Some Aspects of Small Scale Industries in India Findings Based on Two All-India Sample Surveys

R Nagaraj Using two all-India sample surveys, conducted by the Reserve Bank of India and the National Small Industries

Corporation, respectively an attempt has been made in this paper to understand the rate, pattern and characteristics of the growth of small scale industries in India.

Part I of the study based on the Reserve Bank of India's sample survey of small scale industrial units con-ducted during 1976-77, discusses the broad trends in the growth in number of small enterprises and some characteristics of the structure of this sector In Part II, using the National Small Industries Corporation sample survey data for 1979, some other aspects of the small scale sector like marketing of output, availability of inputs, nature of competition, pricing, etc, are discussed. [The first part of this paper was published last week; this is the second and concluding part.]

II THIS part of the study is based on the all India sample survey of small scale units con-ducted by NSIC in 1979 apparently to ob-tain reliable and up-to-date information to aid their promotional activities. The results presented here are based on a small portion of the information contained in the schedules.

The data have a number of limitations. The survey mainly deals with the modern segment'of the .small scale sector, which pro-bably reflects the interests of the NSIC. The sample size is very small, over 1,900 units from 46 industrial centres out of all the registered small units in the country. The sample survey leaves out, as is the case with most of the studies, the unregistered small units, whose number is allegedly as large as that of the registered small units. Moreover, the regional distribution of the sample is uneven. Very surprisingly, the Bombay-Foona industrial belt has been completely left out.14 The centre-wise distribution of the sample is given in Appendix 2.

The NSIC report of the sample survey does not clearly mention the sampling frame. Hence it is difficult to judge its representativeness. Since the sampling pro-cedure is not known it is not possible to make estimates for the population. There-fore the results presented here are strictly valid for the sample units. However, since the sample units are spread across the coun-try representing big and small towns, older centres like Calcutta as well as newer and growing cities like Bangalore, it may not be totally incorrect hazard some broad generali-sations based on this data. Since our aim is not to generate estimates for the concerned industries but to discern the emerging struc-ture of production and its organisation in the small scale sector the data could be useful in many ways.

Obtaining authentic information on cer-tain 'sensitive' questions like turnover, credit, etc, from small scale units is difficult. The data furnished tend to be invariably con-siderably different from their true values. This is true not just of this but all surveys except perhaps in surveys conducted by banks, since the bankers have a better knowledge about the performance of the units having dealings with them. Moreover

many entrepreneurs in this survey refused to furnish information. Therefore we have tried to minimise use of such figures.

The survey has its advantages also. It pro-vides us with fairly recent data—probably the latest survey of small units at the all-India level. Since we had access to the primary schedules it permitted us to under-take some detailed tabulations. The survey collected a good deal of qualitative infor-mation on questions like structure of com-petition, marketing channels, etc, which are not usually captured in NSS and ASI data.

The industries broadly covered in this survey include plastics, engineering and automobiles, which correspond to 30, 33 to 37 of 2 digit National Industrial Classifica-tion (NIC).15 However on close scrutiny of the product description given in the sche-dules, it was realised that these are very broad categories and are inadequate to cap-ture the specific structure of output of the small units. Even the 3-digit NIC was found unsuitable. Therefore we developed a 4-digit classification (Appendix 1) which is collap-sible into 2-digit NIC. The usefulness of this will be evident later when the results are discussed. For the sake of brevity most of the results are discussed at the 2-digit NIC level. However wherever necessary the disag-gregated picture is also presented.

Before going on to present the results we discuss the size distribution of the sample

TABLE 9 (a) ; INDUSTRY-WISE DISTRIBUTION AND AVERAGE SIZE OF SAMPLE UNITS

(Value figures in Rs '000)

units which could have some bearing on our findings. Tkble 9 (a) shows that on the average a sample unit employs 22 workers and capital equipment worth about Rs 18 lakh and has a sales turnover of nearly Rs 90 lakh. These figures are very much higher than the average for estimates based on RBI sample survey and the official cen-sus of small scale units.16 Size distribution of the sample units, according to number of employees, is also highly skewed in favour of larger units (Table 9 b). Manufacture of metal products (34) and transport equipment (37) form the largest and the smallest in-dustry groups in the sample. Plastics, which is the only non-metal based industry group, accounts for about 12 per cent. Exclusive an-

Note: Figures in brackets are percentages of the total. They do not necessarily add up to 100 due to rounding off error. This holds for the percentage distribution in all the tables.

