1. Small scale industry (SSI) is a major sub-sector of Indian economy in view of its size in terms of number of units, number of employment, value of output and value of exports, absolutely as well as relatively. In 2002-03, the SSI sector comprised 3.57 million units, generated production worth of Rs 7,420 billion and employed nearly 20 million persons. The sector’s exports stood at Rs 698 billion in 2000-01. In 2000-01, SSI, with an investment of nearly Rs 797 billion, accounted for about 40% of the industrial production, nearly 7% of the Gross Domestic Product (GDP), 34.3% of the total exports of Indian economy, and manufactured more than 7,500 products. Thus, SSI has a diversified and prominent presence in Indian economy. Energy is an indispensable input in every sector of an economy, however it is crucial for the industrial sector, which accounts for almost half of the total energy used around the globe. This is true even in the case of Indian industrial sector, which has a large number of Small Scale Industry (SSI) units apart from medium and large-scale industries. Considering the size of SSI, its demand for energy is likely to be substantial and will only increase in the future, looking at its prospects for growth and the current policy emphasis on small industry modernization.
2. Energy being an essential input to economic growth, its efficient use in any sector of the economy will have multiple benefits in India, which is a ‘net importer’ of energy.
· Demand will grow at a lesser rate and thereby reduce the need for energy imports and additional energy supply capacity.
· Saved energy can be made available for other economic activities
· Reduction in per unit cost and thereby making the concerned sector more competitive.
· Reduction in negative environmental impacts
3. Among others, government policy has a major role to play in the promotion of energy efficiency. This is particularly true in the context of small industry because small industry units individually may not take any initiative for enhancing energy efficiency due to either lack of awareness or prohibitive costs and lack of competence. Though Government of India has evolved a comprehensive policy since independence for small industry promotion, the policy emphasis on the promotion of energy conservation and efficiency is not substantial and is largely confined to energy intensive sectors of small industry such as foundry, re-rolling mills, glass and ceramics, etc. To promote awareness among the concerned entrepreneurs, SIDO has conducted seminars on ‘energy conservation’ and sponsored studies to identify energy efficiency gaps and potential for energy conservation with reference to the energy intensive sub-sectors of small industry.
4. Leaving alone, the efforts to promote energy efficiency in SSI units, even the industry-wise energy consumption pattern of small industry is still not known as no comprehensive study has been undertaken so far. But the few studies that have been carried out with reference to some specific industries did bring out that there is scope for improvement of energy efficiency, which, in turn, would lead to cost reduction. Of them, there was only one study that was conducted (in the context of rice mills) in Karnataka, which is the focus of our study. Further, all the available studies in India so far are either single cluster or single industry based.
5. Another significant feature of SSIs in India is that they have clustered naturally and spontaneously in different regions of the country. It has been found out that there are over 400 small industry clusters exist in India. Many of these small industry clusters are found to be energy intensive. Though individual SSI units may not consume large amount of energy, collectively, their energy needs in such clusters cannot be ignored. Improving energy efficiency is necessary for survival and growth of these clusters, because, higher energy efficiency not only improves their competitiveness through cost reduction but also minimizes the adverse environmental implications associated with the energy consumption.
6. Karnataka occupies a place of strategic importance on the industrial map of India due to its significant contribution to the industrial sector of the country – in terms of investment, production and gross value added. In the small industry sector, Karnataka accounted for a growing share of small industry units and employment in India in the 1990s. Karnataka also has a considerable presence of small industry clusters, which is an important feature of small scale industrialization in India. It is with this backdrop that we have undertaken this study. The major objectives of the study are:
7. To probe the dimensions of energy intensity (energy cost per unit of value of output) and its relationship with various economic performance measures
8. To analyse the energy consumption pattern and probe and estimate the scope for energy efficiency improvement
9. To make policy recommendations to promote energy efficiency in small scale industry clusters
10. We adopted a cluster based approach to analyse the above objectives for the following reasons-
11. The energy demand emanating from an individual small industry unit may be insignificant both absolutely and relatively. But when small industry units co-exist together in a particular region, their total energy consumption as well as demand may be considerably significant.
12. Small industry units may not implement any energy efficiency improvement measures due to lack of awareness, high costs involved and/or inadequate institutional infrastructure support. These deficiencies could be relatively easily overcome in clusters as they give scope for collective action among the clustered units.
13. The alternative policy measures, if any, could be more effectively implemented in a cluster of units than among dispersed units.
