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Institutional support for small-scale rural processing enterprises: the case of India.

Dr. K.P. Parameshwaran
Retired Commissioner for Small-scale Industries
Government of India, New Delhi


In India, the latest definition of a small-scale industry (SSI) is any unit with an upper limit on investment (in plant and machinery) of from Rs. 0.20 million to Rs. 0.35 million in the case of SSI and Rs. 0.45 million in the case of ancillary units. What is called the village and small industries (VSI) sector comprises both traditional and modern small industries; it is constituted by eight specific groups viz. Handloom, Handicrafts, Coir, Sericulture, Khadi, Village Industries, Small-Scale Industries and Powerlooms. The last two items constitute the modern group of industries, the others being traditional.

In the economic development of India, a strategic position has been given to the development of village and small industries (VSI) which constitute an important segment of the overall economy. Next to agriculture, the VSI sector provides the greatest employment opportunities, a considerable portion of which is in rural and semi-rural areas. It contributes about fifty percent of the value added in manufacturing.

India's overall policy on all industrial development is contained in the Industrial Policy Resolution of 1956, as amended from time to time. New priorities have been developed as and when required including some designed to reduce the basic handicaps of small-scale industries. The latest of these is the Industrial Policy of July 1980 which alms to harmonise growth in the small-scale sector with that in the large and medium sectors and to remove the dichotomies between the two sectors.

During the sixth plan period (1979-80 to 1984-85) production in this sector increased from Rs. 335380 million to Rs. 657300 million at current prices and employment from 23.37 million to 31.50 million persons. The latter figure represents nearly 80 percent of the entire industrial employment. Of this total, modern small-scale industries employ 9 million people; next in importance is the handloom subsector which employs about 7.5 million people. During the seventh plan period (1985-90) the total value of production of the VSI sector is expected to increase by about 52.4 percent and employment by 27 percent to 40.0 million. The seventh plan also lays emphasis on the necessity of providing a new thrust for tiny units having fixed investment of less than Rs. 0.2 million. They form nearly 90 percent of the total number of small-scale industrial enterprises. A modified strategy will provide adequate facilities in rural and semi-urban areas which will increase dispersion of these industries.

Table 24: Growth of Village Industries (VIS)

Table 24 shows the changes in value of production and employment in village and small industries during the period 1973-1985. In terms of value of production, the traditional industry share has declined from 16 to 12 percent; that of modern small industries has risen from 68 to 87 percent. In terms of employment, similar direction of change has occured but traditional industries still account for an important 57 percent of total VSI employment and modern industries 40 percent.

Key Problems

The impressive recent growth of village and small industries recorded above suggests a healthy sector. This is in general true but a number of problems continue to face the sector. An important one is that the interdependence of the different strata of industry (large, medium and small) has not been fully realised. Thus, for example, schemes for making VSI ancillaries of large industries have not spread as widely as had been hoped for. The second problem is that many VSI are technologically obsolete and this has restrained their growth. They are also undercapitalised, use outmoded equipment and exhibit low productivity and high production costs.

Furthermore, many small units are sickly and significant numbers of them are going out of business. Some of these should never have been started as they are in activities where prospects are too poor to justify further encouragement of VSI development. Another important problem is that in the name of backward area development, industries have been set up in inaccessible areas where there are no distinct advantages of raw materials or market. This has resulted in considerable increase in production costs.

Marketing arrangements continue to be a hurdle in spite of official schemes to favour VSI. Reservation of some official markets for VSI has been abused: it is noted for example that many small units tend to overprice their goods due to the absence of competition from larger scale industries. With regard to raw materials, small-scale enterprises still have to purchase these in small lots and through middlemen, which results in high costs. By contrast, large industries are offered raw materials at lower cost under long-term agreements.

Finally, there is no unified law so far to protect or regulate small-scale industries. Instead, a wide array of laws and ad hoc regulations apply to the sector, some on a local basis. There is accordingly much room for misinterpretation and for inadvertment infringement of regulations. This leads to less than orderly development of the small-scale sector.

Institutional framework

Official Assistance Institutions

For developmental purposes, the entire field of village and small industries has been grouped broadly under six different areas.

