Agriculture sector in India

Agriculture and Indian economy

Agriculture is the most important sector of Indian Economy. Indian agriculture sector
accounts for 18 per cent of India's gross domestic product (GDP) and
provides employment to 50% of the countries workforce. India is the world’s largest
producer of pulses, rice, wheat, spices and spice products. India has emerged as the second
largest producer of fruits and vegetables in the world [1]. According to the data provided by
Department of Economics and Statics (DES) the production of food grains for the year 2013-
2014 is 264 million tons which is increased when compared to (2012-2013) 257million tons.
This is a good symptom for the Indian economy from the agriculture sector. India remains
among main three as far as production of different agricultural things like paddy, wheat,
pulses, groundnut, rapeseeds, natural products, vegetables, sugarcane, tea, jute, cotton,
tobacco leaves and so on.

Indian is an agriculture based country, where more than 50% of population is depend on
agriculture. This structures the main source of income. The commitment of agribusiness in
the national income in India is all the more, subsequently, it is said that agriculture in India is
a backbone for Indian Economy. The contribution of agriculture in the initial two decades
towards the total national output is between 48% and 60%. In the year 2001-2002, this
contribution declined to just around 26%.Agricultural exports constitute a fifth of the total
exports of the country. In perspective of the overwhelming position of the Agricultural
Sector, gathering and support of Agricultural Statistics expect incredible significance.
According to the fourth Advance Estimates of Production of food grains for 2013-14,
aggregate food grain production is assessed to be 264.77 million tons (MT).

Role of Agriculture in Indian Economy

1. Contribution to National Income:
From the very beginning, agriculture is contributing a major portion to our national income.
In 1950-51, agriculture and allied activities contributed about 59 per cent of the total national
income. Although the share of agriculture has been declining gradually with the growth of
other sectors but the share still remained very high as compared to that of the developed
countries of the world. For example, the share of agriculture has declined to 54 per cent in
1960-61, 48 per cent in 1970-71, 40 per cent in 1980-81 and then to 18.0 per cent in 2008-09,
whereas in U.K. and U.S.A. agriculture contributes only 3 per cent to the national income of
these countries.

2. Source of Livelihood:
In India over two-thirds of our working population are engaged directly on agriculture and
also similarly depend for their livelihood. According to an estimate, about 66 per cent of our
working population is engaged in agriculture at present in comparison to that of 2 to 3 per
cent in U.K. and U.S.A., 6 per cent in France and 7 per cent in Australia. Thus the
employment pattern of our country is very much common to other under-developed countries
of the world.

3. Source of Food Supply:

Agriculture is the only major source of food supply as it is providing regular supply of food
to such a huge size of population of our country. It has been estimated that about 60 per cent
of household consumption is met by agricultural products.

4. Role of Agriculture for Industrial Development:

Agriculture in India has been the major source of supply of raw materials to various
important industries of our country. Cotton and jute textiles, sugar, vanaspati, edible oil
plantation industries (viz. tea, coffee, rubber) and agro-based cottage industries are also
regularly collecting their raw materials directly from agriculture.

About 50 per cent of income generated in the manufacturing sector comes from all these
agro-based industries in India. Moreover, agriculture can provide a market for industrial
products as increase in the level of agricultural income may lead to expansion of market for
industrial products.

5. Commercial Importance:
Indian Agriculture is playing a very important role both in the internal and external trade of
the country. Agricultural products like tea, coffee, sugar, tobacco, spices, cashew-nuts etc. are
the main items of our exports and constitute about 50 per cent of our total exports. Besides
manufactured jute, cotton textiles and sugar also contribute another 20 per cent of the total
exports of the country. Thus nearly 70 per cent of India’s exports are originated from
agricultural sector. Further, agriculture is helping the country in earning precious foreign
exchange to meet the required import bill of the country.

6. Source of Government Revenue:

Agriculture is one of the major sources of revenue to both the Central and State Governments
of the country. The Government is getting a substantial income from rising land revenue.
Some other sectors like railway, roadways are also deriving a good part of their income from
the movement of agricultural goods.

7. Role of Agriculture in Economic Planning:

The prospect of planning in India also depends much on agricultural sector. A good crop
always provides impetus towards a planned economic development of the country by creating
a better business climate for the transport system, manufacturing industries, internal trade etc.