14. Our study covered 11 small industry clusters located in different parts of the state: foundries in Belgaum, Belgaum district (37 units), silk reeling in Ramanagaram, Bangalore rural district (45 units), bricks in Malur, Kolar district (40 units), plastic units in Baikampady, Dakshina Kannada district (34 units), rice mills in Raichur (41 units), fabrication units in Peenya, Bangalore urban district (43 units) and in Bommasandra, Bangalore urban district (27 units), foundry ancillaries in Shimoga (40 units), coir rope making units in Arsikere, Hassan district (39 units), oil mills in Challakere, Chitradurga district (39 units) and cashew processing units in Uttara Kannada district (20 units). Thus we have covered a total of 405 units in the 11 clusters for the study. Of these 11 clusters, excluding fabrication units of Peenya and Bommasandra and plastic units of Baikampady, Mangalore (which are artificial/induced clusters), all the remaining clusters are natural and horizontal in nature.
15. Majority of the surveyed units have come up in the 1980s or after and are started by first generation entrepreneurs. Units in all the clusters, with the exception of auto ancillaries in Shimoga, function independently. Most of the units are small sized as they individually employed upto 50 workers, had a current investment upto Rs 2.5 million and turnover less than Rs 10 million. Units in six of the 11 clusters used exclusively electricity for operating their plant & machinery whereas in the remaining clusters, units used a combination of energy sources like coal and biomass inputs. Since these clusters rely on machinery based manufacturing process, skilled workers accounted for majority of the workers in most of the clusters. However, contrary to the general perception in the literature that clustering gives scope for interaction among the entrepreneurs, a considerable number of entrepreneurs in most clusters revealed that they do not interact with either fellow entrepreneurs within the cluster or with suppliers of inputs or customers. Further, the level of awareness relating to ‘energy conservation’ though found to be significant, not many have initiated steps towards that end.
16. It is with this backdrop of the surveyed units that we carried out our analysis. At the cluster level, we have analyzed the energy cost per unit, energy intensity in terms of energy cost per unit of value of output, energy cost per unit of factor inputs, capital intensity, energy and factor productivities and value addition per unit of output. The inter-cluster comparison revealed that the 11 clusters present a diverse picture in terms of energy cost per unit as well as energy intensity. Though there is no one to one relationship between energy intensity and energy cost per unit of factor inputs, some clusters, which are more energy intensive are found to be using more energy per unit of factor inputs as well as vice-versa. But energy cost as a percentage of total variable cost followed the same pattern as that of energy intensity between clusters. A cluster, which has higher energy productivity is found to be having higher factor productivities.
17. To understand the energy consumption pattern and the relationship between energy intensity and other variables, correlation analysis is done for each of the 11 clusters. We found a strong statistically significant positive relationship between energy intensity and share of energy cost in total variable cost. However, surprisingly we did not find any relationship between capital intensity and energy intensity. Other things remaining the same, we expected higher capital intensity to lead to higher energy intensity. But it may also depend on the efficiency of the technology, rate of capacity utilization, etc. There is a significant negative relationship between energy intensity and labour productivity but not between energy intensity and capital productivity. Based on these results, we infer that an efficient labour (as reflected in higher productivity) uses energy efficiently resulting in lower energy intensities. Efficient use of capital equipments should also lead to lower energy intensities, which indicates a negative relationship. Of course, we did find the same relationship but it is not statistically significant.
18. In majority of the small industry clusters, energy intensity is negatively correlated with the size of output as well as value addition per unit of output. This brings out that if the rate of output increases, it is likely to result in lower energy intensity and if energy intensity declines, the share of value added in value of output tends to go up.
19. To ascertain the contribution of energy input alongwith raw materials and factor inputs of labour and capital, we performed multiple regression analysis. The regression models for all the 11 clusters turned out to be statistically valid and the four independent variables explained more than 88% of the variation in the dependent variable (value of output). We found that energy contributes significantly to the value of output alongwith material inputs, labour and capital, which enable units to obtain either constant or increasing returns to scale.
20. The next issue that we have probed at the cluster level is – does energy make a difference to the returns to scale of units in clusters. To analyze this issue, we chose three most energy intensive clusters where energy cost accounted for more than 15% of the total variable cost and classified the units of the respective clusters into two groups based on their average energy intensity. Group 1 comprised units having above average energy intensity and group 2 consisted of units having below average energy intensity. The energy intensities of the two groups for all the three clusters found to be different, which is statistically significant. We found that units of group 1, which are more energy intensive obtained lower returns to scale as compared to units of group 2, which are less energy intensive – in two of the three clusters. This enabled us to infer that energy intensity does make a difference to returns to scale. Therefore, it would be appropriate to probe the scope for energy efficiency improvements by comparing the various economic performance measures for different groups of units based on their energy intensities.
