Though small scale industries have several advantages they suffer from the following demerits:
Demerits or Disadvantages of Small Scale Industries
1. Lack economies of scale: SSI’s produce in small quantities. Therefore they do not enjoy economies of scale in purchases, production and marketing. Their costs are consequently higher and they are not able to compete with large scale units. They were able to survive when many of the items were reserved for production by SSI’s. But after the economic liberalization policy followed by the government, many of the items have been De-reservad. Therefore large scale units can also produce products which were earlier produced only by small scale units. Many of the SSI’s have closed down unable to compete with large scale producers and cheap imports from other countries, especially China.
2. Low wages: Though SSI’s are labor intensive, the wages paid in SSI’s are low when compared to those paid in large scale industries. In many SSI’s because of lack of safety measures and proper training to workers, accidents and injuries are common occurrences.
3. Lack of modernization: Due to their small scale of operations and limited capital resources, SSI’s are not able to invest in modernization. They do not have access to latest technology and therefore cannot improve their efficiency of operations.
4. Inefficiency: Due to lack of scale economies, low skilled and poorly trained workers and usage of outdated technology, small scale industry suffers from inefficiency of operations. Their productivity is low when compared to large scale industries.
5. Overcrowding: It is quite easy to set up an SSI. The capital requirement is less and procedural formalities are simple. This leads to intense competition and overcrowding. It may lead to cut-throat competition affecting their survival.
6. Sickness: Due to the ease of setting up and because of the incentives available, many unemployed youth set up SSI’s with very little business knowledge and skills. They find it difficult to survive in the business and close down their operations. Further because of the problems of procuring finance, use of outdated technology and lack of marketing expertise many SSI’s incur losses and are forced to close down.
7. Less innovation capacity: SSI’s have limited financial resources, therefore they are not able to invest adequately in research and development (R&D) or acquire technology. As a result their technological up-gradation is less and they continue with outdated processes and techniques. This hinders their competitiveness and capacity to come out with new products, processes etc.
8. Low competitiveness: Due to their small scale, lack of modern technology and poorly trained workers, SSI’s lack the competitiveness to compete with large scale industries. Now, many items which were reserved for production by SSI’s have been De-reserved. Therefore SSI’s face increasing competition from large scale Indian enterprises as well as foreign competitors.
9. Low capacity utilization: In many SSI’s, capacity utilization is low and productive capacity remains idle. Small firms are unable to utilize their full capacity due to problems related to finance, marketing, technology, skills etc.
10. Lack of pollution control: Large scale enterprises which are polluting in nature, are able to set up pollution control equipment such as effluent treatment plants. SSI’s are not able to set up such facilities because of lack of finance, technology, skills etc.
11. Low labor productivity: The productivity of labor in small scale industries is low. The reason is workers employed in SSI’s are unskilled, lack proper training and work on outdated technology. Their wages are less and therefore motivation levels of workers is also quite low. Poor labor productivity results in lower output, increasing the cost of production and problems in meeting demand schedules.