Household and Small-Scale Industries

T H E E C O N O M I C W E E K L Y September 19, 1959

Household and Small-Scale Industries Some Problems of Industry Analysis

M C S THE labour- intensive small-scale

and household industries have a s t rategic significance in the plan­ned economic endeavours of an underdeveloped coun t ry l ike ours. The i r po ten t i a l i ty for c rea t ing ga in­ful job oppor tun i ty and preserving foreign exchange and other scarce resources which m a y more f r u i t f u l l y be ut i l ised in other directions, their su i t ab i l i ty as seasonal industr ies to subserve the needs of agr icul ture , the i r adap tab i l i ty for being develop­ed on a decentralised pa t te rn these and many more impor t an t points tend to accord them a place of i m ­portance in the na t iona l economy. M a n y of these j o i n t s are s t i l l in the stage of hypothesis, a w a i t i n g ver i f icat ion t h rough empir ica l i n ­vest igat ion. It is true that a t t em­pts are being made in different parts of the count ry to v e r i l y them, but better-organised and systematic­a l ly co-ordinated enquiries w i l l have to be under taken before any mean­ingfu l and comparable conclusions can be d r a w n . Besides, in order to be comparable, the var ious empir ica l invest igat ions should proceed on basic concepts in as u n i f o r m a set­t i n g as is possible w i t h i n l im i t s of regional divergencies.

Th i s paper is, therefore, an at­tempt to discuss a few conceptual difficulties and problems which need to be resolved as a pre-condit ion for achieving precision of judgment , ob jec t iv i ty of approach and un i for ­m i t y o f out look in m a k i n g any ana­lysis of household and small-scale industries. A few of the concepts, basic to any such analysis, m a y be i l lus t ra ted here. I t m a y also be ment ioned tha t the points covered refer mos t ly to the app l icab i l i ty of these concepts to household and small-scale industries. They are, of course, add i t iona l to the points general ly associated w i t h the ana­lysis of organised industries.

Productive Capital L e t us s t a r t w i t h the concepts

i m p l i c i t in an analysis of cap i ta l s t ructure . In the f i rs t place, we have to be clear about the i tems included under the t e r m 'Produc­t ive Capi ta l ' . Simply, product ive cap i t a l means the t o t a l cap i t a l re­sources a t the c o m m a n d of an u n i t :

t ha t w h i c h effectively contr ibutes to the product ion funct ion of the un i t . I t is the sum-tota l of (a) fixed assets, in the f o r m of land, bui ld­ing, machinery and equipment and other f i t t ings and fixtures and (b) w o r k i n g capi ta l or the f loat ing capi­t a l , reflecting the operat ional costs involved in the un i t of manufacture .

Fixed Assets In assessing the values of fixed

assets or the block capi ta l compo­nent of product ive capi ta l , one or more of the fo l lowing methods are usually adopted It may be asses­sed in terms of (1) h is tor ica l cost or the value of the fixed assets at the t ime of thei r purchase; (2) pre­sent book value or the depreciated value of the assets and (3) the pre­sent replacement cost or the cost involved in replacing the ex is t ing set of fixed assets w i t h ident ical sets, hav ing more or less equal capacity and able to produce the same volume of output . Obviously, the choice of one or another of the methods in the de te rmina t ion of the values of fixed assets depends as much on the feas ib i l i ty of muster­ing the requisite data as on the objective in view.

In the case of registered units , it is general ly possible to obta in the requisite data f rom the i r records and books of accounts. wherein they show both the o r ig ina l cost at wh ich each of the items of fixed assets was purchased and their de­preciated value if for no other reason t h a n that of ob ta in ing i n ­come-tax rebates. However, the unorganised nature of household and smal l scale industries and the general absence of account ing habi ts among these uni ts make i t diff icult to ob ta in the necessary da ta regard ing either the h i s to r ica l cost or the present book value of their fixed assets. Besides, f r o m the viewpoint of current economic policy, i t is obvious t h a t neither h i s tor ica l cost nor the present book value is of much significance since neither reflects the m a r k e t apprecia­t i o n (or depreciat ion) of the value of fixed assets. Therefore, it is sometimes contended t h a t a more rel iable a n d a re la t ive ly bet ter de­t e r m i n a n t of the value of f ixed as­

sets would be the Present Replace­ment Cost, However, even here, its va lua t ion may become largely a mat te r of a r b i t r a r y process since if is diff icult to define the te rm, 're­placement' . Moreover, in the con­text of a dynamic society, keen to absorb the latest technological de­velopments, it is neither desirable nor possible to effect a true replace­ment of the old machinery and equipment.

There are other impor tan t points to be considered here especially in the context of household and smal l -scale indus t ry analyses. It is gene­r a l l y found that a sizable propor­t ion of the capital assets possessed by a ma jo r i t y of these industries happens to be either second-hand items or those fabricated local ly . In both cases. since no marke t value can be assigned to such items w i t h any degree of accuracy, con­siderable diff iculty arises in a t tem­pt ing a. correct assessment of the i r replacement value.