Each area comes under the overview of one of the following organizations set up by the Central Government:

a) The Small-Scale Industries Board
b) The Khadi and Village Industries Commission
c) The All India Handicrafts Board
d) The Central Silk Board
e) The Central Coir Board
f) The All India Handloom Board

The last three have specialist responsibilities reflected in their names. They will not be discussed further in this paper.

The Small-Scale Industries Board is chaired by the Union Minister of Industry with the Development Commissioner for Small-Scale Industries (DCSSI) as its Member Secretary. Other union ministries, state governments, SSI associations, financial institutions, eminent industrialists etc. are represented on the board. As the Secretariat of this board the office of the DCSSI (also known as Small Industries Development Organisation (SIDO)) is the nodal agency for formulating, coordinating and monitoring the policies and programmes for promotion and development of small-scale industries in the country.

Facilities are provided by SIDO through a network of 26 small industries service institutes (SISIs), 20 branch institutes, 40 extension centres, product and process development centres, production centres, field testing stations etc. in areas where specific types of industries are concentrated.

A range of specialised institutions have been set up for providing assistance to SSIs. These are the National Small Industries Corporation, the National Institute for Entrepreneurship and Small Business Development, the Small Industries Extension Training Institute, Integrated Training Centre, and several centres or institutes on tools design and training.

Operating in parallel to SIDO is the Khadi and Village Industries Commission (KVIC) which is a government-financed statutory body responsible for selected types of village industries including Khadi.1/ The national KVIC formulates the broad pattern of development needs of the village industries many of which are in the “tiny” category and are traditional. Similar action is taken by the state level KVI Boards which are jointly funded by the respective State Governments. The KVIC also operates through registered institutions and Cooperative Societies which are directly financed by the KVIC or partly through respective State Governments depending on whether they serve more than one state.

1/Khadi is traditional Indian cloth which is fully handmade.

An essential form of transport in country districts

All-India Handicraft Boards are a third set of national institutions which oversee implementation of small industry programmes. Some states have also set up Handicrafts Development Boards to supplement the activities of the All India Organisations. In areas of concentration of particular handicraft items, Research and Development Centres, Design Centres etc. are established.

Small Enterprises' Organisations

The large number of official assistance institutions at national, state, and lower levels still have problems in reaching their dispersed clientele. Small industries have attempted to facilitate access by grouping themselves into associations. Such associations also provide direct assistance to their members but their most important role is probably that of lobbying for small-industry interests in dealings with the authorities. The most prominent VSI organisations are outlined below.

At the top is the Federation of Associations of Small Industries of India (FASII), established in 1959, whose main aim is to promote the development of small-scale industries. The Federation has set up functional and industry-wise panels at national and regional levels which are consulted by the central and state governments in framing policies and providing assistance to SSI units. Recognised as the national apex body, FASII has been given representation on all committees of the Central Ministries as well as State Governments. The federation has played an important role in changing the definition of small industry, seeking reservation of items for exclusive SSI production and supply and negotiating a host of other concessions to small industries. Membership includes associations at all levels, prominent individual units, and industry-specific associations.

Small-Scale Industry Cooperatives have been organised in almost all fields of village and small industries. In the case of many subsectors the progress has not been significant so that there are still under 0.1 million cooperatives. At the national level, a National Federation of Industrial Co-operatives (NFIC) exists which assists in local and overseas promotion and marketing of cooperative products and imports scarce raw materials, components and goods for its members. Societies at state and regional or district levels and large primary societies are members of the NFIC while the Government of India and the State Trading Corporation are shareholders. The Federation concentrates marketing attention on a few priority products (wood carvings among them).

There is also a National Alliance of Young Entrepreneurs (NAYE) which works to safeguard the interests of young entrepreneurs; it has a special wing for women entrepreneurs. The Alliance is represented in the metropolitan cities and in all states.

Assistance to small industries development

India provides a wide array of assistance programmes to promote small industry development. They can perhaps be conveniently grouped under four headings as follows:

- Assistance in expanding markets (including preference in purchasing by government; support in joint tendering for government purchase contracts; price preference; and reservation of certain product lines or industries for only small-scale manufacturers).

