373

Thus in a mixed economy like India, some

wned and managed by the State through its public industries are
the remaining others are owned and sector and
managed by the
sector of the country. In India, only those industries are private
for the public sector which are essential for reserved
of the economy and where private sector is
speedy development
reluctant to invest
either due to low rate of return or heavy risk involved in it.
In India, the area of activities of the public
a sector were very
much restricted to a limited range like power, irrigation, roads,
railways, port, communications and some departmental
undertakings at the time of independence. But after independence,
the area of activities of the public sector was expanded at a rapid
PUBLIC SECTOR AND PRIVATE pace. Two industrial policy resolutions adopted in 1948 and 1956
SECTOR ENTERPRISES respectively have divided the industries of the country into
different categories. Accordingly, some industries were entirely
reserved for the public sector, some industrial fields were left
a12. PUBLIC SECTOR ENTERPRISES IN INDIA completely for the private sector. Such division of areas between
9.12.1. Division of the Economy between Public the public and private sector reveals that while the heavy, basic
Sector and Private Sector and strategic industries were reserved for the public sector, the
entire group of consumer goods industries, producing both
The present economic structure of Indian economy is known as
consumer durables and non-durables was kept open for the private
mixed economy. where there is a co-existence of both the public
sector and the private sector. All the different types of industries
sector. The entire agricultural sector, being the largest sector of
the country has been left for the private sector. Again the infra
are divided between these two sectors. From the very beginning,
Structural fields like railway, air transport, port, power,
most of the industries of the country were within the purview of communications, banks, insurance, financial corporations etc. are
private sector. But after independence and especially after the reserved for the public sector.
introduction of economic planning followed by the introduction
of Industrial Policy Resolutions, 1948 and 1956, the importance The logic behind reserving the heavy and basic industries
of the public sector was realised. Accordingly, some definite like iron and steel, heavy electrical plant, heavy engineering etc.
category of industries were gradually reserved for the public for the public sector and the quick-yielding consumer goods
sector for their expansion and development. In this way, the industries for the private sector is quite simple. R.K. Hazari made
sizes and activities of the public sector gained its momentum an attempt to analyse the logic behind such strategy of the
Government, where he argued that the industrial programmes of
with the growing volume of planned expenditure for the
development of public sector under different Five Year Plans of the government adopted after 1955 were finalised as per the
the country. following two hypotheses :
Alhough the development of public sector in the Indian (a) Private investment activity in relatively simple goods
economy is quite important but there is nothing unique in it. would generally be promoted by shutting out imports as
Even the Governments of various capitalist countries of the West well as through utilisation of excess capacity at home,
has directly participated in the production and distribution with a consequent boost to profits; and
activities as per their need. Moreover, the role of State in the (b) Public investment, being indifferent to profits, would be
process of economic development has been quite significant in made in those basic and strategic areas which had long
those countries where the process of industrialisation was initiated gestation periods, poor or zero rate of profits, a large
quite late. Even in the developed countries like Japan, U.K., exchange requirement, complex technology and equally
Germany and the U.S.A.. the contribution of the State in the complex problems of co-ordination.
pYocess of industralisation has been quite important. In this
connection, Prof. Samuelson has rightly observed that, "Within Here the first hypother is argued that private investment was
ue advanced countries themselves. the scene was drastically in the form of 'induced investment' and could be promoted by
Changed from the Victorian days of laissez faire capitalism. Aimost adopting a policy of protection against various imported
Cvonsciously, undiluted capitalism bad been evolving into` a substitutes. The argument in favour of the second hyposthesis
xed economy with both private the public initiative and control. was that the flow of investments in low profit yielding and heavy
The clock of
historyseensometimes
hands are never
investment requiring industries were in the form of 'autonomous
to move »lrevolves so slowly that its moving investment' and, therefore, could be undertaken by the state.
. Samuelson. P.A..
2. R.K. Economics, Ninth Edition, p. 867.
Hazari and A.M. Oza, "The Public Sector in India in E.A.G. Robbinson and Michel Kidron (eds.) Economic Development in South Asia
(London, 1970), p. 91.
 4 CS
9.12.5. Role of Public Sector in the Indian Económy
Public sector in India has been playing an important role in
shaping the basic structure of economy.Although the public sector
in India is under severe criticism at present due to its overall
poor performance but its role in Indian economy cannot be
nullified. The following are some of the positive roles played by
the public sector in the economy of the country.
1. Public sector and income. Public sector in India has
been playing a definite positive role in generating income in the
economy. The share of public sector in net domestic product
(NDP) at current prices has increased from 7.5 per cent in 1950
51 to 21.7per cent in 2003-04. Again the share of public sector
enterprises only (excluding public administration and defence)
in NDP was also increased from 3.5 per cent in 1950-51 to 11.12
per cent in 2005-06.. b15, (ooto)
2. Public sector and capital formatión. Public sector has
been playing an important role in the gross domestic capital
formation of the country. The share of public sector in gross
domestic capital formation has increased from 3.5per cent during
the First Plan to 9.2 per cent during the Eighth Plan. The
comparative shares of public sector in the gross capital formation
of the country also recorded a change from 33.67 per cent during
the First Plan to 50 per cent during the Sixth Plan and then
declined to 21.9 per cent in 2005-06. 21.4 %(013-2)
But the Public sector is not playing a significant role in
respect of mobilisation of savings. The share of public sector in
 Industrial Development in India
grossdomestic savings increased from 1.7 per cent of GNP during co
3.6
1951-56to only 3. per cent during
1980-85.
share of public sector in gross domestic During
savings 1980s,from
declined the in
16.2per cent in 1980-81 to 7.7
per cent in 1988-89. In this
connection Narottam Shah ga
observed, "The
only 21 per cent of the failure of the public Se
sector contributes
nation's savings;
alsoinpart, through heavy taxation and semi-fictitious profitsthatof Th
the Reserve Bank. The remaining 79 per cent of the nation's ha