Depreciation Also, al lowance for depreciation

becomes difficult in such a context and so too de terminat ion of the rate of depreciation. I t is k n o w n that among household and smal l -scale industries, repairs t u r n out to be actual replacements of old parts and components, w i t h the result that w i t h the passage of years, the o r ig ina l equipment keeps on chang­ing i ts fo rm if it does not become new altogether. This phenomenon of a cont inua l change of fo rm not only confounds the concept of de­preciat ion in the general ly accepted sense of the t e rm but also gives rise to problems of devising new sets of tools to assess and estimate the rates of 'obsolescence' and 'de­precia t ion ' for this sector. For , i t would be dodging the problem to assume in these circumstances tha t both the rate and magni tude of de­preciat ion are insignif icant among household and small-scale Indus­tries. I f any th ing , they are of a higher rate and larger order.

In recent studies of household and small-scale industries, i t is ob­served t h a t genera l ly the H i s to r i ca l Cost and the Replacement Value of the fixed assets are sought to be

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obtained. F o r example, the surveys of small-scale industr ies under taken under the auspices of the Research Programmes Commit tee of the P lan­n ing Commission* have been found to resort to bo th the values for e s t ima t ing F ixed assets.

The methods fol lowed in most cases are also more or less the same, i e, p u t t i n g reliance on the memory of the entrepreneur con­cerned (if, as is general ly the case, he has no record of either the year when the i tem was purchased or its price) in respect of H i s to r i ca l Cost and to make an i tem-wise inven tory of the various items of fixed assets w i t h their approximate marke t value, as est imated b o t h by the en­trepreneur and the inves t iga tor and then cross-checked and verified w i t h the p reva i l ing price in the marke t . I t w i l l be readi ly seen tha t estima­t ion of Replacement Cost is easier and also re la t ive ly more depend­able than the other values a qua­l i t y wh ich commends Replacement Value for being adopted in the ana­lysis of household and small-scale industries.

Land and Building Aga in , normal ly , the values of

land and buildings f o r m an inte­g r a l part of the fixed capi ta l assets. Where these are hired, It is custo­m a r y to capitalise thei r value on the basis of the mon th ly renta l , usual ly at a ra te prescribed by either the Munic ipa l i t y or the i n ­come-tax authori t ies . In the case of household and small-scale indus­tries, however, these present prac­t ica l difficulties o f va lua t ion . In the first place, in a m a j o r i t y of

*Refer; (1) Small-scale Industr ies in Delhi by P N Dhar

(2) Small-scale I n d u s t r y in S ivkas i and Sat tur by E K W a r r i a r

(3) Small-scale Industr ies in Bombay Ci ty by Dr D T L a k d a w a l a and J C Sandesra (to be pub­lished)

(4) Small-scale Industr ies i n A m r a v a t i C i t y by Dr L G Joshi (to be published)

(5) Small-scale Industr ies i n Moradabad C i t y : by Dr B a l j l t S ingh (to be published)

Also refer to Small-scale Engineer­ing Uni t s i n B o m b a y C i t y ; by L a k d a w a l a and Mehta , U n i v e r s i t y Journal , Bombay ,

household and small-scale indus­tries, the work-place and residence are found to be one and the same or are so mixed-up as to be indis­t inguishable f r o m each other. In ei ther case, the difficulties involved in assigning value to tha t pa r t o f the residence where product ion ac t i ­vit ies are carr ied on are innumer­able. Secondly, a substant ia l pro­port ion of uni ts do not own their indus t r i a l premises and w o r k in hired premises. I t is. however, felt t ha t in the context of these indus­tries, any a t tempt either to appor­t ion value to the p a r t of the premises used as 'work-place ' or to capitalize the value of l and and bu i ld ing ob­tained on renta l , wou ld enta i l esti­mates and assumptions, wh ich may be a r b i t r a r y if not unreal .

I n most smal l - indus t ry analyses, the values of land and bui ldings are excluded f rom those of fixed assets and are instead analysed separately. Though the relat ive importance of the items, land and bui lding, in the to t a l value of fixed assets wou ld va ry f r o m indus t ry to industry, the exclusion of this b ig chunk f rom the to t a l value of fixed assets would n o r m a l l y result in dis­tor ted capi ta l coefficients. A g a i n , in the case of uni ts w o r k i n g in hi red land and bui ld ing , the rent would figure as an i tem of expen­di ture to be deducted f r o m Gross Output to a r r ive at net value add­ed', w h i c h is often t aken as 'output.' for de r iv ing Cap i t a l /Ou tpu t and other rat ios . However, because of va lua t iona l difficulties, no such de­ductions are practicable in the case of uni ts w h i c h own l and and bu i ld ­ing . This n a t u r a l l y vi t ia tes compa­r a b i l i t y of the resul t ing analysis.

