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 4th 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 2007-08 total earnings from foreign trade exceeded U$ 120 billion and Indian foreign

Electronic copy available at: http://ssrn.com/abstract=1410604

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 • Estimated No. of Units 128.4 Lakh
sector was not open for a long time and Indian
• Employment 312.52 Lakh
entrepreneurs have had little access to capital, 39%
Share in Industrial Value
but now it is true that in the last few years
Added
several venture funds have entered the Indian
• Share in Total Exports
Market. Another plus point for our country is 45%
Direct
that we are blessed with Small Industries 34%
Overall
Services Institute (30), Branch SISI (28), Sub
Total Number of Items
contract Exchanges for Ancillary 8000
Produced Over
Development SCX(61), Regional testing
Centers(4), Field testing Stations, Financial • Number of Reserved
Items 239
Institutions, which are backed by Central
Government and State Governments. It is
even evident form the table no-4, that how we Source: Indian economic
are marching towards development of the statistics:2007(Table-1)
sector and its impact on economy as far as no
of units, production, Employment and exports
are concerned.

Sickness in the SSI Sector

S.No Reasons for Sickness Total SSI Registered SSI Unreg SSI
Sector Sector Setor
1 Lack of Demand 66% 58% 69%
2 Shortage of Working 46% 57% 43%
Capital
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

Electronic copy available at: http://ssrn.com/abstract=1410604

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

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.
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
 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 Year Total Industrial Gross
concerned. Over the last five decades, the Production Domestic
small scale has acquired a place of Product
prominence in the economy of the country. It 2002-2003 38.89% 5.91%
has contributed significantly to the growth of 2003-2004 38.80% 5.82%
the Gross Domestic product , employment 2004-2005 40.01% 6.02%
generation and exports. The sector now
2005-2006 42.08% 6.40%
includes not only the SSI units but also the
2006-2007 44.96% 7.44%
small service and business enterprise
Source: Economic Survey 2006-
(SSSBEs) and is thus referred as small
07(Table-3)
enterprise sector. During 2002-03 to 2006-07
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.

Year No of Units (in Lakhs) Production Employment Exports(Rs in

(Rs.Crore at (In Lakhs) Crores)
Registered Un- Total 2001-02 prices)
Registe
red
2002-03 16.03 93.46 109.49(4.1) 3,06,771(8.7) 263.68(4.5) 86103(20.7)
2003-04 17.12 96.83 113.95(4.1) 3,36,344(9.6) 275.30(4.4) 97,644(13.5)
2004-05 18.24 100.35 118.59(4.1) 3,72,938(10.9) 287.55(4.5) 1,24,417(27.4)
2005-06 19.30 104.12 123.42(4.1) 4,18,884(12.3) 299.85(4.3) 1,50,242(20.8)
2006-07 20.32 108.12 128.44(4.1) 4,71,663(12.6) 312.52(4.2) NA

Source: Office of the development Commissioner (Table-4)

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.
3. 34% of national export.
4. 7% of Gross Domestic Product.
5. Employment to 294.41 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
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., 1985. 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. 81-85

Acs J. Zoltan, How is Entrepreneurship good for Economic Growth?, Progress Foundation,
Zurich: Switzerland:Oct 2007.

Manimala J. Mathew, Entrepreneurship Education and Training in India: Global Education,

University of Essex, Scotland:2006