Role of Small Businesses in India and Problems of Small Businesses: Guides

The compilation of these Small Business Notes makes students exam preparation simpler and organised.

Role of Small Businesses in India and Problems of Small Businesses

In every economy, small businesses are a million little integral parts of a lavish car which help the engine keep running but all that someone can see from the outside are the four tires (i.e big corporations) that give the car speed. It is confirmed that 65-75% of the innovation in India come from the industry of small business. Let us learn about the vital role small businesses play in our economy and the problems they face.

Role of Small Businesses in India

Role of Small Businesses in India

1. Industrial units
In an economy so enormous as India, 95% of the industrial units in the country consist of small businesses, and 40% of total industrial output is contributed by these small industries. Again, small businesses bag around 45% of the total exports from India.

2. Labour-oriented
Small business provides immense opportunities in the rural and semi-urban areas. The weight of the unemployment faced by the Indian economy is lifted by these small businesses. It is one of their most important roles. Like any other economy having a large labour force, the Indian government also encourages the operations of small businesses to utilize the labour by drafting policies and establishing low loan interest rates.

3. ‎Human Resource
After agriculture, small businesses are the second largest employment provider in the Indian economy. In comparison to big corporations, small businesses generate the most number of employment opportunities per unit of capital invested. Therefore, they are the second-largest generators of employment in human resources.

4. Utilisation of local resources
The awareness of the needs and demands of the local community makes small businesses emerge in rural and semi-urban areas. Small business is community-based and generally focused on fewer areas.

This gives the opportunity to the businesses to utilise the local resources like raw material, local talent, labour, and demographic opportunities. The utilisation and the mobilisation of the local resources help elevate the economic condition of that particular area.

5. Flexible and Adaptable
The new business opportunity is captured at right time. The strength to adapt and grow in the face of upcoming changes gives an edge to small businesses. Also, being the manufacturer and distributor, small businesses develop a sense of personal touch with the area of business and their customers. Limited in size and finance, there is little or no government intervention.

Any business whether small, medium, or large has its opportunities and challenges. Every coin has two sides and every line has a lineage.

Problems of by Small Businesses

1. Finance
The inadequacy of funds to funnel in the operations of a small business prove to be a major hindrance to the development of the small business. Small businesses lack the creditworthiness needed in the capital market. Small businesses have poor creditworthiness.

The banks and industrial investors need collateral security, due to most of the small businesses being operated in rural and semi-urban areas, these businesses lack the collateral security to get finance for their business.

2. Raw material
For production purposes, businesses need raw materials. To get some output, they need to give some input. The quality of the raw material completely depends upon the quality of input. But due to a tight budget, these businesses are unable to get a good quality raw material for their production.

Bargaining power is non-existent because of the small number of purchases. Another issue linked here is the shortage of storage facilities, because of the shortage of storage facilities the production needs to be quick and the sale good. This puts a heavy strain on these small businesses to sell their stock as quickly as possible.

3. ‎Managerial skills
The operations of small businesses are carried out by a limited number of employees. This means that a single person usually manages the operations. The pressure on this manager is immense to satisfy the demands of production. Also, the manager might lack the managerial skills required to operate a unit.

4. ‎Skilled labour
Due to a shortage of funds, small businesses are unable to hire the proper candidate for the job. Also, they are not in a position to give high wages to the employees. This results in a drop in productivity per employee and the rate of labour are high. This proves to be a major obstruction in the operations of productions.

5. ‎Marketing
Marketing is one of the most important links to sell whatever the business plan to or has produced. Without marketing these businesses will not be able to achieve the goal of sales they planned. Direct marketing is not possible due to the lack of necessary infrastructure.

The shortage of finance does not let the business hire a good middleman. These middlemen exploit these businesses by paying low prices and delaying payments.

Small Businesses

“Small businesses already play a pivotal role in India’s economy. But if the country is to fulfill its ambition of becoming a global manufacturing hub, the sector must grow rapidly.” -Amarendra Sinha, Special Secretary, and Development Commissioner at India’s Ministry of Micro, Small and Medium Enterprises, on how the sector can lead the manufacturing charge.


Why do small businesses have a tough time getting financial assistance?
a. Shortage of space
b. Lack of innovation
c. Poor creditworthiness
d. Natural calamities
The correct answer is option “c”.
Small businesses have a tough time getting financial assistance is because of their poor creditworthiness.