Working Capital

Coming to the problem of esti­m a t i n g the w o r k i n g capi ta l , two dis t inct methods are popular ly em­ployed. I t i s estimated in refer­ence to a point of t ime and viewed as compr is ing : (1) stocks of r aw mater ia ls a n d fuels, (2) stocks of finished products, (3) semi-finished products in stock or in process, (4) cash in hand or in bank and (5) credit due to the uni t . Secondly, w o r k i n g cap i ta l can also be sized up in reference to a per iod of t ime (say, for three, six or nine mon ths ) , the period being determined by the nature of the indus t ry and the pro­cesses of p roduct ion involved and the average t ime- lag between pro­duc t ion and rea l iza t ion of the sale-proceeds thereon The average

amount o f w o r k i n g capi ta l required for different industr ies reflects the v a r y i n g opera t ional costs Involved in an indus t ry . A n d the opera t ional costs depend as much on differen­t i a l prices of r a w mater ia ls , fuels etc as on the factors of purchase and s tock ing capacity, need of cre­d i t faci l i t ies for the trade, size of inventories a n d the policies adopted in this respect by the ind iv idua l un i t concerned.

An assessment o f w o r k i n g capi ta l resources by ei ther of the above-mentioned methods is easier In the case of organised units o w i n g both to the obl igat ions imposed on these units by Governmenta l requirements in respect of submission of re turns and to their awareness of the i m ­portance of m a i n t a i n i n g accounts. However, on account of the pecu­l ia r nature of the product ion pro­cesses involved and the conditions of their day-to-day operation, con­siderable di f f icul ty is experienced in es t imat ing the w o r k i n g capital re­sources employed by household and small-scale industries. A n d for the same reason, it is r a the r diff icul t to relate the t o t a l w o r k i n g capi ta l em­ployed by a un i t to a specific period of t ime. Most of the ar t isans and smal l indust r ia l i s t s lead a hand-to-m o u t h existence, and are, therefore, required to dispose of the i r pro­ducts at the earliest oppor tuni ty .

Moreover, the m a j o r i t y of the ar t isans have no idea of the con* cept of w o r k i n g capi ta l and the least knowledge of its volume for a pa r t i cu la r period of t ime. Most of them obta in r aw mater ia ls on credit or get them f rom dealers or f r o m consumers d i rec t ly . I n ei ther case, these unite- are usual ly not in a posit ion to give any idea about the r a w mater ia ls consumed by them or the i r n o r m a l requirements for a g iven period of t ime. In m a n y cases, short periods such as a week, a f o r t n i g h t or a m o n t h w i l l have to be t aken as the basis for esti­m a t i n g and r e l a t i ng each of the consti tuents of w o r k i n g cap i ta l for a specific du ra t i on of t ime . These figures w i l l , however, have to be cross-checked w i t h the actual v o l ­ume of p roduc t ion d u r i n g the res­pective periods by assessing the i n ­put of r a w mater ia l s etc in the g iven volume of output ,

Maximum Capacity L e t us t ake the concept of ' m a x i ­

m u m capacity ' f o r purposes of f u r ­ther i l l u s t r a t i o n . M a x i m u m capaci ty or ins ta l led capaci ty is the produc-

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t i o n or output po ten t ia l of a un i t o f manufacture w i t h its exis t ing set of machinery and equipment, assuming t h a t the opera­t ive condit ions of the un i t such as the a v a i l a b i l i t y of r a w mater ia ls , credit, demand fo r i ts products etc are assured and tha t the uni t func­t ions un in te r rup ted th roughout the year. The aggregate volume of pro­duct ion thus turned out dur ing 300 days (the n o r m a l w o r k i n g period in a year ) , w o r k i n g one sh i f t per day of 8 hours each, is reckoned as the m a x i m u m capacity of a un i t .

Problems of Measurement The measurement of ' M a x i m u m

Capaci ty ' is perhaps best done, at least in so far as organised indus­tries are concerned, in re la t ion to the instal led capacity of the plant, of course other factors remain ing the same. However, in respect of unorganised industries and especial­ly those of the household type, where the product ion potent ial i t ies are related more to uncer ta in human capaciies (or dispositions.) than to the precise and methodical w o r k i n g of p lan t and machinery, the difficulties encountered are man i ­fold. For, un l ike in the case of organised industries, the uncer ta in­ties, and imponderables involved in the de te rmina t ion of the ' m a x i m u m capacity ' of household industries are too many. Le t us take the example of the Oi l Pressing Indus t ry . In the case of expellers, the m a x i m u m capacity can obviously be worked in re la t ion to the capacity of the expeller to crush a g iven type of oilseed for, say, 8 hours in the nor­m a l course, and thus the annual capacity can be worked out. I t should be remembered tha t the pr ime i n ­strument of product ion is the me­chanical expeller w i t h an at tendant o f n o r m a l s k i l l and t r a i n i n g w o r k ­i n g on electr ical or diesel power.