21. After a macro level analysis of energy and its implications for economic performance, we have carried out a micro-level cluster-wise analysis of various dimensions of energy use, its outcomes and cost implications. The analysis aimed at developing a clear understanding on how energy consumption varies within a cluster, how it affects the performance of the units, what are the cost implications and how the energy is shared among various end-uses. We have performed this analysis by keeping in mind the assessment of possible energy efficiency potential that exists in these small industries. To facilitate this, the units within the cluster have been grouped into – high, medium and low – efficiency categories based on their energy intensities measured in terms of energy consumption per tonne of output or per Rs. Million of output. This has been done by initially sorting out units based on the energy consumption norms in the ascending order, and then grouping the units into above three categories depending on the consumption levels. The energy consumption norms have been estimated by combining all types of energy used for all kinds of energy end-use services.
22. Further, for each cluster, each group of units is compared in terms of average raw material cost, energy cost, labour cost, number of labour – in terms of skills and value of output as well as gross profits. In the case of electricity, a detailed end use analysis is performed to find out how much of electricity is being used to carry out various end-use services. Similar end-use analysis is performed for other energy sources, wherever relevant.
23. As indicated earlier, six of the 11 clusters used only electricity as a means of energy. The other five clusters used coal, coke, firewood and biomass (eucalyptus branches/leaves, saw dust) as the energy carriers. Wherever there is process heating end-use, the share of energy used for process heating accounts for more than 90% of the total energy used. In these, the share of other types of end-uses is negligible. Wherever there is no process heating, the energy carrier used is electricity and more than 95% of total electricity consumption is accounted by motive power through motors. Other end uses like space cooling, lighting have a negligible share.
24. Since energy costs accounted for a negligible share in total costs in majority of the clusters, we felt that energy efficiency improvement, as a cost cutting measure may not be an attractive proposition in those clusters. However, there are possibilities of improving the gross profits by reducing energy costs through efficiency improvements. In some of the low efficiency groups of clusters, energy costs are higher than the gross profits. This brings out clearly that in such low energy efficiency units, there is a strong case for improving energy efficiency as it will lead to an increase in gross profits, particularly relative to high energy efficiency group units.
25. The analysis also revealed that the two major energy end-uses are process heating and motive power. Process heating through furnaces, kilns, ovens, etc. is obtained using firewood, coal, coke, eucalyptus leaves/branches, sawdust and electricity. In clusters where there is a requirement for process heating all other end-uses have negligible shares. Motive power is a dominant end-use in units where there is no need for process heating. Motive power through motors is needed for running pumps, compressors, blowers and various machine tools. Electricity is the only energy carrier used for providing motive power.
26. For clusters with process heating as major end-use, the total annual energy consumption is of the order of 688.9 Tera Joules (TJ) and out of this, process heating accounts for 670 TJ (97%). On the other hand clusters with motive power as major end-use consume 256.8 TJ annually with 76.4 TJ of this is accounted by motive power (30%). However, in the total energy of 256.8 TJ, process heating is accounted for almost 179 TJ and if we deduct this from the total and estimate the motive power share in the revised total then it works out to be 98%. In high efficiency group, the average energy cost per value added ranged from Rs. 90,907 to Rs. 98,739 per Rs. Million. In the low efficiency groups this cost goes up to Rs. 178,421/Rs. Million. From the overall perspective it suggests that energy is an important expenditure. The energy input required to generate one million Rupees worth of value added is significantly high in process heating dominated clusters in comparison with motive power dominated clusters. This clearly establishes the need for efficiency improvement in these clusters and the possibility of accruing benefits through efficiency improvement.
27. Considering this, to achieve higher energy efficiency levels, we recommend that energy efficiency improvement measures must be focused on process heating and motive power, the two major end uses of energy in small industry clusters.
28. Our micro-level analysis for groups of clusters substantiated our cluster level macro analysis findings: there is a strong positive relationship between energy efficiency and labour productivity and between energy efficiency and size of output. This only indicates that if a small industry unit produces output optimally with efficient labour, energy intensity is bound to decline.
29. The comparison of units classified under high, medium and low efficiency groups brought out the potential for significant energy savings through efficiency improvement. The analysis clearly showed that in all clusters, the high efficiency units required less quantity of energy inputs to produce same level of outputs. This suggests that the units functioning in similar environment, using same raw material, employing similar production process and technologies, and drawing labour from same pool can have different energy performance levels. Given this, it should be possible for low efficiency units to learn from highly efficient units and thereby graduate into efficient units. Assuming this possibility, we have estimated the achievable energy efficiency potential in the 11 small industry clusters. We have analysed the likely energy savings potential that could be achieved through shift of units belonging to low and medium efficiency groups to high efficiency groups. The total energy savings potential in the sample cluster units is of the order of 238.5 TJ per year (compared to a total annual consumption of 749.4 TJ) and this amount to 31.83% of the total energy consumed. To assess the significance of this savings, if we assume that all this energy is provided electricity, then the savings will be equivalent of 66.25 million kWh per year.
