15 Problems of Small Scale Industries

Small-scale enterprises play a vital role in the economic development of our country. This sector can stimulate economic activity and is entrusted with the responsibility of realizing various objectives like the generation of more employment opportunities with less investment, reducing regional imbalances, etc (Small-scale industries are not in a position to play their role effectively due to various constraints.

Problems of Small Scale Industries

The various problems of small-scale industries are as under:

  1. Finance
  2. Raw Material
  3. Technology
  4. Idle Capacity
  5. Infrastructure
  6. Marketing
  7. Underutilization of Capacity
  8. Skilled Manpower
  9. Project Planning
  10. Managerial
  11. Dispersed and Unorganised
  12. Obtaining Environmental Clearance
  13. Arranging Security and Guarantee
  14. Insufficient Market Research, Linkages, and Design Inputs
  15. Other Problems


Finance is a critical issue for small-scale industries. Adequate funds are essential for an organization to function effectively. The shortage of capital and limited access to credit are the primary challenges.

Entrepreneurs often lack sufficient resources and face difficulties in securing loans due to low creditworthiness. As a result, they resort to borrowing from money lenders at exorbitant interest rates, disrupting their financial plans.

While banks have started financing this sector after nationalization, small-scale enterprises still struggle with the problem of obtaining costly funds. Given their role in promoting various social objectives, providing easier access to credit with favorable terms and conditions is essential to facilitate their operations.

Raw Material

Small-scale enterprises typically rely on local sources for raw materials, but they encounter problems like insufficient quantity, poor quality, and irregular supply. Large-scale units, due to their greater resources, often dominate the open market for raw materials.

This forces small-scale units to buy raw materials at high prices, increasing production costs and making their operations unsustainable. The lack of quality raw materials, power supply (especially for power looms and handicrafts), and proper packaging facilities remains a significant challenge.

Inadequate credit and raw material shortages lead weavers, artisans, and entrepreneurs to resort to loan sharks and middlemen. Even modern manufacturing MSE units face constraints due to the limited availability of quality raw materials. While organizations like the National Small Industries Corporation (NSIC) and State Small Scale Industries Development Corporations offer some raw materials, their efforts do not align with the actual requirements.


Small-scale entrepreneurs are not fully exposed to the latest technology. Moreover, they lack the requisite resources to update or modernize their plant and machinery. Due to obsolete methods of production, they are confronted with the problems of less production of inferior quality, and that too at a higher cost. They are in no position to compete with their better-equipped rivals operating modern large-scale units.

Idle Capacity

There is underutilization of installed capacity to the extent of 40 to 50 percent in the case of small-scale industries. Various causes of this underutilization are shortage of raw materials, problems associated with funds, and even availability of power. Small-scale units are not fully equipped to overcome all these problems as is the case with the rivals in the large-scale sector.


Infrastructural bottlenecks adversely affect the functioning of small-scale units. There is inadequate availability of transportation, communication, power, and other facilities in the backward areas. Entrepreneurs are faced with the problem of getting power connections and even when they are lucky enough to get these they are exposed to unscheduled long power cuts.

Inadequate and inappropriate transportation and communication networks will make the working of various units all the more difficult. All these factors are going to adversely affect the quantity, quality, and production schedule of the enterprises operating in these areas. Thus their operations will become uneconomical or unviable.


Marketing is a significant challenge for small-scale units. They often lack crucial market information, such as competition, consumer preferences, and current trends, making it difficult to adapt their products accordingly.

This results in lower-quality products produced at higher costs, placing them at a disadvantage compared to well-equipped large-scale enterprises. To support small-scale enterprises, the Indian government has reserved specific items exclusively for production in this sector.

Government agencies like the Trade Fair Authority of India, State Trading Corporation, and the National Small Industries Corporation assist small-scale businesses in selling their products in both domestic and international markets.

Underutilization of Capacity

Most of the small-scale units are working below full potential or there is gross underutilization of capacities. Large-scale units are working for 24 hours a day i.e. in three shifts of 8 hours each and are thus making the best possible use of their machinery and equipment.

On the other hand, small-scale units are making only 40 to 50 percent use of their installed capacities. Various reasons attributed to this gross underutilization of capacities are problems of finance, raw materials, power, and underdeveloped markets for their products.

Skilled Manpower

A small-scale unit located in a remote backward area may not have a problem with respect to unskilled workers but it may be exposed to the problem of nonavailability of skilled workers. Firstly skilled workers may be reluctant to work in these areas and secondly, the enterprise may not afford to pay the wages and other facilities demanded by these persons.