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TABLE 9(b) : DISTRIBUTION OF SAMPLE UNITS ACCORDING TO NUMBER OF PERSONS EMPLOYED

ECONOMIC AND POLITICAL WEEKLY October 19, 1985

ciliary units form about 10 per cent of the sample. This low figure seems to be broadly similar to the estimate based on the RBI sample survey discussed in Part I of this paper.

T E M P O R A L DISTRIBUTION O F SAMPLE UNITS

Using the information about 'year of commencement of production', an industry-wise temporal distribution table is drawn. It reflects the growth of small scale units sub-ject to the same limitation discussed earlier

As can be seen from Table 10 (a) the proportion of the sample units which com-menced production before 1950 is insignifi-cant. There is gradual increase in the number of units starting production over time (Table 10 b). However, the increase is percep-tibly sharp in the 1960s and the 1970s com-pared to the fifties. When the data, is re-classified into two periods, 1950-65 and 1966-79, the proportion of units commenc-ing production in the post mid-sixties period is more than twice the proportion in the earlier period (Table 10 c). This again, as in the case of the RBI sample survey, suggests that the growth of this segment of the small scale sector seems to be a post mid-sixties phenomenon. However this is not equally true of all the industry groups in the sam-ple, While in plastics (20-NIC) 80 per cent of the units started after the mid-sixties, in the transport equipment (37-N1C)—a majority of whom are manufacturers of bicycles and their parts—about 50 per cent of the units are relatively much older units.

PATTERN OF OUTPUT

As mentioned earlier, we have developed a 4-digif classification (collapsible into the 2-digit NIC) to describe the range of pro-ducts manufactured by the sample units. The 2-digit classification of the small units could give the impression that they produce a similar range of products as the large 'cale sector belonging to the same groups. This does not seem .to be quite true. We find that the small units produce a relatively limited range of items using apparently simple technology. Moreover in certain categories like manufacture of machinery (35-NIC) the smaller units mostly concentrate on manu-facture of components and very few produce complete machinery.

Secondly, it is found that the usual pro-duct classification does not seem to ade-quately capture certain activities of the small

units. A good number of the sample units— 158 out of 748 units belonging to the in-dustry group 34—described their product (or principal activity) as 'job-work'. These are relatively smaller units employing around 10 workers. These units invariably manufacture components and part or simply undertake some machining operations (like turning, plaining, shaping drilling, boring, etc) on a contract basis from larger units. The customer also usually supplies drawings and specifications and at times provides raw materials, like iron and steel, and may also undertake quality control checks.

If our above understanding is correct, then the detailed product description seems to provide some insights into the emerging rela-tionship between the larger and small units, known as industrial subcontracting. It has been argued 17 that since the mid-sixties, when the industrial sector in general1 and engineering industries in particular faced widespread recession, there seems to be a growing tendency of subcontracting to reduce costs of production and increase pro-ductivity of capital and labour resources. Given the lower wages and overhead costs in smaller units, and plentiful supply of labour, it seems profitable for the larger units to offload manufacturing of simpler com-ponents (or certain simpler mechanical operations) to the smaller units.

Although the argument is fairly simple, the evidence to support this alleged grow-ing tendency is very little. The official surveys of small scale units have not attemp-ted to collet o n s u c h questions. In our classification 'job-work1 seems to be a clear case of subcontracting. This could be true of a number of other categories also, like 'fabrication and welding' (3402), 'turning, drilling, shaping, plaining, etc' (3403).

The other examples of ^contracting ap-pears to be in transport equipment, 'bicycle components and spare parts' (3705) and 'components and spare parts for auto in-dustry' (3701). Geographically most of these units are concentrated in Ludhiana and

Faridabad, respectively. As is well known, Ludhiana is the biggest bicycle producing centre in the country and two major tractor producers are located in Faridabad. It is likely that the sample units are in fact sub-contractors to the larger firms located in these places. The data seems to support the often repeated statement that the bigger firms in fact are apparently just assemblers. In a number of schedules in category 3701 it is clearly stated that they produced parts for Escorts.

The same could be true, probably to a lesser extent, for the machinery component manufacturers in the industry group 35. However, it should be noted that a good pre-portioji of the component manufacturers may be producing for the replacement market and not for the original equipment manufacturers. Therefore, to this extent the component manufacturers have little con-nections with the large producers and hence cannot be categorised as subcontractors.

