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Corporate Finance & Small-Scale Industries

23 Sep 2021
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Progressing in our MBA I was introduced to the subject of corporate finance. In that I learned that how businesses are started from scratch, how do they raise their capital, and how they are evaluated. While studying all this I was struck with the thought that there are many small-scale businesses which don’t operate on these conventional ways but are doing exceptionally well too. I got more inquisitive by this thought and desired to know more. While researching for the same I got to know the magnitude of all these small-scale industries and how vital they are.

Small scale industries are those that create, produce, and provide services with the use of small machinery and less manpower. These businesses must follow the rules put forth by the Indian government. When it comes to job creation and economic progress, these SSIs are a big contributor to the country. SSI and agro-industries have now become major contributors to national wealth, and their importance is growing.

Apart from providing job opportunities, they now occupy a significant share of the worldwide market, since the majority of exports, such as tea, rice, and other agricultural products, are dependent on them. After a certain point, these SSI are confronted with massive market opposition, necessitating some significant changes. Hence, some of the challenges faced by the SSI are:

Capacity utilization

The capacity utilization in many Small-Scale Industries is less than half of the installed capacity. Almost half of the equipment is still inactive. Capital is stranded unnecessarily, and idle gear takes up space and requires maintenance, resulting in higher expenses.

Financing Issues

A lack of finances is a challenge that many small businesses confront. They are unable to raise funds from the domestic capital market. Because of their limited capital, they are also unable to access international markets by issuing ADRs (American Depository Receipts), GDRs (Global Depository Receipts), and other derivatives. Various processes and formalities are required by banks and financial organizations. Even after long wait times, the finances available are insufficient.

Shortage of Raw Material

The needed amount and grade of raw materials are often not accessible. Because there is a greater demand for raw resources than there is supply, raw material prices are extremely high, driving up the cost. Raw material scarcity leads to idle capacity, low output, inability to satisfy demand, and customer loss.

Issues pertaining to working capital

Many Small-Scale Industries face the problem of inadequate working capital. Their output surpasses demand due to a lack of market understanding, and capital is trapped in unsold inventory. They don’t have enough money to cover operating costs and manage the company

The multiplicity of labour laws

One of the benefits of Small-Scale Industries is that they are labour-intensive and may give employment to a large number of people. However, the complexity of labour regulations, the necessity to keep several records (PF, ESI, Muster Rolls, etc.), fines and penalties for small infractions, and other factors put Small Scale Industries at a significant disadvantage.

Inadequate marketing support

Small-scale businesses lack marketing expertise in terms of rivals and consumer preferences. Their market is relatively limited since their manufacturing volume is modest and they cannot fulfil the demand for huge amounts.

Poor industrial relations

Because their sales and profitability are low and uncertain, many small-scale industries are unable to match the salary and perks given by major corporations. This can cause labour issues. Employees struggle for better pay and benefits than the SSI program can give. This might result in strikes, leading to property damage in the event of employee violence, production losses, and so on.

Despite these issues, the SSI in India holds great command over the Indian markets. They have contributed significantly to economic progress, but they have not yet reached their full potential. They have a lot of issues with how they operate, and a lot of small businesses are sick. To enable the SSI sector to assume its proper place as the development engine of the Indian economy, it is important to assist, educate, and empower MSMEs so that they may make the best use of human and financial resources to achieve success. The SSIs must be educated and informed about current events throughout the world, as well as assisted in acquiring the skills necessary to stay up with them.

Pallavi Panjabi
PGPM – Human Resources, Class of 2022