Problems of the small scale sector and the government's measures

The small scale sector

The small scale sector is today part of the wider micro, small and medium enterprises (MSME) category, which also takes in medium-sized units and service enterprises; an MSME is a unit whose investment in plant and machinery and whose turnover are within limits fixed by the Government of India under the Micro, Small and Medium Enterprises Development Act, 2006. Small industries make up the great majority of India's industrial units, create more jobs for each rupee invested than large industry, add to exports and spread industry to small towns and villages. Yet it faces serious problems.

Problems of the small scale sector

1. Delayed payments. Large buyers and even government departments often pay late, which locks up the small unit's funds.
2. Regulatory burden. Multiple registrations, inspections and returns take time that a small owner cannot spare.
3. Infrastructure. Erratic power, poor roads and limited access to testing and storage facilities raise costs.
4. Old technology and quality. Outdated machines and methods lead to low productivity and poor quality, making competition with large firms and imports difficult.
5. Selling the output. They lack brand names, distribution networks and money for advertising, and often sell through middlemen at low margins.
6. Managing and staffing. Owners run every function themselves; trained workers and professional managers are scarce.
7. Buying inputs. Without the volumes of a large buyer, a small unit has little say over the price, quality or timing of what it buys.
8. Money. Banks hesitate to lend without collateral, so small units depend on costly informal credit and are short of working capital.
9. Competition. Large firms and imported goods compete on price, while the small unit has little bargaining power.
10. Sickness. Many units become weak because of a mix of these problems.

Steps taken by the government

1. Legal framework and simple registration. The MSMED Act, 2006 defines and protects these enterprises; online Udyam registration gives a unit its MSME status on the basis of a self-declaration.
2. Credit without collateral. The Credit Guarantee Fund Trust for Micro and Small Enterprises, set up by the Ministry of MSME with SIDBI, guarantees loans that banks give to micro and small units without collateral or a third-party guarantee; MUDRA loans under the Pradhan Mantri MUDRA Yojana finance non-corporate, non-farm small and micro units in three slabs, Shishu, Kishor and Tarun.
3. Protection against delayed payment. Under the MSMED Act, a buyer must pay a micro or small supplier by the date agreed in writing, which can never be more than 45 days after the goods or services are accepted, or, with no agreement, within 15 days; a buyer who pays late owes compound interest at three times the bank rate notified by the Reserve Bank, and either side can take the dispute to the Micro and Small Enterprises Facilitation Council. MSME Samadhaan lets units file such cases online, and the RBI's TReDS platforms let them sell their invoices and bills to financiers, without recourse to the unit.
4. Market support. The Act lets the government set a preference policy for buying from micro and small units; under it, central ministries, departments and public sector units must buy at least 25 per cent of their annual purchases from them.
5. Technology. The Ministry's tool rooms help units with precision tooling; they have even supplied components for India's Mars Orbiter Mission.

Conclusion

The small scale sector's problems arise mainly from its size: little capital, little bargaining power and little specialised management. Government support has eased credit, registration and payment problems, but lasting strength needs better technology, skills and market links developed by the units themselves.