Besides non-availability, entrepreneurs are confronted with various other problems like absenteeism, high labor turnover, indiscipline, strikes, etc. These labor-related problems result in lower productivity, deterioration of quality, increase in wastages, and rise in other overhead costs, and finally adverse impact on the profitability of these small-scale units.

Project Planning

Small-scale entrepreneurs often encounter issues with project planning. They tend to neglect vital viability studies, both technical and economic, and dive into entrepreneurial endeavors driven solely by enthusiasm.

They often overlook factors like demand analysis, marketing challenges, raw material sources, and infrastructure availability before starting their ventures. Comprehensive project feasibility analyses, including technical and financial aspects, are often overlooked.

Inexperienced entrepreneurs submit unrealistic feasibility reports and incomplete documents, causing delays in the promotional process. Limited financial resources prevent them from hiring project consultants, resulting in subpar project planning and execution. This leads to time and cost overruns, adversely affecting small-scale enterprises.


Managerial shortcomings are a significant issue for small-scale units. Modern business demands visionary leadership, knowledge, skills, and wholehearted commitment. The competence of the entrepreneur is crucial for success, as they are at the center of the enterprise.

Many small-scale units have struggled or failed due to a lack of managerial capability. Entrepreneurs need training and counseling to develop their management skills. Insufficient commitment and managerial abilities compound the challenges.

Small-scale entrepreneurs face issues like dependence on institutional agencies for funding and consultancy, limited creditworthiness, education, training, low profitability, marketing challenges, and more. The Government of India has introduced various schemes to enhance the overall performance of these units.

Dispersed and Unorganised

The dispersed, unorganized nature of the industry also raises issues of quality, bulk production, and inability to meet big orders. Often individual units lack packaging facilities. As a result, markets, especially for traditional MSEs, are shrinking and workers are experiencing a dip in wages.

Moreover, like most non-traditional, MSEs serve as ‘captive units’ for big industries, often workers, especially women do not get paid until the product is picked up. The situation is the same for the traditional sector where payments are made by traders and even government corporations only after the stock is sold. Thus money is held up, further impoverishing the workers.

Obtaining Environmental Clearance

The MSEs engaged in the manufacturing of products such as paints, dyes and chemicals, explosives, minerals, leather and leather goods, etc., pollute the environment. These units have to obtain non-pollution certification from the concerned pollution control agencies of the State.

Arranging Security and Guarantee

Lending to micro-enterprises, which is stipulated at 60% of the total credit to the MSE sector, has fallen from 51.2% in 2002-03 to 45.1% at the end of 2005-06. Moreover, difficulty in arranging collaterals or third-party guarantees continues to be a problem.

Though the RBI has issued instructions to advance collateral-free loans up to Rs. 5 lakh, at the end of 200506, only 24% of the total outstanding loans under Rs. 5 lakh were without collaterals. The high cost of credit to MSEs also impacts the competitiveness of their products.

Insufficient Market Research, Linkages, and Design Inputs

Most MSEs do not have money to invest in market research and are unable to carry out design and technical improvements to keep up with market demands. Unlike big businesses, they cannot invest in advertising and packaging. This limits their ability to tap markets and attract consumers.

Most people are unaware of Chamba Chugh, natural fiber purses and cushion covers, passion fruit pickles, Bhuvastra (garment of the Earth—made in coir), Chamba Chappals, Camel Hair Carpets (which do not burn) of Jodhpur, and the intricately carved tables of Ladakh.

MSEs, especially those pertaining to traditional livelihoods, are therefore, increasingly being forced to rely on middlemen, petty traders, and big businesses to market their products. This has reduced many to the status of daily workers, earning less than the minimum wage.

Other Problems

Due to the unorganized nature of the sector, entrepreneurs and artisans/workers face difficulties in accessing government schemes. Consequently, the workers engaged in the MSE sector and these are often the most vulnerable and poor have very little bargaining power and are exploited by the middlemen, unit owners, and big business houses.

Unable to take up aggressive marketing, like big industries, they cannot find markets despite good quality and competent prices. 16. Miscellaneous Problems: Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, as follows:

  1. Lack of availability of adequate and timely credit. The major dependence for some sectors (e.g. Handicrafts) is for larger working capital requirements, which directly impacts their production cycle.

  2. High cost of credit, with interest rates of 14-16%.
  3. Collateral requirements are being insisted upon by banks.
  4. Limited access to equity capital for MSMEs.