savings came from the private sector:" Again the share of

CO

sectorin gross domestic savings increased from 4.78

public Cr
per cent in
se1 6.61 per cent in 2005-06. ,).7 b 2018
to ar

2Public Sector and employment.

Public sector is
an important role in generating employment in the country.playing
Public en
In
sector employments are of two categories, i.e., (a) public sector
er
employment in government administration, defence and other 1
government services and (b) employment in public sector pe
economic enterprises of both Centre, State and Local bodies, In
1071. the public sector offered employment opportunities to about 1n
1l million persons but in 2003 their number rose to 18.6 million
showing about 69 per cent increase during this period.?
Again in 2003, the public sector offered employment
oDportunities to 18.6 million persons which was 69 per cent of
the total employment generated in the country as compared to 71 i
per cent employment generated in 1991. However, there is fo
considerable decline in the annual growth rate of employment in
the public sector from 1.53 per cent during 1983-1994 to 0.80
per cent during 1994-2004.
Moreover, about 69.0 per cent of the total mpfoyment are
generated in the public sector. Moreover, at the end of March
2004, about 51.7per cent of the total employment (i.e. about 96
lakh) generated in public sector is from Government
administration, community, social and personal services and the
remaining 48.3 per cent (i.e., nearly 89.7lakh) of the employment
in public sector is generated by economic enterprises run by the
Centre, State and Local Governments. The maximum number of
employment is derived from transport, storage and communi
cations (28.1 lakh). The public sector manufacturing is the next (
industry which generated employment to the extent of 11.91
lakh persons.
4. Public sector and infra-structure. Without the
development of infrastructural facilities, economic development
is impossible. Public sector investment on infrastructure sector
Iike power, transportation, communication, basic and heavy
industries, irrigation, education and technical training etc. has
paved the way for agricultural and industrial development of the
country leading to the overall development of the economy as a
whole. Private sector investments are also depending on these
Infrastructural facilities developed by the public sector of the
country.
5. Strong Industrial base. Another important role of the
public sector is that it has successfully build the strong industrial
Dàse in the country. The industrial base of the economy is now

I. Narottam Shah. Public Sector in the Indian Economy" Centre for M

2. RBI Report on Currency and Finance, 1991-92.
3. Ec Survey. 2004-05. p. S-54.
 379
considerably strengthencd with the deveclopment of public sector
industrics in various ficlds like iron and steel, coal, heavy
cnginccring. heavy clectrical machinery, petroleum and natural
gas, fertilizers, chemicals, drugs cte. TIhe
development of private
scctor industries is also solely depending on these
industries.
Thus by developing a strong industrial base, the public
has developcd asuitable basc for rapid industrialisation sector
in the
country. Moreover, public scctor has also been dominating in
critical arcas such as petroleum products, coal, copper, lcad, hydro
and steam turbincs ctc.

6. Export promotion and import substitution. Publicsector

enterprises have been contributing a lot for the promotion of
India's exports. The foreign exchange earning of the public
enterprises rose from ? 35 crore in 1965-66 to 5,83| crore in
1984-85 and then to 34,893 crore in 2003-04. Thus, the export
perfomance of the public sector enterprises in India is quite
satisfactory. The public sector enterprises which played an
important role in this regard include-Hindustan Steel Limited,
Hindustan Machine Tools Limited, Bharat Electronics Ltd., State