- Supply of essential raw materials.

- Provision (and subsidy on cost) of finance for investment and working capital.

- Provision of technical assistance and other advisory services.

Policy and implementation bodies along all these lines exist at national and state levels and sometimes also lower down. Many forms of assistance are given from the large variety of institutions but an attempt has been made to provide “one window” bassistance through District Industries Centres which directly provide all assistance or at least coordinate it.

Assistance in expanding markets

Reservation for small industries of certain items is a policy whereby the central government and many national organizations buy exclusively from the SSI sector in order to solve the market difficulties of the SSI units. As at the end of March 1984, 404 items were included in the list for exclusive SSI supply. Table 26 gives the list of forest-based products which fall into this group. In addition, there were 12 items to be preferentially procured from SSI units up to 75 percent and 25 items up to 50 percent of total requirements. Central government also offers 15 percent price preference to tenders by SSI; many states offer the same.

Government has also recognised that since individual SSI units are scattered throughout the country and their resources are limited, they find it difficult to participate in government stores purchase programmes even if certain items are reserved for them to supply. It accordingly allows state SSI corporations to tender on behalf of the small-scale units.

Government also reserves certain industries or product lines for exclusive manufacture by the small-scale sector provided that such articles/goods can be produced economically by small enterprises. The total number of items so reserved stood at 126 in 1968 but had reached 872 in 1984. Table 27 gives the list of forest-based products which fall into this group. In the case of other items reserved for production in the SSI sector but not included in the list of items for exclusive or preferential purchase, a 15 percent price preference is given.

The combined effect of the above favourable discrimination in marketing and market opportunities has been to increase the small industry share in government's total indigenous purchases from about 7 percent in 1973/74 to 12 percent by 1983/4.

A facility which mostly aims at expanding small industry markets but also helps in promoting their technological improvement is “ancillarisation”. Under this scheme, a small industry is deliberately created to be or is transformed into being an ancillary of a larger industry on a formal sub-contract basis. The incentives for the large industry include access to cheaper loans, assured raw material supply etc. The programme is run by state level ancillary advisory committees which also plan and provide infrastructural facilities. The Committees include representatives of large industrial units, public sector undertakings, private sector associations of industries, development agencies, financial institutions, and ancillaries themselves. Plant level committees on ancillary development also exist in public sector undertakings and large industrial houses.

Table 26: List of forest-based items which can only be purchased by government from the SSI sector.

Wooden items

- Crates
- Tool handles
- Hand drawn carts
- Teak Blocks
- Tent poles
- Shelving
- Wood wool
- Plugs
- Ammunition boxes
- Chairs
- Mallets
- Flush doors
- Wooden Pins
- Veneers


- Cane baskets
- Bamboo cool handles
- Brooms

Mats and matting (which includes items made from forest materials) can only be purchased from the handicraft: sector.

Table 27: List of forest-based products reserved for exclusive production by the SSI sector

Seats for buses and trucks
Wooden truck bodies
Wooden crates
Tea chest plywood
Seasoned wood
Wooden sewing machine covers
Cable drums

Wooden storage cupboards
Shelves and racks
Hockey stocks
Wooden flooring tiles
Wooden boats
Natural oils of cashew shell, sandal wood, pine, eucalyptus

Tent poles
Wooden plugs
Wooden or bamboo handles

Wooden furniture and fixtures

Teak blocks

Supply of essential but scarce raw materials

Policy favours imports where they give further impetus to exports and support the growth of indigenous industries. During the period 1982-84, the share of SSI in total value of industrial-input imports averaged 26-28 percent, the rest having gone to larger industries. Out of the licenses issued for the SSI sector in 1983/84, those for raw materials/components accounted for 59 percent by value.

Scarce indigenous raw materials are allocated to State Small Industries Corporations (SSICs) at the beginning of each year for distribution to SSIs as needed. This arrangement enables the SSI units to obtain their requirements on an as and when required basis. The assured supply of scarce raw materials enables SSI units to plan their production programme well in advance.

