Small-scale industries, small sector industrial policy and the Abid Hussain Committee

1. Meaning and classification

Cottage industries are carried on by artisans in their homes with family labour, simple tools and local materials (handloom, pottery, handicrafts, khadi). Small-scale industries use hired labour, power and some machinery, and are defined by investment limits. Since the Micro, Small and Medium Enterprises Development Act, 2006, they are grouped as MSMEs. From 1 July 2020 a composite criterion of investment in plant and machinery and annual turnover applies, and the limits were raised with effect from 1 April 2025 (notification S.O. 1364(E) of 21 March 2025):

Manufacturing and service enterprises are now treated alike, export turnover is excluded from turnover, and enterprises register online on the Udyam portal.

2. Role of small-scale industries

• Employment: labour-intensive, they create far more jobs per unit of capital than large industry; second only to agriculture as an employer.
• Equitable distribution of income and wealth, and prevention of concentration.
• Decentralised and balanced regional development; industry in small towns and villages, less migration to cities.
• Mobilisation of small savings and local skills, and entrepreneurship.
• Exports: a large share of manufactured exports (garments, leather, handicrafts, gems, engineering goods).
• Ancillary role as suppliers of parts to large industry.
• Short gestation: quick output with little capital and imported technology.

3. Problems of cottage and small-scale industries

1. Finance: inadequate and costly credit, collateral demands by banks, dependence on moneylenders; shortage of working capital.
2. Delayed payments by large buyers and government.
3. Raw materials: scarcity, poor quality and high prices.
4. Marketing: no brand, weak bargaining power, dependence on middlemen.
5. Outdated technology and low productivity.
6. Competition from large industry, imports (especially after the WTO and free trade agreements) and e-commerce.
7. Infrastructure: erratic power, poor transport, lack of industrial sheds.
8. Lack of skilled labour and managerial ability.
9. Regulatory burden: many laws, inspections and returns.
10. Industrial sickness: a large number of units become sick or close.

4. Small sector industrial policy

• 1948 and 1956 Resolutions: recognised the role of cottage and small industries; Khadi and Village Industries Commission (1956/57), Small Industries Development Organisation, and the reservation of products for exclusive manufacture by small units (begun in 1967).
• 1977 policy: the tiny sector defined; District Industries Centres (1978) as a single window at district level.
• 1991 small sector policy (August 1991): focus shifted from protection to competitiveness; 24 per cent equity by other undertakings; factoring services; the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.
• SIDBI (1990) as the apex bank for small industry.
• Credit Guarantee Fund Trust for Micro and Small Enterprises (2000) for collateral-free loans.
• MSMED Act, 2006: legal framework, definitions, the MSME Board, and protection against delayed payments (interest at three times the bank rate after 45 days; Micro and Small Enterprise Facilitation Councils). The Ministry of MSME was formed in 2007.
• Dereservation: reserved items were removed in stages; the last were dereserved in 2015.
• Recent schemes: PMEGP (2008), MUDRA loans (2015), the TReDS platforms for bill discounting, Udyam registration (2020), and the 2025 revision of limits.

5. The Abid Hussain Committee (1997)

The Expert Committee on Small Enterprises, chaired by Abid Hussain, was appointed by the Ministry of Industry and submitted its report in January 1997. Its view was that small enterprises would survive liberalisation only by becoming competitive, not through protection. Main recommendations:

1. Abolish product reservation, which had kept units small and technically backward, and replace it with positive promotional measures.
2. Raise the investment ceiling for small-scale units (to Rs. 3 crore) and for tiny units, so that units could adopt modern technology and grow; the government raised the limits in 1997 (the small-scale limit was later reduced to Rs. 1 crore in 1999).
3. Credit: identified credit as the most serious constraint; recommended larger and timely credit flow, specialised bank branches, credit rating, simplified procedures, and a stronger SIDBI.
4. Technology upgradation: technology development and modernisation funds, tool rooms, testing and quality certification.
5. Marketing support: sub-contracting exchanges, links with large firms, export promotion, government purchase preference.
6. Infrastructure: industrial estates and clusters with common facilities.
7. Deregulation and de-bureaucratisation: reduce inspections, allow self-certification, simplify labour and tax compliance for small units.
8. A separate law for small enterprises to give them a coherent legal framework; this was achieved by the MSMED Act, 2006.
9. Rehabilitation of sick units and an exit policy.
10. Skill development and entrepreneurship training.

Evaluation. The committee moved small industry policy from protection to promotion. Its recommendations on dereservation, credit, technology and a separate statute were implemented over the next two decades; its view that small units must compete rather than be sheltered became official policy.

How this is examined

January/February 2025: “Discuss the major recommendation of Abid Hussain Committee Report on small scale sector” (10). June/July 2025 (80 marks): “Write short note on Abid Hussain Committee” or “Problems of cottage and small scale industries in India” (6). For the essay, give the background in three lines, the ten recommendations, and a closing evaluation.