The small-scale and cottage industries face a number of problems. These are discussed hereunder:
Problems
1. Problem of Finance:
Lack of finance is the main obstacle for the development of small-scale industries. The financial problem of small industries is a part of the wider problem of capital scarcity in the economy as a whole and it is partly due to the peculiarity of small industry organisation.
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The creditworthiness of small borrowers is generally weak and therefore they face reluctant creditors who may be induced to lend only at a very high rate of interest.
In the rural areas, no serious attempt has been made to set-up any financial agencies to meet the genuine industrial needs.
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The rural artisans running cottage industries either run their business with whatever little capital they possess or take credit from Mahajans at a very high rate of interest.
The small-scale industries are somewhat better placed. The main institutional sources for small industries are the State Financial Corporations and Commercial Banks.
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Credit provided by banks to small-scale industries is treated as credit to priority sector. Commercial Banks are required to lend 40 per cent of their total loans to priority sector of which 18 per cent is in the form of direct agricultural advances and the rest to small-scale industry, small business, small transport operators, indirect agricultural loans etc.
As at the end of March, 1991 public sector bank credits to small-scale industrial sector formed 15.7 per cent of net Bank credit amounting to Rs. 17,151 crore. The amount of financial assistance sanctioned by the State Financial Corporations to small-scale industries was Rs. 1,301.9 crore and the amount disbursed was Rs. 923.6 crore during 1990-91.
2. Problem of Raw Materials:
Another major problem of small-scale industry is the procurement of raw materials. Scarcity of raw materials means a waste of productive capacity of the economy and a loss for the unit. Due to scarcity of resources, competition has increased and those small units compete with the large scale industries have suffered severely.
Owing to scarcity of resources, small industries cannot utilise their capacity fully. For instance, percentage utilisation of capacity was only 47 in mechanical engineering industries, 50 in electrical equipment, 58 in automobile ancillary industries, 55 in leather products and only 29 in plastic products. If on an average, we assume 50 to 60 per cent capacity utilisation we can perhaps say that 50 to 40 per cent of capacity was not utilised.
3. Problem of Marketing:
One major problem of small- scale industries is marketing. These units often do not possess any marketing organisation and consequently their products compare unfavourably with the quality of the products of large-scale industries.
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Therefore they suffer from a competitive disadvantage vis a-vis large-scale units. The inability to procure customers from distant markets compels them to restrict their scale of operation and forgo economies of scale. The National Small Industries Corporation helps the small-scale units to secure government orders and developing export markets.
4. Problem of High Rate of Mortality:
One major problem is the high rate of mortality among small industries. Most of the small units are marginal buyers of inputs and marginal sellers of output.
Any unfavourable change in the input or output situation tends to throw a number of existing units out of existence. Sickness among small units is a very serious problem.
In addition to these problems, the small-scale industries face a few other problems such as shortage of power, inefficient management, technological obsolescence, inability to respond to changes in tastes and fashions of the people.