ECONOMIC DEVELOPMENT IN INDIA ( Role of Small Scale Enterprises)

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1 ECONOMIC DEVELOPMENT IN INDIA ( Role of Small Scale Enterprises) Singh Inderpal & Saini Amarjit Economic Development, achieved largely through productivity growth, which is very important to both developed and developing nations. However, even though we know that balanced and demand pull productivity leads to improved economic outcomes i.e, higher income, more alternative choices, better quality products and moreover level of satisfaction among consumers. India s economic development strategy immediately after independence was primarily based on Mahalanbosis model, which gave preference to the investment goods or capital goods with secondary importance to the services and household sector. Over the time, India created a large number of government institutions to meet the objectives of growth with equity via supporting ongoing entrepreneurial projects and to encourage new and innovative entrepreneurial proposals. This active and dominant participation by the Government in economic activities results in the creation of a protected, highly regulated and healthy economic environment over the time, but we can t ignore a dramatic increase in corruption in the economy and sectoral imbalances, with shortage in some sectors and surplus in others. (Alluwalia, 1985) Entrepreneurial activities and projects are highly commended for developing countries and country like India can generate additional economic growth and maintain the present level by fostering entrepreneurial activity with in its border. In this paper we examine, how entrepreneurial projects boost the economic growth by paying our attention towards microeconomic and macroeconomic aspects. The plan of the paper is as follows. Section-I jot down the factors influencing entrepreneurial development and factors responsible for hampering it down in India. Section-II compares entrepreneurial activity in developed and developing countries. Section-III helps in knowing the encouraging factors behind the self-employment. Section-IV emphasize on addressing, how entrepreneurship good for economic growth in India. Finally Section V summarizing the main findings and concludes the paper. I-Push and Pull Factors The progress of Indian Economic development from 1947 to the present, provides evidence that individual do respond to incentives in their pursuit of self-survival and accumulation of wealth. Further the nature of this response depends on the economic climate. So many factors in our country posing rosy picture for the success of entrepreneurial projects. As far as Indian growth story is concerned, India is one of the worlds fastest growing economy over the last decade with consistent growth in production and domestic demand and presently ranked 4 th in a PPP comparison. Over the last decade the Indian economy has transitioned from an agrarian economy to a predominately service based economy where, business services provider, trade, hotel, banking, insurance, financial services and communication sector registered robust growth. India s growing participation in international trade opens the door for new and innovative ideas. In the FY total earnings from foreign trade exceeded U$ 120 billion and Indian foreign Electronic copy available at:

2 trade index has tripled over the last decade, where exports have grown by 20.8%. Entrepreneurial projects require vocational training and education and we registered significnat rise in literacy rate. By the report of GEM, India s new startups on average basis up to 98% are small and level of entrepreneurial activity growing from 11.55%(2002) to 17.88% (2005) and to 24%(2008). Basic and prime need for start-up and success SSIs in India: A Look depends upon money and Indian financial sector was not open for a long time and Indian entrepreneurs have had little access to capital, but now it is true that in the last few years several venture funds have entered the Indian Market. Another plus point for our country is that we are blessed with Small Industries Services Institute (30), Branch SISI (28), Sub contract Exchanges for Ancillary Development SCX(61), Regional testing Centers(4), Field testing Stations, Financial Institutions, which are backed by Central Government and State Governments. It is even evident form the table no-4, that how we are marching towards development of the sector and its impact on economy as far as no of units, production, Employment and exports are concerned. Sickness in the SSI Sector Estimated No. of Units Employment Share in Industrial Value Added Share in Total Exports Direct Overall Total Number of Items Produced Over Number of Reserved Items Source: Indian economic statistics:2007(table-1) Lakh Lakh 39% 45% 34% 8000 S.No Reasons for Sickness Total SSI Sector Registered SSI Sector Unreg SSI Setor 1 Lack of Demand 66% 58% 69% 2 Shortage of Working Capital 46% 57% 43% 3 Non-availability of 12% 12% 12% Raw Material 4 Power Shortage 13% 17% 12% 5 Labour Problems 5% 6% 4% 6 Marketing problems 36% 37% 36% 7 Equipment Problems 11% 9% 12% 8 Management Problems 4% 5% 3% *The total in each column will exceed 100%, as some units have reported more than one reason: Source: Indian Economic Statistics(Table-2) But, here we cant ignore the dark side and challenges we are facing like capital shortage v/s abundant labor, growing unemployment, jobless growth and decline in labor sensitivity of production. Secondly, educated mass v/s unemployment. Thirdly, it is evident from table no-2 sickness in Indian small scale industry, vulnerabilities of New start-ups, where two-thirds of all 239 Electronic copy available at:

