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It is estimated that there are 63+ million micro businesses and 0.33+ million small businesses in India. But have you wondered what’s the importance of small scale industry in India? Today, small businesses play a pivotal role in shaping the socio-economic landscape of the country, contributing to its GDP, generating employment in the rural and urban sectors, and increasing consumer spends. Whether it’s in the handloom sector or steel industry, the important role of small-scale industries (SSI) cannot be overlooked.

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Let’s take a closer look at small scale industries and understand the advantages of small scale industry and role in economic development and nation building.

Classification and importance of small-scale industries in India

Let us begin by looking at the meaning of small scale industries and their importance – What is a small-scale industry?

A small scale industry usually refers to businesses with limited capital, resources, manpower and production capabilities. It’s usually a micro, small or medium sized business and often produce goods and services for a local and regional consumer. Not surprisingly, they can foster economic growth and even support the local communities.

As per the new MSME classification, effective from 1 July 2020, small and medium sectors are categorised as:

Business type Investment Turnover
Micro Not more than ₹1 crore Not more than ₹5 crore
Small Not more than ₹10 crore Not more than ₹50 crore
Medium Not more than ₹50 crore Not more than ₹250 crore

Why are small scale industries important?

There are some distinct differences between small and large scale industries which characterise them. Small scale industries and businesses usually:

  • Are run by sole proprietors or families
  • Engage limited manpower and resources
  • Invest less in technology
  • Employ regional and local manpower
  • Cater to the needs of the regional market

With that understanding we take a look the advantages of small scale industry and their role in socio-economic development.

1. Employment generation

Small-scale industries are instrumental in driving employment generation. These industries usually employ local talent making it possible to generate employment in the local areas. Moreover, owing to the diverse business types, they employ people of varying skills and skillsets.

Let us take a look at some of the other ways in which SSI’s drive new employment opportunities with the example of small textile manufacturing centres in rural/semi-urban India:

  • Employing semi-skilled workforce in labour intensive roles, such as spinning, weaving, and dyeing. This enables SSI’s to absorb more manpower especially those without special skillsets or living in rural areas.
  • Providing on-the-job training to the workforce enabling them to enhance skills and improve employability.
  • Creating alternative job opportunities in textile production (i.e., outside of agriculture) to cease urban migration.
  • Building an ancillary network of cotton suppliers and distributors, dye manufacturers, and transporters thus fostering regional development.
  • Empowering women and marginalised groups financially and socially.

Also read: Small scale enterprises in Visakhapatnam

Small scale business in India

2. Regional infrastructure development

When it comes to reginal development and bringing balance to rural economies, the importance of small scale industries is prominent. Small businesses often flourish in rural areas, making it possible for the rural economy to thrive. Unlike large scale industries and businesses that have urban establishments, small businesses are often set up and operate out of rural or semi-urban areas.

This proves advantageous as:

  • Set up expenses and operating costs are low
  • Manpower is available locally, e.g., a dairy-processing unit where local farmers can process their products and sell
  • Economic diversification is possible by creating business opportunities outside agriculture, e.g., food processing units, packaging centres, etc.
  • Government schemes and initiatives can be availed
  • Production timelines are short leading to quick income generation and flow
  • Infrastructure development, regional balance and development takes place, e.g., when a region has a cluster of small businesses, there will be investments made for building roads (e.g., the PMGSY programme), telecommunications, electricity availability, transport systems, etc.

Also read: Role of MSMEs in rural development

3. Economic diversification

Of the many advantages of small scale industry, economic diversification is one of the most visible outcomes.

  • Small businesses produce a wide variety of goods and services. This allows them to often offer unique products and stay competitive. For example, a coffee grower can produce a unique coffee blend that will cater to a niche audience cohort.
  • SMEs help to create economic opportunities for other small businesses. For example, for a small paper manufacturer, the produce might not be enough to sell to a large business. However, they can easily sell to a small business, who can make wrapping paper, paper bags, envelopes, notebook and other stationery items to sell.

Small scale businesses are often flexible and can be started with low investments. As such it is possible for them to diversify and adapt to market needs and customer preferences. For instance, a food-processing unit can make different products such as jams, papads, pickles, sauces etc. from locally available products.

Also read: Low investment business ideas below ₹10 lakhs

Role of small businesses in rural employment

4. Innovation and entrepreneurship

A key role of small scale industries is to drive innovation and entrepreneurship to build a resilient and sustainable economy. There are several government schemes for new entrepreneurs and startups such as the MSME Innovative scheme that has been designed to provide them with the finance, training and opportunities to start and grow their small businesses.

Since it takes low investments to start a small business, it encourages many aspiring entrepreneurs to start their own business and experiment with ideas. For instance, an entrepreneur in logistics can offer dropshipping services to customers. It’s niche, caters to specific consumer demands, and can be started with low investments.

Moreover, small businesses are more flexible when compared to large enterprises and can adapt to changing market needs. This naturally encourages a culture of change and innovation.

For instance, post the pandemic, many coaching and learning institutions have adopted an online model. This enables them to keep their businesses running and cater to students when they cannot be present physically. This has also opened up new markets and opportunities. For example, a yoga instructor providing online classes can teach students from any geography.

Also read: Top 10 business ideas in Mumbai and low investment business ideas in Delhi

5. Export opportunities

The MSME sector’s contribution to India’s GDP, employment generation and exports is significant. There are several noted products – carpets, textiles, vegetable products, handicraft, among others that are exported worldwide. In fact, over 40% of the total exports done by India is by small scale industries, driving revenue and forex reserves.

In several cases, clusters can be formed to produce a specialised product for export. For example, several handloom weavers from a specific region can come together can export their range of apparel/garments under a single brand. This will enable them to have a wide product range, market and promote themselves better, gain from shared resources and expertise, stay competitive and build global recognition.

The government also encourages the same and has introduced export promotion schemes and programmes.

Future of small scale industries in India

The advantages of small scale industry development are many. From economic growth to fostering regional development, SMEs play a pivotal role in shaping the future. They create livelihood opportunities, cater to niche markets and products, drive innovation and empower rural communities.

Moreover, with the advent of eCommerce and digitalisation for MSMEs, their reach has expanded to global markets fostering new trade opportunities. As India continues to develop and grow, the importance of small scale industry and businesses will keep increasing making them a contributor in building a resilient, growth-driven economy.

At Tata nexarc we have built a platform to enable SMEs to find the right opportunities to grow their business. Businesses can buy steel from trusted sellers, find logistics services from leading logistics providers, and other solutions to help them in their business growth journey. To start, register today.

Sohini Banerjee

Sohini is a seasoned content writer with 12 years’ experience in developing marketing and business content across multiple formats. At Tata nexarc, she leverages her skills in crafting curated content on the Indian MSME sector, steel procurement, and logistics. In her personal time, she enjoys reading fiction and being up-to-date on trends in digital marketing and the Indian business ecosystem.