A good crop also brings a good amount of finance to the Government for meeting its planned
expenditure. Similarly, a bad crop lead to a total depression in business of the country, which
ultimately lead to a failure of economic planning. Thus the agricultural sector is playing a
very important role in a country like India and the prosperity of the Indian economy still
largely depends on agricultural sector. Thus from the foregoing analysis it is observed that
 agricultural development is the basic precondition of sectoral diversification and development
of the economy.

Cropping Pattern in India

Cropping Pattern mean the proportion of area under different crops at a point of time,
changes in this distribution overtime and factors determining these changes.

Cropping pattern in India is determined mainly by rainfall, climate, temperature and soil type.

Technology also plays a pivotal role in determining crop pattern. Example, the adoption of
High Yield Varieties Seeds along with fertilisers in the mid 1960’s in the regions of Punjab,
Haryana and Western Uttar Pradesh increased wheat production significantly.

The multiplicity of cropping systems has been one of the main features of Indian agriculture.
This may be attributed to following two major factors:

1. Rainfed agriculture still accounts for over 92.8 million hectares or 65 percent of the
cropped area. A large diversity of cropping systems exists under rainfed and dryland areas
with an overriding practice of intercropping, due to greater risks involved in cultivating larger
area under a particular crop.
2. Due to prevailing socio-economic situations (such as; dependency of large population
on agriculture, small land-holding size, very high population pressure on land resource etc.),
improving household food security has been an issue of supreme importance to many million
farmers of India, who constitute 56.15 million marginal (<1.0 hectare), 17.92 million small
(1.0-2.0 hectare) and 13.25 million semi-medium (2.0-4.0 hectare) farm holdings, making
together 90 percent of 97.15 million operational holdings.
3. An important consequence of this has been that crop production in India remained to
be considered, by and large, a subsistence rather than commercial activity.

Factors Affecting Cropping Pattern in India

The cropping pattern is highly influenced by climatic, personal, social, cultural and

economic factors of the farmers. The major factors are

i)  Size of the Land Holding

In India marginal and small farmers represents the majority of farming community. So

the mono crop paddy has become predominant as it fulfils the household needs and
perpetuates the subsistence agriculture with little scope for commercial Cop husbandry.
ii) Literacy

Majority of the farmers are ignorant of the scientific methods involved in mixed-cropping,

mono cropping and other technological knowhow for practicing better

iii) Disease and pest

The cropping pattern also depends on the possibility of disease and pest infections.

iv) Ecological Suitability

The cropping pattern of a particular region is highly dependent on the ecological condition
(temperature, rainfall, humidity, etc.).

V)    Moisture Availability

The source of irrigation greatly determines the type of the cropping pattern to be practiced.
For example , in low rainfall area, dry land farming is best possible way to profit
maximisation.

vi)   Financial  Stability

The economic condition of the farmers also affects the cropping pattern. As the cash crops
(for example, cotton) involve high capital investments, these are practised only in estate
farming. The marginal section of the farms community adopts low cost crops.

Agricultural Production Trends in India:

(i) Prior to Independence:

It may be pointed out that during the period 1901 to 1947, agricultural production declined.

The population rose by 38 per cent while the increase in cultivated area was to the extent of
18 percent. The annual output of food grains and pulses remained almost constant.

Studies showed that the yield per acre of cereals did not show any consistent decline or
increase but there was a positive increase in the yield per acre of commercial crops and food-
grains. He did not agree with the belief that there had been deterioration in fertility or in the
standards of agriculture.
(ii) Post Independence Period:
The process of decline in productivity has continued in the post-independence period, as
compared to the pre-1939 period. The average yield of cereals per acre during 1946-47 to
1949-50 had declined from 619 to 565 lbs. Rangnekar found that the volume of output in
India declined from 0.9 metric tones in 1938-39 to 0.86 metric tones per hectare in 1951.
Similar conclusion were reached by studies undertaken by ICAR and the Grow More Food
Enquiries.

With the introduction of economic planning in 1951 and with the special emphasis on
agriculture development, particularly after 1962, stagnant of agriculture was reversed as:
1. There was a steady rise in average yield per hectare.