M A R K E T I N G OF O U T P U T

Table 11 shows the number (and percen-tage) of the sample units marketing their output to various categories of customers.18

As the data on quantity of output marketed through various channels is incomplete in a large number of schedules we do not have the corresponding data on the quantity marketed. The Table shows that the majority of producers market their output directly to firms in the private sector, small scale sec-

TABLE 10(b): INDUSTRY-WISE TEMPORAL DISTRIBUTION OF SAMPLE UNITS BY YEAR OF COMMENCEMENT OF PRODUCTION

TABLE 10(a): INDUSTRY-WISE- TEMPORAL DISTRIBUTION OF SAMPLF UNITS BY YEAR OF COMMENCEMENT OF PRODUCTION

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TABLE 10(C): INDUSTRY-WISE TEMPORAL DISTRIBUTION OF SAMPLE UNITS BY YEAR

OF COMMENCEMENT OF PRODUCTION

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tor and public sector in descending orders of importance. The role of distributors and agents is not significant. However, a larger number of the units sell directly to in-dividuals/households, which gives the im-pression that they either sell their output to final consumers or that they have their own marketing network. But neither seems to be correct. When we looked into the schedules we found that in the majority of cases 'out-put sold to traders' is filled under the heading 'individuals/households'. It seems to suggest that it is not the established distributors but probably petty traders who mediate between the actual users and the producers. It appears that the role of traders is significant in the marketing of consumer products, like plastic goods, though it is dif-ficult to make a categorical statement.

It is interesting to note (Table 12) that the proportion of the sample units selling their output to a limited number of customers, less than five, is very small. Majority of the units have 20 or more customers. Moreover, as can be seen in Table 13, no systematic association between the size of the unit (measured in terms of number of employees) and the number of customers is discernible. These results seems to question the usually accepted view on this issue. It is quite often said that the small units in general are dependent1 on a limited number of large firms/distributors for orders. This is con-sidered to be a cause of an 'unequal' rela-tionship between the large and small firms. However, at the disaggregated level some in-dustries, like 'job-work', are relatively more dependent on a limited number of customers (less than 5).

PURCHASE OF INPUTS

As can be seen from Table 14, agents and distributors form the single largest source of raw material supplies for the sample units. The residual category 'others' forms the second largest source. A close look at the schedules revealed that in a large number of cases 'traders' are classified under this group. Interestingly in a number of cases we found that the industry associations provided the raw materials to its members. If this kind of arrangement is fairly widespread, and growing, then it points to an emerging form of organisation of production in the small scale sector where the collective body of pro-ducers (in a region and in an industry) pro-vides for common facilities and inputs for

its members. This tendency could enable, small enterpFises to overcome the disecono-mies of small production by obtaining cer-tain goods and services collectively.

Another interesting finding is that some sample units, though very small in number,

receive raw materials from their customers. This is particularly true for the category 'job-work' (3400). It seems to provide evidence to support our earlier argument about the plausible subcontracting relation-ship between the large and small units.

Note: Row totals are much higher than the total number of units. This is because a number of units have reported multiple source of raw materials.

TABLE 15: NATURE OF THE PRODUCT

TABLE 12; DISTRIBUTION OF TOTAL NUMBER OF CUSTOMERS

TABLE 14: DISTRIBUTION OF SAMPLE UNITS ACCORDING TO MAJOR SOURCE OF RAW MATERIALS

TABLE II : NUMBER o r UNITS MARKETING THEIR OUTPUT TO DIJFERENT CHANNELS

Industry Distributors Government Dept Public Sector Private Sector Small Scale Sector Households

Note: The percentage figures in brackets are usually more than 100 since the same producer can be using more than one marketing channel.