Provision of subsidized finance

Financial outlays by central and state governments to VSI grew from Rs. 52 million in 1951/56 to Rs. 6161 million in the 1980/85 development plan. The proposed figure for 1985/90 is Rs. 11205 millions. These government financial outlays form a minor portion of the total flow of funds to the SSI sector. Much larger resources are provided by the network of Commercial Banks, Cooperative Banks and Regional Rural Banks, State Financial Corporations, State Industrial Development Corporations, and the National Small Industries Corporation.

There has been consistent growth in the availability of credit facilities extended by Commercial Banks. During the 5-year period of 1979/83 the annual disbursement had nearly doubled in volume to Rs. 50506 million lent to 1.23 million enterprises. Such loans are covered by the Industrial Development Bank of India (IDBI) under its refinance scheme. All loans up to Rs. 0.5 million are covered by the automatic refinance scheme at the concessional rate of interest.

State Finance Corporations also lend to the VSI sector (also eligible for refinance by IDBI at concessional rate of interest). The IDBI itself lends heavily to SSI: the total assistance provided by it to the VSI sector up to March, 1986 was Rs. 52850 million. Its annual financing has doubled between 1979/80 and to 1982/83 when it reached Rs. 2902 millions, which included refinancing of advances made by other institutions.

The interest rate charged by IDBI for refinance differs for various purposes. It is as low as 6 percent in specified backward areas but range between 8.25 and 9.58 percent in non-backward areas.

The IBDI is the apex financial institution providing assistance to industries of all types and sizes. The SSI sector's share in IBDI disbursements has increased from nearly 16 percent during 1970/75 to about 31 percent in 1980/85 and IDBI has now established a separate Rs. 25 billion fund called “Small Industries Fund” to take over the bank's own existing and future assistance to SSIs. This new fund is expected to pay particular attention to “micro” industries.

In order to ensure that financial institutions do lend to small-scale industries, the Reserve Bank of India requires all Commercial Banks and other financing institutions to ensure that at least 12.5 percent of the total credit advances is reserved for weaker sections like rural artisans, village craftsmen, or cottage industries.

Some specialization exists in types of lending: the commercial banks provide the bulk of short-term advances to SSI units and the state finance corporations provide long-term loans. Both types of finance are made available at relatively low rates of interest for the SSI sector, the present schedule being as under:

Type of loan (%)

Rate of interest

Composite loans up to Rs. 25,000

i) Backward areas


ii) Other areas


Short-term advances

i) Up to Rs. 0.2 million


ii) Over Rs. 0.2 million to Rs. 2.5 million


iii) Above Rs. 2.5 million


Term loans

i) Backward areas


ii) Other areas


The financing referred to so far is available for a wide range of purposes. Additional specific modes of financing are adopted to cover purchase of machinery and to encourage growth of VSI into the medium-scale sector: these include a bills rediscounting scheme; provision of seed capital; interest-free sales tax loans; national small industries corporation hire-purchase; and state investment subsidies.

The bills rediscount scheme is operated by the Industrial Development Bank of India which covers bills/promisory notes arising out of sales of indigenous machinery on a deferred payment basis. Bills/Promisory notes drawn in favour of or by the machinery manufacturers are in the first instance discounted by them with their banks which in turn rediscount these bills with the IDBI at concessional interest rates of from 9 to 10.25 percent.

In India, tree planting close to SSE's also receives official support

Seed capital is provided by the government for technically or professionally qualified or skilled SSI entrepreneurs who want to expand to medium scale. The seed capital is an interest-free equity loan carrying a service charge of one percent p.a. and an initial moratorium of up to 5 years.

Small enterprises expanding into medium scale units are also eligible to get an interest-free sales tax loan equivalent to the sales tax paid by them for a period of 3 years prior to proposed expansion. This loan is repayable in three equal annual instalments after a moratorium of six years.

The National Small Industries Corporation enables the SSI sector to obtain local or imported machinery and equipment through its long-term hire purchase scheme. The SSI generally deposits 10 percent of the value of the machinery and this outlay is eligible for refinance from IDBI at concessional rates of interest.