3 new ventures perish in the first five years, liability of newness and smallness, traditional Indian business wisdom and last but not the least present economic crisis and slowdown wrapping up the success story. II Entrepreneurial Activity in Developed and Developing countries Level of entrepreneurship varies from country to country. Entrepreneurship is a social phenomenon, which is influenced by different economic and non - economic conditions. Economic conditions include: access to profits, the existence of leading teams, opportunities, chances, capital and human resources, entrepreneurial education, etc. Non-economic factors can be grouped as non-economic motives (the need for achievement, the need for independence, dissatisfaction with the current job, the need for power and control over the situation), values (ethics, personal opinion, optimism, responsibility, honesty, rationality, etc.) and environmental factors (economic stability, open economy and free market, private ownership system, encouraging economic policy, developed entrepreneurial culture). The overall level of entrepreneurial activity for each country is represented by the TEA (Total Entrepreneurial Activity) index. The major and important point behind the entrepreneurial activities is the type of entrepreneurial activity. It is necessary to note down that entrepreneurial activity in developed countries are opportunity cost based whereas in the developing countries like India these are necessity based. In terms of opportunity entrepreneurship the leading countries are Peru, Ecuador, Uganda, Jordanian, New Zealand, Iceland, Australia, USA, Argentina and Canada. As for necessity entrepreneurship the leading countries are mainly the less developed ones, such as Uganda, Peru, Ecuador, Argentina Poland, Jordan, and South Africa and India. Northwestern European countries have a very low percentage of necessity entrepreneurship. According to the general TEA index classification, India ranked rabove average necessity based country (Figure 1). Considering the relationship between necessity-based and opportunity-based TEA index, the largest number of people are forced into entrepreneurial career in South Africa, Brazil and Uganda, in Europe we can list the following countries: Croatia, Hungary and Poland. The highest percent of opportunity-based entrepreneurial activity can on the other hand be found in Denmark, Iceland and Spain.. Figure 1: Total Entrepreneurial Activity (TEA) Medium and High Growth

4 When choosing or thinking about entrepreneurial career, people respect opportunity costs. In less developed countries, it is obvious that potential entrepreneurs cannot loose a lot, especially if they are unemployed and self-employment is the only chance for making a living. In developed countries (e.g. Portugal, Italy, Belgium, Japan, US and Europe), people compare advantages of being employed with advantages of being self-employed and they do not want to take risks. In these countries, Welfare state discourages early-stage entrepreneurial activity, especially necessity-based. High Total Entrepreneurial Activity Index in less developed countries is often reached through significantly high necessity-based entrepreneurial activity as the consequence of low standard of living, low employment protection index and poor chance for making a living. Rather low TEA index in developed countries, accompanying higher GDP p.c. (up to USD 30,000) indicates better living conditions and welfare state, which guarantee social and economic security to inhabitants. People are not forced into entrepreneurship to make a living. Developed and rich countries express high TEA index, which is achieved mostly by having high rates of opportunity-based entrepreneurship. Countries having GDP p.c. more than USD 30,000, have already established conditions enabling entrepreneurial development among start-ups, as well as among dynamic enterprises. Potential entrepreneurs in these countries can afford risks, neither individuals nor society face a lack of capital. Relatively high TEA indexes in developed countries are achieved mostly with high levels of opportunity-based entrepreneurial activity. Opportunity-based enterprises are more stable, the mortality between them is lower, and they usually grow fast Moreover, highly developed countries mostly promote entrepreneurship, spread entrepreneurial culture among their citizens and foster fast-growing, knowledge-based enterprises to compete even more successfully on the global market. Considering the facts mentioned above it is not wise just to promote entrepreneurship and to force people into entrepreneurial career. Having millions of nascent entrepreneurs involved in business due to necessity and having little chances to survive and growth does not contribute to economic growth. Knowledge-based economy needs new ideas to be commercialized; it needs dynamic, knowledge based enterprises.(lal, K Anil, 2005) But the countries like India promotes entrepreneurial activities and encourage FDI for these activities in order to create plate form for those who want to start their own business. India growth prospect is also the temptation for foreign direct investment and it is obvious developing countries require generation of capital and the mobilization of resources depends upon the quantity of entrepreneurial activities undertaken by these countries. Countries which don t have any space to invest their surplus, wants to invest their money in those countries which provides them healthy avenues of investment and developed countries wants to start their opportunity based entrepreneurship projects not in their countries but in developing ones by investing directly or indirectly III Factors behind the self-employment in India A major debate regarding decline in employment, particularly in the organized government sector, post-liberalisation, has concluded that unemployment has increased after the 1990s. And we have seen this manifest in various forms in the Indian blogosphere in debates on the effectiveness of globalization in removing poverty and suchlike. This debate does not take in to account the fact that India is a country of the self-employed, and not of employees.

