ENTREPRENEURSHIP
DEVELOPMENT
AUTHOR
Dr Ullas Chandra Das
CENTRE FOR DISTANCE AND ONLINE EDUCATION
UTKAL UNIVERSITY, BHUBANESWAR7
2
Centre for Distance & Online Education
Utkal University, Bhubaneswar- 751007
ENTREPRENEURSHIP DEVELOPMENT
Entrepreneurship Development
Block
No
Unit No
Unit
1
1
The Entrepreneur: General concept and
definition
2
Entrepreneur and Entrepreneurship,
Entrepreneurial culture
3
Types of Entrepreneurship, Entrepreneurial
traits
4
Woman Entrepreneur
2
5
Entrepreneurial environment in India
6
Entrepreneurial Development Programmes
(EDPs) Role
7
Relevance and Achievement of EDPs in India
8
Institutions for entrepreneurial development.
3
9
Search for business ideas, Project
identification and
formulation,
10
Project appraisal
11
Profitability and risk analysis, Sources of
finance.
4
12
Legal formalities in setting up of SSIs
Business Laws
13
Governmental Setup in promoting small
industries, Financial institutions
14
Social Responsibility of Business
15
Status of Small Scale Industrial
Undertakings, Steps in
starting a small industry,
16
Incentives and subsidies, Problems in small
enterprise
management, Sickness and Preventions
3
CENTRE FOR DISTANCE AND ONLINE EDUCATION, UTKAL UNIVERSITY,
BHUBANESWAR
Program Name: Master in Commerce Program Code: 030300
Course Name: Entrepreneurship Development
Course Code: MCM-2.5 Semester: I Credit: 4 Block No. 1 to 4 Unit No. 1 to 16
EXPERT COMMITTEE:
COURSE WRITER:
Dr. Ullas Chandra Das
COURSE EDITORS
REFERENCES
MATERIAL PRODUCTION
4
ENTREPRENEURSHIP DEVELOPMENT
Unit- I
CONTENTS
Introduction to Entrepreneur.
1.1 Evolution of the word Entrepreneur.
1.2 Meaning of Entrepreneur.
1.3 Definition of Entrepreneur.
1.4 Internal and External factors of Entrepreneur.
1.5 Characteristics of an Entrepreneur.
1.6 Manager versus leaders
1.7 Functions of an Entrepreneur.
1.8 Types of Entrepreneur.
1.9 Relationship between entrepreneur and entrepreneurship.
1.10 Entrepreneurial culture
1.11 Development of Entrepreneurial culture.
1.12 Concept of Entrepreneurship.
1.13 Definition of Entrepreneurship.
1.14 Importance of Entrepreneurship.
1.15 Features of Entrepreneurship.
1.16 Growth of Entrepreneurship in pre-independence period.
1.17 Theories of Entrepreneurship.
1.18 Problems in the growth of Entrepreneurship.
1.19 Difference between Entrepreneurship and entrepreneur.
1.20 Types of Entrepreneurship.
1.21 Entrepreneurial Traits or competencies.
1.22 Meaning of motivation
1.23 Definition of motivation
1.24 Nature of motivation
1.25 Types of motivation
1.26 Importance of motivation
1.27 Theories of motivation
(i) Maslow’s need Hierarchy Theory
(ii) Mc Clelland’s three need model.
(iii) Aldeafer’s ERG Theory
1.28 Meaning of Women Entrepreneur
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1.29 Definition of Women Entrepreneur
1.30 Functions of Women Entrepreneur
1.31 Growth of Women Entrepreneur
1.32 Problems of Women Entrepreneur
1.33 Remedies for the problems of women Entrepreneurs
1.34 Summary
1.35 Self assessment questions.
Unit- II
CONTENTS
2.0 Entrepreneurial Development
2.1 Meaning of Entrepreneurial Development
2.2 Environmental factors
2.3 Socio-economic environment in the emergence of entrepreneurship
2.4 Meaning of EDPs
2.5 Definition of EDPs
2.6 Objectives of EDPs
2.7 Need of EDPs
2.8 Evaluation of EDPs
2.9 Problems in the conduct of EDPs
2.10 Suggestions to make EDPs successful
2.11 Organizing product/ process oriented EDPs
2.12 Course contents of EDP
2.13 Role of Entrepreneurial Development Programme
2.14 Relevance of Entrepreneurial Development Programme
2.15 Achievements of EDPs
2.16 Financial Institutions ^provide finance to entrepreneurship at National
2.17 Institutional support to small entrepreneurs
2.18 Specialized Institutions
2.19 Institutional support for EDPs
2.20 Summary
2.21 Self Assessment Questions
Unit- III
CONTENTS
3.1 Introduction to business ideas
3.2 Sources of business ideas
3.3 Idea and information sources
3.4 Techniques for generating new ideas.
3.5 Meaning of Project
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3.6 Project classification
3.7 Project identification
3.8 Meaning and Significance of Project Report
3.9 Contents of Project Report
3.10 Formulation of project report
3.11 Planning Commission Guidelines
Project Appraisal
3.12 Meaning and definition
3.13 Identification of Opportunity
3.14 Project feasibility study
3.15 Introduction to profit
3.16 Meaning and nature of profit.
3.17 Theories of Profit
3.18 Depreciation
3.19 Profit Planning and Forecasting
3.20 Cost volume-profit analysis
3.21 Objectives of cost-volume-profit analysis
3.22 Profit volume (P/V) ratio
3.23 Break even analysis
3.24 Risk analysis
3.25 Type or kinds of risks
3.26 Methods of Risk analysis
3.27 Criteria for evaluating proposal to minimise risk
3.28 Sources of finance
3.29 Summary
3.30 Self Assessment Questions
UNIT-4
CONTENTS
4.1 Constitution of small scale business
4.2 Legal formalities
4.3 Provisional Registration
4.4 Licensing systems of SSIs
4.5 SSI exemption skill as per budget 2003-2004
4.6 Rules regarding the Factories Act
4.7 Meaning and definition of small scale industries
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4.8 Characteristics of SSI
4.9 Rationale of small scale industry
4.10 Objective of SSI
4.11 Scope of SSI
4.12 Role of SSI in economic development
4.13 Advantage of SSI
4.14 Government policy : Industrial policy resolutions
4.15 Government support to SSI during five year plan.
4.16 New policy initiative in 1999-2000 for small scale sector.
4.17 Impact of globalization and liberalization on SSI.
4.18 Impact of WTO/GATT on SSI
4.19 Meaning and need for support
4.20 Agencies of Government for SSI
4.21 Nature and types of support
4.22 Financial Institutions
4.23 Social responsibility of business
4.24 Meaning and definition of social responsibility
4.25 Responsibility of business towards different sectors of society.
4.26 Arguments for social responsibility of business
4.27 Arguments against social responsibility
4.28 Limits of social responsibility.
4.29 Barriers of social responsibility
4.30 Social responsibility – Indian situation
4.31 Summary
4.32 Self assessment questions
UNIT-5
Contents
5.1 Introduction to SSIs
5.2 Definition of small scale unit
5.3 Characteristics or features of small scale industry or (MSME)
5.4 Objectives of small scale industries or (MSME)
5.5 Small business as a seedbed of entrepreneurship.
5.6 Importance of small scale industry or (MSME)
5.7 Problems of Small Scale Industry or (MSME)
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5.8 Steps to start an SSI
5.9 Introduction and meaning of incentives and subsidies.
5.10 Need for incentives
5.11 Types of central government subsidies and incentives
5.12 Foreign direct investment in SSI sector
5.13 Problems of small scale industries
5.14 Causes of Industrial Sickness
5.15 Consequences of Industrial sickness
5.16 Remedial Measures of Sickness in Industries.
5.17 Summary
5.18 Self assessment questions
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UNIT – 1
INTRODUCTION TO ENTREPRENURE
AIMS AND OBJECTIVES
After going through this unit, you will be able to :-
• Define the concept of entrepreneur
• Understand the functions of entrepreneur
• Understand the entrepreneurial culture.
• Define the concept of entrepreneurship.
• Discuss types of entrepreneurship.
• Understand entrepreneurial traits and motivation.
• Define women entrepreneur.
CONTENTS
Introduction to Entrepreneur.
1.1 Evolution of the word Entrepreneur.
1.2 Meaning of Entrepreneur.
1.3 Definition of Entrepreneur.
1.4 Internal and External factors of Entrepreneur.
1.5 Characteristics of an Entrepreneur.
1.6 Manager versus leaders
1.7 Functions of an Entrepreneur.
1.8 Types of Entrepreneur.
1.9 Relationship between entrepreneur and entrepreneurship.
1.10 Entrepreneurial culture
1.11 Development of Entrepreneurial culture.
1.12 Concept of Entrepreneurship.
1.13 Definition of Entrepreneurship.
1.14 Importance of Entrepreneurship.
1.15 Features of Entrepreneurship.
1.16 Growth of Entrepreneurship in pre-independence period.
1.17 Theories of Entrepreneurship.
1.18 Problems in the growth of Entrepreneurship.
1.19 Difference between Entrepreneurship and entrepreneur.
1.20 Types of Entrepreneurship.
1.21 Entrepreneurial Traits or competencies.
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1.22 Meaning of motivation
1.23 Definition of motivation
1.24 Nature of motivation
1.25 Types of motivation
1.26 Importance of motivation
1.27 Theories of motivation
(i) Maslow’s need Hierarchy Theory
(ii) Mc Clelland’s three need model.
(iii) Aldeafer’s ERG Theory
1.36 Meaning of Women Entrepreneur
1.37 Definition of Women Entrepreneur
1.38 Functions of Women Entrepreneur
1.39 Growth of Women Entrepreneur
1.40 Problems of Women Entrepreneur
1.41 Remedies for the problems of women Entrepreneurs
1.42 Summary
1.43 Self assessment questions.
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INTRODUCTION TO ENTREPRENEUR
1.1 Evolution of the word Entrepreneur
The word ‘entrepreneur’ is derived from French word ‘Entrependre’ which means
undertaking the risk of enterprise and further it was used to designate an organizer of musical or
other entertainments. Later in 16
th
century it was used for army leaders. It was extended to cover
civil engineering activities such as construction in 17
th
century. But it was Richard Cantillon, an
Irishman living in France who first used the term entrepreneur to refer to economic activities.
According to Cantillon “An entrepreneur is a person who buys factor services at certain prices with
a view to selling its product at uncertain prices”. Entrepreneur, according to Cantillon, is a bearer of
risk, which is non-insurable. Schum peter gave a central position to the entrepreneur who believed
that an entrepreneur was a dynamic agent of change; that an entrepreneur was a catalyst who
transformed increasingly physical, natural and human resources into correspondingly production
possibilities. Since then the term entrepreneur is used in various ways and various views.
1.2 Meaning of Entrepreneur
Entrepreneur is a person who tries to create something new, searches new opportunities,
bears risk, unites various factors of production like land, labour and capital carries innovations and
from his skill and farsightedness faces unforeseen circumstances and thereby earns profits.
Entrepreneurs are the pioneers who are instrumental in the economic development, growth and
development of and prosperity of a country.
1.3 Definition of Entrepreneur
There are various views about entrepreneur which are broadly classified into three groups,
namely risk bearer, organizer and innovator.
Entrepreneur as Risk Bear : Richard Cantilon defined entrepreneur as an agent who buys
factors as production at certain prices in order to combine them into a product with a view to selling
it at uncertain prices in future. He illustrated a farmer who pays contractual incomes, which are
certain to land owners and labourers and sells at prices that are ‘uncertain’. He includes, merchants
also who make certain payments in expectation of uncertain receipts. Hence both of them are risk-
bearing agents of production. F.H. Knight described entrepreneur to be a specialized group of
persons who bears uncertainly. Uncertainty is defined as risk, which cannot be insured against and
is incalculable. He made distinction between certainty and risk. A risk can be reduced through the
insurance principle, where the distribution of outcome in a group of instance is known, whereas
uncertainty cannot be calculated.
Entrepreneur as an Organizer : According to J Baptist Say “an entrepreneur is one who combines
the land of one, the labour of another and capital of yet another, and thus produces a product. By
selling the product in the market, he pays interest on capital, rent on land and wages to laborers and
what remains is his/her profit”. Say made distinction between the role of capitalist as a financer and
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the entrepreneur as an organizer. This concept of entrepreneur is associated with the functions of
coordination, organization and supervision.
Entrepreneur as an Innovator : Joseph A. Schumpeter Peter in 1934 assigned a crucial role of
‘innovation’ to the entrepreneur. He considered economic development as a dynamic change
brought by entrepreneur by instituting new combinations of factors of production, i.e. innovations.
The introduction of new combination according to him, may occur in any of the following forms.
(a) Introduction of new product in market
(b) Use of new method production, which is not yet tested.
(c) Opening of new market.
(d) Discovery of new source of raw materials.
(e) Bringing out of new form of organization.
Schums Peter also made distinction between inventor and innovator. An inventor is one who
discovers new methods and new materials. An innovator utilizes inventions and discovers in order
to make new combinations.
Hence the concept of entrepreneur is associated with three elements risk bearing, organizing
and innovating. Hence an entrepreneur can be defined as a person who tries to create something
new, organizes production and undertakes risks and handles economic uncertainty involvement in
enterprise.
Some more important definitions of entrepreneur
1. According to F.A. Walker : “Entrepreneur is one who is endowed with more than average
capacities in the task of organizing and coordinating the factors of production, i.e. land, labour
capital and enterprises”.
2. Marx regarded entrepreneur as social parasite.
3. According to Gilbraith : “An entrepreneur must accept the challenge and should be willing
hard to achieve something”.
4. Peter F. Drucker defines an entrepreneur as one who always searches for change, responds to
it and exploits it as an opportunity. Innovation is the basic tool of entrepreneurs, the means by
which they exploit change as an opportunity for a different business or service.
5. According to E.E. Hagen : “An entrepreneur is an economic man who tries to maximize his
profits by innovation, involve problem solving and gets satisfaction from using his
capabilities on attacking problems”.
6. According to Mark Casson : “An entrepreneur is a person who specializes in taking
judgement decision about the coordination of scarce resources”.
7. Frank Young defined entrepreneur as a change agent.
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8. According to Max Weber : “Entrepreneurs are a product of particular social condition in
which they are brought up and it is the society which shapes individuals as entrepreneurs”.
9. International Labour Organization (ILO) defines “entrepreneurs as those people who have
the ability to see and evaluate business opportunities, together with the necessary resources to
take advantage of them and to initiate appropriate action to ensure success”.
10. Akhouri describes “entrepreneur as a character who combines innovativess, readiness to take
risk, sensing opportunities, identifying and mobilizing potential resources, concern for
excellence and who is persistent in achieving the goal”.
1.4 INTERNAL AND EXTERNAL FACTORS OF ENTREPRENEUR
Entrepreneur is a person of telescopic faculty drive and talent who perceives business
opportunities and promptly seizes them for exploitation. Entrepreneur needs to possess
competencies to perform entrepreneur activities.
Personal entrepreneurial characteristics
Core Competencies
Entrepreneurial Activities
1.
Initiative
Does things before asked for or forced to by events and acts to extend the
business to new areas, products or services.
2.
Perceiving opportunities
Identifies business opportunities and mobilizes necessary resources to make
good an opportunity.
3.
Persistence
Takes repeated or different actions to overcome obstacles.
4.
Information gathering
Consults experts for business and technical advice. Seeks information of a
client or supplier’s needs. Personally undertakes market research and make
use of personal contacts or information networks to obtain useful
information.
5.
Concern for quality
work
State desire to produce or sell a better quality product or service. Compares
his performance favourably with that of others.
6.
Commitment to
contractual obligations
Makes a personal sacrifice or expands extraordinary effort to complete a job,
accepts full responsibility in completing a job contract on schedule, pitches in
with workers or work in their place to get the job done and shows atmost
concern to satisfy the customer.
7.
Efficiency orientation
Finds ways and means to do things faster, better and economically.
8.
Planning
Various inter-related jobs are synchronized according to plan.
9.
Problem solving
Conceives new ideas and finds innovative solutions.
10.
Self-confidence
Makes decisions on his own and sticks to it in spite of initial setbacks.
11.
Experience
Possesses technical expertise in areas of business, finance, marketing etc.
12.
Self-critical
Aware of personal limitations but tries to improve upon by learning from his
past mistakes or experiences of others and is never complacent with success.
13.
Persuasion
Persuades customers and financers to patronize his business.
14.
Use of influences
strategies
Develops business contracts, retains influential people as agents and restricts
dissemination of information in his possession.
15.
Assertiveness
Instructs, reprimands or disciplines for failing to perform
16.
Monitoring
Develops a reporting system to ensure that work is completed and quality
norms.
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17.
Credibility
Demonstrates honesty in dealing with employees, suppliers and customers
even if it means a loss of business.
18.
Concern for employee
welfare
Express concern for employees by responding promptly to their grievances.
19.
Impersonal relationship
Places long-term goodwill over short-term gain in a business relationship
20.
Expansion of capital base
Reinvests a greater portion of profits to expand capital of the firm.
21.
Building product image
Concerned about the image of his products among consumers and does
everything possible to establish a niche for his products in the market.
1.5 CHARACTERISTICS OF AN ENTREPRENEUR
An entrepreneur should possess all such characteristics with the help of which he can perform
various responsibilities successfully. The following characteristics are :-
1. Innovator
Schumpeter differentiates between an inventor and innovator. An inventor discovers new
methods and new materials and an innovator is the one who utilizes those discoveries and
inventions. Not only this, the entrepreneur further exploits the inventions commercially and thus
produces newer and better goods which give him profit and satisfaction.
Innovation may occur in the following forms :
(i) The introduction of new goods.
(ii) The introduction of new methods of production.
(iii) The opening of a new market.
(iv) The conquest of a new source of supply of raw-material.
(v) The carrying out of the new form of organization of any industry.
The entrepreneur locates ideas and puts them into effect in the process of economic
development. According to Baumol, an entrepreneur is a Schumpetarian innovator and something
more than a leader.
2. Risk-taker
Risk means the condition of not knowing the outcome of an activity or decision. A risk
situation occurs when one is required to make a choice between two or more alternatives whose
potential outcomes are not known and must be subjectively evaluated. A risk situation involves
potential gain or loss. The greater the possible loss, the greater is the risk involved.
An entrepreneur is a calculated risk-tasker. He enjoys the excitement of a challenge but he
does not gamble. An entrepreneur avoids low-risk situation because there is a lack of challenge and
he avoids high-risk situation because he wants to succeed. He likes achievable challenges.
An entrepreneur likes to take realistic risks because he wants to be successful. He gets
greater satisfaction in accomplishing difficult but realistic tasks by applying his own skills. Hence,
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low-risk situation and high-risk situation both are avoided because these do not satisfy the
entrepreneur.
3. Organiser
An entrepreneur has to bring together various factors of production, minimize losses and
reduce the cost of production. Initially, he may take all the decisions but as the enterprise grows, he
starts delegating the authority. He produces that best results as an organizer. Not only this, it is the
entrepreneur who has to pick or select the right piece of land, choose the right person and opt for
the finance. He must be able to inspire loyalty and hard work amongst the workers to raise
productivity and efficiency. In order to expand the business, he must have willingness to delegate
authority and trust his sub-ordinates and managers although shaping of long-run policies of the
enterprise would remain in his hands.
4. Creative
Creatively, as field knowledge, seeks to explain how humans, either individually or
collectively, reach solutions that are both novel and useful. Innovation means the effort to create
purposeful ventures.
Harry Nystrom states that innovation may be defined as radical discontinuous change and
creativity is the ability to devise and successfully implement such changes. Successful innovations
depend on creativity and one of the most important requirements of an entrepreneur is to be creative
as creativity may be taken as the cause and successful innovation as the effect.
5. Motivator
McClelland explicitly introduces the need for achievement motivation as a psychological
motive and implicitly emphasised the need for achievement as the most directly relevant factor for
explaining economic behaviour.
Achievement motivation is a drive to overcome challenges, to advance and to grow. An
entrepreneur is an achievement-oriented person, not ‘money hungry’. He works for his desire for
challenge, accomplishment and service to others.
Achievement concerns refers to the accomplishment of excellent, innovative and risk
involving tasks. The organizational goal of an entrepreneur can be boosted by inculcating in him the
need for achievement.
6. Technical Competent
Success of an entrepreneur depends largely upon his ability to adopt latest technology.
Technical knowledge implies the ability to devise and use new and better ways of producing and
marketing goods and services. An entrepreneur must have a reasonable level of technical
knowledge. Technical knowledge is the ability that people can acquire with hard work.
An entrepreneur who has a high level of administrative ability, mental ability,
communication ability, human relations ability and technical knowledge can be more successful
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than a person with low level of these abilities. A dynamic entrepreneur must also be interested in
changing the pattern of production to suit the requirements.
7. Self-confident
It is necessary for an entrepreneur to be self-confident. He should have faith in himself only
then he can trust others.
In an expanded business, delegation of authority is a must and only a self-confident
entrepreneur can delegate his authority. He can seek cooperation of his staff and inculcate a sense of
team work in them.
8. Socially Responsible
The changing environment calls for a socially conscious entrepreneur who is not threatened
by progress of others. On the contrary, he acts in full awareness of social repercussions of his
actions. His entrepreneurial ability may create jobs for others. He may invent new products and new
manufacturing methods. He may innovate new ways of doing things. All these have social
consequences. An entrepreneur should think of projects of social significance and of importance to
others. He should expand his entrepreneurial activities, in order to help in creating conditions for
social change and for development of business which benefit the society. Such an attitude for others
raises the level of entrepreneurship from that of an individual activity to a meaningful social
endeavour.
9. Optimistic
An entrepreneur should approach his task with a hope of success and optimistic attitude. He
attempts any task with the hope that he will succeed rather than with a fear of failure. Such a hope
of success enhances his confidence and drives him towards success.
10. Equipped with Capability to Drive
Drive is a person’s motivation towards a task. It comprises of such personality traits as
responsibility, vigour, initiative, persistence and ambition. An entrepreneur must exert considerable
effort in establishing and managing his business. Those entrepreneurs who work hard in planning,
organizing, co-ordinating and controlling their business are more likely to have a successful
business than the entrepreneur who is lost and haphazard.
11. Blessed with Mental Ability
Mental ability that contributes to the success of an entrepreneur consists of overall
intelligence, i.e. IQ, creative thinking ability and analytical thinking ability. An entrepreneur must
be intelligent, adaptable, creative and he must be able to engage in analysis of various problems and
situations in order to deal with them.
12. Human Relations Ability
Personality factors such as emotional stability, personal relations, sociability, consideration
and tactfulness are important contributors to entrepreneur’s success. One of the most important
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facets of human relations ability is one’s ability to “put himself in someone else’s place” and to
know how the other person feels. This is the ability to practice empathy.
The entrepreneur must have good relations with his employees, customers etc. He must be
aware of the needs and motivations of customers if he is to adequately train his employees to
maintain good customer relations.
13. Communication Ability
An entrepreneur must possess the quality of communicating effectively in written and oral
communications. Good communication also means that both the sender and the receiver understand
and are being understood.
14. Decision-Making
An entrepreneur must be clear and creative when it comes to decision-making. He must
believe in himself and should be possessing ability to take decisions effectively. Decisions taken
should be based on quantitative facts. Decisions which effect organisaton’s future and are likely to
be irreversible must be taken with great care.
Here are some tips to become a good decision-maker (1) Define the problem, (2) Collect
information and relevant data, (3) Begin with a brain storming session and discuss the problem
with each other, (4) Never criticize or reject any solution suggested during the brain storming
session, (5) Encourage group members to come up with potential solutions, (6) Reduce the number
of alternatives to three or four after discussion, (7) Consider each alternative extensively and
determine the best to meet your needs and (8) Implement decisions.
Decision-making is an art; the more one practices it, better expert he/she becomes.
15. Business Planning
The decision to become an entrepreneur is the first step followed by the choice of the
product. As the business venture is undertaken, need for planning arises. It is the rigor and
thoroughness of the business plan which could be behind the successful entrepreneur throughout
his venture’s life.
Planning is really nothing more than decision-making, that is, deciding what to do, how to
do and when to do. It is vital for the success of a business. As a business person puts it:
“Planning is so important today that it occupies a major part of the time of the most
respective men in business. Planning allows us to master change. It forces us to organize our
expectations and develop programs to bring them about. Planning is the most effective way to draw
out the best in all of us-our best thinking, out best interests and aims and to enable us to develop the
most efficient way of achieving our maximum goals”.
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16. A Venture Capital
A David Silver, a successful capitalist described an entrepreneur as “Energetic”, single-
minded’, having ‘a mission and a clear vision”. He or she intends to create out of this vision a
product or service in a field which many have determined is important to improve the lives of
millions”. Silver also suggests that entrepreneurs venture out on their own from a sense of
dissatisfaction with their organization, but they are not necessarily unhappy with their existing
career fields.
17. Visionary
Entrepreneurs are visionaries like J.R.D. Tata, Dhirubhai Ambani, Narayanamurthy, Aziz
Premji etc. Entrepreneurs have a vision for growth, commitment to constructive change, persistence
to gather necessary resources and energy to achieve results. An Entrepreneur is distinguished from a
small business person. A person who leaves his job to start an independent business is not an
entrepreneur. Constructive change is an essential feature of a visionary. For example, Gulshan
Kumar (T-Series) was a venture capitalist and a visionary as well. He has left behind an unequalled
legacy of music innovations. Henry Ford created the manufacturing miracle that launched a modern
era in industry.
An effective visionary performs two key roles : (i) A charismatic role which involves
establishing support for a vision and direction. He inspires and empowers his employees for
support. Secondly, he plays an architectural role in order to build an appropriate organization
structure. He has to look after various functions of management and discharge them effectively.
18. Entrepreneurs make Significant Differences
The differences made by the entrepreneurs are significant. They have their own style of
dealing with various problems, set backs and uncertainties. They tend to change the existing state of
affairs and get the work done without bothering about obstructions and barrers.
19. Ability to Spot and Exploit Opportunities
A story is told of a Jeweller who many years ago sent two of his marketing graduates to a
remote village to see if they could come up with new product ideas for underdeveloped jewellery
market. The first one after exploring the market said, “There is no business here, the residents of the
village don’t wear jewellery of any type!” The second one was enthusiastic about the prospects and
he said, “This is a great opportunity; the people here haven’t discovered Jewellery yet.”
This is how entrepreneurs spot the opportunities which others miss. Mc Grath states that the
entrepreneurs are comfortable with ambiguity and they can bring clarity by piecing together
previous unrelated messages and signals.
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The entrepreneurs craft or carve out opportunities for themselves. Their perceptions differ
from non-entrepreneurs. There are very few persons who are inventors and entrepreneurs at the
same time. Such persons have an edge over those who are only inventors or entrepreneurs.
20. Courage to Face Adversities
Entrepreneurs face the adversities boldly and bravely. They refuse to be beaten and become
tougher during adverse situations. They have faith in themselves and attempt to solve the problems
even under pressure. Every unpredictable situation is a challenge before them which they overcome
and survive through.
21. Leadership – An essential trait of the entrepreneur
Leadership is the process of influencing and supporting others to work enthusiastically
towards achieving objectives. It is a critical factor that not only helps an entrepreneur to identify his
goals but also motivates and assists him in achieving the stated goals. Without leadership, an
organisation would be only a confusion of people and machines, just as an orchestra without a
conductor would be only musicians and instruments. Leadership is one of the primary traits of an
entrepreneur by which he can influence others to voluntarily seek defined objectives. Leadership,
thus, is the catalyst that transforms potential into reality, problems into opportunities, heading
towards the achievement of objectives. This role is often seen dramatically when a small scale unit
transforms itself into medium-scale and finally it turns into a giant organization. Leadership is
equally important in all sizes of organization – be it small, medium or large Wrarren Bennis, the
leadership guru, says that effective leadership can’t exist without the full inclusion, initiatives, and
the co-operation of employees. Since a small industry is as labour-intensive industry, the
entrepreneur must have leadership qualities to influence his workers or employees.
Traits of Leadership :- The path to leadership that one takes differs from individual to
individual.
However, there are a few key traits we can focus on :
o High level of personal drive
o The desire to lead
o Personal integrity
o Self-confidence
o Cognitive (Analytical) ability
o Business Knowledge
o Charishma
o Creativity
o Personal Warmth
The traits between leaders and non-leaders may differ at the physical level, intellectual level
or personality features could be different as well.
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1.6 MANAGER VERSUS LEADER :
Warren Bennis point out the characteristics of managers versus leader in the 21
st
century like this :
Manager Characteristics
Leader Characteristics
Administers
A copy
Maintains
Focus on systems and structure
Relies on Control
Short-range view
Eye on the bottom line
Imitates
Accepts the status quo
Classic good soldier
Does things right
Innovates
An originally Develops
Focuses on people Inspires trust
Long-range perspective
Asks what and why
Eye on the horizon
Originates
Challenges the status quo
Own person
Does the right thing
Although a manager has different features than a leader but in small business the
entrepreneur has to play the role of both. By creating an environment that encourages personal
interaction, the leader and entrepreneur of a small firm can get the best from her/his employees and
also offer a strong inducement to prospective employees. Several decades ago, managers were hard-
nosed autocrats, giving orders and showing little concern for those who worked under them. Over
the years, this style of leadership has given way to a gentler and more effective variety that
emphasis as respect for all members of organisation and shows an appreciation for their potential as
well. Manager leader entrepreneur frequently seeks some degree of employee participation in
decisions that affect personnel and work process. This leadership approach taken upto a level can
also be termed as empowerment. By using empowerment, managers go beyond solicitation of
employees’ opinion and ideas by increasing their authority to act on their own and to make
decisions about the process they are involved with.
1.7 FUNCTIONS OF AN ENTREPRENEUR
An entrepreneur has to perform a number of functions right from the generation of idea up
to the establishment of an enterprise. He also has to perform functions for successful running of his
enterprise. Entrepreneur has to perceive business opportunities and mobilize resources like man,
money, machines, materials and methods. The following are the main functions of an Entrepreneur.
1. Idea Generation : The first and the most important function of an Entrepreneur is idea
generation. Idea generation implies product selection and project identification. Idea
generation is possible through vision, insight, keen observation, education, experience
and exposure. This needs scanning of business environment and market survey.
21
2. Determination of Business Objectives : Entrepreneur has to state and lay down the
business objectives. Objectives should be spelt out in clear terms. The entrepreneur must
be clear about the nature and type of business, i.e. whether manufacturing concern or
service oriented unit or a trading business so that he can very well carry on the venture
in accordance with the objectives determined by him.
3. Raising of Funds : All the activities of the business depend upon the finance and hence
fund raising is an important function of an entrepreneur. An entrepreneur can raise the
fund from internal source as well as external source. He should be aware of different
sources of funds. He should also have complete knowledge of government sponsored
schemes such as PMRY, SASY, REAP etc. in which he can get government assistance
in the form of seed capital, fixed and working capital for his business.
4. Procurement of Machines and Materials : Another important function of an
entrepreneur is to procure raw materials and machines. Entrepreneur has to identify
cheap and regular sources of raw materials which will help him to reduce the cost of
production and face competition boldly. While procuring machineries, he should specify
the technical details and the capacity. He should consider the warranty, after sales
service facilities etc. before procuring machineries.
5. Market Research : Market research is the systematic collection of data regarding the
product which the Entrepreneur wants to manufacture. Entrepreneur has to undertake
market research persistently to know the details of the intending product, i.e. the demand
for the product, size of the market/customers, the supply of the product, competition, the
price of the product etc.
6. Determining form of Entreprise : Entrepreneur has to determine form of enterprise
depending upon the nature of the product, volume of investment etc. The forms of
ownership are also proprietorship, partnership, Joint Stock Company, co-operative
society etc. Determination of ownership right is essential on the part of the entrepreneur
to acquire legal title to assets.
7. Recruitment of Manpower : To carry out this function, an entrepreneur has to perform
the following activities.
a. Estimate man power requirement for short term and long term
b. Laying down the selection procedure.
c. Designing scheme of compensation.
d. Laying down the service rules.
e. Designing mechanism for training and development.
8. Implementation of the Project : Entrepreneur has to develop schedule and action plan
for the implementation of the project. The project must be implemented in a time bound
manner. All the activities from the conception stage to the commissioning stage are to be
22
accomplished by him in accordance with the implementation schedule to avoid cost and
time over run. He has to organize various resources and coordinate various activities.
This implementation of the project is an important function of the entrepreneur. All the
above functions of the entrepreneur can precisely be put into three categories of
innovation, risk bearing, and organizing and managing functions.
1.8 TYPES OF ENTREPRENEUR
Today various types of entrepreneur are found engaged in different types of activities, not
only in industrial activities but also in agriculture and commercial activities. Today we can
recognize entrepreneur in industry, service and business sectors which are technically called as ISB
sectors. Entrepreneurs are classified in a number of ways as discussed below.
Clearance Danhof’s Classifications
Danhof classifies Entrepreneur into four types.
1. Innovative Entrepreneur: This category of entrepreneur is characterized by smell of
innovativeness. This type of entrepreneur sense the opportunities for introduction of new
ideas, new technology, discovering of new markets and creating new organizations.
Such entrepreneur can work only when certain level of development is already achieved
and people look forward to change and improve. Such entrepreneur are very much
helpful for their country because they bring about a transformation in life style.
2. Adoptive or Imitative Entrepreneur : Such entrepreneurs imitate the existing
entrepreneur and set their enterprise in the same manner. Instead of innovation, he may
just adopt the technology and methods innovated by others. Such types of entrepreneur
are particularly suitable for under developed countries for imitating the new combination
of production already available in developed countries.
3. Fabian Entrepreneur : Fabian entrepreneurs are characterized by great caution and
skepticism, in experimenting any change in their enterprise. They imitate only when it
becomes perfectly clear that failure to do so would result in a loss of the relative position
in the enterprises.
4. Drone Entrepreneur : Such entrepreneurs are conservative or orthodox in outlook.
They always feel comfortable with their old fashioned technology of production even
though technologies have changed. They never like to get rid of their traditional
business, traditional machineries and traditional system of business even at the cost of
reduced returns.
Arthur H Cole Classification
Arthur H Cole classifies entrepreneurs as empirical, rational and cognitive entrepreneur.
Empirical : He is an entrepreneur who hardly introduces anything revolutionary and follows the
principle of rule of thumb.
23
Rational : The rational entrepreneur is well informed about the general economic conditions and
introduces changes, which look more revolutionary.
Cognitive : Cognitive entrepreneur is well informed, draws upon the advice and services of experts
and introduces changes that reflect complete break from the existing scheme of enterprise.
Classification Based on the Scale of Enterprise
Small Scale : These entrepreneurs do not possesses the necessary talents and resources to initiate
large scale production and to introduce revolutionary technological charge.
Large scale : They possess the necessary financial and other resources to initiate and introduce new
technological changes. They possess talent and research and development facilities.
Other Classification
Following are some more types of entrepreneurs listed by hehavior scientists.
Solo Operators : These are the entrepreneurs who essentially work alone, introduce their own
capital and if essential employ very few employees. In the beginning most of the entrepreneurs start
their enterprises like them.
Active Partners : Such entrepreneurs jointly put their efforts and resources. They actively
participate in managing the daily routine of the business concern. Entrepreneurs who only
contribute their funds but not actively participate in the business are called simple ‘Partners’.
Inventors : Such entrepreneurs are creative in character and feel happy in inventing new products,
technologies and methods of production. Their basic interest lies in research and innovative
activities.
Challengers : According to such entrepreneurs, if there is no challenge in life, there is no charm in
life. Such entrepreneurs plunge into industry/business because of the challenge it presents. When
one challenge seems to be met, they begin to look for new challenges. They convert odds and
adversities into opportunities and make profit.
Buyers : These are the entrepreneurs who do not like to face the hassles of building infrastructure
and other facilities. They simply purchase the existing one and by using their experience and
expertise try to run the enterprise successfully.
Life Timers : Such entrepreneurs take business as an integral part of their life. Family enterprises,
which mainly depend on exercise of personal skill, fall in this category.
Industrial Entrepreneurs : Such entrepreneurs engage in manufacturing and selling products.
Service Entrepreneurs : Such entrepreneurs engage in service activities like repair, consultancy,
beauty parlor etc., where entrepreneurs provide service to people.
Business Entrepreneurs : They are also called as trading entrepreneurs which buy and sell goods.
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Agricultural Entrepreneurs : They engage themselves in agricultural activities like horticulture,
floriculture, animal husbandry, poultry etc.
Corporate Entrepreneurs : Corporate entrepreneurs undertakes their business activities under
legally registered company or trust.
Rural Entrepreneurs : Entrepreneur’s selecting rural-based industrial opportunity in either khadi
or village industries sector or in farm entrepreneurship are regarded as rural entrepreneurs.
According to Kkhadi and Village Industry Commission (KVIC) village or rural industry means any
industry located in rural areas, population of which do not exceed 10,000, which produces any
goods or services in which fixed investment of an artisan or a worker does not exceed one thousand
rupees.
Women Entrepreneurs : According to Government of India an women entrepreneur is defined as
an enterprise owned and controlled by a woman and having minimum financial interest upto 51% of
the capital and giving at least 51% employment to women.
1.9 RELATIONSHIP BETWEEN ENTREPRENEURS AND ENTREPRENEURSHIP
Entrepreneurs
Entrepreneurship
Producer
Person
Organiser
Innovator
Risk bearer
Motivator
Creator
Leader
Imitator
Visualiser
Planner
Investor
Production
Process
Organization
Innovation
Risk-bearing
Motivation
Creation
Leadership
Imitation
Vision
Planning
Investment
The term entrepreneur is often used interchangeably with entrepreneurship, yet they are
conceptually different. The relationship between the two is just like the two sides of the same coin.
Thus, entrepreneurship is concerned with the performance and coordination of the entrepreneurial
functions.
1.10 ENTREPRENEURIAL CULTURE
The famous study on culture’s consequences by Greet Hofsted has long proved that there
culture-dependent differences in thinking and acting, and at times this cultural differentiation may
prove the crucial element in fostering entrepreneurship. Culture both reflects the environment –
physical and social – and in turn shapes it. It is important, therefore to understand the relationship
between culture and entrepreneurship. The cultural moulding of one’s perception, memory and
attitudes indicates the massive impact of different designs for living upon the individual. A
convenient shorthand way of referring to the training in the life-ways of a society, which the new
member acquires through social interaction, is to speak of the effect of culture upon the individual.
But in so speaking, we are merely using a convenient abstraction to point to the myriad ways in
25
which various people (who themselves learn the ways of the group from others) train the new
individual in the approved ways. There is no single thing called ‘culture’ which influences a person.
The relationship between culture and the individual is intertwined. Culture influences a person in a
massive and pervasive way and this makes for the stability of a society and the continuity of its
culture; the person also influences his culture and thus makes social change possible. The culture of
a society consists, in part, of a particular set of arrangements for solving the problems of the
members of the society. Some of these problems are special ones peculiar to the members of a
particular society. Others are universal problems common to all human beings – such as meeting
biological needs of the members, training the young caring for the sick. There are, of course, many
different possible arrangements for solving those problems. From among these possible
arrangements, one society adopts one set; a second society, a different set. This is another way of
saying that no two cultures are identical.
The particular set of cultural arrangements adopted by a society is influenced by the
physical environmental factor, as well as man’s attitude and desire to improve his habitat. A
society’s culture, in other words, is not entirely determined by the ‘given’ physical environment.
Man is not a passive victim of his physical environment. Within limits, he can act on it and
transform it to suit his ends.
The historically important things with regard to natural resources is man’s attitude towards
them. It was not the availability of iron that created the Iron Age in Britain, nor the presence of coal
that ushered in the Industrial Revolution, but the initiative of certain men at particular moments in
time in finding a sue for these mineral riches of the earth. The modifications or changes that have
taken place in mechanical contrivances follow and tangibly employ prior modifications and changes
in the purposes of human tool makers and tool users. The conversion of an agricultural parish in
England into an industrialized community, the adoption of a new tool or the incorporation of a new
technique of production into a small local cultural system has occurred early or late in time, here or
there in space, as dictated by human will. Human geography demands as much knowledge of
human beings as of geography.
The culture of a given society is also influenced by contacts with other cultural groups. Just
as there is congruence between the ‘physical surround’ and culture, so is there congruence between
the ‘social surround’ neighboring cultures and the culture of any given society. The borrowings of
one society from the culture of another are not, however, blind and random scavenging of odd bits
and pieces. A society borrows only those cultural ways that are seen by its members as helpful in
solving the problems they face; that are seen, in other words, as a means of reaching their goals.
However, the impact of social surround is a slow and complex process that is determined, among
other things, by strength of the cultures, the value system and the attitude of people towards change.
Education plays an important role in determining attitudes. Perhaps, this is the reason why
providing education for all is a central pillar of the Millennium Development Goals stipulated by
the United Nations. The relationship between quality education and economic growth is now a
proven fact. A few cases provided hereafter may be relevant at this stage. The Chotanagpur region
26
of the Jharkhand state, which was earlier the southern part of the erstwhile Bihar state was one of
the first regions to have acquired industrial status in independent India. The mineral-rich region had
attracted the attention of our first Prime Minister Pt. Jawaharlal Nehru and a number of large
industries came up in the region. Along with large public/private sector undertakings like HEC,
SAIL, IISCO, HSCL, FCL, PDIL, TISCO, the central as well as state governments promoted
growth of small scale industries and entrepreneurs were encouraged to set up units. With the
nationalization of coal mines in the early 1970s this process gained further impetus. Thus, four
major industrial area development authorities were created around the four industrial cities of
Ranchi, Jamshedpur, Bokaro and Dhanbad. These were Ranchi Industrial Area Development
Authority. Adityapur Industrial Area Development Authority, Bokaro Industrial Area Development
Authority and New Kandra Industrial Estate, respectively. The objectives of these area development
authorities were manifold. The state government wanted to enhance the pace of industrialization,
exploit the natural resources of the region judiciously and catalyze economic growth and regional
development. Many small scale units were set up on the region. Some were ancillaries to the
existing large industries and some were set up to use the natural resources, particularly coal and
other minerals available as raw material. This period saw rapid industrial activity in the region. It is
to be remembered that today’s highly developed regions like Gurgaon and NOIDA were not even
planned then.
In the 1980, the Government of Uttar Pradesh (UP) decided to develop the industrially
backward eastern region, and a number of strategic initiatives like incentives to set up units in zero
industrial areas were announced. Land, finance, etc. were made available and industrial estates
around industrially backward districts like Varanasi and Jaunpur were developed. Thus, Ramnagar
Industrial Estate in Varanasi District and SathariaI industrial Development Authority in Jaunpur
were created. Many units came up. It was much later that NOIDA started coming up, after the
government of UP decided to use the proximity of the region to Delhi as a strategic advantage. The
Haryana Government’s plan of developing Gurgaon came even later. However, as things stand
today, the industrial area development authorities of Jharkhand and industrial estates of eastern UP
are in shambles, while Gurgaon has become a leading industrial hub of the country, overtaking even
NOIDA. A systematic observation of the industrial development process in and around the regions
mentioned above will suggest that for entrepreneurship to flourish mere government support in
terms of incentives is not enough. Nor, also, is the abundance of natural resources in the region.
There is an entrepreneurial culture that is needed which includes many more things. It was this that
was missing in eastern UP and Jharkhand.
Why the attempts to industrialize Jharkhand and eastern UP failed and why NOIDA and
Gurgaon grew has to be understood. The difference lies in the cultures of these regions While
Jharkhand and eastern UP represent stifling cultures, NOIDA and Gurgaon represent facilitative
cultures.
In stifling cultures, entrepreneurs set units to misuse the finance and other incentives that are
offered, the political establishment is exploitative, the support system is rudimentary and the social
27
system is indifferent. Thus, all the stakeholders lack commitment. And without commitment the
result is what we saw, efforts and intentions do not yield results.
Attempts have been made by researchers to find out the basic elements of the
entrepreneurial culture. While opinions vary and views are myriad, there is a wide agreement on the
fact that entrepreneurship flourishes in some societies much more than in others. In India, for
instance, Sindhi, Marwari, Gujarati and Punjabi cultures have thrown up many more successful
entrepreneurs than others. This, however, is not to rule out the growth of entrepreneurship in other
cultures. Rather, it is to identify the elements of successful entrepreneurial cultures and inculcate
them in other cultures. But this is easier said than done.
There is a need to study and understand the entrepreneurial culture, identify the elements of
cultures and inculcate them in other cultures.
1.11 DEVELOPING ENTREPRENEURIAL CULTURE
India can make rapid strides if entrepreneurship gets due importance in national economic
policies. The growth of Japan, South Korea, Singapore and other leading Asian economies can
largely be attributed to entrepreneurship. The point to be noted here is that a culture for facilitating
entrepreneurship is to be fostered How to do this is perhaps to be learned from those who have
realized it. Culture, like personality, has both content and pattern. Just as mere testing of the
separate traits of an individual does not describe his personality, so the mere listing of the separate
institutionalized ways of a society does not describe its culture. Two cultures, just as two
personalities, may contain highly similar elements and yet be extremely unlike one another in
pattern. It is this pattern, the arrangement of elements, that is critical. Just as in diamond and coal,
the basic element carbon is same but the arrangement of molecules does the trick.
Developing entrepreneurship is thus a difficult task given the fact that you need a facilitative
culture. Industries fail to flourish in Jharkhand, Bihar and eastern UP despite government efforts.
The entire set of social, psychological, political, legal and economic environment needs to be taken
into account. Delineating areas, outlining policies and announcing incentives may not be enough as
has been proved in the cases mentioned above. A culture needs to be created. There is need to learn
from the experiences and experiments of other cultures.
In India, the problem is diversity. There is so much diversity that a one-size-fits-all
intervention will not work. Down south, the knowledge-based industry and its servicing has thrown
up many entrepreneurs. Chennai and Hyderabad have seen rapid growth. East on the other hand is
sluggish; rather the growth in Bihar, Jharkhand and eastern UP is negative, West Bengal being no
better. Jharkhand is a classic case to prove how absence of entrepreneurial culture stifles growth.
The state has abundance of natural resources, and industrial background running back to late sixties
and availability of finances, yet it is ranked amongst the worst states in the country. In fact, the
Honourable High Court of the state has been constrained to observe time and again that Jharkhand
is going the Bihar way. These remarks made by a highly responsible agency of the state sum up the
quality of governance of the state. This quality, incidentally, is a crucial determinant of an
28
entrepreneurial culture because other determinants like infrastructure and law and order are
dependent on it. Another important aspect is the social-cultural milieu. But more than their presence
it is their interaction that is critical.
What makes an economy tick ? This, perhaps, is the most relevant economic question for us
in present times. Particularly, because many in India see this country emerging as an economic
superpower in the next few decades. The popular one word answer to this vital question should be
entrepreneurship. Both the theory and evidence suggest that entrepreneurial activities play a pivotal
role in economic growth, small and medium enterprises being the crucial determinants. It is
precisely because of this that the Government of India as well as different states are so keen to
encourage entrepreneurship. In fact, the various state governments are boasting about their open
arm policy towards entrepreneurs. Finances are available, policy measures are initiated and
technical support is being extended. Despite these, however, growth of entrepreneurship is not
satisfactory. But why does the entrepreneurship that steered growth in the West, Association of
Southest Asian Nations (ASEAN) countries and Japan fail to click in India. Small and medium
enterprises have not shown the competitiveness and the character that boosts the economic
development. The reason in one simple word is culture – entrepreneurial culture. This has to be
systematically developed.
The Jharkhand example sums this up very well. This new state has the potential to be a
leading state of the country. But it is a laggard. The same can be said of Bihar and eastern UP. To
develop entrepreneurial culture, policy initiatives have to take a culture-specific view. What works
in one region may not necessarily work in another region. A holistic approach is required for
developing an entrepreneurial culture, where the society at large is involved in entrepreneurial
development. It is the social environment that ignites young minds towards achievement
orientation.
1.12 CONCEPT OF ENTREPRENEURSHIP
Entrepreneurship can be defined as the propensity of mind to take calculated risks with
confidence to achieve a pre-determined business or industrial objectives. That points out the risk
taking ability coupled with decision making.
The word ‘entrepreneurship’ typically means to undertake. It owes its origin to the western
societies. But even in the west, it has undergone changes from time to time. In the early 16
th
century, the term was used to denote army leaders. In the 18
th
century, it was used to denote a dealer
who buys and sells goods at uncertain prices. Towards 1961, Schumpeter, used the term innovator,
for an entrepreneur. Two centuries before, the concept of entrepreneurship was shady. It is only in
the recent years that entrepreneurship has been recognized widely all over the world like in USA,
Germany, Japan and in the developing countries like ours. Gunnar Myrdal rightly pointed out that
Asian societies lack entrepreneurship not because they lack money or raw materials but because of
their attitudes. Till recently, in the west, the entrepreneurship is mainly an attribute of an efficient
manager. But the success achieved by entrepreneurs in develoing countries demolishes the
29
contention that entrepreneur is a rare animal and an elusive character. In India the definition of an
entrepreneur being the one who undertakes to organize, own and run a business has been accepted
in a National Seminar on entrepreneurship organized in Delhi in 1975. Still there has been no
consensus on the definition of entrepreneurship and qualities of entrepreneurship.
Incidentally, entrepreneurship has engaged the attention of sociologists, psychologists and
economists. Sociologists analyse the characteristics of an entrepreneur in terms of caste, family,
social status etc. Psychologists analyse their attributes on the basis of their personality traits such as
need for achievement, affiliation and power, risk taking, decision making, creativity, leadership etc.
The economists analyze them on the basis of occupational background, access to capital, business
and technical experiences.
1.13 DEFINITIONS OF ENTREPRENEURSHIP
McClelland identifies two characteristics of entrepreneurship. Firstly, doing things in a new and
better way (Schumpetrian’s innovator). Secondly, decision making under uncertainty (Cantillon’s
entrepreneur). McClelland emphasized that entrepreneurial manager should have a high need for
influencing other (need for power), a low need to establish emotional relationships (low need for
affiliation) and a high capacity to discipline one’s own self (inhibition). In other words,
entrepreneurship means the function of creating something new, organizing and co-ordinating and
undertaking risk and handing economic uncertainty.
“Entrepreneurship is meant the function of seeing investment and production opportunity,
organizing an enterprise to undertake a new production process, rising capital, hiring labour,
arranging for supply of raw materials and selecting top managers for day to day operations of the
enterprise”.
- Higgins
“Entrepreneurship is essentially a creative activity or it is an innovation function. The
process of innovation may be in the form of
(a) Introduction of a new product
(b) Use of a new method of production
(c) Opening of a new market
(d) The conquest of new source of supplying raw material
(e) A new form of organisation” - Joseph A. Schumpeter
“Entrepreneurship is neither a science nor an art. It is a practice. It has a knowledge base.
Knowledge in entrepreneurship is a means to an end. Indeed, what constitutes knowledge in
practice is largely defined by the ends, that is, by the practice”. - Peter F. Drucker
30
“Entrepreneurship is the purposeful activity of an individual or a group of associated
individuals, undertaken to initiate, maintain or organize a profit-oriented business unit for the
production or distribution of economic goods and services”. - A. H. Cole
“Entrepreneurship is that form of social decision making which is performed by economic
innovators”. - Robert K. Lamb
“Entrepreneurship connotes innovativeness, an urge to take risk in face of uncertainties, and
an intuition, i.e. a capacity of seeing things in a way which afterwards proves to be true”.
- V.R. Gaikwad
“Entrepreneurship is the investing and risking of time, money and effort to start a business
and make it successful”. - Musscleman and Jakson
1.14 IMPORTANCE OF ENTERPRENEURSHIP
Entrepreneurship being an intangible factor is the moving force and development is the
consequence. It has an important role in the context of a developing nation like India which is
confronted with major socio-economic problems. Entrepreneurship can play an important role not
only in the industrial sector of a country but in the farm and service sectors also.
India is being attacked by baffling problems of over population, unemployment, under-
employment, poverty and the like. entrepreneurship is consistently equated with the establishment
and management of small business enterprises and setting up these units is the solution to these
baffling problems.
Concentration of economic power, regional imbalances, exploitation by monopolists, and
many other giant problems find their solutions in the development of small scale industry which is
another name of entrepreneurship in the developing countries. Mahatma Gadhiji also asserted the
same. Entrepreneurship has not grown much in India but it is gaining importance fast. The factors
which retard the success of Entrepreneurship in India are inadequate infrastructural facilities
shortage of capital, technical knowledge and transport, absence of cheap and good quality raw
material and shortage of power, etc. The government has been taking significant steps to encourage
entrepreneurship as entrepreneurship is the only solution to various problems of developing
countries. Entrepreneurship caught strong waves during the last three decades and became a
worldwide movement spreading across countries, regardless of their level of development. Even in
Europe and United states, revival of small business has been seen for more than a decade. Constant
change and innovations are simply a necessity of entrepreneurship and is becoming essential to
survive in a global economy. An American magazine. “The Economist’ (1999) recently put it,
“Innovation has become the industrial religion of the late 20
th
Century”. It is being increasingly
realized that today’s managers and businessmen need not only managerial skills but entrepreneurial
skills as well. Entrepreneurship needs to be demystified and transformed into a skill by teaching and
practicing. Skill of entrepreneurship knows how to turn an ordinary corporation, managed in a
31
routine manner, into an entrepreneurial organisation. People within the organisation can be trained
to:
(i) defect the opportunities;
(ii) peruse the opportunities and rewarded;
(iii) to lesson the consequences of failing;
Entrepreneurship plays a premium mobile role in promoting development of an economy. Hence, it
is said that an economy is the effect for which entrepreneurship is the cause. Various levels of
economic development across the countries and even within the country are attributed to their
differences in entrepreneurship development.
