India’s Terms of Trade- Balance of Trade

India’s Terms of Trade

Terms of trade means the rate on which exports are traded with the imports. In other words, it indicates the quantity of exports which is given in exchange of one unit of import goods. The favourable terms of trade for a country implies that it has to export lesser amount of goods in exchange of a given amount of import-goods. India’s terms of trade is getting worse or we are facing the problem of unfavourable terms of trade. It means we are required to pay more and more with our exports for a given amount of imports every year. It is because of the reason that the prices of some of our vital imports are rising more speedily than the prices of our export items.

Process and Working of Foreign Trade

There is an important difference between internal trade and foreign trade. In internal trade country’s currency is used both by the buyer and the seller. But in foreign trade country’s currency is exchanged with the foreign currency. When we export we get foreign currency (or foreign exchange) and when we import we need foreign currency while foreign Countries get our currency (rupees). In this process of foreign trade exchange between different currencies may be required. Suppose an Indian trader exports goods to U.S.A., he earns dollars which he needs to convert into rupees. Similarly, if he imports from U.S.A., he has to buy dollars in exchange for his rupees.

Now the question is how the r1te of exchange between rupee and dollar is determined? In a free competitive market, the rate of exchange between U.S. dollar and Indian rupee will be determined by the relative demand for U.S. goods and capital in our country and for our goods and capital in the U.S.A. Keeping in view this criterion, the actual rate of exchange is generally fixed officially by the two countries.

Efforts are made to keep the rate of exchange free from temporary fluctuations in demand. In this task International Monetary Fund (IMF) plays an important role. IMF maintains the reserves of all currencies which are contributed by the member Countries according to their fixed quotas. Whenever a country is in shortage of a particular currency it can get it form the IMF reserves. But actually our imports have to be paid by our exports. The Reserve Bank of India controls the purchases and sales of foreign exchange and also maintains the foreign exchange reserves of our country. When country’s imports are higher than the exports, the foreign exchange reserve goes down and vice versa.

Balance of Trade

Balance of trade of a country means the systematic record of imports and exports of goods in a given year. We can find out the balance of trade of a country by deducting its imports from its exports.

Balance of Trade = Exports — Imports

If the exports exceed imports, balance of trade is said to be favourable and if imports exceed exports, it is regarded unfavourable. In India we are facing the problem of unfavourable balance of trade since independence. There are two main causes of this trade deficit

(i) Rapid and continuous rise in our imports over the years due to developmental requirements, food crisis and border disputes with the neighbour countries.

(ii) Slow progress in exports.

To overcome the problem of trade deficit we have to make efforts in two directions:

  1. Import Substitution—Import substitution means to promote and support indigenous production through indigenous resources especially the goods of imports.
  2. Export Promotion. Export promotion means promotion and expansion of exports. Now India is relying more on export motion.

Main Items of Imports and Exports in India

Before independence, the number of goods included in our imports and exports were limited. But after independence this number has increased considerably. The number of commodities being traded in India’s foreign trade are now nearly 6700. Moreover, we witness some important changes , the composition of India’s foreign trade.

Main Items of Imports

Before independence India was importing mainly consumer goods manufactured in the British industries, such as, medicine, cloths, electric goods, steel etc. It was a sort of forced import on her. But now India is importing goods with a view to her developmental needs. Items of India’s imports can be grouped broadly into three categories.

(a) Capital Goods. Machinery, manufactures of metals, transport equipment etc.

(b) Raw Materials and intermediate Goods. High fibre cotton, raw jute, chemicals, petroleum and lubricants, fertilisers etc.

(c) Consumption Goods. Cereals and cereal preparations, electric goods, medicines, cloth, paper etc.

In the post-independence era, the major items of India’s imports are: cereals and cereal preparations, cashewnuts, crude rubber, raw cotton, raw jute, edible oils, petroleum oil and lubricants, fertilisers and chemical products, iron and steel, non-ferrous metals, manufactures of metals and machinery, pearls and precious stones, paper and paper board etc.

