Understanding Ancillarisation
🔍 Understanding Ancillarisation
✅ Definition:
Ancillarisation refers to the process of developing small-scale or subsidiary (ancillary) units that support large-scale industries by supplying them with components, parts, or services necessary for their production processes.
In simple terms, an ancillary unit is a small or medium enterprise that supplies goods or services to a parent (main) industrial unit.
Ancillarisation is the promotion or encouragement of such ancillary industries, usually through government policy or business strategy.
✅ Key Features of Ancillarisation:
Dependency Relationship:
The ancillary unit is dependent on a larger parent industry for orders.
The parent unit may support it with raw materials, technical guidance, or financial assistance.
Product Focus:
Ancillary units typically manufacture parts, components, tools, or sub-assemblies required by the parent unit.
Mutual Benefits:
The parent company benefits by outsourcing components to reduce costs and focus on core activities.
The ancillary unit benefits from assured business, technical know-how, and sometimes even infrastructure support.
Government Promotion:
In countries like India, ancillarisation is promoted to encourage self-reliance, employment, and regional industrial development.
✅ Legal and Policy Framework in India:
Under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), ancillary units are often classified as MSMEs.
Various state industrial policies and central government schemes (like vendor development programs) aim to support ancillarisation.
The idea has been central to India's industrial growth strategy, especially since the Industrial Policy Resolution of 1956 and the 1980s modernization efforts.
✅ Objectives of Ancillarisation:
Promote small-scale industries (SSIs)
Generate employment
Decentralize industrial development
Enhance capacity utilization of large-scale industries
Encourage entrepreneurship in backward regions
⚖️ Relevant Case Law:
🔹 Mahindra & Mahindra Ltd. vs. Union of India
Court: Bombay High Court
Summary:
Mahindra & Mahindra had engaged several small units to supply specific parts for their automobiles.
A dispute arose regarding the status of these units as ancillary under the government's industrial policy.
The court held that for a unit to be considered ancillary, there must be a functional, production-linked relationship with the parent unit and that the unit must derive substantial business from the principal industry.
The judgment clarified the criteria for recognizing ancillary status and reinforced the responsibility of the parent unit in capacity building of ancillary partners.
🔹 Indian Tool Manufacturers vs. Asst. Collector of Central Excise
Court: Supreme Court of India
Summary:
The question was whether certain small units supplying tools to Indian Tool Manufacturers should be treated as independent entities or as ancillary units.
The Court observed that ancillary status does not mean complete dependence, but the existence of technical or financial reliance, along with long-term supply contracts, was sufficient to qualify.
It also highlighted that ancillarisation cannot be forced; it must arise from a business necessity or contractual arrangement.
✅ Benefits of Ancillarisation:
For Large Industries:
Cost savings due to outsourcing
Flexibility in production
Access to specialized services or components
For Ancillary Units:
Assured demand and market
Technical and financial support
Opportunities for growth and diversification
For Economy:
Employment generation
Regional development
Promotion of entrepreneurship
Balanced industrial ecosystem
✅ Challenges in Ancillarisation:
Overdependence on the parent unit
Delayed payments from large firms
Limited bargaining power
Quality control and compliance issues
Need for continuous technological upgradation
🏁 Conclusion:
Ancillarisation is a strategic industrial concept aimed at creating a symbiotic relationship between large and small enterprises. It encourages decentralization of manufacturing activities, fosters entrepreneurship, and strengthens the industrial supply chain. With supportive policies and legal clarity, ancillarisation has played a key role in India’s industrial development, especially in sectors like automobile, electronics, textiles, and engineering.
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