How to Promote Energy Efficiency in Small Enterprises? an Economic Analysis of Small Enterprise Clusters in India

By Subrahmanya, M. H. Bala | Indian Journal of Economics and Business, June 2006 | Go to article overview
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How to Promote Energy Efficiency in Small Enterprises? an Economic Analysis of Small Enterprise Clusters in India


Subrahmanya, M. H. Bala, Indian Journal of Economics and Business


Abstract

This paper probes the role of labour and energy intensity in the economic performance of small enterprises with reference to brick making in Malur, foundries in Belagaum, rice mills in Raichur and Oil mills in Challakere in Karnataka state of India. The study found that small enterprises where labour productivity was higher and energy intensity was lower, achieved higher returns as compared to those where labour productivity was lower and energy intensity was higher. This implies that when technology is similar in small enterprises, where labour and energy inputs are complements, improving labour skills and efficiency can be an important strategy for improving energy efficiency, achieving higher returns and enhancing competitiveness.

JEL Classification: Q43, Q48

1. INTRODUCTION

Small Enterprises account for a sizable share of Indian industry in terms of not only number of enterprises, employment and production but also exports. Small enterprises account for 95% of industrial units, 40% of MVA, 44% of manufacturing employment and 35% of total exports in Indian economy (Ministry of SSI, 2003; Ministry of Finance & Company Affairs, 2003). They produce more than 7500 items and the product range varies from simple items produced with traditional technology to high-tech products, produced with sophisticated state of the art technology (Ministry of SSI, 2003). Today, Indian small enterprise finds itself in a competitive environment and enhancement of its competitiveness is considered crucial for its survival and growth (Bala Subrahmanya, 2004a).

Among others, energy efficiency improvement can be an important strategy for enhancing competitiveness in industry. This is because a significant portion of the operating costs of any manufacturing industry is in the form of energy costs. Therefore, energy conservation and management form a critical activity within any manufacturing organization because it can reduce operating costs. Any reduction in operating costs is bound to increase the competitive edge of the industry (Gopalakrishnan, Plummer and Alkadi, 2002). This will be particularly true for energy intensive manufacturing enterprises including small enterprises.

Improvement in the energy efficiency of small enterprises will have both micro and macro level benefits. At the micro level, it will reduce the cost of production of individual small enterprises and at the macro level it will bring down or at least, curtail the growth of industrial demand for energy. The former will contribute to the cost competitiveness of small enterprises whereas the latter will call for less energy related investments at the national level. This is significant because a considerable share of India's industrial demand for energy must be emanating from small enterprises, considering its size and structure.

But does energy play a prominent role in small enterprise performance? Does energy efficiency significantly influence economic performance of small enterprises? Given the technology and if labour and energy inputs are complementary to each other, will labour efficiency influence energy efficiency and economic performance? In the Indian context, no empirical study has thrown sufficient light on these issues. This paper analyzes energy consumption pattern and energy efficiency in relation to economic performance in four energy intensive small enterprise clusters in Karnataka. This paper is structured to comprise six sections. Section 2 briefly deals with the policy measures in force to promote energy conservation in small enterprises and section 3 presents a brief review of literature. Section 4 describes the objectives, scope and methodology and background of four clusters. Section 5 comprises analysis of the objectives and section 6 consists of summary and conclusions.

2. GOVERNMENT POLICY FOR ENERGY CONSERVATION AND EFFICIENCY IN SMALL ENTERPRISES

A small enterprise, according to the Industries Development and Regulation (IDR) Act, 1951, is defined in terms of investment limit in plant & machinery (original value) of Rs.

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