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Roles of Small Businesses in India and Problems of Small Businesses

Last updated date: 23rd May 2024
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An Introduction

Small businesses play a vital role in the economy. Think of the luxurious car that you see on the roads daily. The final product is the outcome of many small businesses that are integral parts that help the engine to run. It is these millions of small industries that get you the dream car. It has been seen that 65-75% of the innovation comes from small business industries. Here you will learn about the major role played by the small business and all the issues that are faced by them.

Role of Small Business in India

  1. Industrial Units: In an economy like India, the majority of the industrial units are because of small business. This today accounts for more than 95% of the units. Almost 40% of the total industrial units are contributed because of the small industries. The small businesses are bagging around 45% of the total exports that happen from India.

  2. Labor - Oriented: Small businesses generate a lot of labor. They give many employment opportunities to those living in rural and semi-urban areas. The small businesses help to lift the weight of unemployment in any economy. This is a significant role that they play predominantly in a country like India. India has a large labor force and the Indian government also encourages small industries that employ and utilize labor. The government encourages small businesses by drafting various policies and offering low-interest rates.

  3. Human Resource: The small businesses rank next to agriculture to employ in the Indian economy. As compared to many big companies, the small businesses are capable of generating the maximum employment opportunities for each unit of capital that is invested. This makes the small business the second largest employment generator in the economy.

  4. Utilization of Local Resources: The local community needs and demands let the small businesses to emerge in the semi-urban and the rural areas. The small businesses are community-based, and these are focused to work for and generate employment in a few areas. This lets any business utilize local resources like talent, raw materials, demographic opportunities and labor. When there is ample mobilization and utilization of any local resources, this helps to improve the economic condition of a particular area.

  5. Flexible and Adaptable: Any new business opportunity gets captured at the correct time. Small businesses get an edge when it comes to adapting and growing in the light of any upcoming changes. The small business usually is the manufactures and the distributors, and they are thus capable of generating a personal touch with the business and with their clients as well. There is also no government intervention in the case of small businesses as these are limited in finance and size.

  6. Promotes Development & Growth: Development of the region plays an important role in contributing to the country's development. The establishment of small businesses in any region or area helps to uplift the lifestyle, earning of the people residing. Businesses bring in more exposure to foreign markets, production scale and the overall evolution of state as well as workers. 

  7. Increased Tax Revenue: The industries need to pay the required amount of tax to government bodies, which is in turn used for the development of rural regions and to fulfill the demands of cities. When businesses operate, they do look for profits. And when more profits come in, more taxes are devoted to the government of the country. The taxes therefore generated are contributed to upliftment services such as healthcare, education, defense field and many more. 


There are however many challenges of small enterprises along with the opportunities that are faced by them. 


Problems of Small Businesses

These are the problems faced by small businesses.

  1. Finance

The major small business problems faced is the inadequacy of funds to funnel in the operations. This hinders the business from developing. The small business does not have enough creditworthiness that is important in the capital market, and thus there are financial problems faced by small businesses. The industrial investors or the banks ask for collateral as security. The small businesses operate in the semi-urban and rural areas, and this makes it difficult for them to get their finances.

  1. Raw Material

Businesses need raw materials for production. They need some input to generate output. The raw material quality is the challenges faced by small businesses as it depends on what is inputted into it. However, it is possible that because the small business is tight on the budget, they are not able to get raw materials of good quality. Also, because these industries purchase in small lots, they do not have a lot of bargaining power. The storage facility is also an issue here. This is why the small business needs to be quick to produce and to sell the goods. This is among the major problems of small scale business because they cannot hold on to their inventories for long.

  1. Managerial Skills

The small business operations are done by limited employees. In most cases, a single person only will manage all the operations. The manager has a lot of pressure to meet production demands. Also, it is possible since the small business cannot hire well-read managers. The managers may lack the basic managerial skills that are needed to operate any unit. These are the challenges of small business.

  1. Skilled Labor

Skilled labor is among the problems of small scale enterprises. Small businesses have a fund shortage because of which they are not able to employ skilled labor to do the job, which is one of the challenges of small scale business. They cannot pay very high wages to their employees, and thus they have to make do with a low skill level. This results in a productivity drop, and the labor rates are high. This again is a major concern in the production operations.

  1. Marketing

Here are the small business marketing problems. The small business needs to sell the product to make profits, and for this, they need a marketing channel. The business needs a marketing channel that can help it achieve its sales goals. Because of the lack of infrastructure, direct marketing is not possible for these companies and is one of the problems of small entrepreneurs. The lack of funds hinders the small business to hire a middle man to make the sales. These middlemen exploit these companies by paying a low price and delaying payments. This is another of the challenges facing small business enterprises. 