2. There was a Steady rise in area under cultivation.

3. Due to increase in area and increase in yield per hectare, total production of the crops
recorded a rising trend.

Productivity Level of Indian Agriculture: Factors and Measures

Productivity Level of Agriculture defines as the amount of crops production in per hectare
land.

Agriculture productivity = Total agriculture crop production/Total land area (hectares)

India being one the largest producers of most of the agricultural crops (both food grains and
non- food grain) but ranks are very low in terms of productivity. India is the second largest
producer of rice and wheat in the world, but in terms of productivity the ranks are and 38
respectively. India is the largest producer of pulses, but it is only 138 in the world.

Factors Responsible for low Productivity:

There are several factors responsible for low productivity of Indian agriculture.

(i) Rural Environment:

In India rural social environment is itself an important cause behind low productivity. Indian
farmers are lazy, illiterate, superstitious, primitive outlook, conservative, unfit and
unresponsive to the modern method of cultivation. According to G.S. Sahato, the marginal
productivity of farmer is zero in agriculture due to family-based cultivation process.
(ii) High Land-Man Ratio:
Indian agriculture is characterized by huge population pressure. According to 2001 Census,
about 72.2% of total population lived in rural areas and about three-quarters of total rural
working population, i.e., nearly 228 million workers (out of 310.7 million workers) was
engaged in the agriculture sector. Due to rise in population, uneconomic subdivisions of land
take place. All these lead to low productivity.

(iii) Degradation of Land:

According to Government of India, about 329 million hectares (half of the land) have already
been degraded. This results in 33 to 67 percent of yield loss. Moreover, 5% of land has been
damaged so badly that it cannot be used further.

(iv) Existence of Big Farmers:

Although Zamindari system had been abolished in India, but the rural big farmers are still
playing their shadow roles. These big landowners are regulating rent, tenure system and
rights of tenancy etc for tenants. Thus the position of tenants are going worse day by day. In
this type of tenure system, it extremely difficult to raise productivity by only applying
modern technologies,

(v) Irregular and Inadequate Credit and Marketing Facilities:

According to the study of Raj Krishna, due to insufficient and inadequate availability of
agricultural loans at minimum rate of interest the poor farmers cannot properly invest money
on the land during the peak season of cultivation. Moreover, the marketing of the agricultural
crops is regulated by middlemen or touts. All these resulted in low agricultural productivity.

(vi) Lack of Modern Technologies:

In India about 60% of the cultivatable land are out of irrigation facilities only 75.14 million
hectares (out of 87.94 million hectares) in 2000- 01 are under irrigation facilities. Thus,
‘Package Programme’ under green revolution turns to be ineffective in most of the gross
cropped areas in India.
Measures to Raise Productivity:
Several measures have been adopted from the view of socio-economic angles to raise the
productively of Indian agricultural system.

There are as follows:

(i) Proper Implementation of Land Reforms:
Proper implementation of land reforms and land tenure system can bring up the productivity
rate of Indian agriculture. After independence, except West Bengal and Kerala land reform
programme has not been successfully implemented. Hence more endeavor has been required
from the part of the government of other states to raise productivity. The famous slogan,
‘land to the tiller’, must be turned into reality.

(ii) Proper Education:

Positive efforts have been taken by the government to educate the illiterate poor farmers
about the new methods of technical farming. All the marginal farmers and tillers must know
how to introduce latest scientific technology in the cultivable lands. This will increase the
productivity.

(iii) Adequate Land Water Resources:

As already said, 329 million hectares of land degraded. Hence an integrated and efficient
management of our land is very necessary, the Tenth five year Plan lots of initiatives have
been taken in these areas.

(iv) Package Programme:

Proper implementation of ‘Package Programme (i.e. irrigation, high yielding variety seeds
chemical fertilizers, modern machineries etc. is necessary to increase the productivity of the
soil. The effects of green revolution are huge All these not only increase the fertility of land,
but change the single time crop producing land into multi-production. In India most the lands
are unfertile and have no permanent water flowing system. Thus per hectare production is
very poor. Therefore, the government has to take positive initiatives! Implements ‘Package
Programme’ throughout every corner of the country. These will help to increase the fertility
of the soil.
(v) Crop Protection:
According to agricultural scientists in India nearly 5% of the total crop production are
destroyed by different insects, pests and diseases. Maximum farmers are ignorant about the
use of insecticides and pesticides. Hence to increase productivity the government must take
initiatives to start several programmes.