1.15 EATURES OF ENTREPRENEURSHIP
Entrepreneurship is the tendency of a person to organize the business of his own and to run
it profitably, using various traits like leadership, decision making, innovation, managerial caliber
etc. Entrepreneurship is a set of activities performed by an entrepreneur. In a way, entrepreneur
precedes entrepreneurship. The main features of entrepreneurship as are follows:
(i) Economic Activity : Although classical economists like Adam Smith and Richard Cantillon and
many others didn’t recognize entrepreneurship as an economic activity but since last few decades
entrepreneurship s catching up and is primarily becoming an economic function because n involves
creation and operation of an enterprise.
Cantillon also pointed out that entrepreneurship involves conscious decision making about
resource allocations. It also implies seeking the best opportunities for using resources for their
highest commercial yields. Adam Smith viewed that there was no difference between an
entrepreneur and an industrialist. He agreed that economic change could be brought through
entrepreneurs.
Entrepreneurship is a continuous economic process which recognize the need to change and
entrepreneur is a key person to initiate any change.
(ii) Innovative Activity : Innovation is the process of doing new things. Drucker elaborates:
“Innovation….. is the means by which the entrepreneur either creates new wealth-producing
resourses or endows existing resources with enhanced potential for creating wealth.”
Entrepreneurship is innovation where new products, services, ideas and information is produced,
new efficient production techniques are introduced by the firms, new market opportunities are
identified and better ways of meeting existing demands are looked into. Whenever a new idea
occurs, entrepreneurial efforts are essential to convert the idea into practical application. According
to Schumpter, innovation may occur in any of the following ways :
(a) The introduction of a new good with which the customer is not yet familiar.
(b) The introduction of a new method of production which is not tested by experience in
the branch of manufacture concerned;
32
(c) The opening of a new market the customers are not yet familiar with the product and
the market for that innovative product has not previously been entered;
(d) The conquest of new source of supply of raw-material irrespective of the fact
whether that source already exists or it has been created.
(e) The creation of a new organization of an industry a new innovation may create the
monopoly for that product or break the monopoly of similar existing product.
iii. A function of High Achievement. People differ not only in their ability to do but also in their
will to do, or motivation. The motivation, in turn depends on the strength of their motives
sometimes defined as needs, wants, drives or impulses within the individuals. McClelland identified
two features of entrepreneurship (a) doing things in a different and better way (b) decision making
under uncertainty. He found that looking at the history of industrial development, money of the
pioneers who built up industrial empires are strongly motivated by need for power and
achievement. Thus, people having high need for achievement and power are more likely to succeed
as entrepreneurs and this is a very critical factor that leads one towards entrepreneurship.
Researches also show that stable personality characteristic like motive are laid down in childhood.
iv. Creative and Purposeful Activity. Creativity is “the ability to bring something new into
existence”. The definition emphasizes on “ability” and not the “activity” of bringing something new
into existence. A person may conceive of something new and also visualize its usefulness but unless
he takes necessary action to convert it into reality, his ideas will not be termed as creative.
Innovation is the process of doing new things. Innovation, therefore, is the transformation of
creative ideas into useful applications but creativity is a prerequisite to innovation.
Entrepreneurship is virtually a creative and a purposeful activity. The entrepreneur passes
through the five stages during the process of entrepreneurship viz. idea germination, preparation,
incubation, illumination and verification. Earning profits is never the sole objective but to introduce
something new and creative is the purpose of entrepreneurship. The benefits of his creativity are
enjoyed by people at large, e.g. Internet benefits are being enjoyed by more than 50 million people
world over.
v. Entrepreneurship : An Organising function. J.B. Say describes entrepreneurship as an
organizing function whereby the entrepreneur brings together various factors of production, ensures
the continuing management and renders risk-bearing functions as well. According to J.B. Say, an
entrepreneur is one who combines the land of one, the labour of another, and capital of yet another,
and thus produces a product. By selling the product in the market, he pays interest on capital, rent
on land, wages to labourers and what remains is his profit. Thus, J. B. Say clearly distinguishes
between the role of a capitalist as a financer and the entrepreneur as an organizer. Marshall also
advocated the significance of organization among the services of special class of business
undertakes.
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vi. Entrepreneurship : A function of risk-bearing. Richrd Cantillon, an Irishman living in France
is credited with giving the concept of entrepreneurship. Cantillon described in his book published in
1755, an entrepreneur as a person who buys things at a certain price and sells them at an uncertain
price. Thus, he makes decisions about obtaining and using resources while consequently assuming
the risk of enterprise. Thus, Cantillon conceived of an entrepreneur as a bearer of non-insurable
risk. According to him, risk-bearing forms an unique constitutive function of entrepreneurship.
1.16 GROWTH OF ENTREPRENEURSHIP IN PRE-INDEPENDENCE PERIOD
Entrepreneurial growth in India is as old as Rigveda but there was no manufacturing as such
before 1850. This manufacturing entrepreneurship was too confined to cottage & small scale
industry. But it could not grow further due to various reasons such as lack of political unity, capital,
network of custom barriers, existence of multiple systems of currency.
Emergence of entrepreneurial class is as old as our ancient history itself dating back to the
pre-vedic period when the Harappan culture flourished in India. However, history of
entrepreneurship and emergence of entrepreneurial class in India may be viewed under the
following periods :
1. Period 1 : Entrepreneurship in ancient period
2. Period II : Entrepreneurship in pre-independence era i.e. before 1850.
3. Period III : Entrepreneurship between 1850-1947
4. Period IV : Entrepreneurship after 1947 & onwards i.e. post independence period.
1. Period I : Entrepreneurship in Ancient Period : As per the ancient literature, the ancient
Indians took up a variety of commercial vocations akin to present day entrepreneurial activities. The
arrival of Aryans opened the first phase of entrepreneurship, with their innovative new crafts and
occupations, evolving division of labour for the new handicrafts, breeding of cattle, & cultivating
land which were nearly non-existing before them. The ancient literature like Manusmriti gives a
more clear picture about the entrepreneurial class of people during pre-vedic period. According to
him, vaisyas were the specialized class of people carrying entrepreneurial activities in agriculture,
industry & banking sector. During the Gupta & Post-Gupta period, agriculture, crafts and
handicrafts comprised the basic sources of occupation for the people.
2. Period II : Entrepreneurship in Pre-independence Era before 1850 AD : During the
pre-independence period, agriculture was the main occupation of the people of India. Besides
agriculture, the bania, Parsis, Cherriars & Gujaratis etc., specialized in the manufacturing of
handicrafts, metal works, stone carving & jewellery designing etc. had dominated the industrial
entrepreneurship sector in rural areas. These communities actually laid the foundation of
entrepreneurship by carrying out trade & commerce activities initially & later by establishing
manufacturing centers.
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British colonialism in India dealt a severe below to the Indian entrepreneurship & industrial
revolution in Great Britain reduced India to the status of material supplier for consumer market for
the finished products manufacture in Britain.
Due to lack of support from the British Government and its discriminatory policies towards
Indian made products, the industrial entrepreneurship suffered a great deal.
3. Period III : Entrepreneurship during 1850-1947 : The mid nineteenth century opened up
path for rapid industrialization with the introduction of railways in 1853, development of other
infrastructural facilities like roads, ports etc. The eastern part of the country witnessed
entrepreneurship mainly due to Europeans who engaged in export-oriented industries, like jute,
textiles, tea, coal etc. whereas in the western part, entrepreneurship was mostly among the Indians.
It is observed that during the last decades of the 18
th
century, the Parsis along with Marwaris &
Gujaritis trading castes, took to entrepreneurial behaviour.
The adoption of the concept of swadeshi & boycott in 1905 to counter the discriminatory
policies o the British Government encouraged the Indians to plunge into entrepreneurship.
Jamshedji Tata established his first iron & steel industry with the help of ‘swadeshi contribution’.
Due to the swadeshi movement which emphasized on manufacturing & using indigenous goods by
the Indian’s, indigenous entrepreneurship developed in many types of activities such as textiles,
soap, matches, oil, tanneries, potteries, banking, insurance etc.
As such, indigenous entrepreneurship grew at a rapid pace with emergence of entrepreneur
classes such as Parsis, Marwaris & Gujaratis in the country on the eve of independence of India.
4. Period IV : Entrepreneurship in 1947 & onwards – Post-Independence period : In the post-
independence period, the Government identified the need for rapid industrialization with the
establishment of heavy & basic industries. The post independence period witnessed the emergence
of Marwaris as big investors and industrialists. Before independence, where the Marwaris
controlled only 6 companies, after independence, they had 618 directorships which rose to 1/4
th
of
the total in 1951. The Monopolies Inquiry Commission in 1964 has mentioned in its report that the
Marwaris accounted for 10 large industrial houses out of a total of 37 showing the strength of the
Marwaris in the growth of entrepreneurship during this period. The Marwaris community emerged
as a giant entrepreneurial class in the post-independence period. The house of Birla, Singhania,
Bajaj & others have created their image in the industrial market in the field of industrial
development in India.
1.17 THEORIES OF ENTREPRENEURSHIP
Entrepreneurial history is left to be interdisciplinary in approach and, thus, it is difficult to
label entrepreneurship as purely a theory of economics or sociology or psychology or a
anthropology. The concept of entrepreneurship is as old as civilization while the theories of
entrepreneurship have been evolved from over a period of more than two centuries.
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Theories of entrepreneurship can a broadly be classified into four categories :
(i) The economist’s view (ii) the sociologist’s view
(iii) The psychologist’s view (iv) The anthropologist’s view
Economic Theory
Economics is the social science that deals most directly with contemporary economic
reality. Economists have done little work on entrepreneurship and therefore, have tended to be in
minority. Economists like Adam Smith and David Richard assigned no significance to
entrepreneurial role in economic development. Richard Cantillon (1755) was the first person to
recognize the role of entrepreneurs in economic theory. He stated that, “the farmer is an
entrepreneur who promises to pay the land owner for his farm or land, a fixed sum of money
without assurance for the profit he will derive from his enterprise”.
He described an entrepreneur as a person bearing risk. He makes profit by buying good at a
known price and by selling at an increased higher price but there is always an element of
uncertainty in market. Hence, entrepreneur is always at a risk of bearing losses if he would be
unable to sell the goods at a higher price. Cantillon stressed on the economic function of
entrepreneur over his social status or his personality. JB Say broadened the definition and role of
an entrepreneur to include the concept of combining factors of production, also noting that the
entrepreneur must have special personal qualities.
The economic theory of entrepreneurship centres around Joseph Schumpeter which is
versatile and multi-disciplinary. J. Schumpeter (1934) added the concept of innovation to the theory
of entrepreneurship. He visualized the entrepreneurs as the key figure in economic development
because of his role in introducing innovations. For Schumpeter, the ability to identify new
opportunities in the market is a central entrepreneurial activity which creates disequilibrium in the
economy. He states that the entrepreneur is the bearer of the ‘mechanism for change’. Changes can
occur from inside and outside the economy. Joseph, in one of his books, attempts to develop a
number of economic theories of interest, capital, credit, profit and the business cycle by relating
them to the theory of entrepreneurship. He centres the whole new economic theory around the
entrepreneur rather than just a theory of the entrepreneur emphasis the vital role played by the
entrepreneur in an economy.
ii. Sociological Theory
Sociologists suggest that entrepreneurship can be conceptualized as a social movement an
entrepreneurs exist not only in the economy but in other spheres of society as well. S. M. Lipset
argues that cultural values deeply affect entrepreneurship and the level of economic development.
Mark Granovetter points that family ties may create an obstacle for a businessman if he cares for his
family too much; but the same strong family feelings can turn into an advantage once the
businessman has emigrated – as long as the distant family members stay behind. He also discusses
the role of trust in entrepreneurial ventures. According to him, in social groups and societies where
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people are isolated from each other, it may be difficult to develop the kind of confidence that is
absolutely necessary to start a firm or otherwise cooperate in economic matters. Thus, Mark
Granovetter emphasizes the role played by society and family-members in growth of
entrepreneurship.
According to Cochran, the entrepreneur represents society’s model personality. His
performance depends upon his own attitudes towards his occupation, the role expectations of
sanctioning groups and the occupational requirement of the job. Society’s values are the most
important determinant of attitudes and role expectations.
Everett. E. Hagen in his book ‘On The Theory of Social Change’ (1962) argues that people
who have grown up in certain minorities develop a much stronger psychological propensity for
entrepreneurship than who have not. Hagen’s theory may well contain a grain of truth but his
approach is discredited by others. Hagen also concluded that entrepreneurs have emerged from
certain communities and castes.
Thus, Hagen disregard the complicated institutional environment that surrounds the
entrepreneur.
iii. Psychological Theory
Psychological theory of entrepreneurship has a fairly high status among social scientists
who study entrepreneurship because it is very difficult to single out one or several psychological
traits as typical for the entrepreneurial personality. However, advocates of this theory assert that
entrepreneurship is most likely to emerge when a society has sufficient psychological
characteristics.
Joseph Schumpeter states that the entrepreneur is mainly motivated and driven by
three things :
(i) the dream and the will to found a private kingdom;
(ii) the will to conquer;
(iii) the joy of creating;
J. Schumpeter’s formulation can be translated as :
(i) the desire for power and independence;
(ii) the will to succeed;
(iv) the satisfaction of getting things done.
According to him, money is not what ultimately motivates the entrepreneur.
‘Entrepreneurs’, according to Schumpter, ‘are certainly not economic men in the theoretical sense’.
Thus, he supports the psychological theory and not the economic theory He asserts that what
matters is the behaviour, and not the actor.
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According to David Mc Clelland’s book The Achieving Society (1961), entrepreneurship has
to do with an individual’s so called need for achievement (referred to n-Achievement). He
identified three features of entrepreneurs that were related to their need for achievement : (1) desire
to accept responsibility for solving problems, setting goals and reaching the goals; (2) a willingness
to accept moderate risks; (3) a desire to know the outcomes of their decisions. It was widely
believed that a high achievement motivation has a strong likelihood of predicting entrepreneurial
behaviour. Individuals with high achievement motive tend to take keen interest in situations of high
risk, desire for responsibility and a desire for a concrete measure of task performance.
iv. Anthropological Theory
Fredrik Barth made his first attempt to develop an anthropological theory of
entrepreneurship. According to Barth, entrepreneurship has essentially to do with connecting two
spheres in the society, between which there exists a difference in value. Something which is cheap
in one sphere, may be expensive in another sphere. Barth, one of the leading anthropologists of the
world, states that entrepreneurial behaviour means to connect two different spheres in the society,
between which there is a huge discrepancy in value.
Each of the above theories is incomplete and none of them is right or wrong. Theories of
entrepreneurship are inter-disciplinary and are influenced by a multitude of factors. It is the
integration of external environment, achievement motivation, ability and ambition which largely
determines whether an individual become an entrepreneur or not.
1.18 PROBLEMS IN GROWTH OF ENTREPRENEURSHIP
Entrepreneurship is a skill, the resultant of a mix of many qualities, traits and competencies.
Entrepreneurship must be a cluster of many entrepreneurial people devoted to their respective
ventures. Entrepreneurship is nothing unless entrepreneurs give a creative response to the
environment and undertake to establish their enterprise. But devoted, imaginative, hard-working
creative and competent entrepreneurs are not enough to further the process of entrepreneurship.
Entrepreneurship refers to a process of actions taken by entrepreneur in a specific environment. We
can say that entrepreneurship is sum total of entrepreneur and his environment. We have studied
both the aspects of entrepreneurship – and environment. Let us now study that what is obstructing
the growth of entrepreneurship. It is poor entrepreneurs or unhealthy environmental factors or both?
Undoubtedly, entrepreneurship growth in India is slow as compared to other countries.
Women’s entrepreneurship is still slower and rather negligible. As far as development of
entrepreneurship is concerned, the factors responsible for its slow growth are :
(i) Incompetence and poor management;
(ii) Low level of commitment;
(iii) Restriction imposed by custom and tradition;
(iv) Involvement of high risk;
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(v) Socio-cultural rigidities;
(vi) Lack of motivation;
(vii) Lack of infrastructural facilities;
(viii) Lack of communication network;
(ix) Absence of entrepreneurial aptitude;
(x) Low status of businessmen;
(xi) Market imperfections;
(xii) Legal formalities involved to set up a unit
(xiii) Low quality products
(xiv) Low package of salaries to employees
The reasons or the obstacles are many. An enthusiastic entrepreneur starts his venture with
determination but generally ends up with a sick unit. Incompetence of entrepreneur and
environmental factors, both are responsible for his failure. Financial institutions are liberally
sanctioning loans but the permission to commence production is not given in time resulting into
heavy interest and debt burden. Entrepreneurs have to wait for months to get power connection for
their unit making this financial position still more grave and pathetic. Although the government has
simplified the loan procedures to a great extent but realities are different from theory. The
stimulation of entrepreneurship is a function of both internal and external variables. There is no
dearth of men with the right blend of vision and practical sense to become successful entrepreneurs.
But how to identify such persons without a mistake The magnitude of industrial sickness proves and
self-explains the causes of poor growth of entrepreneurship. Everyone cannot become
demonstration model like Shehnaz Hussain or Dhirubhai Ambani or like. The right type of climate
has to be generated. Once it is existing, entrepreneurship becomes a way of life. A mischievous
child cannot be disciplined in a day, similarly, entrepreneurship cannot grow overnight. Growth
also depends upon level of development.
Robert L. Garner quotes, “Development is a state of mind. People have to develop
themselves before they can change their physical environment and this is a slow process….. it
involves changes in relations between classes and races. It requires improvement of governmental
organizations and operations; the extension of social institutions, school, courts and health services.
Habits of thoughts and conduct are the most stubborn obstacles to development’.”
Similar are problems in the growth of women entrepreneurship. Various problems obstruct
the growth of women entrepreneurship.
To name a few, various social factors includes
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(i) lack of education; (ii) dual role of women; (iii) lack of independence; (iv) family burden;
(v) responsibility of rearing the children and their home work; (vi) unfavouring family background
(vii) lack of cooperation from spouse and other family members.
Similarly, economic factors could be the (i) lack of mobility; (ii) problem of getting the loan
sanctioned; (iii) exploitation; (iv) shortage of finance; (v) lack of technical know- how (vi) non-
availability of power and raw-material; (vii) insufficient intrastructural facilities etc.
1.19 DIFFERENCE BETWWEEN ENTREPRENEURSHIP AND INTRAPRENEUR
Basis of difference
Entrepreneur
Intrapreneur
1.
Ownership
Entrepreneur is owner of the
enterprise.
Intrapreneur is dependent on
entrepreneur who performs the task of
innovation.
2.
Status
An entrepreneur is independent in his
operatons.
The intrapreneur is dependent upon
entrepreneur.
3.
Capital formation
Entrepreneur himself forms capital
Intrapreneur does not form capital
4.
Risk
Entrepreneur bears the risk involved
in an enterprise
An intrapreneur does not fully bear
the risk involved in an enterprise.
5.
Operation
An entrepreneur operates from
outside
Intrapreneur operates from within the
organisation.
6.
Guarantee of
investment
Entrepreneur gives guarantee to the
investors for their investment
Intrapreneur himself is a manager, so
he manages from within. Question of
guarantee does not arise.
7.
Management
Entrepreneur manages the enterprise
from outside.
Intrapreneur is a professional
manager.
8.
Professional
qualification
Entrepreneur need not possess
professional qualification
Intrapreneur must possess
professional qualification.
1.20 TYPES OF ENTREPRENEURSHIP
There are various types of entrepreneurship which are as follows :-
(i) Small business entrepreneurship
Today, the overwhelming number of entrepreneur and startups in the United States are still
small business. There are 5.7 million small business in the U.S. They make up 99.7% of all
companies and employ 50% of all non-governmental workers.
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Small businesses are grocery stores, hair dressers, consultants, travel agents, internet
commerce store fronts, carpenters, plumbers, electricians, etc. They are any one who runs his/her
own business. They hire local employees or family. Most are barely profitable. The definition of
success is to feed the family and make a profit not to take over an industry or build a 100 mn
business. As they can’t provide the scale to attract venture capital they fund their business via
friends/family or small business loans.
(ii) Scalable startup entrepreneurship
Unlike small business, scalable startups are what silicon valley entrepreneurs and their
venture investors do. These entrepreneurs start a company knowing from day one that their vision
could change the world. They attract investment from equally crazy financial investor – venture
capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable
business model when they find it, their focus on scale requires even more venture capital to fuel
rapid expansion. Sealable startups in innovation clusters make up a small percentage of
entrepreneurs and startups but because of the outsize returns, attract almost all the risk capital.
(iii) Large company entrepreneurship
Large companies have finite life cycles. Most grow through sustaining innovation, offering
new product that are variants around their core products, shares in customer tastes, new
technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation –
requiring large companies to create entirely new products sold into new customers in new markets.
Existing companies do this by either acquiring innovative companies or attempting to build a
descriptive product inside. Ironically, large company size and culture make disruptive innovation
extremely difficult to execute.
(iv) Social entrepreneurship
Social entrepreneurs are innovators who focus on creating products and services that solve
social needs and problems. But unlike scalable startups their goal is to make the world a better place
not to make market share or to create to wealth for the founders. They may be non-profit, for profit,
or hybrid.
1.21 ENTREPRENEURIAL TRAITS OR COMPETENCIES.
There has been a controversy on what it takes to be a successful entrepreneur. Some people
argue that entrepreneurs are born with the right personality attributes and others insist that any one
can be taught to be an entrepreneurs. In view of above controversy in order to understand clearly
what it takes to be a successful entrepreneurs research institutions and behavioural scientists
through their research studies have tried to resolve the interiorly on what makes a successful
entrepreneur. Following is a lot of major competencies as identified by the Entrepreneurship
Development Institute of India (EDI) Ahmedabad.
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1. Initiative :- The entrepreneur initiates a business activity i.e. he takes the first step to start
an enterprise. He takes initiative that goes beyond enterprise establishment or the demand of the
situation. For example, he does things before being asked or forced by the situation.
2. Passion :- The entrepreneur should possess passion for his enterprise. He therefore, develop
more than a casual interest in the enterprise so that the could overcome various hurdles and
obstacles coming on the way of starting an enterprise. Available evidence indicate that without
passion or consuming interest, business will not succeed. Such a personal or emotional or
consuming commitment to do some thing by giving full try is an example of ‘passion’.
3. Tenacity despite failure
Because of the hurdles and obstacles that must be overcome, the entrepreneur must be
persistent and must not give up easily. Many successful entrepreneurs succeeded only after they had
failed several times. It has been said that successful entrepreneurs do not have failures. They have
learning experiences.
4. Self-confidence
Entrepreneur is a strong believer in his strength and abilities. He believes that he possesses
the ability to accomplish whatever he sets out to do and achieve. The confidence is not unfounded
however. The entrepreneur who believes that “He can” becomes successful.
5. Sheer grit and strong determination
The life history of successful entrepreneurs reveals that they are characterized by self
motivation and strong determination in their goal. They act out of choice. They are never victim of
fate. The entrepreneur believes that the success or failure depends on his own actions. This quality
is known as “internal locess of control’. A person who believes that fate and other outside factors
determine success has an external locus of control and is not likely to succeed as an entrepreneur.
6. Creativity
One of the reason that entrepreneurs are successful is that they have imagination and can
envision alternative scenarios. They have the ability to recognize opportunities that other people do
not see. Here again let us take the example of Henry Ford.
7. Change Seeker
To the most of people change is often frightening and is something to be avoided. But,
successful entrepreneurs see change as normal and necessary. Therefore, they search for change,
respond to it and exploit it as an opportunity. In fact, this exploitation of change is the basis of
innovation. In economics, change is considered a prerequisite for improvement and development.
8. High need for achievement
Many studies have shown that the successful entrepreneurs have ‘high need for
achievement’ than the general population. David. C. McClelland considers it the most crucial
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element to become an entrepreneur. It is the high need for achievement which makes entrepreneurs
act on their ideas. The achievement motive is converted into drive and initiative that results in
accomplishment.
9. Team spirit
Successful entrepreneurs build team and work with teammates. In simple words, team is a
group of individuals who work in a face-to-face relationship to achieve a common goal. They share
collective accountability for the outcome of the team’s effort. Working in teams creates synergy and
achieves success in its endeavours. While appreciating the role of team spirit in success. Henry
Ford’s view seems worth citing “Bringing people together is beginning, keeping people together is
progress and working with people is success”.
10. Information Seeker. A successful entrepreneur always keep his eyes and ear open and is
receptive to new ideas which can help him in realizing his goals. He is ready to consult expert for
getting their expert advise.
11. Quality Consciousness. Successful entrepreneur always keep his eyes and ear open and is
receiptive to new ideas which can help him in relishing his goals. He is ready to consult expert for
getting their expert advise.
12. Proper Planning. Successful entrepreneurs develop or evolve future course of action
keeping in mind the goals to be realized. They believe in developing relevant and realistic plans and
ensure proper execution of the same in their pursuit of attaining their goals.
13. Problem Solver. Successful entrepreneurs take problem as a challenge and put in their best
for finding out the most appropriate solution for the same. They will first of all understand the
problem and then evolve appropriate strategy for overcoming the problem.
14. Assertive. An assertive person knows what to say, when to say, how to say and whom to
say. He believes in his abilities and ensures that others fall in line with his thinking, aimed at
promoting the interests of the organization.
15. Effective Monitoring. Top performers ensure that everything is carried out in their
organizations as per their wishes. They ensure regular monitoring of the working so that the goals
of the organization are achieved in best possible manner.
16. Employees Welfare. Future of the organisation depends on its employees. If the employees
are dedicated, committed and loyal, the organization is bound to perform well. A successful
entrepreneur tries to promote organization’s interests through promotion of interests of the workers.
He takes personal interest in solving problems confronting workers and generates the feeling that
there is interpendence of the interests for workers and the management.
1.22 MEANING OF MOTIVATION
43
Motivation is the inner urge of a person that ignites and sustains behaviour to satisfy need of
himself as well as of the society. Motivation has been derived from the Latin word “Motive” which
implies the inner state of mind that activates, provokes and directs our behaviour towards the goal.
1.23 DEFINITON OF MOTIVATION
According to Mcfarland, “Motivation refers to the way in which urges, drives, desires,
striving, aspirations or needs, direct or explain the behaviour of human beings”. Thus
entrepreneurial motivation may be defined as the process that motivates an entrepreneur into action
and induces him to follow the course of action till the goals are not achieved finally or till the
establishment of an well-established enterprise. In a nut shell motivation includes motives,
behaviours and goals.
“A motive is an inner state that energies, activates or moves and that directs behaviour
towards goals”. – Bernard and Steiner
“Motivation is getting people to do. What you want them to do, because they want to do it”.
– D.D. Eisenhower
“A willingness to expend energy to achieve a goal or reward. It is a force that activates
dormant energies and sets in motion the action of the people. It is the function that kindles a
burning passion for action among the human beings of an organization” – C.B. Memoria
“Motivation represents an unsatisfied need which creates a state of tension or
disequilibrium, causing the individual to make a goal directed pattern towards restoring a state of
equilibrium by satisfying the need”. – Vitiles
1.24 NATURE OF MOTIVATION
Based on above definitions the following points of nature of motivation emerge :
1. Motivation refers to the internal feelings of an individual or individual’s motives.
2. These emotions, feelings or desires of a person prompt him to work more.
3. Unsatisfied needs of an individual disturb his equilibrium, forcing an individual to resort to
a goal directed approach.
4. Motivation activates and channelises dormant energies of an individual towards productive
action.
5. Motivation is linked to satisfaction. Satisfaction is the felling of contentment a person
experiences out of need fulfillment.
6. An individual is motivated in totality and not in parts.
1.25 TYPES OF MOTIVATION
44
In order to extract more out of his subordinates a manager will be required to motivate them
for performing better. This can be done either by offering them reward for more work or by
instilling fear among them in the form of punishment.
Motivation can be of two types and these are :-
1. Positive Motivation. Workers are tempted to put in their best for achieving the desired
objectives. These temptations rewards or incentives can be in the shape of extra pay, promotion,
recognition etc. Positive motivation will result in willing cooperation of workers for the attainment
of organizational goal.
2. Negative Motivation. Negative motivation creates fear or deterrent amongst workers. Fear
forces workers to behave in the way the owner wants them to behave. Workers are coerced to
behave in a certain manner, failing which they are threatened with lay offs, demotions, pay cuts etc.
Workers work not willingly but out of fear.
Out of the two positive motivation should be preferred as it leads to willing rather than
forced cooperation of workers towards the realization of organizational goals.
1.26 IMPORTANCE OF MOTIVATION
Motivation has become all the more important due to the following reasons.
1. Improved Morale. Motivation acts as morale booster for employees. Motivated workers are
tempted to put in their best for the realization of organizational goals. High Morale will result in
more interest in work and higher productivity. It will enable the organisation to produce more at
lower costs. It will have overall positive impact on the interests of the various parties linked with
the business.
2. Lower labour turnover. Motivated employees will never feel like leaving the organisation
and as such the firm will be able to utilize the services of trained, committed and loyal workers for
longer period of time. Organization will be saved from the botheration of making fresh recruitment,
selection, training and placement of workers. Lower labour turnover will result in saving of time,
effort and money of the organisation. Rate of absenteeism will be reduced and workers will try to
promote organizational interest.
3. Improved goodwill. Motivated employees can help the organization in improving its good
will or image. A reputed organization is in a position to attract best possible talent from the market.
Existing employees won’t leave the organization and outsiders will be taken to join.
4. Cordial Industrial Relations. A sound motivational system will promote job satisfaction
amongst workers. Workers will start identifying their interests with the interests of organization due
to positive motivation. The feeling of distrust, conflict or clash of interest will be removed amongst
motivated workers. There won’t be any strike or lockout in the organization and motivation will
ensure cordial industrial relations.
45
5. Quality Orientation. A motivated employee is generally more quality oriented. Everyone
from bottom to top or top to bottom takes extra care while performing the assigned work. It leads to
overall improvement in the working and people start recognizing the organization as a quality
conscious organization.
6. Acceptability of Change. An organisation is required to remain in touch with the changing
scenario and at the same time take effective steps for making adjustments according to changes. Its
survival and future depends upon its ability to cope up with the changes. Motivated employees
rather than opposing changes welcome these. They help the owners in converting these changes into
opportunities to be exploited in the best possible manner for the promotion of business interests.
1.27 THEORIES OF MOTIVATION
Need is the starting point of motivation. A satisfied need does not motivate an individual. It
is only the unsatisfied need which creates tension and stimulate drives within the individuals for the
satisfaction of the need and reduction of tension. The efforts or actions initiated by the individual
will yield results which will lead to satisfaction of need or removal of tension. Classical theories
and scientific management thinkers were of the opinion that people were mainly interested in
maximizing economic gains as they were primarily concerned with satisfying their basic needs of
food, water, air, shelter etc. Thus they tried to link up performance and productivity with monetary
rewards or incentives. F.W. Taylor, father of Scientific Management proposed Differential Piece
Rate system for motivating workers to work at their level best. The traditional thinkers were mainly
concerned with the monetary reward and were treating human beings as mere machines, which do
not have any inner feelings or emotions. Under Hawthorne Experiments, it was proved that there
was not direct relationship between productivity and economic rewards. Money is an essential
condition but not a sufficient one for motivating people to work. Human beings are not machines
and they have also social and psychological needs.
Various researchers are actively engaged in finding answer to one basic question i.e. What
motivates people ? or what makes them work ? Various theories have been propounded by different
experts to focus attention on this basic issue.
Some of the theories which are prominent and relatively more relevant to entrepreneurship
are as under :-
I. MASLOW’S NEED HIERARCHY THEORY
Maslow’s theory is based on human needs. He developed a conceptual framework for
understanding human motivation. He was of the opinion that every individual has a complex set of
exceptionally strong needs and the behaviour of an individual at a particular moment of time is
usually determined by his strongest need. He defined a person’ effectiveness as a function of
matching man’s opportunity with the appropriate position of hierarchy of needs. Process of
motivation begins with the assumption that the behaviour, atleast in part, is directed towards the
achievement or the satisfaction of needs. Maslow felt that the ‘needs have a definite sequence of
46
domination. Second need does not dominate till first need is reasonably satisfied and third need
does not dominate until first two needs have been reasonably satisfied. Man in never fully satisfied,
if one need is satisfied the other will arise and so on. Once a need or certain order of needs is
satisfied, it ceases to be a motivating factor. Maslow stated that human beings have five basic levels
of needs, which they tend to satisfy in a hierarchical manner. He proposed that human needs can be
arranged in a particular order from the lower level needs to the highest level needs. This hierarchy
of human needs can be shown in the following figure.
Maslow’s Need Hierarchy
These five needs can be discussed as follows :
(i) Physiological Needs : These needs are basic and are related to survival and maintenance of
life. These needs comprise of food water, air, shelter, clothing and other necessities of life. The first
priority of human beings is to acquire these basic necessities of life and then move to second level
of needs.
(ii) Safety and Security Needs : After satisfying physiological needs, human beings aim at
satisfying safety and security needs. Human beings are not content with just satisfying present
physiological needs, they want to make provision for the same for future also. They want job
security, personal body security, security of source of income, provision for old age, insurance
against risks etc. Entrepreneurs just like other human beings are guided by all these factors.
(iii) Social Needs : Man is a social animal and wants to belong to a social group where his social
and emotional needs for love, affection, warmth and friendship are satisfied. An entrepreneur too is
interested in conversion, exchange of feelings and grievances with fellow entrepreneurs, his
employees and others. He wants to belong to others and expects that others should belong to him
i.e. the feeling of belongingness.
(iv) Esteem Needs : These needs include self respect, self confidence, recognition, appreciation,
prestige, power & control These are also known as egoistic needs and affect prestige and status of
individuals. Entrepreneur derive status and respect through their ownership and control over their
business.
(v) Self-actualization or Self fulfillment needs : This is the ultimate goal and involves
realizing one’s potentialisities for continued self development. After other needs are fulfilled a man
has the desire for personal achievement. He want to do something which is challenging and since
this challenge gives him enough push and initiative to work It is beneficial to him and the society.
PHYSIO-
LOGICAL
NEDS
SAFETY
NEEDS
SOCIAL
NEEDS
ESTEEM
OR EGO
NEEDS
SELF-
FULFIL
MENT OR
ACTUAL-
ISATION
NEEDS
47
The sense of achievement gives him psychological satisfaction. An entrepreneur can achieve self
actualization in being a successful entrepreneur.
Though the impulse to realize one’s potential is natural and necessary, only a few usually
the gifted ever do so. Maslow himself estimated that less than one percent of the people realize the
need for self actualisaton.
Maslow states three reasons for it.
(i) People are invariably blind to their own potentialities.
(ii) Social environment often stifles development towards self fulfilment.
(iii) The strong negative influence is exercised by the safety needs. The growth process
demands a constant willingness to take risks, make mistakes and to break old habits.
All these result in breaking the safety barriers.
II. MCCLELLAND’S THREE NEED MODEL :
According to David McClelland, “a person acquires three types of needs as a result of one’s
life experience. He tends to develop certain motivation drives as a result of his interaction with the
environment in which he lives.
These three needs are :
1. Need for achievement. It is a drive to excel, advance and grow. This refers to one’s desire
to achieve something with own efforts. People with a high need for achievement derive satisfaction
from achieving goals. These people are often wealthy and their wealth comes from their ability to
achieve goals. High achievers want immediate feedback on their performance and they generally
undertake tasks of moderate difficulty rather than those which are either very easy or very difficult.
These people prefer to work independently so that successful task performance can be
linked to their own efforts rather than to someone else’s McClelland and his associates made
specific suggestions for the development of achievement need and these are -
(i) Give employees periodic feedback on performance. This will provide information
that will enable them to modify or correct their performance.
(ii) Provide good models of achievement. Employees who are successful should be
made available for others to emulate.
(iii) Arrange tasks so that employees can pursue moderate challenges and
responsibilities. Avoid tasks that are either very difficult or very easy.
(iv) As much as possible employees should be able to control their own destiny and
imagination. They should be trained to think realistically and positively about how
they will accomplish goals.
2. Need for power. A drive to influence others and situations. It refers to one’s desire to
influence and dominate others through use of authority. Achievement of goals is less important than
48
the means by which goals are achieved. Alfred Adler was leading advocate of power motive. He
propounded the concept of inferiority complex and compensation. According to him the
individual’s life style is characterized by striving to compensate for the feeling of inferiority which
are combined with innate drive for power. As such there arises need to manipulate others or there is
drive for superiority over others McClelland and his associates have found that people with high
power need have a great concern for exercising influence and control. Such type of people generally
seek positions of leadership and are forceful, outspoken, hard headed and demanding.
3. Need for affiliation : A drive for friendly and close interpersonal relationships. It refers to
one’s desire to establish and maintain friendly relationship with others. People with affiliation need
derive satisfaction from social and inter personal activities. Affiliation plays a very vital role in
human habaviour. McClelland has suggested that people with high need for affiliation usually
derive pleasure from being loved and tend to avoid pain of being rejected. These individuals are
concerned with maintaining pleasant social relationship, enjoying a sense of intimacy and
understanding and enjoy assisting or helping others in trouble.
People possess the above needs in varying degrees and these needs may be simultaneously
acting on an individual. In case of entrepreneurs, need for achievement is more dominating.
McClelland is of the opinion that people with high need for achievement are characterized
by the following :
(i) They set moderate, realistic and attainable goals for them.
(ii) The take calculated risks and look for challenging tasks.
(iii) They prefer situations where in they can take personal responsibility for solving
problems.
(iv) They need concrete feedback on how well they are doing.
(v) Their need for achievement exists not merely for the sake of economic rewards or social
recognition rather personal accomplishment is intrinsically more satisfying to them.
III. ALDERFER’S ERG THEORY :
Clayton Alderfer reformulated Maslow’s need hierarchy theory. According to
Alderfer, Maslow’s five levels of needs can be regrouped under three heads namely Existence,
Relatedness and Growth (ERG)
1. Existence Needs : These existence needs combine the physiological and safety needs of
Maslow. These existence needs can be satisfied by material or financial incentives and include
survival needs, physical & psychological safety etc.
2. Relatedness Needs : These include Maslow’s social and esteem needs which are derived
from other people. These needs are satisfied by personal relations & social interactions.
49
3. Growth Needs : These include Maslow’s self actualization needs. These needs will be
satisfied only if an individual involves himself in activities of the organisation and is always on the
lookout for new challenges and opportunities. Through creative efforts individual can realize his
potential by making best use of the available opportunities.
For the proper development of entrepreneurship, Relatedness and Growth needs are more
important. Alderfer theory assumes that different types of needs can operate simultaneously
whereas Maslow’s theory follows a rigid need hierarchical order.
Very little research exists on the ERG theory of motivation. Still there seems to be some
support for the theory over the need priority model or the two factor theory of motivation. ERG
theory seems to take some of the strong points of the earlier theories, but is less restricting and
limiting. Besides disagreement over the exact number of categories of needs persist. Satisfing needs
is an important part of motivating employees. If a manager finds that a subordinate’s growth needs
are blocked, for whatever reasons, he may attempt to redirect employees behaviour towards
satisfying relatedness or growth needs.
1.28 MEANING OF WOMEN ENTREPRENEUR
Women constitute around half of the total world population. So is in India also. They are,
therefore, regarded as the better half of the society. In traditional societies, they were confined to
the four walls of houses performing household activities. In modern societies, they have come out
of the four walls to participate in all sorts of activities. The global evidences buttress that women
have been performing exceedingly well in different spheres of activities like academics, politics,
administration, social work and so on. Now, they have started plunging into industry also and
running their enterprises successfully. Therefore, while discussing on entrepreneurial development,
it seems fit to the context to study about the development of women entrepreneurs in the country.
The present discussion therefore, aims at discussing the growth and problems of women
entrepreneurs in India. Let us begin with understanding the concept of women entrepreneurs.
1.29 DEFINITION OF WOMEN ENTREPRENEUR
“Women entrepreneur according to government of India is an entrepreneur who runs an
enterprise owned and controlled by her and having minimum financial interest upto 51% of the
capital and giving at least 51% employment to women”.
Thus, women entrepreneur is one who intitiates, organizes and operates a business
enterprise. In developing countries like India, such innovators are found less in number when
compared with other advanced countries.
1.30 FUNCTIONS OF WOMEN ENTREPRENEURS
As an entrepreneur, a woman entrepreneur has also to perform all the functions involved in
establishing an enterprise. These include idea generation and screening, determination of objectives,
project preparation, product analysis, determination of forms of business organisation competitive
50
of promotional formalities, raising funds, processing men, machines and materials and oeration of
business.
Frederick Harbinson has enumerated the following five functions of a woman entrepreneur :
1. Introduction of innovations or imitation of innovations.
2. Exploration of the prospects of starting a new business enterprise.
3. Supervision and leadership.
4. Undertaking of risks and the handling of economic uncertainties involved in business.
5. Coordination, administration and control.
The fact remains that, like the definition of the term ‘entrepreneur’, different scholars have
identified different sets of function performed by an entrepreneur whether man or woman. All these
entrepreneurial functions can be classified broadly into three categories. 1. Risk-bearing, 2.
Organisation and 3. Innovations.
1.31 GROWTH OF WOMEN ENTREPRENEURS
Women in India constitute around half of the country’s population. In the official
proclamation, they are at par with men. But, in real life, the truth prevails otherwise. Our society is
still male-dominated and women are not treated as equal partners both inside and outside four walls
of the house. In fact, they are treated as abla, i.e. weak and dependent on men. As such, the Indian
women enjoy a disadvantageous status in the society. Let some facts be given. The much low
literacy rate (40%), low work participation rate (28%) and low urban population share (10%) of
women as compared to 60%, 52% and 18% respectively of their male counterparts well confirm
their disadvantageous position in the society. Our age old-cultural traditions and taboos arresting
the women within four walls of their houses also make their conditions more disadvantageous.
These factors combined by serve as non-conducive conditions for the emergence and development
of women entrepreneurship is expectedly low in the country. This is well indicated by a dismally
low level of women (5.2%) in total self-employed people in the country.
In India, women entry into business is a new phenomenon. Women entry into business, or
say, entrepreneurship is traced out as an extension of their kitchen activities mainly to 3 Ps, viz,
Pickles, Powder and Pappad. Women in India plunged into business for both pull and push factors.
Pull factors imply the factors which encourage women to start an occupation or venture with an
urge to do something independently. Push factors refer to those factors which compel women to
take up their own business to tide over their economic difficulties and responsibilities. With
growing awareness about business and spread of education among women over the period, women
have started shifting from 3Ps to engross to 3 modern Es., viz, Engineering., Electronic and
Energy. They have excelled in these activities. Women entrepreneurs manufacturing solar cookers
in Gujarat, small foundries in Maharashtra and T.V. capacitors in Orissa have proved beyond doubt
that given the opportunities, they can excel like their male counterparts. Smt. Sumati Morarji
51
(Shipping Corporation), Smt. Yamutai Kirloskar (Mahila Udyog Limted), Smt. Neena Malhotra
(Exports) and Smt. Shahnaz Hussain (Beauty Clinic) are some exemplary names of successful and
accomplished women entrepreneurs in our country.
According to a survey, Bengaluru seemed to be the nation’s top incubator for women entrepreneurs,
followed by Delhi, Chennai, Mumbai, Hyderabad, Pune and Ahmedabad. The major areas of their
business are professional services, IT, Apparels, Travel, Media, Manufacturing etc. Statistics
showed that most women entrepreneurs had small to medium sized enterprises and more than 70%
had less than 5 employees working for them.
1.32 PROBLEMS OF WOMEN ENTREPRENEURS
Women entrepreneurs encounter two sets of problems, viz, general problems of
entrepreneurs and problems specific to women entrepreneurs. These are discussed as follows:
1. Stiff completion : Women entrepreneurs do not have organizational set-up to pump in a lot
of money for canvassing and advertisement. Thus, they have to face stiff competition for making
their products with both organized sector and their male counterparts. Such a competition ultimately
results in the liquidation of women enterprises.
2. Family ties : In India, it is mainly a women’s duty to look after the children and other
members of the family. Man plays a secondary role only. In case of married women, she has to
strike a fine balance between her business and family. Her total involvement in family leaves little
or no energy and time to devote for business. Support and approval of husbands seem necessary
condition for women’s entry into business. Accordingly, the educational level and family
background of husbands positively influence women’s entry into business activities.
3. Male-dominated society : Male chauvinism is still the order of the day in India. The
Constitution of India speaks of equality between sexes. But in practice, women are looked upon as
abla, i.e. weak in all respects. Women suffer from male reservations about a woman’s role, ability
and capacity and are treated accordingly. In nutshell, in the male-dominated Indian society, women
are not treated equal to men. This, in turn, serves as a barrier to women entry into business.
4. Problem of finance : Finance is regarded as “life-blood” for any enterprise, be it big or
small. However, women entrepreneurs suffer from shortage of finance on two counts. Firstly,
women do not generally have property in their names to use them as collateral for obtaining funds
from external sources. Thus, their access to the external sources of funds is limited. Secondly, the
banks also consider women less creditworthy and discourage women borrowers on the belief that
they can at any time leave their business. Given such situation, women entrepreneurs are bound to
rely on their own savings, if any, and loans from friends and relatives which are expectedly meager
and negligible. Thus women enterprises fail due to the shortage of finance.
5. Scarcity of raw material : Most of the women enterprises are plagued by the scarcity of
raw material and necessary inputs. Added to this is the high prices of raw material on the one had,
and getting raw material at the minimum of discount, on the other. The failure of many women co-
52
operatives in 1971 engaged in basket making is an example of how the scarcity of raw material
sounds the death-knell of enterprises run by women.
6. Limited mobility : Unlike men, women mobility in India is highly limited due to various
reasons. A single woman asking for room is still looked upon with suspicion. Cumbersome exercise
involved in starting an enterprise coupled with the officials’ humiliating attitude towards women
compels them to give up the idea of starting an enterprise.
7. Low risk-bearing ability : Women in India lead a protected life. They are less educated
and economically not self-dependent. All these reduce their ability to bear risk involved in running
an enterprise. Risk-bearing is an essential requisite of a successful entrepreneur.
8. Lack of education : In India, around three-fifths (60%) of women are still illiterate.
Illiteracy is the root cause of socio-economic problems. Due to the lack of education and that too
qualitative education, women are not aware of business, technology and market knowledge. Also
lack of education causes low achievement motivation among women. Thus, lack of education
creates problems for women in setting up and running business enterprises.
9. Legal formalities : Women entrepreneurs find it extremely difficult to comply with various
legal formalities in obtaining licenses etc.
In addition to above problems, inadequate infrastructural facilities, shortage of power, high
cost of production, social attitude, low need for achievement and socio-economic constraints also
hold the women back from entering into business. According to Pandit Jawahar Lal Nehru, the then
Prime Minister of India, “When woman moves forward, the family moves, the village moves and
the nation moves”.
1.33 REMEDIES FOR THE PROBLEMS OF WOMEN ENTREPRENEURS
Once an enterprise starts, the difference between a male and female must be forgotten
because an entrepreneur is an entrepreneur, business is business and profit and loss strictly depend
upon entrepreneurial competencies. In order to make the women entrepreneurs to start the business
venture, the following measures can be taken :
1. Proper supply of raw materials : Women entrepreneurs should be ensured of proper
supply of scarce raw materials on priority basis. A subsidy may also be offered to make the
products manufactured by women entrepreneurs cost competitive and reasonable.
2. Creation of finance cells : The Financial Institutions and banks which provide finances to
entrepreneurs must create a special cell for providing easy finance to women entrepreneurs. For the
convenience of such entrepreneurs, these cells should be manned by female staff.
3. Changing the social attitudes : It is absolutely necessary to change the negative social
attitudes towards women. The elders particularly mothers and mother-in-law, need to be made
aware of the potentiality of the girls and their role in the family and society. Unless the social
attitudes are made positive through education and awareness programmes, the women entrepreneurs
cannot get the required support from their family members.
53
4. Concessional rate of interest : The women entrepreneurs should be provided finance at
concessional rates of interest and at easy repayment basis. The cumbersome formalities should be
avoided in sanctioning the loans to women entrepreneurs.
5. Setting up marketing co-operatives : Proper encouragement and assistance should be
provided to women entrepreneurs for setting up marketing co-operatives. These cooperatives shall
help in getting the inputs at reasonable rate and they are helpful in selling their products at
remunerative prices. Hence, middlemen can be avoided and women entrepreneurs can derive
maximum benefits of enterprises.
6. Offering training facilities : Training is essential for the development of entrepreneurship.
It enables the women entrepreneurs to undertake the venture successfully as it imparts required
skills to run the enterprise. Additional facilities like stipend, good hygienic crèches, transport
facilities etc. can be offered to attract more and more women entrepreneurs. Presently, the
economically weaker entrepreneurs of the society are offered such training facility under Prime
Minister’s Rozgar Yojana (PMRY). FICCI, Lions club, Rotary club and other voluntary
organizations can also arrange such training programmes for women entrepreneurs.
Thus, proper education, comprehensive training, setting up of separate financial cells,
development of marketing co-operatives to a large extent will help to flourish the women
entrepreneurship in India. Further, both government and non-government agencies should play an
important role to solve the problems of women entrepreneurs.
1.34 SUMMARY
• The word ‘entrepreneur’ is derived from French word ‘Entrepreneur’ which was used to
designate on organizer of musical or other entertainment.
• Entrepreneur is a person of telescopic faculty drive and talent, who perceives business
opportunities and promptly seizes them for exploitation.
• An entrepreneur has to perform a number of functions right from the generation of idea upto the
establishment of an enterprise.
• Entrepreneurship is a set of activities performed by an entrepreneur. Entrepreneurship is
influenced by economic, social and psychological factors.
• A successful entrepreneur must be a person with technical competence, initiative good
judgement, Intelligence leadership qualities, self-confidence, energy, attitude, creativeness,
fairness, honesty, tactfulness and emotional stability.
• The particular set of cultural arrangements adopted by a society is influenced by the physical
environmental factor as well as man’s attitude and desire to improve his habitat.
• The culture of a given society is also influenced by contacts with other cultural groups.
1.35 SELF ASSESSMENT QUESTIONS
1. Explain in brief the concept of entrepreneur.
2. Give various definitions of entrepreneur.
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3. Enumerate the characteristics of entrepreneur.
4. Distinguish between entrepreneur and manager.
5. Explain in brief the functions of entrepreneurs.
6. Explain in brief classification of entrepreneurs.
7. Explain in brief the concept of entrepreneurship.
8. Explain in brief the evolution of concept of entrepreneurship in India.
9. Explain in brief the role of entrepreneurship in economic development.
10. Write a note on barriers of entrepreneurship.
11. Write the short notes on entrepreneurship culture.
12. Define motivation and discuss its importance.
13. Discuss various theories of motivation.
14. Define women entrepreneur and discuss its functions.
15. Define various problems of women entrepreneurs.
16. What are the remedies for the problem of women entrepreneur.
55
UNIT-2
ENVIRONMENT AND ENTREPRENEURIAL DEVELOPMENT
AIMS AND OBJECTIVES
After studying this unit you will be able to:
• Understand Entrepreneurial Environment
• Define Economic Environment & Social Environment
• Define socio-economic environment in the emergence of entrepreneurship.
• Understand Entrepreneurial Development Programme
• Define Role, Relevance and Achievements of Entrepreneurial Development
Programme
• Understand Institutional Support to EDP
• Define Financial Institutions that Provide Finance to entrepreneurship.
CONTENTS
2.0 Entrepreneurial Development
2.1 Meaning of Entrepreneurial Development
2.2 Environmental factors
2.3 Socio-economic environment in the emergence of entrepreneurship
2.4 Meaning of EDPs
2.5 Definition of EDPs
2.6 Objectives of EDPs
2.7 Need of EDPs
2.8 Evaluation of EDPs
2.9 Problems in the conduct of EDPs
2.10 Suggestions to make EDPs successful
2.11 Organizing product/ process oriented EDPs
2.12 Course contents of EDP
2.13 Role of Entrepreneurial Development Programme
2.14 Relevance of Entrepreneurial Development Programme
2.15 Achievements of EDPs
2.16 Financial Institutions ^provide finance to entrepreneurship at National
2.17 Institutional support to small entrepreneurs
2.18 Specialized Institutions
2.19 Institutional support for EDPs
2.20 Summary
2.21 Self Assessment Questions
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ENVIRONMENT AND ENTREPRENEURIAL DEVELOPMENT
2.1 ENTREPRENEURIAL ENVIRONNENT
Meaning: Entrepreneurial Environment is a combination of factors that play a role in the
development of entrepreneurship first, it refers to the overall economic, socio-cultural and political
factors that influence people’s willingness and ability to undertake entrepreneurial activities.
Various economic social, political, technological and psychological factors and responsible
for growth by entrepreneurship. Entrepreneurship environment refers to the various positive and
negative constraints within which various enterprises are required to operate. The environment
especially the external environment is highly dynamic. It keeps on changing and affects different
organizations to a varying extent. The degree or extent of environmental impact depends upon the
extent upto which the organization depends on it and the organizational response to the changes in
environment. An entrepreneur should understand the behaviour of key environmental forces that are
going to affect the present and future operations of the enterprise. The post independence period has
witnessed tremendous social, economic and political changes, which have directly or indirectly
influenced environment of entrepreneurship. During the last decade many established big business
houses have yielded competitive advantage to relatively new entrants. In the automobile sector
Hindustan Motors and Premier automobiles had to meekly surrender their market share to Maruti
Udyog Limited and the same story was repeated in the detergent market wherein a relatively
unknown new entrant Nirma grabbed major market share of Surf, a product produced and marketed
by a reputed multinational corporation i.e. Hindustan Lever. All these examples clearly highlight
the fact that an enterprise, howsoever big or reputed, cannot afford to remain insensitive to the
external environment. It must identity the opportunities presented by the environment and exploit
them in the best interests of the organization. No enterprise can afford to ignore the threats arising
out of environment and in its interests, it must chalk out corrective measures for minimizing
adverse impact of these threats.