When we look at the whole plan-period we find that the imports of some commodities have fallen while others have risen. Just after independence we were forced to import cereals and cereal preparations in order to solve our food problems. But after some time our food grains production has sufficiently risen. India became almost self-sufficient in the field of wheat and rice, especially after green revolution. Consequently the imports of cereals have been reduced. Similarly, with the increase in the production of cotton, its import has also come down. On the other, commodities whose imports were increased tremendously are petrol and petroleum-products, fertilisers, chemicals, metal products and machinery, pearls and precious stones etc. This change in the composition of imports indicates the process of economic development and industrialization in the country. It reveals that India’s imports have primarily increased because of her developmental needs. However, in spite of this, there are some items in our imports whose imports can be and should be curtailed. For this we have to increase country’s productive capacity and the use of indigenous goods. In 1950-51 India’s total imports were of Rs. 608 crores which-increased to Rs. 139000 crores in 1996-97. Thus in 1996-97 in comparison to 1950-51 our imports have become 228 times.

Main Items of Exports

Before independence the main items of India’s exports were raw materials and agricultural products for the use of industries of England, But after independence, the composition of India’s export has, remarkably, changed. Now we are exporting various types of manufacturing and engineering goods also. Items of India’s exports can be grouped, broadly into four categories:

(a) Agricultural and Allied Products. Tea, coffee cashew kernels, spices, raw jute, tobacco, fish and fish preparations, rice, oil cakes,fruits and vegetables etc.

(b) Ores and Minerals. Manganese, mica, iron ore etc.

(c) Manufactured Goods. Textile fabric manufactures, chemical and allied products, jute manufactures, leather and leather manufactures handicrafts etc.

(d) Mineral Fuels and Lubricants
Thus, after independence India’s major exports have been Tea, coffee, cashew kernels, vegetable oil, oil cakes, spices, raw cotton, rice, iron ore, manganese ore, mica, coal, crude mineral oil, sugar, textile fabric, jute manufactures, leather and leather manufactures, readymade garments, iron and steel, machinery and transport equipments, gems, jewellery and precious stones etc.

The major changes in the composition of India’s export during the plan-period are:

(a) In the beginning traditional goods (such as, Tea, Coffee, Tobacco, Cotton, Textile, Jute manufactures etc.) had a dominant place in India’s exports but now the export of non-traditional goods are steadily increasing.

(b) India has traditionally been an exporter of agricultural and allied products. Their shares have gradually declined. On the other side the exports of manufactured goods and engineering goods are increasing.

(c) In agricultural goods, the exports of coffee, cashew kernels, oil cakes, fish and fish preparations have increased substantially while the exports of tea, spice and tobacco have only increased marginally.

(d) The goods whose exports have increased substantially over the years and also have tremendous export potential for the future are leather, transport equipments and other engineering goods, gems, jewellery and precious stones.

(e) The total number of export goods have also substantially increased. It is a good sign.

In 1950-51 India’s total exports were of Rs. 606 crores which has been increased to Rs. 118800 crores in 1996-97. Thus during this period our exports have become more than 196 times. Thus, in brief, the pattern of India’s export indicates that the Indian economy is being diversified.

Volume and Value of Foreign Trade in India

After independence both value and volume of India’s foreign trade have substantially increased. The total value of foreign trade (Imports + Exports) of India in 1950-51 was only Rs. 1214 crores. This increased to nearly Rs. 257800 crores in 1996-97. In other words, our foreign trade in 1996-97 has become more than 212 times to the 1950-51 level. The part of this increase in the value of foreign trade, is undoubtedly, due to price hike. But only price hike cannot explain this phenomenon. This suggests that the volume of foreign trade has also increased. It means that the total amount of goods which we either import or export has also increased. However, when we compare the share of India’s foreign trade in world’s total foreign trade we find that India’s share is continuously declining. It indicates that India’s foreign trade has increased but this increase is at a very low rate in comparison to world’s foreign trade.