(vi) Adequate Credit and Marketing Facilities:

To apply ‘Package Programme’ the farmers need adequate amount of low rate of interest
credit facilities. Farmers should get easy loans at the beginning of the cultivation so that they
can use all the modern technologies in the land and improve both crop production and
productivity. Not only that, the government must pay proper attention to expand the
agricultural market from remote corners villages to urban areas so that sufficient amount of
marketable surpluses can be generated,

(vi) Encouragement to the producers:

Government must encourage the producers by giving various incentives like:
(a) By giving agricultural subsidy;

(b) Provide adequate credit facility;

(c) Rendering price support;

(d) Providing crop-insurance to the poor farmers;

(e) Implementing land reform programmes countrywide;

(f) Use of improved seeds, fertilizers, etc.;

(g) Implementing irrigation facilities; and

(h) Expansion of technical know-how.

(viii) Research and Development:

Government of India made Indian Council of Agricultural Research and several Agricultural
Unversities to organize several research and development programme for the improvement of
cultivation. In West Bengal, Kalyani Krishi (Agriculture) Vishwavidyalaya (University) has
been introduced to initiate agricultural research and development.

Industrial sector in India

The Role of Industrialization in the economic development of India!
Industrialization refers to a process of change in the technology used to
produce goods and service.

According to Wilbert Emoore and G. R. Madan, it is a much broader

process of economic development which has in view the integrated
development of all other sectors, i.e. agriculture, power, transport and
other services.

The role of industrializtion in the development of country can be analysed

as follows:

i. Increase in per capita income.

ii. Growth in international trade

iii. High level of investment

iv. Generation of employment

v. Meets the requirements of people

i. Growth of Infra structure:
Rapid industrial growth has resulted in the expansion of infrastructural
facilities. The development of modern industries has stimulated the growth
of banking, insurance, commerce, shipping, air services etc.

ii. Growth of science and technology:

Thus our economy is based on industrialization to a large extent.

Industrial Policy before 1991:

India started her quest for industrial development after independence. The
industrial policy resolution of 1948 marked the beginning of the evolution
of Industrial policy.

Features of industrial policy 1948:

i. The industrial policy resolution of 1948 contemplated a mixed economy
reserving a sphere for both public and private sector.

ii. The industries were divided into four broad categories viz:

a. Defence industries and control of atomic energy. The ownership and

management of these industries was the exclusive monopoly of the Central
Government.

b. Coal, Iron and steel, ship building, telephone and telegraphs were to be
owned by the state.

c. Basic industries—Fertilizers electron chemicals, non- ferrous metals

woollentextiles, minerals etc. were subject to the regulation of Central
Government.

d. Remaining industries other than the above mentioned were open to the
private sector.
Industrial Policy 1956:
After 1948 significant developments took place in India. Parliament
accepted the socialist pattern of economy.

It facilitated the fresh statement of industrial policy.

Provisions of 1956 Policy:

i. New classification of industries: Schedule A industries: Exclusive
responsibility of the state.

Schedule B: State owned industries, but the private enterprises could

supplement the effort of the state.

Schedule C: All the remaining industries which could be owned by private

sector.

ii. Fair and non-discriminatory treatment of Private sector.

iii. Encouragement to village and small scale industries.

iv. Removing regional disparities.

v. Provision of amenities for labour.

Industrial Policy 1977:

In 1977 the Congress Party was thrown out and Janata Party assumed
power, new Industrial Policy was introduced to make radical changes in
the existing policy.

Provisions of 1977 Industrial Policy:

i. Development of small scale sector. Small scale sector was classified into
three categories Viz:
a. Cottage and household industries.

b. Tiny sector with less than 1 lakh investment.

c. Small scale sectors with investment upto 10 lakhs.

ii. District industrial centres were to setup in each district to support small
scale and cottage industries.

iii. Programmes to enlarge the areas of operation of Khadi and village

industries.

iv. Special arrangements for the application of technology to improve the

productivity of small and village industries.

v. Large scale sectors should devise programme for small scale and village
industries.

vi. Approach towards sick units should be selective and public funds
should be pumped into sick units.

vii. Framing policies encouraging worker’s participation in management.