The small business plays a key role in the economy of the country. There are many problems with small enterprises. However, if the country has to fulfill its aim of becoming a global hub of manufacturing, then it does need small business in its country. As is rightly said by Amarendra Sinha, Special Secretary and Development Commissioner at India’s Ministry of Micro, Small and Medium Enterprises, it is the small business that can lead the charge of manufacturing.

Some Suggested Solutions to Overcome The Problem

In the early stages, let that business be small or big, problems do come. But all it depends on how one overcomes and tackles different situations that appear no way. These are some suggested solutions that one can adopt:

  • Using online tools to keep a record for inventory, sales receipts or any other important reports. This would help managers to keep close attention to all the happenings in the business. 

  • Time Management needs to be well planned before, especially for small businesses. The reporting managers or staff must closely look up timesheets of employees and prepare some strategy for quick responses and work on time. 

  • If possible, make one online store to mark digital visibility. Nowadays, being digital is one of the most important aspects. As everyone searches through online search engines before buying or visiting any shop. 

  • Any business comes with plenty of risks. And sometimes they are just more frequent than needed. So, insurances play an effective role in managing the accidental damages caused to any of the parts of the business. Insurance promises safety for employees, staff, businesses, investors and for customers too. Good coverage is always a good friend for investors. 

Do’s & Don't Before Starting any Business 


  1. DO consider the business name descriptive and Compellent enough to the target audience. 

  2. DO plan business meetings periodically to keep a check on milestones achieved and future tasks. 

  3. DO host some business greetings for inter-company relations tHis will help employees and the company to compare with the outside world and match up with their accuracy. 

  4. DO well plan your finances beforehand. Also, it is always advisable to keep a good accountant that will help your business to very less go into debt and maintain good financial records over the years. 

  5. DO get associated with some lawyers and professional experts to get help for all the official documentary work needed to start a business.

  6. DO take thoughtful risks. As even a single wrong step would pull you back 6 months or more in the business era. 

  7. DO acknowledge the strengths and weaknesses. It will help the company to make strong fundamental decisions and ill in turn help to grow the business. 


  1. DON’T over project the sales. Being optimistic is good, but anything but being ‘over’ has never helped anyone. 

  2. DON’T ignore or misjudge your competitors. Any business should never underestimate anyone in the industry and should be considered as an equal opponent irrespective of the factors associated. 

  3. DON’T ignore the future. Whenever you start the business, do consider the future scope of that business. Chart out some five to ten-year plans along with the goals and missions to be accomplished. 

  4. DON’T do everything yourself. Because ‘teamwork makes the dream work’. Businesses require a lot of energy, time, dedication and patience consistently. Hence a good team will always help you to get some good sales. 

  5. DON’T ignore social media. More than 70% of businesses are now investing in social media and there’s definitely a good reason attached to it. Social media will help early budding businesses to grow and gain brand visibility.  

FAQs on Roles of Small Businesses in India and Problems of Small Businesses

1.  What is the role of Small Business in rural India?

The small scale industries offer many benefits in rural areas. They offer non-farm employment to the people. The small scale industries help to offer employment opportunities. They also help to curb the migration of rural people to urban areas by giving them ample opportunities in their rural areas. The small scale business also helps to meet the demand of the rural population. When the business is set, it eradicates poverty by generating employment. There are also many social-economic aspects of the small scale industries. These industries contribute to various social-economic factors like dispersed development and reduction in inequality.

2. What are the problems faced by Small Scale Industries?

Small scale industries face a lot more trouble than the large scale industries. They have to deal with the scale of operations, procurement of raw materials and shortage of funds. The primary issue, however, that the small-scale industries face is finance.

They do not have enough finance to carry out their operations. They thus depend on local moneylenders to finance their business plans which charge a high-interest rate. The acquirement of raw materials is a major concern for the small scale industries. Because of lack of funds, these industries are unable to hire skilled labour which in turn affects productivity. Marketing is another major concern faced by the small scale industries as they need to create the marketing channel themselves and cannot pay extra to an intermediary.

3. How can one estimate the market potential for business?

Estimating market potential plays an important role in deciding the success factor of the business. It can simply be done by analyzing the target audience, geographical conditions, availability of raw materials. It can also be done by researching the competitors’ functioning and their strategy to stay in business. Also, remember the data you would use for research and finding, should be accurate and the market through which it is obtained must be steady at least during the inception phase. 

4. How can businesses increase their reach to find new customers?

Irrespective of the scale of business, each and every business must be marketed and reached to every person residing around it. There are several ways one can adopt in order to educate people about the new business coming into the picture. Preparing brand awareness models, running paid campaigns, distributing leaflets and making it live on digital platforms such as Instagram, Facebook, website and many more. Also while marketing, one thing that should be kept in mind is to amplify the benefits of using your business and what changes could be done while using it.