Whatever increase we find in India’s foreign trade, it is both in the field of imports and exports. But our imports have increased at a much faster rate than our exports. The high increase in our imports is mainly because of two reasons : (a) to achieve economic development through rapid industrialization made it necessary for us to import machinery and equipments, industrial raw materials, technical know-how etc., and (b) to fulfill the increasing demands for essential mass consumption goods. Our exports have increased as a result of increase in overall production of export goods. However, increase in export is much below to our expectations.

Direction of India’s Foreign Trade

Direction of trade implies the source-countries for India’s imports and destination of India’s exports. As we know that before independence, India’s foreign trade was mainly confined to Britain and other Commonwealth countries. In the post-independence era, the share of U.K. has declined sharply while the shares of U.S.A., U.S.S.R. (Now Russia and other countries), Canada, Japan, Germany and petroleum exporting countries have gone up. Moreover, now we have trade relations with a greater number of countries, than before. It will be better to know the changes that have occurred both in the direction of imports and exports, separately.

(A) Changes in the Direction of Imports

Direction of imports means the source-countries for India’s import. United Kingdom was the most important source of our imports in the preindependence  period but after the independence it has steadily lost its ground. Besides this, the other countries whose share has declined are Pakistan, China, Burma, Sri Lanka, Australia etc. On the other, the shares of U.S.A., Russia, Japan and Germany have increased substantially. Moreover, with the increase in demand for petroleum, the share of petroleum exporting countries has also gone up. The countries which have dominant place today as a source-country for our imports include U.S.A., Germany, Japan, United Kingdom, Russia and OPEC (Organisation of Petroleum Exporting Countries). Nearly half of our imports come from developed countries, one-fourth from petroleum exporting countries and. rest from Eastern Europe and other developing countries.

(B) Changes in the Direction of Exports

The number of countries to whom we export has increased considerably since independence. Yet a major portion of our exports is concentrated in a few countries. Here again U.K. was the principal trading partner in our exports before independence but its share has declined sharply after independence. Besides this, there has been marked decline in the shares of Sri Lanka, Burma, China and Pakistan. The main countries whose shares have increased in our export trade are America, Canada, East European countries, Germany, Japan and Russia. Now Iran and other petroleum exporting countries are becoming important markets for our export trade.
The countries which have dominating position, at present, in India’s export trade are U.S.A., Japan, Germany, U.K., and the countries belonging to the group LDCs (Less Developed Countries excluding OPEC). At present more than half of our exports go to the developed countries, nearly one-third to the Eastern Europe and other developing countries and rest to the petroleum exporting countries.

Taking an overall view, it can be said that India has now a more spatially dispersed pattern of foreign trade. This is a welcome development both from the economic and political point of view.

Importance of Foreign Trade in the Indian Economy

Trade of a country is of two kinds: (a) internal trade, and (b) external trade. Internal trade implies a trade among different persons or among different -regions within the boundary of a country. For example, trade between the people of Delhi and Calcutta or between the people of Jaipur and Lucknow or trade among different persons within the Delhi, is internal trade. However, when the people of a country trade with the people of some other country. it is foreign (external) trade. In this chapter we shall study the foreign trade of India.

Importance of Foreign Trade in the Indian Economy

Before independence, foreign trade was colonial in nature. In those days the aim of foreign trade was to serve the British interests rather than India’s interests. India had exported food grains and raw materials to England and in return imported finished goods of British industries. India, thus, suffered double exploitation through that trade. But in the post- independence era the situation has altogether changed. Now the main aim of our foreign trade is to serve the interests of India. Now we plan foreign trade in a way so that it may be helpful in India’s economic development. In this modern age we cannot progress without foreign trade. Foreign trade is very important for the Indian economy.

No country can produce all goods of its requirements. Foreign trade provides the opportunity to exchange and consume the goods of other countries. It also increases the efficiency and productivity of the country’s productive sector through a vision of labour and specialisation. With the help of foreign trade we can buy from the rest of the world goods that are relatively cheaper in the world market and can sell to the rest of the world goods that we can produce move efficiently.