N o w let us take an oi l ghan i . Here the p r ime ins t ruments of pro­duct ion are: (a) the ghani , (2) bul locks and (3) the ghan i a t tend­ant . N o w let us suppose t ha t the ghan i is of s tandard type, so t ha t i ts capacity can be kept constant (as in the case of the expeller) . The other t w o factors, viz, the bul­locks and the a t tendant are the variables. Being non-mechanical ins t ruments , how fa r i s i t just if iable to t h i n k of the i r w o r k i n g in con­sonance at a g iven ra te of efficiency to keep to a given rate of output? Th i s w i l l , of course, depend on (1) the number of g h a n i charges w o r k ­

ed per day throughout the year, (2) the t ime taken by each charge and the t o t a l number of charges assum­ed per day, (3) the type, qua l i ty and s tamina of the bullocks engaged which , apart f r o m factors affect ing their heal th and da i ly upkeep, de­pend on their feed and on weather conditions, (4); the non-u t i l i sa t ion of these bullocks for other w o r k , and (5) the health, disposition and other-day-to-day l i v i n g conditions of the ghan i a t tendant ( t e l i ) .

We may continue l i s t i ng such con­dit ions as these almost ad in f in i tum. A n d what is t rue of this case is equally so, in v a r y i n g degrees, of other household and smal l scale industries. The problem is to find out a sat isfactory method whereby some system of s ta t is t ica l measure­ment can be evolved to judge the extent of idleness prevalent among the household and smal l scale i n ­dustries. As yet, however, no satis­fac tory methods have been devised to obviate the various uncertainties mentioned above or to isolate v a r i ­ables. Perhaps a few of these could he overcome to a cer ta in degree by re la t ing the question of m a x i m u m capacity, not only to the exist ing machinery and tools, but also to such factors as the general condi­tions of w o r k i n g , the art isan's s k i l l , t r a i n i n g and his capacity and so on.

Other Problems There are also other problems to

be considered here. N o t a l l house­hold units, and for tha t mat ter , not even small-scale ones w o r k a l l round the year. In other words, there are what are k n o w n as the 'Perennial ' or units wh ich have w o r k a l l round

the year and the 'Seasonal' or units w h i c h have w o r k only for a few months in the year. W h a t period of w o r k i n g can be assumed to estimate the m a x i m u m capaci ty of uni ts of the 'Seasonal type'? Can we assume a f u l l w o r k i n g year of 300 days or more in this case also? Then there is the obvious and we l l -known fact tha t an ar t i san is never known to stick to any regular hours of w o r k , much less to a regular period of w o r k . Apa r t f rom the obvious shortcomings and the innumerable dis t ract ions inc i ­dental to w o r k i n g in or near his own house, a vi l lage a r t i san is not equipped and t r a ined temperament­a l ly to submit to the r igours of dis­ciplined w o r k . Sometimes he migh t w o r k for only four hours a day while at other times he m i g h t for even sixteen hours. Much would , of course, depend on the type of i n ­dustry, the season, the place where the uni t is located and so on. It is necessary, therefore, to know the no rma l period of w o r k the art isans m a i n t a i n in various specific indus­tries at different times of the year and in different parts of the country.

It may be mentioned here that these are only a few of the prob­lems re la t ing to the conceptual and valuat ional difficulties involved in any industry-analysis concerning household and small-scale indus­tries. I t may also be emphasised here that even among the prob­lems and difficulties i l lus t ra ted here, the aspects discussed are but a few, this review being more i l lus t ra t ive than exhaustive. F i n a l l y , i t is w o r t h r emind ing ourselves here that a proper unders tanding of the v a r i -

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ous concepts, the i r impl ica t ions a n d the f lense in w h i c h they are made use of w i l l make for clearer expo­s i t ion, a l l ay ambigui t ies and gene­r a l l y fac i l i t a te a comprehensive unders tanding and u n i f o r m inter­p re t a t ion of the resul tant analysis.

T h e appl ica t ion of var ious economic a n d s ta t i s t i ca l tools fo r a scientific and mean ingfu l analysis o f the da ta collected i s f r augh t w i t h the r i s k o f w r o n g in terpre ta t ions lead­i n g to fal lacious conclusions in the absence of appropriate c lar i f ica­

t ions and l a c k of u n i f o r m i t y o f ap­proach to these problems. I t i s to h i g h l i g h t some of these aspects a n d to stress the necessity of concerted t h i n k i n g a n d ac t ion on the p a r t of research scholars t h a t th is paper has been p r i m a r i l y w r i t t e n .

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