Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
1
Small and Medium Enterprises (SMEs): Past, Present and Future in India
KD Raju
Abstract
SMEs form the backbone of the Indian manufacturing sector and have become engine of
economic growth in India. It is estimated that SMEs account for almost 90% of industrial units in
India and 40% of value addition in the manufacturing sector. This paper closely analyses the
growth and development of the Indian mall scale sector from opening of the economy in 1991.
Third part looks into the present scenario of SMEs and the problems they phases like lending,
marketing, licenseraj issues in detail. The Micro, Small and Medium Enterprises Act, 2006 is
intended to boost the sector. The provisions of the Act are examined closely. The final part
provides some future policy framework for the sustainability of the sector.
I. Introduction
Small industry has been one of the major planks of India's economic development strategy
since Independence. India accorded high priority to small and medium enterprises (SMEs)
from the very beginning and pursued support policies to make these enterprises viable and
vibrant and over time, these have become major contributors to the GDP. Despite
numerous protection and policy measures for the past so many years, SMEs have
remained mostly small, technologically backward and lacking in competitiveness. The
opening of the Indian economy in 1991 added problems to the SMEs. At the beginning,
small scale enterprises found it difficult to survive. In the last decade, the economic
environment has changed in favour of SMEs. Presently, the SMEs in India are at a cross-
road and intense debate is centered around questions like what would be the future of the
small enterprises? How these enterprises can survive in the international trade arena?
2
What role can the government play in making these SMEs more competitive? In this
context, it is important to re-look into the basic issues of SMEs, past, present and future
prospects, especially in the policy framework.
Today, small and medium industry occupies a position of strategic importance in the
Indian economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition
and 50% of total manufacturing exports. More than 3.2 million units are spread all over the
country producing about 8000 items, from very basic to highly sophisticated products. The
SMEs are the biggest employment-providing sectors after agriculture, providing
employment to 29.4 milllion people. However SMEs, which constitute more than 90% of
total number of industrial enterprises, are now facing a tough competition from their global
counterparts due to liberalization, change in manufacturing strategies, technological
changes, and turbulent and uncertain market scenario.
This contribution is despite the sector being exposed to intensified competition since
liberalisation of Indian economy in 1991. Small industry in India has been confronted with
an increasingly competitive environment due to: (1) liberalisation of the investment regime
in the 1990s, favouring foreign direct investment (FDI); (2) the formation of the World Trade
Organisation (WTO) in 1995, forcing its member-countries (including India) to drastically
scale down quantitative and non-quantitative restrictions on imports, and (3) domestic
economic reforms. The cumulative impact of all these developments is a remarkable
transformation of the economic environment in which small industry operates, implying that
the sector has no option but to 'compete or perish'.
This paper is an attempt to discuss the following questions:
3
- Why should global and national policy developments affect small industry in India,
and how? What are its implications?
- How far has small industry been able to cope with the present competitive
environment?
- What are the future prospects of small industry in India in the era of globalisation?
- What steps need to be taken to strengthen small industry to ensure its sustained
contribution to Indian economy?
The definition of medium enterprises is a recent entrant in India, and part of
Government’s policy focus lately. The small scale segment is a manifestation of India’s
socio-economic development model and has met with the country’s long-term expectations
in terms of contribution to GDP, industrial base, employment and exports. This segment
forms a major part of India’s industrial base.
Recognising the importance of SMEs in the industrial development of the country,
the Government has initiated a range of programmes in diverse areas, viz. financing,
technology, innovation, market information, technical training and developmental
assistance. These initiatives are important in facilitating the growth of SMEs. But it will be
the internal dynamics of industries, and the path India’s industrial development takes, that
will give a thrust to the development of SMEs.
II. Liberalisation and Impact on SMEs
The decade of the 1990s was an eventful one in terms of policy changes, nationally as well
as internationally. Since the beginning of the 1990s, policy changes have been taking
place at three different levels - global, national and sectoral - which have implications for
small industry functioning and performance in India. The first and the foremost development
4
is the 'globalisation' process at the international level. Globalisation would mean free
movement of inputs (both labour and capital) as well as output between countries.
According to Stiglitz (2002), globalisation is the closer integration of the countries and
peoples of the world, which has been brought about by the enormous reduction of costs of
transportation and communication, and the breaking down of artificial barriers to the flow of
goods, services, capital, knowledge, and (to a lesser extent) people across borders.
However, the developments that have been taking place since the early 1990s are mostly
with reference to the free movement of only one of the factor inputs - capital, commonly
known as FDI and free movements of goods, more from developed to developing countries.
The formation of the World Trade Organisation (WTO) in 1995 has accelerated the
process of scaling down of tariff and non-tariff restrictions on imports. India, as a member of
the WTO, had substantially done away with its quantitative restrictions. As a result, industry
has had to face much stronger international competition. The process of removal of
quantitative and non-quantitative restrictions across countries has led to free movement of
goods between countries including India. As a result, world exports grew in dollar terms at
an average annual rate of 5.9 per cent during 1990-99 as against 5.2 per cent during 1980-
90 (MoF 2003). The reduction of restrictions on the movement of goods between countries
and the subsequent increase in world exports would have benefited multinational
corporations much more than small enterprises.
This has to be viewed along with the process of economic reforms launched by the
Indian government at the national level. This has resulted in considerable freedom for
enterprises, domestic as well as foreign, to enter, expand or diversify their investments in
Indian industry. India's economic reforms have seen two major outcomes, amongst others.
Firstly, the growth of the public sector has declined considerably since 1991 than in the
5
earlier period in terms of not only investment and employment but also production. The
public sector has been a major customer of small enterprises in India. The relative role of
the public sector as a distinct entity will decline further in the course of the Tenth Plan. This
will most probably further bring down public sector demand for small industry products.