Corporation. 1, 43, 371a.(208 -9) Minerals

ecase Tradiný"
Trading Corporation and Metals and
t
f Some public sector enterprises have showó creditable records
in achieving import substitution and thereby saved precious
s foreign exchange of the country. In this regard mention may be
made of Bharat Heavy Electricals Limited, Bharalt Electronics
) Ltd., Indian Oil Corporations, Oiland Natural Gas Commission.
Hindustan Antibiotics Ltd. etc. which have paved a successful
way substitution in the country. eERp n imp,
eyYetrai Bcheuer. The publie geo
enterprises are contributing a good amount of resources to the C
central exchequèr regularly in the form of dividend, excise duty,"?
custom duty, corporate taxes etc. During the Sixth Plan, the ne e
contribution of public enterprises to the central exchequer was to 2$2
the tune of 27,570crore. Again this contribution has increased
from 7,610 crore in 1980-81 to 18,264 crore in 1989-90 and
then to 1,56,124 crore in 2010-11. Out of this total contribution,
the amount of dividend contributed only 23.76 per cent of it.
8. S,68,8oB
CheckÉng concentraionaf blCa wealth.
and (29
Expansion of public sector enterprises in India has been
successfully checking the concentration of economic power into
the hands of a fevw and thus are redressing the problem of
inequalities of income and wealth of the economy. Thus, the
public sector can reduce this problem of inequalities through
diversion of profits for the welfare of the poor people, undertaking
measures for labour welfare and also by producing commodities
for mass consumption.
9. Removal of regional disparities. From the very beginning
industrial development in Indiawas very much skewed towards
certain big port cities like Mumbai, Kolkata and Chennai. In
order to remove regional disparities, the public sector tried to
disperse various units towards the backward states like Bihar,
Orissa, Madhya Pradesh. Pbhan,Bnyeeh. Dgs
Monitoring Indian Economy, August 1981, p. 12.
 Ilds

9.12.7. Major Problems of the Public Sector

Enterprises in India
The publicenterprises in India are faced with the following major
problems which are mainly responsible for this mounting losses
of those loss incurring public sector cnterprises in country.
() Endowment constraints. Some of the public sector
enterprises, particularly some of the loss-incurring enterprises are
suffering from endowment constraints as the selection of sites of
these enterprises were done on political considerationsrather than
on rational considerations.
(ii) Ünder-utilisation of capacity. Under-utilisation of the
production capacities are one of the common constraints from
which almnost all public sector enterprises are suffering. In 1986
87, out of the 175 public sector units 90 units had been able to
utilise over 75 per cent of its capacities, 56 units achieved
utilisation of capacities between 50 and 75 per cent and the rest
29 units could somehow managed to utilise under 50per cent of
its capacities. This had been mainly due to the reasons such as
long gestation periods, huge in-built capacities, ambitious scales
of planning based on inadequate economic (particularly market)
data, inadequate motivation, lack of initiatives and obsolescence
of the product mix.2
(ii) Absence of rational pricing. Public sector enterprises
in India are suffering from absence of rational pricing as the
prices of their products are determined by such a price policy
which has three considerations like : (a) profit as the basis of
price fixation, (b) no-profit basis of public utility approach, and
(c) import-parity price. Thus, formal and informal regulation of
prices by the Government in the interest of the economy and
consumers, in general, and of price stabilisation are also
responsible for huge losses incurred by some of these enterprises
of our country. Moreover, subsidisation of the prices of some of
the produce by these public enterprises had added a new
dimension to the problems.
(iv) Technological gap. Some of the public sector enterprises
in Indiaare suffering from technological gap as these enterprises
could not adopt up-to-date technologies in their production system
leading to high unit cost and lower yield. Enterprises like I.I.S.C.0,
E.C.L etc. are still suffering from this constraint.
(V) Government Interference. Much government
interference in the day to day activities of the public sector
enterprises has reduced the degree of autonomy of the
managements in respect of employment, pricing. purchase etc.
 () Heavy Noclal conts. lublle nevtor outerpriCN TC Nulfering
tihon heavy Nocial eOstN Nuch N the outlays on townships and
allicd provision of' amncnitioN to itN cmployoos,
(vi) Operatlonal and managerlal Inndequacles. The public
sector cnteprises in lndianre also Nultering Irom operational and
managerial inadequacies and inellieiencies lending to huge
wastages and leakages of fnds in their day-lo-day activitics.
(vi) Evil competition and snbotage. Bctwcon the public
sector and private sector units within the same industry sometimes
there exists evil competition which leads to sabotaging of public
sector units at a large scale.
(2v) Marketing constraint. Some public sector units are even
faced with marketing constraints where due to repetitive type of
production mix they could not collect a good market for some of
their products where the market is already captured by some big
private industrial houses leading to a constant increase in
inventories.
() Surplus manpower. In some of the public sector units
there is the problem of surplus manpower which is
drainage of resources unnecessarily leading to increase creating
cost of production. Political considerations have also in the unit
contributed
towards overstaffing of unskilled workers in these units.
(xi) External factors. Workers
engaged in the public sector
enterprises are lacking sincerity and
to wastage of working hours whichdevotion to their job leading
finally affects productive 1
capacities of these enterprises. Moreover, external factors like too
much trade unionism, union rivalries and labour
troubles are als0
disrupting the smooth functioning of the production system of
these public sector enterprises in the
country. 11