2.2 ENVIRONMENTAL FACTORS
The following environmental factors are:
I. ECONOMIC ENVIRONMENT
One of the most important factor affecting entrepreneurship is economic environment. It
comprises of capital, labour, raw material and market demand.
(a) Capital: Capital is one of the most important factor of production for the establishment of an
enterprise. Adequate funds are required for bringing together other factors of production. It is with
the capital that other factors of production like labour, raw material, machinery etc. can be arranged.
Capital acts as a lubricant for the production process. Increase in capital investment in viable
57
projects result in increase in profits which help in accelerating the process of capital formation.
Entrepreneurship activity too gets a boost with the easy availability of funds for investment.
(b) Labour: Easy availability of right type of workers also effect entrepreneurship. The quality
rather than quantity of labour influences the emergence and growth of entrepreneurship. The
advantages accruing to an entrepreneur due to low cost labour are often offset by the disadvantages
arising out of immobility of unskilled workers. The disadvantages arising out of immobility and
high cost labour can be better tackled by resorting to capital intensive technologies. But a country
like India, confronted with the twin problems of unemployment and shortage of capital, cannot
afford to adopt capital intensive technologies. Labour intensive rather than capital intensive
technology will serve our interests in a better manner. The problem of labour immobility can be
solved by providing infrastructural facilities including efficient transportation, wherever
entrepreneurship is to be promoted.
(c) Raw Material: Raw material is one of the basic ingredient required for production. Shortage
of raw material can adversely affect entrepreneurial environment. Without adequate supply of raw
materials no industry can function properly and emergence of entrepreneurship too is adversely
affected. Shortage, high prices and inferior quality of raw materials are the major problems
confronting entrepreneurs. The more favourable are these conditions, better would be its influence
on entrepreneurial emergence.
(d) Market: The role and importance of market and marketing is very important for the
emergence and growth of entrepreneurship. Monopoly in a particular product line is more tempting
to an entrepreneur than a competitive market. In the modern competitive world no entrepreneur can
think of surviving in the absence of latest knowledge about market and various marketing
techniques. The benefits of improved and healthy market conditions in the environment on
entrepreneurial growth are self evident. Germany and Japan are examples where rapid improvement
in market was followed by rapid entrepreneurial appearance. Entrepreneurs should keep track of
main trends in the economic environment. Market demand depends upon purchasing power, which
in turn depends upon current income, prices, savings and availability of credit. Changes in major
economic variables like money income, cost of living, interest rates, savings and credit availability
have an immediate impact on the working of an enterprise.
II. SOCIAL ENVIRONMENT
Social environment strongly affect the entrepreneurial behaviour which contributes to
entrepreneurial growth. The social setting in which the people grow, shapes their basic beliefs,
values and norms. The social factors can be (i) Family background (ii) Friends, relatives and
teachers, (iii) Religion, (iv) Social status (v) Social mobility and social marginality.
58
Family background greatly influences the entrepreneurial environment and maintenance of
social system. The environment of the family affect entrepreneurship. Joint family can provide
family resources to invest and expand family business. If the father is a professional entrepreneur or
businessman, the son is more likely to enter the same line because of certain inherent advantages.
Background of a family in manufacturing provide a source of industrial entrepreneurship. Mobility
of the entrepreneur is influenced by the occupational and social status of the family. Social status
too affect entrepreneurship.
All human beings aspire for high social status and on attaining a particular level they start
aspiring for higher & higher levels. People become quite responsible in their pursuit of protecting
and developing their status. Chester I Bernard believes that the desire for improvement and
protection of status, forces people to behave responsibly. People work hard to maintain and improve
their status, and it contributes to entrepreneurial growth.
Caste and religion of entrepreneur are contributory factors of entrepreneurial growth. Some
of the castes have inculcated in themselves a particular culture that fosters entrepreneurship. In
India certain ethnical communities engaged in trade and industry for centuries like Jains, Baniyas,
Vaishyas and Khatris have been the dominant sources of entrepreneurship. Similarly certain
religious communities like the Parsees, Marwaris and Sindhis have inclination for industrial activity
and this has definitely helped in the emergence and growth of entrepreneurship. A person is likely
to assume the guidelines or rules of the reference group to which he belongs. The reference group
can be religious groups, close circle of friends and relatives. The prospective entrepreneur would
discuss his business ideas with them artd seek their advice before starting a new business.
Social mobility involves the degree of social and geographical mobility and the nature of
mobility within the system. The opinion that social mobility is crucial for entrepreneurial
emergence is not unanimous. There are persons of the view point that high degree of mobility is
conducive for the emergence of entrepreneurship. At the, same time there are others of the opinion
that lack of mobility would result in the emergence of entrepreneurship. There are still fee others
putting forth the argument that the system should not be too flexible nor too rigid because the
former would pull the entrepreneur away from his role and latter would restrict the entrepreneur.
Social marginality also positively influences entrepreneurship. Social marginality implies a
situation in which there is a discontinuity between the individuals personal attributes (comprising of
physical characteristics, intellectual make up and social behaviour patterns) and the role or roles
which the individual plays in the society. A person belonging to a social group traditionally
constrained to enter economic activity and barred from any other activity by the society is expected
to choose the ownership manager role in a small industry. The number of openings available also
affect the emergence of entrepreneurship. Expanding economy and increase in per capita income
59
give boost to the entrepreneurial activity. Similarly, the pace of structural change in the economy
opens new opportunities| for the prospective entrepreneurs.
III. PSYCHOLOGICAL FACTORS
McClelland developed theory of Achievement Motivation.-Achievement motivation is a
drive to overcome challenges. According to McCelland a constellation of personality characteristics
which are indicative of high
:
need achievement is the major determinant of entrepreneurship
development.
If the average level need achievement in a society is relatively high, one can expect a
relatively high amount of entrepreneurship in the society. The trait of need for achievement is not
by birth and can be developed through intensive training programmes. In India, Small Industries
Training Institute (SIET) Hyderabad and Small Industries Service Institutes (SISI) and others all
over India are extensively conducting training programmes aimed at generating confidence amongst
new entrepreneurs. In Kakinada Experiment, McClelland carried out a full fledged programme in
Kakinada City of Andhra Pradesh. The training was to be given to a group of persons and was
designed primarily to stimulate the imagination and encourage introspection of personal motivation
and community goals. McClelland concluded that those participating in the programme
displayed a more active business behaviour and worked for longer time. He found that caste
traditional beliefs or even western ways of life did not determine the mental make up of
participants. McClelland explains that people with low achievement motivation are prepared to
work hard for money or other such incentives but the people with high achievement motivation
work for status.
He states that people with high need for achievement possess the following attributes
(a) Prefer personal responsibility for decisions
(b) Are moderate risk takers and
(c) Possess interest in complete knowledge of the results of decisions.
McClelland believes that achievement motivation can be developed through intensive
training programmes.
Hagen was of the opinion that the withdrawal of status respect of a group led to the
emergence of entrepreneurship in Japan.
Hagen states that the initial conditions leading to eventual entrepreneurial behaviour is the
loss of status respect by a group and four different types of events can produce status withdrawal—
(a) The group may be displaced by force.
(b) It may have its value symbols denigrated.
(c) It may drift into a situation of status inconsistency.
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(d) It may not be accepted into expected status on migration in a new society. Whenever there is
any withdrawal of status respect it would lead to four different responses and create four
different types of personalities.
(a) Retreatist. It refers to the person who continues to work in the society but remains
indifferent to his work and position.
(b) Ritualistic. He is the type of person who adopts a kind of defensive behaviour and acts in a
way accepted and approved in his society but with no hope of improving his position.
(c) Reformist. He is the one who forments a rebellion and attempts to establish a new society.
(d) Innovator. A creative individual who is likely to be an entrepreneur.
Hagen believes that creative personalities emerge when the members of some social group
experience the withdrawal of status respect. Innovation, which is basic for the emergence of
entrepreneurship, requires creativity and such creative individuals act as catalytic agents for
economic growth.
IV. ATTITUDE OF GOVERNMENT
Government all over the world can play a very important role in the emergence of
entrepreneurship. Positive actions by the government can facilitate-grow-potent influence
entrepreneurial emergence and growth. The Industrial Policy framed by the government proves to
be crucial factor for the setting up of industrial units. The government by providing right type of
infrastructural facilities and other incentives can definitely play a positive role leading to the
emergence of entrepreneurial class and setting up of more and more viable industrial units. The
supportive actions of the government help in creating conducive environment which finally leads to
entrepreneurial growth. It is only due to the various steps initiated by the government under
development planning over years that positive environment for entrepreneurial growth has been
created. The slogan 'Export or Perish' led to export promotion.
The government took three important steps in various industrial resolutions.
(a) To maintain a proper distribution of economic power between private and public sector.
(b) To encourage the tempo of industrialisation by spreading entrepreneurship to every city,
town or village.
(c) To disseminate the entreprenurial talent concentrated in a few dominant communities to a
large number of people of varied social and economic groups.
It is the government which regulates business activities. Government policies are going to
influence all the decisions of the entrepreneurs regarding what to produce, how much to produce, of
what quality to produce, where to produce and for whom to produce. The entrepreneurs are to
operate within the concessions and limits set by the government. It is in the interest of the potential
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entrepreneur to thoroughly scan the government policies before taking decision with regard to
setting up his enterprise.
V. EDUCATION AND TECHNICAL KNOW-HOW
Education, entrepreneurship and development are interrelated. Education helps in the
development of capabilities of individuals which facilitates the emergence and growth of
entrepreneurship. An alert entrepreneur, in order to survive in the modern competitive world, has to
keep an eye over the technological advances taking place around. These technological
developments provide opportunities for the entrepreneurs to develop and produce new products.
Moreover various studies too have revealed that many entrepreneurs have been driven to the
threshold of entrepreneurship for making use of their technical and professional skills. After
acquiring these skills they want to use these skills for themselves rather than benefiting others by
taking employment. Thus, the high level of education and training may enable the entrepreneurs to
use their entrepreneurial talent more effectively and efficiently.
VI. FINANCIAL ASSISTANCE
Liberal financial assistance on easy terms & conditions act as a motivating force for
boosting the morale of the young entrepreneurs to set up their own enterprises. To create an
environment conducive to entrepreneurial growth, a policy of support and incentive has been
introduced by the government. Various types of subsidies, concessions and facilities are extended to
attract entrepreneurs in backward areas. The government of various states have floated various
schemes aimed at providing adequate financial assistance to the entrepreneurs on easy terms and at
low rate of interest.
VII. MOBILITY OF ENTREPRENEURS
Mobility refers to the drive in the entrepreneurs to locate green postures for setting up their
units. It is an urge to move to other places in search of better opportunities. In India, Marwaris,
Sindhis and Sikhs have moved to every corner of India and abroad to carry on business and
entrepreneurial activities. This will help in reducing regional imbalances in economic growth. In the
initial phase of industrialization, entrepreneurs set up their units at or near their places due to
limited resources, communication, bottlenecks and absence of institutional support. An entrepreneur
after tasting success and gaining experience is ready to make investment anywhere. He is always on
the lookout for opportunities, which can be exploited for furthering his business interests. He is not
tied to any place and is ready to move to any place wherever viable business opportunities exist.
VIII. COMPETITIVE FACTORS
No prospective entrepreneur can afford to ignore competitive factors. Study of competitive
factors covers members of competing firms, their scale of operation, product range and features,
prices, channels of distribution, terms & conditions of sale etc.
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Michael E Porter states the following four factors for the analysis of industry and
competitors.
1. Existing and Potential Extranets. Various aspects studied are capital requirement, scale of
operation, product differentiation, channels of distribution etc. Threat perception from
existing and potential extranets is scanned under this head.
2. Bargaining Power of Buyers. Keeping in mind demand and supply position, bargaining
power of buyers is studied.
3. Bargaining Power of Suppliers. Bargaining power of suppliers of raw materials and other
factors can be assessed keeping in mind the demand and supply position.
4. Availability of Substitutes. Demand for a particular product will depend upon the
availability and prices of substitutes.
IX. COMPETITIVE OR INDUSTRIAL ENVIRONMENT
An industry comprises of group of enterprises offering similar products or services. Industry
includes close substitute products or services that satisfy same consumer needs. No prospective
entrepreneur can afford to ignore competitive factors. Study of competitive factors covers members
of the competing firms, their scale of operation, product range and features, prices, channels of
distribution, terms and conditions of sale etc. An entrepreneur as a strategic manager has to analyse
competitive forces in industrial opportunities and threats that a company will meet.
2.3 SOCIO-ECONOMIC ENVIRONMENT IN THE EMERGENCE OF
ENTREPRENEURSHIP.
Entrepreneurship does not emerge & grow spontaneously. Rather it is dependent upon
several economic, social, political & legal factors. An entrepreneur should understand the behaviour
of key environmental forces that have an implication on the enterprise & get a grasp of the
technique for environmental scanning.
The socio-economic environment plays a crucial role in governing entrepreneurial acumen
among the people. The growth of entrepreneurship depends on a favourable socio-economic
environment. Environment is the aggregate of external factors within which the enterprise operates.
In order to achieve success the entrepreneur has to operate and adapt themselves to different
situations of the environment.
(A) Social Environment:
A conducive & congenial social environment helps in manifold increase of entrepreneurial
activities. Social environment presupposes a number of social factors which are critical for the
growth of entrepreneurship. These factors are:
(i) Family background
(ii) Caste & religion
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(iii) Kith & Kin
(iv) Social status
(v) Social mobility
(vi) Social marginality
(i) Family Background :
This is one of the most crucial factor influencing the entrepreneurial movement. This
comprises of family size, type of family, status of family etc. In India, there are joint or nuclear
family which have wider impact on the running of the enterprise. There is more emotional
attachment of family members in a joint family which influences the entrepreneurship supply to a
greater extent. For example, if father is a businessman or professional, son is likely to adopt the
same occupation and continue the business or profession of the father.
(ii) Caste & Religion :
In India, caste and religion of the entrepreneur also plays an important role in influencing
entrepreneurial emergence and growth. Specific castes & religions in the society exhibit more
entrepreneurial talent than their counterparts as they have possessed latent potential and specialized
culture which helps to foster entrepreneurship. For example, Parsis & Marwaris of Maharashtra,
Vysyas of Andhra Pradesh. Jains of Gujarat & Rajasthan, Sikhs of Punjab have exhibited
extraordinary entrepreneurial talent in enterprise building & management. But in recent times this
trend is changing. Entepreneurial traits do not belong to any specific caste or religion, rather they
emerge from varied communities and religions.
(iii) Kith & Kin :
Entrepreneurial initiatives are influenced by kith & kin, friends, relatives, well wishers,
teachers & trainers. They exert considerable influence in decision-making process for starting a
particular business which has significant effect on creation of entrepreneurship. A person is likely to
adopt the guidelines or rules of the reference group to which he belongs.
(iv) Social Status :
Social status plays a very important role in the growth of entrepreneurship. Every human
being aspires to be a man of high social esteem in the society. This aspiration drives him to be self-
propelled & entrepreneurial in his activities & once he achieves a reasonable level, his aspiration &
desires for it starts getting multiplied. People are very much interested in protecting and developing
their status.
(v) Social Mobility:
Social mobilities involves the degree of social & geographical mobility & nature of mobility
channels within a system. This factor greatly influences the emergence of entrepreneurship. There
are different opinions on the influence of social mobility on the entrepreneurial environment.
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Hoselitz & McClelland are of the view that openness of a system and flexibility in role relations
reveals an imperative role of mobility within a system of entrepreneurship movement. High degree
of social mobility would help in promoting entrepreneurial talents, thereby paving the way for
entrepreneurial development. In the view of Hagen, lack of mobility promotes entrepreneurship.
(vi) Social Marginality :
Social marginality has also considerable impact on the entrepreneurial growth. The persons
from socially marginal classes often come forward and show keen interest in choosing
entrepreneurship as their career.
(vii) Social Values :
Social values and the philosophy of a country play a predominant role in the growth of
entrepreneurial culture in the society. Ideologies of the society like freedom, democracy,
secularism, emancipation of weaker sections, fair play, tolerance, social justice & non-violence also
influence the promotion of entrepreneurship.
B. Economic Environment:
Economic environment refers to those economic factors which influence the entrepreneurs
in identifying the business opportunities & giving their decision to finalize the ventures out of those
opportunities that are economically viable & financially feasible. The following are the most
important economic factors which very often affect entrepreneurship.
(i) Capital requirements;
(ii) Availability of labour;
(iii) Availability of raw materials
(iv) Market demand
(i) Capital Requirements : Capital is one of the most important factor affecting almost all
related elements such as raw materials, labour, machinery etc. Adequate funds are required for
bringing together other factors as they can be arranged with the help of capital. Entrepreneurship
activity too gets a boost with the easy availability of funds for investment. Investment decisions are
generally influenced by the availability of both fixed & working capital. Economic & financial
environment should be conducive so as to broaden the base of availability of capital so as to
accelerate entrepreneurial development.
(ii) Availability of Labour: Easy availability of quality labour rather than quantity also affects
the emergence & growth of entrepreneurship. The disadvantages arising out of immobility & high
cost labour can be better tackled by resorting to capital intensive technologies. But a developing
country like India, cannot afford to adopt capital intensive technologies because of the acute
problems of high rate of unemployment & shortage of capital. Labour intensive rather than capital
intensive technology will serve our interests in a better manner.
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(iii) Availability of Raw Materials : Raw materials is one of the basic ingredients required for
production. Shortage of raw materials can hamper the entrepreneurial growth. No industry can
function and prosper without adequate supply of raw materials which in turn adversely affects
entrepreneurship development. Hence, availability of materials in right quantity, of good quality, at
right prices & at right place influences the growth of entrepreneurship in the right direction. The
more favourable these conditions, the better would be its influence on entrepreneurial emergence.
(iv) Market & Market incentives: The knowledge of market & marketing cannot be
underestimated for the development of entrepreneurship. Hence, the entrepreneur must possess the
knowledge & track of main trends in the marketing environment to survive for a longer period in
the market. The size & composition of market, the knowledge of marketing techniques or strategies
adopted by competitors in the market shall influence the emergence & growth of entrepreneurship.
ENTREPRENEURIAL DEVELOPMENT PROGRAMME (EDP)
2.4 Meaning of EDP
Entrepreneurial development is a process by which persons are prepared to face business
uncertainties and risks through proper education, training, motivation, orientation and re-orientation
of entrepreneurs.
Entrepreneurial development programme plays very important role in the development of
business and industry. EDPs are based on the thinking that the attitude of people can be changed by
developing their skill, so that they can convert their ideas into an organization. It is not a training
programme but it is a technique which helps to increase motivation, working capacity and
knowledge of the prospective entrepreneurs.
An entrepreneurial development programme is a process to help the entrepreneur in
strengthening and fulfilling his motive and in acquiring skills and capabilities to promote and
manage his enterprise efficiently and effectively.
2.5 DEFINITION OF EDP
According to C.B. Gupta & N.P Srinivasan, development of an entrepreneur means
inculcating entrepreneurial traits into a person, imparting requisite knowledge, developing the
technical, mechanical, financial and marketing skills and building the entrepreneurial attitude.” The
process of entrepreneurial development involves equipping a person with the relevant information
needed for enterprise building and sharpening his entrepreneurial class.
In the words of Joseph. E. Steparek, “intelligence, motivation, knowledge & opportunity are
the pre-requisites for entrepreneurial development.”
It has been rightly pointed out that entrepreneurial development is a prerequisite
qualification for an overall economic development of any country.
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The importance of small scale industries in employment creation and economic
development made the government realise & envisage promotional packages facilitating the
establishment of new enterprises. To promote entrepreneurial growth, the policy makers and
financial institutions started thinking in terms of imbibing entrepreneurial culture through training
interventions & thus, the emergence of entrepreneurial development programmes.
Entrepreneurial Development Programme may be defined “as programme designed to help
individuals to strengthen his entrepreneurial motive by acquiring skills and capabilities necessary
for playing his entrepreneurial role effectively.”
The EDP, considered as an effective human resources development programme, helps in
removing unemployment, promotion of small scale units, development of industrial regions, overall
economic development etc.
2.6 OBJECTIVES OF EDPs
(i) To accelerate the pace of industrial development by enlarging the supply of entrepreneurs;
(ii) Inculcating entrepreneurial qualities and motivating the prospective entrepreneurs to achieve
the goal;
(iii) Promoting the growth of small and medium scale enterprise sectors offering better potential
for employment generation & dispersal of industrial units;
(iv) Providing productive self-employment avenues to a large number of educated and less
educated unemployed young men & women passing as well as dropping out of schools &
colleges;
(v) Improving the performance of small & medium-scale industries with the help of carefully
selected and trained entrepreneurs and diversifying the sources of entrepreneurship;
(vi) To industrialize rural and backward areas.
(vii) To improve managerial skills of entrepreneurs.
An entrepreneurial development programme highlights the fact that an individual can be
developed, their outlook can be changed and their ideas can be given a true shape of enterprises
through an organized and systematic programme. Entrepreneurial development programme is not
only a training programme but also a technique of enhancing the motivation, skills and knowledge
of the potential entrepreneur, simultaneously aiming at arousing and reforming the entrepreneurial
behaviour in their day-to-day activities and helping them develop their own ventures or enterprises.
In other words, the process of entrepreneurial development involves equipping a person with the
information necessary for enterprise building and shaipening his entrepreneurial skills.
2.7 NEED OF EDPs
The Entrepreneurship Development Programme may be regarded as an important,
innovative breakthrough in the strategy for developing human resources and promoting economic
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development of the country. In the words of A. N. Oza; the EDP is an innovation in which those
persons possessing certain distinct qualities of entrepreneurship undergo counselling, motivation
and training in order to strengthen their self-confidence, seize a business opportunity, initiate an
enterprise and be the master of his destiny i.e., to become entrepreneurs instead of passively waiting
for suitable employment or continue suffering from frustration in their current jobs. In the above
backdrop, the role of EDP can be considered as the most important tool to tackle- the problems of
poverty and widespread chronic unemployment through rapid growth of small scale industrial
sector in India.
Entrepreneurial development being an organised and systematic development results in the
proper utilisation of local resources, generating more employment opportunities, promotion of small
scale units & overall development of an area. One trained and successful entrepreneur can become a
role model for others to follow. In other words, trained entrepreneurs act as catalysts of industrial
development and economic progress. EDP is a comprehensive programme comprising the
following process :
(i) Enhancing the motivation, knowledge and skills of the potential entrepreneurs.
(ii) Arousing and reforming the entrepreneurial behaviours in their day-today activities.
(iii) Assisting them in the development of their own enterprise. EDPs not only instills confidence
amongst participants but also prepares them to face numerous problems confronting
business with patience and boldness.
EDPs are becoming increasingly popular now-a-days and this can be judged on the basis of
the following points :
1. Eliminates Poverty & Unemployment: The twin problems of poverty and unemployment are
the major obstacles in the path of economic development that most of the developing and under
developed countries have to dealt with. EDPs provides an answer to solve the above problems to a
greater extent by helping unemployed people to opt for self-employment thereby creating job for
themselves as well as for others in the process.
Under different five-year plans in India, a number of schemes such as IRDP, ERRP, SGSY,
PMRY, REGP, NREP, etc., were introduced from time to time to solve the problems ot poverty and
unemployment by inducing the people to take up self-employment activities or entrepreneurship as
an alternative to wage employment.
2. Balanced Regional Development: Successful EDPs not only helps in accelerating the pace
of industrialisation but also results in reduction of concentration of economic power in the hands of
few. Small scale units can be put up in industrially backward and remote areas with limited
financial resources which help in achieving balanced regional development. The Government in
order to encourage the entrepreneurs to set up more small scale units in the backward regions to
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promote balanced regional development of areas has offered several incentives, concessions and
subsidies. EDPs aimed at promoting small scale units are more useful for balanced regional
development than medium and large scale units.
3. Prevents Industrial Slums : Industrially developed areas are faced with the problems of
industrial slums resulting in overburdening of civic amenities and having adverse impact on the
health of the people. EDPs help in the removal of these slums as entrepreneurs are provided with
various schemes, incentives, subsidies & infrastructural facilities to set up enterprises of their own
in the industrial backward areas. This not only helps in preventing the industrial slums but also
reduces pollution, traffic congestion, overcrowding in development areas and overtaxing of civic
amenities.
4. Utilizing Locally Available Resources : Local resources remain unutilized until the absence
of any initiation to develop that area industrially and that too at lower cost. Alert entrepreneurs seize
the opportunity and exploit it in the best interests of the area and industry. The EDPs can help in
harnessing locally available resources by providing guidance, training and education to the
entrepreneurs and assist in setting up industrial units which will lead to creation of a healthy base
for sound economic growth and rapid industrialisation.
5. Reducing Social Tension : Unemployment amongst the young and educated people is a
major cause of concern as the meer frustration of not getting gainful employment and the lure of
money may compel them to indulge in antisocial and anti-national activities resulting in social
unrest. EDPs helps in channelizing the talent of this section of the society in the right direction by
proper guidance, training and assistance for setting up their enterprises which results in the
generation of self-employment and prevention of social tension, unrest, etc.
6. Improvement in the standard of living: Entrepreneurs take lead in organizing various factors of
production by putting them into productive use through the setting up of enterprises. More
enterprises will lead to more production, employment and generation of wealth in the form of goods
and services resulting in the increase in the overall productivity and per capita income in the
country. By adopting latest innovations during production of variety of goods and services and the
efficient use of resources the entrepreneurs produces goods of better quality at a cheaper &
reasonably lower costs. With better quality products available at reasonable prices which enables
the consumers to buy freely indicates improvement in the standard of living. EDPs, thus, helps in
the generation of employment, industrialization of rural and backward areas, providing gainful self-
employment, developing small and medium sized industries and diversifying the sources of
entrepreneurship.
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2.8 EVALUATION OF EDPs
Evaluation of an EDP can be judged on the basis of extent of success achieved in the
realization of objectives established under EDP.
According to Dr. Sharma entrepreneurial performance is a function of the following factors.
(a) Socio cultural background of the entrepreneur (SB). This implies the environment in which
the entrepreneur was born and brought up. It conditions the values and attitudes of the
entrepreneur.
(b) Motivational force (MF). It implies the motives which prompts a person to undertake
entrepreneurship e.g. wealth, status, self employment etc.
(c) Knowledge and ability of the entrepreneur (K.A.). It refers to the education, training and
experience of the entrepreneur.
(d) Financial Strength (FS). It means the funds which an entrepreneur can mobilise from
internal and external sources.
(e) Environmental Variables (EV). These consist of government policies, market conditions,
availability of technology and labour situation. Symbolically Entrepreneurial Performance
(EP) can be represented in the following way-—
EP = f (SB, MF, KA, FS and EV)
Various studies have been undertaken by different organisations to find out how many
participants in different EDPs have actually started their own enterprise after completing their
training under EDPs. Entrepreneurship Development Institute of India, Ahmedabad had made
nationwide evaluation study on the effectiveness of EDPs. The major findings of this study are—(i)
One out of four trainees actually started his/her enterprise after completing EDPs (ii) The final start
up rate is higher around 32 per cent, (iii) About 10 percent trainees are found blocked due to various
reasons at various stages in the process of setting up their enterprises. If proper assistance is not
provided they may add to the category of 29 percent trainees who have already dropped the idea of
setting up their own enterprises (iv) 17 percent
have given up the idea of starting their ventures as they are engaged in other activities.
The following main criteria can be employed to comment on the performance of
entrepreneurs.
(i) Financial Results. Judgement about the financial health of the enterprise can be made on the
basis of various yardsticks like return on capital employed:, net profit over sales etc.
(ii) Gestation Period. It represents the time gap between the registeration and commencement of
commercial production. Gestation period of two to three years is regarded as satisfactory by the
financial institutions. Projects can be delayed due to various reasons like delay in governmental
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approvals, assistance from financial institutions, manpower availability problem and problems with
collaborators.
(iii) Capacity Utilisation. It depends upon the demand for finished products and availability of
various factors of production like funds, raw material, power labour etc. Break even occurs for
majority of entrepreneurs at 60 percent of installed capacity. Approximately 50 percent of
entrepreneurs were operating at 80% of installed capacity.
(iv) Expansion and Diversification. Expansion refers to the increased production of the same
product whereas diversification implies production of new type of products. Depending upon the
demand and availability of resources firms can opt for expansion or diversification.
(v) Value Addition. It refers to the gross value of output minus value of raw materials and other
inputs used in the production. More is the value addition more efficient is the entrepreneur,
(vi) Other Factors. Various other factors can be used to examine entrepreneurial effectiveness.
These can be employment generation, rural development, sales turnover, export promotion and
import substitution etc.
2.9 PROBLEMS IN THE CONDUCT OF EDPs
1. No Policy at the National Level. Though Government of India is fully aware about the
importance of entrepreneurial development, yet we do not have a national policy on
entrepreneurship. It is expected that the government will formulate and enforce a policy
aimed at promoting balanced regional development of various areas through promotion of
entrepreneurship.
2. Problems at the Pre training Phase. Various problems faced in this phase are—identification
of business opportunities, finding & locating target group, selection of trainee & trainers etc.
3. Over Estimation of Trainees. Under EDPs it is assumed that the trainees have aptitude for
self employment and training will motivate and enable the trainees in the successful setting
up and managing of their enterprises. These agencies, thus, overestimate the aptitude and
capabilities of the educated youth. Thus, on one hand the EDPs do not impart sufficient
training and on the other financial institutions are not prepared to finance these risky
enterprises set up by the not so competent entrepreneurs.
4. Duration of EDPs. An attempt is made during the conduct of EDPs to prepare prospective
entrepreneurs thoroughly for the various problems they will be encountering during the
setting up and inning of their enterprises. Duration of most of these EDPs varies between 4
to 6 weeks, which is too short a period to instill basic managerial skills in the entrepreneurs.
Thus the very objective to develop and strengthen entrepreneurial qualities and motivation is
defeated.
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5. Non Availability of Infrastructural Facilities. No prior planning is done for the conduct of
EDPs. EDPs conducted in rural and backward areas lack infrastructural facilities like proper
class room, suitable guest speakers, boarding and lodging etc.
6. Improper Methodology. The course contents are not standardised and most of the agencies
engaged in EDPs are themselves not fully clear about what they are supposed to do for the
attainment of pre-determined goals. This puts a question mark on the utility of these
programmes.
7. Mode of Selection. There is no uniform procedure adopted by various agencies for the
identification of prospective entrepreneurs. Organisations conducting EDPs prefer those
persons who have some project ideas of their own and thus this opportunity is not provided
to all the interested candidates.
8. Non Availability of Competent Faculty. Firstly there is problem of non availability of
competent teachers and even when they are available, they arc not prepared to take classes
in small towns and backward areas. This naturally creates problems for the agencies
conducting EDP.
9. Poor Response of Financial Institutions. Entrepreneurs are not able to offer collateral
security for the grant of loans. Banks are not prepared to play with the public money and
hence they impose various conditions for the grant of loans. Those entrepreneurs who fail to
comply with the conditions are not able to get loan and hence their dream of setting up their
own enterprises is shattered. Helpful attitude of lending institutions will go a long way in
stimulating entrepreneurial climate.
PROBLEMS FACED BY WOMEN ENTREPRENEURS
Various problems are as under
(i) Stiff competition from male entrepreneurs
(ii) Low ability to bear risk.
(iii) Low level of family support.
(iv) Shortage of funds.
(v) Slow progress of Women Entrepreneur Association.
(vi) Production, marketing, managerial, administrative and organizational problems
2.10 SUGGESTIONS TO MAKE EDPs SUCCESSFUL
1. Emphasis on Stimulating, Supporting and Sustaining Activities.
There should be balance between stimulating, supporting and sustaining activities for
making EDPs successful. Stimulating activities comprise of entrepreneurial education,
publicity of entrepreneurial facilities, motivational training and assistance in the
identification of viable projects, creating a common platform for entrepreneurs where they
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can share their problems, experiences and success. Under supporting activities, comes
various forms of support that can be extended to the potential entrepreneurs for setting up
and running of their units. Supporting activities include registration, funds mobilisation,
licence, tax relief and incentives and management consultancy services. Sustaining activities
include expansion, diversification, modernisation and quality control.
EDPs normally lay more emphasis on stimulating and supporting activities and
neglect sustaining activities. This results in imbalance which will adversely affect
entrepreneurial development and the credibility of EDPs will be eroded.
2. Model Based EDPs. Entrepreneurial development is an area where there is no ready made
solution available. The agency undertaking an EDP is expected to have indepth study of the
demand pattern and availability of local resources. Any particular model of training which
may be very successful in one area may prove to be utter failure in another area.
3. Focus on Achievement Motivation. In order to create right impact on potential entrepreneurs
it is essential to develop achievement motivation amongst them through proper training and
conducive environment. Entrepreneurs should be assisted in converting their dream into
reality. A successful entrepreneur will serve as a role model for others and they will like to
follow him.
4. Designing of Viable Projects. A viable project is that project which is feasible in terms of
availability of resources and market potentials. A viable man has the requisite aptitude and
competence to initiate a project. The EDP organisers should prepare the projects keeping in
mind local resources, funding, training requirements and assessing the feasibility of the
same. The entrepreneurial development agencies should select right people, impart right
training and entrust viable projects to them for making EDPs successful.
5. Selection of Trainees. Trainees should be selected after proper screening. Educated
unemployed youth having aptitude for self employment should be selected for EDPs.
Persons having traditional background in the chosen economic activity should be preferred.
Efforts, money and other resources must not be wasted on those trainees, who lack requisite
aptitude and commitment.
6. Training of Trainers. Success of EDPs depends on the trainers. They should be committed,
competent and qualified. Trainers must be fully acquainted with whatever is latest in their
respective fields.
7. Organizing Part Time Programmes. Part time EDPs can definitely suit those persons who
are working or studying somewhere else. These EDPs can be conducted during week ends
or in the evening. By providing part time EDPs, we can provide opportunity to those who
cannot joint any regular EDP.
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8. Duration of EDPs. There are no short cuts for entrepreneurial development. Under EDPs, an
attempt is made to provide self employment to unemployed through a series of activities
involving identification of potential entrepreneurs, providing them with the requisite
training, developing achievement motivation amongst them and helping them in various
ways for making them a successful entrepreneur. Since it is a lengthy process and as such
the duration of EDPs should be increased to six months so that these may remain relevant
and serve the purpose for which we are conducting these programmes.
PRODUCT PROCESS ORIENTED EDPS
The concept of organizing product/process oriented EDPs was introduced from 1990
onwards by Small Industries Development Organization as tool for widening the entrepreneurial
base by motivating a large number of young entrepreneurs in setting up self employment ventures.
The main feature of such training programmes is that participants are given practical exposure in
selected manufacturing activities in addition to class room lectures, group discussions, case studies
etc.
Since 1960 a large number of entrepreneurial development programmes were organized
both by the Government and Non Government Organizations. The courses were designed to
develop entrepreneurial skills among the participants. It was assumed that the proposed activities
and technology was not an essential input. This assumption was valid for technocrat entrepreneurs
who had good technology base but it was not so as far as other entrepreneurs were concerned. It
was discovered that the success rate amongst the participants of the general entrepreneurial
development programmes was uniformly low due to lack of proper knowledge of the participants in
key areas like technology, marketing, project management and product quality. The significance of
these inputs became more crucial for small entrepreneur who had to gear themselves up for multi
faceted role of designer, production supervisor, financial controller and marketing person besides
routine managerial activities. Looking at these shortcomings experts in Small Industries
Development Organisation (SIDO) through systematic analysis and brain storming sessions came to
the conclusion that entrepreneurial development programmes would need to be restructured with a
thrust to improve success ratio.
Small Industries Service Institute caters to the needs of existing small scale units and
prospective entrepreneurs to strengthen and develop small scale industries. It provides common
facility support services such as machinery, heat treatment, electroplating, designs and drawings to
small scale units to enhance their productivity. It initiates various promotional programmes aimed
at developing entrepreneurship amongst the educated unemployed youth belonging to various
sections of society. This Institute has conducted various product and process oriented programmes
of four to six weeks duration in different fields comprising of food processing, computer education,
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fashion garments, knitwear hosiery and cosmetics including herbal cosmetics. This institute instead
of paying stipend, levied fee on participant and still could attract a large number of potential
entrepreneurs. The institute took an initiative to design innovative course curricula to meet the
requirements of the programme. These programmes aim at instilling achievement motivation,
opportunity identification guidance, knowledge about assistance being provided by various
promotional agencies, project management etc. An effort is also made to improve technological and
marketing competence of the entrepreneurs. Theoretical knowledge is also supported by practical
exposure.
2.12 COURSE CONTENTS OF ENTREPRENEURIAL DEVELOPMENT PROGRAMME
Contents of entrepreneurial development programme arc decided keeping in mind the
Iraining requirements of both existing and the potential entrepreneurs.
The training programme may include the following aspects.
(i) Knowledge about entrepreneurship.
(ii) Motivational Training.
(iii) Basics of Management.
(iv) Project Study.
(v) Support System.
(vi) Initiating the Venture.
(vii) Factory Visits/Plant-Training
(i) Knowledge about entrepreneurship. Main objective is to acquaint a prospective entrepreneur
about minute details regarding factors affecting business, role of entrepreneurs in economic
development and availability of various incentives and facilities. Innovative behaviour
related issues should be focused to eighteen the entrepreneurs about future prospects and
challenges. Developmental agencies should highlight various risks inherent in the business
like technical, social, economic and environmental and suggest suitable strategies for
overcoming these risks.
(ii) Motivational Training. Motivational training inputs are meant to develop the motivation of
potential entrepreneurs and their enterprise building skills. Motivational training is aimed at
increasing the participant's level of confidence and developing the right attitude towards
business. The understanding of the entrepreneurial personality and behaviour will be
enhanced through interaction with successful and not so successful entrepreneurs.
(iii) Basics of Management. Prospective entrepreneurs are made conversant with the basic
management and technical know how to enable them to operate their enterprises effectively
and efficiently. These entrepreneurs are given exposure in different types of managerial
problems for shaipening their problem solving and managerial skills. This management
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training may include knowledge about general management, purchase and production
management, marketing and financial management.
(iv) Project Study. Project inputs are required to help the potential entrepreneur to convert their
project ideas into viable projects. Necessary information regarding opportunities available in
the area and assistance in the selection of a product/project should be made available to the
prospective entrepreneurs. Essential information regarding project feasibility, viability and
implementation should be provided. Knowledge about technical and financial feasibility
should be made available.
Prospective entrepreneurs should be imparted proper training about scheduling of various
activities, provision for effective supervision and timely execution of project to save on
delays and cost overruns,
(v) Support System. Under this an attempt is made to tempt prospective entrepreneurs by
highlighting various incentives and facilities being made available by the government.
Support system is used as motivational input to encourage the participants about the future
prospects. They are made conversant with the concessions available like tax incentives, tax
holiday, backward/zero industries area concessions, soft loans scheme etc. Procedure for
applying for these concessions and availing these concessions/facilities is also made clear to
the entrepreneurs.
(vii) Initiating the Venture. This main purpose here is to give practical shape to the enterprise.
Here an attempt is made at familiarizing the participants about the proposed structural
arrangements for the business or industrial unit. Formalities regarding registration and
licensing procedures, forms of organizations etc are made clear to the participants. Training
is also imparted to entrepreneurs for mobilising of various resources for the setting up and
smooth running of the enterprise.
(viii) Factory Visits/Plant Training. Practical exposure to the participants is given organizing plant
visits. These trips provide entrepreneurs with opportunities to study entrepreneur, behaviour
and production processes.
The training method comprise of lectures, discussions, case studies, preparation of project
report and workshop exposure.
2.13 ROLE OF ENTREPRENEURIAL DEVELOPMENT PROGRAMME
An individual has two types of qualities, traits or skill i.e innate skills and skill which are not
entirely innate. Innate skills are those skills which can't be enhanced or developed. For, example
honest, integrity or habit of Industry. Such skills are found in the blood of an individual. He inherits
these skills in the form of genes from his parents. These can't be developed or enhanced through
education, training or experience.
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An individual has also some qualities which are not innate. Such qualities can be enhanced
through, EDPs, education, training and experience. Similarly foresightedness can also be enhanced
through education, training and experience. EDPs help in enhancing qualities of an entrepreneur so
that he can successfully run his venture. EDPs are helpful in the following ways:
(i) Enhancing entrepreneurial qualities
The most important role of EDPs is to enhance the qualities of an entrepreneur so that he
can successfully run his enterprise. EDPs through training, education, experimental orientation
programmes tend to develop or enhance the entrepreneurial qualities.
(ii) Helps in formulating projects
EDP helps an entrepreneur in formulating project by providing the entrepreneur necessary
technical guidance and support. EDP helps him in formulating viable project within his means. It
gives him necessary information regarding infrastructural facilities, machinery and equipment, their
sources of supply along with addresses. Information regarding other inputs such as raw materials,
labour, land and building, power, methods of production, testing and quality control is also made
available.
(iii) Enhances capacity to search and exploit business opportunities:
EDP helps an entrepreneur to select a project suiting his attainments, resources and attitude.
It helps him in evaluating the various projects and products and choosing the project and product
which will give him maximum profit and which have good scope for further development in future.
(iv) Enhances capacity to search and exploit business opportunities:
Business opportunities have to be searched and exploited, they will not come
automatically. EDPs highlight available opportunities to the entrepreneurs and encourage
then to grab and exploit them. The entrepreneurs are guided to select a suitable project, appraise it
and mobilize the resources to start the enterprise.
(v) Strengthening and fulfilling motivation
EDPs arouse motivation among entrepreneurs through planned publicity of success stories
of other entrepreneurs and through cultivating among then reading and observation. An
entrepreneur is motivated to achieve or excel others. He is also motivated to influence others by his
achievements to satisfy his ego. This is done through achievement motivation training.
(vi) Enhancing the organization and Managerial abilities
EDPs help the entrepreneurs to enhance their organizing and managerial capabilities to run
their enterprises successfully. This is done through organizing educational, management training
and orientation programmes specialized agencies such as the National Institute for Entrepreneurship
and Small Business Development, New Delhi and Entrepreneurship Development Institute of India
(EDII), Ahmedabad are engaged in entrepreneurial development programmes.
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(vii) Assists in Setting up of the Enterprise
EDP helps an entrepreneur in setting up his enterprise. It is done through various support
services which provide funds, machinery and equipment, scarce raw materials and infrastructural
facilities such as land/shed, power etc.
(viii) Helps in acquainting and appreciating needed social responsibilities
An entrepreneur owes social responsibility towards the society. Earning profit cannot be the
sole objective of an entrepreneur. He should acquaint himself with his social responsibilities
towards, consumers, employees, Government, tax authorities in particular, environment protection,
etc. Not only he should appreciate them but also discharge them honestly. EDP helps him in this
process by identifying his social responsibilities.
(ix) Helps in knowing the pros and cons of being an entrepreneur
An entrepreneur should know the pros and cons of being an entrepreneur so that he can take
a decision as to whether or not he would like to become an entrepreneur. It is particularly essential
for an executive who wants to take a decision to stick to his job or to quit it to start his own
enterprise. Again, an entrepreneur has to properly assess the risk involved in a venture. He should
take only calculated and moderate risk.
(x) Helps in achieving entrepreneurial disciplines
Entrepreneurs also own a responsibility towards the society to observe certain discipline for
ex, he should discharge his liabilities: (i) Pay taxes (ii) observe environmental laws, (iii) maintain
ecology balance, (iv) regard dignity of labour.
2.14 RELEVANCE OF ENTREPRENEURIAL DEVELOPMENT PROGRAMME
An entrepreneurial development programme is relevant only if it proves fruitful to social,
economic, political and legal environment of a country. Various researches conducted in and
outside the country have shown that the countries which have implemented entire preneur
development programmes have attained high economic growth in various fields as compared to
those who have not done so. Economic development of a country never takes place by chance or
accident, it has to be designed. It is a result of constant and positive efforts made by the
Government and its agencies. Entrepreneurial development programmes search potential
entrepreneurs and encourage them to establish business in backward areas which help in balanced
regional growth. EDPs also encourage research and development which helps to establish new
business in and outside the country.
2.15 ACHIEVEMENTS OF ENTREPRENEURIAL DEVELOPMENT PROGRAMME
Entrepreneurial development programmes are the prerequisites for the overall economic
development of a country. EDP is a process in which entrepreneurs are prepared to establish
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develop and expand their business enterprise and face the business risks. Following are the major
achievement of EDPs.
(i) These programmes have played an important role in establishment development and
expansion of the practice oriented development programmes. Training is an integral part of
managerial and technical developments, and is essential for both old and new entrepreneurs.
In India, almost all the training programmes conducted are organized and developed under
EDPs. The steps taken by EDPs in this direction include (a) creation of necessary
infrastructure (b) preparing training syllabus (c) designing tools and techniques for selection
of trainees (d) identification of suitable and viable projects (e) specific training in technical
trades etc.
(ii) Entrepreneurial development programmes have also developed and established various
support systems necessary for the entrepreneurs. They strengthen and coordinate these
support systems. The major support systems are credit service and implementing
institutions.
(iii) Entrepreneurial development programmes have not only created a background for
industrialization but have also given momentum to it.
(iv) These programmes have contributed a lot to solve the problem of unemployment. EDPs
have helped to a great extent in this direction by starting self employment programmes and
by giving momentum to the speed of industrialization.
(v) Another achievement of these programmes is establishment and development of new
enterprises. It is very difficult task to establish and develop new enterprise in today’s
competitive era. EDPs have provided various inputs to establish new enterprises and also
have instructed by developing various entrepreneurial skills and qualities, like
farsightedness, imagination, patience, technical, knowledge etc.
(vi) Entrepreneurial education and training has spread because of entrepreneurial development
programs. This has resulted in increase in the knowledge, imaginative power,
farsightedness, decision making ability and risk taking ability of the entrepreneurs and has
also helped in developing personality.
(vii) Entrepreneurial development programmes have also contributed in project formulation.
Choosing a right type of project is a difficult task as resources are limited. The choice of a
project requires detailed analysis of technical and financial aspects requires detailed analysis
of technical and financial aspects. EDPs have proved very useful in such situation.
(viii) Many entrepreneurship development institutions have been established because of the EDPs
in India and abroad. For example, the major entrepreneurial development institute in India
are: (a) Management development institute (b) National institute for entrepreneurship and
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small business development (c) entrepreneurial development institute of India (d) small
industry service institutes (e) small industries development organizations etc.
(ix) Entrepreneurial development programmes have helped in balanced regional development by
encouraging people to establish small industries in villages and background areas.
(x) Another important achievement of EDPs is availability of cheap and quality products to the
consumers. Due to EDPs new ventures have been established which have increased
competition and the tendency of open market. As a result of it the products which were out
of the reach of common man have reached him that too at cheaper rates. The standard of
living has improved, national income has increased and the economic power has
decentralized.
2.16 FINANCIAL INSTITUTIONS PROVIDING FINANCE TO ENTREPRENEURSHIPS AT
NATIONAL LEVEL.
Finance is the life blood of any enterprise. An entrepreneur has to assess his actual financial
requirements before the establishment of his enterprise. As the small scale entrepreneurs do not
have adequate amount of funds for establishing and running an enterprise, the Government of India
has set up a number of institutions to provide financial assistance to small scale entrepreneurs. The
various financial institutions which provide finance with the types of assistance to the enterpreneurs
in the country are listed as follows :
(i) Industrial Development Bank of India (IDBI)
(ii) Industrial Finance Corporation of India (IFC1)
(iii) Industrial Credit and Investment Corporation of India (ICICI)
(iv) Life Insurance Corporation of India (LIC)
(v) Unit Trust of India (UTI)
(vi) Small Industries Development Bank of India (SIDBI)
(vii) Industrial Reconstruction Bank of India (IRBI)
(viii) State Financial Corporation (SFC)
(ix) National Bank for Agriculture & Rural Development (NABARD)
(ix) EXPORT - IMPORT Bank (EXIMB)
(x) Regional Rural Banks (RRB)
(xii) National Industrial Development Corporation Ltd. (NIDC)
(xiii) Commercial Banks.
(xiv) Khadi & Village Industries Commission (KVIC).
(i) Industrial Development Bank of India : Established on july 1, 1964 by the Government of
India under the Act of Parliament, acts as the principal financial institution in the country. Initially,
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it was a wholly owned subsidiary of Reserve Bank of India & in feb. 1976 it was made an
autonomous organization & its ownership transferred to the Govt, of India from the RBI.
The objectives and function of IDBI are :
(a) Provides assistance to the small scale sector through its scheme of refinance and bill
rediscounting scheme.
(b) The financial assistance has been indirect in the form of refinancing of loans granted by the
commercial banks and the State Financial Corporations (SFCs)
(c) In order to assist the small scale sector, IDBI has set up Small Industries Development Fund
(SIDF) in may, 1986 aiming at providing a focal point to co-ordinate financial and non-
financial inputs required for growth of small industries sector.
(d) Constitution of National Equity Fund (NEF) to prevail equity type of support to tiny and
small scale units engaged in manufacturing activities in association with the govt, of India
and administered through nationalized banks.
(e) Introduction of the single window assistance scheme for grant of term loan and working
capital assistance to small, tiny & medium scale enterprises.
(f) Setting up of a Voluntary Executive Corporation Cell (VECI) for utilizing the services of
experts professionals for counseling small units and for providing consultancy support in
specified areas.
(g) To undertake market and investment research in connection with the development of
industry,
(h) To provide technical and administrative help for promotion, management and expansion of
industry.
(ii) Industrial Financial Corporation of India :
Established in July 1984 under IFCI Act by the Government of India and brought under
Companies Act, 1956 to provide long term finance to industries is the oldest financial institution
covering large scale industries. It has devised new promotional schemes such as :
(a) Consultancy fees subsidy schemes for assisting small scale entrepreneurs in marketing
sector.
(b) Interest subsidy scheme for unemployed youth, women entrepreneur etc;
(c) Pollution control in small and medium scale enterprises.
(d) Encouraging the modernisation of tiny, small & medium scale industries.
(iii) Industrial Credit and Investment Corporation of India Ltd.:
Established as a private sector development bank by the Govt. of India under the Indian
Companies Act in 1955, it was set up with the objective of providing financial assistance to
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the small and medium scale sector. It also assists in the creation, expansion & modernization
of private enterprises.
(iv) Life Insurance Corporation of India (LIC) : Established under the LIC Act in 1956, offers
multitude of insurance policies to extend social security to various segments of the society.
As per its investment policy, it invests 75 percent and above in central & state Government's
securities including government guaranteed marketable securities & in the socially oriented
sector. It extends loans-for the following activities also:
(a) Housing,
(b) Rural electrification,
(c) Water supply & sanitation,
(d) Expansion, diversification of industrial ventures,
(e) Modernization of industry etc.
(v) Unit Trust of India : Set up by the Govt. of India in 1964 under an Act of Parliament with
the objective of:
(i) Mobilizing savings of small investors through sale of units and,
(ii) Channelizing these savings towards corporate investment. It also provides financial
assistance to corporate sector in the form of term loans and underwriting direct subscription
to shares and debentures.
(vi) Small Industries Development Bank of India : (SIDBI)
Established in the year 1989 as a subsidiary of IDBI to provide financial assistance to the
units in small sector in the form of indirect assistance and direct assistance. The initial
authorized capital of SIDBI was Rs 250 crores which can be extended upto Rs.1000 crores.
Its main functions include promotion of small scale industries in semi-urban areas to create
more employment opportunities, undertaking technological upgradation & modernization of
existing small scale industries & expansion of channels for marketing the products of SSI
sector on both domestic & international markets.
(vii) Industrial Reconstruction Bank of India : Set up in 1971 under the Indian Companies Act to
act as an agency to rehabilitate the sick units, was renamed as IRB1 (from IRCI-Industrial
Reconstruction Corporation of India) in 1984 by an Act of Parliament, Presently, it acts as a
reconstruction agency to revive, reconstruct & rehabilitate the sick industrial concerns.
(viii) State Financial Corporations : In order to cater to the needs of the small scale units, the
Government of India passed the State Financial Corporation Act in 1951 under which the
State Financial Corporations were set up. State Financial Corporations are managed by a
Managing Director, Board of Directors and the Executive Committee which is headed by a
Chairman. Its main functions includes advancing term loans to small scale & medium scale
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industrial units, granting loans to industrial concerns repayable within period not exceeding
20 yrs & providing financial assistance to small road transport operators, tour operators,
hoteliers, hospitals & nursing homes etc.
(ix) National Bank of Agriculture and Rural Development (NABARD) : Set up to operate as an
apex bank in agriculture, it meets its loan requirements by drawing funds from the central
government, the World Bank & other agencies. Its main functions include acting as a
refinancing institution to advance loans to agriculture, small scale industries, cottage and
village industries, providing financial assistance to handicrafts sector, rural artisans,
agriculturists, farmers and entrepreneurs engaged in allied non-farm sector activities and
organizing-entrepreneurship development-programme skill-upgradation programmes for
tiny, small & medium scale entrepreneurs, workshops and seminars to promote integrated
rural development both in agriculture & industrial sectors.
(x) EXPORT-IMPORT Bank of India :
Established in the year 1982 by an Act of Parliament it took over the export loans &
guarantee portfolio of IDBI. The important functions of EXIM Bank includes advancing financial
assistance to exporters & importers and to boost India's export promotion strategy. It has also
introduced the following programmes:
(i) Export bills rediscounting.
(ii) Technology & consultancy.
(iii) Financing & relending facility to banks aboard.