Imports and exports both are essential and important for the economy. This is explained below:

(A) Importance of Imports

(i) It is essential for India to import some important capital equipments and high technology for her industrialisation and development. They are called developmental imports.

(ii) India’s developing economy requires the import of scarce raw-, materials and intermediate goods with a view to maximum utilisation of her productive capacity. They are known as maintenance imports.

(iii) There are some essential consumption goods which are in short supply in our country. Import of such commodities, therefore, becomes essential. For example, after independence India had imported foodgrains and other foodstuffs. Such imports are anti-inflationary in nature because they reduce the scarcity of consumer goods.

(B) Importance of Exports

(i) India has to expand her exports to pay back for her essential imports.

(ii) Exports are essential to earn foreign exchange.

(iii) Exports also act as stimulus to domestic growth and industry.

Thus, foreign trade has an important place in the developing economy of India which is moving in the direction of industrialisation.

Since independence, India’s foreign trade has undergone a complete change. Some of the salient features of independent India’s foreign trade are discussed below.

Industrial Productivity and Efficiency


Industrial productivity (or efficiency) can be defined or measured in three different ways. They are:

(i) Incremental Capital-output Ratio. Incremental capital-output ratio means how much capital is required to increase one unit of output. Suppose to increase one unit of output if we require 4 units of capital then the incremental capital-output ratio will be 4 : 1. This means, the higher the ratio, the lesser will be the productivity of capital investment.

The incremental capital-output ratio in Indian industries has risen over many years. It indicates decline in industrial productivity. But for the last few years it is showing signs of falling again, which is a good indication.

(ii) Total Factor Productivity (TFP). Total factor productivity measures the increase in output by adding a little of all factors in a combination of various factors of production. There are some indications which suggest that TFP is increasing in many Indian industries.

(iii) Domestic Resource Cost (DRC). When we compare the price of the product concerned in the international market with the cost of domestic resources for its production, it is called Domestic Resource Cost at international prices. It measures the industrial productivity (or efficiency) in comparison to rest of the world. On the basis of this measure many capital goods such as electric machinery and some of the machine tools produced by Indian industries have high efficiency. But in most of the areas of advanced technology Indian industries are less efficient.

Causes of Inefficiency and Low Productivity in Indian Industries

Keeping in view all the three above-mentioned criteria, the productivity (or efficiency) in Indian industrial sector is generally low. Following are the main causes of this low productivity


(i) Lack of incentives and facilities for technology up-gradation.
(ii) Lack of facilities for Research and Development activities.
(iii) Lack of incentives and support for modernisation of plant and machinery.
(iv) Lack of adequate infrastructural facilities like power supply
(v) Lack of financial resources.
(vi) Industrial disputes and lack of work-culture.

To improve industrial productivity we have to tackle the above- mentioned causes effectively and urgently.

Dispersal of Industries in India

We find that there is great disparity in industrial development among different states of the country. The solution of this problem depends on the dispersal of industries. Dispersal of industries means location of industries in different regions of the country or the geographical decentralisation of the industrial activities. In this process of dispersal of industries backward regions are required to be given priority in the location of industries.
In this regard government has adopted the following important steps:

(i) In 1968, the government had identified 246 districts as backward districts and financial incentives and subsidies were given to industries set up in these districts.

(ii) In 1978, industrial licensing regulations were used to encourage regional dispersion of industries and large industrial houses were allowed to set up industries in the backward areas.

(iii) In 1981, the idea of ‘no industry’ districts was introduced and such districts were given top priority in all schemes and provided with infrastructural facilities for attracting new industries.

(iv) Through licencing policy, the MRTP companies were forced to locate industrial units in the backward areas.

(v) The thrust of the new industrial policy, 1991 is to shift industries away from big congested cities to the rural and backward areas.

Government Steps to Promote Large Scale Industries

Indian Government has adopted following important steps for the development of large scale industries in the post independent era:

1. Expansion of Infrastructural Base. Government has paid special attention to the development and expansion of infrastructural facilities in India. Consequently, we find development in the field of electricity, machinery and equipment, transport and communication services, monetary and financial institutions etc. As a result the industrial sector of the country has become more modern and strong.