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NATURE A N D E N D USES O F P R O D U C T S Table 15 shows that three-fifths of the

sample units produced industrial products while only a quarter of them manufactured consumer goods, A very small proportion of the metal-based industries' output con-

stituted consumer products. There is little systematic association between the size of the unit and the nature of the products manufactured (Table 16). However this pro-portion is much higher in plastics and a quarter of the units in this industry group

TABLE 16: NATURE OF THE PRODUCT PRODUCED BY SIZE OF UNITS

TABI C 17; END USES o r THE PRODUCT

TABLE 18: END USeS OF PRODUCTS PRODUCED BY Size OK UNITS

produced goods which have their industrial and household uses. The data seem to sug-gest that a major portion of the output of this segment of the small industries enter as inputs into further processing, mainly in the private and public sector manufacturing units. Therefore one can infer that this seg-ment of the small scale sector seems to be well integrated into the overall cycle of in-dustrial production,

An overwhelmingly large percentage of the units have reported producing 'finished products' as against intermediate products' (Table 17). No relationship is discernible between the end uses of their output and the size of the unit (Table 18). This seems to be questionable since the information is based on the response of the entrepreneurs and not on any objective criteria. An examination of the schedblcs does seem to confirm our doubt. For example, a 'turned' component manufactured for a customer according to the latter's specification is objectively an in-termediate product used in the production of another item. But such cases are recorded as finished products in many schedules, if a finished product is defined as one which is produced as an 'interchangeable' part with standard engineering dimensions usable by a variety of customers and/or can be sold 'off the shelf as an independent product, then in our view a large number of the pro-ducts of the small units cannot conform to this definition.

N A T U R E O F C O M P E T I T I O N A N D P R I C I N G As can be seen from Table 19 the sample

units face very little competition from the public sector units and imports. However, the private sector does seem to offer some competition to the small producers. But the most important source of competition comes from within the sector. The number of competitors on average is very large ("fable 20).

Since most of the small units seem to pro-duce technologically simpler products—as evidenced in the 4-digit classification— which probably require small amounts of capital, and since labour is available fairly in abundance, it seems natural for these in-dustries to be competitive. Moreover, the promotional efforts like the fiscal conces-sions offered, reservation of a growing number of products for the small scale sec-tor and the soft loans from the financial in-stitutions could definitely have contributed towards increasing the level of competition in this sector.

This result seems to give rise to a number of questions. If the industries in this sector are competitive then how do the units fix their prices and how intensively does the capacity gets utilised.

The data shows that the entrepreneurs mainly rely on to two criteria: 'cost-plus' principle and 'the current price charged by their competitors' (Table 21). A small number of the sample units have also reported 'price recommended by customer' as one of the considerations in deciding the price. However, the majority of them use one, or at best two, criteria for price fixa-tion (Table 22).

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Note, Since some units have not reported this information, the row totals do not add up to the total number of units.

TABLE 23: NUMBER OF SHIFTS OPERATED

C A P A C I T Y U T I L I S A T I O N

As the data on the number of shifts operated is incomplete in a large number of schedules we could not get the average for 1977 to 1979, but just for the year 1978. Therefore, we do not know if it represents the situation of a 'normal' year. Moreover the concept of an 8-hour shift may not in fact apply to small scale units where there are no strong labour unions to protect the interests of the workers. It is said that in these units a shift could mean anything from 8 to 12 hours of work.

The data (Table 23) shows that in all the industry groups the majority of the units operated only one shift, though second and third shifts are not uncommon. About 50 per cent of the units reported capacity utilisa-tion of over 50 per cent (Table 24). It can be said that there is considerable under-

utilisation of capacity in the sample units. l b sum up: Admittedly the data have a

number of problems which severely restrict any attempt at a generalisation of these results. However, since the survey covered a fairly large and varied group of industrial centres it may not be totally incorrect to draw some broad inferences based on the data. The results of the study are tentative and the explanations provided are, we think, indicative of the emerging trends in the small scale sector which warrant further enquiry.

The distribution of the sample units ac-cording to the year commencement of pro-duction suggests, even if one discounts for a fairly high morality rate, that they seem to have grown rapidly after the mid-sixties. The detailed classification—as the conven-tional classification does not seem to repre-sent the output pattern of the sample units adequately—indicates that they produce a

relatively limited range of products using ap-parently relatively simple technology. Cer-tain product descriptions give us the impres-sion that a fairly good number of units sell their output directly to the private, public and small scale sectors. The role of distri-butors and agents in selling is minimal but traders, who are classified as individuals/ households, are fairly important. A very large proportion, over four-fifths, of output of the metal-based industries is used as in-puts for industrial production. This propor-tion is much smaller for plastics. The small units sell their output to a large number of customers and exclusively ancillary units are very few. There is no relationship between the size of the units and the number of customers they have.

The sample units face major competition from within the small scale sector, though, to a limited extent, from the private sector also. They decide their prices mostly on 'cost-plus' basis. The price charged by their competitors is the second important con-sideration. Capacity utilisation on the average is just round 50 per cent.