Considering the problems of sickness faced by the Public

enterprises, the Standing Conference on Public Enterprises
(SCOPE) had recently constituted a committee to study various
aspects of sickness of public enterprises. In its recently submitted
report (in December, 1995) on its analysis of PSU t

committee felt that too much interference by the problems, the

areas like autonomy and accountability, constitution Government in
of board of 9
directors, continuity to top management and little
powers to management for investment, discretionary M
wages affected the PSU performance. employment, pricing and
Bad financial planning was another
and many sick companies had cause of PSU sickness 1

here that "debt is a dangerous over-borrowed. The report added

interest on debt keep on accruingsubstitute for equity capital and
and has to be paid." The report p
of the SCOPE V
Committee further added that in many
industries, management had been burdened with nationalised pr
like nationalisation
accounts, fictitious inventory anddummy assets to
current assets which only deteriorated unrealisable
the balance sheet
ot
not provide any
financial support to the companies. and did
The SCOPE Committee
further
regreted that the
as a promoter, was
charging one per cent fee from Government
its own sick
companies for providing guarantees to bank loans and that too
the
for a limited period of one year at 'c
a time whereas private
promoters were not charging any fee for such sector ma
guarantee. pri
1. VV. Ramanadhan, Privatisation in
2. Barbara Lee and John Nellis (1990),developing countries (London. 1989),
Enterprise Reform and Privatisatior
 Indian Economy
Various other problems such as allocation of resources, delave
in filling up top-level posts, tight regulations and procedures for
investment and restrictions on functional autonomy of the
enterprises, e.g., in respect of labour and wage policy etc. have
been creating serious constraints on the operational efficiency of
e public sector enterprises of the country.
9.12.8. Changes in Public Opinion on the Public
Sector Enterprises in India
There was a time when most of the Indian people were very
much in favour of public sector enterprises even without going
into details of this sector. But with the gradual increase in the
volume of investment at a very high level, increasing volume of
f losses by some of the enterprises along with overall low rate of
return on capital employed, general opinion has now been turning
towards a different direction. Following are some of the reflections
in this regard :
(a) Poor profitability argument. Inspite of its huge
S investment as the public sector enterprises could not contribute a
satisfactory rate of return even after 40 years planning compared
t to private sector enterprises, thus the public sector enterprises in
India are gradually becoming less attractive and less popular
leading to erosion of faith of the general people on this sector.
(6) Constant under-utilisation. Constant under-utilisation
of production capacities in almost all the public sector enterprises
in India forced the sector to become totally inefficient leading to
an erosion of images of thus huge organisation before the people.
f
(c) Increasing unaccountability. Increasing unaccount
ability of public sector management to the general people due to
inefficient political system makes it totally ineffective.
ic
(d) Increasing volume of losses. Increasing volume of losses
es
incurred by the loss-incurring enterprises along with their
d
increasing number makes the sector totally burdensome to both
the people and also to the government as huge budget is now
required to run such enterprises.
9.12.9. The Issue of Privatisation
y Meaning of Privatisation
d
The term privatisation has its diversified use as it
wide range of ideas. Privatisation, in a narrow sense, signified
indicates an
SS
introduction of private ownership in publicly owned and managed
enterprises, but, in abroader sense, it signifies introduction of
public control and management in the public sector
rt V.V. Ramanadhan mentioned fifteen senses by enterprises.
d which this term
privatisation can be used as the literature ranging from transition
to private legal forms' to 'partial or
of assets! complete denationalisation
Again, Barbara Lee and John Nellis analysed this
concept :
"Privatisation is the general process of involving the private
t in the ownership or operation of a state sector
the term refers to purchase of all or part owned enterprise. Thus,
of a company. t covers
'contracting out' and the privatization of
management contracts, leases or franchisemanagementthrough
privatisation includes the following three arrangements."2 Thus,
sets of measures :
1989), p. 62.
 (a) Ownership measures for transferring ownership of public mar
enterprises either fully or partially leading to of
privatisation. This may be introduced in the form of OVe
total denationalisation, Joint Venturc, liquidation and
management buy-out.
0VO
(b) Organisational measures for limiting state control anc
through a holding company structurc, leasing and has
restructuring. on

(c) Operational measures for improving efficiency of the pri

organisation by injecting the spirit of commercialisation pro
in public sector enterprises through the grant of tha
autonomy to Public Sector Enterprises in decision thr
making, provision of incentives for increasing efficiency Sn
of workers, acquiring inputs through the system of gr
contracting, permitting PSEs to raise fund from capital pr
markets etc. so as to bring drastic reform to reduce pa

government control over the enterprise.