2. Promotion of Public Sector Industries. Just after Independence, government established a number of important industries in the public sector. It has stressed on the expansion of public sector in different plans. As a result of government policy, public sector industries have undoubtedly played an important role in the industrial development of post-independent India. At present there are a number of industries under public sector. Prominent among them are: Steel Authority of India Ltd.; Sindri Fertiliser Factory; Indian Oil Corporation, Hindustan Machine Tools; Bharat Heavy Electricals Ltd. etc.

During the period of planning both the number of public sector industries and the capital investment in them have increased a lot. But they proved unsuccessful in maintaining the high levels of productivity and managerial efficiency. Thus, this sector has failed to fulfil the expectations of the country. It is, therefore, required that we should pay more attention to the improvement of the working of the public sector. Now for the last few years the policy of promoting private sector industries has again been adopted.

3. Foreign Collaboration. During plan-period foreign collaboration has undoubtedly been sought but simultaneously efforts have also been made to keep the economy free from the clutches of foreign ownership and control. Many industries have been set up in India with the help of foreign capital and foreign technology.

4. Financial Institutions. A number of financial institutions have been set up to meet the financial requirements of large scale industries. For instance, Industrial Financial Corporation of India (IFCI), Industrial Credit and investment Corporation of India (ICICI). Industrial Development Bank of India (IDBI), Industrial Reconstruction Bank of India (IRBI), etc. These financial institutions provide credit facilities at reasonable terms to large scale industries according to their needs.

5. Improvement in Technology. For the development of large scale industries measures to use modern and efficient production techniques have been adopted, New scientific and technological experiments and researches related to the field of industries have been conducted. In this regard efforts have been made mainly in two directions: (i) In adopting the high technology of developed countries. (ii) In developing appropriate technology suitable to the conditions of our country. For this a number of technical institutions have been set up by the government and the work of research and development has also been promoted.

6. Tax and other Concessions. For industrial development government announces from time to time, concessions also such as tax concessions, credit facilities, land for the factory at concessional rates, special concessions and benefits for the establishment of industries in backward regions.

7. Special Encouragement to Export Industries. Government has adopted a number of measures for the promotion of export industries. Such industries have been allowed to import raw materials, machinery and equipments etc. for their requirements and they have also been given
special tax concessions.

8. New industrial Policy. In order to give more push to the industrial development, government announced a New Industrial Policy in July 1991. The main provisions of this new policy were : reduction of areas reserved for public sector, delicensing of a number of large scale industries, removal of investment controls on large business houses, liberalisation of foreign investment policy and import policy, development of backward areas etc. In short, it is a liberalised industrial policy.

The major objectives of this policy are : (a) Full utilisation of the capablities of entreprenerus; (b) Encouragement for technology upgradation: (c) Improvements in efficiency and productivity by removing all regulations and hurdles in their way; (d) Massive help for modemisation of plant and equipment; (e) Increase in the competitive strength of the Indian industries.

For the purpose of technology upgradation and modernisation, government has set-up two funds (a) the Technology Upgradation Fund, and b) the Capital Modernisation Fund.
Besides this some measures have also been adopted to make available raw materials to the large scale industries, to reduce industrial disputes and industrial unrest in order to improve industrial relations.

Thus, government has initiated a number of measures for the development of large scale industries in the country. But keeping in view the requirements of the country, the development in this sector is not up to the mark. Hence in coming years we have to speed up our efforts in this field.

Classification of Large Scale Industries

Classification of Large Scale Industries

A. On the Basis of Type of Output
According to type of output (or used-based classification) industries in India are broadly divided into four groups. They are:

(1) Basic industries. The basic industries are the industries which provide essential inputs to industrial and agricultural sectors of our economy. For example : Coal, Iron and Steel, Fertilisers, Cement, Aluminium, Electricity, Chemicals, Non-ferrous metals etc.