Industrial policy 1980:

It was announced by Congress (I). The objective of this policy was to
strengthen the economic infrastructure Features:

i. Socio-economic objectives:

a. Optimum utilisation of installed capacity.

b. Maximising production

c. Higher productivity
d. Higher employment generation

e. Correction of regional imbalance

f. Preferential treatment to agro-based industries.

g. Promoting economic federalism.

ii. Revival of the economy

iii. Effective operational management of the Public sector.

iv. Integrating industrial development in the private sector by promoting

the concept of economic federalism.

v. Promotion of industries in rural areas.

vi. Removal of regional imbalances.

vii. Industrial sickness and state policy.

The Industrial policy stated that industrial units found guilty of

mismanagement leading to sickness would be dealt firmly. All the above
industrial policies recognised the need for securing participation of foreign
capital and enterprise. But there was no encouragement for foreign
ownership and control. These policies could not meet the requirements of
liberalised economy and foreign investments. Hence the new policy was
framed in 1991.

Features of 1991 Industrial Policy:

1. Structural reforms:
With the introduction of new industrial policy a substantial programme of
deregulation has been undertaken. Industrial licensing has been abolished
for all items except for a short list of six industries, viz.:

i. Distillation of alcoholic drink

ii. Cigars and Cigarette.

iii. Aerospace and defence equipments.

iv. Industrial explosives.

v. Hazardous chemicals.

vi. Drugs and Pharmaceuticals.

MRTP Act has been amended in order to eliminate the need to seek prior
government approval for expansion of the present industrial units and
establishment of new industries.

A significant number of industries had been reserved for the public sector.
Some areas reserved for the Public sector are:

i. Arms and ammunition.

ii. Atomic energy

iii. Defence air craft

iv. Railway transport.

2. Foreign Direct investment:

The government has been committed to promoting accelerated growth the
industrial sector. The role of foreign direct investment as a means to
support domestic investment for achieving a higher level of economic
development. FDI benefits domestic industry as well as the Indian
consumer by providing opportunities for technological upgradation access
to global managerial skills and practices etc.

To reduce delays, a simplified approval mechanism for FDI proposals has

been put in place via:

i. Automatic approval by RBI to specified industries.

ii. Other proposals which do not conform to the guide lines for automatic
approval are considered by foreign investment promotion Board (FIPBJ.
The FIPB makes recommendations to the government.

3. Major initiatives:
The following initiatives have been taken:

(a) Delicensing of some industries Viz:

i. Coal and lignite

ii. Petroleum and its distillation

iii. Sugar industry

iv. Bulk drugs.

(b) Foreign equity upto 100% in

i. Power sector

ii. Electric generation

(c) Requirement of prior approval by RBI for bringing FDI/ NRI/OCB
investment.

(d) The RBI has delegated powers to regional office.

(e) Scope for private sector: The number of industries reserved for private
sector has been reduced and entry level barriers have been removed.

(f) Foreign exchange rate policy has been changed. Restriction on current
account transaction has been removed.

(g) Integration with global economy. Industrial policy has brought reforms
in related areas such as export, import etc. Tariffs have been reduced on
imports.

Critical Analysis of New Industrial Policy:

1991 policy has a greater impact on Indian economy and society. It has
positive as well as negative impact which may be summed up as follows:

i. Research and development:

Creativity and innovation has become the order the day. Knowledge is
updated by constant research and development. Industries are
concentrating on research and development to bring out creativity in
product design.

ii. Quality:
Quality aspect has gained a lot of significance. The concept of quality has
undergone a significant change. Quality is not something which is
determined by the quality control department. Rather it is to be judged by
the customer. The focus is on total quality which is to be maintained at all
levels rights from the manufacture of goods till it reaches the customer.
iii. Infra structure:
On account of new industrial policy, there is extensive growth of infra
structure such as Transport, banking, communication etc.

iv. Free flow of foreign capital on account of FDI.

v. Employment opportunities in MNCs

vi. Increase in the standard of living.

vii. Implementation of better technology.

Negative impact of new industrial policy:

i. Tough competition for Domestic industries.

ii. Opposition from trade unions.

iii. Unemployment

iv. Indiscriminate use of natural resources of domestic country by MNCs.

Role and Performance of Small-Scale

and Cottage Industries of India

Next to agriculture, small-scale and cottage industries is the most

important employment providing sector of the economy. It also contributes
a substantial part of manufacturing output.

