The Hindu Business Line : Small-Scale Industry — The right time to make it big

Over the years, the SSI sector has received a spate of sops, even as several problems have prevented it from achieving its full potential. The recently introduced Small and Medium Enterprises Development Bill provides a legal framework to promote the sector's growth and enhance its competitiveness, besides reducing the rigours of the `Inspector Raj'. It is up to the entrepreneurs to make use of this facilitating legislation to make an impact in both global and local markets.

THE United Progressive Alliance (UPA) Government, headed by the Prime Minister, Dr Manmohan Singh, with its commitment to creating more employment opportunities and ensuring inclusive and equitable growth across regions and among people, is now looking at the small-scale sector.

The introduction of the Small and Medium Enterprises Development (SMED) Bill in the post-Budget session in May, though hailed as a piece of reform encouraging the growth of the small and tiny industry,, drew strong protests from small-scale industry associations, which felt that no good could come from such a paradigm shift in their nomenclature and the very approach.

In his 2005-06 Budget speech, the Finance Minister, Mr P. Chidambaram, said that "our approach to small-scale industry has evolved and now we are inclined to treat the sector as the small and medium enterprises sector". Accordingly, the SMED Bill was introduced to bring benefits to small enterprises by providing a legal framework for promoting the sector's growth and enhancing its competitiveness, besides reducing the rigours of the `Inspector Raj'. This was not an idea thought up by the UPA Government, as the erstwhile NDA regime had mooted a proposal in 2002 to widen the definition of the small-scale industry (SSI) sector.

This is also in keeping up with the universal trend of treating small and medium enterprises as a composite sector, particularly as the pace of globalisation gathered momentum and tariff and non-tariff barriers were brought down with a thud.

The number of SSI units in the country (including registered and unregistered) is estimated to have grown from 10.52 million in 2001-02 to 11.86 million in 2004-05; the employment estimate has correspondingly gone up from 24.91 million persons in 2001-02 to 28.28 millions in 2004-05.

According to the Third Census, in November 2002, covering units registered permanently up to March 31, 2001, a total of 22.62,401 units were surveyed. Of these 13,74,974 were found to be working and the remaining 8,87,427 units (39 per cent) closed, according to the 2004-05 Annual Report of the Ministry of Small Scale Industries, released recently.

The size of the total SSI sector, as per the 2002 Survey, is estimated to be over one crore units, with as much as 47.22 per cent of the units located in Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Tamil Nadu.

Over the years, the SSI sector has been the beneficiary of a spate of sops, even as the development of the sector remains a State subject.

The fiscal and supportive measures put in place by the Centre include the integrated infrastructure development scheme, the small industry cluster development programme, the credit guarantee scheme, the performance and credit rating scheme for small industries, the ISO-9000 certification reimbursement scheme, mini tool-rooms, testing centres, sub-contracting exchanges, purchase and price preference policy, market development assistance, participation in international fairs and assistance to entrepreneurship development institutes.

The problems plaguing the sector and which hamper it from achieving its full growth potential range from inadequate access to timely credit, technological obsolescence and infrastructure bottlenecks, to marketing constraints and cumbersome rules and regulations.

At the State-level, the local bureaucracy often makes entrepreneurs run from pillar to post, even for a simple procedure like registration, to make them qualify for various credits, including essential raw materials at competitive prices.

In the days of industrialisation and import controls, SSI entrepreneurs often resigned themselves to the fact they could get raw materials at globally competitive rates only by greasing the palms of officials to get their orders released in time.

Though by degrees the SSI sector learnt to be competitive, with the gradual integration of the economy into the global mainstream in the early 1990s, the progressive dereservation of products meant for exclusive production by small-scale units and the general fall in the import duty for industrial raw materials and intermediates only aggravated the agonies of these small industrial establishments.

International lending agencies and liberal economists in the country did not mince words when they proclaimed that the growth of small businesses remained stunted and insufficient due to investment ceilings and product reservation.

When the reform programme began in the early 1990s, some 800 items were reserved for exclusive production by the SSI sector, which meant that investment in plant, and machinery in any individual SSI unit in "a reserved product category" could not exceed the narrowly defined investment ceiling.

Small firms that produce goods in the reserved sectors could not expand, achieve economies of scale and improve efficiency as they had a vested interest in being small.

This also encouraged sickness to creep in, compounded by the delayed payments to small units performing an ancillary role to larger industrial units. In recent years, credit to the small-scale sector as percentage of net bank credit from the public sector banks declined from 17.5 per cent in March 1998 to 14.2 per cent in March 2001, and further to 10.4 per cent in March 2004.

Not only this, the number of SSI accounts also plummeted from 29.64 lakh in 1998 to 16.33 lakh in 2004 — or 50 per cent. Various factors, such as a high risk perception, higher transaction cost in processing SSI loan application, and the lack of credit rating facilities for SSI units led to the lamentable decline in flow of credit to the SSI sector.

Concerned about this steep fall, a report of the House panel on inter-sectoral strategic cooperation to promote SSI said in May 2005 that the RBI should examine the recommendation of the Ganguly Committee report and issue guidelines to all banks for immediate enhancement of credit to small and medium enterprises at reasonable rate of interest so that small enterprises may grow and graduate to medium enterprises before long.

Now that India is being looked upon as a supplier to retail giants for a range of goods for sale abroad, the SSI units should gear themselves to take the opportunity head-on instead of living in the past and whining about the lack of a facilitating environment.

Entrepreneurs should make ample use of new schemes on performance and credit rating of small-scale industries.

The scheme is tailored basically to sensitise the SSI sector to the need for credit rating and encourages them to maintain clean and accurate financial records that would help them earn higher ratings when they tap the financial institutions for working capital and investment requirements.

Rightly, the government has proposed the de-reservation of 108 items from a list for exclusive manufacture ranging from textile products to agricultural implements, to enable technology upgradation and greater competitiveness.

The investment limit (in plant and machinery) was raised in October 2004 from Rs 1 crore to Rs 5 crore in respect of seven items of sports goods reserved for the SSI.

The small and medium enterprise fund of Rs 10,000 crore was operationalised by the Small Industries Development Bank of India (SIDBI) since April 2004 by the erstwhile NDA government.

With the introduction of the SMED Bill, the stage is now set for the entrepreneurial class to improve its lot by capitalising on the burgeoning opportunities in global and local markets.

For this players in the SSI sector must credibly rejig their cost calculations and transaction expenses so that they can continue to focus on the core activity despite the changing rules of the game.

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