means of channeling it, on all of which there was some dissatisfaction. For a sector whose needs were reportedly large the extent of credit made available fell short of the requirements in most of the cases. Added to this was the cumbersome pro- cedures involved and the enormous time taken to grant loans. It was stated that the expanding requirements of a small industrial unit were not normally met under the existing system. xx. The selected units estimated their requirements of funds for expansion and continuation of production at Rs. 50 million. Of this foreign ex- change requirements were placed at Rs. 8 million mostly for capital equip- ment and for raw materials in a few cases. xxi. The problem of marketing in the small enterprises could by and large be attributed to such factors as limited size of operation, practi- cally little or no control over the quality, price or timeliness of avail- ability of raw materials and a weak financial base restricting the scope for engaging in sustained sales promotion. xxii. The problem of sales was more acute in cases where the area of operation was large as in consumer products or where service after sales was essential as in capital goods. In most of the cases the enterprises were found dependent, much to their disadvantage, on intermediate agencies or parent units for their marketing. xxiii. As for exports, the potential that exists in the small sector does not seem to have been fully exploited. The basic deficiencies here are inadequate knowledge of foreign markets and insufficient realization of production problems at home. xxiv. Provided it is nurtured properly the small industrial sector could contribute more efficiently to the country's domestic product and foreign exchange earnings. In designing policies for development, therefore, greater attention needs to be paid to the efficiency of operation of the enterprises. xxv. Most of the problems of this sector seem to arise, in part from the adoption of wrong policies, and in greater measure from the way in which policies are in fact implemented. An example of the former is the allotment of aluminium ingots to the small scale sector which has no re-rolling facilities at all. In general, however, inadequacies in implementation are due to the fact that the policies themselves require an extent of detailed and reliable information unitwise which those concerned with the admin- istration do not just have. This is most evident in the application of the system of allocation of raw materials based on so-called capacities or on past consumption. There has so far been no scientific assessment of capacities that exist in the small sector. The concept of capacity itself is a tenuous one; its determination becomes rather difficult in several cases. Even where the capacities could be determined the requirements of  - iv - the units would vary from time to time depending on many other factors. Data available on past consumption are also not quite reliable. In any case allotment on the basis of past consumption chokes off expansion. xxvi. Any system of allocation of raw materials to individual units, to be sound and successful, should obviously be based on requirements determined on the basis of current performance, position of the order books and ability to expand production or improve quality. This would require an intimate and continuing knowledge of the performance and development of each individual unit. One way of improving the system without radically altering its nature w uld be to establish joint groups as agencies to ascertain the facts and fulfil these functions. With sufficient and sus- tained cooperation from all concerned, such agencies may be in a better position to keep a continuous watch on performance and judge requirements in that light. Further, if "indents" for materials screened in this fashion are required to be backed by the advance deposit of some earnest money, some of the defects of the existing system may be mitigated, though not eliminated. In actual operation, however, even this type of arrange- ment may quickly degenerate into something not dissimilar to the existing system. xxvii. A more enduring solution has, therefore, to seek the removal of the basic causes. These are the overall shortage of raw materials, and the need to examine requirements of each individual unit. So long as shortages are serious and entitlements to allotments carry high premiums the administration will be forced to continue the system of screening individual requirements. This vicious circle can be broken only by taking some risk and increasing the total allocation in large enough measures to permit allocations on a more automatic basis. Thus, if in a particular industry present allotments are believed to represent say fifty per cent of real requirement (some units getting more and some less) the vicious circle might be broken by boldly doubling the total allocation and dis- tributing it on the latest past basis without further individual scrutiny. Premiums will then drop sharply and with it the temptation to exaggerate requirements. Actual utilization during such a period of comparatively liberal supply could then provide a sounder base for determining future allocations even on an individual basis. It goes without saying that even such a system may break down if allocations to larger scale units in the same field of production are held down too tightly. In that case, more liberal supplies to small industries may be sucked into the sectors in which scarcity is greater. Acute and widespread scarcity prevails mainly in certain categories of mild and alloy steels and non-ferrous metals. In the former the question is mainly one of increasing domestic production and meanwhile augment supplies by timely imports. In most other cases, the problem will be nothing of this magnitude. It would, therefore, be well worthwhile to import enough to make a good initial impact. Once this is done and premiums fall or vanish errors in individual allotments will not have much significance and can be left to be corrected by mutual transfers. The tendency to overstate requirements and opportunities to create artificial shortages will both be reduced a great deal. The Government will then be in a better position to continue adequate supplies.  v xxviii. Selling is basically a job that is to be carried on by the entre- preneur himself. His task could, however, be eased to a large extent through the removal of the production bottlenecks. Instituticonal assis- tance could be provided by developing common facilities for ensuring quality control, and where necessary, technical guidance. The introduction of a 'quality marking scheme', either by the Government or association of manufacturers, would help in building up confidence among the consumers on the products marketed. This would be of great help in consumebr products. xxix. Another area where assistance could be given is in the provision of the much needed market intelligence. Closer liaison needs to be est- ablished between the large and medium enterprises and the smaller units. The larger enterprises are to be apprised of the potential of the small sector - the products that are manufactured, the performance of the various enterprises and their capacity to fulfil order in time. The small enter- prises are to be informed of the market opportunities that exist and the type of products that would be required and are to be provided with the necessary contacts.   CHAPTER I INTRODUCTION 1. Development of small scale industries has been accorded special importance in the country's planning efforts both for economic arLd social reasons. Pointing out their desirable features of providing immediate large scale employment, offering a method of ensuring a more equitable distribution of the national income and facilitating an effective mobili- zation of resources of capital and skill which might otherwise remain un- utilized, the Industrial Policy Resolution, 1956, enphasized the need for integrating the development of this sector with that of the large scale industries. The Resolution also suggested that policies should be so designed as to improve the competitive strength of the small scale producers. 2. A systematic attempt has since been made to develop the small scale sector through a number of devices - positive and negative - by pro- viding infrastructure facilities for their establishment and expansion, giving machinery on instalment basis, organizing the institutional set-up to meet their capital and other requirements, reserving areas of produc- tion exclusively for the small sector, limiting capacities of large enterprises in certain spheres and assisting the small industrial units in their marketing operations. The growth of this sector over thie past decade and a half has been marked by greater diversity of production and a higher degree of sophistication. The Small Sector in the Economy 3. The small sector subsumes different tiers of industrial activity ranging from the artisan enterprises to the sophisticated type. According to the definition currently in force an enterprise with an invest;ment in plant and machinery not exceeding Rs. 0.75 million is regarded as a small industrial unit (the ceiling is Rs. 1 million in the case of an ancillary unit). 4. Reliable or detailed information it. W -. -d to the produiction and capital structure, employment or value added is no