(xi) Regional Rural Banks : Inaugurated on 2nd Oct 1976, with the objective of providing
financial credit needs of the small & marginal farmers, rural artisans, agricultural labourers,
small & tiny entrepreneurs. It also provides financial assistance to small entrepreneurs for
development of trade, commerce, industries, agriculture and other allied economic activities
in rural areas.
(xii) National Industrial Development Corporation Ltd. : Established in the year 1954 with the
objective of bringing about a balanced development of industries both in private and public
sectors, also aims to promote small and medium scale industries. Its main functions includes
extension of financial assistance for rehabilitation and modernisation of industries like
cotton textiles, jute industry and machine tools industry & conducting industrial potential
survey and seeks cooperation from private entrepreneurs to establish more industries in
private sector.
(xiii) Commercial Banks : They assist in providing finance to the entrepreneurs. In general,
commercial banks provide short-term loans in the shape of working capital to the small
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entrepreneurs but with the development of industries, these banks have become more
interested in advancing long-term finance to the entrepreneurs,
(xiv) Khadi & village industries commission : It is a statutory body established by an Act of
Parliament in April, 1957 with the objective of generating employment avenues for rural
unemployed people through its different schemes such as Gramodyog Rojgar Yojana, to
develop entrepreneurship ability among the rural unemployed, mobilizing bank finance for
the entrepreneurs looking to the limited resources of KVIC & bringing about regional
balance in assisting cottage & village industries.
2.17 INSTITUTIONAL SUPPORT TO SMALL ENTREPRENEURS NATIONAL SMALL
INDUSTRIES CORPORATION LTD. (NSIC)
The National Small Industries Corporation Ltd. (NSIC), an enterprise under the Union
Ministry of Industries, was set up in 1955 to promote, aid and foster the growth of small scale
industries in the country. NSIC provides a wide range of services, predominantly promotional in
character to small scale industries. Its main functions are:
• To provide machinery on hire-purchase scheme to small scale industries.
• To provide equipment leasing facility.
• To help in export marketing of the products of small scale industries.
• To participate in bulk purchase programme of the Government.
• To develop prototype of machines and equipments to pass on to small scale industries for
commercial production.
• To distribute basic raw material among small scale industries through raw material depots.
• To help in development and upgradation of technology and implementation of
modernization programmes of small scale industries.
• To impart training in various industrial trades.
• To set up small scale industries in other developing countries on turnkey basis.
• To undertake the construction of industrial estates.
SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO)
Small Industries Development Organisation (SIDO) is a subordinate office of the
Department of SSI & ARI. It is an apex body and nodal agency for formulating, coordinating and
monitoring the policies and programmes for promotion and development of small-scale
industries. Development Commissioner is the head of the SIDO. He is assisted by various
directors and advisers in evolving and implementing various programmes of training and
management consultancy, industrial investigation, possibilities for development of different types
of small-scale industries, development of industrial estates, etc. The main functions of SIDO are
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classified into (i) co-ordination, (ii) industrial development, and (iii) extension. These functions are
performed through a national network of institutions and associated agencies created for specific
functions at present. The SIDO functions through 27 offices, 31 Small Industries Service Institutes
(SISI), 37 Extension Centres, 3 Product-cum-Process Development Centres, and 4 Production
Centres.
All small-scale industries except those falling within the specialised boards and agencies
like KVIC, Coir Boards, Central Silk Board, etc. fall under the purview of the SIDO.
Let us have a look at the main functions performed by the SIDO in each of its three
categories of functions.
FUNCTIONS RELATING TO CO-ORDINATION
• To evolve a national policy for the development of small scale industries,
• To co-ordinate the policies and programmes of various State Governments,
• To maintain a proper liasion with the related Central Ministries, Planning Commission,
State Governments, Financial Institutions, etc., and
• To co-ordinate the programmes for the development of industrial estates.
FUNCTIONS RELATING TO INDUSTRIAL DEVELOPMENT
• To reserve items for production by small-scale industries,
• To collect data on consumer items imported and then encourage the setting of industrial
units to produce these items by giving coordinated assistance,
• To render required support for the development of ancillary units and
• To encourage small scale industries to actively participate in Government Stores Purchase
Programme by giving them necessary guidance, market advice and assistance.
FUNCTIONS RELATING TO EXTENSION
• To make provision of technical services for improving technical process, production
planning, selecting appropriate machinery, preparing factory lay-out and design,
• To provide consultancy and training services to strengthen the competitive ability of small-
scale industries,
• To render marketing assistance to small-scale industries to effectively sell their products,
and
• To provide assistance in economic investigation and information to small-scale industries.
SMALL SCALE INDUSTRIES BOARD (SSIB)
The Government of India constituted a Board, namely, Small Scale Industries Board (SSIB)
in 1954 to advise on development of small scale industries in the country. The SSIB is also known
as Central Small Industries Board. The range of developmental work in small scale industries
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involves several departments/ministries and several organs of the Central/State Government. Hence,
to facilitate co-ordination and inter-institutional languages, the Small Scale Industries Board has
been constituted. It is an apex advisory body constituted to render advice to the Government on all
issues pertaining to the development of small-scale industries.
The Industries Minister of the Government of India is the Chairman of the. SSIB. The SSIB
comprises of 50 members including State Industry Minister, some Members of Parliament,
Secretaries of various Departments of Government of India, financial institutions, public sector
undertakings, industry associations and eminent experts in the field.
STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDC)
The State Small Industries Development Corporations (SSIDC) were set up in various States
under the Companies Act, 1956, as State Government Undertakings to cater to the primary
developmental needs of the small, tiny and village industries in the State/Union Territories under
their jurisdiction. Incorporation under the Companies Act has provided SSIDCs with greater
operational flexibility and wider scope for undertaking a variety of activities for the benefit of the
small sector.
The important functions performed by the SSIDCs include:
• To procure and distribute scarce raw materials.
• To supply machinery on hire purchase system.
• To provide assistance for marketing of the products of small-scale industries.
• To construct industrial estates/sheds, providing allied infrastructure facilities and their
maintenance.
• To extend seed capital assistance on behalf of the State Government concerned. Provide
management assistance to production units.
SMALL INDUSTRIES SERVICE INSTITUTES (SISIs)
The Small Industries Services Institutes (SISIs) are set up to provide consultancy and
training to small entrepreneurs—both existing and prospective. The activities of SISIs are
coordinated by the Industrial Management Training Division of the DCS office. There are 28 SISIs
and 30 Branch SISIs set up in State capital and other places all over the country.
The main functions of SISIs include:
• To serve as interface between Central and State Governments.
• To render technical support services.
• To conduct Entrepreneurship Development Programmes.
• To initiate promotional programmes.
The SISIs also render assistance in the following areas:
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(i) Economic Consultancy/Information/EDP Consultancy.
(ii) Trade and market information’s.
(iii) Project profiles.
(iv) State industrial potential survey.
(v) District industrial potential surveys.
(vi) Modernisation and in plant studies.
(vii) Workshop facilities.
(viii) Training in various trade/activities.
DISTRICT INDUSTRIES CENTRES (DICS)
The District Industries Centres (DICs) programme was started on may 8, 1978 with a view
to provide integrated administrative framework at the district level for promotion of small-scale
industries in rural areas. The DICs are envisaged as a single window interacting agency with the
entrepreneur at the district level. Services and support to small entrepreneurs are provided under a
single roof through the DICs. They are the implementing arm of the Central and State Governments
of the various schemes and programmes. Registration of small industries is done at the district
industries centres. The SEEUY/PMRY for employment generation is also implemented by the
DICs.
The organizational structure of DICs consists of one General Manager, four Functional
Managers and three Project Managers to provide technical service in the area relevant to needs of
district concerned. Management of the DICs is done by the State Governments. The scheme has
now been transferred to the states and from the year 1993-94, funds will not be provided by the
Central Government to the States for running the DICs.
FUNCTIONS:
The DICs role is mainly promotional and developmental. To attain this, they have to perform
the following main functions:
• To conduct industrial potential surveys keeping in view the availability of resources in terms
of material and human skill, infrastructure, demand for product, etc. To prepare techno-
economic surveys and identify product lines and then to provide investment advice to
entrepreneurs..
• To prepare an action plan to effectively implement the schemes identified
• To guide entrepreneurs in matters relating to selecting the most appropriate machinery and
equipment, sources of its supply and procedure for procuring imported machinery, if
needed, assessing requirements for raw materials etc.
• To appraise the worthiness of the various proposals received from entrepreneurs.
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• To assist the entrepreneurs in marketing their products and assess the possibilities of
ancillarisation and export promotion of their products.
• To undertake product development work appropriate to small industries.
• To conduct artisan training programmes.
• To function as the technical arms of DRDA in administering IRD and TRYSEM
programmes.
FUNCTIONS OF DIC
• To help the entrepreneurs in clarifying their doubts about the matters of operation of bank
accounts, submission of monthly, quarterly and annual returns to Government Departments.
• To act as the nodal agency for the district for implementing PMRY (Prime Minister Rojagar
Yojana).
• To help the specialized training organizations to conduct entrepreneur development
programmes.
In a nut shall, DICs function as the torch-bearer to the beneficiaries / entrepreneurs in setting
up and running the business enterprise right from the concept to commissioning. So, the role of
DICs in enterprise building and developing small scale sector is of much significance.
INDUSTRIAL ESTATES
Industrial estates are yet another institutional measure to promote industrialization in the
country. In India, industrial estates have been utilized as an effective tool for the promotion and
growth of small-scale industries. They have also been used as an effective tool to decentralize
industrial activity to rural and backward areas. Industrial estates are also known by different names,
e.g., industrial region, industrial park industrial area, industrial zone, etc. Let us consider a few
definitions on industrial estates given by different authors and agencies.
According to RC. Alexander, an industrial estate is a group of factories, constructed on an
economic scale in suitable-sites with facilities of water, transport, electricity, steam, bank, post
office, canteen, watch and ward and first-aid, and provided with special arrangements for technical
guidance and common service facilities.
In the opinion of Bredo, an industrial estate is a tract of land which is sub-divided and
developed according to a comprehensive plan for the use of a community of industrial enterprises.
The United Nations has defined an industrial state as “a planned clustering of enterprises
offering standard factory buildings erected in advance of demand and variety of services and
facilities to the occupants.”
Thus, an industrial estate is a place where the required facilities and factory accommodation
are provided by the Government to the entrepreneurs to establish their industries there.
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TYPES OF INDUSTRIAL ESTATES
Industrial estates are classified on various bases. The prominent ones are:
1. On the Basis of Functions: On the basis of functions, industrial estates are broadly classified
into two types: (i) General type industrial estates, and (ii) Special type industrial estates.
General Type Industrial Estates: These are also called as conventional or composite
industrial estates. These provide accommodation to a wide variety and range of industrial concerns.
The Indian industrial estates are mainly of this type.
Special Type Industrial Estates: This type of industrial estates are constructed for specific
industrial units, which are vertically or horizontally interdependent.
2. On the Basis of Organisational Set-up: On this basis, industrial estates are classified into
following four types:
(i) Government Industrial Estates,
(ii) Private Industrial Estates,
(iii) Co-operative Industrial Estates and
(iv) Municipal Industrial Estates.
3. On the Basis of Other Variants: On the basis of other variants, industrial estates are
classified into following types:
(i) Ancillary Industrial Estates: In such industrial estates, only those small-scale units are
housed which are ancillary to a particular large industry. Examples of such units are like one
attached to the HMT, Bangalore.
(ii) Functional Industrial Estates: Industrial units manufacturing the same product are usually
housed in these industrial estates. These industrial estates also serve as a base for expansion
of small units into larger units.
(iii) The Workshop-bay: Such types of industrial estates are constructed mainly for very small
firms engaged in repair work.
OBJECTIVES OF INDUSTRIAL ESTATES
The main objectives of the establishment of industrial estates are:
(i) To provide infrastructure and accommodation facilities to the entrepreneurs;
(ii) To encourage the development of small-scale industries in the country;
(iii) To decentralize industries to the rural and backward areas;
(iv) To encourage ancillarisation in surrounding major industrial units; and
(v) To develop entrepreneurship by creating a congenial climate to run the industries in these
estates/areas/townships, etc.
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INDUSTRIAL ESTATES IN INDIA
One of the major handicaps faced by small-scale industries in India has been either lack or
insufficient infrastructure facilities. In order to provide small-scale units the readymade
buildings/factory sheds at subsidised rates, infrastructure facilities and the proximity of other
industrial units, the idea of establishing industrial estates was first adopted in India by the Small-
Scale Industries Board (SSIB) at its meeting held in January 1955. As a result, the first industrial
estate in India was set up at Rajkot in Gujarat in September 1955. Since then, there is no looking
back. By now, the number of industrial estates in the country had gone up to more that 650—
making it the largest programme of its kind in the world.
The objectives tagged to the programme included to give a boost to the growth of small-
scale industries in the country, to disperse industry outside the metropolitan towns, to relocate
existing units operating in congested areas, to provide sub-contracting opportunities to small
industry and to improve operational efficiency of small units through common facilities. However,
studies report findings contrary to it. The outside units have performed better than units working
inside the industrial estates. The reasons held responsible for poor performance of industrial units
working inside the industrial estates were:
• Lack of essential infrastructure facilities such as roads, power and water.
• Lack of common facilities such as a tool room, heat treatment, or testing.
• Lack of realistic survey prior to the establishment of the estate.
• Lack of a clear idea about the relevance of products to the area.
• Lack of local involvement and active participation in the programme.
Added to these problems was that the most of the estates were general purpose estates' in
diverse product groups having no organic relationship between them. As such, the possibility of
establishing common production facilities was highly limited. Hence, in order to forge organic
relationship between them, the Industrial Estate Programme was modified on two counts. Firstly,
the estates were set up on a functional basis in specific product areas like electronics, leather and
rubber or as ancillary to a present unit-such as HMT (Bangalore), BHEL (Bhopal) or ECIL
(Hyderabad) etc. Secondly, in the matter of funding, the estates became either co-operatives or the
Government merely developed land and the entrepreneur has to build his shed according to an
approved type design.
Now, how to make this noble programme more effective to boost the growth of small-scale
industry in the country? An industrial estate alone cannot create industry. It is not a magic wand.
The following factors, according to a survey conducted by UNIDO, are essentials to make the
industrial estate programme effective in developing countries including India:
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• Existence of a large number of small firms or artisan shops in appropriate industrial sectors;
• Entrepreneurs willing and able to take advantage of the facilities offered by the industrial
estates;
• A nucleus of skilled workers;
• Government agencies with skills and funds to plan and administer the programme. Financial
institutions willing to give credit to the units; and
• Availability of adequate infrastructure in terms of water, electricity and transport.
2.18 SPECIALISED INSTITUTIONS
In addition to the above institutions, the Government has also set up the following
specialized institutions to boost the growth of all types of small-scale industries in the country:
(i) Central Institute of Tool Design, Hyderabad
The Central Government set up this Institute in 1968 with the help of UNDP and ILO to
help small-scale industries by imparting specialized training to the personnel working in the design
and manufacture of tools, jigs, fixtures, dies and moulds. The other functions performed by it are:-
(a) To offer consultancy and advisory services and assistance in the design and development of
tools.
(b) To suggest proper measures to improve the standard of tools, tooling elements, jig
components, fixtures, dies etc.
(c) To offer the needed tool room facility.
A governing council which consists of representatives of the Government and industry is
constituted to look after the management of the Institute. The governing council is headed by the
Development Commissioner (SSI).
(ii) Central Tool Room Training Centres
In order to provide tool room services and facilities in design, manufacture and training, the
Government has set up four tool room framing centres located at Bangalore, Calcutta, Ludhiana and
New Delhi.
(iii) Central Institute of Hand Tool, Jalandhar
This institute has been set up with a view to provide improved technology, raw materials,
design and testing for handloom industry. This is the only institute of its kind in the country located
at Jalandhar.
(iv) Institute for Design of Electrical Measuring Instruments (IDEM), Mumbai
This institute was set up in 1969 with the assistance from UNDP. It was set up to provide
technical consultancy services in the matters relating to design and development of electrical and
electronic instruments, tool designing and fabrication and training.
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(v) National Institute of Entrepreneurship and Small Business Development (NISEBUD), New
Delhi
It is an apex national level institute of its kind set up at New Delhi in 1983. Its main
functions are to coordinate research and training in entrepreneurship development and to impart
specialised Iraining to various categories of entrepreneurs. Besides, it also serves as a forum for
interaction and exchange of views between various agencies engaged in activities relating to
entrepreneurial development.
(vi) National Institute of Small Industries Extension Training (NISIET), Hyderabad
This institute was set up in 1956 to develop the required manpower for running small-scale
industries in the country. Accordingly, its main functions are:
(a) To impart training to the persons engaged in small-scale industries.
(b) To undertake research studies relating to development of small-scale industries.
(c) To enter into agreements relating to consultancy services both with national and
international organisations to provide consultancy services to small industries in the country.
The institute conducts courses in business management for the benefit of the entrepreneurs
and semi-managerial personnel of small industries. It is located at Hyderabad,
(vii) Other Institutes
Following are some of the important institutes set up by the Government for development of
small-scale industries:
(a) Electronic Training and Service Institute, Nainital.
(b) Central Machine Tools Limited, Bangalore.
(c) Sports Goods and Leisure Time Equipment, Meerut.
(d) Central Institute of Plastics Engineering and Tools, Madras.
(e) National Institute of Foundary and Forging Technology, Ranchi.
TECHNICAL CONSULTANCY ORGANISATIONS (TCOs)
A network of Technical Consultancy Organizations (TCOs) was established by the all-India
financial institutions in the seventies and the eighties in collaboration with state-level
financial/development institutions and commercial banks to cater to the consultancy needs of small
industries and new entrepreneurs. At present, there are 17 TCOs operating in various states, some of
them covering more than one state. These 17 TCOs are:
1. Andhra Pradesh Industrial and Technical Consultancy Organisation Ltd. (APITCO).
2. Bihar Industrial and Technical Consultancy Organisation Ltd. (BITCO).
3. Gujarat Industrial and Technical Consultancy Organisation Ltd. (GITCO).
4. Haryana-Delhi Industrial Consultants Ltd. (HARDICON).
5. Himachal Consultancy Organisation Ltd. (HIMCO).
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6. Industrial and Technical Consultancy Organisation of Tamil Nadu Ltd. (ITCOT).
7. Jammu and Kashmir Industrial and Technical Consultancy Organisation Ltd. (J&KTTCO).
8. Karnataka Industrial and Technical Consultancy Organisation Ltd. (KITCO).
9. Madhya Pradesh Consultancy Organisation Ltd. (MPCON).
10. Maharashra Industrial and Technical Consultancy Organisation Ltd. (MITCON).
11. North-Eastern Industrial Consultants Ltd. (NECON).
12. North-Eastern Industrial and Technical Consultancy Organisation Ltd. (NEITCO).
13. North-India Technical Consultancy Organisation Ltd. (NITCON).
14. Orissa Industrial and Technical Consultancy Organisation Ltd. (ORITCON).
15. Rajasthan Consultancy Organisation Ltd. (RAJCON).
16. U.P. Industrial Consultants Ltd. (UPICO).
17. West Bengal Consultancy Organisation Ltd. (WEBCON).
FUNCTIONS
Initially, TCOs functions were focused on pre-investment studies for small and medium
scale enterprises. Over the years, they have diversified their functions to include the following:
• To prepare project profiles and feasibility profiles.
• To undertake industrial potential surveys.
• To identify potential entrepreneurs and provide them with technical and management
assistance
• To undertake market research and surveys for specific products.
• To supervise the project and where necessary, render technical and adroinistrative
assistance.
• To undertake export consultancy for export-oriented projects based on modern technology.
• To conduct entrepreneurship development programmes.
• To offer merchant banking services.
2.19 INSTITUTIONAL SUPPORT FOR EDP
The following institutions were set up by the central and state governments.
(a) Institutions set up by Central Government
1. Small Industries Development Organization (SIDO): SIDO was established by the Central
Government in 1954. It has 27 Small Industries Service Institutes, 31 Branch Institutes, 38
Expansion Centres, 4 Regional Training Centres, 20 Local Testing Centres, 4 Product-
coprocess Centres, 2 Shoe Training Centres and 4 production Centres. In addition to provide
services in these area, SIDO is also engaged in providing training to the entrepreneurs.
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2. Management Development Institute (MDI): Management Development Institute is located
at Gurgaon (Haryana). It was established in 1973 and is sponsored by Industrial Finance
Corporation of India with the objective of improving managerial effectiveness in the
industry. It conducts management development programmes in various fields. It also
includes the programmes for the officers of Indian Administrative Services (IAS), Indian
Economic Services (IES) and for the officers of a number of public sector undertakings like
Bharat Heavy Electrical Ltd. (BHEL), Oil and Natural Gas Commission (ONGC), Bharat
Aluminum Company Ltd. (BALCO), Export-Credit Guarantee Corporation of India
(ECOC), Hindustan Zinc Ltd. (HZL), Hindustan Machine Tool Ltd. (HMT) and many
leading PSU's.
3. Entrepreneurship Development Institute of India (EDII) : EDII is sponsored by All India
Financial Institutions and the Government of Gujarat. It conducts research, training and
institution building activities to encourage participation of backward regions and special
target-groups in entrepreneurship. The training programmes of EDII consist of:
(a) Selection of potential entrepreneurs,
(b) Providing achievement motivation training,
(c) Selection of the product and preparation of project report,
(d) Training for business management,
(e) Practical training and work experience,
(f) Support system and follow up.
The programmes of Entrepreneurship Development Institute of India are the oldest, largest,
best organised and most comprehensive in the country.
4. All India Small Scale Industries Board (AISSIB): Established in 1954, the AISSIB
determines the policies and programmes for the development of small industries with a
Central Government Minister as its president and the representatives of various organisation
i.e., Central Government, State Government, National Small Industries Corporation, State
Financial Corporation, Reserve Bank of India, State Bank of India, Indian Small Industries
Board, Non-government members, such as members of Public Service Commission, Trade
and Industries Members.
5. National Institution of Entrepreneurship and Small Business Development (NIESBUD),
New Delhi: It was established in 1983 by the Government of India. It is an apex body to
supervise the activities of various agencies engaged in entrepreneurial development
programmes.
It is a society under Government of India Societies Act of 1860. When there is absence of
organization conducting new EDPs it assumes the task. The major activities of Institute are:
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(a) To evolve effective training strategies and methods,
(b) To formulate scientific selection procedures,
(c) To standardize model syllabi for training,
(d) To develop training aids, tools and manuals,
(e) To provide facilities and other support agencies engaged in EDPs,
(f) To conduct EDPs which are not undertaken by other agencies,
(g) To evaluate the benefits of EDPs and promoting the process of entrepreneurial development,
(h) To conduct workshops, seminars, conferences etc.,
(i) To help and support various Governments and other agencies in executing entrepreneur
development programmes,
(j) To undertake research and development in the field of EDPs.
FUNCTIONS OF THE INSTITUTE
(i) To evolve effective training strategies and methodology,
(ii) To formulate scientific selection procedures,
(iii) To standardize model syllabi for training various target groups,
(iv) To develop training aids, manuals and other tools,
(v) To facilitate and support agencies engaged in entrepreneurship development,
(vi) To conduct such programmes which are not undertaken by other agencies,
(vii) To measure their benefits and accelerating the process of entrepreneurial development,
(viii) To organise all those activities that help and develop entrepreneurship culture in society,
(ix) To undertake documentation and research in the field of entrepreneurship and
small business development,
(x) To conduct workshops, seminars and conferences, etc., for entrepreneurship
development,
(xi) To assist in setting up of regional and state level training institutes for entrepreneurship and
small business development.
6. National Institute of Small Industries Extension Training: It was established in 1960 with its
headquarters at Hyderabad. The main objectives of National Institute of Small Industries
Extension Training are:
(a) Directing and Coordinating syllabi for training of small entrepreneurs,
(b) Advising on managerial and technical aspects,
(c) Organizing seminars for small entrepreneurs and managers,
(d) Providing services regarding research and documentation.
7. National Small Industries Corporation Ltd. (NSIC): The NSIC was established in 1955 by
the Central Government with the objective of assisting the small industries in the
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Government purchase programmes. The corporation provides a vast-market for the products
of small industries through its marketing network. It also assists the small units in exporting
their products in foreign countries.
8. Risk Capital and Technology Finance Corporation Ltd (RCTFC): RCTFC was established in
1988 with an authorized capital of 15 crore rupees. The main objectives of RCTFC are
provision of risk capital for the extension and expansion of entrepreneurial development and
venture capital for the projects with high techniques for technology development and
transfer.
9. National Research and Development Corporation (NRDC): NRDC was established in 1953
under Department of Science and Industrial Research under Government of India. Its main
objectives are:
(i) Providing assistance in technology transfer,
(ii) Transfer of technology,
(iii) Establishing relations with various technology institutions and collecting various indigenous
techniques developed by them.
At present there are 29 training centres of the Corporation in India.
10. Indian Investment Centre: This is an autonomous organization established by Central
Government. Its main objective is to assist in promoting foreign cooperation with Indian
entrepreneurs and providing necessary information to foreign entrepreneurs. Indian
Investment Centre has also established Entrepreneurship Consultancy Institute with the
objective of identifying useful projects. In addition this Institute helps entrepreneurs in
preparation of project, selection of proper place and necessary financial assistance.
11. Khadi and Village Industries Commission (KVIC): Khadi and Village Industries
Commission was established by an Act of Parliament in 1956. It is a service organization
engaged in promotion and development of Khadi and Village Industries in rural areas. Its
main objectives are:
(i) Providing employment in rural areas
(ii) Improvement of skills
(iii) Rural Industrialization
(iv) Transfer of technology
(v) Building strong rural community base and self reliance among rural people.
12. Indian Institute of Entrepreneurship (IIE) : It was established by the Department of Small
Scale Industries and Agro and Rural Industries in 1953. It is an autonomous organization
with its headquarters at Guwahati. Its main objective is to undertake research, training and
consultancy activities in the field of small industry and entrepreneurship.
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13. National Alliance of Young Entrepreneurs (NAYE) : It has sponsored a number of
entrepreneurial development schemes in collaboration with various public sector banks. The
main object of the scheme is to encourage young entrepreneurs to explore investment and
self-employment opportunities. It arranges for their training and assists them in procuring
necessary finance. In 1975 NAYE also set up a Women's wing. It has been a pioneer in
promotion and development of young entrepreneurs in general and the women entrepreneurs
in particular. To make women self-reliant and to raise their status NAYE has organised a
number of National and International conferences.
14. Centre for Entrepreneurial Development (CED) Ahmedabad : It was sponsored by the
Government of Gujarat and public financial institutions operating in the state. It conducts
entrepreneurial development programmes at various centres. The important features of these
training programmes are:
(i) Training programmes were conducted after a survey for opportunities was made.
(ii) Appropriate linkage was established with supporting agencies supplying finance, factory
sheds, raw materials, etc.
(iii) Behavioural tests were conducted to select the entrepreneurs.
(iv) Training programmes covered theoretical and practical aspects.
(v) Full time project leader took follow up action after the training was over.
15. Institute for Entrepreneurial Development (1ED): It was set up by the IDBI in association
with other financial institutions, public sector banks and the State Governments. The IEDs
were set up to fulfill the entrepreneurial development needs of the industrially backward
states in the country. IEDs have been set up in a few states where IEDs have conducted a
number of EDPs on subjects such as motivation, business opportunities, entrepreneurial
awareness programme and project counselling for women.
16. Technical Consultancy Organization (TCOs) : A network of TCOs has been established by
All India Financial Institutions and State Government throughout the country. These
organizations have been set up with the objective of providing a comprehensive package of
services to entrepreneurs in general and to small business entrepreneurs in particular. Their
main functions include the following:
(a) Identifying potential industrial projects.
(b) Preparing project reports, feasibility reports and pre-investment status.
(c) Identifying potential entrepreneurs.
(d) Providing technical and administrative support.
(e) Conducting techno-economic studies of the projects.
(f) Conducting market research and surveys.
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(g) Acting as industrial management and financial consultant.
(h) Helping entrepreneurs in technology up gradation, modernization and rehabilitation of sick
units.
(i) Maintaining data bank and information cell to provide information for entrepreneurial
development.
(j) Rendering advice to set up laboratories and design centre,
(k) Rendering assistance for setting up and organizing machine tool shops, workshops and
standardization units. The major thrust of TCOs has been in the field of project
identification and project formulation.
The TCOs also take keen interest in marketing and motivation development programmes
for the entrepreneurs.
17. Public Sector Banks: Public sector banks in association with NAYE have been conducting
entrepreneurial development programmes. The main thrust of these banks has been to
identify potential entrepreneurs in rural and backward areas. For example,. Punjab National
Bank started entrepreneurial assistance programme in March 1977 in the states of West
Bengal and Bihar. Similarly, Bank of India started entrepreneurial assistance programme
since August 1972 in the states of Punjab, Rajasthan, Himachal Pradesh, J&K and the Union
Territories of Chandigarh and Delhi.
These banks have been rendering assistance to potential entrepreneurs in various
forms. The important forms of entrepreneurial assistance are:
(i) Identifying potential entrepreneurs.
(ii) Identifying viable projects.
(iii) Assisting in preparation of project profiles.
(iv) Helping in project evaluation.
(v) Arranging practical training.
(vi) Assisting in the procurement of machinery and equipment.
(vii) Financing the projects.
18. Miscellaneous Organizations: In addition to above, various organizations at all India level
are assisting and are engaged in entrepreneurship development. These include ICICI, IFCI,
IDBI, UTI, IDBI, IIBI etc.
(b) Institution set up at State Level
There are a number of institutes established at state level for organizing, developing,
assisting and making successful entrepreneurial development programmes. Prominent among these
are :
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1. Small Industries Service Institutes (SISI),
2. State Financial Corporations (SFC),.
3. State Small Industries Corporations (SSIC),
4. District Industries Centres (DIC),
5. Technical Consulting Organization Ltd. (TCO),
6. Industries Directorates,
7. Commercial and Cooperative Banks,
8. State Industrial Development Corporations,
9. Industrial Estates,
2.20 SUMMARY
Entrepreneurship environment refers to the various positive and negative constraints within
which various enterprises are required to operate. The environment especially the external
environment is highly dynamic. It keeps on changing and affects different organizations to a
varying extent.
Entrepreneurial development programme plays very important role in the development of
business and industry. EDPs are based on the thinking that the attitude of people can be changed by
developing their skill, so that they can convert their ideas into an organization.
The process of industrial development require the participation of large number of people
engaged in various innovative entrepreneurial activities. One of the obstacles in such development
is finance which becomes the primary duty of the govt, to provide. Such finance is made available
by setting up financial instructions all over the country.
Entrepreneurs play an important role in the economic growth of a nation. Entrepreneurs act
as innovator, generator of employment, supplement and complement of economic growth and bring
social stability.
2.21 SELF ASSESSMENT QUESTIONS
1. Define Entrepreneurial Environment
2. Discuss various Environmental factors
3. Discuss socio-economic environment in the emergency of entrepreneurship.
4. Explain entrepreneurial development programme.
5. What are the problems in the conduct of EDP?
6. Define role, relevance & achievement of entrepreneurial development programme.
7. What are the institutional support to EDP?
8. What are the financial institutions established to provide finance to the entrepreneurship in
national level?
9. What are the suggestions to move EDP successful?
10. What are the needs for EDP?
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UNIT-3
PROJECT APPRAISAL AND MANAGEMENT
AIMS AND OBJECTIVES
After going through this chapter you will be able to understand:-
• Sources of business ideas.
• Techniques for generating new ideas.
• What is project
• Project identification and formulation
• Project appraisal
• Profit analysis
• Risk analysis
• Sources of Finance
CONTENTS
3.1 Introduction to business ideas
3.2 Sources of business ideas
3.3 Idea and information sources
3.4 Techniques for generating new ideas.
3.5 Meaning of Project
3.6 Project classification
3.7 Project identification
3.8 Meaning and Significance of Project Report
3.9 Contents of Project Report
3.10 Formulation of project report
3.11 Planning Commission Guidelines
Project Appraisal
3.12 Meaning and definition
3.13 Identification of Opportunity
3.14 Project feasibility study
3.15 Introduction to profit
3.16 Meaning and nature of profit.
3.17 Theories of Profit
3.18 Depreciation
3.19 Profit Planning and Forecasting
3.20 Cost volume-profit analysis
3.21 Objectives of cost-volume-profit analysis
3.22 Profit volume (P/V) ratio
3.23 Break even analysis
3.24 Risk analysis
3.25 Type or kinds of risks
3.26 Methods of Risk analysis
3.27 Criteria for evaluating proposal to minimise risk
3.28 Sources of finance
3.29 Summary
3.30 Self Assessment Questions
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PROJECT APPRAISAL AND MANAGEMENT
3.1 INTRODUCTION BUSINESS IDEAS
Every business needs a good business idea. It is the idea which can help them to move in the right
direction. The success and failure of a business depends on its business ideas. If the idea of a business is
good, the business will survive otherwise it will fail in the market of competition. Good business ideas, if
introduced at the right time, can make a business very successful. The ability to come up with a good
business idea can be transformed into a viable business.
3.2 SOURCES OF BUSINESS IDEAS
There are many sources of business ideas. The most important sources of business idea have been
discussed below:-
(A) PRIMARY SOURCES OF BUSINESS IDEAS
1. Hobbies: While having fun at what they enjoy doing, many people have started businesses.
Converting hobbies into money making opportunities has worked for many entrepreneurs. For instance, if
you love to travel, perform arts or into hospitality you can look at starting a business venture in the tourism
sector. Examples of hobbies that make money include sports, cooking, piano playing, photography etc.
2. Self Experience: Many investors find it convenient to choose business ideas in line with their
background. This because of them understands the terrain better. More than half of business ideas come from
experiences at work place only. A survey of entrepreneurs found that most of the new start-up companies are
involved in industries where they had significant work experience. The personal contacts and domain
expertise developed on the job have proven to be valuable to many individuals who contemplated launching
a business of their own. Anybody who intends to start a business in a new industry are therefore, encouraged
to firstly becoming an "apprentice" for a suitable period of time. By doing this he could avoid costly
mistakes and the same time be able to assess whether he enjoy the work before making a serious financial
commitment.
3. Mass Media: The Mass Media is also a platform for the generation and sources of business ideas
in the following ways:
(a) Study commercial advertisements on business needs and sales of entire business.
(b) Extract information from reports on changes in fashions or consumer needs e.g healthy
eating, weight loss, etc.
(c) Sieve through advertisements for popular skills demanded e.g security, catering, web design.
4. Exhibitions: If we take time to study most exhibitions, we would be able to discover the nature of new
products and re-branding ideas of existing products. Through talking with sales representatives,
manufacturers and end users, we will be able to find a gap to fill to start our own business.
5. Surveys: Surveys can either be done online or offline. Talking to neighbours, co-workers and family
members about a particular product or service is a form of informal survey. The essence of carrying out
surveys is to gather complaints from dissatisfied customers of new and existing products. We will be able to
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generate new ideas to fine-tune our own investment so as to include improvements and changes most people
would like to see.
6. Complaints: Anytime we hear a customer complaint about a product such as; I wish there
was......, if they had....etc., there lies an idea for investment. We can either set up competitor business with
such firms offering a better product or sell that idea/product for improvement to the company directly. Talk
to people, read comment and reviews on blogs and browse popular forums to gather complaints about that
product. Complaint is one of the most practical primary sources of business ideas.
7. Brainstorming: Brainstorming involves using creative thinking to generate business ideas to
solve problems. The first step is to identify a problem or question and then Brainstorming is a technique of
creative problem-solving as well as for generating ideas. The overall idea is to come up with solutions as
many as possible. When looking for sources of ideas for new business start ups, through brainstorming you
should avoid criticizing the ideas of others on our team, allow even the wildest of ideas, allow large number
of contributions and don't hesitate to merge and improve upon other people’s suggestions.
(B) SECONDARY SOURCES OF BUSINESS IDEAS
1. Consumers: Potential entrepreneurs should continually pay close attention to potential customers. This
attention can take the form of informally monitoring potential ideas and needs or formally arranging for
consumers to have an opportunity to express their opinions. Care needs to be taken to ensure that the idea or
need represents a large enough market to support a new venture.
2. Existing Products and Services: Potential entrepreneurs and intrapreneurs should also
establish a formal method for monitoring and evaluating competitive products and services on the market.
Frequently, this analysis uncovers ways to improve on these offerings that may result in a new product or
service that has more market appeal.
3. Existing Distribution Channels: Members of the distribution channels are also excellent sources for
new ideas because of their familiarity with the needs of the market. Not only do channel members frequently
have suggestions for completely new products, but they can also help in marketing the entrepreneur's newly
developed products. One entrepreneur found out from a sales clerk in a large departmental store that the
reason his hosiery was not selling was its colour. By heeding the suggestion and making the appropriate
colour changes, his company became one of the leading suppliers of non-brand hosiery in that region of the
United States.
4. Government and Industrial Policies: The Government and Industrial policies can be a source of new
product ideas. New product ideas can come in response to Government regulations and new industrial
policies. The files of the patent office contain numerous new product possibilities. Although the patents
themselves may not be feasible, they can frequently suggest other marketable product ideas. Several
Government agencies and publications are helpful in monitoring patent applications.
5. Research and Development: The largest source of new ideas is the entrepreneur’s own "research
and development", efforts, which may be a formal endeavour connected with one's current employment or
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informal lab in a basement or garage. The research and development wing of the enterprise will continue the
research to find the suitable products according to the need and requirement of the customers.
3.3 IDEA AND INFORMATION SOURCES
(B) Periodicals and Technical Reports
1. Trade Magazines: There are a number of trade magazines that cover general design issues or are
targeted at a specialized technical field. These magazines are often a source of solutions for current
problems. Besides the articles in these magazines, the advertisements can provide a fruitful source of ideas.
As it is difficult to pinpoint specific information in trade magazines, it is a good practice to make a habit of
regularly reading or at least scanning these publications so that information can be located when required.
2. Research Journals: Research journals directly related to the specific area of the problem which is to
be solved may provide modelling and analysis of specific problems as well as more general information that
can lead to a design solution. Examples of these journals are Journal of Engineering Design, ASME Journal
of Seat Transfer, and Artificial Intelligence in Engineering, Design and Manufacturing etc.
3. Databases: Databases provide a mechanism by which articles from hundreds of technical journals
spanning numerous years can be searched for a specific subject. The usability of these databases has been
greatly enhanced in recent years by computerization. Examples of these databases include “The Engineering
Index and The National Technical Information Service” etc. These databases can be searched by general
categories or specific key words can be used for more targeted searches.
(C) Directories
1. Thomas Register: The Thomas Register of American Manufacturers is a set of volumes that provide
information about manufacturers of a multitude of products and services. It can typically be found in the
library but is now conveniently available on the Internet at www.thomasregister.com.
2. Fraser's Canadian Trade Directory: Similar to the Thomas Register, Fraser’s Canadian Trade
Directory provides information about Canadian providers of products and services. It is available in both
hard copy and CD-ROM formats, and can also be accessed through the Internet at www.frasers.com where
searches can be conducted .within the categories of company, product/service or brand name.
3. Yellow Pages: The yellow pages are another source for suppliers and manufacturers. If availability from
local suppliers is insufficient, yellow pages for other cities can often be found at the library or on the
Internet.
4. Catalogues: There are hundreds of catalogues of parts, assemblies and materials available through
vendors. These catalogues are often available through workshops and resource centres, or can be ordered by
mailing away request cards often included in trade publications.
(D) Other Literature Sources
1. World Wide Web: Searching the Internet can lead to websites belonging to vendors, manufacturers,
consultants, design companies, professional organizations and educational centres etc. Almost every
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organization of one type or another has a website and the information that is often provided on these
websites is remarkable. Information found on the Internet is often more current than what is published, and
often provides an e-mail address to which questions and requests for additional information can be sent. As
anyone can create a website, caution should be used when utilizing information that it has been obtained
from a reputable source.
2. Brochures: Marketing publications available from competitors or for related products can sometimes
provide valuable information.
2. PEOPLE AS IDEA AND INFORMATION SOURCES
An extremely valuable source of ideas that often gets overlooked is people. It is truly amazing that
the viable ideas can come from not only subject experts, but also the most unlikely sources including the
person sitting next to you on the plane or a small child. Designers should never be afraid to ask others for
ideas. Even if someone does not have any solutions to offer, they may know where to locate information or a
person who can provide information. This is called networking and can be one of the most powerful tools in
business today. We can find the new ideas from the people like Colleagues, Consultants, Business Vendors,
Existing Customers, Lead Users of our products and Friends and our Family Members.
1. Colleagues: Colleagues are usually a very approachable source of ideas. They may be people within the
same company, contacts within other organizations or former classmates etc.
2. Consultants: Consultants are generally people who are experts in a certain area. Although mostly paid
for their expertise, many willingly answer the questions and provide information as long as it is not in
conflict with their commitments and doesn't require a great deal of time. Consultants can generally be
located through word-of-mouth, professional directories, yellow pages, educational institutions or the
Internet.
3. Vendors: Although the business vendors typically are interested in selling their product, many, value the
development of relationships and will therefore often be a willing source of ideas and even samples. Vendors
are an excellent resource as they often are current in technology and have the opportunity to visit a variety of
companies where they can view different ways of doing things.
4. Customers: Customers are an excellent source of ideas. Often they have conducted their own research
before committing to working with a team of designers on a specific project. They may have seen similar
products in use and have ideas on different concepts that could be employed.
5. Lead Users: These people are those that had a need for a product long before the general population.
Lead users have often created adaptations or invented their own solutions to satisfy their requirements until a
new product comes along.
6. Friends/Family: Many designers find ideas for projects when casually talking to friends and family.
Sometimes people who have little knowledge of the technology or the specific problem to be solved may
look at things from a different perspective and propose creative solutions.
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3. ORGANIZATIONS AS IDEA AND INFORMATION SOURCES
The Government and business organization including various departments, laboratories, associations
and other professional groups are also major sources of ideas and information.
1. Government: There are numerous sources within all levels of government. Many departments,
including the Transportation and Safety Board, the National Bureau of Standards and the Department of
National Defence, have standards and guidelines based on extensive research. Engineering organizations
throughout the world make extensive use of the Military Standards produced by the U.S. Department of
Defence, many of which can be accessed through libraries or downloaded from the Internet. The National
Technical Information Service, a branch of the U.S. Department of Commerce, is a source for worldwide
scientific, technical, engineering and business related information. Much of this information can be obtained
through their Internet site www.ntis.gov.
2. Non-Profit Laboratories and Associations: Organizations such as the Canadian Standards
Association, Underwriters Laboratories, American Society for Testing and Materials, and American
Standards Association can provides standards and guidelines at a nominal fee. Often products must be tested
against and comply with these standards before they can be offered commercially
3. Professional Organizations: Groups such as Association of Professional Engineers, /Geologists and
Geophysicists of Alberta (APEGGA) and Society of Manufacturing Engineers (SME) often have
publications and codes available. These organizations typically can identify and provide contact information
for experts on a given subject.
4. . OTHER IDEA AND INFORMATION SOURCES
Generally, the innovative business ideas and its related information are available in the nature itself.
The patents, analogies are other sources of ideas and information to start the enterprise.
1. Nature: Many innovative technical solutions are based on principles found in nature. Birds have
provided concepts for winged flight as fish have for submarines. Honeycombs have provided
examples of lightweight but strong structures and the arch of the human foot demonstrates the
effectiveness of a keystone bridge structure for supporting heavy loads. Velcro an extensively used
fastening device was based on the gripping capabilities of a burr.
2. Patents: Patents are an excellent source of technical ideas. Although the use of protected products
may be prohibited or require the payment of a royalty, expired and foreign patents without global
coverage can be used. Reviewing restricted patents may spawn innovative new ideas that do not fall
under the restriction of a patent. The Mechanical Design Process explains the process for researching
patents.
3. Analogies: The creative technique of using analogies involves examining the similarities between
the current design problem and another similar problem. Basically, the design team completes the
phase "This situation is like..." collects solution ideas for the analogous problem then transfers these
ideas to the original problem. The analogous problem can be another technical example or one from
nature.
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The book Guide to Basic Information Sources in Engineering by Mount is one reference that
highlights additional sources for information. Many engineering design books also provide suggestions for
sources of ideas and information.
3.4 TECHNIQUES FOR GENERATING NEW IDEAS
Generally, the entrepreneurs identify more ideas than opportunities because many ideas are typically
generated to find the best way to capitalize on an opportunity. The following are different types of
techniques which can be used to stimulate and facilitate the generation of new ideas for products, services
and businesses.
1. Brainstorming
2. Focus Groups
3. Observations
4. Surveys
5. Emerging Trends
6. Research and Developments
7. Trade Shows and Association Meetings
8. Other Techniques
1. Brainstorming: This is a process in which a small group of people interact with very little structure,
with the goal of producing a large quantity of novel and imaginative ideas. The goal is to create an open,
uninhibited atmosphere that allows members of the group to "freewheel" ideas. Normally, the leader of the
group asks the participants to share their ideas. As group members interact, each idea sparks the thinking of
others, and the spawning of ideas becomes contagious.
2. Focus Groups: These are group of individuals who provide information using a structured format.
Normally, a moderator will lead a group of people through an open and in depth discussion. The group
members will form comments in open-end in-depth discussion for a new product area that can result in
market penetration. This technique is an excellent source for screening ideas and concept.
3. Observation: A method that can be used to describe a person or group of people’s behaviour by
probing:
(i) What do people/organizations buy?
(ii) What do they want and cannot buy?
(iii) What do they buy and don't like?
(iv) Where do they buy, when and how?
(v) Why do they buy?
(vi) What are they buying more of?
(vii) What else might they need but cannot get?
4. Surveys: This is a process which involves the gathering of data based on communication with a
representative sample of individuals. This research technique requires asking people who are called
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respondents for information either verbally or by using written questions. Questionnaires or interviews are
utilised to collect data on the telephone or face-to-face interview.
5. Emerging Trends: The example is based on the population within your area may be getting older and
creating demand for new products and services.
6. Research and Development: Research is a planned activity aimed at discovering new knowledge,
with the hope of developing new or improved products and services. Researching new methods, skills and
techniques enable entrepreneurs to enhance their performance and ability to deliver better products and
services.
7. Tradeshows and Association Meetings: This can be an excellent way to examine the products of
many potential competitors, uncover product trends and identify potential products.
8. Other Techniques: This can be achieved by reading relevant trade magazines and browsing through
trade directories. These may include local, national and foreign publications.
3.5 MEANING OF PROJECT
An entrepreneur takes numerous decisions to convert his business idea into a running
concern. His/Her decision making process starts with project/product selection. The project
selection is the first corner stone to be laid down in setting up an enterprise. The success or failure
of an enterprise largely depends upon the project. The popular English proverb well began, is half
done” applies to project selection and also indicates the significance of a good beginning.
The dictionary meaning of project is that it is a scheme, design a proposal of something
intended or devised to be achieved. Newman and his associates define that “a project has typically a
distinct mission that designed to achieve and a clear termination point, the achievement of the
mission.” Gillinger defines project “as a whole complex of activities involved in using resources to
gain benefits”. According to Encyclopedia of management, “a project is an organized unit dedicated
to the attainment of goal—the successful completion of a development project on time, within
budget, in conformance with predetermined programme specifications.” Now, a project can be
defined as a scientifically evolved work plan devised to achieve a specific objective within a
specified period of time. Project can differ in their size, nature of objectives, time duration and
complexity. However projects partake of the following three basic attributes:
1. A course of action
2. Specific objectives and
3. Definite time perspectives.
Every project has starting point, an end point with specific objectives.
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3.6 PROJECT CLASSIFICATION
Project classification helps in expressing and highlighting the essential features of project.
Different authorities have classified projects differently. The following are some of the important
classification of projects.
Quantifiable and Non-Quantifiable Projects
Quantifiable projects are those in which possible quantitative assessment of benefits can be
made. Non-quantifiable projects are those where such assessment is not possible. Projects
concerned with industrial development, power generation, mineral development fall in the first
category while projects involving health, education and defense fall in the second category.
Sectional Projects
Here the classification is based on various sectors like
• Agriculture and allied sector
• Irrigation and power sector
• Industry and mining sector
• Transport and communication sector
• Information technology sector
• Miscellaneous.
This system of classification has been found useful in resource allocation at macro level.
Techno-Economic Projects
Classification of projects based on techno-economic characteristic fall in this category. This
type of classification includes factor intensity-oriented classification, causation oriented
classification, magnitude oriented classification as discussed below.
(a) Factor Intensity-Oriented Classification: Based on this projects may be classified as capital
intensive or labor intensive. If large investment is made in plant and preparation of
machinery, the project will be termed as capital intensive. On the other hand project
involving large number of human resources will be termed as “labor intensive”.
(b) Causation-Oriented Classification: On the basis of causation, projects can be classified as
demand based and raw material based projects. The availability of certain raw materials,
skills or other inputs makes the project raw-material based and the very existence of demand
for certain goods or services make the project demand-based.
(c) Magnitude-Oriented Classification: This is based on the size of investment involved in the
projects. Accordingly project are classified into large scale, medium-scale or small-scale
projects.
The selection of a project consists of two main steps: Project identification and project
selection.
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3.7 PROJECT IDENTIFICATION
Often indenting entrepreneurs always are in search of a project having a good market but
how without knowing the product coat they determine market whose market they find out without
knowing the item i.e., product? Idea generation about a few projects provides a way to come out of
the above tangle.
Idea Generation
The process of project selection starts with idea generation. In order to select most
promising and profitable project, the entrepreneur has to generate large number of ideas about the
possible projects he can take. The project ideas can be discovered from various internal and external
sources. These may include:
1. Knowledge of potential customer needs.
2. Personal observation of emerging trends in demand for certain products.
3. Scope for producing substitute product.
4. Trade and professional magazines which provide a very fertile source of project ideas.
5. Departmental publications of various departments of the government.
6. Success stories of known entrepreneurs or friends or relatives.
7. A new product introduced by the competitor.
8. Ideas given by knowledgeable persons.
All these sources putting together may give few ideas about the possible projects to be
examined among which the project must be selected. After going through these sources if an
entrepreneur has been able to get six project ideas, one project idea will be finally selected going
through the following selection process.
Project Selection
Project selection starts once the entrepreneur has generated few ideas of project. After
having some ideas, these project ideas are analyzed in the light of existing economic conditions,
market conditions and the government policy and so on. For this purpose a tool is generally used
what is called SWOT analysis. The intending entrepreneur analyses his strengths and weaknesses as
well as opportunities/ competitive advantages and threats/challenges offered by each of the project
ideas. In addition, the entrepreneur needs to analyze other related aspects also like raw material,
potential market, labor, capital, location and forms of ownerships etc. Each of these aspects has to
be evaluated independently and in relation to each of these aspects. This forms a continuous and
back and forth process.
On the basis of this analysis, the most suitable idea is finally selected to convert it into an
enterprise. The process involved in selecting a project out of few projects is also termed as “Zeroing
in Process”.
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There is a time interval involved in between project identification and project selection. In
some cases it may be few months and in others it may be few minutes.
3.8 MEANING AND SIGNIFICANCE OF PROJECT REPORT
A project report or a business plan is a written statement of what an entrepreneur proposes
to take up. It is a kind of guide frost or course of action what the entrepreneur hopes to achieve in
his business and how is he going to achieve it. A project report serves like a kind of big road map to
reach the destination determined by entrepreneur. Hence a project report can be defined as a well
evolved course of action devised to achieve the specified objectives within a specified period of
time. It is like an operating document.
The preparation of project report is of great significance for an entrepreneur. The project
report serves two essential purposes. The first is that the project report is like a road map as it
describes the direction the enterprise is going in, what its goals are, where it wants to be, and how it
is going to get there. In addition, it enables the entrepreneur to know that he is proceeding in the
right direction. Dan Steinhoff and John F. Burgess hold the view that without well spelled out goals
and operational methods, most businesses flounder on the rocks of hard times. The second purpose
of the project report is to attract lenders and investors. The preparation of project report is beneficial
for those small scale enterprises which apply for financial assistance from the financial institutions
and commercial banks. On the basis of this project report the financial institutes make appraisal and
decide whether financial assistance should be given or not. If yes how much. Other organizations
which provide various assistance like work shed/land, raw material etc, also make decision on the
basis of this project report.
3.9 CONTENTS OF A PROJECT REPORT
The significance of project report as discussed above makes it clear that there is no
substitution for business plan or project report and there are no shortcuts to prepare it. The more
concrete and complete project report not only serves as road map but also earns the respect of
outsiders who support in making and running an enterprise. Hence project report should be prepared
with great care and consideration. A good project report should contain the following.
1. General Information: Information on product profile and product details.
2. Promoter: His/her educational qualification, work experience, project related experience.
3. Location: Exact location of the project, lease or freehold, location advantages,
4. Land and Building: Land area, construction area, type of construction, cost of construction,
detailed plan and estimate along with plant layout.
5. Plant and Machinery: Details of machinery required, capacity, suppliers, cost, various
alternatives available, cost of miscellaneous assets.
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6. Production Process: Description of production process, process chart, technical know how,
technology alternatives available, production programme.
7. Utilities: Water, power, steam, compressed air requirements, cost estimates sources of
utilities.
8. Transport and Communication: Mode, possibility of getting costs.
9. Raw Material: List of raw material required by quality and quantity, sources of procurement,
cost of raw material, tie-up arrangements, if any for procurement of raw material, alternative
raw material, if any.
10. Man Power: Man power requirement by skilled and semi-skilled, sources of manpower
supply, cost of procurement, requirement for training and its cost.
11. Products: Product mix, estimated sales distribution channels, competitions and their
capacities, product standard, input-output ratio, product substitute.
12. Market: End-users of product, distribution of market as local, national, international, trade
practices, sales promotion devices, proposed market research.