to
Although privatisation maysimply indicate transfer of ownership pr
but in reality it indicates transfer of managerial control of PSE, im
either to private hands, individual or co-operative. In some respects,
'token privatisation' may be effected in the form of disinvestitute P
which may be considered as a short-term measure of privatisation.
In India, the privatisation strategy has been adopted in the CO

form of disinvestment of governments's equity in public sector b

undertaking and also through theopening up of hitherto reserved
areas for the participation of private enterprises. With the growing f
problem of large-scale fiscal deficits faced by government in
recent years, the issue of privatisation has been brought to the
forefront. In 1990-91, the huge fiscal imbalance and growing p
balance of payments crisis have forced the country to approach
the IMP for huge repurchase facilities and also to the World
Bank for structural adjustment loan. While giving such assistance,
both the IMP and the World Bank had linked it with certain t
'conditionalities' covering differing sectors of the economy for
their gradual opening up and liberalisation. Accordingly, the new P
Industrial Policy, 1991 was formulated to meet some of these
conditionalities. This new policy has emphasised the increasing I
role and importance of the private sector in developing the
industrial health of the economy and thereby adopted various
measures. Some of these important measures included abolition
of licensing in all industries excepting 18industries (subsequently
reduced to 15 industries), reducing the number of industries
reserved for the public sector from 17 to 8, scrapping of the
MRTP limit, free entry of foreign investment and technology
transfer etc. In recent years, the most specific step that has been
identified and adopted by the Government in the issue of
privatisation is the divestiture, i.e., through selling of equity of
public sector enterprises to mutual funds, financial institutions
and finally to the private sector.
In aFund-Bank meeting, the managing director of IMF has
made it clear that India is expected to go ahead with its
disinvestment and privatisation programme in a more ambitious
"Market Socialism :A case for
I. Pranab Bardhan and John, E. Roemer,
PP. 101-2.
Crisis : The Way Ahead (Delhi, l991),
Z. Bimal Jalan, India's Economic
 385