Finally, the government encourages rural fixed investment by paying a 15 percent subsidy or Rs. 1.5 million (whichever is less) for SSI units set up in notified backward areas and new industrial complexes in selected places. Some State Governments also pay subsidies of varying generosity to selected priority categories of industries set up in areas not covered by Central or State level subsidy schemes.

It is clear from the foregoing information on finance that many incentives are provided. In order to control the direction of industrialization, the incentives are sometimes made selective in nature when the government feels that (a) a subsector is overcrowded (b) the activities are not essential and socially beneficial in nature or (c) attraction of private initiative is high even without incentives due to the industry's potential profit earning capacity. Precaution is also taken to ensure that the enterpreneur has sustained and continued stake and interest in the project. The entrepreneur is therefore required to make a minimum contribution which ranges from 15 percent for “technocrat entrepreneurs” and for all backward areas, to 20 percent in other cases.

To reduce waste of resources, government also insists that the financing institution make a detailed technical and financial appraisal of the project before sanctioning assistance. In order to ensure prompt repayment, a penalty of 5 percent per annum is levied on the defaulted portion of loans. There is also a commitment charge of one percent payable by the enterpreneur (0.5 percent in backward areas). Banks retain first claim on fixed assets created from their loans.

Provision of technical assistance and general advisory services

A systematic review undertaken during the mid-seventies revealed that the benefits of the SSI programme were, by and large, limited to those situated in urban and semi-urban areas and were used mainly by modern mechanised SSI units. It was therefore decided to create District Industries Centres as focal points for industrial development in every district of the country. The functions of these District Centres (whose costs are shared equally by central and state governments) are: to coordinate promotion of small, tiny, village and cottage industries; to provide all services and support at pre-investment, investment and post-investment stages to the decentralised industries sector under a single roof; to provide incentives for industrial units to be set up in rural areas which will mainly supply local markets and use local raw materials and skills.

Each district centre can have functional managers for Economic Investigation, Credit, Village Industries, Raw Materials, Marketing, Training Information, Infrastructure etc. depending on the local need. Technical assistance in each field is obtained from the nearest Small Industries Service Institute. The vital aspect of this programme is the “single window concept” and delegation of powers to the local level in respect of administrative, financial, and external trade matters.

It is now reported that the District Industries Centres (which are spread over the entire country), have not fulfilled all their tasks. It appears that they need to be strengthened and given adequate inputs for establishing small units in rural areas.

A second thrust of assistance is entrepreneurial development. This started in the 1960s with training of unemployed but technically qualified engineers. Subsequently the scheme was expanded to cover different types of entrepreneurs such as (a) agriculturists who had sufficient capital but did not know investment channels, and (b) merchants who desired to also manufacture their own goods.

Funding for entrepreneurial development training is given to small industries service institutes, the National Small Industries Corporation, State Directorates of Industries and technical colleges. A National Institute for Entrepreneurship and Small Business Development was established in 1983 with responsibility for training programmes for motivators, trainers and entrepreneurs themselves and for research and development in entrepreneurship and small business management. In due course, regional and state level training institutes are to be established.

A new scheme for unemployed rural youths to be converted into entrepreneurs has now been started. It is implemented by District Industry Centres. Once they “graduate,” youths obtain a bank loan which attracts a capital subsidy of 25 percent payable by the Government to the lending bank at between 10-12 percent p.a. interest. Tiny and artisanal units will form the bulk of the clientele.

Industrial estates are a third line of assistance. By grouping SSI units, the programme enables development authorities to establish common service centres and facilitates the dissemination of modern production techniques. In several industrial estates, economies have been achieved through collective purchase of raw materials and other collaboration. Within the industrial estates occupants of factory sheds are helped to own them through easy hire-purchase terms. There are also concessional charges for transport, water and power; temporary exemption is authorised from sales-tax and duties on specified goods and services for certain categories of industries.

Special assistance is provided to encourage location of industry in backward areas. The special loan interest rates have been mentioned earlier but other incentives include preferential treatment in the grant of industrial licences and outright subsidy on fixed capital investment. More than half the districts in the country are considered backward and therefore eligible for concessional finance of which 101 are entitled to even greater subsides than the rest.