5 Our economy is not that of wage earners and shareholders. A significant portion of the economy consists of the self-employed who are both wage-earners and shareowners. The share of the proprietorship and partnership forms of organizations in the national income is 35 per cent, that of corporate around 15 per cent, of government around 25 per cent, and agriculture around 25 per cent. Combine agriculture and the self-employed in industry and service sectors, nearly 60 per cent of the national income is generated by the self-employed and does not fall in the paradigm of either capitalism or socialism (Mathew. J, Mainimala 2006). The large corporates are increasingly resorting to `outsourcing their regular manufacturing activities to small and medium enterprises. Earlier companies in soap powder and biscuit and shampoo categories did it, but now firms in the consumer durables sector as also in technology and heavy engineering `outsource.hence employment is growing. Not in corporates but in the self-employed segment. Self-employment is the answer to the Western choice of capitalism and socialism. Perfect. But do our policy makers know this caught as they are between providing quota at various private companies or regulating courier companies ( there is a lot of casual labour/contractors/self employed at both these places). It is interesting that the largest contributors to the national income and employment and capital providers are not talked about or considered in policy formulations. They are often dismissed as `unorganized or `residual sectors. India is one of the fascinating countries where more than 60 per cent of the activities are called `residual sector. The opposing groupings, of the globalizes and the Left intellectuals, interestingly support the slow death of the self-employed group. Not only that, we seem to be bent on creating a huge mass of unemployable persons with the education having no links to trade and craft. The globalizer would like the entire country to be a giant corporation, FDI funded and owned, where every one is a wage earner. For the Left thinkers it is a historical, and an inevitable, process wherein the small entrepreneurs are destroyed to become workers. And jobs in public sector units are more important than the livelihood of millions of street-corner vendors. Due to faulty policies, supported by the metropolitan elite and the Marxist intellectual, we may end up having a huge mass of unemployable persons who are currently self-employed. The policies to be adopted in the service sector in retail trade, restaurants, construction, road transport, etc., are going to require massive employment guarantee schemes (EGS) even in the urban areas, which will make the state wither away. The self employed really are the backbone of the nation, starting from the small tea shop at construction sites to scrap dealers to vegetable vendors and going all the way up to hotshot entrepreneurs. This is something we need to encourage, since it has been shown time and again that private entrepreneurship and initiative is, really, one of the big things about India. IV How SME s good for Economic Growth in India How is entrepreneurship good for economic growth? This question would seem to have a simple answer: Entrepreneurs create new businesses, and new businesses in turn create jobs, intensify competition, and may even increase productivity through technological change. High measured levels of entrepreneurship will thus translate directly into high levels of economic growth. However, the reality is more complicated. If, by entrepreneurship, one allows