manner. Public sector undertakings willgo in for a massive dose

of disinvest1ment and more infrastructural projects willbe handed
over to the private scctor.
Inrespect of infrastructural scctor, privatisation will be carried
over from power to telccommunications to roads, ports, railways
and airways. Privatisation willbe necdcd becausc the government
has been lacking the required rcsources to build such infrastructure
on the required scale. What is being assumed, however, is that
privatisation is going to crcate more cfficicnt infrastructural
projects than when opcrated by the public sector. It is assumed
that privatisation will lead to chcaper and better quality output
through competition. This sort of belief even goes back to Adam
Smith, who in his The Wealth of Nations (1776) stated, "in every
great monarchy in Europe the sale of the crown lands would
produce a very large sum of money, which if applied to the
payment of public debts would deliver from mortgage a much
greater revenue than any of those lands which have ever afforded
to the crown.. When the crown lands had become private
property, they would, in the course of a few years, become well
improved and well cultivated"
Privatisation : A Critical Analysis
In recent times, a good number of studies have been
conducted which have questioned the validity of the belief that
blanket privatisation improves the performance of the enterprise.
It has been argued that within an orthodox micro-economic
framework, in many respects, public management will show better
performance in terms of economic efficiency than private
management. Again, over a long period, private infrastructural
projectscould improve its position andgrow into powerful private
monopolies. In that case, privatisation would mean replacing
public sector monopoly with private sector monopoly.
Many studies conducted in different countries have revealed
that public sector enterprises can be managed efficiently too and
can experience a higher productivity growth as compared to their
private sector counterpart... Thus, the benefits from privatisation
have to be weighed very carefully. It is also argued that there is
no positive relationship between the nature of ownership and
performance. In this connection, Pranab Bardhan and John E.
Roemer observed, "Our claim is that competitive markets are
necessary to achieve an efficient and vigorous economy, but that
full scale private ownership is not necessary for the successful
operation of competition and markets. Contrary to popular
impression, this claim has not been yet disproved by either history
or economic theory. Again with reference to Fishlow's study,
Bimal Jalan pointed out that "the sale of public enterprises would
not help unless the macro-economic environment is improved;
and if economicpolicy is conducted better, then such sales might
not be necessary."2 Thus, the question of efficiency and
inefficiency are common both to public enterprises and private
enterprises. Thus, what is required at this moment is to improve
the efficiency of inefficient units through the creation of
Competitive market structure. Thus. it is the competitive
Perspectives Vol. 6, No. 3, 1992,
Dr Rejuvenation, Journal of Econonmic
 SMALL SCALE INDUSTRIES
AND MSMEs
9.11. SMALL SCALE AND COTTAGE INDUSTRIES IN
INDIA AND MSMEs
9.11.1. Definition of Small Scale and Cottage
Industries and MSMEs
Industrial units are generally classified between small-scale,
medium scale and large scale units; considering their size, capital
resources and the number of labourers engaged upon. There are
differences between small scale and cottage industries on two
different issues : (a) small scale industries are mostly located in
urban centres as separate units, but the cottage industries are
normally associated with agriculture and provide subsidiary
employment inrural areas; and (b) small scale industries produce
goods with mechanised equipments, partially or fully, but the
cottage industries involve activites mostly by hand and are
performed primarily with the help of household workers.! In
1950, the Fiscal Commission laid down the basis for the
distinction between the small scale and cottage industries: A
cottage industry is thus one which is carried on wholly Or
primarily with the help of members of the family either as a
whole or a part time occupation. A small scale industry, on the
other hand, is one which is operated mainly with hired labour
usually 10 to 50 hands." Accordingly, the Industries (Development
and Regulation) Act, 1951 exempted small scale units employing
less than 50workers with power and less than 100 workers without
power, from the system of registration. This exempted industries
were termed as small scale industries.
'Fixed Capital investment in a unit' has also been adopted as
the other criterion to make distinction between small scale and
village industries and the large scale industries. This limit is
being continuously raised upwards by the government.
In India, the small scale industrial sector has been growing
at a very rapid scale. Industrial Policy Resolutions, 1948, 1956
and more particularly the Industrial Policy Statement, 1977 have
offered a special favour for the development of small scale
industries in India. Initially the fixed capital investment limit of
an, 1951, p. 162.
358
Indian Economy
the small scale units was
limit has been raised to restricted
to 5 lakh and later on the Micro, Small and Medium Enterprises (MSMEs)
10 lakh for small scale unit and ? 15
lakh for ancillaries in 1975. Again this In recent years, all micro, tiny, small and medium enterprises
limit was raised to 15 lakh for small fixed capital investment are clubbed in one broad group as Micro, Small and Mediu
units and
ancillary units in 1980. In 1985, this investment limit 20 lakh for
was further
Enterprises (MSMEs). After the enactment of Micro, Small and
raised by the Government to 35 lakh for Medium Enterprises Development (MSMED) Act, 2006, the small