We can discuss the role and performance of small-scale and cottage

industries under the following headings:
1. Expansion of small-scale sector and its share in industrial output.

2. Employment generation.

3. Relative efficiency as compared with large-scale sector.

4. Equitable distribution of national income.

5. Mobilisation of capital and entrepreneurial skills.

6. Regional dispersal of industries.

7. Less industrial disputes.

8. Contribution to export earnings.

(1) Expansion of Small-Scale Sector and Contribution to Industrial

Output:
As is clear from the discussion above, the definition of small-scale
undertakings has changed over time. Therefore, study of the expansion of
small-scale sector over a long period of time is not possible. However, a
study of the data contained in Economic Survey 2001-02 gives the
following results for the period 1993-94 to 2000- 01.

(a) The number of small-scale units stood at 23.9 lakh in 1993-94 and this
rose to 33.7 lakh in 2000-01. This shows that during the period eight years,
the number of industrial units rose by as much as 41 percent.

(b) The output of small-scale units was Rs. 2, 41,648 crore in 1993-94 and
this rose to Rs. 4, 50,450 crore in 2000-01 (at 1993-94 prices). This shows
that the output of the small-scale industries increased by as much as 86.4
percent over the period 1993-94 to 2001-02.

(2) Relative Efficiency as Compared with Large-Scale Sector:

(i) Whether large-scale industries are more efficient or small-scale
industries are more efficient, is a matter of debate. The problem arises
because of the fact that efficiency can be defined in many different ways.
The study on this issue was conducted by SIDBI (Small Industries
Development Bank of India) Team in 1999 in association with NCAER
(National Council of Applied Economic Research).

The study covers the period 1980-1994. The study reveals that the small-
scale industries, by investing only 7 percent to 15 percent of the total
manufacturing sector’s capital, contribute to nearly one-fifth of industrial
output and 35 to 40 percent of total employment in the industrial sector.

Moreover, both labour productivity and capital productivity in small-scale

sector grew at a faster rate than large-scale sector during 1980-94. Thus,
the small-scale sector has proved to be more efficient.

(3) Employment Generations:
The small-scale units employed 129.80 lakh people in 1991-92 and this
number has consistently risen to 185.6 lakh people in 2000-01. Given the
acute problem of unemployment in India, creation of employment
opportunities depend crucially on the development of small-scale and
cottage industries.

There is already surplus labour in agriculture while the large-scale

industrial sector, being capital-intensive in nature, has limited employment
opportunities. In fact, the employment argument is the strongest argument
that can be put forward in favour of small-scale and cottage, industries in
India.

(4) Equitable Distribution of National Income:

The main arguments put forward in support of the small-scale and cottage
industries is that they ensure a more equitable distribution of national
income and wealth. This happens because of the following two
considerations:

(a) The ownership of small-scale industries is more widespread than the

ownership of large- scale industries, and

(b) They possess a much larger employment potential as compared to the

large industries.

(5) Regional Dispersal of Industries:

There has been massive concentration of large-scale industries in the states
of Maharashtra, West Bengal, Gujarat and Tamil Nadu. As a result,
disparity in industrial development have increased. Even within these
industrialized states, industries have tended to get concentrated in a few
large cities like Mumbai and Chennai.

People migrate in large numbers from villages and lower order urban
centres to these centres of industrial development. This swells the
population of slums and create various social and personal problems. The
whole urban environment gets polluted.

As against this, the small-scale industries are ostly set up to satisfy local
demand and they can be dispersed overall the state very easily. They can
also effect a qualitative change in the economy of a state. The most glaring
example of this phenomenon is the economy of Punjab which has more
small- scale industrial units than even the industrially developed state of
Maharashtra.

(6) Mobilisation of Capital and Entrepreneurial Skill:

Small-scale industries are at a distinct advantage as far as mobilisation of
capital and entrepreneurial skill is concerned. A number of entrepreneurs
are spread over small towns and village industries are distributed over the
entire length and breadth of the country.

Similarly, large-scale industries cannot mobilise the savings done by

people in areas far flung from the urban centres. But this task can be
effectively accomplished by getting up a network of small-scale and
cottage industries. In addition, a large number of other resources spread
over the country can be put to an effective use by the small-scale and
cottage industries.