Our analysis of the various aspects of the sample unit seem to provide some empirical basis to support the argument of a growing subcontracting relationship between large and small engineering firms. The evidence cannot be taken to be conclusive and the question requires further enquiry.

C O N C L U S I O N S

Using two all-India sample surveys con-ducted in 1976-77 and 1979 by Reserve Bank of India (RBI) and National Small In-dustries Corporation (NSIC), respectively, an attempt has been made in this study to understand the rate, pattern and characteris-tics of the growth of small scale industries in India. The data analysed have a number of limitations which have to be recognised before highlighting the main findings. Both the surveys are confined to the registered small scale sector. They leave out a large chunk of small enterprises which do not get registered with the concerned government department. The NSIC data is much more restrictive as it is confined to the engineer-ing, and chemicals and plastic industries only. The age distribution of the sample units, which is used as a proxy for the growth (in number) of small enterprises, has to be

TABLE 24 : QUARTILE DISTRIBUTION OF CAPACITY UTILISATION

Note: ' Some units have not specified the capacity utilisation.

1 7 9 4

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taken with considerable circumspection as it does not take into account their mortality which may not be insignificant.

Registered small enterprises seem to have grown (in number) relatively rapidly after the mid-sixties. And this is more true in the 'modem' industries like engineering, chemi-cals and plastics, etc. Further, these in-dustries are also the ones which form a greater part of the value added in the small scale sector compared to the traditional in-dustries like handlooms though they have a greater share in terms of number.

Wages in the small scale sector can be con-sidered to be low. While wages across in-dustries do not differ very much variation

in productivity is very significant. It suggests that wages are determined by the competitive conditions in the labour market and gains due to increase in productivity mainly ac-crues to capital. Moreover, industries with higher productivity seem to offer greater volume of employment.

Comparison of profitability between the private corporate and the small scale sectors, and within the small scale sector across size class of units is revealing since the findings are at variance with some of the accepted views on this issue. Profitability within the small scale sector is inversely related to size of units as measured by the 'original value of plant and machinery'. Further, profit-

Appendix 2 CENTRE-WISE DISTRIBUTION o r tHE SAMPlE UNITS

ability in the small scale sector as a whole is higher than that in the private corporate sector. The second result could be attributed to lower wage costs and fiscal concessions to the small scale sector. A pan of the reason for the observed inverse relationship within the small scale sector could be the use of family labour in the smaller sized units whose costs are not imputed in the survey data. But another plausible reason could be the greater exploitability of labour as si/e decreases. Smaller units use their labour more intensively and also seem to substitute labour for capital to a considerable extent. This is very clear from the fact that capital efficiency is also inversely related with size.

According to NSIC sample survey data engineering, chemicals and plastic industries in the small scale sector arc very competitive, While multiple shifts are not uncommon, the majority of enterprises operated single shift in 1978. The cost-phis principle is the most widely used basis for pricing among the sample units.

Our detailed four digit industrial classi-fication reveals some interesting facts about the product range of the sample units. It sug-gests that they produce a relatively limited range of items using apparently simple technologies. The classification revealed clear signs of the subcontracting nature of the work done by a si/able proportion of units in the engineering industry.

A majority of enterprises directly supply their output—which invariably are inter-mediate products—to units in private, public and small scale sectors. The role of inter-mediaries in marketing seems to be minimal except in the case of consumer goods in plastic manufacturing. In the majority of cases the sample enterprises obtained their inputs from the market. However, in certain cases, like 'job-work', inputs are invariably supplied by the customers.

(Concluded)

Notes 14 Apparently the NSIC could not cover this

region for some logistic reasons. 15 The survey also covered about 200 units

belonging to the leather industry (NIC-27) which are not included in our study.

16 See (1) "Survey of Small Scale Industrial Units, 1977", Vol I, Reserve Bank of India, 1979. (2) Report of Census of Small Scale Industrial Units, Vol 1 and II, Government of India, DCSS1, New Delhi, 1977.

17 Sec R Nagaraj; "On Crisis and Accumula-tion; An Attempt Towards Understanding the Development Tendencies of Capital in India since the Mid-Sixties", 1980 (mimeo). S Mundle: "Growth, Disparity and Capital Reorganisation in Indian Economy: Some Speculations", EPW Annual Number 1981,

18 Number of firms exporting is not presented in the table as their number is negligible.

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