household and small-scale industries
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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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