(2) Capital Goods industries. The capital goods industries are the industries which provide machinery and other capital equipments to the economy. For example Machinery. (industrial as well agricultural), Machine tools, Tractors, Harvesters, Power transformers, Motor vehicles, Electric motors, Electric cables, Heavy electrical equipments etc.

(3) Intermediate Goods industries. The intermediate goods industries are the industries which provide goods that are used in the process of production in other industries or as accessory to the capital goods. For example Cotton Spinning, T’res and tubes, Man made fibres, Petroleum products, Bolts, Nuts etc.

(4) Consumer Goods industries. Consumer goods industries are the industries which produce goods that arc directly required for the satisfaction of consumers’ wants. They can again be divided into two sub-groups
(i) Durable Consumer Goods industries. For example : Refrigerator, Air-conditioner, Television, Radio, Car. Scooter, Cycle industries etc.
(ii) Non-durable Consumer Goods Industries. They include industries producing sugar, tea, cotton textile, edible oil, paper etc.

B. On the Basis of Ownership

On the basis of ownership industries in India can be classified into three groups
(i) Private Sector Industries owned, controlled and managed by private individuals, institutions and organisations.
(ii) Public Sector Industries owned, controlled and managed by the Government.
(iii) Joint Sector Industries owned, controlled and managed jointly by private entrepreneurs and the Government.

Large Scale Industries During the Plan Period

The history of organised industry in India may be traced to 1854 when the real beginning of the cotton textile mill industry was made in Bombay. Besides this, jute and coal-mining also progressed about this time. During and after the First and Second World Wars several industries expanded rapidly and a number of new industries came up, such as steel, sugar, cement, glass, industrial chemicals, soap and vanaspati. But their production was neither adequate in quantity nor diversified in character. Thus on the eve of planning, India was industrially backward and the pattern of industries was oriented towards consumer goods.

Though First Five Year Plan was mainly an agricultural plan, however some steps were taken by the government to establish some large scale industries. During this period some prominent industries were set up, such as, Sindri Fertiliser Factory, Chittaranjan Locomotive Factory, Integral Coach Factory, Indian Telescope Industries etc. However, real progress began with the Second Five Year Plan. A base of heavy industry was sought to be created during the Second Plan period. Three new steel plants—Rourkela Steel Plant in Orissa, Bhila Steel Plant in Madhya Pradesh and Durgapur Steel Plant in West Bengal—were set up in the public sector. The capacity of the two existing steel plants working in the private sector was doubled. During this plan period top priority was accorded to the development of heavy electrical and heavy machine tools industries, heavy machine building and other engineering industries, iron and non-ferrous metals, fertiliser and chemical industries etc. During this period the output of many other industries, like bicycles, sewing machines, telephone and electrical goods also increased substantially. Since then number of measures were initiated by the government in subsequent plans with regard to the development of large scale industries in the country. In the Third Five-Year Plan, for building a sound capital base for self-reliant and self-sustained growth, special emphasis was laid on industries such as coal, oil, steel, electric power, machine-building and engineering goods.

In the Fourth Five-Year Plan, the performance of the industrial sector fell short of expectations both in terms of production and investment. The fifth plan had emphasis on rapid growth of core sector industries and increase in the production of export-oriented goods and articles of mass consumption. Industrial policy during the Sixth Five-Year Plan aimed at (a) optimum utilisation of existing capacities, (b) quantitative increase in output of consumer, intermediate and capital goods, and (c) improvement of productivity. This plan gave special emphasis to improve the functioning of infrastructure particularly coal, power and railways. The industrial policies in the Seventh Five-Year Plan were oriented towards; (a) ensuring adequate supply of wage goods and consumer articles of mass consumption; (b) maximising production of existing assets; (c) development of sunrise industries, such as, telecommunication, computers, micro-electronics, ceramic composite and bio-technology.