13. Requirement of Working Capital: Working capital required, sources of working capital, need
for collateral security, nature and extent of credit facilities offered and available.
14. Requirement of Funds: Break-up project cost in terms of cost of land, building machinery,
miscellaneous assets, preliminary expenses, contingencies and margin money for working
capital, arrangements for meeting the cost of setting up of the project.
15. Cost of production and profitability of first ten years.
16. Break-even analysis.
17. Schedule of implementation.
3.10 FORMULATION OF PROJECT REPORT
A project report is like a road map. It is an operating document. What information and how
much information it contains depend upon the size of the enterprise, as well as nature of production.
For example small-scale enterprises do not include technology which is used for preparing project
reports of large-scale enterprises. Within small-scale enterprises too, all information may not be
homogeneous for all units. Vinod Gupta has given a general set of information in his study
"Formation of a project report." According to Gupta, project formulation divides the process of
project development into eight distinct and sequential stages as below:
(1) General information
(2) Project description
(3) Market potential
(4) Capital costs and sources of finance
(5) Assessment of working capital requirements
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(6) Other financial aspects
(7) Economical and social variables
(8) Project implementation
The nature of formation to be collected and furnished under each of these stages has been
given below.
(1) General Information
The information of general nature given in the project report includes the following:
Bio-Data of Promoter: Name and address, qualifications, experience and other capabilities of the
entrepreneur. Similar information of each partner if any.
Industry Profile: A reference analysis of industry to which the project belongs, e.g., past performance;
present status, its organization, its problems etc.
Constitution and Organization: The constitution and organization structure of the enterprise; in case of
partnership firm its registration with registrar of firms, certification from the Directorate of
Industries /District industry Centre.
Product Details: Product utility, product range, product design, advantage to be offered by the
product over its substitutes if any.
(2) Project Description
A brief description of the project covering the following aspects should be made in the
project report.
Site: Location of the unit; owned, rented or leasehold land; industrial areas no objection certificate
from municipal authorities if the enterprise location
falls in the residential area.
Physical Infrastructure: Availability of the following items of infrastructure should be mentioned
in the project report.
(a) Raw Material: Requirement of raw material, whether inland or imported, sources of raw
material supply.
(b) Skilled Labour: Availability of skilled labour in the area i.e., arrangements for training
labourers in various skills.
(c) Utilities: These include:
• Power: Requirement of power, load sanctioned, availability of power
• Fuel: Requirement of fuel items such as coal, coke, oil or gas, state of their availability and
supply position.
• Water: The sources of water, quality and quantity available.
• Pollution Control: The aspects like scope of dumps, sewage system, sewage treatment plant,
infiltration facility etc., should be mentioned.
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• Communication and Transportation Facility: The availability of communication facilities, e.g.,
telephone, fax, telex, internet etc., should be indicated. Requirements for transport, mode of
transport, potential means of transport, approximate distance to be covered, bottlenecks etc.,
should be stated in the business plan.
• Production Process: A mention should be made for process involved in production and period
of conversion from raw material into finished goods.
• Machinery and Equipment: A complete list of machines and equipments required indicating
their size, type, cost and sources of their supply should be enclosed with the project report.
• Capacity of the Plant: The installed licensed capacity of the plant along with the shifts should
also be mentioned in the project report.
• Technology Selected: The selection of technology, arrangements made for acquiring it should
be mentioned in the business plan.
• Other Common Facilities: Availability of common facilities like machine shops, welding
shops and electrical repair shops etc., should be stated in the project report.
• Research and Development: A mention should be made in the project report regarding
proposed research and development activities to be undertaken in future.
3. Market Potential
While preparing a project report, the following aspects relating to market potential of the
product of the product should be stated in the report.
(a) Demand and Supply Position: State the total expected demand for the product and present
supply position, what is the gap between demand and supply and how much gap will fill up
by the proposed unit.
(b) Expected Price: Expected price of the product to be realized should also be mentioned.
(c) Marketing Strategy: Arrangements made for selling the product should be clearly stated in the
project report.
(d) After Sales Service: Depending upon the nature of the product, provisions made for after-sales
should normally be stated in the project report.
(4) Capital Costs and Sources of Finance
An estimate of the various components of capital items like land and buildings, plant and
machinery, installation costs, preliminary expenses, margin of working capital should be given in
the project report. The sources should indicate the owners fund together with funds raised from
financial institutions and banks.
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(5) Assessment of Working Capital
The requirement for working capital and its sources of supply should clearly be mentioned.
It is preferred to prepare working capital requirements in the prescribed formats designed by limits
of requirement. It will reduce the objections from banker's side.
(6) Other Financial Aspects
To adjudge the profitability of the project to be set up, a projected profit and loss account
indicating likely sales revenue, cost of production, allied cost and profit should be prepared. A
projected balance sheet and cash flow statement should also be prepared to indicate the financial
position and requirements at various stages of the project. In addition to this, the break even
analysis should also be presented. Breakeven point is the level of production at which the enterprise
shall earn neither profit nor incur loss. Breakdown level indicates the gestation period and the likely
moratorium required for repayment of the loans. Break-even point is calculated as
Break-Even Point (BEP) = F/S-V
Where F = Fixed Cost
S = Selling Price/ Unit
V = Variable Cost/ Unit
The break-even point indicates at what level of output the enterprise will break even.
(7) Economical and Social Variables
Every enterprise has social responsibility. In view of the social responsibility of business,
the abatement costs, i.e., the costs for controlling the environmental damage should be stated in the
project. Arrangements made for treating the effluents and emissions should also be mentioned in the
report. In addition, the following socio-economic benefits should also be stated in the report.
(i) Employment Generation
(ii) Import Substitution
(iii) Ancillaration
(iv) Exports
(v) Local Resource Utilization
(vi) Development of the Area.
(8) Project Implementation
Every entrepreneur should draw an implementation scheme or a time-table for his project to
the timely completion of all activities involved in setting up an enterprise. If there is delay in
implementation project cost will overrun. Delay in project implementation jeopardizes the financial
viability of the project on one hand, and props up the entrepreneur to drop the idea to set up an
enterprise, on the other. Hence, there is need to draw up an implementation schedule for the project
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and then to adhere to it. PERT and CPM can be used to get better insight into all activities related to
implementation of the project.
3.11 PLANNING COMMISSION GUIDELINES
In order to process investment proposals and arrive at investment decisions, the Planning
Commission has issued guidelines for preparing/formulating industrial projects. The guidelines
have been summarized as follows:
1. General Information: The feasibility report should include an analysis of the industry to which the
project belongs. It should deal with the past performance of the industry. The description of the type
of industry should also be given, i.e., the priority of the industry, increase in production, role of the
public sector, allocation of investment of funds, choice of technique, etc. This should contain
information about the enterprise submitting the feasibility report.
2. Preliminary Analysis of Alternatives: This should contain present data on the gap between demand
and supply for the outputs which are to be produced, data on the capacity that would be available
from projects that are in production or under implementation at the time the report is prepared, a
complete list of all existing plants in the industry, giving their capacity and their level of production
actually attained, a list of all projects for which letters of intent licenses have been issued and a list
of proposed projects. All options that are technically feasible should be considered at this
preliminary stage. The location of the project and its implications should also be looked into. An
account of the foreign exchange requirement should be taken. The profitability of different options
should also be given. The rate of return on investment should be calculated and presented in the
report. Alternative cost calculations vis-a-vis return should be presented.
3. Project Description: The feasibility report should provide a brief description of the
technology/process chosen for the project. Information relevant for determining the optimality of
the location chosen should also be included. To assist in the assessment of the environmental effects
of a project, every feasibility report must present the information on specific points i.e., population,
water, land, air, flora, fauna, effects arising out of the project's pollution, other environmental
destruction, etc. The report should contain a list of important items of capital equipment and also
the list of the operational requirements of the plant, requirements of water and power, requirements
of personnel, organizational structure envisaged, transport costs, activity wise phasing of
construction and factors affecting it.
4. Marketing Plan: It should contain the following items: Data on the marketing plan, demand and
prospective supply in each of the areas to be served. The methods and the data used for making
estimates of domestic supply and selection of the market areas should be presented. Estimates of the
degree of price sensitivity should be presented. It should contain an analysis of past trends in prices.
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5. Capital Requirements and Cost: The estimates should be reasonably complete and properly
estimated. Information on all items of costs should be carefully collected and presented.
6. Operating Requirements and Costs: Operating costs are essentially those costs which are incurred
after the commencement of commercial production. Information about all items of operating cost
should be collected. Operating costs relate to cost of raw materials and intermediaries, fuel, utilities,
labour, repair and maintenance, selling expenses and other expenses.
7. Financial Analysis: The purpose of this analysis is to present some measures to asses the financial
viability of the project. A Performa balance sheet for the project data should be presented.
Depreciation should be allowed for on the basis specified by the Bureau of Public Enterprises.
Foreign exchange requirements should be cleared by the Department of Economic Affairs. The
feasibility report should take into account income tax rebates for priority industries, incentives for
backward areas, accelerated depreciation, etc. The sensitivity analysis should also be presented. The
report must analyze the sensitivity of the rate of return on the level and pattern of product prices.
8. Economic Analysis: Social profitability analysis needs some adjustments in the data relating to the
costs and return to the enterprise. One important type of adjustment involves a correction in input
and cost, to reflect the true value of foreign exchange, labour and capital. The enterprise should try
to assess the impact of its operations on foreign trade. Indirect costs and benefits should also be
included in the report. If they cannot be quantified they should be analyzed and their importance
emphasized.
3.12 PROJECT APPRAISAL: MEANING AND DEFINITION
Project appraisal is an exercise where by a lending financial institution makes an
independent and objective assessment of various aspects of an investment proposition to arrive at
the financial decision. Project appraisal means the assessment of project in terms of its economic,
social and financial viability. It is a complete scanning of the project. Usually banks and financial
institutions conduct a critical appraisal of projects, which are submitted to them by the entrepreneur
for getting loans. They have been traditionally accepting the data provided by the entrepreneur as
valid while assessing the project. In fact the emphasis has largely been on the cash flow and
financial viability of a project in assessing their suitability for extending the loans. Project appraisal
can be defined as the promoter taking a second look critically and carefully at a project as presented
by the promoter a person who is no way involved in or connected with its preparation and who is as
such able to take an independent dispassionate and objective view of the project in its totality as
also in respect of its various components. The person who carries out appraisal of project is usually
a team of institutional officials.
The appraisal of proposed project includes the following analysis:
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1. Economic Analysis: An economic analysis looks at the project from the viewpoint of the whole
economy, asking whether the latter will show benefits sufficiently greater than project cost to justify
investment in it.
2. Financial Analysis: The purpose of the appraisal of the financial aspects of a project is generally to
ensure its initiation of financial conditions for the sound implementation and efficient operation.
3. Market Analysis: Financial institutions examine the project to ensure economic justification of
investment details. They study the marketing scope of the project and also its worth to the national
economy by analyzing the consumption pattern and the potential demand for the project.
MARKET ANALYSIS COVERS THE FOLLOWING
• Anticipated market for the product
• Analysis of market opportunity and specifying marketing objectives
• Planning the process of marketing the product
• Organization for the marketing process
• Life cycle of the product
4. Technical Analysis: Technical appraisal of a project broadly involves a critical study of the
following:
• Location and Site: There are a number of aspects that influence industrial location because it
may significantly influence the cost of production and distribution efficiency, the operating
environment etc. The important factors that influence industrial location are raw material,
proximity to market, availability of water, power, transportation facilities, man power, labor
laws, taxes, incentives, subsidies etc. The factors to be considered for selection of site are
load bearing capacity, access to water, effluent discharge etc.
• Size of the Plant/Scale of Operation: The size of the plant determines the economic and
financial liability of a project. An important aspect of size is the available process
technology. Equipment is often standardized at specific capacities in production sectors.
Operative capacities in such sectors are therefore available only in certain multiples.
• Technical Feasibility: The appraisal of the technical aspects involves scrutiny of such aspects
of the project as
❖ Technology selected
❖ Technical collaboration and arrangements made
❖ Capacity/Size of the project
❖ Selection of plant, machinery and equipment
❖ Plant layout and factory building
❖ Technical and engineering services.
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5. Organizational Analysis: As a lender and development institution, the banks and other financial
institutions place particular stress on the need and efficient organization and responsible
management for the execution of the project. During project appraisal, these two aspects of a
project are examined. If both aspects are not carried out properly, short term remedial steps are
recommended to the entrepreneur. The objective of this aspect of appraisal is to make sure that the
project is adequately carried out. The various organizational aspects are organization, structure,
recruitment, training and development and so on.
6. Managerial Aspects: If the management is incompetent, even a good project may fail. It is rightly
pointed out that if the project is weak, it can be improved upon but if the promoters are weak and
lack in business acumen, it is difficult to reverse the situation. To safeguard from this problem, the
financial institutions can exercise control over the assisted units. There is a provision for
appointment by the financial institutions or nominate directors on the boards of all MRTP
companies assisted by them. The Companies Act, the Industries Act (Development and Regulation),
empower government to exercise powers of control over the management, including the takeover of
management of industrial undertakings. All these indicate the importance given to proper managerial
strategies to prevent mismanagement. If the proper appraisal of the managerial aspects is made in
the beginning itself, future problems in this area can be avoided to a very large extent.
3.13 IDENTIFICATION OF OPPORTUNITY
The reason for anyone to think of establishing an SSI unit can be summarized in single
word—opportunity. The opportunity to be your own boss, to implement your own ideas, to earn for
himself or herself is reason to think of starting an SSI unit. Starting an SSI needs a lot of courage.
To be successful, to stay in the business an entrepreneur needs combination of hard work, skill and
perseverance.
Entrepreneur who starts their own business can be grouped into two broad categories. The
first category consists of people who know exactly what they want to do and are merely looking for
the opportunity or resources to do it. These people may have already developed many of skills
necessary to succeed in their chosen field and are also likely to be familiar with industry customs
and practices, which can help during the start-up phase of a new business.
The second group consists of people who want to start their own business, but do not have
definite ideas about what they would like to do. They may have developed skills during their
education or in the course of their previous employment, but may not have interest in opening a
business in the same field of endeavor. Project identification is concerned with the collection
complication and analysis of data for the eventual purpose of locating possible opportunities for
investment and with the development of the characteristics of such opportunities. Opportunities,
according to Drucker, are of three kinds: additive, complimentary and break-through. Adittive
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opportunities are those opportunities which enable the decision maker to better utilise the existing
resources without in anyway involving a change in the character of business. Complementary
opportunities involve the introduction of new ideas and as such do lead to certain amount of change
in the existing structure. Breakthrough opportunities on the other hand, involve fundamental
changes in both the structure and character of business. Additive opportunities involve the least
amount of disturbance to the existing state of affairs and hence the least amount of risk. The
element of risk is more in other two opportunities. Project identification cannot be complete without
identifying the characteristics of the project. Every project has three elements—inputs, outputs and
social costs and benefits. The input characteristics define what the project will consume in terms of
raw material, energy, manpower, finance and organizational setup. The native and magnitude of
these input must be determined in order to make the input characteristics explicit. The output
characteristics of a project define what the project will generate in the form of goods and services,
employment, revenue etc. The quantity and quality of all these output should be clearly specified. In
addition every project will have impact on society. It inevitably affects the current equilibriums of
demand and supply in the economy. It is necessary to evaluate carefully the sacrifice which the
society will be required to make and the benefits will not accrue to the society from a given project.
3.14 PROJECT FEASIBILITY STUDY
Project feasibility analysis is carried put to ensure viability of project. The important project
feasibility study is
1. Market feasibility
2. Technical feasibility
3. Financial feasibility
4. Economic feasibility
5. Ecological feasibility.
Market Feasibility
Market feasibility is concerned with two aspects the aggregate demand for the proposed
product/service, and the market share of the project under consideration. Fox this market analysis
requires variety of information and appropriate forecasting methods. The kind of information
required is
• Consumption trends in the past and the present consumption level
• Past and present supply position
• Production possibilities and constraints
• Imports and exports
• Structure of competition
• Cost structure
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• Elasticity of demand
• Consumer behavior, intentions, motivations, attitudes, preferences and requirements
• Distribution channels
• Administrative, technical and legal constraints.
Technical Analysis
Technical analysis seeks to determine whether prerequisites for successful commissioning
of the project have been considered and reasonably good choices have been made with respect to
location, size, and so on. The important questions raised in technical analysis are:
• Has the availability of raw material, power, and other inputs been established?
• Is the selected scale of operation optimal?
• Is the production process chosen suitable?
• Are the equipment and machines chosen appropriate?
• Have the auxiliary equipment and supplementary engineering works been provided for?
• Has provision been made for treatment of effluents?
• Is the proposed layout of-the site, buildings and plant sound?
• Have work schedules been drawn up realistically?
• Is the technology proposed to be employed appropriate from the social point of view?
Financial Analysis
Financial analysis is necessary as ascertain whether the propose project is financially viable
in the sense of being able to meet the burden of servicing dept and whether the proposed project
will satisfy the return expectations of those who provide the capital. The aspects to be looked into
while conducting financial appraisal are as follows.
• Investment outlay and cost of project
• Means of financing.
• Project profitability
• Break-even point
• Cash shows of the project
• Investment worthiness, judged in terms of various criteria of merit
• Project financial position
• Level of risk
Economic/Social Cost-Benefit Analysis
This is concerned with judging a project from the larger social point of view, where in the
focus if on social costs and benefits of a project, which may often be different from its monetary
costs and benefits. The questions to be answered in social cost benefit analysis is are as follows:-
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• What are the direct economic benefits and costs of the project measured in terms of shadow
prices and not in terms of market prices?
• What should be the impact of the project on the distribution of income in the society?
• What would be the impact of the project on the level of savings and investment in the
society?
• What would be the contribution of the project towards the fulfillment of certain like self-
sufficiency, employment and social order?
Ecological Analysis
Today, environment concerns assured a great deal of significance and hence ecological
analysis should be done, particularly for projects which have significant ecological implications like
power plants and irrigation schemes and for environmental polluting industries like chemicals,
leather processing etc. The key questions to be answered in ecological analysis are as follows:-
• What is the likely damage caused by the project to the environment?
• What is the cost of restoration measures required to ensure that the damage to the
environment is contained within acceptable?
3.15 INTRODUCTION TO PROFIT
Profit motive is the most important motive that governs the behavior of business firms. In
studying the pricing and output decisions of the business firm, economists usually rely on the
assumption of profit maximization. The difference between the total revenue and total cost in
economic profit, which it is assumed, the firm attempts to maximize subject to the constraints
imposed by consumer demand and production costs. The profit analysis allows us to predict quite
well the behaviors of business firms in the real world. Profit analysis is quite useful in predicting
the price and output-behaviors of business firms in response to changes in tax rates, wage rates,
availability of resources, and so on.
3.16 MEANING AND NATURE OF PROFIT
Profit is the reward of the entrepreneur rather than the entrepreneurial functions. Profit
differs from the return on other factors in three important respects:
(a) Profit is residual income and not contractual or certain income as in the case of other factors; (b)
There are much greater fluctuations in profits than in the rewards of other factors and (c) profits
may be negative whereas rent, wages and interest must always be positive.
The term “profit” means all excess of income over costs and this includes the earnings of
self-used factors; i.e., entrepreneur's own land, capital and his own labour work called respectively
implicit rent, implicit interest and implicit wage. But in economics, profit is regarded as a reward
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for the entrepreneurial functions of final decision making and ultimate uncertainty bearing. Profits
can be expressed in the following different ways.
(i). Gross Profit and Net Profit
A businessman analyses gross profit income available to him after payment is made to
contractual hired factors and taxes, depreciation charges, insurance charges. In other words, it is the
excess of revenue receipt over explicit payment and charges.
Gross profit = Total Revenue - Explicit costs
Net profit, also called as pure profit or economic profit, is the residual balance of income
after making payments to all contractual and non-contractual payments to factors of production.
Implicit costs have to be deducted from gross profit to arrive at net profit, which could be positive
or negative.
(ii) Normal Profit and Supernormal Profit
Normal profit refers to that portion of profit which is absolutely necessary for the business
to remain in operation. In other words, it is the minimum necessary to induce the business to remain
and operate. Normal profit forms part of the average cost. The organizer obtains, normal profit when
average revenue is equal to average cost (AR = AC).
Super normal profit or abnormal profit could be treated as any return above the normal
profit. It is the residual surplus after paying for explicit costs, implicit costs and normal profit.
When average revenue or price is more than the average cost, the entrepreneur gets super-normal
profits. The existence of this profit is not obligatory to the firm to remain in business like normal
profits.
(iii) Accounting Profit and Economic Profit
Accounting profit is the revenue obtained during the period minus the cost and expenses
incurred to produce the goods responsible for getting the revenue.
Accounting profit = Total Revenue - The cost involved in producing and selling.
This theory is heavily discounted on the ground that it does not take into consideration other
expenses like the entrepreneurs wages, rental incomes on self-owned land and interest on self-
capital (also called as imputed cost).
The economic profit refers to those items that take into consideration both explicit costs and
implicit costs. Economists point out that economic profits are more important than accounting
profits since they alone reflect the true profitability position of the business enterprise.
Economic profit = Total Revenue - Explicit costs + imputed costs. . .
OR
Economic profit = Accounting profit - Imputed cost.
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3.17 THEORIES OF PROFIT
The theories of profits could be analysed and explained as follows:
• Profit as the reward for risk bearing and uncertainties,
• Profit as the consequence of frictions and imperfections in the economy (dynamic theory of
profits),
• Profit as a reward for successful innovation and
• Profit as a payment for organising other factors of production.
Thus, there are several viewpoints in explaining theories of profits.
To some economists, profits are nothing different from rent. Rent is defined as a differential
surplus. Similarly profit also arises when some entrepreneurs have more ability over others in the
field of production. While rent refers to land, profit refers to production. A superior entrepreneur
enjoys more talent as compared to a marginal entrepreneur. Prof. Senior and Prof. Mill treated rent
and profit on the same level and this was responsible for developing a full fledged theory of profit
by the American economist Prof. F Walker. His theory, is called the Rent theory of Profit.
Prof. Walker's concept of profit is-synonymous with Prof. Richardo's theory of rent. Rent
arises due to the fact that not all pieces of land have the same fertility and productivity; likewise
profit arises due-to differential factors in talent and ability of the entrepreneur, who is supposed to
be the captain of industry. This position ensures the emergence of differences in industrial revenue
profit, just like the differences in agricultural revenue and rent Prof. Walker treats profit as “rent of
ability.”
1. Risk and Uncertainty Theory of Profits
This theory envisages that profit is a reward paid to the organisation for undertaking risks.
People generally do not want to shoulder risks but some who are prepared to venture in spite of
risks involved should be rewarded and this rewards is profit. Higher the risk, higher will be the
reward. Since business operates under conditions of uncertainty, the risk premium, in the form of
profit is to be paid. Risks are not confined only to owners who receive profits and even non-
entrepreneurial risks, like the risk of vocational specialization are also important. According to Prof.
Hawley, risk bearing is the special function of an entrepreneur and it leads to the emergence of
profit. Greater the risk, greater will be the expected gain to induce entrepreneur and to start the
business. Most businesses are speculative and reward is necessary to the risk bearer. According to
Prof. Hawley's concept, enterprise is the only real productive factor - land, labour, and capital are
subordinate factors and mere means of production. Prof. F H Knight contends that risks are an
inherent factor in any business and they are of two kinds, insurable risks and non-insurable risks, In
the case of insurable risks one can predict the event and it could be subject to insurance. This
insurance premium becomes a part of the cost of production and enters into price. But business risks
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are non-insurable and these risk are necessarily to be borne by the entrepreneur himself. They
include risk of competition, technological risks, business cycle risks and risks arising from
governmental action such as tax policy, price control, import and export restrictions, etc. The above
risks are not insurable. Prof. Knight advanced the theory that pure economic profit is related to
uncertainty. The foreseen risks are insurable. The only unforeseen risks are non-insurable and they
are responsible for the emergence of profit. According to him, it is uncertainty-bearing rather than
risk-bearing that earns profit for the entrepreneur.
2. Profit as a Reward for Market Imperfection and Friction in Economy
(Dynamic Theory of Profit)
In a static economy neither demand nor supply changes. The demand for a commodity
depends upon the size of population, incomes, consumer's tastes, substitutes of commodities, price
and the price of related goods. In a static equilibrium, the supply of the commodity does not change.
When demand and supply do not change, the price as well as the cost of production remains
constant.
So, to say, in a static equilibrium the price of the product will be equal to the average total
unit cost of production including normal profit. But this static equilibrium concept is only
theoretical in character.
In a dynamic world, things keep on changing and every thing is uncertain. In a dynamic
economy all factors that influence demand and supply change continuously resulting in profit or
loss. The demand for a commodity or service may increase due to many factors like population, rise
in incomes, non-availability of substitutes, changes in tastes, etc. Such a demand may increase price
of the product and the cost of production remaining constant, profit will arise. Similarly, the supply
position may also increase due to improvements in transport facilities, introduction of new
production processes, reduction in the cost of raw materials, etc.
According to Prof. Clark, profits belong essentially to economic dynamics and not to
economic statics where the economy is frictionless and full competition pervades. In a static
economy, pure profit would be eliminated as fast as they could be created.
A war, an inflation, a business depression are all factors in a modern economy which lead to
profit or losses. During inflation, prices and costs go up but prices increase at a faster rate than costs
resulting in larger margins of profit to producers and merchants. During a depression the opposite
trend prevails. These consequences are common to all firms and industries and are beyond the
control and influence of anyone.
At times, individual firms introduce dynamic changes through inventions of science and
technology; introduction of new processes of production, introduction of new commodities and
changes in advertisements and salesmanship. These changes are the cause for the emergence of
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profit. Some argue that profit is the result of disequilibrium and imperfect competition in the
market. Especially the monopoly powers prevailing in the market help producers of companies to
accrue profits. They raise prices by restricting output and the economy cannot adjust itself
immediately to changes in costs and demand. Their concept of profit is due to the enhanced
earnings of a permanent monopoly and which is market imperfection.
3. Innovation Theory of Profits :
Prof. J A-Schumpeter's theory of profits is almost akin to the theory of profits enunciated by
Prof. J B Clark. Prof. Schumpeter, in his innovation theory, attributed profits to dynamic changes in
the productive process due to the introduction of modern science and technology of production
techniques. Risk Plays no part in this theory and profits are solely attributed to dynamic
development. Innovation may bring about changes in methods of consumer tastes increasing
national output more than increase in costs. The increased net output is the profit out of innovation.
New organization, new promotion, new raw material, new markets or new products constitute
innovation. Through advertising and research laboratories, innovation is built into the competitive
system. It may also be argued that profit is the cause for innovation. According to Schumpeter,
profit is both the cause as well as the effect of innovations and thus it is the cause and effect of
economic progress also. Profit accrues not to the innovator, nor to the financier but to the
entrepreneur who introduces it into the productive process. When innovation becomes obsolete,
profit disappears and innovation is always subject to competition. Innovational profits have a
tendency to appear, disappear and reappear as the result of emergence of new and more clever
innovation.
4. Profit as a Reward for Organizing other Factors of Production
A proportionate combination of the various infrastructures, men, material, money,
machinery, marketing is quite indispensable to produce the desired output. Entrepreneur takes this
responsibility to coordinate these infrastructures to produce products. He not only takes unforeseen
risks but also in the midst of uncertainties, combines the factors of production to produce output. A
disproportionate combination of factors only increases cost of production and reduces profits. It is
here that the entrepreneurial skill and wisdom play a very important part. In owner-managed firms,
part of the profit goes to the manager's skill. In large corporations, the responsibility of organizing
the infrastructure and their efficient and effective utilization to the optimum point fully rests with
the salaried managers and as such the companies profit is to be treated as a payment for organizing
and directing activities.
All profits, in a sense, are complementary, since many factors like risk, uncertainty,
innovation and monopoly powers, etc, affect every business activity in profit earning.
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In general, it could be argued that under perfect competition, when the price is equal to the
average and marginal costs, the entrepreneur gets only “normal profits” and not supernormal
profits.
3.18 DEPRECIATION
With the passage of time and use, the equipment, machinery and buildings wear out and in
course of time they become useless from the business point of view they only have scrap value. To
measure the true income of a business, a charge is made by the accountant against the annual
income of the business and this charge is termed as depreciation. It is usually provided in equal
amounts over the life of the asset. The provision of depreciation enables the firm to provide for
replacement of the asset by the time it is declared a scrap. The depreciation charges vary from
company to company. In heavy industries like iron and steel, air transport, railways, aluminum
industries, etc., heavy depreciation charges are provided; whereas in the case of banks, insurance
companies, financial institutions, etc., the depreciation charges are relatively lower. Depreciation
acts as an instrument for stimulating capital formation and directing investments in the national
interest.
For the purpose of reporting business profits to the shareholders and income tax authorities,
different methods of measuring depreciation are followed.
The commonly accepted methods of depreciation are discussed below.
1. Straight Line Method
Under this method an asset is supposed to wear evenly during its normal life and
depreciation is provided uniformly on the assumption that the asset depreciates more rapidly at
some stages of its life than at others. Assuming that there is no scrap, value, the annual depreciation
is worked out by dividing the initial value of the asset by the number of years estimated. If the asset
has scrap value, it is deducted from the initial cost and then divided by the estimated life in years.
For example if the initial cost of the asset is Rs 5,000 with a scrap value of Rs 500 and
estimated life of 5 years, the amount of annual value of depreciation would be
Rs.
-900/ Rs
5
4500
5
5005000
==
−
per year
This method is very simple, provided the asset is not prone to premature retirement due to
obsolescence or accidents.
The depreciation charge is made against annual income and set apart for being credited to
depreciation fund. This method does not take into consideration the fact that the cost of repairs is
likely to be higher in the later years of the life of the asset due to heavy wear.
From the economists point of view there are two methods of charging depreciation. First,
the opportunity cost of equipment, that is, the most profitable alternative use of the asset that is
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foregone by putting the asset to its present use. Secondly, the exhaustion of year’s worth of limited
valuable life of the asset to be the basis of depreciation charges, and this is measured by the
replacement value of the equipment that will produce comparable earnings. Both these economic
concepts are important to management since the opportunity cost is required for operation problem
of profit making, whereas the second is required to find out the replacement of eroded earnings
ability which help in financial problems of preserving and administering capital.
2. Declining Balance Method (DBM)
According to this method depreciation is provided at a uniform rate on the written value of
the asset at the commencement of the year. For example, if the value of the asset is Rs.2,000 at the
beginning of the year and the rate of depreciation is 20 per cent, the first year depreciation will be
Rs 400 and the written down value of the asset at the beginning of the second year would be Rs
1600. Similarly, the written down value in the 3rd year would be Rs 1280 and so on. Under this
method, even after 5 years the written down value will never be zero and as such the asset is
supposed to have some scrap value.
3. Sum of the Year's Digits Method (SYDM)
This method is similar to declining balance method that is to provide for more or less
uniform total cost of operation of the asset. But this method differs from the declining balance
method in that the book value remains constant while the annual rate of depreciation changes. For
example, the expected life periods are 5,4,3,2 and 1 which add upto 15, and 15 serves as a common
denominator of the numerators 5,4,3,2 and 1. Thus, the annual rates are 5/15, 4/15, 3/15,2/15 and
1/15 respectively. If it is assumed that the original value of the asset is Rs 1000, scrap value is Rs
100 and the expected life of the a set is 5 years; the basis is Rs 1000 - 100 = Rs 900.
Either of these two methods, DBM and SYDM, will be found useful as well as equitable.
3.19 PROFIT PLANNING & FORECASTING
In the modern dynamic world the attitudes and policies of business firms are entirely
different. Economic theory makes an assumption that the maximization of profit is the sole
objective of a business firm. Today profit maximization refers to the long run periods; to
managements rather than to owner's income; to include non-functional income; to restrain
competition; to maintain management control, etc. Of late there seems to be same realization on the
part of the management and economic theorists that firms do not always aim at profit maximization
in relation to marginal cost and revenue, but set standards and targets of reasonable profits for the
following considerations.
• To attain industry leadership
• To forestall potential competition
• To prevent governmental intervention and restraints
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• To maintain and foster consumer goodwill
• To control wage increases
• To avoid risks threatening the survival of the business firms and
• To maintain the liquidity of the business firm.
Modern business firms feel that they have a social responsibility and an obligation to society
and therefore they are even prepared to sacrifice profits during the short run periods. The executives
want to limit profit in order to maximize their own benefits either by non-diluting control over the
industry or by the desire to maintain pleasant working conditions. Today firms set “profit
standards” through a percentage on sales or a reasonable return on investments. To discourage
potential competitors, return on investments seems to be a relevant profit standard, if all new firms
have similar cost standards. From the owner's point of view, return on capital is the best method for
profit standard because the ratio of profits to sales varies very widely among firms. Now the
problem is how to set the standard and what is the criteria behind it.
Capital is formed by attracting investments (profit is a bait to attract capital along with the
interest rates) and also by ploughing back the earned profits. Therefore, the criteria to be set
depends upon the mode applied to achieve the above.
It is necessary to set different standards for different companies and purposes, since they
give widely varying results depending on market conditions. The business firms pursue a variety of
profit policies to achieve different goals like long run survival; to maintain safety margins; to
introduce leisure as a variable; to maintain financial control of the firm; to maintain liquidity; to
earn a satisfactory return or to maximize sales subject to profit constraints, etc.
1. Profit Planning
A sound and healthy business should always aim at consistent profit in the midst of risk and
uncertainties which are a result of the dynamic nature of consumer needs, peculiar nature of
competition and uncontrollable nature of costs. Thus, planning for profit is absolutely necessary,
and demands a thorough understanding of the relationship between output, cost and price and it is
the “break even analysis” that can explain this relationship clearly. Through break even analysis, it
is possible to derive managerial actions to maintain and increase profitability.
2. Profit Measurement
For most firms, the most practical measure of whether they are making adequate profits is
the rate of return on capital which is calculated as
Rate of return on capital-
100x
Capital Fixed
ProfitNet
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If this figure is too low then the firm would have to question either its profitability and how
it could be improved or in extreme cases whether its capital could be invested more effectively
elsewhere.
Profits are the excess of total revenue over total costs, where total costs include both explicit
and implicit costs.
3.20 Cost Volume-Profit Relation
Cost is the result of the operation of a number of varying factors such as:
• Volume of production,
• Product mix,
• Internal efficiency
• Methods of production,
• Size of plant, etc.
Of all these, volume is perhaps the largest single factor which influences costs which can
basically be divided into fixed costs and variable costs. Volume changes in business are a frequent
occurrence, often necessitated by outside factors over which management has no control and as
costs do not always vary in proportion to changes in levels of output, management control of the
factors of volume presents a peculiar problem.
As profits are affected by the interplay of costs and volume, the management must have, at
its disposal, an analysis that can allow for a reasonably accurate presentation of the effect of a
change in any of these factors which would have no profit performance. Cost-volume-profit
analysis furnishes a picture of the profit at various levels of activity. This enables management to
distinguish between the effect of sales volume fluctuations and the results of price or cost changes
upon profits. This analysis helps in understanding the behaviour of profits in relation to output and
sales.
Fixed costs would be the same for any designated period regardless of the volume of output
accomplished during the period (provided the output is within the present limits of capacity). These
costs are prescribed by contract or are incurred in order to ensure the existence of an operating
organization. Their inflexibility is maintained within the framework of a given combination of
resources and within each capacity stage such costs remain fixed regardless of the changes in the
volume of actual production. As fixed costs do not change with production, the amount per unit
declines as output rises.
Absorption or full costing system, seeks to allocate fixed costs to products. It creates the
problem of apportionment and allocation of such costs to various products. By their very nature,
fixed costs have little relation to the volume of production.
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Variable costs are related to the activity itself. The amount per unit remains the same. These
costs expand or contract as the activity rises or falls. Within a given time span, distinction has to be
drawn between costs that are free of ups and downs of production and those that vary directly with
these changes.
Study of behaviour of costs and CVP relationship needs proper definition of volume or
activity. Volume is usually expressed in terms of sales capacity expressed as a percentage of
maximum sales, volume of sales, unit of sales, etc. Production capacity is expressed as a percentage
of maximum production, production in revenue of physical terms, direct labour hours or machine
hours.
Analysis of cost-volume-profit involves consideration of the interplay of the following
factors:
• Volume of sales
• Selling price
• Product mix of sales
• Variable cost per unit
• Total fixed costs
The relationship between two or more of these factors may be (a) presented in the form of
reports and statements or (b) shown in charts or graphs or (c) established in the form of
mathematical deduction.
OBJECTIVES OF COST-VOLUME-PROFIT ANALYSIS:
The objectives of cost-.volume-profit analysis are given below:
• In order to forecast profit accurately, it is essential to know the relationship between profits
and costs on the one hand and volume on the other.
• Cost-volume-profit analysis is useful in setting up flexible budgets which indicate costs at
various levels of activity.
• Cost-volume-profit analysis is of assistance in performance evaluation for the purpose of
control. For reviewing profits achieved and costs incurred, the effects on cost of changes in
volume are required to be evaluated.
• Pricing plays an important part in stabilizing and fixing up volume. Analysis of cost-
volume-profit relationship may assist in formulating price policies to suit particular
circumstances by projecting the effect which different price structures have on costs and
profits.
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• As predetermined overhead rates are related to a selected volume of production, study of
cost-volume relationship is necessary in order to know the amount of overhead costs which
could be charged to product costs at various levels of operation.
3.22 PROFIT-VOLUME (P/V) RATIO
The ratio or percentage of contribution margin to sales is known as P/V ratio. This ratio is
known as marginal income ratio, contribution to sales ratio or variable profit ratio. P/V ratio,
usually expressed as a percentage, is the rate at which profits increase with the increase in volume.
The formulae for P/V ratio are
P/V ratio = Marginal contribution / Sales
Or
Sales value - Variable cost/Sales value
Or
I- Variable cost/Sales value
Or
Fixed cost + Profit/Sales value
Change in profits/Contributions/Changes
(All the above formulae mean the same thing).
A comparison for P/V ratios of different products can be made to find out which product is
more profitable. Higher the P/V ratio more will be the profit and lower the P/V ratio, less will be the
profit. P/V ratio can be improved by
• Increasing the selling price per unit.
• Reducing, direct and ariable costs by effectively utilising men, machines and materials.
• Switching the product to more profitable terms by showing a higher P/V
;
ratio.
3.23 BREAK EVEN ANALYSIS
Break even analysis examines the relationship between the total revenue, total costs and
total profits of the firm at various levels of output. It is used to determine the sales volume required
for the firm to break even and the total profits and losses at other sales level. Break even analysis is
a method, as said by Dominick Salnatore, of revenue and total cost functions of the firm. According
to Martz, Curry and Frank, a break even analysis indicates at what level cost and revenue are in
equilibrium.
In case of break even analysis, the break even point is of particular importance. Break even
point, is that volume of sales where the firm breaks even i.e., the total costs equal total revenue. It
is, therefore, a point where, losses cease to occur while profits have not yet begun. That is, it is the
point of zero profit.
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BEP =
unitper costs Variable - price Selling
Costs Fixed
For Example =
unitper 3 Rs. costs Variable -unit per 5 Rs price Selling
10,000 Rs. Costs Fixed
Therefore, BEP =
units 5,000
35
10,000 Rs.
=
−
1. Uses of Break even Analysis
Break even analysis is a very generalized approach for dealing with a wide variety of
questions associated with profit planning and forecasting. Some of the important practical
applications of break even analysis are:
• What happens to overall profitability when a new product is introduced?
• What level of sales is needed to cover all costs and earn, say, Rs 1,00,000 profit or a 12%
rate of return?
• What happens to revenues and costs if the price of one of a company's product is hanged?
• What happens to overall profitability if a company purchases new capital equipment or
incurs higher or lower fixed or variable costs?
• Between two alternative investments, which one offers the greater margin of profit (safety)?
• What are the revenue and cost implications of changing the process of production?
• Should one make, buy or lease capital equipment?
2. Assumptions of Break even Analysis
The break even analysis is based or certain assumptions, namely
• All costs are either perfectly variable or absolutely fixed, over the entire period of
production but this assumption does not hold good in practice.
• The volume of production and the volume of sales are equal; but in reality they differ.
• All revenue is perfectly variable with the physical volume of production and this assumption
is not valid.
• The assumption of stable product mix is unrealistic.
3.24 RISK ANALYSIS
Risk is inherent in every business. How so ever hard we may try to eliminate it, it can’t be
eliminated and can only be reduced. Project cost estimates life of the project and the estimates of
demand, production, sales and prices may not prove to be accurate because of uncertainty about
future. Project decisions are based on many political and social developments as well as changes in
technology, prices competition and productivity. Foreseeable risk implies considering all these
factors while deciding about the desirability of a project. The size of allowance provided for this
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purpose will have a decisive impact on the profitability of the project and in certain cases where the
profitability appears to be less, the project may not be carried on. Thus, it is necessary to
incorporate measures at the appraisal stage to identify the risk factors and provide for the same.
The decision situations can be classified into three types viz. certainty, risk and uncertainty.
Certainty refers to the situation where the future outcome can be accurately predicted. In reality all
investment decisions are undertaken under conditions of risk and uncertainty. Risk refers to a
situation where probability distribution of a particular outcome could be objectively known in
advance. Uncertainty refers to a situation where such probability distribution cannot be objectively
known but can only be guessed.
There are some factors which add to the degree of uncertainty of an investment and these
are:
(i) The process or the product becoming obsolete.
(ii) Decline in demand for the product.
(iii) Change in government policy about business.
(iv) Price fluctuations.
(v) Foreign Exchange restrictions.
(vi) Inflationary tendencies etc Uncertainty can be managed in two ways :
(I) By employing modern quantitative techniques such as System Analysis, Marketing
Research, Operations Research, Network Analysis etc.
(II) By using some techniques for handling risk at the capital investment appraisal stage. In
mathematical sense, risk refers to a set of unique outcomes for a given event which can be
assigned probabilities. Uncertainty refers to outcomes of a given event which are too unsure
to be assigned probabilities i.e. risk exists when the decision maker is in a position to assign
probabilities to various outcomes. This happens when the decision maker has some
historical data on the basis of which he assigns probabilities to other projects of the same
type. Uncertainty exists when the decision maker has no historical data from which to
develop a probability distribution and must make intelligent guesses in order to develop a
subjective probability distribution e.g. if the project is new to the firm, then decision maker
through research and consultation with others, can develop or assign probabilities to
possible outcomes.
Investment planning is impossible without a thorough understanding of risk. There is
risk-return trade off i.e. the greater the risk accepted, the greater must be the potential return
as reward for committing one's resources to an uncertain outcome. As the level of risk rises,
the rate of return should also rise and vice versa. Risk can be perceived, defined and handled
in various ways. One way to handle risk is to avoid it e.g. risk of being injured while driving
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a vehicle can be avoided by not driving a vehicle. One may view a risk in taking food that
might be toxic. Complete avoidance by refusing to eat at all would create the ultimate
inevitable outcome of death and as such avoidance is not a viable choice. In the investment
world, avoidance of some risk is deemed to be possible through the act of investing in risk
free investments. Stock market risk can be avoided by choosing to have no exposure to it by
not investing in equity securities.
Another way to handle risk is to transfer the risk. Risk transfer can be linked to the concept
of insurance e.g. health insurance is advisable if one is interested in covering financial risk of
becoming severely ill. An insurance company allows the transfer of large medical bill to itself in
exchange for a fee called an insurance premium. The insurance company is fully convinced that it it
can collect enough premiums and have a large enough pool of insured persons ; it can pay the cost
of the minority who will require extensive medical treatment and have enough left over to record a
profit.
It is normally believed that investors are rational and are averse to risk taking. Rational
investors prefer certainty to uncertainty. A risk averse investor is one who will not assume risk
simply for its own sake and will not incur any given level of risk unless there is an expectation of
adequate compensation for having done so. It is not irrational to assume risk, even very large risk,
as long as one expects to be compensated for it. Investor cannot reasonably expect to earn larger
returns without assuming larger risks. Investors do opt for high level of risk with the expectation of
high levels of return. On the other hand investors unwilling to assume much risk should not expect
to earn large returns. There is need to think in terms of the expected return-risk trade off that results
from the direct relationship between the risk and the expected return of an investment.
Investors should also think about the time period involved in their investment plans. It is
normally assumed that the longer is the time horizon the more risk can be incorporated into
financial planning.
3.25 TYPES OR KINDS OF RISKS
Risk means possibility of financial loss which can adversely affect both present and future
of an entrepreneur. Various types of risks are :
Systematic and Non Systematic risks.
An investor can construct a diversified portfolio and can eliminate part of the total risk.
Variability in a security's total returns that is directly associated with the overall movements in the
general market or economy is called systematic risk. Non systematic risk includes the variability in
a security's total returns not related to overall market variability. The unsystematic risk is that
portion of total risk which is unique and peculiar to the firm. Factors such as management
capability, labour strikes, consumer preferences etc. cause these variability of returns in a firm.
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1. Market Risk. Market risk may be caused by investor’s reaction to tangible as well as intangible
events. Political, social or economic developments are a set of real and tangible events. The
intangible events relate to pure market psychology. The market risk is usually touched off by a
reaction to real events, but the emotional instability of investors acting collectively leads to
snowballing over reactions.
2. Interest rate risk. Interest rate risk refers to the uncertainty about future market price and the
size of future income caused by changes in the interest rates. The variability in a security's return
resulting from changes in the level of interest rates is referred as interest rate risk. Such changes
generally affect securities inversely i.e. other things being equal, security prices move inversely to
interest rates. The reason for this movement is tied up with the valuation of securities. Interest rates
risk affects bonds more directly than common stock and is a major risk faced by all bond holders.
As interest rates change, bond prices change in the opposite direction.
3. Purchase Power Risk. (Inflation Risk). Risks arising from the decline in purchasing power on
account of inflation is referred as inflation risk. This is more pronounced for the holders of fixed
income securities. If we think of an investment as postponement of consumption we can visualize
that when a person buys a share he postpones his present consumption. He had foregone an
opportunity to buy some goods as long as he holds these shares. If during this period, the prices of
desired goods rise, the investor loses the purchasing power. He, therefore, requires to be
compensated by way of additional returns. Rational investor makes provision to include an
allowance for loss in the purchasing power in the estimate of expected returns.
4. Business Risks. Every firm operates within a particular operating environment. Business Risk is
a function of operating conditions faced by a firm. An investor is exposed to the risk of poor-
business performance. This may be the result of stiff competition, emergence of new technologies,
development of substitute products, shifts in consumer preference, inadequate supply of essential
inputs, incompetence, failure of management etc. Business risks can be divided under two heads
namely external and internal. Internal business risk is largely associated with the efficiency with
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which the firm conducts the business within the broad operating environment imposed on it.
External business risk is the result of operating conditions imposed upon the firm by external
environment, on which the firm has no control. The recessionary situation, government policies
with respect to monetary and fiscal situation, liberalisation of imports and increase in competition
are instances of such factors. The poor business performance caused by external and internal
sources of business risks definitely adversely affects the interests of shareholders and bondholders.
5. Financial Risk. Financial risk is associated with the way a firm finances its activities. The
presence of borrowed money or debt in the capital structure creates a fixed charge in the form of
interest liabilities. These liabilities must be sustained by a firm. The presence of interest
commitment causes more variability in residual income available for shareholders. Financial risk is
avoidable to the extent management has freedom to decide to borrow or not to borrow funds. A firm
with zero debt financing has no financial risk.
3.26 METHODS OF RISK ANALYSIS
1. Modern Quantitative Methods
(i) Systems Analysis: It refers to the set of techniques concerned with the analysis, procedures
and other methods of doing things and with the design and implementation of new & superior
system. Its principal objective is to evaluate alternatives in a consistent unarbitrary manner. Growth
in size and complexity of business operations need a systematic examination of a problem of choice
in which each step of the analysis is made explicit.
(ii) Marketing Research: It is a systematic study or investigation to collect and interpret facts for
providing information to management to get products and services more efficiently into the hands
of the consumers. It is used to forecast objectively the demand potential for goods and services of
the prospective project. The main aim is to assess the available opportunities and study the future
trend of these opportunities so that investment decision could be taken with a degree of confidence.
It will help in reducing the degree of risk.
(iii) Operations Research: It enables a decision maker to be more objective in choosing among
alternatives. Some popular OR techniques are linear programming, game theory, inventory control
techniques.
(iv) Network Analysis—PERT/CPM: Gestation period is the time lag which will elapse between
the commencement of investment and start of the return on investment—a vital-determinant in
establishing the acceptability of the project. The longer the gestation period, higher would be cost
escalations and the risk associated with the project resulting in lower returns. PERT and CPM
provide the project formulation with one of the most effective analytical aid.
This analysis is useful in :
(i) Developing the project.
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(ii) Controlling the project implementation delays and costs.
(iii) Ascertaining gestation period realistically.
(v) Break Even Analysis. Break even point is that level of output/sales where there is no profit
or no loss. Below that point there is loss and beyond that point there is profit.
Break even analysis serves as an important managerial tool to study cost-output profit
relationship at varying levels of output. It also helps in forecasting profits more accurately. Break
even analysis evaluates the performance of business in terms of cost of incurred and profit earned. It
also helps the management in deciding about pricing policies. The mathematical model of analysing
cost volume profit relationship can be shown in the form of following equations.
Sales = Variable cost + Fixed Cost ± Profit/Loss.
Sales — Variable Cost = Fixed Cost ± Profit/Loss.
Contribution = Sales — Variable Cost.
Contribution = Fixed Cost ± Profit/Loss.
In order to make profit, the contribution must be more than fixed cost and to avert any loss,
contribution must be equal to fixed expenses. Profit-Volume Ratio (P/V Ratio) establishes the
relationship between contribution to sales.
P/V Ratio =
100x
Sales
onContributi
Where Contribution = Sales — Variable Cost
A high P/V Ratio shows that even a slight increase in the volume without a corresponding
increase in fixed cost would result in high profit. P/V Ratio can be increased by maximising
contribution which is possible by increasing selling price, reducing variable cost and by improving
product size.
(vi) Ratio Analysis: Cost, benefits and profits measured in absolute figures do not provide clear
information while comparing two or more investment proposals or resource allocation. Ratio
analysis can be used for better, easy and useful comparisons.
The above stated methods can help in the minimisation of the degree of risks associated with
different types of investment decisions. These methods cannot completely eliminate risk.
Risk Analysis is of immense use while taking any investment decision.
II. Various Methods Under Risk Analysis are :
(i) Shorter Payback Period. Shorter is the payback period for a project the better it will be for
the firm implementing that project. Projects with the shortest payback period should be
preferred. Cut off period states the risk tolerance level in the firm. Both payback period and
cut off period should be considered while taking decision on any project.
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(ii) Sensitivity Analysis. It is a simulation technique in which key variables are changed and the
resulting change in the rate of return is observed. Those variables are selected whose
estimated value may contain significant errors or an element of uncertainity and then to
calculate the effect of errors of different sizes on the present value of the project. Key
variables are cost, prices, market share, project life etc. The method involves varying each
strategic variable by certain fixed percentage in both positive as well as negative directions
in turn and examine the impact of change on the rate of return.
(iii) Probability Analysis. Probability is the measure of one's opinion about the likelihood that an
event will occur. Two types of probabilities namely objective and subjective are used for
decision making under uncertainty. The objective probability is the probability estimate
which is based on very large number of observations. Subjective probabilities are based on
the state of belief a person rather than objective proof of a large number of trials. Since
capital expenditure dcisions are mostly non repetitive and not taken under identical
situations, only subjective probabilities are useful and hence employed.
3.27 CRITERIA FOR EVALUATING PROPOSAL TO MINIMIZE RISK
It is evident that project giving higher rate of return involves higher degree of risk. While
selecting a project a firm has to keep in mind its capacity to bear risk. To select or reject a proposal
following criteria is adopted.
(i) Select the least risky proposal: According to this criteria a firm will accept only that
proposal which has the least risk. For this purpose all proposals are arranged according to
the agree of risk involved in a ascending or descending order. The proposal having least risk
is accepted. In case two or more proposals are to be picked up then those having minimum
risk are chosen.
(ii) Avoid proposals with fluctuating returns. According to this criteria a firm should avoid
those proposals which have larger fluctuations in the returns. For example a proposal having
fluctuations in returns from 10% to 15% should be preferred in comparison to a proposal
having return from 5% to 30%.
(iii) Apply hurdle rates. As per this criteria a firm determines different hurdle rates for different
risk levels. The firm may decide the minimum acceptable return below which it is not going
to accept the proposal e.g.
Degree of risk Expected Return
Low 5%
Medium 15%
High 25%
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In case of medium risky projects those projects will be accepted which give return of more
than 15% and those rejected which given return less than 15%. Similarly in case of high risky
projects only those projects will be accepted which give return of more than 25%.
Minimisation of Risk
The risks may be divided into following two categories for the purpose of minimisation of
risk :
(i) Risks relating to errors in forecasting.
(ii) Risks relating to factors external to enterprise.
The first type of risk can be minimized by undertaking a scientific data generation process
for decision making. After making a realistically pessimistic estimate of all cost, provision for
contingencies is provided. This provision is normally provided at 10 per cent of expenditure
estimated for the project. This method can be useful in most of the cases but different yardsticks be
adopted keeping in mind the nature of the expenditure. For assessing the impact of second category,
every aspect of the method used by the enterprise might be examined. Marketing risks can be
minimised by :
(a) Entering into long term contracts with suppliers and customers.
(b) Entering into collaboration with other producers for specialising in certain products or
geographical areas,
(c) diversifying into certain related and unrelated products.
In the above stated manner, risks associated with technical and financial aspects can be
minimized. In nutshell, it can be stated that an enterprise will prepare itself for all future
eventualities, taking risks as a challenge and taking such measures which promote both the short
and long term interests of the firm.