45 laklh for ancillary units. small scale units and and medium sector has been clearly defined as micro, small and
medium enterprises with effect from 2nd October, 2006
Again the Industrial Policy statement, 1990 raised the Moreover, separate investment limits have been prescribed For
investment ceiling in plant and machinery to60 lakh for small manufacturing and service enterprises. The new definition So
SCale units and ? 75 lakh for ancillary unit and for the tinv? prescribed is as follows :
units the limit was raised from 2lakh to 5 lakh. Small
industries were also given extra incentives for export. Thus, scale
their
(A) Manufacturing Enterprises
investment limit was raised further to95 lakh on condition that Manufacturing enterprises include :
these small scale units should export 30 per (i) A micro enterprise, whose investment in plant and
by the third year of their cent of their output
commencing production. machinery does not exceed? 25 lakh:
In 1996-97 (January 1997), the (i) A small enterprises, whose investment in plant and
policy of industrial reforms has againGovernment of India in its
enhanced the investment machinery is more than 25 lakh but does not exceed
ceilings in plant and machinery for small scale industries (SSI) 5 crore: and
and ancillary units from 60 lakh and 75 (iii) A medium enterprise, whole investment in plant and
lakh respectively to
3 crore and that for the tiny
sector has also been raised from machinery is more than R 5crore but does not exceed
5lakh to 25 lakh, Thus, this 10 crore.
investment ceiling of SSI unit
would also apply to ancillary and export oriented units for which (B) Services Enterprises
no separate limit has been
prescribed. Service enterprises include :
In 1999-2000, the investment limit for
small (i) Amicro enterprise, whose investment in equipment does
ancillary undertakings has been reduced from existing scale and
?3 crore not exceed 10 1akh:
to ? 1crore and the limit for tiny
enterprises was fixed at 25 (ii) A small enterprise, whose investment in
lakh. equipment is
more than 10 lakh but does not exceed 2 crore:
Again the Union Budget. 2007-08 has also proposed to raise (iii) A medium enterprise, whose
the exemption limit of Small Scale Industry (SSI) more than 2
investment in equipment is
crore to ? 1.5 crore.
from 1.0 crore and does not exceed 5 crore.
Manufacturing enterprises of MSME category constitute 31.8
Moreover, the process of reservation of items of production pèr cent of MSME sector and service
enterprises account for the
exclusively by the small scale sector was started in 1967 and remaining 68.2 per cent of MSME sector. About 55.3 per cent of
reached 873 items the peak in 1984. There has been a continuous these MSME enterprises are located in rural areas. The
relaxation of the reservation policy overtime and the number of sector achieved consistent growth of more than 11 per MSME
items reserved for the small scale sector was 239 on January 22, cent every
year till 2010-11, whereas in 2012-13 growth rate of this
2007. was 19 per cent and in 2013-14 nearly 14 per cent'. sector
The process of de-reservation of items from small scale sector At present, there are about 3.61 crore number of
MSMES,
which are contributing 37.5 per cent of the GDP of the country.
continued in recent years. Number of items de-reserved in 2005,
2006 and 2007 were 108,180 and 212 respectively. Again on MSMEs have a critical role in boosting industrial growth and
February 5, 2008, theGovernment has excluded an additional 79 ensuring the success of the Make in India' programme.
items from a list of 114 items which can be exclusively Thus, the MSME sector in India plays a crucial role by
manufactured in the small scale sector. With this de-reservation, providing large employment opportunities, industrialization of
only 35 items can now be manufactured in the SSI sector. The rural areas, reducing regional imbalances etc. The MSME sector
Government has been de-reserving items in a gradual and contributed 33 per cent of industrial GVA and 31 per cent of
calibrated manner to increase competitiveness of the industry, Industrial Gross Domestic Product at constant prices (base 201ll
facilitate adequate flow of credit and upgrade technology. The 12).
35 items that would continue to be manufactured in the SSI
Small scale industries are now defined under the Micro,
sector include-food and allied items, wood, wood products,
small and Medium Enterprises Development Act, 2006,
paper, paper products, plastic product, organic chemicals, drug, has specifically categorized small scale sector enterprises which
based
drug intermediates, other chemicals, chemical products, glass, on the value of investment in plant and manufacturing and
ceramics, mechanical engineering and electrical machines, investment in egquipment for service sector. At present, 20 items
appliances and apparatus. are strictly reserved for manufacture in the small scale sector,
1. Economic Survey, 2013-14, p. 165.
2. Economic Survey, 2014-15, p. 95.
 India
Industrial Deveiopment in
vz,()pickles and chutneys; (ii) bread; (iii) mustard oil
(except
solvent extracted); (iv) ground nut oil (except solvent extracted);
(v) Wooden furniture and fixtures; (vi) exercise books and
registers; (vii) wax candles; (viii) laundry soap; (ix) safety
matches; (r) fireworks; (xi) agarbattis; (xii) glass bangles; (xiii)
teel Almirah; (xiv) rolling shutters; (*v) steel chair-all types;
(av) steel table-all other types; (vii) steel furnitureallother
nes:
types; (xvii)) padlocks; (xix) stainless steel utensils; and (xx)
domestic utensils-aluminium.
All undertakings other than small scale industries
undertakings engaged in the manufacture of items reserved for
manufacture in the small sector are required to obtain an industrial
license and undertake an export obligation of 50 per cent of the
annual production. The condition of licensing is, however, not
applicable to those undertakings operating under 100 Export 1