The Government has taken a number of steps to remove the difficulties and problems faced by our large scale industries. Some of the prominent steps are : creation of sound infrastructural base, encouragement to modernisation, protection to indigenous industries, provision for adequate supply of scarce raw-materials, special encouragement to export-goods industries, creation of financial institutions to meet out the requirements of long-term finance to industries, expansion of transport and communication facilities, provision for high skill training, upgradation of technology, increase in managerial efficiency, development and improvement in capital market etc.

The industrial policies in the Eighth Five-Year Plan were framed with a view to achieve three main objectives:
(a) Consolidating the gains already achieved during the eighties;
(b) Providing greater competitive stimulus to domestic industry;
(c) Globalising the Indian economy through its greater integration with the world economy.

Keeping in view these objectives, Eight Five-Year Plan has stressed the following reform measures—Curtailment of unnecessary interference by the government in the industrial sector of the economy, granting freedom to the industries in taking decisions according to the changing situations; making industries free from restrictions and control such as quota-permit, licence and export-import regulations. The Eighth Plan has almost achieved the target rate of industrial growth (7.5 per cent per annum).

Importance of Cottage and Small Scale Industries

Cottage and small scale industries have important place in Indian economy since very old time. Britishers destroyed our traditional handicraft industries in order to sell their industrial products. Since then Indian economy became weak. If we want to revive the Indian economy, we will have to concentrate again on the development of cottage and small scale industries. Their importance can be understood mainly on the following counts:

(i) Source of Employment. They are the important source of employment and supplementary income. With the same capital investment, small scale industries can provide employment to more people in comparison to large scale industries. In Indian agricultural sector where farmers do not get employment for whole of the year, these industries can serve as supplementary occupations to them. It will reduce the problem of disguised unemployment in the agricultural sector and on the other, it will also provide extra income to the cultivator and other artisans.

(ii) Equal Distribution of Income. Cottage and small scale industries encourage equality in the distribution of income and wealth. In these industries a good number of persons run their own occupation. Thus, it avoids the concentration of income and wealth in a few hands. Similarly, they can easily be established in different villages and regions. This will lead to the balanced regional development.

(iii) More Suitable in Indian Environment. They are more appropriate in Indian environment. In India we have more labour and less capital. Hence for India only those industries are more appropriate which employ more labour but require less capital. Here we want to produce more mass consumption goods in the shortest possible time. In this regard cottage and small scale industries can better serve our purpose since they have short gestation period.

(iv) Use of Local Resources and Skills. India is full of diversities. We find different types of raw materials and skills at different places. Different places have different needs also. Cottage and small scale industries are more suitable in catering local needs by utilizing local resources and skills.

(v) Decentralisation of Industries. Cottage and small scale industries can easily be established in different villages and towns of bur country. Thus, they can help in decentralisation of industries and regional balance.

Besides this, with a view to avoid industrial unrest, to reduce pressure on foreign exchange, to check trade cycles and inflation, to help and serve large industries and also to keep politics free from the pressures of money, cottage and small scale industries can play a very important role. Now, they are being considered more important because of the problems of ecology and environment also. Perhaps in view of all these things Gandhiji once said, “The salvation of India lies in cottage and small scale industries.”

Government Measures to Promote Small Scale Sector

Keeping in view the role and importance of small scale sector Government of India has initiated number of promotional measures for this sector. They are given below
(i) Efforts are being made to supply rw materials and equipments at affordable prices.
(ii) Arrangements have been made to provide credit facilities at concessional rates through banks and other financial institutions.
(iii) To protect from the competition of big industries nearly 872 items have been reserved for the small scale sector.
(iv) In the purchase policy of government and public sector institutions the goods of small sector are given preference over the goods of large-scale industries.
(v) Small scale industries are receiving a number of tax reliefs, concessions and financial incentives from the government.


Cottage and small scale industries have showed considerable progress. The share of cottage and small scale industries in the total industrial output is nearly fifty per cent. And their share in the total industrial employment is nearly 80 per cent. At present this sector is producing more than 7000 goods in India. Along with traditional goods, this sector is now producing a large number of non-traditional goods also viz., radio, tape recorder, fans, television, sewing machines, electronic and engineering goods etc. Now we export number of goods manufactured by our small sector and this export is continuously increasing.