3.28 SOURCES OF FINANCE
There are several sources of finance for entrepreneurs looking to get their business off the ground
and one should consider some of these alternative sources before one ask friends and family members for
start up money. Generally there are two sources of finance such as, internal and external.
• Internal Sources: Internal sources are those, which are owned by the entrepreneur himself and the
money is invested as equity. The sources of finance derived from the enterprises assets or activities
also come under this category. Entrepreneurs can create financial assistance internally from the
following sources:-
o Personal investment
o Deposits and loans given by the owner
o Personal loan from provident fund, life insurance policy etc.
o Playing back of profits into one’s own enterprise.
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• External Sources:-Several financial institutions like development banks, commercial banks,
financial corporations etc. help entrepreneurs raise funds. These are classified as external sources
from which the entrepreneur can seek financial assistance as well. Entrepreneurs can create financial
assistance from the following sources:-
o Borrowings from friends and relatives
o Borrowings from the commercial banks for working capital.
o Term loans from development financing institutions like IDBI, SIDBI, IFCI, Ltd, ICICI Ltd.
Etc
o Hire-purchasing or leasing facilities from national small industries corporations, State Small
Industries Development Corporations, etc.
o Seek capital loan from the financial institutions as well as commercial banks.
o Credit facilities provided by different financial institutions as well as commercial banks.
In case of setting up a small scale enterprise, an entrepreneur mostly depends, upon institutional
finance for initial capital investment. Very few entrepreneurs rely upon such social sources like friends and
relatives and that too as a last resort. Moreover, Indian Institutional finances such as commercial banks and
development banks offer financial assistance at attractively low interest rates as compared to other forms of
loans. The sources used for funds determine the capital structure of the enterprise which presupposes the
relation between debt and equity capital, otherwise called debt equity ratio.
3.29 SUMMARY
Generating ideas is an innovative and creative process. Sometimes the most difficult aspect of
starting a business is coming up with a business idea. Even if you have a general business idea in mind, it
usually needs to go through fine tuning processes, fruitful ideas often occur at points where the person’s skill
set, hobbies, interest and also his social networks intersect. In other words, the best ideas for a new business
are likely to come out from the activities and people that we already know well.
Project appraisal is a technique used to test whether the project under taken is feasible or not. It
involves technical and managerial appraisal. You have understood that to successfully manage a project an
organization has to meet certain pre-requisites such as adequate project formulation and effective
monitoring. An organization also has to establish certain principles such as identifying the type of business
that is conducted by an organization and preparing a plan to establish the scope of a project you have learned
that project ideas that are generated are rated according to different factors to select the most feasible project
idea. The project analyst, who is mainly responsible for producing project ideas, should have qualities such
as open mindedness and confidence to successfully generate project ideas.
3.30 SELF ASSESSMENT QUESTIONS
1. Discuss various sources of business ideas.
2. What are the techniques for generating new ideas?
3. Define project and discuss project identification.
4. What do you mean by project report? And what are its contents?
5. Define project appraisal? Discuss various factors relating to project appraisal.
6. Describe project feasibility study.
7. Define profit & discuss theories of profit.
8. Define risk analysis and discuss various kinds of risk.
9. Describe various sources of finance.
10. Define cost-volume-profit and discuss it’s objective.
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UNIT – 4
LEGAL AND STATUTORY ENVIRONMENT FOR SMALL INDUSTRY
AIMS AND OBJECTIVES
After going through this unit, you will be able to understand :
• Constitution of small scale business
• Legal formalities in setting of SSIs
• Licensing system of SSIs
• The factories Act.
• Meaning and definition of small scale industry
• Rationales small scale industries
• Role of SSI in economic development
• Government policy towards small scale industry
• Government support to SSI during five year plan
• New policy initiative tips in 1999-2000 for small scale sector.
• Impact of globalization and liberalization on SSI.
• Impact of WTO / GATT on SSI
• Agencies of government for SSI
• Financial Institutions for small scale industry
• Social responsibility of business.
CONTENTS
4.1 Constitution of small scale business
4.2 Legal formalities
4.3 Provisional Registration
4.4 Licensing systems of SSIs
4.5 SSI exemption skill as per budget 2003-2004
4.6 Rules regarding the Factories Act
4.7 Meaning and definition of small scale industries
4.8 Characteristics of SSI
4.9 Rationale of small scale industry
4.10 Objective of SSI
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4.11 Scope of SSI
4.12 Role of SSI in economic development
4.13 Advantage of SSI
4.14 Government policy : Industrial policy resolutions
4.15 Government support to SSI during five year plan.
4.16 New policy initiative in 1999-2000 for small scale sector.
4.17 Impact of globalization and liberalization on SSI.
4.18 Impact of WTO/GATT on SSI
4.19 Meaning and need for support
4.20 Agencies of Government for SSI
4.21 Nature and types of support
4.22 Financial Institutions
4.23 Social responsibility of business
4.24 Meaning and definition of social responsibility
4.25 Responsibility of business towards different sectors of society.
4.26 Arguments for social responsibility of business
4.27 Arguments against social responsibility
4.28 Limits of social responsibility.
4.29 Barriers of social responsibility
4.30 Social responsibility – Indian situation
4.31 Summary
4.32 Self assessment questions
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LEGAL AND STATUTORY ENVIRONMENT FOR SMALL INDUSTRY
4.1 CONSTITUTION OF SMALL SCALE BUSINESS
While deciding on the constitution of business i.e. whether the entrepreneur wants it in the
form of sole proprietorship, partnership or a private limited company, he should base his decision
on the size of the project and the degree of risk involved. He will have to undertake formalities such
as registration of partnership or incorporation of a private limited company but, however, no such
formalities are required in case of a sole trader.
Arrangement of Finance for Fixed Assets and Current Assets
Once the entrepreneurs has obtained necessary clearances, he should apply for a term loan
(for fixed assets) to state level financial institutions and/or to a commercial bank along with the
business plan (detailed project report) and the documentary evidence required by them. After the
loan is sanctioned, he has to execute the necessary legal documents mortgaging assets to them, as
decided in the agreement.
The entrepreneur should keep in mind that disbursement of loan amount takes time. It
generally begins after he has fulfilled all required conditions and after part of his own capital
(margin money) has been raised and invested in the project. As far as the working capital is
concerned, the bank would consider sanctioning of the same one after the term loan is sanctioned.
After all the sanctions have been received, he can start with the actual implementation of his
project. Therefore, he should lay emphasis on completion of all formalities otherwise the
implementation would be delayed leading to cost over runs.
4.2 LEGAL FORMALITIES IN SETTING UP OF SSIs
Various legal formalities are to be completed for setting up a small scale unit. These
formalities are as under.
Registration with Director of Industries
Registration of small scale industrial unit is not compulsory. However registration with the
State Directorate of Industries or District Industry centre facilitates obtaining of assistance from the
government.
The registration of small scale units is done in two stages i.e. :
(i) Provisional registration (ii) Permanent registration
In case a small scale unit is a subsidiary of or owned by or controlled by any other
undertaking, it is subject to the normal licensing provisions under the Industries Development and
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Regulation Act, 1951. Provisional registration is made before the setting up of unit and permanent
registration is done after the unit commences production.
Small Scale and ancillary units (i.e. undertaking with investment in plant and machinery of
less than Rs. 10 million) should seek registration with the Director of Industries of the concerned
State Government.
Registering SSI Unit
The main purpose of Registration is to maintain statistics and maintain a roll of such units
for the purpose of providing incentives and support services.
States have generally adopted the uniform registration procedures as per the guidelines.
However, there may be some modifications done by States. It must be noted that small industries is
basically a state subject. States use the same registration scheme for implementing their own
policies. It is possible that some states may have a SIDO registration scheme and a State registration
scheme.
Benefits of Registering
The registration scheme has no statutory basis. Units would normally get registered to avail
some benefits, incentives or support given either by the Central or State Govt.
The regime of incentives offered by the Centre generally contains the following :
• Credit prescription (Priority sector lending), differential rates of interest etc.
• Excise Exemption Scheme
• Exemption under Direct Tax Laws
• Statutory support such as reservation and the Interest on Delayed Payments Act.
(It is to be noted that the Banking Laws, Excise Law and the Direct Taxes Law have
incorporated the word SSI in their exemption notifications. Though in many cases they may define
it differently. However, generally the registration certificate issued by the registering authority is
seen as proof of being SSI).
States/UTs have their own package of facilities and incentives for small scale. They relate to
development of industrial estates, tax subsidies, power tariff subsidies, capital investment subsidies
and other support. Both the Centre and the State, whether under law or otherwise, target their
incentives and support packages generally to units registered with them.
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Objectives of the Registration Scheme
They are summarized as follows :
• To enumerate and maintain a roll of small industries to which the package of incentives and
support are targeted.
• To provide a certificate enabling the units to avail statutory benefits mainly in terms of
protection.
• To serve the purpose of collection of statistics.
• To create nodal centres at the Centre, State and District levels to promote SSI.
Features of the Scheme
Features of the scheme are as follows:
• DIC is the primary registering centre
• Registration is voluntary and not compulsory
• Two types of registration is done in all States. First a provisional registration certificate is
given. And after commencement of production, a permanent registration certificate is given
• PRC is normally valid for 5 years and permanent registration is given in perpetuity.
Provisional Registration Certificate (PRC)
• This is given for the pre-operative period and enables the units to obtain the term loans and
working capital from financial institutions / banks under priority sector lending.
• Obtain facilities for accommodation, land, other approvals etc.
• Obtain various necessary NOCs and clearances from regulatory bodies such as Pollution
Control Board, Labour Regulations etc.
Permanent Registration Certificate
Enables the unit to get the following incentives / concessions :
• Income Tax exemption and Sales Tax exemption as per State Govt. Policy
• Incentives and concessions in power tariff etc.
• Price and purchase preference for goods produced.
• Availability of raw material depending on existing policy.
• Permanent registration of tiny units should be renewed after 5 years.
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Procedure for Registration
Features of the present procedures are as follows :
• A unit can apply for PRC for any item that does not require industrial license which means
items listed in Schedule-II and items not listed in Schedule-I or Schedule-II of the licencing
Exemption Notification. Units employing less than 50/100 workers with/without power can
apply for registration even for those items included in Schedule-II.
• Units applies for PRC in prescribed application form. No field enquiry is done and PRC is
issued.
• PRC is valid for five years. If the entrepreneur is unable to set up the unit in this period, he
can apply afresh at the end of five years period.
• Once the unit commences production, it has to apply for permanent registration on the
prescribed form.
The following form the basis of evaluation :
• The unit has obtained all necessary clearance whether statutory or administrative e.g. drug
license under drug control order, NOC from Pollution Control Board, if required etc.
• Unit does not violate any locational restrictions in force, at the time of evaluation.
• Value of plant and machinery is within prescribed limits.
• Unit is not owned, controlled or subsidiary of any other industrial undertaking as per
notification.
De-Registration
A Small Scale Unit can violate the regulations in the following ways which will make it
liable for de-registration :
• It crosses the investment limits.
• It starts manufacturing any new item or items that require an industrial license or other kind
of statutory license.
• It does not satisfy the condition of being owned, controlled or being a subsidiary of any
other industrial undertaking.
Registration with DGS & D/NSIC. A small scale unit can get itself registered with the
Director General of Supplies & Disposal (DGS & D) or National Small Industries Corporation, if it
wants to avail the benefit of purchases made for government office.
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For this purpose application should be submitted on the prescribed form along with following
documents :
(i) Copies of balance sheet and profit & loss account for the last three years.
(ii) Income Tax clearance certificate
(iii) Ownership document in respect of firm’s factory and machinery
(iv) Copies in form A, in case of partnership firm.
(v) Copies of Memorandum and Articles of Association, in case of a company.
Cancellation of Registration
The registration of small scale unit can be cancelled on the following basis :
(i) The unit remained closed continuously for more than one year.
(ii) The unit fails to give full and true information required by the registering authority at
various intervals of time.
(iii) The unit has mis-utilized the raw-material allocated to it.
The affected unit is at liberty to file appeal against cancellation of registration.
4.3 PROVISIONAL REGISTRATION (PROFORMA)
The application is accepted for Provisional Registration as SSI/SSSBE unit for the
manufacturer of items / activities as stated in the application form.
1. Provisional Registration No. :
2. Date of Issue
3. Category of Unit (S.No. 3) ………………………………..
4. Name & Address of unit ………………………………..
………………………………..
5. End Products ………………………………..
Signature
Name & Designation of
Registering Authority
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1. The endorsed application form is a part of the certificate of registration.
2. The provisional registration is valid for a period of five years from the date of issue.
3. The provisional registration will automatically lapse at the end of the validity period or
the date of commencement of production, whichever is earlier.
4. If an applicant/unit is unable to set up the unit within the validity period, the
applicant/unit has the option to apply afresh for provisional registration using standard
procedure.
5. The provisional registration is given to enable the unit to obtain all facilities / clearance
etc. required in the production stage.
6. The provisional registration is subject to any or all condition that may be imposed by the
Registering Authority.
7. Only the procurement of provisional Registration Certificate does not entitle you to any
incentives which are otherwise admissible under the package of incentives, 1992 or any
other policy of the Govt.
4.4 LICENSING SYSTEM OF SSIs
(A) Exemption from Licensing
Section 11 of the Industries (Development and Regulation) Act (IDR) provides that no
industrial undertaking shall be established without a license. After obtaining the license, the
undertaking has to adhere to various rules as laid by the Central Govt. under section 30.
According to IDR Act, industrial licence would be required for :
1. establishment of a new undertaking;
2. substantial expansion;
3. production of a new product;
4. changing the location of an industrial undertaking
In order to maintain the viability and strength of small scale units/undertakings section 11B
of IDR Act, SSI are exempted from licensing provisions of the Act.
Section 10, 11, 11A and 13 of the IDR Act would not be applicable to small scale units,
subject to the following conditions :
(1) The articles manufactured are not included in Scheduled I or Schedule II to the notification
of new industrial police, dated 24.07.91 or
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(2) The articles manufactured are included in Schedule III to the notification dated 24.07.91.
Schedule I. Schedule I of the notification relates to items which are reserved for manufacture
by public section undertakings.
Schedule II. Schedule II includes those industries which are kept under compulsory licensing.
Schedule III. The small scale industries may manufacture those items which are included in
Schedule III, which are exclusively reserved for such sector even if they happen to be included
in Schedule II.
(B) Memorandum with SIA
The small scale and ancillary units are not required to file the Memorandum with the
Secretriat for Industrial Assistance (SIA) before any action for setting up of new project or
substantial expansion and at the time of commencement of commercial production.
(C) Carry on Business (COB) Licence
All undertakings other than small scale industrial undertakings engaged in the manufacture
of items reserved for exclusive manufacture in the small scale sector are exempted from the
operations of Section 29B of IDR Act but subject to a condition. As per the condition, such
undertakings have to export minimum of 50% of the new or additional production. The Government
has decided to exempt export-oriented units (EOUs) from obtaining industrial licence, if they
manufacture items reserved for small scale units. The exemption would be available even if they
had a foreign equity component of over 24%.
If existing small scale and ancillary undertakings exceeds their investment ceiling in plant
and machinery (which is 1 crore in case of small scale industry and ancillary industry) by virtue of
natural growth needs to apply for and obtain a carry on business (COB) licence. No export
obligation is fixed on the capacity for which the COB licence is granted.
(D) Industrial Entrepreneur Memorandum (IEM)
If any existing small scale or ancillary industry which is engaged in the manufacturer of
items exempted from compulsory industrial licencing or items not reserved for small scale
industries cross the investment limit prescribed for them, they are not required to obtain COB
licence. Such industries, named as de-licensed industries, are required to file an IME to the
Secretariat for industrial Assistance (SIA), Deptt. of industrial Policy & Promotion, Ministry of
Industry, New Delhi. They also have to obtain an industrial licence if they are manufacturing items
covered under compulsory licensing.
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(E) Integration of Small & Large industries
In order to improve the competitive strength of small scale industries, it is imperative to
constantly improve and modernize the technique of production.
The entrepreneurs can conclude an agreement with a collaborator for import of technology
or in respect of technical transfer without obtaining any clearance from the Govt. provided that
royalty payment does not exceed 5 percent of domestic sales and 8 per cent on exports. If, however,
lump sum payment is involved in the import of technology, the proposal would require government
clearance.
(F) State Regulations
The state govt. in its executive capacity is entitled to lay down the policies and preferences
in the interest of the economy. The state govt. has the right to grant fiscal benefits by way of
exemption from sales tax, confessional tariff etc. having regard to the industrial policy of the govt.
The govt. may modify its industrial policy and grant, withdraw or modify fiscal benefits and
exemptions granted from time to time.
(G) Environmental Clearance
Those items which are reserved for small scale sector and need investment of less than Rs. 1
crore, are exempted from obtaining environmental clearance from the Central Government.
However, entrepreneurs are required to obtain necessary clearance from the environment angle
before setting up an industrial project.
Small scale industries are also exempted from taking the prior approval of Pollution Control
Boards before starting operations except for 17 heavily polluting categories. Exempted industries
simply have to get acknowledgment of the application form by the Central Pollution Control Board.
Such industries with a low pollution load would also not have to obtain periodic renewal consent
until the unit changes its process But these small scale industries which fall in the category of heavy
pollution load will have to take the prior approval of Pollution Control Board and get their date
scrutinized from time to time before the consent to operate is given. The Govt. also helps the small
scale units in getting subsidized financial assistance to aid implementation of pollution standards by
setting up common effluent treatment plants.
Heavily polluting categories include items :
(i) Sugar (ii) Fertilizer (nitrogenous / phosphatic) (iii) Cement (iv) Fermentation and
distillery (v) Aluminium (vi) Petrochemicals (vii) Thermal Power (viii) Caustic Soda (ix) Oil
Refineries (x) Tanneries (xi) Copper Smelter (xii) Zinc Smelter (xiii) Iron and Steel (xiv) Pulp
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and Paper (xv) Dye and dye intermediaries (xvi) Pesticides manufacturing and formulation (xvii)
Basic Drugs and pharmaceuticals.
(H) Regulation of Acceptance of Loan
Section 58A of the Companies Act, 1956 and the Companies (Acceptance and Deposits)
Rules prescribe the limits upto which, the manner in which and the conditions subject to which
deposits may be invested or accepted by a company either from the public or from its members. In
other words, the law lays down various ways in which deposits have to be invested or accepted by a
company.
Small scale industrial units registered under Companies Act, 1956 as companies are
exempted from the above said provisions of Section 58A of the Companies Act, and the Acceptance
of Deposit Rules provided the following conditions are fulfilled :
(i) the paid-up capital of the company does not exceed Rs. 25 lakhs;
(ii) the company accepts deposits from not more than 100 persons;
(iii) there is no invitation to public for deposits;
(iv) the amount of deposit accepted by the company does not exceed Rs. 20 lakhs or
the amount of its paid-up capital, whichever is less.
4.5 SSI EXEMPTION SCHEME AS PER BUDGET 2003-04
(i) Exemption for SSI goods has been raised to Rs. 3 crore. Value of exempted goods
will be included (excluding exports) for calculating eligibility limit of Rs. 3 crores under SSI
exemption with effect from 01.04.2003.
(ii) SSI exemption has been withdrawn on the following items w.e.f. 01.04.2003 :
(a) Ceramic tiles, printed ceramic tiles mode from duty paid tiles outside the factory will
be exempted from excise duty;
(b) Stainless steel patties / pattas used for manufacturing cycles.
Excise Exemptions and Concessions
Taxes on commodities are generally called indirect taxes, for they are ultimately shifted
completely or partially on to the consumer by the producer. Such indirect taxes are first collected
from the dealers or producers by the Govt. but later the burden of tax is shifted to the ultimate
consumer.
Taxes on commodities may take the following forms :
(i) A tax on manufacture or production of a commodity is called excise duty;
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(ii) A tax on the sale of a particular commodity is called general sales tax;
(iii) A tax on import or export of a commodity is called customs duty.
Excise duty (tax on production of a commodity) tends to raise the price of a commodity
which is ultimately borne by the consumer. Excise duty on a commodity may be borne partly by the
buyers and partly by the sellers. How much exactly ? It will depend on the degree of elasticity of
demand and supply.
Excise exemptions and concessions are given by Govt. to manufactures as a part of fiscal
assistance. These concessions are given to both registered and unregistered units. Every person has
to undertake manufacturing of goods in accordance with the terms and conditions of licence issued.
Small scale industries are required to fulfill certain conditions in order to avail of
excise exemptions and concessions :
(i) Small scale industrial units for the purpose of excise exemption must be a factory
as defined in the Factories Act, 1948;
(ii) The unit shall be engaged in manufacture of goods;
(iii) Factory, including precincts thereof, should not have more than 49 workers
working on any day of the preceding 12 months.
(iv) SSI unit must be a factory registered with the Directorate of industries.
Exemptions. The excise exemptions of small scale industrial units are as follows :
(1) The small scale and tiny industrial units are not required to pay any excise duty of the value
of clearance if excisable goods including value of clearances for export doesn’t exceed Rs.
50 lakhs. The limit has been raised upto Rs. 1 crore from 01.09.2000. However, Govt. also
exempts the small scale units from payment of duty with reference to value of clearance and
in respect of goods from time to time.
(2) If value of clearances (excluding completely exempted goods) is within 50 lakhs, no
declaration need to be filed with the Central Excise.
(3) No separate accounts are to be maintained by small scale industrial units for excise purpose.
(4) No monthly return is required to be sent by SSI units to excise office. Only quarterly return
needs be sent but only those manufacturers whose sales start exceeding Rs. 30 lakhs and
they start paying duty. Those whose sales are already more than Rs. 30 lakhs and are paying
duty also have to send a quarterly return.
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It is important to know that the eligibility for excise concessions are based on annual turnover
and not on registration because the latter is based on investment in plant and machinery.
Rates of Excise Duty. (A) The rates of excise duty applicable to manufacturer whose turnover
doesn’t exceed Rs. 3 crores in respect of clearances for home consumption (including export to
Nepal or Bhutan) is as follows.
Value of Clearance
Rate of Duty
Remarks
Upto Rs. 100 lakhs
Rs. 100 – 300 lakhs
N. 1
Normal rate of duty
Not to avail CENVAT
Can avail CENVAT
(B) The rate of excise in respect of specific goods for home consumption (including exports to
Nepal or Bhutan) and all clearances of specific goods for captive goods / consumption of the
specified goods is as follows :
Value of Clearance
Rate of Duty
Remarks
Upoto Rs. 100 lakhs
Rs. 100 – 300 lakhs
60% of normal rate of duty
Normal rate of duty
CENVAT credit available
Normal rate of duty means the duty of excise specified in the First Schedule of Central
Excise Tariff Act and special duty means duty of excise specified in second schedule of the said
Act. Central Excise Act 1944 also gives notification from time to time.
Scheme for Excise Relief for Weak Industrial Unit. The Govt. of India started a scheme
in Oct. 1989 to help weak industrial units to regain their viability by providing a special type of loan
named as excise loan. The loan would be available to the applicable industrial units through the
designated financial institutions only.
The Scheme for excise relief in the form of excise loan would be available only to that
industrial undertaking whose accumulated losses, as at the end of the financial year, have resulted in
erosion of 50% or more of its maximum net worth during the immediately preceding five financial
years.
Following financial institutions have been designated by the central Govt. to provide excise
loans to weak industrial units :
(i) Industrial Development Bank of India (IDBI)
(ii) Industrial Finance Corporation of India (IFCI);
(iii) Industrial Reconstruction Bank of India (IRBI);
(iv) Such other finance institution which the central Govt. may specify in this behalf.
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The amount of loan will be not more than 50% of the excise duty actually paid for three
years subsequent to the date of approval of the rehabilitation package by the Empowered
Committee. The total amount given by way of such excise loan shall not, in any case, exceed 25%
of the overall cost of the Rehabilitation package.
The loan shall be interest free and shall be repayable in instalments in a period of seven
years as determined after a moratorium of three years commencing from the date of last
disbursement of excise loan.
4.6 RULES REGARDING THE FACTORIES ACT
The Factories Act, 1948 is a comprehensive piece of legislation which covers all aspects
regarding factories, right from registration of factories, the inspecting authorities, provision
regarding health, safety, welfare, working hours, employment of adult, adolescent, child, annual
leave and penalties.
The main objective of the Factories Act is to ensure healthy and safe working conditions for
workers. The Act protects the workers from being subject to undue bodily strain or manual labour.
The Act extends to the whole of India including the State of Jammu and Kashmir. It applies
to all the factories defined in the Act including small scale industries and factories belonging to
Central or any State Government unless otherwise expressly excluded.
The main provisions of this act are as follows :
1. Definition of Factory. U/S 2 (m) factory means any premises including the precincts where
manufacturing process is carried on and the number of workers is ten or more if manufacturing
process is being carried on with the aid of power and twenty or more if manufacturing process is
being carried on without the aid of power. Some of the premises like saw mill, railway workshop,
composing for the purpose of printing by letter press have been held to be factories.
2. Health. Section 11 to 20 in the Factories Act, 1948 deals with the health of workers in a
factory. The objective behind these provisions is to ensure healthy working conditions in the
factories. Our constitution requires the respective state to make provisions for securing healthy
conditions of work. The state is required to protect the interests of the workers. The act contains the
following provisions to safeguard the health of workers : (a) Cleanliness (b) Disposals of wasteland
effluents (c) Ventilation and temperature (d) Dust and fume (e) Artificial humidification
(f) Overcrowding (g) Lighting (h) Drinking Water (i) Latrines and Urinals (j) Spittoons.
3. Safety of Workers. Safety is another basic and primary requirement in a factory. Unless the
worker is ensured safety of work, smooth and proper working cannot be ensured.
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The Act provides for the following provisions relating to safety of workers :
(i) Fencing of machinery
(ii) Work on or near machinery in motion – only trained males wearing tight fitting
clothing. No woman or young person is allowed to clean, lubricate or adjust any
part of the machinery while it is in motion.
(iii) Prohibition of young persons to work at any dangerous machines.
(iv) Maintenance of striking gear and devices for cutting off power.
(v) Prohibition of employing women and children near cotton openers.
(vi) Proper hoists and lifts.
(vii) Safety on revolving machinery, lifting machines, chains, ropes etc.
(viii) Proper maintenance of floors, stairs and means of access.
(ix) Measures for protection of eyes.
(x) Precautions against dangerous fumes, gases etc.
(xi) Proper precautions in case of fire.
(xii) Safety of buildings and machinery.
(xiii) Appointment of safety officers.
4. Welfare of Workers. Every factory has to adopt welfare measures to improve labour
productivity, to keep up their morale and have cordial employer – employee relations.
Various provisions regarding welfare under the Act are :
(i) Working facilities (ii) Facility for storing and drying clothes (iii) Facilities for sitting (iv)
First aid appliances (v) Canteen (where number of workers is 250 or more) (vi) Shelters, rest
rooms and lunch rooms (vii) Creches (here 30 or more women are ordinarily employed) (viii)
Welfare officers.
5. Other Provisions. It includes the rules as to the regulation of hours of work of adults in the
factories on weekly and daily basis. It also provides for weekly holidays, compensatory holidays,
rules regarding night shifts, prohibition of overlapping shifts, extra wages for overtime etc.
6. Duties of the Employer. Under the Act, the State Govt. is empowered to make it obligatory
for every occupier to :
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(i) obtain approval, licence and registration of factory; failure to apply for registration of the
factory and a licence amounts to an offence.
(ii) the occupier is required to serve a notice at least 15 days before he begins to occupy or use
any premises as a factory to the Chief Inspector. The notice must contain the details
regarding name and address of the occupier and factory, the address for communication,
total horse power installed, name of the manager of the factory etc.
(iii) ensure healthy, safety and welfare of all workers while they are at work in the factory.
4.7 MEANING AND DEFINITION OF SMALL SCALE INDUSTRY
The definition of small scale industry varies from one country to another and from one time
to another in the same country depending upon the pattern and stage of development, government
policy and administrative set up of the particular country.
There are at least 50 different definitions of SSI’s found and used in 75 countries. In some
of the countries. In some of the countries of the world, the criterion for defining small enterprise is
related to the size of employment. For example, in USA a small enterprise is one which has
employment of 500 people. In UK, it is less than 20 skilled labours, in Germany, less than 300 and
in Italy less than 50 people. However, in most of the countries, the definitions of SSI are related to
either investment or size of employment or both.
The definition of small scale industry is an important aspect of government policy as it
identity the target groups. The first official criterion for small scale industry in India dates back to
second five year plan when it was in terms of gross investment in land, building, plant, machinery
and the strength of the labour force. On the recommendation of the Federal Association of Small
Industries of India (FASI), only the investment in fixed assets in plant and machinery, whether held
in ownership terms or by lease or hire purchase, is considered instead of fixing the limit on overall
investment in plant and machinery. The evolution of legal concept of SSI is given in the Table 3.6.
An ancillary unit is one which sells not less than 50% of its production of services to one or more
industrial units.
However for small scale industries, the planning commission of India uses the terms village
and cottage industries. These include modern small-scale industries and the traditional cottage and
house-hold industries as shown in Fig. 4.2.
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Table 4.1
1950
The fiscal commission for the first time defined an SSI as one which is operated mainly with
hired labour usually 10 to 50 hands
1954-55
The Government of India set up Central Small Scale Industries Organisation (CSSIO) and
Small Scale Industries Board (SSIB) to promote small scale industries.
1960
Employment criterion to define SSI was dropped and under investment criterion an industry
having gross value of fixed assets up to Rs. 5 lakhs was called as SSI.
1975
The investment limit was raised to Rs. 10 lakhs (15 lakhs for ancillary units)
1980
The investment limit was rise to Rs. 20 lakhs (25 lakhs for ancillary units)
1995
The investment limit was raised to Rs. 60 lakhs (75 lakhs for ancillary units)
March 1997
The investment limit was raised to Rs. 3 crores
1999-2000
The investment limit was reduced to 1 crore
2007
Limit is 1 crore only
Table 4.2
4.8 CHARACTERSTICS OF SSI
“Small scale industry is beautiful” because of its following important characteristics :
1. Small unit is generally a one-man show. Even if SSI is run on partnership or company, the
activities are carried by one of the partners or directors; the others act as sleeping partners.
2. In case of SSI, the owner himself or herself is a manager also and hence, an SSI is managed
in a personalized fashion. The owner takes effective participation in all matters of business
and decision making.
Small Scale Industries
Modern Small
Scale Industries
Cottage
Industries
Village
Industries
Ancillary
Industries
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3. The scope of operation of SSI is generally localized, catering to the local and regional
demands.
4. The gestation period i.e. the period after which return on investment starts is relatively lower
when compared to large units.
5. SSI’s are fairly labour intensive with comparatively smaller capital investment.
6. Small units use indigenous resources and therefore, can be located anywhere subject to the
availability of these resources like raw materials, labour etc.
7. Using local resources small units are decentralized and dispersed to rural areas. Thus, small
units promote balanced regional development and prevent the influx of job seekers from
rural areas to cities.
8. Small scale units are more change susceptible and highly reactive and receptive to socio-
economic conditions. They are more flexible to adopt changes like introduction of new
products, new method of production, new materials, new markets and new form of
organization etc.
4.9 RATIONALE OF SMALL SCALE INDUSTRY
Emphasizing the very rationale of small-scale industry in the Indian economy, the Industrial Policy
Resolution (IPR) 1956 stated:
“They provide immediate large scale employment, they offer a method of ensuring a more equitable
distribution of the national income and they facilitate an effective mobilization of resources of
capital and skill which might otherwise remain unutilized. Some of the problems that unplanned
urbanization tends to create will be avoided by the establishment of small centers of industrial
production all over the country”.
The rationale of small scale industries so established can broadly be classified into four arguments
as discussed below :
1. Employment Argument : In view of abundant labour and scarce capital resources, the most
important argument in favour of the SSI’s is that thus have a potential to create immediate
large scale employment opportunities. There are many research findings available which well
establish that small scale units are more labour intensive than large units. Small units use
more of labour per unit than investment. Studies have shown that the output employment ratio
is the lowest in small sector, employment generating capacity of small sector is eight to ten
times that of large scale sectors. Some scholars oppose this argument. They are of the opinion
that employment should not be created for the sake of employment. According to them the
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important problem is not how to absorb surplus resources but how to make the best use of
scarce resources. Then employment argument becomes output argument.
2. Equality Argument : An important argument in favour of small-scale industries is that they
ensure a more equitable distribution of national income and wealth. This is based on two
major considerations:
(i) Compared to ownership of large scale units, the ownership of small scale units is wide
spread.
(ii) Their more labour-intensive nature and decentralization and dispersal to rural and
backward areas provide more employment opportunities to the unemployed.
Most of these small scale units are proprietary or partnership concerns, the relations between
workers and employers are more harmonious in small-scale units than in large-scale units.
Dhar and Lydall do not agree with this argument and give statistical evidence that wages paid
to workers in small-units are much lower when compared to the workers in large industries.
Workers in small enterprises, due to non-existence of trade unions are unorganized and
therefore, are easily exploited by the employers. But in an underdeveloped country like India,
even if small-scale units provide low paid jobs, they would be of virtual importance in our
economy where millions are already in search employment to eke-out their livelihood.
3. Decentralization Argument : Big industries are concentrated every where in urban areas, but
small industries can be located in rural or semi-rural areas to use local resources and to cater
to the local demands. Hence, it promotes balanced regional development in the country.
Though it is not possible to start small-scale industry in every village, but it is quite possible
to start small units in a group of villages. Decentralization will help tap local resources, idle
savings and local talents and improves the standard of living even in erstwhile backward
areas. The good example of this phenomenon is the economy of Punjab which has more
small-scale units than even the industrially developed state of Maharashtra.
4. Latent Resource Argument : According to this argument, small enterprises are capable of
mopping up latent and unutilized resources like hoarded wealth and ideal entrepreneurial
ability etc. Dhar and Lydall feel that the real force of latent resources argument lies in the
existence of entrepreneurial skill. According to them, there is no evidence of an overall
shortage of small entrepreneurs in India. Hence, they doubt the force of this latent resource
argument. Their assertion does not appear to be very sound simply because of the fact that if
small entrepreneurs were present in abundance, then what obstructed the growth of small
enterprises ? The emergence of entrepreneurial class requires a conducive environment. The
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impressive growth in the number of small enterprises in the post independent period
highlights the fact that, providing the necessary conditions such as power and credit facilities,
the latent resources of entrepreneurship can be tapped by the growth of small enterprises only.
4.10 OBJECTIVES OF SSIs
The various objectives of developing small-scale industries are in fact, implied in one way or
other, in its rationale itself. However, an attempt has been made in this section to enumerate the the
main objectives of developing small enterprises in India.
1. To generate immediate and large scale employment opportunities with relatively low
investment.
2. To eradicate unemployment problem from the country.
3. To encourage dispersal of industries to all over country covering small towns, villages and
economically lagging regions.
4. To bring backward areas too, in the main stream of national development.
5. To promote balance regional development in the whole country.
6. To ensure more equitable distribution of national income.
7. To encourage effective mobilization of country’s untapped resources.
8. To improve the standard of living of people in the country.
4.11 SCOPE OF SSIs
The scope of small-scale industries is quite vast covering a wide range of activities. These
activities are characterized by labour intensive, need less capital and requires less sophisticated
technology. The activities which are found particularly amenable can be successfully operated in
small scale are too many to mention. Among them the important ones are :
• Manufacturing activities
• Servicing / repairing activities
• Retailing activities. Financial activities
• Whole-sale business
• Construction activities
• Infrastructural activities like transportation, communication and other public utilities.
In order to strengthen the scope for small-scale industries, the Government of India has announced
reservation policy for small sector in the country initiated in 1967, only 47 items were reserved for
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exclusive manufacture in small scale sector. In 1983, the reserved list included 836 items. Later
Abid Hussain committee deserved 12 items and thus there are 824 items in the reserved list. The
objective of this reservation policy is to insulate the small sector from unequal competition of large
industrial establishments, so that the small firms can grow through expansion of existing units and
the entry of new firms. Some of the important items reserved for exclusive development in the
small sector are food and allied industries, textile products, leather and leather products, glass and
ceramics, pressure stove, electrical appliances, boats and truck body building, auto parts
components, bicycle parts, tricycles, survey instruments, sports goods, stationery items, clocks and
watches etc.
It is also important to note that the performance of reserved small-scale industries does not outshine
that of non-reserved small industries. J.C. Sandesara, has found that the easy entry into SSI sector
has intensified competition within the sector, and resulted in excess supply, and thus, a fall in
profitability. He also adds that the reservation policy is calculated to keep ‘infant’ industry in a
permanent state of infancy. However, the main objective of reservation policy has been insulate the
small sector from unequal competition of powerful large scale units, so that the small sector can
grow through expansion on one hand, and by the entry of new firms on the other hand seems to be
achieved. Examples are many to support this view.
4.12 ROLE OF SSI IN ECONOMIC DEVELOMENT
Economic development is defined in a number of ways; the commonest definition could be
an increase in real per capital income of a person resulting in improvement in the levels of living’.
The development of small-scale industries contributes to the increase in per capital income. The
roles of SSI in economic development is given below.
1. Employment : SSI use labour intensive techniques and therefore, provide employment on a
large scale, SSI accounts for 75% of the total employment in the industrial sector. SSI
provides self-employment to artisans, technically qualified persons and professionals. These
industries also offer employment to farmers when they are idle.
2. Optimization of Capital : SSI requires less capital per unit of output and provides quick
returns on investment due to shorter gestation period. Small scale units help to mobilize small
and scattered savings and channelise them into industrial activities.
3. Balanced Regional Development : SSI promotes decentralized development of industries.
They help to remove regional disparties by industrializing rural and backward areas. They
also help to improve the standard of living in suburban and rural areas
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4. Mobilization of Local Resources : SSI helps to mobilize and utilize local resources like
small saving, entrepreneurial talent etc. which might otherwise remain idle and unutilized.
These industries facilitate the growth of local entrepreneurs and self-employed professionals
in small towns and villages.
5. Export Promotion : SSI helps in reducing pressure on the country’s balance of payments in
two ways. First, they do not require imports of sophisticated machinery or raw materials.
Secondly, SSI can earn valuable foreign exchange through exports. There has been a
substantial increase in exports form the small scale sector
6. Consumer Surplus : SSI now produces a wide range of mass conception items. Over 5000
products are being manufactured in small scale sector. About one-half of the output of
manufacturing sector in India comes from small scale industries
7. Feeder to Large Scale Industries : SSI plays a complementary role to large scale sector.
They provide parts, components, accessories etc, to large scale industries. They serve as
ancillary units.
8. Social Advantage : Small scale sector contributes towards the development of a socialistic
pattern of society by reducing concentration of income and wealth. They provide an honorable
and independent living to people with limited resources. They facilitate wide participation of
public in the process of development.
9. Share in Industrial Production : SSI contributes more than one-half of the total industrial
production in India. About 5000 products are manufactured in the small scale sector.
10. Development of Entrepreneurship : Small scale units have helped to develop a class of
entrepreneur. These units facilitate self-employment and spirit of self-reliance in the society.
4.13 ADVANTAGES OF SMALL SCALE INDUSTRIES
• Small scale enterprises can be started as per convenience of the owner in terms of space,
finance, product and man power.
• The setting up of the unit and starting of production requires a small gestation period of only 2
to 6 months and layout can be made as per convenience.
• Locally available skilled and semi-skilled people can be appointed at short notice and at a
much lower wages compared to the medium and large industries.
• Wherever high technology is involved the parent company executive will help. Alternatively,
consultants can be hired to sort out technology related problems.
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• It is one of the best forms of self-employment as well as giving employment opportunities to
own kith and kin, friends and relatives etc.
• In case of rural sector, the SSI units will be able to have cheaper labour especially in off
seasons.
• In developing countries, the SSI units are a necessity to assist bigger industries and new
projects. Thus, they not only contribute to the economy of the nation but also create
employment opportunities to people around the project sites.
• In case of SSI units started by experienced and talented executives, there is abundant scope to
develop high technology components for MNCs and also to organize exports.
• Due to increase in population there has been increase in production of consumer goods and
Fast Moving Consumer Goods (FMCG). In view of this there is a bigger role for small
industries to take up components production and even manufacture the product itself.
• The small units are exempted from excise duty upto 75 lakhs per annum turnover. In case of
industries in the backward districts, waiver or concession is given for various statutory taxes.
Thus, lot of paper work and formalities are avoided.
• Since employees are recruited based on contacts or relations there will be loyalty to the owner
and hence, there will be no trade union activity.
4.14 GOVERNMENT POLICY : INDUSTRIAL POLICY RESOLUTION
Major Environment
After attaining independence in 1947, India adopted economic planning as a method to
achieve economic development. The pattern of planning that came to be accepted was of a mixed
type meaning thereby that industrial units in the public and private sector will be operating in the
economy. The mixed nature of the economy meant that on crucial areas the policy of the
government was decisive and changes therein were in great relevance to industrial units. In the field
of industry, government’s objectives and intensions were announced through five Industrial Policy
Resolutions (IPRs). These resolutions were announced in 1948, 1956, 1977, 1980 and 1990. We
shall briefly state what each of the IPRs had stated about growth and development of SSI sector. It
must be added that it is only recently that government policy and activities of the different interface
institutions have covered SSE in addition to SSL. The earlier thinking was mostly addressed to SSI.
IPR 1948
The industrial sector in 1948 was not different from the one existing in pre- 1947 days and hence
the SSI sector meant mainly rural industrial units, small job-cum-repair shops, units making
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agricultural implements, a few urban small units and handloom units weaving clothes. The greatest
economic significance of these units to the Indian economy was their employment potential. It was
this potential which called for protection through policy and the main trust of IPR 1948 as far as the
small scale sector was concerned was protections.
IPR 1956
The second IPR was announced against the background of a bolder Second Five year Plan, with a
long term strategy for industrial and economic development. As to the SSI sector, the resolution
envisaged a dual role viz. (i) manufacture of consumer goods such as clothes and (ii) manufacture
of components for the newly established industry as a part of the programme for long term
industrial development. Thus, to the earlier emphasis of protection was added development.
Industrial policy for SSI aimed at “Protection plus Development”. IPR 1956 in a manner initiated
the modern SSI in India.
IPR 1977
The next IPR was announced a lapse of two decades. During the preceding decades, two major
problems had been witnessed. First was the lopsided industrial development – large, medium and
small scale industries had become more of an urban phenomena and the other was large scale
unemployment – the issue of urban and rural, educated and uneducated unemployed had started
becoming difficult.
This situation led to a renewed emphasis on promotion of typical employment generating small
scale industry, located in rural areas and small towns. As a formula it was : scale of output should
be small, location semi urban/rural and technology, labour intensive. This was the IPR which
assigned a positive role to SSI in terms of wage employment of worker and self-employment of the
entrepreneur. This was the IPR which, therefore, offered a wider perception to policies and
programmes for SSI development. To the earlier trust of protection (IPR 1948), development (IPR
1956) this resolution added promotion. This SSI sector was thus, to be protected, developed and
promoted.
IPR 1980
This IPR re-emphasized the spirit of the IPR 1956 with its strategy of large scale, high technology
and heavy investment based key or basic industry. Nevertheless, the SSI sector remained as perhaps
the best sector for generating wage and self-employment based opportunities in India.
IPR 1990
This IPR was announced during June 1990. Its basic aim was to introduce measures of economic
liberalization and simplified rules and procedures with a view to enhancing the technological base
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of industry and accomplishing higher levels of output. It gave a special emphasis on the SSI/SSE
sector where employment opportunities are likely to be high. In order to enable the SSI units to
update their technology, the investment limit of SSI has been raised to Rs. 60 lakhs.
SSI Policy Framework – Latest Amendment
In line with new economic policies, a policy document for SSI was announced on 6
th
August 1991.
• It continued priority sector lending to SSI by Banks/Financial Institution.
• Excise exemption scheme
• Reservation of items for exclusive production
• Price and purchase preference
• Uniform package of incentives of the entire sector
It introduced new measures like :
• Removal of location restrictions
• Enhancement of coverage limits
• Shift towards infrastructural development support
• Inclusion of services in this sector
• Allowing equity investment in SSI (up to 24%).
• Shift from protection/regulation to promotion of equity, technology and efficiency.
• Substantial de-regulation and simplification of rules and procedures.
Table-4.2 : Industrial Policy Resolution a summary
Year
Main Objective
Principal Measure
The SSI Universe
IPR
1948
Protection
Raw material, cheap power, technical
advice, marketing of products, safe-guarding
against excessive competition from large
units
Village-based small enterprises
Repairs-cum- job shops
Units using local market, raw
materials, labour.
Hence locally self-sufficient.
1956
Protection plus
development
Protect artisan based non-tech enterprise
development. Modern SSI for industrial and
consumer goods. Provide capital and skill.
Tiny/cottage rural units. Modern
SSI units in urban areas. Units
employing labour intensive
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Develop export based units. Achieve regional
balance through SSI. Package of assistance
and incentives, infrastructure, technological
up-gradation, Reservation of items for SSI.
technology. New entrants to SSI
new entrepreneurs. Ancillary
units, Modern SSI.
1977
Protection plus
development plus
promotion
Protect labour intensive technology. Promote
small tiny units, promote non-urban
location, promote new first generation
entrepreneurs, decentralized production
-do-
1980
Protection plus
development plus
promotion
Protect labour intensive technology. Promote
small tiny units, promote non-urban
location, promote new first generation
entrepreneurs decentralized production,
nuclear plant for SSI growth, reservation
products for SSI.
-do-
1990
Promotion of
equality, technology
and efficiency
Promotion of SSI and agro based industries
reservation of products 836 & identified.
Central investment subsidy rural and
backward areas. Technology centers for
modernization, Small Industry Development
Bank (SIDBI) acclivities at KVIC and KVI
board to be exported to help artisans in
marketing. Ago processing industry receive
high priority.
-do-
4.15 GOVERNMENT SUPPORT TO SSI DURING FIVE YEAR PLANS
Immediately after independence, government of India has given great importance to the
development of small-scale sector in the successive five year plans.
First Plan : In the first year plan Rs. 48 crores (constituting 47.8% of total plan expenditure on
industry) was spent on small-scale sector alone. During this plan, six boards were constituted
namely All India Handloom Board, All India Handicraft Board, All India Khadi and Village
Industry Board, Small Scale Handicraft Board, Coir Board and Central Silk Board. The Boards
were established to cover the entire field of small-scale and cottage industries.
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Second Plan : As per the recommendations of Karve Committee, the second Five Year Plan
focused on dispersal of industries. During this plan 60 industrial estates were established for
providing basic facilities like water, power, transport etc. at one place. The total expenditure during
this plan towards SSI was Rs. 187 crores. In addition some items were reserved for exclusive
production in small-scale industries.
Third Plan : The third plan focused on extension of coverage of small scale industries. During this
plan Rs. 248 crores were spent.
Fourth Plan : The programmes adopted during the third plan were extended during fourth plan
also. As a result, small-sector witnessed significant diversification and expansion during the forth
plan period, during which 346 industrial estates had been completed and small-scale sector
provided employment to almost 82,700 persons.
Fifth Plan : The main thrust of the fifth plan was to develop small-scale industries to remove
poverty and inequality stalking the land. During this plan the expenditure incurred is Rs. 592 crores.
Sixth Plan : Because of the massive development programmes initiated for the development of
promising small-scale sector, the actual expenditure of Rs. 1945 crores surpassed the plan outlay
836 items were reserved for manufacturing in small scale industries and 409 items reserved for
exclusive purchase from small scale industries. In addition, SIDO (Small Industries Development
Organisation) was established for providing consultancy services in technical, managerial and
marketing. In 1982, CART (Council for Advancement of Rural Technology) was established for
providing necessary technical input to rural industries necessary technical input to rural industries.
By the end of sixth plan, the production from small and cottage industries increased to Rs. 65,730
crores, exports touched Rs. 557 crores and employment in SSI sector reached 315 lakh persons.
This accounts for 80% of the total industrial employment.
Seventh Plan : The main thrust of this plan was upgradation of technology to increase
competitiveness of small sector. The new watch word was “competition” and “not reservation”.
B. Seventh Plan : The actual expenditure of Rs. 3249 crores surpassed the plan outlay of Rs. 2752
crores. The value of production increased from Rs. 57,100 crores to Rs. 91,681 crores.
Eighth Plan : The main thrust of the eighth plan was the employment generation as the motive
force for economic growth. To achieve this, small and village industries have been assigned an
extremely important role. The proposals of this plan are : (i) The plan reiterated that timely and
adequate availability of credit is more important than concessional credit. For this purpose SIDBI
was established, certain new initiatives like sanction of composite loans under ‘single window
system’, concessional loans to state corporations for infrastructural developments were introduced,
(ii) Eighth plan proposed to establish tool room and training institutions in order to upgrade
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technology (iii) Growth centre approach has been accepted and 70 growth centres were established.
In addition establishment of functional industrial estates with agricultural vegetables and
horticultural products was also proposed. (iv) Proposed to establish integrated infrastructure
development centres for tiny units. For this the centre, the state governments and industry
associations were also involved.
4.16 NEW POLICY INITIATIVES IN 1999-2000 FOR SMALL SCALE SECTOR
The government of India has announced new policy initiatives for small scale sector in
1999-2000. The features of new policy are listed below.
1. A national programme for Rural Industrialization has been announced, with a mission to
set up 100 rural clusters every year, to give a boost to rural industrialization.
2. To coordinate the latest development with regard to the World Trade Organization
(WTO), a cell has been set up in the office of DC (SSI) to disseminate information to
SSI Association and SME units, regarding recent developments, prepare policies for
SSIs in tune with the WTO agreements and organizing WTO sensitization seminars,
workshops.
3. Cotton yarn has been included in the general excise exemption scheme for SSIs.
4. Small job workers, engaged in printing of glazed tiles, have been exempted from excise
duty.
5. Announcement of a new Credit Insurance Scheme in the Budget (1999-2000) for
providing adequate security to banks and improving flow of investment credit to SSI
units, particularly export oriented and tiny units.
6. The working capital limit for SSI units is determined by the banks on the basis of 20
percent of their annual turnover. The turnover limit for this purpose has been enhanced
from Rs. 4 crore to Rs. 5 crore.
7. To increase the reach of banks to the tiny sector, rending by banks of Non-Banking
Financial Companies (NBFCs) or other financial intermediaries for purpose of on
lending to the tiny sector, has been included within the definition of priority sector for
bank lending.
8. Exemption from excise duty, as given to SSI units, will be extended to goods bearing a
brand name of other manufactures in rural areas.
9. The investment limit for small scale and ancillary undertakings has been reduced from
existing Rs. 3 crores to Rs. 1 crore.
4.17 IMPACT OF GLOBALIZATION AND LIBERALIZATION ON SSI
Before the introduction of new economic reforms in 1991 following the inevitable
globalization, the SSI sector was overprotected. The small-scale industry never had a strong desire
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to grow to medium and large scale because of the benefits of protection given to it. Many of the
policies also discouraged the growth of small scale units into large ones and had a stunting effect on
manufacturing, employment and output growth.
With the globalization, the SSIs are now exposed to sever competition both from large-scale
sector, domestic and foreign and MNCs. The effect of globalization can be summarized as below.
1. The new policies of the government towards liberalization and globalization without
ensuring the interest or priority of small-scale sector resulted in poor growth rate of SSI
sector. The SSI sector has suffered because of the lending institutions and promotional
agencies, whose main agenda is to serve big units and multinationals.
2. The problems of SSI in liberalized environment have become multidimensional; delay in
implementation of project, inadequate availability of finance and credit, marketing
problems, cheap and low quality products, technological obsolescence, lack of
infrastructural facilities, deficient managerial and technical skills, to name some.
3. Globalization resulted in opening up of markets leading to intense competition. For
example, the World Trade Organization (WTO) regulates multilateral trade, requiring its
member countries to remove its import quotas, restrictions and reduce import tariffs. India
was also asked to remove quantitative restrictions on import by 2001 and all export
subsidies by 2003. As a result every enterprise in India whether small scale or large scale
has to face competition. The process was initiated for small scale units by placing 586 of its
812 reserved items on the open general license list of imports.
4. With the removal of restrictions of foreign direct investment, multinational companies
entered India which further intensified the competition in the domestic market. The 1990’s
witnessed the entry of multinational companies in areas such as automobiles, electronics and
IT based sectors.
In the changed environment after globalization and liberalization, the policies and projects for the
SSI sectors will have to be effective and growth oriented (not just protecting) so as to achieve
competitiveness.
In order to protect, support and promote small enterprises, a number of protective and promotional
measures have been undertaken by the central government. The promotional measures cover the
following.
• Industrial extension services
• Institutional support in respect of credit facilities.
• Provision of development sites for construction of sheds
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• Provision of training facilities.
• Supply of machinery on hire purchase terms.
• Assistance for domestic marketing as well as exports
• Special intensive for setting up enterprises in backward areas.
• Technical consultancy and financial assistance for technological upgradation.
4.18 IMPACT OF WTO/GATT ON SSI
The challenges to the small-scale sector are due to the impact of agreements under WTO.
The setting up of the WTO in 1995 has altered the framework of international trade towards non-
distortive, market oriented policies. This is in keeping with the policy shift that occurred world wide
in favour of the free market forces and tilt away from state regulation / intervention in economic
activity. This is likely to lead to an expansion in the volume of international trade and changes in
the pattern of commodity flows.
The main outcome of WTO stipulated requirements will be brought about through reduction
in export subsidies, greater market access, removal of non-tariff barriers and reduction in tariffs.
