What is Role & Importance of Small & Medium Enterprises (SMES) in India?


Ans:   The role and importance of SMEs is as follows

1.      Employment

Small and medium enterprises (SMEs) use labour intensive techniques and thereby provide employment on a large scale. For every ` 1 lakh of fixed investment small scale sector provides employment to 26 persons as against 4 persons in the large scale sector. Small Scale industries provide self-employment to artisans, technically qualified persons and professionals. Small scale sector accounts for 75% of the total employment in the industrial sector. More than 18 million persons are employed in small scale units in India. These units also offer employment to farmers when they are idle. The healthy growth of small scale industries can be an effective solution to the unemployment problem in India.

2.      Optimisation of Capital

Small Scale firms require less capital per unit of output and provide quick returns on investment due to shorter gestation period. In a capital scarce economy like India small scale sector can become a stabilising force by providing high output capital ratio and high employment capital ratio. Small scale units help to mobilise small and scattered savings and channelise them into industrial activities.

3.      Balanced Regional Development

Small scale industries promote decentralised development of industries. They help to remove regional disparities by industrialising rural and backward areas. Dispersal of small industries in rural and semi-urban areas is the only means of balanced industrialisation of all parts of the country. Small scale industries help to reduce the problems of congestion, slums and pollution in cities by providing employment and incomes in rural areas. They help to improve the standard of living in suburban and rural areas.

4.      Mobilisation of Local Resources

Small scale industries help to mobilise and use local resources like small savings, entrepreneurial talent etc. which might otherwise remain idle and unused. They help to perfect and promote traditional family skills and handicrafts. These industries help in the growth of local entrepreneurs and self-employed professionals in small towns and villages.

5.      Export Promotion

Small scale industries help in reducing pressure on the country’s balance of payments in two ways. First they do not require imports of sophisticated machinery or raw materials. They are now producing electro-medical equipment, drugs, etc which were being imported earlier. Secondly, small scale industries earn valuable foreign exchange through exports. There has been a substantial increase in exports from the small scale sector. A significant feature has been rapid growth in the export of non-traditional items. Small scale sector contributes about 25% of India’s total exports and 90% of non-traditional exports.

6.      Consumer Surplus

Small scale industries now produce a wide range of mass consumption items. Over 5000 products are being manufactured in the small scale sector. By providing goods of daily use on a large scale, small scale industries serve as an anti-inflationary force. About one half of the output of manufacturing sector in India comes from small scale and village industries.

7.      Feeder to Large Scale Industries

Small scale industries play a complementary role to large scale sector. They provide parts, components, accessories to large scale industries. They serve as ancillaries to large units.

8.      Social Advantage

Small scale sector contributes towards the development of a socialistic pattern of society by reducing concentration of income and wealth. They provide an honourable and independent living to people with limited resources. They facilitate wider participation of public in the process of development and thereby serve the cause of democracy and self-government.

9.      Share in Industrial Production

Small scale industries contribute more than one-half of the total industrial production in India. About 5000 products are manufactured in the small scale sector. These include several items of consumption such as T.V. sets, hearing aids and industrial items.

10.    Development of Entrepreneurship

Small scale units have helped to develop a class of entrepreneur. These units help in self-employment and spirit of self-reliance in the society. The development of small scale industries contributes to increase in per capita income or economic development in various ways. It generates immediate employment opportunities with relatively low capital investment, makes effective use of untapped local resources, facilitates development of backward areas and weaker sections of society.

11.    Important Segment

The Small Scale Industries (SSI) constitute an important segment of the Indian economy in terms of their contribution to the country’s industrial production, exports, employment and creation of an entrepreneurial base. The Government established a separate Ministry of Small Scale Industries in September 2001.

12.    Expansion of SSI Sector and its Share in Industrial Output.

The number of units in the SSI sector stood at 101.1 lakh in 2000-01. This number rose to 118.59 lakh in 2004-05. As far as output of units in the SSI sector is concerned, it was ` 2,61,297 crores in 2000-01 and this rose considerably to ` 4,18,263 crores in 2004-05 (at current prices).

13.    More Efficiency

There are some studies which prove that small scale units are more efficient than large scale units. One study on this issue was conducted in 1999 by the SIDBI. It revealed that the small scale industries by investing only 7% to 15% of the total manufacturing sector’s capital contribute to nearly one-fifth of the total industrial output and 35 to 40% of total employment in the industrial sector. An analysis of productivity shows that capital productivity was slightly higher in small scale industries over the period 1980-81 to 1994-95.


14.    Higher Rate of Growth

The small scale sector has maintained a higher rate of growth than the overall industrial sector. The comparative growth rates of production for both the sectors are given below:


Growth rate of SSI (%)

Growth rate of overall industrial sector

1999 – 2000



2000 – 2001



2001 – 2002



2002 – 2003



2003 – 2004



2004 – 2005




15.    Equitable Distribution of National Income

SSIs ensure a more equitable distribution of national income and wealth due to these reasons : (i) the ownership of SS’s is more widespread, and (ii) they have a much larger employment potential.


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