30. Finally, we have estimated the costs and benefits of some cluster specific energy efficiency enhancement measures to bring out the advantage of energy use efficiency. For the motive power end-use, the shifting from standard motors to energy efficient motors is likely to result in substantial energy savings. Though this shift requires an additional investment of Rs. 2,900, the cost savings due to this shift will be of the order of Rs. 7,605 per annum. In terms of cost of saved energy it is just Rs. 0.19/kWh compared to a value of saved energy of Rs. 3.75/kWh. This is an attractive proposition for units having old motors to shift to more efficient motors. Similarly we have analysed possible technology shifts for process heating end-use and brought out the related cost and benefits.
31. Small Scale Industries are the second largest segment of Indian economy in terms of employment as well as exports. Their sustained economic performance is imperative for India’s economic development. Individually, a small scale unit’s energy consumption may not be high but together the consumption in millions of small scale units across the country will add up to a very large quantity and likely to place a very high demand on limited energy resources.
32. Energy efficiency improvement may be an important objective from country’s perspective in order to preserve scarce natural resources, reduce environmental damages and minimize dependency on imported energy carriers. However, this need not be an important issue from the perspective of an entrepreneur who is running a small scale unit. He will be motivated to take any initiative on energy efficiency improvement provided energy is an important issue for him either as it accounts for major share in the total cost of production or energy savings is likely to result in significant increase in value addition (or increase in gross profits). Under such situations, the unit can adopt efficiency improvement measures either as a “cost cutting strategy” or as a “profit maximization strategy”. Unless these benefits are realized no small scale unit will come forward to implement any efficiency improvement measures. This brings out the fact that the government intervention is imperative to achieve higher energy efficiency in small industry clusters.
33. Considering this we would like to make the following recommendations.
· Since the late 1990s, particularly after the Abid Hussain committee recommendations, there has been greater focus on small industry cluster in the small industry policy of government of India. However, neither this committee nor the S.P. Gupta committee has laid emphasis on energy conservation and energy efficiency improvement measures. We strongly advocate that there is an explicit need to incorporate measures for the promotion of energy conservation and efficiency in the existing policy framework, particularly for clusters.
· Annual energy auditing by an external authorised agency should be made compulsory. However, for individual small industry unit, the cost of this exercise may be prohibitively high and therefore the units readily may not come forward for such an initiative. Government may have to pitch in to share some of the costs either through subsidies or by providing incentives.
· Our analysis revealed that the cost of energy efficient motors is marginally higher than the standard motors. However, the benefits in terms of value of saved energy far outweigh this small additional investment. Government along with local small industries associations can initiate awareness programmes on these aspects through seminars and exhibitions. Also, schemes can be introduced to provide soft loans for the entrepreneurs to encourage the replacement of old motors with new energy efficient motors.
· Local industry associations can actively involve in organizing special programmes to show case the performance of most energy efficient unit in the cluster. It will provide an opportunity for the fellow entrepreneurs to learn from the ‘Champion’ and attempt such measures in their respective units.
· Technology up-gradation alone will not result in efficient use of energy. The quality of human resource available with the SSI is also equality significant in determining the level of energy use. It is a possibility that the best technology used by untrained manpower producing bad products with inefficient use of resources. Therefore a perfect match between the technology and quality human resource is essential to optimize the resource use and thereby reduce the environmental impacts. Any technology up-gradation in a unit should be preceded by having quality workforce in place. Any government agency promoting technology up-gradation should ensure appropriate training to the existing manpower simultaneously. That is, the employee training should be made a part of the technology up-gradation package.
· Skill level of labour force should be given due importance and accordingly they should be trained periodically. Even though, skilled labour did account for majority of the workers in all the clusters, it may not be true that all the skilled workers would have had adequate training and skills to undertake manufacturing operations efficiently. The fact that there is a strong positive relationship between energy efficiency and labour efficiency, which has been observed both at the macro and micro levels, underscores the point that a periodic training for skilled workers will not only enable them to contribute more efficiently but will also facilitate efficient utilization of energy.
· Though SIDO has conducted seminars and workshops on themes relating to energy conservation and efficiency, our interaction with Small Industries Service Institutes revealed that no such programmes have been held in any part of the state so far. This could be partly due to lack of information about the existence and operation of small industry clusters across the states. However, of late, the information relating to the location of small industry clusters across the country has been significantly updated, thanks to the efforts of UNIDO. Therefore, we strongly feel that SIDO should chalk out a national strategy involving all the SISIs to conduct seminars and workshops in all the prominent energy intensive small industry clusters from time to time.
34. These measures would go a long way in giving a new direction for promoting energy efficiency in small industries and thereby contribute to their competitive growth.