There will also be tighter patent laws through regulation of intellectual property rights under
Trade-Related Intellectual Property Rights (TRIPS) Agreements, which laid down what is to be
patented, for what duration and on what terms. Increased market access to imports will mean
opening up the domestic market to large flows of imports. The removal of quantitative restrictions
on imports of these items will soon be freed from all restrictions as announced in the recent import-
export policy. Increased market access will also mean that our industries can compete for export
markets in both developed and developing countries. But the expected surge in our exports can
come about only if SSI sector is restructured to meet the demands of global competitiveness, which
is the key to the future of small industries in present contest.
SSIs have to face threats and also avail opportunities owing to the WTO and its agreements.
The main opportunities of the WTO are classified into three. Firstly, national treatment of
exportable items across the countries all over the world, with better market access through the
internet. Second, enlightened entrepreneurs have greater opportunities to benefit from their
comparative advantages due to lowering of tariffs and dismantling of other restrictions. Finally,
industries that are in constant touch with government, which in turn negotiates in their best interests
in the on-going dialogue with the WTO, are going to benefit. India has real chance of becoming
superpower in the service sector, particularly IT. It has already captured about 25 percent of world
exports.
1.19 Meaning and Need of Support
Finance is one of the essential requirements of any line of activity. Before actually setting
up their units, small entrepreneurs need to know very clearly about the type and extent of their
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financial requirements. Integral to financial requirements is to know about the possible alternative
sources from which finance can be availed of. Given the shortage of own funds, the Government of
India as a part of its policy of promotion of small-scale sector in the country, has set up a host
institutions to meet the financial requirements of small entrepreneurs.
Starting an industrial unit requires various resources and facilities. Small scale enterprises,
given their small resources find it difficult to have these on their own. Finance has been an
important resource to start and run an enterprise because it facilitates the entrepreneur to procure
land, labour, material, machine and so on from different parties to run his/her enterprise. Hence,
finance is considered as “life blood” for an enterprise. Recognizing it, the Government through her
financial institutions and nationalized banks, has come forward to help small entrepreneurs provide
them funds. Admittedly, finance is an important resource but not the only condition to run an
enterprise. In order to start any economic activity, a minimum level of prior built up of
infrastructural facilities is needed. Financial assistance and concessions cannot, in any case,
adequately compensate for the deficiencies of infrastructure such as transport and communication.
This is one of the reasons why industries have not been developing in backward areas in spite of
financial assistance and concessions given by the Government to the entrepreneurs to establish
industries in backward areas. Creation of infrastructural facilities involves huge funds which the
small entrepreneurs do lack. In view of this, various central and state government institutions have
come forward to help small entrepreneurs in this regard by providing them various kinds of support
and facilities. Availability of institutional support helps make the economic environment more
conducive to business or industry.
4.20 AGENCIES OF GOVERNMENT FOR SSI
The ministry of small-scale industries is the administrative ministry in the Government of
India for all matters relating to small scale and village industries which designs and implements
policies and programmes for promotion and growth of small industries. The Department of small-
scale industries was created in 1991, in the Ministry of Industry to exclusively formulate the policy
framework for promoting and developing small-scale industries in the country. It initiates
appropriate policy measures, pogrammes and schemes for promotion of SSI. The policy measures
include setting up of a network of institutions to render assistance and to provide a comprehensive
range of services and common facilities for SSIs. The range of services cover consultancy in
techno-economic and managerial aspects, training, testing facilities, and marketing assistance
through the agencies created for the specified functions. These activities are supported by a host of
other central/ state government departments, promotional agencies, autonomous institutions, non-
government organizations and so on.
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The implementation of polices, programmes and schemes for providing infrastructure and
support services to small enterprises is undertaken through its attached office, namely Small
Industries Development Organisation (SIDO), Khadi Village and Industry Commission (KVIC) and
Coir Board, National Small Industry Corporation (NSIC) and various training institutes. The
institutional network can be broadly classified as under.
(1) Central level institutions / agencies
(2) State level institutions / agencies
(3) Other agencies
SSIS
Others
Industry Association
R & D Organization
Non-Government Organizations
Institutions supporting small scale industries
4.22 NATURE AND TYPES OF SUPPORT
(1) Policy Support
(i). The investment limit for the tiny sector will continue to be Rs. 25 lakhs.
2. The investment limit for the SSI sector will continue to be at Rs. 1 crore.
3. The ministry of SSI and ARI will bring out of specific list of hi-tech and export oriented
industries which would require the investment limit to be raised upto Rs. 5 crore to admit
suitable technology up-gradation and to enable them to maintain their competitive edge.
4. The Limited Partnership Act will be drafted quickly and enacted.
(ii) Fiscal Support
To improve the competitiveness of small scale sector the exemption for excise duty limit
rose from Rs. 50 lakhs to Rs. 1 crore
1. The composite loans limit rose from Rs. 10 lakhs to Rs. 25 lakhs
2. The Small Scale Service and Business (Industry related) Enterprises (SSSBES) with a
maximum investment of Rs. 10 lakhs will qualify for priority lending.
Central Level
SSI Board
KVIC, NPC
NSTEDB
NISIET, IIE
NIESBUD
EDI
State Level
DIS
DICS
SFCS
SSIDC
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3. In the National Equity Fund Scheme, the project cost limit will be raised from Rs. 25 lakhs
to Rs. 50 lakh. The soft loan limit will be retained at 25 percent of the project cost subject to
a maximum of Rs. 10 lakh per project. Assistance under the NEF will be provided at a
service charge of 5 percent per annum.
4. The eligibility limit for coverage under the recently launched (August, 2000) Credit
Guarantee Scheme has been revised to Rs. 25 lakh from the present limit of Rs. 10 lakh.
5. The Department of Economic Affairs will appoint a Task Force to suggest revitalization /
restructuring of the State Finance Corporation.
6. The Nayak Committee’s recommendations regarding provision of 20 percent of the project
turnover as working capital is being recommended to the financial institutions and banks.
(iii) Infrastructure Support
1. The Integrated Infrastructure Development (IID) Schemes will progressively cover all areas
in the country with 50 percent reservation for rural areas.
2. Regarding upgrading Industrial Estates, which are languishing, the Ministry of SSI and ARI
will draw up a detailed scheme for the consideration of the planning commission.
3. A plan scheme for Cluster Development will be drawn up.
4. The funds available under the non-lapsable pool for the North-East will be used for
Industrial Infrastructure Development, setting up of incubation centres, for cluster
development and for setting up of IIDs in the North East including Sikkim.
Technological Support and Quality Improvement
1. Capital subsidy of 12 percent for investment in technology in selected sectors. An Inter-
ministerial committee of Experts will be set up to define the scope of technology upradation
and sectorial priorities
2. To encourage Total Quality Management, the scheme of granting Rs. 75,000/- to each unit
for opting ISO-9000 Certification will continue for the next six years i.e. till the end of the
10
th
plan.
3. Setting up of incubation centers in Sunrise Industries will be supported.
4. The TBSE set up by SIDBI will be strengthened so that it functions effectively as a
Technology Bank. It will be properly networked with NSIC, SIDO (SENET Programme)
and APCTT.
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5. SIDO, SIDBI and NSIC will jointly prepare a compendium of available technologies for the
R & D institutions in India and Abroad and circulate it among industry associations for the
dissemination of the latest technology related information.
6. Commercial banks are being requested to develop schemes to encourage investment in
technology upgradation and harmonize the same with SIDBI.
7. One-time capital grant of 50 percent will be given to Small-Scale, Associations which wish
to develop and operate Testing Laboratories, provided they are of international standard.
(v) Marketing Support
1. SIDO will have a Market Development Assistance (MDA) programme, similar to one
obtaining in the Ministry of Commerce and Industry. It will be a plan scheme.
2. The Vendor Development Programme, Buyer-Seller meets and Exhibitions will take place
more often and at dispersed locations.
(vi) Informational Support
1. General information
2. Technical / Marketing expertise in specific areas
3. Technical and financial expertise
4. Implementation assistance for turn-key project
(vii) Incentives and Subsidies
1. Export-import subsidies.
2. Interest free loans.
3. Subsidy for R & D work
4. Capital investment subsidy
5. Transport subsidy
6. Interest subsidy
7. Subsidy for power generation
8. Exemption from property tax
9. Incentives for NRI
10. Exemption from income tax
11. Sales tax exemption
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12. Price preference to SSIs
13. Subsidy/assistance for technical consultancy
14. Exemptions from stamp duty
15. Provisional for seed capital
16. Allotment of controlled for subsidized raw materials.
17. Subsidy for cost of market study/feasibility study or reports.
4.22 FINANCIAL INSTITUTIONS
1. NATIONAL SMALL INDUSTRIES CORPORATION (NSIC)
The National Small Industries Corporation (NSIC), an enterprise under the union ministry of
industries was set up in 1955 in New Delhi to promote, aid and facilitate the growth of small scale
industries in the country. NISC offers a package of assistance for the benefit of small scale
enterprises.
• Single Point Registration : Registration under this scheme for participating in government
and public sector undertaking tenders.
• Information Service : NSIC continuously gets updated with the latest specific information
on business leads, technology and policy issues.
• Raw Material Assistance : NSIC fulfils raw material requirements of small-scale industries
and provides raw material on convenient and flexible terms.
• Meeting Credit Needs of SSI : NSIC facilitate sanctions of term loan and working capital
credit limit of small enterprise from banks.
• Performance and Credit Rating : NSIC gives credit rating by international agencies
subsidized for small enterprises upto 75% to get better credit terms from banks and export
orders from foreign buyers.
• Marketing Assistance Programme : NSIC participates in government tenders on behalf of
small enterprises to procure orders for them.
2. SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO)
SIDO is created for development of various small scale units in different areas. SIDO is a
subordinate office of department of SSI and ARI. It is a nodal agency for identifying the needs of
SSI units coordinating and monitoring the policies and programmes for promotion of the small
industries. It undertakes various programmes of training, consultancy, evaluation for needs of SSI
and development of industrial estates. All these functions are taken care with 27 offices, 31 SISI
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(Small Industries Service Institutes), 31 extension centres of SISI and 7 centres related to
production and process development.
The activities of SIDO are divided into three categories as follows :
(a) Coordination Activities of SIDO
1. To coordinate various programmes and policies of various state government
pertaining to small industries.
2. To maintain relation with central industry ministry, planning commission, state level
industries ministry and financial institutions
3. Implement and coordinate in the development of industrial estates.
(b) Industrial Development Activities of SIDO
1. Develop import substitutions for components and products based on the data
available for various volume-wise and value-wise imports.
2. To give essential support and guidance for the development of ancillary units.
3. To provide guidance to SSI units in terms of costing, market competition and to
encourage them to participate in the government stores and purchase tenders.
4. To recommend the central government for reserving certain items to produce at SSI
level only.
(c) Management Activities of SIDO
1. To provide training, development and consultancy services to SSI to develop their
competitive strength.
2. To provide marketing assistance to various SSI units.
3. To assist SSI units in selection of plant and machinery, location, layout design and
appropriate process.
4. To help them get updated in various information related to the small scale industries
activities.
3. SMALL INDUSTRIES SERVICE INSTITUTES (SISI)
The small industries service institutes have been set up in state capitals and other places all
over the country to provide consultancy and training to small entrepreneurs both existing and
prospective.
The main functions of SISI include :
1. To serve as interface between central and state government.
2. To render technical support services.
3. To conduct entrepreneurship development programmes
4. To initiate promotional programmes.
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The SISIs also render assistance in the following areas:
1. Economic consultancy/information/EDP consultancy.
2. Trade and market information.
3. Project profiles
4. State industrial potential surveys
5. District industrial potential surveys
6. Modernization and in plant studies.
7. Workshop facilities
8. Training in various trade/activities
4. SMALL SCALE INDUSTRIES BOARD (SSIB)
The government of India constituted a board, namely, Small Scale Industries Board (SSIB)
in 1954 to advice on development of small scale industries in the country. The SSIB is also known
as Central Small Industries board. The range of development work in small scale industries involves
several departments / ministries and several organs of the central / state governments. Hence, to
facilitate co-ordination and inter-institutional linkages, the small scale industries board has been
constituted. It is an apex advisory body constituted to render advice to the government on all issues
pertaining to the development of small-scale industries.
The industries minister of the government of India is the chairman of the SSIB. The SSIB
comprises of 50 members including state industry minister, some members of parliament, and
secretaries of various departments of government of India, financial institutions, public sector
undertakings, industry associations and eminent experts in the field.
5. STATE SMALL INDUSTRIES DEVELOPMENT CORPORATION (SSIDC)
(Karnataka State Small Industries Development Authority KSSIDC in Karnataka State) The
State Small Industries Development Corporations (SSIDC) were sets up on various states under the
Companies’ Act 1956, as state government undertakings to cater to the primary developmental
needs of the small, tiny and village industries in the state / union territories under their jurisdiction.
Incorporation under the Companies Act has provided SSIDCs with greater operational flexibility
and wider scope for undertaking a variety of activities for the benefits of the small sector. The
important functions performed by the SSIDCs include :
• To procure and distribute scarce raw materials.
• To supply machinery on hire purchase system.
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• To provide assistance for marketing of the products of small scale industries.
• To construct industrial estates / sheds, providing allied infrastructure facilities and their
maintenance.
• To extend seed capital assistance on behalf of the state government concerned and provide
management assistance to production units.
6. DISTRICT INDUSTRIES CENTRES (DIC)
The District Industries Centres (DIC’s) programme was started in 1978 with a view to
provide integrated administrative framework at the district level for promotion of small scale
industries in rural areas. The DICs are envisaged as a single window interacting agency at the
district level providing service and support to small entrepreneurs under a single roof. DICs are the
implementing arm of the central and state governments of the various schemes and programmes.
Registration of small industries is done at the district industries centre and PMRY (Pradhan Mantri
Rojgar Yojana) is also implemented by DIC. The organizational structure of DICS consists of
General Manager, Functional Managers and Project Managers to provide technical services in the
areas relevant to the needs of the district concerned. Management of DIC is done by the state
government. The main functions of DIC are :
1. To prepare and keep model project profiles for reference of the entrepreneurs.
2. To prepare action plan to implement the schemes effectively already identified.
3. To undertake industrial potential survey and to identify the types of feasible ventures which
can be taken up in ISB sector, i.e. industrial sector, service sector and business sector.
4. To guide entrepreneurs in matters relating to selecting the most appropriate machinery and
equipment, sources of it supply and procedure for importing machineries.
5. To provide guidance for appropriate loan amount and documentation.
6. To assist entrepreneurs for availing land and shed equipment and tools, furnitures and
fixtures.
7. To appraise the worthness of the project-proposals received from entrepreneurs.
8. To help the entrepreneurs in obtaining required licenses/permits/ clearance.
9. To assist the entrepreneurs in marketing their products and assess the possibilities of
ancillarization.
10. To conduct product development work appropriate to small industry.
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11. To help the entrepreneurs in clarifying their doubts about the matters of operation of bank
accounts, submission of monthly, quarterly and annual returns to government departments.
12. To conduct artisan training programme.
13. To act as the nodal agency for the district for implementing PMRY (Primary Minister
Rojgar Yojana).
14. To function as the technical consultant of DRDA in administering IRDP and TRYSEM
programme.
15. To help the specialized training organizations to conduct Entrepreneur development
programmes.
In fact DICs function as the torch-bearer to the beneficiaries / entrepreneurs in setting up
and running the business enterprise right from the concept to commissioning. So, the role of DICs
in enterprise building and developing small scale sector is of much significance.
7. TECHNICAL CONSULTANCY SERVICES ORGANIZATON OF KARNATAKA
TECSOK is a professional industrial technical and management consultancy organization
promoted by the government of Karnataka and other state level development institutions way back
in 1976. It is a leading investor-friendly professional consultancy organization in Karnataka. Its
various activities are investment advice, procedural guidance, management consulting , mergers and
acquisition, process reengineering studies, valuation of assets for takeovers, impact assessment of
socio-economic schemes, critical infrastructure balancing, IT related studies, detailed feasibility
studies and reports. TECSOK with its pool of expertise in varied areas can work with new
entrepreneur to identify a product or project. In addition to this TECSOK sharpens the project ideas
though feasibility studies, project reports, market surveys, and sources of finance, selection of
machinery, technology, costing and also providing turnkey assistance. To help entrepreneurs to face
the global competition TECSOK facilitates global exposures, updated technology, market
strategies, financial restructuring and growth to improve profitability of an industry.
TECSOK can identify sickness in existing industry and facilitate its turn around. TECSOK
has expertise in rehabilitation of sick industries by availing rehabilitation packages offered by the
government and financial institutions. In addition, it offers expert professional services to various
institutions and departments of the state and central government. TECSOK undertakes the
assignment in the field of
• Technical and market appraisal of projects.
• Industrial potential surveys
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• Fact-finding and opinion reports
• Corporate planning
• Collection and collation of information
• Impact assessment
• Evaluation of schemes and programmes
• Asset evaluation
• Infrastructure development project proposal
• Event management and publicity campaigns and
• Organizing seminar and workshops.
TECSOK has over 25 well-experienced agencies in different disciplines, MBAs, economists and
finance professionals. It has business partnerships with reputed national and multinational
consultants and out sources expertise for professional synergy. TECSOK has an exclusive women’s
cell which conducts training and education programmes, exhibitions for promotion of products and
services provided by women entrepreneurs and offers escort services to women entrepreneur.
TECSOK has many publications. “Kaigarika Varthe” a monthly is published by TECSOK. In
addition it publishes “Guide to Entrepreneurs” “Directory of Industries” on a regular basis.
Focused Consultancy Areas of TECSOK
Promotion of Agro Based Industries : TECSOK is recognized nodal agency by the Ministry of
Food Processing Industries, Government of India, for project proposal to avail grant and loan
assistance under the special schemes.
Energy Management and Audit : Thrust is given to use non-conventional energy sources for which
both state and central governments are offering incentives. TECSOK has been recognized as a body
to undertake energy audit and suggest energy conservation measures. TECSOK undertakes studies
and project proposal for availing assistance from the Indian Renewable Energy Development
Authority (IREDA).
Environment and Ecology : TECSOK undertakes assignments relating to environment education,
environment impact assessment, environment management plan and pollution control measures.
TECSOK has joined hands with Karnataka Cleaner Production Center (KCPC) to provide total
consultancy support in the area of environment. Human Resource Development : TECSOK
designs and organizes business development progrmames, management development workshops,
skill development programmes and in-house training packages. It undertakes programmes of
empowerment of women entrepreneurs, organization of self-help groups. In order to encourage
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local entrepreneurs TECKSOK organizes awareness campaigns and motivation programmes in
taluks and districts throughout Karnataka. Other TECSOK activities :
• Guidance in product selection and project identification.
• Market survey and market development advice.
• Consultancy for agro-based industries of a nodal agency of the government of India.
• Diagnostic studies and rehabilitation of sick industries.
• Environment impact assessment studies environment management plans and propagation of
cleaner production techniques.
• Energy management and audit.
• Valuation of assets for mergers and takeovers.
• Infrastructure development project reports.
• Port tariff study and related areas
• System study and software development
• Management studies, company formation, corporate plan, enterprise restructuring etc.
• Designing and organizing training programme.
8. SMALL INDUSTRIES DEVELOPMENT BANK OF IDIA (SIDBI)
For ensuring lager flow of financial and non-financial assistance to the small scale sector,
the government of India has set up the Small Industries Development Bank of India (SIDBI), under
Special Act of Parliament in 1989 as a wholly owned subsidiary of the IDBI. The SIDBI has taken
over the outstanding portfolio of the IDBI relating to the small scale sector. The important functions
of IDBI are as follows :
• To initiate steps for technological upgradation and modernization of existing units.
• To expand the channels for marketing the products of SSI sector in domestic and
international markets.
• To promote employment industries especially in semi-urban areas to create more
employment opportunities and thereby checking migration of people to urban areas.
4.23 MEANING & DEFINITION OF SOCIAL RESPONSIBILITY
Social responsibility means obligation of decision-makers to take actions which protect and
improve the welfare of a society as a whole along with their own interests. Now-a-days the aim of
business is no more only profit maximization. There has been growing acceptance of the view that
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business should be socially responsible which says the business enterprise which makes use of the
resources of society and depends on society for its functioning should discharge its duties and
responsibilities in improving the welfare of the society.
Social responsibility refers to the obligations and duties of business to the society.
According to K.K. Andrew, “social responsibility may be taken to mean intelligent and objective
concern for the welfare of the society.
H.S. Singhania classifies the nature of social responsibility of business into two categories :
(a) The manner in which a business carries out its own business activity and
(b) The welfare activity that it takes upon itself as an additional function.
Business is not merely a profit-making occupation but a social function which involves
certain duties and requires that appropriate ethics are followed. Social responsibility indicates
personal obligation of people, as they act in their own interest to ensure that the rights and
legitimate interest of others are not sacrificed by their behaviour and action. The shareholders, the
suppliers of resources, the consumers the employees, the local community and society are affected
to a great extent by the way an enterprise functions. So it becomes very important for the business
enterprise to be socially very responsive to maintain a social balance between the opposing interests
of these groups.
4.24 RESPONSIBILITY OF BUSINESS TOWARDS DIFFERENT SECTIONS OF
SOCIETY.
Business depends on society for inputs like money, men, skills and also for market where
products have to be sold to the buyers. The business depends on society for existence, sustenance
and encouragement. Being so much dependent on society, business also has definite responsibility
towards different segments of the society. Though profit making is one of main objectives of
business but it has to satisfy employees, consumer, government, community, shareholders also.
A business is responsible to safeguard the interests of following sections :
1. Employees. No organization can be successful without the whole-hearted cooperation of the
employees. Responsibility of business towards employees is in the form of training, promotion,
proper selection, fair wages, safety, health worker’s education, comfortable working conditions,
participation management etc. The employees should be taken into confidence while taking
decisions affecting their interests. The workers should be offered incentives for raising their
performance. Mental, physical, economic and cultural satisfaction of employees should be taken
care of. If business looks after the welfare of employees then they will also work whole heartedly
for the prosperity of business.
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The committee that conducted ‘social audit’ of TISCO (Tata Iron and Steel Company)
observes, “not only should the company carry out its various obligations to the employees as well as
the larger community as a matter of principle, but this has also led to a higher degree of efficiency
in TISCO works and an unparalleled performance in industrial peace and considerable team spirit
and discipline which have all resulted in high productivity and utilization of capacity”. Thus, by
discharging its responsibility to employees the business advances its own interests.
TATAS have been the firsts to the enforcement of certain laws in favour of employees.
Similarly Godrej and Boyce, Shriram Industries and TVS groups are also good employers.
Financial position of company and economic conditions of nation should be taken into
consideration while spending on labour welfare during performance of responsibility towards
employees.
2. Owners. Business is accountable towards owners as well as managing business profitably,
ensuring fair and regular return on capital employed, consolidating financial position of
business, guaranteeing capital appreciation so as to enable the owners to withstand any
business contingencies.
3. Consumers. Responsibility of business towards consumer extends to :
(i) Product. Quality goods should be produced and supplied. Distribution system should
make goods easily available to avoid artificial scarcities and after sales service should be
prompt. Buying capacity and consumer preferences should be taken into consideration
while deciding the manufacturing policies. Top care must be exercised in supplying the
goods of quality which has no adverse effect on the health of consumers.
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(ii) Marketing. To avoid being misled by wrong claims about products through improper
advertisements or otherwise, the consumer should be provided full information about the
products including their adverse effects, risks and care to be taken while using the
products.
Consumers all over the world are, by and large, dissatisfied because the
performance of businessman is far from satisfactory. Consumer is not the king of our
country but a vehicle used by businessmen for driving towards the goal of profit
maximisation. As a result of which the concept of 'consumerism' has come up to protect
the rights of consumers. Even the government is interfering in a big way to protect the
interests of consumers.
4. Government. A number of legislatives are formed from time to time by the
government for proper regulation and control of business. Businessmen should comply
with all legal requirements, execute government contracts, pay taxes honestly and in
time, make services of executives available for government, suggest measures and send
proposals to enact new laws for the business.
But series of raids conducted on business houses clearly show that businessmen
have failed to discharge their responsibility towards government.
5. Shareholders. Shareholders who are the owners of business should be provided
with correct information about company to enable them to give them true and fair
position of the company to enable them to decide about further investments. Company
should provide a fair return on the investment made by shareholders. If shareholders do
not get proper dividend then they will hesitate
to invest additional funds in the concern.
Shareholders should be kept fully informed about the working of the company for
healthy growth of the business. The Companies Act 1956 also requires the company to
give full disclosure in published statements. Company should strengthen the share
prices by its growth, innovation and diversification. At the same time shareholders shall
also offer wholehearted support and cooperation to the company to protect their own
interests.
6. Community. Responsibility of business towards community and society includes
spending a part of profits towards civic and educational facilities. Every industrial
undertaking should take steps to dispose off industrial wastes in such a way that
ecological balance is maintained and environmental pollution is prevented. Rehabilitating
the population displaced by business units should also be part of responsibility of
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business. Business houses should set up units at those places
where sufficient space is available for housing colonies of workers. The promotion of
small scale industries will help not only the nation but also help in building up a better
society.
7. Environment. Business should protect the environment which has acquired great
importance all over the world. Business can discharge the responsibility of protecting environment
in the following way :
(i) Preservation of Natural Resources. Scarce natural resources should be used very carefully as
these are depleting at a very fast rate. The alternative sources can also to found out to save natural
resources like to save forests alternative to wood and pulp can be found, the use, of coal can be
reduced by alternative source of energy.
(ii) Pollution Control. Appropriate steps should be taken to prevent environmental pollution and
to preserve ecological balance. The industrial waste should be disposed off carefully or if possible
can be recycled to minimise pollution. The toxic of wastes, excessive noise, chemical pesticides,
automobile exhaust etc. need to be checked from time to time.
4.25 ARGUMENTS FOR SOCIAL RESPONSIBILITY OF BUSINESS
1. Public Requirements. Business can exist only with public support and only if business
fulfills needs of society. One of the main arguments for social responsibility is that public
expectations from business have changed. Therefore, if business wishes to remain in existence in
long term it must respond to society's needs and give society what society wants. The business must
come upto expectations of public for its survival since the demand for products or services arises
from customers who are a part of society. Since business is a part and parcel of society, it must
think of its responsibilities.
2. Favourable for Business. Performance of social obligation by business will not only be in
the interest of society but in its own interest also. The firm which is more responsive to
improvement of community quality of life will as a result have better community in which to
conduct its business. People with healthy environment, good health and education will make them
good customers and employees. Recruitment of labour will be of higher quality. Turnover and
absenteeism will be reduced. The society may reject an enterprise which does not care for social
welfare. Crime rate will also decrease as a result of social improvements.
3. Moral Justification. Nowadays modem industrial society faces many serious social problems
as a result of emergence of large companies. Therefore, these large corporations have a moral
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responsibility to solve these problems. Also business which is using so many resources of our
economy, has responsibility to devote some of these resources in overall development of society.
4. Socio-cultural Norms. In a country like India where social and cultural values have long and
rich heritage, a business promoting social equalities, healthy employer-employee relations,
consumer service will enjoy better social position. A business working against traditional values
will face criticism from society.
5. Business can shoulder Responsibility. Many people who feel frustrated with failure of other
institutions in handling social problems are turning to the business for their solution to social
problems. In such a situation, it becomes the duty of business to come upto expectation of public
and fulfill its responsibilities towards society.
6. Responsibility must Correspond with Power. Business enjoys social power to a great extent.
So they do affect economy, minorities and other social problems. Business should perform equal
amount of social responsibility to match their social power. If they don't, then it will reflect their
irresponsible behaviour, which will ultimately affect the natural growth.
7. Public Image. Only that firm can enjoy better reputation in public which supports social
goals. Each firm seeks an enhanced public image so that it may gain more customers, better
employees, more responsive money markets etc. It is possible only if business performs its
responsibilities towards society whole-heartedly which will result in raising the value of shares and
debentures held by the owners.
8. Government Regulations. If business does not respond positively to the needs of
society, then it may be compelled to do so through government laws and regulations.
Before government stretches its long arms, the business should discharge its obligations
to society. It has to regulate the business in public interest.
9. Indebted to Society. Business units benefit from society. In return it also has
certain debts that it owes to society. Business uses vast pool of resources in terms of
men, talents, expertise and money. Business is in a position to work for social goals with
the help of these resources. Also corporations unlike citizens are created by society, so
they have certain civic duties and responsibilities.
4.26 ARGUMENTS AGAINST SOCIAL RESPONSIBILITY
1. Deviation from Main Objective. The main goal of business is 'profit maximization'.
Economic efficiency of business is a top priority and any deviation from this would divert
the business from its mission. The welfare of employees and owners will also be served
well by increasing profitability. Moreover performance of social obligations will also
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involve large sums of money which will adversely affect the financial position of the
concern. Business's function is economic not social and economic values should be the
only criteria to measure the success.
2. Increase in Prices. Cost of social responsibility will be passed on to the society in
the form of increased prices. When a business house is required to spend money on
performing social obligations, the money spent on social welfare will be collected from
consumer only by way of increased prices of goods and services. So ultimately it is the
consumer only who bears the burden of social obligation.
3. Excessive Concentration of Power. Combining social activities with economic
activities of business would mean giving business excessive concentration of power.
Business has already got enough social power, giving them more social power would
mean letting them influence society in education, in home, in government and in market.
This way society will also start depending upon business. This influence of business on
society may create social, economic and political problems.
4. Lack of Social Skill. Businessmen who are good at managing business may not be
good at solving social problems. A businessman devotes all his energies in running his
business efficiently and smoothly. He may not have the required skill to solve complex
social problems. Also why choose a group of people who do not have qualification and
skill to solve social problems. The problem has, however, been solved to great extent by
institutions, like Xavier Institute of social science and IRMA (Institute of Rural
Management, Anand) which train students for social work only.
5. Lack of Accountability. Businessmen have no direct accountability to the people.
So it is not a wise step to give responsibility to businessmen for areas for which they are
not accountable. The management of a business is accountable to the owners for its
performance. It is not accountable to anyone for its social obligation.
6. Influence on Social Set-up. When business concern spends money in solving social
problems then they may try to influence society for their own good. The society will also start
depending upon business which in turn may create many social, economic and political problems.
7. Opposition from Society. All groups in society may not support the involvement of
business in social goals. Although few persons wish the business to become more actively involved
in performance of social obligations but at the same time, others may oppose this idea. There is
difference of opinion among general public, government and even among businessmen themselves.
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8. Complex Social Problems. Some social problems like destruction of rain forests, AIDS,
ozone depletion, sex discrimination are so complex that even most socially conscientious
companies fail to solve these. Also business has its own problems like delivering goods of quality at
less price, earn profit for shareholders, paying taxes to government and stand in competitive world.
How can we expect business undertake social responsibility amidst so many problems of its own?
4.27 LIMITS OF SOCIAL RESPONSIBILITY
The social responsibility is a concept which has been well understood by the businessmen
today and they are all set to realise the goals of social responsibility. But there are certain factors
which limit the social responsibility actions of business houses and these are:-
(i) Cost
(ii) Efficiency
(iii) Relevance
(iv) Scope
(i) Cost : To fulfill and implement social responsibility the main thing required is money. All the
actions towards social responsibility involves cost e.g. donations to educational institution, adopting
a village or district for different projects like adult education & health etc., construction of hospital,
relief to needy people in times of storms, draughts or any other natural calamity. So at times the
intentions for social benefit can not be put into actions for paucity of funds.
(ii) Efficiency : An effort towards social responsibility actions may bring down efficiency and
ultimately the ability to stand in competitive market e.g. a company may continue its business even
if it is running into losses with the feeling of its duty towards society and welfare of employees. As
a result efficiency will go down. A number of projects being run for the benefit of the society still
continue even if the company has to bear losses.
(iii) Relevance : How far the task of social responsibility is relevant. This question still remains
controversial. Some critics are of the view that business has no social obligation to society. They
are of the opinion that business has to ignore and tax its own employees and customers in an effort
to fulfill social responsibility. The social problems should be the problem of government or
concerned individuals, and business should concentrate on production of goods and services
efficiently and effectively. According to Friedman, 'There is one and only one social responsibility
of business", to use its resources and energy in activities designed to increase its profits so long as it
stays within the rules of the game ... (and) engages in open and free competition, without deception
and trend …..”
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(iv) Scope : There are some social problems the permanent solution to which is not in the hands of
human beings and those problems are too complex and deep rooted like drug addiction, sex
discrimination, ozone depletion, environment pollution. As it is business also has number of
complex problems which are to be solved and concentrated upon, so it will be unfair to expect from
businessmen to solve another complex problem of social responsibility.
4.28 BARRIERS TO SOCIAL RESPONSIBILITY :
To fulfill the task of social responsibility the following problems may be faced at
organisational level which hinder the process of implementation of achieving the goal of social
responsibility.
(i) The Manager : The managers are extra cautious while planning and implementing the
programmes related to social responsibility as the people at high level may not approve the plans of
managers if they feel the plans to be non-profitable to organisation. It is the manager who is
ultimately responsible for social action programmes of any organisation. The manager can also plan
or implement the social action programme.
(ii) The Organisation: The main objective of any organisation is profit maximization as
shareholders want dividend ultimately or they may like the profits to be reploughed back for
expansion of business and people working in the organisation expect higher & higher salaries. So
Social action projects need to be evaluated very carefully in terms of cost and benefit. So social
responsibility may be overlooked while achieving the main objective of the organisation i.e. profit
maximisation.
(iii) The Industry : There are many competitors in the same industry for an organisation. When a
particular organisation does some socially beneficial activity for the benefit of society only then it
may not be appreciated by other competitors in the industry which makes individual organisation
very difficult to survive in the industry alone.
(iv) The Division : There are number of divisions in the organisation which are competing among
themselves and also strive towards main goal of organisation i.e. profit. Any social responsibility
decision and project which affects or reduces the profit might threaten the existence of that
particular division. This is one of the main reasons that most of the divisions feel hesitant in
initiating and implementing social responsibility programmes unless & until there are clear
guidelines and instructions from the people at top level.
4.29 SOCIAL RESPONSIBILITY—THE INDIAN SITUATION
The concept of social responsibility is very old in India. Businessmen were treated with
great respect also because of prevalence of the concept of parting with one's wealth for the benefit
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of society. Merchants have always been charitable and provided relief in difficult times of droughts,
famine or epidemics. Over the years this practice remained same except the shift from merchant
charity to corporate citizenship.
The merchants were leaders not only in the economic but also the social fields and took
active interest in social reforms and in public life as well.
J.R,D. Tata was first to conduct social audit in India. Number of leading companies have
realized the social responsibility and recognized the concept of social responsibility of corporate
sector. Number of schools, colleges, hospitals, research institutes, technological institutes,
management institutes, libraries.
Museums, places of religious worship, institutes for old and orphans, have been
set up with the help of business community. There has been contributions from many
businessmen for the poor and needy in times of draughts, earthquakes, floods and other
natural calamities. The problem of damage to ecology is a serious problem now-a-days
which has been handled by many businessmen in a every effective way. The number of
measures taken to control “Pollution in environment” shows the efforts put in by them
with the help of government. Public sector is guilty as private sector as far as the
problem of pollution of environment is concerned. There are many public sector
enterprises in India which have failed to discharge their primary responsibilities as well.
There has been change in attitudes of society and the business community itself
about its obligations to society and the way of expressing it. Now there is more of direct
engagement in the mainstream development concerns and in helping disadvantaged
groups in the society.
Though the business units in India have started realizing their responsibility
towards society, but member of such units is very limited. Government should take
legislative measures to force all business units to contribute something for social uplift.
Besides legislative measures, awareness about social responsibility should be created.
Business should prepare a code of ethics for social upliftment the company law can also
make a provision to make it obligatory for units having investment beyond a certain limit
to spend a part of their profits on social welfare activities. The companies should also
show in their balance sheets the amount they have spent on social obligations.
4.30 SUMMARY
While deciding on the constitution of business i.e. whether the entrepreneur wants it in the
form of sole proprietorship, partnership or a private limited company, he should base his decision
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on the size of the project and the degree of risk involved. He will have to undertake formalities such
as registration of partnership or incorporation of a private limited company but, however no such
formalities are required in case of sole trader.
Small-scale industry is generally a one-man show. Even if SSI is run on partnership or
company, the activities are carried by one of the partners or directors, the others act as sleeping
partners.
• Emphasizing the very rationale of small scale industry in the Indian economy, the Industrial
Policy Resolution (IPR) 1956 stated. That they provide immediate large scale employment.
They offer a method of ensuring a more equitable distribution of the national income and
they facilitate an effective mobilization of resources of capital and skill which might
otherwise remain unutilized.
• The scope of small-scale industries is quite vast covering a wide range of activities. These
activities are characterized by labour intensive, need less capital and require less
sophisticated technology.
• The National Small Industries Corporation (NSIC) an enterprise under the Union Ministry
of Industries was set up in 1955 in New Delhi to promote aid and facilitate the growth of
small scale industries in the country.
• The small industries service institutes have been set-up in state capital and other places all
over the country to provide consultancy and training to small entrepreneurs both existing
and prospective.
4.31 SELF ASSESSMENT QUESTIONS
• What are the legal formalities for setting up a small scale industry ?
• What are the legal formalities in Factory Act for setting up a small scale industry ?
• What is the rationale behind the development of small scale industries in India ? And what
are it’s argument for small scale industry ?
• Discuss the role of SSI in economic development.
• Discuss various government industrial policy resolutions.
• Discuss the impact of globalisation and lebaralisation on SSI.
• Discuss various financial institutions which provide finance to the SST.
• What do you mean by social responsibility of business and discuss argument for and against
social responsibility of business.
• What are the barriers to social responsibility ?
• What are the limits of social responsibility ?
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UNIT-5
SMALL SCALE INDUSTRIAL UNDERTAKINGS
AIMS AND OBJECTIVES
• After going through this unit you will be able to:-
• Understand meaning, definition and characteristics of small scale industry.
• Understand the procedure to start an SSI
• Understand the concept of incentives and subsides.
• Describe the problems in SSI
• Understand the causes and consequences of industrial sickness
• Describe corrective measures of sickness in industries.
Contents
5.1 Introduction to SSIs
5.2 Definition of small scale unit
5.3 Characteristics or features of small scale industry or (MSME)
5.4 Objectives of small scale industries or (MSME)
5.5 Small business as a seedbed of entrepreneurship.
5.6 Importance of small scale industry or (MSME)
5.7 Problems of Small Scale Industry or (MSME)
5.8 Steps to start an SSI
5.9 Introduction and meaning of incentives and subsidies.
5.10 Need for incentives
5.11 Types of central government subsidies and incentives
5.12 Foreign direct investment in SSI sector
5.13 Problems of small scale industries
5.14 Causes of Industrial Sickness
5.15 Consequences of Industrial sickness
5.16 Remedial Measures of Sickness in Industries.
5.17 Summary
5.18 Self assessment questions
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SMALL SCALE INDUSTRIAL UNDERTAKING
5.1 INTRODUCTION TO SSI
Our first Prime Minister Pt Jawaharlal Nehru said “Sky is the limit for small industry”. India
has to its credit of operating the largest and the oldest programme for the development of small
scale industry. Even a child knows that the master brain behind the revival of village industries was
the father of the Nation, Mahatma Gandhi. He equated Khadi to the 'Sun' of the village solar system
and other industries as planets which support the Khadi programme. He said that true swadeshi
consists in encouraging and reviving home industries and that alone can help millions. Gandhiji was
not against mechanisation. He said “Mechanisation is good when hands are too few for the work
intended to be accomplished, it is an evil when there are more hands than required for the work as
in case of India." He was of the opinion that if the government could provide full employment to
our people without the help of Khadi and Village industries, he was prepared to wind up his
constructive programme of revival of village industries. After independence the government has
been giving due emphasis on the development of small scale industry. The Directive Principles of
State Policy in the Constitution and Industrial Policies of various Five Year Plans are in tune with
the ideas propogated by Mahatma Gandhi. Even the year 1995-96 has been declared as SSI YEAR
by the Indian Government Dr. Sh'ankar Dayal Sharma, our Ex President, remarked before giving
away the National Awards to outstanding small scale entrepreneurs for the year 1993 "Small scale
sector is an important component of our national industrial base and the driving force of our
developmental efforts." It is a vital link in the industrialisatiotv-process which takes modern
technology to the people and serves as a pre-requisite for balanced economic growth.
5.2 DEFINITION OF SMALL SCALE UNIT
The definition of small scale unit can be categorised in different ways depending on a
country's pattern and stage of development, policy aims and administrative set up.
There can be two basis for defining small business and these are.
I. Scale of Business. The size or scale of business can be measured in various ways like :
(i) Investment on plant and machinery.
(ii) Employment generation.
(iii) Investment and Employment,
(iv) Volume and/or value of production,
(v) Volume and/or value of sales.
II. Qualitative Aspects. These can be :-
(i) Ownership of small business is in the hands of an individual or a few individuals.
(ii) Management and Control of small scale firm is with the owner or owners.
(iii) Technology adopted in small scale unit is normally labour intensive.
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(iv) Small scale business is normally carried on in a limited or local area.
In 1916 Indian Industrial Commission defined cottage industries as “Industries carried on in
homes of workers which we have designated as cottage industries. In these, operations is small and
there is but little organization so that they are, as a rule, capable of supplying only local needs.”
Before Second World War a small concern was defined as a unit having capital invested
upto Rs. 30,000 and those concerns having capital in excess of that amount were classified as large
scale units.
The definition of small scale enterprise has undergone changes over years with the ceiling
raised to take into account the rising cost of machinery as well as falling value of rupee.
Definitions of Micro, Small & Medium Enterprises [MSME]
In accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into two
classes:
(a) Manufacturing Enterprises. These enterprises are engaged in the manufacture or
production of goods pertaining to any industry specified in the first schedule to the
industries (Development and regulation Act, 1951). The Manufacturing Enterprises are
defined in terms of investment in plant & machinery.
(b) Service Enterprises. The enterprises engaged in providing or rendering of services and
defined in terms of investment in equipment.
The limit for investment in plant and machinery/equipment for manufacturing’s service
enterprises, as notified, vide S.O. 1642(E) dtd. 29-09-2006 are as under:
Manufacturing Sector
Enterprises
Investment in plant & machinery
Micro Enterprises
Does not exceed twenty five lakh rupees
Small Enterprises
More than twenty five lakh rupees but does not exceed five crore
rupees
Medium Enterprises
More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises
Investment in equipment
Micro Enterprises
Does not exceed ten lakh rupees:
Small Enterprises
More than ten lakh rupees but does not exceed two crore rupees
(Medium Enterprises
More than two crore rupees but does not exceed five crore rupees
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Tiny Industries. Very small enterprises with an investment of less than Rs. 25 lakh
included in the category of Tiny Industries. Capital investments for this purpose means investment
in plant and machinery. The locational restrictions for the setting up of Tiny Units have been
removed by Small Industries Policy of 1992. The number of persons employed in these units must
be less than 50. These units are normally operated under sole proprietorship form of ownership.
These units are managed by family members and not professionals which result in lower profit
generation.
Ancillary Units. Industrial units having an investment in plant and machinery, whether hold
on ownership or by lease or by hire purchase does not exceed Rs. 1 crore and engaged or is
proposed to be engaged in the manufacture or production of parts, components, sub assemblies,
toolings and intermediaries, or the rendering of service and supply or render at least 50 percent its
production of services as the cases may be to one or more other industrial undertakings.
Cottage Industries. These are also called household industries and are characterised by
following features.
They are organised by individual’s private resources and with the help of members of the
household (including family labour) and are pursued as full time or part time occupation. The
capital investment is small and the components used are simple. These industrial units normally use
local resources and local skills. The output produced in each industrial unit is generally sold in the
local market.
5.3 CHARACTERISTICS OR FEATURES OF SMALL SCALE INDUSTRY OR
(MSME)
1. Ownership. Ownership of small scale unit is with one individual in sole Proprietorship or it
can be with a few individuals in Partnership.
2. Management and Control. A small scale unit is normally a one man show and even in case
of partnership the activities are mainly carried out by the active partner and the rest are
generally sleeping partners. These units are managed in a personalized fashion. The owner is
actively involved in all the decisions concerning business.
3. Gestation Period. Gestation period is that period after which teething problems are over
and return on investment starts. Gestation period of small scale unit is less as compared to
large scale unit.
4. Area of Operation. The area of operation of small scale unit is generally localized catering
to the local or regional demand. The overall resources at the disposal of a small scale units
are limited and as a result of this, it is forced to confine its activities to the local level.
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5. Technology. Small scale enterprises are fairly labour intensive with comparatively smaller
capital investment than the larger units. Therefore these units are more suited for economies
where capital is scarce and there is abundant supply of labour.
6. Resources. Small scale units use local or indigenous resources and as such can be located
anywhere subject to the availability of these resources like labour and raw materials.
7. Dispersal of Units. Small scale units use local resources and can be dispersed over a wide
territory. The development of small scale units in rural and backward areas promotes more
balanced regional development and can prevent the influx of job seekers from rural areas to
cities.
8. Flexibility. Small scale units as compared to large scale units are more change susceptible
and highly reactive and responsive to socio- economic conditions. They are more flexible to
adopt changes like new method of production, introduction of new products etc.
5.4 Objectives of Small Scale Industry or (MSME)
The small scale sector can stimulate economic activity and is entrusted with the
responsibility of realising the following objectives :-
1. To create more employment opportunities with less investment.
2. To remove economic backwardness of rural and less developed regions of the economy.
3. To reduce regional imbalances.
4. To mobilise and ensure optimum utilisation of unexploited resources of the country.
5. To improve standard of living of people.
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self reliance.
9. To adopt latest technology aimed at producing better quality products at lower costs.
5.5 SMALL BUSINESS AS A SEEDBED OF ENTREPRENEURSHIP
Seedbed refers to the preparing of soil for the sowing of seeds so that we may have good
crop. Small business is regarded as a seedbed for entrepreneurship as it provides conducive
conditions for the emergence and growth of entrepreneurs. Small scale units employ available
technology and can be started with less investment. They are going to use local resources and cater
mainly to local demand. These units normally revolve round one individual who is called upon to
perform various roles. He is the owner, manager and risk bearer and hence can be called an
entrepreneur. The emergence, growth and success of entrepreneurs is linked with the growth of
small business. The government of India too has given small scale industry an important place in
the framework of economic planning for economic and ideological reasons. Thus setting up of more
small scale units will create more opportunities for entrepreneurial development and more and more
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educated unemployed will come forward for setting up their own enterprises. It will usher in an era
where in enterprising persons will assume entrepreneurial career in future.
Small enterprises are called seedbed of entrepreneurship due to the following reasons.
1. Small scale enterprises can be started with lesser investment, which can be contributed by
the promoter or arranged from friends and relatives.
2. Small scale units carry on business on a small scale and as such the element of risk too is
less.
3. Small scale units are generally based on local resources and as such there is no problem
regarding their availability.
4. To mobilise and ensure optimum utilisation of unexploited resources of the country.
5. To improve standard of living of people.
6. Small scale units generally cater to local demand and necessary modifications can be made
in the products keeping in mind the changing demand of people.
7. Small scale units provide ample opportunities for creativity and experimentation.
8. Small scale units have shorter gestation period and hence waiting period for getting return
on investment is less.
9. These units are relatively more environmental friendly.
10. Small scale units help in building achievement motivation amongst entrepreneurs.
11. Small scale units are viewed favourably by the government and society because these help
in equitable distribution of income & wealth.
Keeping in mind the above potentials of small scale industry as a developer of
entrepreneurial talent, the government of India has facilitated this sector by providing it with
various concessions and incentives.
5.6 IMPORTANCE OF SMALL SCALE INDUSTRY OR (MSME)
Small scale industries play a very important role in the economic development of our
country. The socio-economic development of India depends upon the development of small scale
industries. This sector is contributing a lot towards generation of employment, increasing overall
production and exports. Highlighting the importance of small scale business even Industrial Policy
Resolution 1956 states.
“They provide immediate large scale employment : they offer a method of ensuring a more
equitable distribution of the national income and they facilitate an effective mobilisation of
resources of capital and skill which might otherwise remain unutilised.”
The second Five Year Plan while recognizing the importance of small scale sector states the
following five points.
1. Generation of employment opportunities.
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2. An equitable distribution of national income.
3. Mobilization of Capital.
4. Mobilization of entrepreneurial skills.
5. Regional dispersal of industries.
It is evident from the above points that small scale enterprises play an important role in
employment generation, resource mobilization and utilisation, income generation and in helping to
promote change in a gradual and phase manner. India occupies a distinct position amongst
developing countries specifically in the area of development of small scale industries. India has a
vast reservoir of scientific and technical manpower and occupies third position in the world as far as
technical manpower is concerned. It has already emerged as a leading player in the development of
software technology.
The importance of MSMEs can be judged from the following points :-
1. Employment Generation. Small scale enterprises employ labour intensive technology and
hence generate more employment opportunities. Small scale industries generate
opportunities for self employment of technically qualified persons, artisans and
professionals. A major problem confronting our country is of increasing pressure of
population on land and the need to generate more employment avenues. A given amount of
capital invested in a small scale industry provides more employment than the same amount
of capital invested in a large scale industry. In a country like India confronted with the twin
problems of unemployment and scarcity of capital, it is only the small scale industry which
can solve these problems. Small scale industries can be located anywhere and hence can
provide employment to workers near their homes, more work for the under employed and
additional work for the farmers when they are idle.
2. Self Employment. Small scale sector provides numerous opportunities for self employment
and hence is more suited for our country faced with the major problem of unemployment. A
self employed entrepreneur is the master of his own show and he, thus gets, opportunity for
doing something creative, new and different. He instead of seeking job for himself, provides
employment to others. Working for himself creates personal interest and successful
accomplishment of the task generates job satisfaction and sense of attainment.
3. Optimum Use of Capital. Small scale enterprises require relatively lesser amount of capital
as compared with large scale enterprises. In the context of Indian economy where capital is
scarce, small scale sector can act as a stabilising force by providing high output capital ratio
as well as high employment capital ratio. Moreover due to shorter gestation period, small
scale units provide early returns to the entrepreneurs. Small scale units help in capital
formation by mobilising idle and small scattered savings of the people and put these into
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productive use by investment in small scale units. P.C. Mahalanobis has rightly observed "In
view of the meagreness of capital resources there is no possibility in the short run for
creating much employment through the factory industries (large scale). Now consider the
household or cottage industries. They require very little capital. About six or seven hundred
rupees would get an artisan family started. With any given investment, employment
possibilities would be ten or fifteen times greater in comparison with corresponding factory
industries."
4. Facilitate Entrepreneurial Development. Small scale sector helps in entrepreneurial
development. The units provide self employment to educated unemployed and reduce their
overdependence on the government. It also generates feeling of self reliance amongst the
people. This sector generates more employment opportunities with relatively lesser capital
investment. Large scale industries cannot provide opportunities to a large number of
entrepreneurs, who are scattered over a wide territory. Small scale industries on the other
hand can mobilise such entrepreneurial skills more effectively and put these into productive
use.
5. Use of Local Resources. Small scale enterprises employ local resources like raw material,
savings, entrepreneurial skill more effectively. In the absence of these enterprises, these
resources are likely to remain unutilised. Thus, on one hand small scale sector ensures better
use of the local resources and on the other, generates employment opportunities and income
for the local population.
6. Balanced Regional Development. Large scale units are normally concentrated at selected
places and this results in generation of employment opportunity, income and development of
only these places. Whereas small scale industries utilise local resources and promote
decentralised development of industries. It is only through dispersal of industries in rural
and backward areas that the objective of balanced regional development can be achieved.
Small scale sector by providing employment to people in rural & backward areas help in
solving the problems of industrial slums, congestion and pollution in industrial towns. Small
scale sector by generating employment and income in backward areas help in raising
standard of living of people.
7. Conservation of foreign exchange. Small scale enterprises help in saving precious foreign
exchange. Firstly small scale units utilise local resources like raw material and available
machinery and they are not dependent on costly imports. These units also produce those
products which were earlier being imported. Secondly there has been considerable increase
in exports from the small scale sector over years and presently this sector contributes about
35 percent to India's total exports, thus earning precious foreign exchange for the country.
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8. Equitable spread of income and wealth. Small scale enterprises help in the development
of socialistic pattern of society by ensuring equitable distribution of income and wealth.
This sector inculcates the spirit of entrepreneurship amongst people thereby providing them
self employment with limited means. Ownership of small scale industries is widespread and
offer more employment potential as compared with large scale industries. Large scale
industries result in concentration of income and wealth in a few hands and that too at
selected places whereas small scale industries ensure equitable spread of income & wealth
amongst all and that too at all places. Small scale enterprises thus promote the objective of
social justice.
9. Supporting Large Scale Industries. Small scale enterprises can facilitate growth and
development of large scale industries by providing various parts, components and
accessories to large scale industries. Small scale units serve as ancillaries to large units by
playing a complementary role.
10. Contribution towards national economy. Small scale enterprises have made rapid strides
over years and can produce wide range of products having mass consumption. More than
5000 different products are being manufactured in the small scale sector. This sector is
helping in realisation of the objective or export promotion and import substitution. Nearly
50 percent of the output of the manufacturing sector in our country is produced by small
scale sector. The small scale sector thus play a very important role in the economic
development of our country.
5.7 PROBLEMS OF SMALL SCALE INDUSTRY OR (MSME)
Small scale enterprises play a very vital role in the economic development of our country.
This sector can stimulate economic activity and is entrusted with the responsibility of realising
various objectives like generation of more employment opportunities with less investment, reducing
regional imbalances etc. Small scale industries are not in a position to play their role effectively due
to various constraints.