Oriented Undertakings Scheme, the Export Processing Zone (EPz)

or the Special Economic Zone Scheme (SEZs).
9.11.2. Distinction between Cottage and Small Soale
 international market.

9.11.4. Role of Small-scale and Cottage or MSME

Industries in India
Small scale and cottage industries have been playing an extremely
important role in Indian economy in terms of employment
generation and growth. It is estimated that this sector has been
contributing about 40 per cent of the gross value of output
produced in the manufacturing sector and the generation of
employment by the small scale sector is more than five times to
that of large-scale sector. The Second Plan rightly emphasised
the role of small scale and village industries on the growth of:
(a) employment generation,(b) equitable distribution of income,
(c) mobilisation of capital, (d) mobilisation of entrepreneurial
skill, and (e) regional dispersal of industries. Following are some
of the important roles played by small scale and cottage industries
| in India :
1. Number of Units. Total number of registered small scale
units has been increasing rapidly from 16,000 in 1950 to 36,000
in 1961 and to 8.53 lakh units in 1985-86 and then finally to
f 20.32 lakh in 2006-2007. Moreover, there were about 108.12
lakh unregistered small scale units in India. In 2006-2007 the
total number of small scale units further increased to 128.4 lakh.
But as per the census of SSI units, 1987-88, about 30 to 40 per
362
Indlan Economy
cent of these registered units might be non-functional. The sccond In 2012-13, the entire
all-India census of registered small scale industrial units was to India's GDP and 45 per MSME
cent to
sector contributes 8 ner.
conducted by Small Industries Development Organisation (SID0) 5. manufactured outout
in 1987-88. This report shows that out of 9.87 lakh registered Contribution
towards export
to Exports. The
contribution of SSI sentes
has been increasing at a
SSI units as on 31.3.88 included in the frame 3.05 lakh units (31 exports of theproducts produced by thefaster
small
rate. The value of
per cent were closed and another 57,000 units were not traceable). increased from 393 crore in 1973-74 to ? scale
Findings of the census also give added empirical support to the 91 and then to ? 9,100 croresector has
in 1900
terms, the value of1,50,242.crore
in 2005-2006. Again in dollav
generally accepted hypothesis about the distinct characteristics exports from
of the SSIsector compared with those of the large and medium from $ 8.87 billion in 1993-94 toSSI$ sector has also increased
sector, namely lower capital base, lower capital/labour ratio, lower The share of export fromn small 13.13 billion in 2000-01
scale sector in the total exnorte
productivity of labour and higher productivity of capital and has increased from 9.6 per cent in
lower wage rates. These small scale industries are also producing 2000-2001. 1971-72 to 35 per cent in
various types of commodities (over 5000 commodities) starting In 2012-13, the share
from simple consumer goods to the manufacture of sophisticated MSME units in country's total exports
stands at 42.6 per cent which is likely to
electronic goods. The reserved list of the small scale units has cent of the total exports of the country byincrease
the
upto 50 per
been increased from 177 in 1972 to 837 in 1983 and then declined Plan. end of Twelfh
to 35 in 2008. n0 l052 1an 6. Equitable distribution of income. Small scale and
In recent years, number of units engaged activély in industries has been resulting cottage
a more equitable distribution of
MSME sector has increased considerably and in 2012-13, total national income and wealth. This is mainly due to the fact that
number of MSME units stands at 46.76 milion. the ownership of small scale industries is quite
widespread as
2. Employment generation. Small scale industries Or compared to large scale industries and small scale sector is having
MSME are. labour-intensive and thus are generating a huge a higher employment potential than that of large scale sector.
number of employment opportunities. Total employment 7. Mobilisation of capital and
generated by these small scale industries has increased from 39.7 scale industries can mobilise a good entrepreneurial skill. Small
lakh in 1973-74 to 96.0 lakh in 198S-86. Estimated amount of savings and
employment entrepreneurial skill from rural and semi-urban areas remained
of the smallscale sector has again increased from 129.8 lakh in untouched fromn the clutches of large scale sector. Thus a huge
1991-92 to 312.5 lakh in 2006-2007, showing an increase of amount of latent resources are being mobilised by the SSI sector
about 4.2 per cent over the previous year. for the industrial development of the country.
Recent study shows that MSME sector provides employment 8. Regional dispersal of Industries. Small scale industries
to over 4.67 crore people engaged in over 10.6 crore are playing an important role in dispersing the industrial units of
units in
2012-13. the country in the various parts of the country. Asthe large scale
3. Investment. Investment in the small scale sector has been industries are mostly located in some states like Maharashtra,
increasing at a faster rate. As per the statistics made available bÝ West Bengal, Gujarat, Tamil Nadu, thus dispersal of SSI units
SIDO, total amount of investment in the small scale units of throughout the country can achieve a balanced pattern of industrial
India has increased significantly from 2,233 crore in 1972-73 development in the country.
to 4,431 crore in 1978-79 and then to R 9,585 crore in 9. Better industrial relations, The small scale industries
1985
86. Thus, the investment has increased by 116 per cent are maintaining better industrial relations between employers and
during
the last 7 years. Fixed investment per employee which was employees and thus can lessen the frequency of industrial disputes.
?6.4
thousand in 1972 as per SSI census gradually rose to ? 6S.71 But the large-scale industries are facing the problems of strikes
thousand in 1987-88 as per the results of Annual Survey of and lockouts and hence good industrial relations in these industries
Industries (ASI). are very difficult to maintain. Thus the loss of production and
4. Output. Total production of the small scale mandays are comparatively less in small scale sector.
units has
increased from? 7,200 crore in 1973-74 to ? 57,100 crore in It is due to the above mentioned factors the growth rate of
1985-86. The value of output of the SSI sector in 2006-2007 is small scale industrial sector has remained faster in terms of its
estimated at 4,71,663 crore showing an increase of 12.6 per number, employment and output.
cent over the output of R 4,18,884 crore in 2005-06.4
In 2011-12, total value of production at Thus, in realterms the growth rate of the SSI output during
constant prices 1992-93 is estimated to be about 5.6 per cent when compared
produced by all MSME units of the country stood at 17.908
with only 1.8 per cent growth of the overall industrial production.
billion, registering a growth rate of 8.1 per cent over the previous In 2006-2007, the growth rate of the SSI sector is likely to be
year. more than 12.6 per cent. Research studies indicate that the SSI

1. SmallIndustries Development Organisation (SIDO).

2. Economic Survey, 2007-2008, p. 198.
3. Handbook of Industrial Statistics, 1987.
4. Economic Survey, 2007-2008, p. 198.