6 Year inclusion of any type of informal self-employment, then high levels of entrepreneurship may actually mean either that there are substantial bureaucratic barriers to formally creating a new business, or simply that the economy is creating too conventional few wage-earning job opportunities. Under these circumstances, we might reasonably hypothesize that high levels of entrepreneurship would correlate with slow economic growth and lagging development. Moreover, the relationship between necessity entrepreneurship and economic development is most likely negative in low income countries while the relationship between entrepreneurship and economic development in high income countries is mostly likely positive(joltan K. ACS,2007). This must be further balanced by the fact that some low income countries like India and China have high levels of opportunity entrepreneurship, at least in certain part of the country, and countries like Japan have very low levels of opportunity entrepreneurship and low The small scale sector in India has particularly emerged as a vibrant and dynamic segment of the economy. It is a matter of pride that India has a distinct position of its own among the developing countries, particularly in the area of small scale industries, India has a vast reservoir of scientific and technical manpower, occupying third position Contribution of SSI in the industrial production and GDP in the world as far as technical man power is concerned. Over the last five decades, the small scale has acquired a place of prominence in the economy of the country. It has contributed significantly to the growth of the Gross Domestic product, employment generation and exports. The sector now includes not only the SSI units but also the small service and business enterprise (SSSBEs) and is thus referred as small enterprise sector. During to sector has registered continuous growth in the number of units, production, employment and even exports. During this period the average annual growth in the number of units was around 4.1%, while employment grew by 4.2% annually. Further, the average annual growth in production is at 12.6%. SME registered 20.8% growth in terms of Exports. Performance of Small Scale Enterprises. No of Units (in Lakhs) Registered Un- Registe red Total Production (Rs.Crore at prices) Employment (In Lakhs) Exports(Rs Crores) (4.1) 3,06,771(8.7) (4.5) 86103(20.7) (4.1) 3,36,344(9.6) (4.4) 97,644(13.5) (4.1) 3,72,938(10.9) (4.5) 1,24,417(27.4) (4.1) 4,18,884(12.3) (4.3) 1,50,242(20.8) (4.1) 4,71,663(12.6) (4.2) NA Year Source: Office of the development Commissioner (Table-4) Total Industrial Production Gross Domestic Product % 5.91% % 5.82% % 6.02% % 6.40% % 7.44% Source: Economic Survey (Table-3) in

7 The small enterprises sector, however faces several problems, which hamper it achieving it in achieving its full growth potential. Some of the major problems faced by the sector are access to timely and adequate credit, technological obsolescence, infrastructural bottlenecks, marketing constraints and plethora of rules and regulations. Findings India is having good push factors for entrepreneurial development like healthy and encouraging GDP numbers between (7-8%), growth in number of Units(4.1%), employment(4.2%) and Exports(20.8%). Level of entrepreneurial activity in India (TEA) stands at above average 7%. We are facing the vulnerabilities of New start-ups, where liability of newness/smallness and moreover traditional Indian business wisdom causes problems for SSIs. While considering the necessity based and opportunity based TEA index, the largest number of people are forced to being self-employed, because they don t have any kind of job. The relationship between necessity entrepreneurship and economic development is most likely negative in low income countries, while the relationship between entrepreneurship and economic development in high income countries is mostly likely positive. India is having high level of opportunity entrepreneurship, at least in certain part of country, even though the level of income in India is very low. India s economic development strategy immediately after independence was based on the Mahalanobis Model, which gave preference to the Investment goods/capital goods, but now SME activities has transitioned from an agrarian to a predominately service based activities. More over, the SSI sector accounts for 1. 98% new start-ups in India are small 2. 40% of value added in the manufacturing sector % of national export. 4. 7% of Gross Domestic Product. 5. Employment to lakh persons. 6. Production of over 8000 items in the Industrial Sector. Less developed countries need to strengthen their Small and Medium Sized sector, before focusing on the entrepreneurial framework conditions, since this is the first step toward development. These policies are focused at firms not at individuals. These include financial assistance, management assistance, training and reducing regulatory burdens. Part of the goal should be to reduce the number of self-employed and strengthen the existing Small and Medium Sized Sector. Underdeveloped countries should be focuses on bringing in direct foreign investment that would employ more of the people leaving agriculture and self-employment. A strong commitment to education and training, both at the elementary and secondary level are important. Those with less education in developing countries will end up in necessity entrepreneurship. The Indian economy provides a revealing contrast between how individuals react under a government-controlled environment and how they respond to a market-based environment. The evidence presented here suggests that recent market reforms encouraging individual enterprise have led to higher economic growth in that country. The reasoning here is

8 not new, although it is refreshing to discover that this tried-and-true reasoning applies to developing as well as to developed nations. Specifically, reliance upon a free market, with its emphasis upon individual self-interest in survival and wealth accumulation, can yield a wide range of economic benefits. In India those benefits have included, among other things, increased economic growth, reduced inflation, a smaller fiscal deficit, and higher inflows of the foreign capital needed for investment. REFERENCES Ahluwalia, I.J., Industrial Growth in India: Stagnation Since the Mid- Sixties (London, Oxford University Press). Lal, K Anil and Clement W. Roland. Economic Development in India; The role of Individual Enterprises, Asia-pacific Development Journal, Vol 12. No 2, December 2005, pp Acs J. Zoltan, How is Entrepreneurship good for Economic Growth?, Progress Foundation, Zurich: Switzerland:Oct Manimala J. Mathew, Entrepreneurship Education and Training in India: Global Education, University of Essex, Scotland:2006