The various problems faced by small scale industries are as under :-
1. Finance. Finance is one of the most important problem confronting small scale industries.
Finance is the life blood of an organization and no organization can function properly in the
absence of adequate funds. The scarcity of capital and inadequate availability of credit
facility are the major causes of this problem. Firstly, adequate amount of funds are not
available and secondly entrepreneurs due to their weak economic base, have lower
creditworthiness. Neither they are having their own resources nor are others prepared to
lend. Entrepreneurs are forced to borrow money from money lenders at exorbitant rate of
interest and this upsets all their calculations. After nationalization, banks have started
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financing this sector. These enterprises are still struggling with the problem of inadequate
availability of high cost funds. These enterprises are promoting various social objectives and
in order to facilitate their working adequate credit on easier terms and conditions must be
provided to them.
2. Raw Material. Small scale enterprises normally tap local sources for meeting raw material
requirements. These units have to face numerous problems like availability of inadequate
quantity, poor quality and even supply of raw material is not on regular basis. All these
factors are going to adversely affect the functioning of these units. Large scale units,
because of more resources, normally corner whatever raw material that is available in the
open market. Small scale units are thus forced to purchase the same raw material from the
open market at very high prices. It will lead to increase in the cost of production thereby
making their functioning unviable.
3. Technology. Small scale entrepreneurs are not fully exposed to the latest technology.
Moreover, they lack requisite resources to update or modernize their plant and machinery.
Due to obsolete methods of production they are confronted with the problems of less
production of inferior quality and that too at higher cost. They are in no position to compete
with their better equipped rivals operating modern large scale units.
4. Idle Capacity. There is under utilisation of installed capacity to the extent of 40 to 50
percent in case of small scale industries. Various causes of this underutilization are shortage
of raw material, problem associated with funds and even availability of power. Small scale
units are not fully equipped to over-come all these problems as is the case with the rivals in
the large scale sector.
5. Infrastructure. Infrastructural bottlenecks adversely affect the functioning of small scale
units. There is inadequate availability of transportation, communication, power and other
facilities in the backward areas. Entrepreneurs are faced with the problem of getting power
connections and even when they are lucky enough to get these they are exposed to
unscheduled long power cuts. Inadequate and inappropriate transportation and
communication network will make the working of various units all the more difficult. All
these factors are going to adversely affect the quantity, quality and production schedule of
the enterprises operating in these areas. Thus their operations will become uneconomical or
unviable.
6. Marketing. These small scale units are also exposed to marketing problems. They are not in
a position to get first hand information about the market i.e. about the competition, taste,
liking disliking of the consumers and prevalent fashion. With the result they are not in a
position to upgrade their products keeping in mind market requirements. They are producing
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less of inferior quality and that too at higher costs. Therefore, in competition with better
equipped large scale units, they are placed in a relatively disadvantageous position. In order
to safeguard the interests of small scale enterprises the Government of India has reserved
certain items for exclusive production in the small scale sector. Various governmental
agencies like Trade Fair—Authority of India, State Trading Corporation and the National
Small Industries Corporation are extending helping hand to small scale sector in selling its
products both in the domestic and export markets.
7. Underutilization of Capacity. Most of the small scale units are working below full
potentials or there is gross underutilization of capacities. Large scale units are working for
24 hours a day i.e. in three shifts of 8 hours each and are thus making best possible use of
their machinery and equipments. On the other hand small scale units are making only 40 to
50 percent use of their installed capacities. Various reasons attributed to this gross
underutilization of capacities are problems of finance, raw material, power and
underdeveloped markets for their products.
8. Skilled Manpower. A small scale unit located in a remote backward area may not have
problem with respect to unskilled workers but it may be exposed to the problem of non
availability of skilled workers. Firstly, skilled workers may be reluctant to work in these
areas and secondly, the enterprise may not afford to pay the wages and other facilities
demanded by these persons. Besides non availability, entrepreneurs are confronted with
various other problems like absenteeism, high labour turnover, indiscipline, strike etc. These
labour related problems result in lower productivity, deterioration of quality, increase in
wastages, rise in other overhead costs and finally adverse impact on the profitability of these
small scale units.
9. Project Planning. Another important problem faced by small scale entrepreneurs is poor
project planning. These entrepreneurs do not attach much significance to viability studies
i.e. both technical and economical and plunge into entrepreneurial activity out of mere
enthusiasm and excitement. They do not bother to study the demand aspect, marketing
problems, sources of raw materials and even availability of proper infrastructure before
starting their enterprises. Project feasibility analysis covering all these aspects in addition to
technical and financial viability of the projects is not at all given due weight age.
Inexperienced and incompetent entrepreneurs often submit unrealistic feasibility reports and
incomplete documents which invariably results in delays in completing promotional
formalities. Small entrepreneurs do not fully understand project details. Moreover due to
limited financial resources they cannot afford to avail services of project consultants. This
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results in poor project planning and execution. There is both time and cost overrun which
adversely affect interests of these small scale enterprises.
10. Managerial. Managerial inadequacies pose another serious problem for small scale units.
Modern business demands vision, knowledge, skill, aptitude and whole hearted devotion.
Competence of the entrepreneur is vital for the success of any venture. An entrepreneur is a
pivot around whom the entire enterprise revolves. Thus, he must be fully conversant with all
aspects of management. Many small scale units have turned sick due to lack of managerial
competence on the part of entrepreneurs. An entrepreneur is required to undergo training
and counseling for developing his managerial skills. Lack of proper commitment and
managerial skills will add to the problems of entrepreneurs.
The small scale entrepreneurs have to encounter numerous problems relating to
overdependence on institutional agencies for funds & consultancy services, lack of
creditworthiness, education.
5.8 STEPS TO START AN SSI
1. Decision to be self-employed
This is the most crucial decision a youth has to take, shunning wage employment and opting
for self-employment or entrepreneurship.
2. Analyzing strengths, weaknesses, opportunities and threats (SWOT analysis):
The potential entrepreneur has to analyze his strengths, weaknesses, opportunities and
threats, while deciding to go for entrepreneur career. This analysis enables him to know what type
and size of businesses would be the most suitable. This will vary from person to person.
3. Scanning of Business Environment: It is always essential on the part of the entrepreneur to
study and understand the prevailing business environment. In order to ensure success of his
enterprise, entrepreneur should scan the business opportunities and threats in the environment. He
should study the administrative framework, procedures, policies, rules and regulations and other
formalities implemented by the government.
4. Training: Before going to start the enterprise, the potential entrepreneur must assess his own
deficiencies which he can compensate through training. He can avail the facilities of various
training institutes like EDI, NIESBUD, IEDs existing in our country. These institutes are providing
tailor-made Entrepreneurship Development Programmes (EDPs) and skill up gradation training
programmes for the benefit of the new entrepreneurs, existing entrepreneurs and for the employees
of the small scale industries.
5. Product Selection: The most important step is to decide what business to venture into, the
product or range of products that shall be selected for manufacture and in what quantity. The level
of activity will help in determining the size of business and thus form of ownership. One could
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generate as many project ideas as one can through environment scanning and short list a few of
them, closely examine with the help of opportunity analysis each one of them and zero on the final
product or products.
6. Market Survey: It is always convenient to manufacture an item but difficult to sell. So it is
rational on the part of the entrepreneur to survey the market thoroughly before embarking upon
production. Market survey implies systematic collection of data by the entrepreneur about the
product for manufacture, demand-supply lag, extent of competition, frequency of demand, pattern
and design of demand, its potential share in the market pricing, distribution policy, etc. The
principle is to produce what actually people demand. The entrepreneur can contact the concerned
authorities for this.
7. Form of Organization: A firm can be constituted as proprietorship, partnership, limited
company (public/private), cooperative society, etc. This will depend upon the type, purpose and size
of entrepreneur's business. One may also decide on the form of ownership on the basis of resources
at hand or from the point of view of investment.
8. Location: The next step will be to decide the location where the unit is to be established.
Will it be hired or owned? The size of plot, covered and open area and the exact site will have to be
decided.
9. Technology: To manufacture any item, technology is used. Information on all available
technologies should be collected by the entrepreneur and the most suitable one to be identified. This
will also be useful to determine the type of machinery and equipment to be installed. The
entrepreneur can contact DIC, TCO etc.
10. Machinery and Equipment: Having chosen the technology, the machinery and equipment
required for manufacturing, the chosen products have to be decided, suppliers have to be identified
and their costs have to be estimated. One may have to plan well in advance for machinery and
equipment especially if it has to be procured from outside the town, state or country.
11. Project Report Preparation: After deciding the form of the ownership, location, technology,
machinery and equipment, the entrepreneur should be ready to prepare his project report or the
feasibility study. The economic viability and the technical feasibility of the product selected have to
be established through a project report. A project report that may now be prepared will be helpful in
formulating the production, marketing, financial and management plans. It will also be useful in
obtaining finance, shed, power connection, water connection, raw material quotas, etc. The
entrepreneur has to consider the guidelines given by the Planning Commission in preparing the
report.
12. Project Appraisal: Ordinarily, project appraisal implies the assessment of a project. It is a
technique for ex-ante analysis of a scheme or project. While preparing to set up an enterprise, the
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entrepreneur has to carefully appraise the project from the standpoint of economic, financial,
technical, market, managerial and social aspects to arrive at the most socially-feasible enterprise. To
avail the finance from the financial institutions and banks, a comprehensive appraisal of projects
carrying techno-economic feasibility aspects should be undertaken by the entrepreneur. Thus, a
project which is selected should be technically feasible and economically viable and then only it
will be bankable. For this, the following appraisals can be performed at the preliminary level:
(a) Economical appraisal
(6) Financial appraisal
(c) Technical appraisal
(d) Management appraisal
(e) Organizational appraisal
(f) Operational appraisal
(g) Market appraisal
13. Finance: Finance is the lifeblood of the enterprise. Entrepreneur has to take certain steps and
follow specified norms of the financial institutions and banks to obtain it. A number of financial
agencies provide capital assistance and venture capital for starting an enterprise. There are some
agencies which provide financial assistance on concession rates. Under PMRY and REGP schemes
financial assistance and subsidies are being provided to the persons who want to set up their own
enterprise.
14. Provisional Registration: It is always worthwhile to get the unit registered with the
government. The entrepreneur has to obtain the prescribed application form for provisional
registration from DIC or Directorate of Industries. After having duly filled in the application form,
he has to submit the application with all relevant documents in the local DIC or Directorate of
Industries. This will enable the entrepreneur to avail various government facilities, incentives and
assistances schemes including financial assistance from NSIC/SFCs/ KVIC.
15. Technical Know-How: In some cases, technical know-how may be arranged for setting up
enterprise. This can be arranged through TCOs, NSIC, SSIDC, DIC, private consultants, SISI, ED-
institutes, foreign collaborators, India Investment Centre, and Industry, etc. Facilities are also
available to SSI for making technical know-how arrangements including turn-key jobs.
16. Power and Water Connection: The sites where the enterprise will be located, should either
have adequate power connections or this should be arranged. Entrepreneur can calculate the total
power requirement and determine the nearest pole from which power will be given to the enterprise
as it can materially affect the installation cost. Similarly, the water connection will have to be
obtained or provision should be made for adequate water supply to the firm.
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17. Installation of Machinery: Having completed the above formalities, the next step is to procure
the machinery for installation. Machinery should preferably be installed as per the plan layout.
18. Recruitment of Manpower. Once machines are installed, the need for manpower arises to run
them. So the quantum and type of manpower is to be decided. This presupposes the skilled,
unskilled and semiskilled labour, administrative staff etc. Further, sources of getting desired labour
and staff members be indented and recruited. Possibly, the labour force has to be trained either at
the entrepreneur's premises or in a training establishment.
19. Procurement of Raw Materials: Raw materials are the important ingredients for running an
enterprise. The labour will require raw materials to work upon the installed machinery. These
materials may be procured indigenously or may have to be imported by the entrepreneur.
Entrepreneur has to identify the cheap an assured sources of supply of raw materials for running his
own enterprise. Government agencies can assist in case the raw materials are scarce or imported.
20. Production: The unit established should have an organizational setup. To operate optimally,
the organization should employ its manpower, machinery and methods effectively. There should
not be any wastage of manpower, machinery and materials. If items are-exported, then the product
and its packaging must be attractive. Production of the proposed item should be taken up in two
stages:
(i) Trial production
(ii) Commercial production
Trial production will help tackling problems confronted in production and test marketing of
the product. This will reduce the chances of loss in the eventuality of mistakes in project
conception. Commercial production should be commenced after the test-marketing of the product.
21. Marketing: Marketing is the most important activity as far as the entrepreneurial development
is concerned. Various aspects like how to reach the customer, distribution channels, commission
structure, pricing, advertising, publicity, etc., have to be decided by the entrepreneur. Like
production, marketing should also be attempted cautiously, that is, in two stages namely:
(i) Test stage
(ii) Commercial marketing stage
Test marketing is necessary to save the enterprise from going into disrepute in case the
product launched is not well accepted by the customers. It will also assist the entrepreneur in
carrying out modifications or additions in designs and features of the product. Having successfully
test marketed the product, commercial marketing can be undertaken. The entrepreneur can contact
the Small Industries Marketing Corporation.
22. Quality Assurance: Before marketing, the product quality certification from BIS (Bureau of
Indian Standards)/AGMARK/HALLMARK, etc., should be obtained depending upon the product.
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If there is no quality standards specified for the products, the entrepreneur should evolve his own
quality control parameters. Quality, after all, ensures long term success.
23. Permanent Registration: After the small scale unit goes into production and marketing, it
becomes eligible to get permanent registration based on its provisional registration from DIC or
Directorate of Industries.
24. Market Research: Once the product or service is introduced in the market, there is strong need
for continuous market research to assess needs and areas for modification, upgradation and growth.
Market becomes waterloos for most SSI entrepreneurs as they ignore the vital day-to-day operation.
Initial success should not lure the entrepreneur into a sense of complacency.
Table 5.2 Sources of information
S. No.
Area
State Level Agencies
National Level Agencies
1.
Project selection
SISI, DIC, IDC's, IIC's,
TCO's,' SFSs, SIC, IC, IEB,
PTC
CB, SIDO, CSIR, DEP, IIC,
IFCI, IPB, NRDC, EDI
2.
Registration and
licenses
CIF, DDCA, DIC, EB,
GMD, SIC, WPCB, IC, LA,
STC, TC
CECD, CCIE, ISI, IDC, MIC,
NSIC, RC, RT, SC, DGTD
3.
Finance
DIC, Bank, SFC, SIC, IICs,
IDCs
CB, CEC, ICICI, IDBI, IFCI,
NISC, SBI, DIC
4.
Technical
DDCA, DIC, DJCII TOCs,
GMD
CIPET, CSIR, IIC, IIFT, MRDC,
NSIC, RT, SBS, SISI, CITD,
ICMR
5.
Training
EDPs, SISI, TCDs, DICs
SBI, CB, CIPET, IRL, NISIET,
IITs, NISBUT, EDI
6.
Infrastructure
facilities
DIC, EB, IDC, LA
7.
Raw materials
DIC, MID, MDC, SIC, IC,
STC
CCIE,MMTC, MDC, SPC
8.
Plant and
machinery
DIC, IIC, SFC, SEC, IC,
IDB
CCIE, NSIC, SISI
9.
Marketing
information
DIC, TCO's, SEC, SIC,
RIMCO
DEP, DGSD, CCIE, IIFT, MID,
SIC, ICMR, ICAR
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Table 5.3: Application forms
S. No.
Subject
Agencies
(A)
Planning Stage
1.
Provisional registration number
DIC
2.
Application for shed or plot
SIDC
3.
No objection certificate from ideal authorities
LA (Local Authority)
4.
No objection certificate from health department
District health officer
5.
No objection certificate from electricity department
Electricity department
6.
Loan application for term loan
SFC/NB/NSIC
7.
Subsidy registration
DIC
8.
Application for building plan and estimates
Approval of architect
contractor
9.
Application for bank account/cash credits/ working capital
loan
NB
10.
Application for air and water pollution no objection
certificate
State pollution control
authority
11.
Application for the approval of production programme for
certain restricted items .
DIC, SISI, Central
Ministry
12.
Registration of partnership deed
Registrar of firms
13.
Application for ancillary units
Parent companies
14.
Registration of firms
Register of firms
15.
Application for the boilers and plant layout of the unit
Inspector of Boilers
16.
Application for the production of petroleum based product
Ministry of Petroleum
17.
Application for Excise Registration Number
Excise Department
18.
Application for Latex in rubber based products
Rubber Board
19.
No objection certificate from Forest Department for wood
based products
State conservation of
forests
20.
Applications for essential commodity items as raw
materials
District Civil Supply
Department
208
21.
Application for imported raw materials
DIC/Export-Import
Boards
22.
Application for imported of machines
DIC/Export-Import ,
Boards
23.
Application for raw materials quota
DIC/Export-Import
Boards
(B)
During Implementation of Project
24.
Application for power connection
Local Electricity Dept.
25.
Application for water
LA
26.
Application for C-Form (Sales Tax)
Sales Tax Department
27.
Application for state Sales Tax Registration
Sales Tax Department
28.
Application for central Sales Tax Registration
Sales Tax Department
29.
Application for exemptions from Sales Tax
DIC/Sales Tax Deptt.
30.
Application for exemption from Octroi Duty
DIC/LA
31.
Application for storing of inflammable raw material
Director of Explosives
(C)
During Running of Enterprise
32.
Application for Permanent Registration Number
DIC/Dirctorate of
Industries
33.
Application for subsidy claims
DIC
34.
Application for power subsidy
LA
35.
Application for food preservation ordinance license
Food Controller
36.
Application for registration in case of more than 20
employees without power use or more than 10 employees
with power use.
Labour Welfare Board/
Employment Exchange/
P.F. Commissioner
37.
Application for product marketing to the Central
Government Department
DIC/DGSD
5.9 INTRODUCTION & MEANING OF INCENTIVES AND SUBSIDIES
Entrepreneurs in India are offered a number of incentives in order to encourage them to set
up small industrial units. As already witnessed, availability of incentives can reduce concentration
of SSIs in urban cities and help dispersal of industries over India's vast geographical area.
Incentives benefit the economy and assist entrepreneurs shift from traditional technology to modern
technology. Adoption of modern technology helps in improving the skills, higher productivity, high
wages and better standard of living.
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Incentives, is a general term which includes concessions, subsidies and bounties. Oxford
dictionary defines an incentive as, "a thing that encourages somebody to do something". A
concession can be described as, "a reduction in price for particular categories of people". Subsidy
denotes a single lumpsum given by the Government to an entrepreneur to cover the cost. It is
granted to an industry which is considered to be essential in the national interest. The term 'bounty'
implies bonus or financial help given by the government to an industry to help it to compete with
other units in country or in a foreign market. It is given in proportion to its output. Bounty gives
benefits to a particular industry, while subsidy is given in the interest of the nation.
The objective of incentives is to stimulate and motivate an entrepreneur to set up new ventures so
that the people and the nation as a whole benefit from that particular venture.
These incentives and subsidies can give following benefits.
(i) Incentives and subsidies act as a motivational force and push the prospective entrepreneurs
to an entrepreneurial line.
(ii) Entrepreneurs are encouraged to take action and decisive decisions.
(iii) It encourages entrepreneurs to set up their ventures in those states where incentives are
available. Thus, it results in regional dispersal of industries in rural and backward areas. For
example, in the State of Punjab, Bhatinda, Ferozpur, Gurdaspur, Hoshiarpur and Sangrur,
have been in the list of Industrially Backward Districts in the country.
(iv) Incentives and subsidies increase the ability of the entrepreneur to face competition.
(v) More and more young people are encouraged to become entrepreneurs and exploit their
skills. Failures also emerge but hidden talent also crops up.
5.10 NEED FOR INCENTIVES
Following reasons justify the need for incentives :
(i) To Remove Regional Disparities in Development: It is responsibility of respective
state/UT Government to develop village and small industries. By offering better incentives
in backward areas, the concentration of industry in cities will reduce resulting in even
distribution of industry all over the state. For example, Ludhiana (Punjab) is heavily
concentrated for hosiery manufacturing whereas Ferozpur district has been declared as
backward with nearly no industry. Similarly, the entire state of Himachal Pradesh, Jammu &
Kashmir, Tripura, Manipur and many others have been listed as backward states/ districts in
country. Incentives allure the entrepreneurs to overlook the deficiencies of backward areas
thus, removing the disparities and utilising the local resources properly.
(ii) To Strengthen and Expand the Entrepreneurial Base: Entrepreneurial development is an
index to measure the development of any country. Whether entrepreneurship is taken up out
of necessity or as an opportunity, incentives do strengthen them to face and overcome
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various problems coming up in their way. Many incentives like reservation of products,
infrastructural facilities, laboratory and testing services, export-import incentives etc.
encourage the entrepreneurs to take up new ventures with much reluctance and many
schemes of SIDBI, commercial banks etc. help them to continue with their existing units.
(iii) To Provide Competitive Strength, Survival and Growth: Central and State governments
have a variety of incentives for the industrialists. Some incentives, like seed money are for
establishing the new unit while others, like interest free loans, exemption from income-tax
are concerned with survival and growth of industries. Some benefits are available only in
beginning years of setting up a unit while few are available over a long period. Reservation
Policy, for example, comprises 664 products exclusively reserved for production by SSIs.
Non-SSIs can also produce the same products but with an obligation of 50 percent exports
of the product. Thus, these incentives encourage new comers in the market and also supports
the existing industrialists.
(iv) Ensure Employment Opportunities. Establishing a small unit ensures not only self-
employment but also generates employment for others and removes the evil of under-
employment. Proper availability and usage of incentives and subsidies can make it happen.
A prosperous and contended entrepreneur will be a satisfied owner also and would give
reasonable wages as well. He will be able to generate a conducive environment and may
also move from developed to backward area in order to diversify his unit. As a result, more
employment will be generated.
5.11 TYPE OF CENTRAL GOVERNMENT SUBSIDIES AND INCENTIVES
The Government of India (GOI), from time to time, announces various schemes/concessions
and support services for the promotion of industries. The aim behind such incentives stimulate
prospective entrepreneurs to establish themselves in backward areas and, secondly, to reduce the
regional imbalances. Some of the subsidies and incentives are as follows :
Credit Linked Capital Subsidy. The GOI launched a new Credit Linked Capital Subsidy Scheme
with effect from October 2000. The subsidy is given to upgrade technology of SSIs in selected
products and to strengthen the units in the identified sectors to face the competition. The 45
products/Sub-sectors selected sectors, inter alia, include leather and leather products, including
footwear and garments, food processing, information technology, drugs, pharmaceuticals, auto
components etc SIDBI implements this scheme and gives a capital subsidy of 15% per cent on
loans and advances to SSI units by scheduled commercial banks and NSIC. The subsidy is extended
to SFCs as well. The plan has been continued during eleventh plan from 2006-2011.
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Capital Investment Subsidy. Capital Investment Subsidy was notified on June 01, 1998 by the
Prime Minister for North- Eastern Region. Under the Capital Subsidy Scheme, subsidy at the rate of
15 per cent of the investment in plant and machinery is given subject to a maximum ceiling of Rs. 3
million. The subsidy is payable to (i) industry which is located in the growth centres, (ii) to new
industrial units, (iii) to industries undergoing substantial expansion in other identified areas in the
North Eastern Region. The subsidy is given through the respective stale governments.
Transport Subsidy. The Transport Subsidy Scheme was introduced in July 1971 to promote
industries in hilly, remote and inaccessible areas. The scheme is applicable to the States of
Himachal Pradesh, J&K, the North Eastern States, Sikkim, Union Territories of Andaman &
Nicobar Islands, Lakshadwcep, Darjeeling district of West Bengal and eight hill districts of Uttar
Pradesh (now in Uttranchal State) comprising Almora, Chomoli, Dehradun, Nainital, Pauri
Garhwal, Pithoragarh, Tehri Garhwal and Uttar Kashi. Under the scheme, a subsidy ranging from
50 per cent to 90 per cent is admissible on transport costs incurred on the movement of raw-
materials and finished goods from designated rail heads/parts upto the location of the industrial
units and vice-versa. The subsidy scheme has been extended upto March 31, 2007.
Capital Subsidy for tannery Units. The subsidy is given for modernisation of tannery units in the
country. The capital subsidy is given against purchase of eligible machinery upto 30 percent of cost
or Rs. 2.8 million whatever is lower. SIDBI is implementing the scheme for SSI and non-SSI units
through its direct and indirect finance routes.
Collateral-free and Third Party Guarantee free Loans. The GOI in association with SIDBI set
up a Credit Gurantee Fund Trust for small industries during financial year 2000-01. The scheme
provides a guarantee cover to the eligible lending institution (e.g. commercial banks) in respect of
their collateral free and third party guarantee free loans given to SSIs including IT and software
sector. The limit has been raised from Re 1 million to Rs. 2.5 million for borrowing unit.
Power Subsidy. Power subsidy is not uniform in all the states/UTs; their nature, contents, quantum
and periodicity vary from state to state.
Incentive for Marketing Development. Ministry of Commerce. Government of India reimburses
the expenditure incurred by SSI delegates that visit foreign countries for the purpose of exploring
marketing possibilities. The incentive is given at the rate of 50 per cent of expenditure incurred by
the delegation. This incentive is extended for admissible items only.
Price Preference to SSI Units. The NSIC extends following incentives to SSI units which get
registered under the Single Point Registration Scheme.
• Availability of tender sets free of cost,
• Exemption from payment of Earnest Money Deposit,
• Exemption from payment of Security Deposit,
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• Price preference upto 15 per cent over lowest quotation of the large scale units
Availability of Industrial Estate. Industrial estates which provide industrial area, plots and
industrial sheds for allotment to SSI entrepreneurs is implemented through State or UT
Governments. These IEs provide infrastructural facilities which include subsidy on rent fo'r factory
accommodation, allotment of sheds on hire-purchase as well on outright sale. Other incentives like
concessional charges for water and power, exemption from sales tax and Octroi duty etc. are also
offered. Facilities of developed roads, banks, canteens, watch and ward, communication network
may also exist.
State Capital Investment Subsidy
In order to encourage setting up of Industrial units in their States, State Governments
provide State Capital Investment Subsidy to Priority Sector industries. The facilities are available in
Utlar Pradesh. Jammu & Kashmir. Andaman & Nicobar Islands., Sikkim, Karnataka. Meghalaya,
Himachal Pradesh, Gujarat, Punjab, Andhra Pradesh, Kerala, Maharashtra, Tripura and Manipur.
Sales Tax concessions
State Governments give concessions in sales tax to new units/sick units on the sale of their
finished products at the first point of sale for a period of three to fifteen years. The facilities are
available in Uttar Pradesh, Jammu & Kashmir, Sikkim. Daman & Diu. Karnataka, Meghalaya,
Himachal Pradesh, Gujarat, Nagaland, Punjab, Rajasthan, Andhra Pradesh, Kerala, Haryana and
Tripura.
Exemption from stamp duty and local taxes
State Government exempt stamp duty in respect of land allotted by the Government to the
new industrial units. Machinery, equipments, raw materials and packing materials of new units arc
exempted from payment of octroi duty and other local taxes. The facilities are available in Jammu
& Kashmir, Sikkim, Daman, Karnataka, Meghalaya, Gujarat, Nagaland, Rajasthan, Haryana,
Maharashtra and Manipur.
Rebate in electricity charges and water charges
State Governments provide rebate in electricity charges and water charges to the new and
existing units in their respective States. The facilities are available in Sikkim, Daman, Karnataka,
Himachal Pradesh, Gujarat, Nagaland, Rajasthan, Andhra Pradesh, Kerala and Maharastra.
Interest Sutsidy
State Governments provide interest subsidy to entrepreneurs on terms loans which they get
from State Financial Institutions/Scheduled Banks. The facilities are available in Jammu &
Kashmir, Andaman & Nicobar Islands, Sikkim, Meghalaya, Himachal Pradesh, Punjab, Rajasthan,
Andhra Pradesh and Manipur.
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State Transport Subsidy
Some State Governments provide State transport subsidy and notified rates from time to
time to industrial units on transportation of raw materials and finished products. The facilities are
available in Jammu & Kashmir, Andaman & Nicobar Islands, Nagaland and Manipur.
Subsidy for technical know-how
Stale Governments provide subsidy on the cost of technical know- how obtained by small
scale industries from reputed and well established research and development organizations. For
obtaining such technical know - how, prior permission from State Governments has to be obtained.
The facilities are available in Jammu & Kashmir, Sikkim, Delhi, Kerala and Manipur.
Marketing Support
The State Government Departments, Semi-Government Organizations, Autonomous
Government Organizations, Grant-in-Aid Institutions, Departmental Undertakings, etc. while
making purchases of their requirements of store items, give preference to the products
manufactured by the local SSI units. The facilities are available in Jammu & Kashmir, Sikkim,
Nagaland, Delhi, Kerala, Manipur and Tripura.
Special facilities for export oriented units
State Governments provide special package of incentives and better infrastructural facilities
for export oriented units. State Governments reimburse costs incurred by SSI units for shipment of
export samples from the nearest port/container depot to the port of destination. The facilities are
available in Uttar Pradesh, Karnataka, Himachal Pradesh, Punjab, Rajasthan and Tripura.
Air Freight Subsidy
State Government provide Air Frieght Subsidy to SSI units on their finished goods for any
destination. The facilities are available in Uttar Pradesh.
Incentives to Non-Resident Indians (NRIs)
State Governments provide special incentives for setting up new industries by NRIs in their
respective States. The facilities are available in Uttar Pradesh, Himachal Pradesh, Punjab and
Rajasthan.
Special incentives for Women
SSI units owned and managed by women entrepreneurs having more than 80% women
labourers are provided special incentives like 50% subsidy for building and machinery, rent
subsidy, managerial grant, stipendary training, etc. The facilities are available in Tripura and
Kerala.
Incentive for ISO 9000/ISO 14001 Certificates.
The government introduced this incentive scheme for their technological
upgradation/quality improvement and environment management. The scheme provides incentive to
these small scale undertaking who have acquired ISO 9000/ISO 14001 certificate.
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The scheme envisages reimbursement of charges of acquiring ISO- 9000/ISO-14001
certification to the extent of 75% of the expenditure subject to a maximum of Rs. 75,000/- in each
case. The scheme is valid upto 31st March 2007.
National Award for outstanding Entrepreneurship in Micro & Small Enterprises engaged in
manufacturing.
1. First National Award Rs. 1,00,000/ -cash prize, a Trophy and a Certificate.
2. Second National Award Rs. 75,000/- cash prize, a Trophy and Certificate.
3. Third National Award Rs. 50,000/- cash prize, a Trophy and a Certificate.
4. Special National Award to oustanding Woman Entrepreneur Rs.1,00,000/- cash prize, a Trophy
and a Certificate.
5. Special National Award to outstanding SC/ST Entrepreneur Rs.1.00.000/- cash prize, a Trophy
and a Certificate.
6. Special National Award to outstanding Entrepreneur from NER including Sikkim Rs.1,00,000/-
cash prize, a trophy and certificate.
National Award for outstanding Entrepreneurship in Micro & Small Enterprises rendering
services.
1. First National Award Rs. 1,00,000/- cash prize, a Trophy and a Certificate.
2. Second National Award Rs. 75,000/- cash prize, a Trophy and a Certificate.
National Award for outstanding Entrepreneurship in Medium Enterprises engaged in
manufacturing.
1. First National Award Rs. 1,00,000/- cash prize, a Trophy and a Certificate.
2. Second National Award ,Rs. 75,000/- cash prjze, a Trophy and a Certificate.
A Special "Recognition Award to those MSMEs scoring marks above 80 percent and (50
percent in case of North Eastern Regions including Sikkim) will be given with a Cash prize of Rs.
20,000/- each, a Certificate and a Trophy at the State Level Function to be organized by Director,
MSME-DI.
The awards will be presented in a public function.
Periodicity & Eligibility
The Awards will be given for every calender year to deserving entrepreneurs managing
Micro, Small and Medium Enterprises having permanent registration/have filed Entrepreneur’s
Memorandum with the authorities notified by respective State Governments/UT Administration in
accordance with the provisions contained in the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006, which has since come into force from 2 October 2006. The
MSMEs should have been in continuous production/servicing at least during last four years.
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5.12 FOREIGN DIRECT INVESTMENT IN SSI SECTOR.
(i) To provide access to capital market and to encourage modernisation and technological
upgradation, equity participation upto 24 per cent of the total shareholding is allowed in
SSIs by other industrial undertakings including foreign collaborators.
(ii) To encourage and promote the acquisition of technological capability, mechanism for
foreign technology agreements have been simplified. No permission is necessary for hiring
foreign technicians and hence no application needs to be made to the government for this
purpose.
(iii) Use of foreign brand names/trade marks on goods for sale within the country has been
permitted.
(iv) Procedure has been simplified for investment by NRI and Overseas Corporate Bodies
(OCBs), which are predominantly owned by NRIs. OCBs are those companies in which
NRIs hold at least 60 per cent of the equity.
(v) The RBI accords automatic approval to all proposals from NRIs and OCBs by permitting
NRI investment upto 100 per cent equity in high priority industries. The approval includes
full benefits of repatriation of capital invested and income accruing thereon.
(vi) 100 per cent equity investment in industries reserved for the small scale sector is permitted
to NRIs and OCBs, provided the export obligation criteria (i.e. export of 50 per cent of the
production) is undertaken by the unit.
Incentives of Exporters
(i) The Special Import Licence which was required to be obtained has been abolished
from April 01, 2001,
(ii) Import of second hand capital goods (less than 10 years old) is allowed without
obtaining any licence or surrender of SIL.
(iii) Export Promotion Capital Good Scheme is extended to all sectors and to all capital
goods without any threshold limit on payment of 5 per cent of duty,
(iv) Units set in the Special Economic Zones will be treated as being outside the custom
territory.
(v) In order to give recognition to the established exporters and large Export Houses to
build up marketing infrastructure and expertise required for export promotion, a
scheme of Export Houses, Super Star Trading Houses was initiated. Under this
scheme, registered exporters are granted the status of Export Houses/Trading
Houses/Star Trading/Super Star Trading Houses subject to certain requirements.
216
Participation in International Fairs/Exhibitions
The capability of SSI products is reflected by the fact that it has share of about 34% in
national exports. In case of readymade garments, leather goods, processed foods, engineering items,
the position of SSI in terms of value and their share within the SSI sector has been commendable. In
some cases like sports goods they account for 100% share to the total exports of the sector.
If small scale industrialists want to exhibit their product in the international exhibitions, the
whole expenditure on account of space rent, handling and clearing charges, insurance and shipment
charges etc. are met by the-office of Development Commissioner (Small Scale Industries) under
one of the plan schemes. The basic objective behind the scheme is to promote exports. The strategy
has been found to be successful for exporters from small scale sector in identifying new foreign
buyers markets.
With a view to acquiant SSI exporters of the latest packaging standards, techniques etc for
exports, training programmes are organised in various parts of the country in association with
Indian Institute of Packaging. Thus, entrepreneurs get educated about the scientific techniques of
packaging and get sensitized about the international standards of packaging.
Technical and managerial consultancy services to SSI manufacturers and exporters is
provided through a net of field officers of this office.
Purchase and Price Preference Policy for Marketing SSI Products.
The policy of reservation of items for exclusive purchase from SSI sector has been in vogue
since late 60's as a measure of marketing support to SSI sector. The Store Purchase Policy of the
government prior to 1989 was in the form of categorization of items and was divided in six major
groups.
However, with effect from July 28, 1989, the Purchase Policy of the government was
reduced to two major groups :
(i) Items of stores were reserved for exclusive purchase from KVIC/Women's Development
Corporations/Small Scale units and
(ii) Others not so reserved. The first group comprised of 409 items earlier reserved for exclusive
purchase from small-scale sector.
The list of 409 items was reviewed recently and a list of 358 items including 8 handicrafts
items reserved for purchase from the Handicraft Sector was revised in the year 1998.
(iii) Prime Minister's Rozgar Yojana (PMRY). PMRY, implemented since 1993, is designed to
create and provide sustainable self-employment opportunities to one million educated
unemployed youth in the country during the 8th Plan Period. The Scheme has been modified
from time to time.
217
5.13 PROBLEMS OF SMALL SCALE INDUSTREIS
We have discussed so far the distinguished peculiarities of small-scale industries. We have
found that the organizational pattern of these industries places them at a distinct disadvantage vis-a-
vis the large sector. This disadvantage has given rise to various problems with which the small-scale
industries have to contend. We discuss them below in some detail.
1. Problem of Raw Material—A major problem that the small-scale industries have to contend with
is the procurement of raw material. The problem of raw material has assumed the shape of (i) an
absolute scarcity, (ii) a poor quality of raw materials and (iii) a high cost. Earlier, the majority of
small-scale units mostly produced items dependent on local raw material. Then, there was no severe
problem in obtaining the required raw materials. But, ever since the emergence of modern small-
scale industries manufacturing a lot of sophisticated items, the problem of raw material has emerged
as a serious problem on their production efforts. The small units that use imported raw material face
raw material problem with more severity mainly due to difficulty in obtaining this raw material
either on account of the foreign exchange crisis or some of other reasons.
Even the small units that depend on local resources for raw material requirements face the
problem of other type. An example of this type is handloom industry that depends for its
requirement of cotton on local traders. These traders often supply their cotton to the weavers on the
conditions that they would sell their ready clothes to these traders only. Then, what happens that the
traders sell cotton to them at a fairly high prices and, on the contrary, purchase the ready clothes at a
very low prices. This becomes a clearest example of how the poor weavers are subjected to double
exploitation at the hands of traders.
Keeping in view the raw material problem of small-scale industries, the Government makes
provisions for making raw material available to small units. Nonetheless, small units with no
special staff to liaise with the official agencies, these small units are left with inadequate supplies of
raw material. As a result, they have to resort to open market purchases at very high prices. This, in
turn, increases their cost of production, and, thus, puts them in an adverse position vis-a-vis their
better and larger rivals.
2. Problem of Finance—An important problem faced by small-scale industries in the country is
that of finance. The problem of finance in small-sector is mainly due to two reasons, firstly, it is
partly due to scarcity of capital in the country as a whole and Secondly, it is partly due to weak
creditworthiness of small units in the country. Due to their weak economic base, they find it
difficult to take financial assistance from the commercial banks and financial institutions. As such,
they are bound to obtain credit from the money lenders on a very high rate of interest and are, thus,
exploitative in character. It is a happy augury that ever since the nationalisation of banks in 1969,
the credit situation has improved still further. The positive change in attitude of banks would be
218
clear from the fact that whereas the amount of credit outstanding (of public sector banks) to small-
scale industries stood at only Rs.251 crores in June 1969, it rose to a staggering figure of Rs.15,105
crores in March 1990.
From the above figures, it appears that the availability of institutional credit to small scale
industries is certainly increasing. Nevertheless, the fact remains that the criterion of ‘credit
worthiness' still weights heavily with the nationalised commercial banks. This would be clear from
this fact that of the units assisted by commercial banks upto June 1976, about 69 per cent of the
total credit was availed of by 11 per cent of the (bigger) units in the small-scale industries sector,
which accounted for 55 per cent of the total production. This underlines the need to change the
outlook of the banks. For this, it is necessary to further liberalise the rules and practices of banking
in the country.
3. Problem of Marketing—One of the main problems faced by the small-scale units is in the field
of marketing. These small units often do not possess any marketing organisation. In consequence,
their products compare unfavourably with the quality of the products of the large-scale industries.
Therefore, they suffer from comparative disadvantages vis-a-vis large-scale units.
In order to save small units from this competitive disadvantage, the Government of India has
reserved certain items for the small-scale sector. The list of reserved items has continuously
expanded over the period and at present stands at 824 items. Besides, the Trade Fair Authority of
India and the State Trading Corporation (STC) help the small-scale industries in organising their
sales. The National Small Industries Corporation set up in 1955 is also helping the small units in
obtaining the government orders and locating export markets
Ancillary units face the problems of their own types like delayed payment by parent units;
inadequacy of technological support extended by parent units, non-adherence to quality and
delivery schedules, thus, disturbing the programmes of the parent unit and absence of a well-
defined pricing system and regulatory laws.
4. Problem of Under-Utilization of Capacity—There are studies that clearly bring out the
gross under-utilization of installed capacities in small-scale industries. According to Arun Ghosh,
on the basis of All India Census of Small-Scale Industries, 1972, the percentage utilization of
capacity was only 47 in mechanical engineering industries, 50 in electrical equipment, 58 in
automobile ancillary industries, 55 in leather products and only 29 in plastic products. On an
average, we can safely say that 40 to 50 percent of capacity was not utilized in small-scale units.
The very integral to the problems of under-utilization of capacity is power problem faced by
small-scale industries. In short, there are two aspects to the problem: One, power supply is not
always available to the small units on the mere asking, and whenever it is available, it is rationed
out, limited to a few hours in a day. Second, unlike large industries, the small-scale industries
219
cannot afford to go in for alternatives; like installing own thermal units, because these involve
heavy costs. Since small units are weak in economic front, they have to manage as best as it can
within their available meagre means.
5. Other Problems—In addition to the problems enumerated above, the small-scale industries have
been constrained by a number of other problems also. According to the Seventh Five Year Plan,
these include technological obsolescence, inadequate and irregular supply of raw materials, lack of
organised market channels, imperfect knowledge of market conditions, unorganised nature of
operations, inadequate availability of credit facility, constraint of infrastructure facilities including
power etc. and deficient managerial and technical skills. There has been lack of effective co-
ordination among the various support organisations set up over the period for the promotion and
development of these, industries. Quality consciousness has not been generated to the desired level
despite various measures taken in this regard. Some of the fiscal policies pursued have resulted in
unintended splitting up of these capacities into is economic operations and have inhibited their
smooth transfer to the medium sector. All these constraints have resulted is a skewed cost structure
placing this sector at a disadvantage vis-à-vis the large scale industries both in the domestic and
export markets.
5.14 CAUSES AND CONSEQUENCES OF INDUSTRIAL SICKNESS
CAUSES
So far as the causes of industrial sickness are concerned, it cannot be attributed to a single
factor alone. In fact, it is an ultimate result of the cumulative effect of many factors/ causes working
simultaneously which may be closely inter-related or even independent of each other. In view of the
origin of the causes of industrial sickness, these are broadly classified into two categories:
1. External or Exogenous Causes, and
2. Internal or Endogenous Causes.
Let us discuss these in turn.
I. External Causes: The external or exogenous causes which are beyond the control of the
industry usually affect the industry-group as a whole. There may be serval external factors causing
a unit sick and which may vary from time to time from industry to industry and even from one point
of time to another for the same industry. The important external factors causing industrial sickness
include the following:
(i) Changes in the industrial policies of the Government from time to time, (ii)
Inadequate and untimely availability of necessary inputs like raw materials, power, transport
and the skilled labour.
(iii) Lack and shrinkage of demand for the product.
(iv) Recessionary trends hovering in the economy.
(v) Frequent industrial strikes and labour unrest.
220
(vi) Shortage of financial resources especially working capital.
(vii) Natural calamities like drought, floods, etc.
In view of the nature of all these factors, these can broadly be classified into three
categories: (i) Government Policy, (ii) Environment, and (iii) Natural Calamities.
II. Internal Causes: Internal or endogenous causes are those which are within the control of the
unit. These causes arise due to some internal deficiencies in various functional areas like finance,
production, marketing and personnel. Many studies have brought out the fact that sickness is
normally caused by internal factors, in one way or other, related with the mismanagement in various
operational areas (see Table 5.3).
TABLE 5.3 Cause wise Distribution of New Projects in Default
Causes
No. of
% of the
Contribution
Projects
Projects
of Cause Default
1. Lack of good management
36
16.1
22.19
2. Poor Implementation
56
15.1
21.70
3. Marketing Problems
29
13.1
15.81
4. Non-Availability of Raw Materials
53
23.8
13.45
5. Shortfall of Working Capital
03
1.4
7.20
6. Labour Trouble
12
5.4
5.74
7. Technical/Operational Problems
13
5.3
5.55
8. Other Problems
21
9.4
8.36
Total
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100.0
100.00
Majority of projects (53.8%) are found in default due to internal causes like problems of
poor management, poor implementation, shortage of working capital and operational and labour
problems.
Sandesara has delineated sickness from the angle of stages in which it may be routed. In the
planning and construction stage, the unit may be found to be located at an uneconomic location, to
have adopted an inefficient method of production or to be planning to produce an obsolete product.
In the second stage of sickness, the unit may have committed some mistakes in recruitment and
training of the workers, underestimates of various inputs such as powers, funds etc., which cannot
be easily corrected later. The third and final stage of sickness may arise even when the unit is in full
swing but the demand for product may have changed, new and advanced methods of production
may have devised and meanwhile new competitors may also have emerged.
Instances are gallore to note that small scale units are mainly beset with external factors
while large sick units are plagued by internal factors.
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Small in India is literally too small. According to Economic Survey 1992-93, about 90% of
sick units lie in small scale sector. A too small unit cannot withstand fluctuation setbacks, frequent
changes in government policies, market changes, etc. Small operates on very small margins and a
small error can make the unit sick. Small units command small resources and expertise both in
absolute and relative terms. Small is basically poor and unorganised set of the industry. These units
work with large number of handicaps and constraints. All these shortcomings ultimately make small
scale units highly prone to sickness.
5.15 CONSEQUENCES OF INDUSTRIAL SICKNESS
The main evil effects/consequences of industrial sickness on an economy have been locking
up the economy's financial resources, wastages of scarce capital assets, loss of production and
increase in unemployment. An attempt has been made in this section to discuss the various
consequences of industrial sickness in a more orderly manner:
Huge Financial Losses to the Banks and the Financial Institutions: The banks and the
financial institutions provide substantial funds to start an industry. To quote, by March 1992, the
amount of outstanding bank credit against the sick units have reached a staggering figure of
Rs.11,533.30 crores. These huge funds are locked up in 1336 non-SSI sick units and 245575 small
sick units and 813 weak units. Obviously the locking up of substantial funds in the sick industrial
units impinges on the future lending capacity of the banks and the financial institutions. Further,
recovery of overdue takes an unduly long period of time and in many cases only a small portion of
overdue amount is finally recovered. Thus, these bear an adverse effect on the financial health of
the banks and the financial institutions.
Loss to Employment Opportunities: One of the serious consequences of industrial
sickness has been loss to employment and, thereby, aggravating the most dangerous socioeconomic
problem of unemployment in a labour surplus economy like ours. According to an estimate, nearly
30 lakhs of workers are likely to be affected by the closure of sick and weak units. In relative terms,
about 6% of total employment in industrial sector is likely to be affected by industrial sickness. Out
of total 30 lakh workers likely to be affected by closure of sick units, even more than two-thirds
(68%) of total will be rendered jobless in small sector alone. This presents a grim prospect in the
employment scenario of the country.
Emergence of Industrial Unrest: The closure of sick units causes not only unemployment,
but leads to industrial unrest also. Whenever the workers are retrenched and rendered out of jobs,
the trade unions oppose it and resort to industrial strikes. Such disturbances threaten the peace and
tranquility of the industrial environment. This results in setback to industrial production.
Adverse Effect on Prospective Investors and Entrepreneurs: Industrial sickness
adversely affects the prospective investors and the entrepreneurs also. Due to sickness, the share
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price of the unit tumbles down which, in turn, adversely affects the stock market of the country. In
this way, industrial sickness creates a psychology of despair for investments amongst the
prospective investors. Added to this, the failure and closure of a unit acts as an unhappy example of
disincentive to the prospective entrepreneurs who are planning to plunge into the same lines of
production. On the whole, the industrial climate becomes non-conducive for the industrial
development of the economy.
Wastages of Scarce Resources: In an under-developed economy like ours, the resources
are already scarce. If these scarce resources are locked up in sick units, it becomes the wastage of
scarce resources which otherwise invested would have yielded substantial returns to the economy.
Loss of Revenue to the Government: The government raises a substantial portion of its
revenue from industrial units by way of various taxes and duties levied on them. But, when a large
number of industrial units becomes sick, the possibilities for raising substantial revenue from the
sick units by way of various levies are greatly reduced. Thus, industrial sickness results in loss of
revenue to the Government also. The shortage of revenue ultimately affects the functioning of the
economy as a whole.
The Planning Commission commenting on the consequences of sickness mentions: “The
phenomenon of industrial sickness not only tends to aggravate the problem of unemployment, but
also renders infructuous capital investment and generally creates an adverse climate for further
industrial growth. While in advanced countries where there are adequate social security benefits,
this is accepted as a normal feature of industrial scene. But such sickness has much more serious
economic consequences in a country where unemployment is a major problem and resources are
scarce.... clearly the problem of industrial sickness is an area to which the Government must give
priority.”
In nutshell, whatever may be causes, the consequence is always the same: Loss of
employment and production to an economy already suffering from chronic unemployment and
shortage of goods. Thus, industrial sickness is a bane on the Indian economy.
5.16 REMEDIAL MEASURES OF SICKNESS IN INDUSTRIES
The growing incidence of sickness by size, region and industry followed by its far reaching
socio-economic evil effects lends a strong realisation of urgency to the solution of the sick industry
problem in India. Therefore, this section deals with the remedial measures to detect the fast
spreading disease of sickness in industries.
1. Industrial sickness is not an overnight occurence but it is a gradual process taking from 5 to
7 years corroding the health of a unit beyond cure. Therefore, the identification and
detection of sickness at the incipient stage is the first and foremost measure to detect and
reduce industrial sickness. It will not be less than correct to argue that delayed identification
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of sickness could have been mainly responsible for such high proportion of non-viable units
among the identified sick units. For identifying sickness at an early stage, appropriate
yardsticks need to be evolved and developed.
2. In view of limited resources at the disposal, a large number of sick units may have to be
permitted to close/liquidate; a fewer number of sick units may be picked up for
revival/rehabilitation and a larger number of weak units may be combined together to
prevent sickness. The time has come to substitute the adage that 'what cannot be cured has
to be endured' by 'what cannot be cured should be ended'. However, merger of a large
number of sick units will be a welcome proposition only when complete social security for
labourers displaced due to unit closure is prevalent in the society.
3. At present, the attitudes of three different sets of a unit-management, financial institutions
and labour do not converge as they view the problems of industrial sickness quite differently
For example, management seeks freedom to close the unit if it feels it is no more viable.
Financial institutions think that whatever can be salvaged should be salvaged. Labour view
is that in the event of the closure of the unit, they will lose job, providend fund and other
benefits, therefore, the unit should continue production. Thus, all the three drag in different
directions. But, if these diverse view points could be properly integrated, their approach
could be integrated and their interests could also be converged, the unit can be salvaged in
the best interest of all three.
4. It is a happy augury that now sick small-scale industries also fall within the purview of
Board for Industrial and Financial Reconstruction (BIFR). It will be better to open a separate
division in BIFR to deal with sickness in small-scale industries because small-scale
industries are characterized by different sets of problems and prospects as compared to
medium and large scale industries.
5. It is found that the rehabilitation programmes for sick small units are often carried out in an
adhoc and haphazard manner. The rehabilitation packages provided to the sick units consist
of only financial measures such as rescheduling of debts, sanction of additional term loans
for installation of new machineries, enhancement of working capital limit etc. However,
other problems like managerial, marketing, power and raw material are equally important
which remain unattended to in the rehabilitation programmes. The need is, therefore, to
provide for managerial efficiency, marketability of products, adequate availability of power
and raw material in the rehabilitation programmes.
6. Having taken a decision to rehabilitate a sick unit, the programme should be finalised
quickly and implemented speedily. Instances are many to suggest that any delay in these two
matters aggravates position and revival becomes a distant goal. At the same time, the
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rehabilitation programme need to be implemented in full as a piece-meal implementation
often jeopardizes the efforts to rehabilitate the unit. For instance, if the need-based funds are
not released in full, the unit may not be able enough to operate above the breakeven point.
As a result, the unit may continue incurring losses and the additional working funds may
also be wiped out to meet such losses.
7. In order to arrest sickness, at the incipient stage, banks and financial institutions should
periodically review the accounts of small scale industry borrowers to identify units which
are becoming sick or are prone to sickness. The Government of India and the Reserve Bank
of India should be requested to direct commercial banks and financial institutions to provide
information on sickness to the agencies like BIFR implementing the rehabilitation
programme to facilitate them to take appropriate action.
8. Last but not the least, past experiences indicate that many industrial units fall sick because
of the improper opportunity scanning made by the entrepreneurs themselves They start an
industrial unit mainly to avail of subsidies, concessions and incentives from the
Government. We know that a small scale industry entrepreneur is like a one-man band.
He/she may possess one or two or three ingredients/requisites but not the all. To quote, an
entrepreneur may have land, building, machinery etc., but had no experience in functional
areas like production and marketing. Therefore, the necessity of the situation is to impart
necessary knowledge to the entrepreneurs in various functional areas through the training
programmes like Entrepreneurship Development Programme (EDP).
5.17 SUMMARY
Small scale sector is the best option for a country like in India where in on one hand there is
acute problem of unemployment and on the other hand scarcity of capital. SSIs in India play a
major role in contributing towards the progress in the economy of the country. This unit detailed
you about the steps to start a SSI and various sources of information. Now you are aware of the
incentives and subsidies which encourage them to set up small scale units. This unit has also made
you understand the problems of SSIs. It also helps us to know the causes and consequence of
industrial sickness and what are the remedial measures of sickness in industries.
5.18 SELF ASSESSMENT QUESTIONS
1. What do you mean by SSI? Give its characteristics.
2. What are the steps that must be performed to create a SSI?
3. What do you mean by sickness of business?
4. Describe in detail the various types of incentives and subsidies.
5. What are the Central Government subsidies and incentives?
6. What are the problems of SSIs?
7. What are the remedial measures to detect the fast spreading disease of sickness of
industries?
8. What is the importance of SSIs?
9. What is the need for incentives and subsidies for a small sc ale industrial unit?
10. Small business is regarded as a seedbed for entrepreneurship discuss.