To differentiate by degree of backwardness, the industrially backward areas have now been categorised into three strata which attract subsidies ranging from 10 to 25 percent. The new format has been so successful that in certain areas some of the concessions have had to be withdrawn so as to avoid overcrowding of industrial units.

Some remote areas need this method of logging

Forest-based small-scale manufacturing

Among the village industries scheduled for development by KVIC are the following forest based industries: collection of forest plants and herbs for (mostly medicinal purposes); cane and bamboo processing; gums and resins; khattha manufacturing; and shellac industry. These industries utilise minor forest produce which are under the control of State Forest Departments.

The Khadi and Village Industries Commission (KVIC) helps individual entrepreneurs directly or through State Departments/agencies. However, in the absence of assured and sustained raw material supply and a regular and profitable market for the collectors, these industries may have created much employment but have generated little additional income. The technologies required to make these industries more successful are still to be propagated extensively amongst the tribals who are the main beneficiaries.

With regard to collection of forest plants and herbs a very large proportion of the plants is found in temperate regions and at high altitudes in the Himalayan and sub-Himalayan ranges and scattered in other hilly tracts in Assam, Kerala etc. The traditional established pattern of collection by tribesmen continues; produce reaches the dealers in towns and villages through middlemen who have regular dealings with the tribal people, lend them money, purchase their forest produce and supply them with other goods, often by barter.

There has been indiscriminate exploitation of both the resources and the tribesmen in the past. Sparce distribution, difficulty of access to and high cost of transport to reach the natural habitat of the plants, extermination of the rare plants, incorrect identification of the genuine plants are among difficulties faced in this industry. It is in this context that the Khadi and Village Industry Commission and other agencies moved to organise the tribals into cooperatives which can obtain benefits directly for their members instead of through middlemen.

The cane and bamboo industry is widespread in India since the raw materials occur everywhere and are associated with many aspects of rural activity. The availability of canes in India is meager compared to its requirements. The chief uses are for making furniture, baskets, handles for umbrellas, and mats. Industries based on gums and resins, and khattha (a medicinal extract of Khair tree heartwood) are relatively minor relative to cane/bamboo and collection of herbs. Shellac, which employs over a million people, is more prominent.

With regard to wood processing, there are nearly 8 000 units producing wood products in the small-scale sector employing 0.29 million persons or about 1 percent of the SSI employment total. The average employment per unit works out to 4.2 persons compared to the SSI sector average of 6 persons. The average investment in plant and machinery for a woodworking unit is Rs. 19 184 which is only 40 percent of the average for the whole SSI sector. The much smaller size of enterprises in the forest-based sector suggests that of the existing assistance programmes, the most relevant in many cases will be those designed for “tiny” units.

The location of many residual forest resources in relatively isolated localities also suggests that many forest-based SSI may have “backward area” status and so attract the additional support this status entitles them to.

It is interesting to note the position occupied by the sub-group “wood products” in SSI sector. Table 25 shows the all-India proportions in terms of number of units, employment and investment for 1983; it shows that wood products accounted for 9 percent of SSI enterprises, 6.7 percent of the labour force and 5.7 percent of investment.

Many forest-based SSI enterprises would be entitled to the extra privileges and assistance to “tiny” units since they tend to have only up to Rs. 0.2 million investment in machinery and equipment. They are generally artisan oriented, use relatively little machinery and equipment, much of which is locally made. Such units have access to all the facilities and concessions available to small-scale units generally. In addition, they receive priority assistance in getting organized and in allocation of sheds in industrial estates. Government also gives some priority to “tiny” units in allocating scarce raw materials. Bank loans are given to them without security (whether collateral or otherwise). On their part “tiny” units have affiliated themselves with large SSI enterprises in district and state level associations which are ultimately represented in the national federation of SSI associations.

In spite of the special efforts to assist them, however, the “tiny” units continue to face serious problems, the most important being small rural markets, low productivity, high costs and poor or stagnant technology. Modernization is proving difficult due to the very small capital base of these enterprises.

Table 25: Wood products in the Indian SSI sector in 1983.

Industry Group

Percentage of

Number of Units



Wood Products




Leather and Leather Products




Metal Products




Food Products




Source: Small-Scale Industries in India - Book of Statistics

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