The rapid development of small-scale industries in the post-Independence

period is a proof that given the necessary credit, power and technical
knowledge a large quantity of latent resources of the economy can be
mobilised for purposes of industrial development.

(7) Less Industrial Disputes:

A number of supporter of small-scale and cottage industries have argued
that as compared with large-scale units, these industries have less
industrial disputes. While these are frequent strikes and lock-outs in large
industries, small-scale and cottage industries do not face such problem.

Therefore, there is no loss of output in small-scale and cottage industries.

However, this point of view is not totally correct. The fact is that workers
in large scale units are organised and thus the strikes are well reported in
media.

As against this workers in small scale units are unorganised and cannot
resort to strike. Any worker who shows his resentment is immediately
thrown out. Therefore, while in a small-scale unit relations between the
employer and employees appear to be normal on the surface but in fact
they may be not.

In the case of cottage industries, the question of dispute does not arise at
all since the main form of labour in these industries is family labour.

(8) Contribution to Exports:
With the establishment of a large number of modem small-scale industries
in the post-independence period, the contribution of the small-scale sector
in export earnings has increased by leaps and bounds.

What is heartening to observe is that the bulk of the exports of the small-
scale industries (in fact, around 93 percent) consists of such non-traditional
items like readymade garments sports-goods, finished leather, leather
products, woollen garments and knitwear, processed foods, chemicals and
allied products, and a large number of engineering; goods.

The total export of the small-sector industry products increased from Rs.
150 crore during 1971-72 to Rs. 48,979 crore in 1998-99. This implies, an
increase in the share of small-scale industries in the total exports of the
country from 9.6 percent in 1971-72 to 34.9 percent in 1998-99. The share
of the small-scale sector in manufacturing exports is about 45 percent.
Exports of the small scale sector are estimated at $ 13 billion in 2000-01
which was about 30 percent of total exports in that year.

8 Major Sources of Industrial Finance

Available in India
(A) Internal Self-Finance:
One source, quantitatively of big importance, is the saving of the unit
itself. It may be the household, the business or the government.

Normally, the household not only invests out of its own saving but it also
has surplus which it lends to other units via, financial institutions. Like
banks, capital market etc.

The savings of the business, comprised of depreciation and the retained

earnings, are normally short of its investment. Hence it also borrows from
financial institutions. Government too finances a part of their investment
from internally generated funds.

These arise from the excess of tax and other income over consumption
spending plus transfers. For the shortfall, if and when it occurs, it also
borrows from the financial system. Altogether, roughly half of all the
investment is self-financed.

An advantage of investment through internally generated funds is that it

combines the acts of saving and investment. As such certain costs are
internalized and reduced. These costs pertain to collection of information
in respect of borrowers, transactions with them, monitoring the use of
funds, and enforcement of the conditions of borrowing.

These costs would have to be met if these funds were to be lent to

someone else. Self- financing also reduces the risks of lending’s as it does
not involve preparation of documents in respect of contract, collateral or
security etc.
The shortcoming of this source is that it may fall short of investment
opportunities or its use may be inefficient. That is funds may not be
wholly or partly invested in the most productive lines.

(B) Equity, Debentures and Bonds:

A large part of finance for fixed investments [building, machines, etc.]
comes from different types of equity or shares such as ordinary,
cumulative and non-cumulative preference shares. These shares bear risks
of different degrees and are tailored to suit the temperament of different
investors.

The latest trend is to issue shares in small denominations of ten rupees so

as to enable the largest number of people to participate in providing long-
term finance. The credit-worthiness of promoters of industries and
profitability of industries, determinate the extent to which savers invest
their money in shares. In this way, industries are not burdened with
interest, and therefore do not get involved in complications on this account
during recession or depression.

Often industrial companies also get long-term finance through the issues
of debentures and bonds. These are debt (loans), instruments. The buyers
of those debentures and bonds are the creditors of companies. They get a
fixed rate of interest on the money invested in these securities.

For this reason debentures are safer investments. Till recently, these debt-
instruments were not very popular. At present many industries are tapping
this source. Public sector undertakings too have started depending upon
them. Since recently they have raised funds through the sale of bonds
bearing fixed interest.
(C) Public Deposits:
Another source is public deposits. It is also a debt-instrument, mostly for
short-term finance. Under this system, people keep their money as deposit
with these companies or managing authorities for a period of six months, a
year, two years, three years or so. Depositors receive a fixed interest.