Cottage and Small Scale Industries

Sometimes we fail to distinguish between cottage and small scale industries. Let us understand their meaning and distinction.

Meaning of Cottage Industries

They are the industries which are carried on largely by the members of the family in their own households. That is why they are termed as household industries also. These industries have two main characteristics which distinguish them from modem industrial mode of production : (a) workers are not required to leave their home; and (b) labourers do not sell their labour to some other capitalists.

In India cottage industries are found both in rural sector and urban sector. Rural industries can be of two types: (i) the industries which provide supplementary jobs to the farmers such as handloom, basket manufacturing, bidi-manufacturing etc., and (ii) the industries which provide full time jobs to the rural people. Most of such industries are related with rural handicrafts for example, mud pottery, carpentry and of blacksmith, weaver, ghani oil etc. Urban industries are: works of gold, silver, jewellery, metal-wares, Kashmiri shawls, dyeing, printing etc. They can also be of both types part time and full time industries.

Importance of Cottage Industries

Cottages industries are very important to our economy especially to the agricultural and village sector. This can be explained on the following grounds
(i) Cottage industries can retain the agriculturists in agriculture.
(ii) They can be helpful in removing disguised and seasonal unemployment from the agricultural sector. Thus cottage industry can become complementary occupation to agriculture.
(iii) They do not require hired factors and much capital and can be managed through family members.

Raw material is arranged through local sources.

Role of Cottage Industries In the Rural Sector

As far as India’s rural and agricultural sector is concerned, cottage industries are more appropriate. In India’s agricultural sector there is a large number of small and marginal farmers. They cannot run their family merely with the income from farming. Besides this, they do not get full time job in agriculture. That is why a number of people are migrating to cities in search of employment. But there also, all of them are not getting full time jobs. If we want that these farmers should remain on their farms, we have to provide some jobs to them during their off-season. In this regard cottage industries can be more helpful. If our farmers are provided with some capital, raw material and preliminary training, they can develop different types of handicrafts. These will prove complementary and helpful in their work of farming also. It will solve the problem of disguised unemployment and also increase the level of living and income of the poor class of our society. Thus, cottage industries are more important for the rural sector of our economy.  Our Constitution has also accepted the importance of these industries and stressed the need of their development in its guiding principles.

Problems Faced by Cottage Industries

Cottage industries in our country are facing number of problems. Some of them are as follows:
(i) Competition with the products of modem industries. For example mill-made cloth has replaced handloom cloth and glass and stainless steel has replaced brassware utensils.
(ii) Insufficient financial resources.
(iii) Lack of modern techniques, business methods, skills, marketing and advertising techniques.

Because of all these reasons cottage industries have languished in our country. It has created a contradictory situation. On the one hand, we find that cottage industries have the potential of reducing unemployment and poverty but on the other they cannot compete with the factory—based industries. Hence we have to revive and strengthen them.

Recognizing the importance of cottage industries Government of India had set up the Khadi and Village Industries Commission to look after their special requirements. But inspite of this the performance of Khadi and village industries is not satisfactory.

Small Scale Industries

In India the official definition of small scale industry has changed from time to time. At present small scale industry has been defined as an industrial unit with a fixed investment (in plant and machinery) of not more than Rs. I crores. And for tiny industry the investment limit is Rs. 25 lakhs. These small industries use mo4ern machines and implements and also employ hired labourers.

Examples of small scale industries are : Bicycle industry, Sewing machine industry, Sports goods industry, Hosiery industry, Readymade garments industry, Leather industry, Footwear industry, Electrical goods industry, Electronic goods industry, Brassware industry etc.

Features of Cottage Industries

1. These industries are largely carried on by the members of the artisans family.
2. Capital investment is very small and it is generally arranged from the household’s own resources.
3. They use traditional techniques and implements.
4. They generally use locally available resources.
5. They mainly cater local needs, hence they operate in local and small markets.