They can ask for the refund of money at any time. This money is used by
companies to meet their needs of working capital. However, this source of
finance is unreliable because depositors can seek refund at any time.

And if the refund happens to coincide with the time when a company
needs funds most, then it complicates matters. With the growth of banking
habits and increase in dealings with other financial institutions, the
importance of public deposits, as a source of finance, will decline.

(D) Loans from Banks:

Commercial banks can do also provide funds for meeting short-term needs
or for working capital. Loans are given against the guarantee of
government securities and stocks with companies. Loans are advanced in
the form of overdraft and credit limit. Commercial banks are generally
reluctant to put their money in the purchase of shares.

The reason is that the deposits that they receive from the public are
generally for a short-term and therefore, banks can ill-afford to take any
risk in investing public money in shares. They can, however, do something
by way of buying debentures of companies.

They can earn fixed interest on such investment and at the time of need
they can sell these debentures in the market and recover their money. Still,
little has been achieved in this field because of the fear that banks may
find it difficult to cash debenture precisely at a time when they need.
(E) The Managing Agency System:
The system of industrial finance, peculiar to India, and which prevailed till
the recent times, is of little importance now days. Under this system an
individual or a group of individuals finance the initial stage of the
establishment of industries, and manage many activities of the company
thus established very often, one managing agent controls more than one
concern and uses fund of one concern to meet the needs of others under
him.

In the past when there was a great shortage of industrial finance and
almost complete lack of financial institutions, and capital market in the
real sense had not even come into existence, managing agents did render a
valuable service in the promotion of industries within the country. Of
course, it is true that their funds were mostly used for the establishment of
consumer goods industries.

In due course, however, the system developed certain drawbacks and came
to be plagued by serious shortcomings. The management of so many units,
good and bad, and producing a variety of products led to certain evils.

The payments which managing agents extracted for themselves, interest on

their money, commission for their services etc., were too much and were
out of proportion with the paying capacity of the companies and/or the
work performed by those agents. It is for these reasons that the
government put a ban on this system in 1970.

(F) Indigenous Bankers:
In spite of the establishment of new financial institutions, indigenous
bankers also advance financial help to a few large-scale industries,
particularly during the time of stress, both for fixed capital and working
capital. But mainly they have provided finance to small scale industries.
In the absence of adequate institutional finance, these industries have been
forced to depend upon indigenous bankers. These banks charge a very
heavy rate of interest, thus making finance a costly affair. However, the
importance of these banks, even as a source of finance for small industries,
is on the decline.

(G) Development Finance Institutions:

Established with the help of the Government to fill-in the gap in industrial
finance and to promote the objective of planning, these institutions cater to
the needs of large and small industries.

The new institutions supplying industrial finance are Industrial

Development Bank of India, Industrial Finance Corporation of India, Unit
Trust of India, and General Insurance Corporation of India, Industrial
Reconstruction Bank of India, State Financial Corporations, and State
Industrial Development Corporations.

These institutions provide huge quantity of finances for setting up of new

industries, for meeting their several needs and in several forms. These also
ensure and monitor the use of finance in pre-planned directions. As such
these fit well with the modem scenario of industrial development.

(H) Foreign Capital:
As a supplement to domestic finance, external capital too has been made
use of in meeting the needs of industrial finance, mostly for long-term
needs. This has taken several forms. There is the foreign aid (i.e., loans on
concessional term) from foreign governments and foreign institutions (like
the World Bank) extended to the Government.

A part of this assistance has also gone to the private sector. A part of
foreign funds has come through foreign companies which have Indian
subsidiaries in our country or through Multinational Corporations which
have branches in India.

Some foreign companies have given funds as part of direct investment or

as part of collaborations with Indian companies. There are also non-
resident Indians who have invested in collaboration with Indians. Indian
companies have also raised loans from foreign markets.

The sources of industrial finance are thus of various types. And so are the
instruments of finance. A number of them are modem Such as shares,
debentures, and loans from the financial institutions. The old ones like,
deposits from public, the finances of managing agents as also of
indigenous bankers are on the decline. This is as it should be for these are
neither enough, nor suitable for meeting the needs of the modern industrial
growth.