The introduction of an exclusive policy for small industry, which laid emphasis on
imparting more vitality and growth impetus to the sector, is the sectoral dimension of the
major policy changes relevant to small industry. The policy marked: (1) the beginning of the
end of protective measures for small industry, and (2) promotion of competitiveness by
addressing the basic concerns of the sector, namely, technology, finance and marketing.
Subsequently, the number of items reserved exclusively for small industry manufacturing
has been gradually brought down from 842 in 1991 to 239 in 2007.
Thus policy changes that have occurred at the global, national and sectoral levels
have radically changed the environment for the functioning of small industry in India. The
growth of small industry in the country has to be analysed against this backdrop.
Small enterprises in India have come up in an unplanned, uncontrolled and
haphazard manner. They have emerged anywhere and everywhere – closer to the location
of resources as well as markets, in clusters as well as in a dispersed manner, in industrial,
commercial and residential areas. Of these, the 2000-odd small industry clusters vary in
size with a population ranging from 100 to 1,000 units. Approximately, these clusters would
account for 1/3 to ½ the total small industry units in the country. A considerable majority of
these clusters are based on natural and traditional skills. By and large, these clusters lack
reliable and efficient infrastructural facilities such as power, road, water, transportation and
communications, information and technical inputs. But the infrastructural problem is more
acute in case of units that are located in a dispersed manner.
6
The central issue of concern for the growth of small industry is how to strengthen its
competitiveness. First of all, if small industry has to thrive, infrastructural bottlenecks must
be overcome to enable it to compete on its inherent potential. And it is the responsibility of
the government to remove any structural bottleneck in small industry performance
especially when market forces are given prominence through the removal of ‘protective
elements’. It is essential to provide the much-needed ‘level playing field’ to small enterprises
through infrastructure development. But overcoming infrastructural bottlenecks for small
enterprises is easier said than done.
III. The SMEs in India: Present Scenario
In the recent past, small companies have performed better than their larger counterpart.
Between 2001-06, net companies with net turnover of Rs. 1 crore – 50 crore had a higher
growth rate of 701 per cent as compared to 169 per cent for large companies with turnover
of over Rs. 1,000 crore (Business World Jan. 2007). The total SSI production, which had
reached the all time high of Rs. 1,89,200 crores in 1989-90 dropped dramatically in the next
10 years and only in 2001-02 the level of production was surpassed. But after 2002, the
production has risen at a faster rate. Since 2000, there is a continuous growth in number
of units, production, employment and in exports. The average annual growth in the number
of units was around 4.1%. At the
Table I : Performance of Micro and Small Enterprises
Year No. of Units (in Lakh))_______________________ Regd. Unregd. Total
Production (Rs. Crore) (at current (at constant
prices) prices)
Employment (in lakh)
Exports (Rs. Crore)
2002-03
15.91 93.58 109.49 (4.1)
3,11,993 (10.5)
2,10,636 (7.7)
260.21 (4.4)
86,013 (20.7)
2003-04
16.97 96.98 113.95 (4.1)
3,57,733 (14.7)
2,28,730 (8.6)
271.42 (4.3)
97,644 (13.5)
2004-05
17.53 101.06 118.59 (4.1)
4,18,263 (16.9)
2,51,511 (10.0)
282,57 (4.1)
1,24,417 (27.4)
2005-06
18.71 104.71 123.42 (4.1)
4,76,201 (13.9)
2,77,668 (10.4)
294.91 (4.4)
N.A.
7
Note : Figures in parenthesis Indicate percentage growth over previous years
Source: Development Commissioner (SSI)
Today, some of the SMEs are acquiring companies abroad as part of the globalisation
process. Mostly, these units are ancillaries and are export oriented. The SME sector have
transformed to the need of large local manufacturers and suppliers to global manufacturers
like Auto Industry. Today some SMEs are investing in R&D in order to compete globally.
Outsourcing from multi-national companies has played a vital role in the emergence of
Indian SMEs as world leaders in specified products. The advantages in labour-intensive
manufacturing units, lower transport costs and lose labour policies of the small scale sector
have led to major outsourcing in manufacturing and services.
With the elimination of Multi Fibre Agreement (MFA)in 2005, lot of opportunities have
opened for the Indian textile sector. Presently, SMEs in this sector have shown an average
growth rate of 32% for the past two years. The auto component sector grew at an average
35% over the past two years and expects to maintain this momentum. Besides this sector,
food processing and construction have also been growing. The IT sector services is
another success story of SMEs. The retail business in India has become an area of
immense opportunity. In the retail sector, the SMEs will act as a supply source for the big
retailers like Reliance Retail, Big Bazar, etc.
The Indian experience with SMEs is common to other East Asian economies also.
The SMEs are acting as entrepreneural engines of growth in the whole of Asia. About 70%
of the employment growth comes from the SMEs in the Asian region. This is the case with
China, Vietnam and Indonesia, which are the rising countries in East Asia. It is expected
that this phenomena is also common in Europe and the US. The SMEs will provide major
8
employment all over the world. Even when SMEs are contributing so much to employment
generation and exports, the policy support and capital supply are not so encouraging in
countries like India.
The way forward would be to create an environment of risk-taking by the
government for providing a start-up capital to SMEs and to facilitate technology transfers
and training in skill development. The Micro, Small and Medium Enterprises Act, 2006 is a
legal framework for more capital investment in the SME sector. However, the
implementation of the Act would need more precision and authority with different agencies.
IV. Current Issues
i. Lending Facilities to SMEs
The mind set of banks towards SMEs have somewhat changed in the recent past. With the
entry of private banks, increased competition has led to a rush for lending to prime
customers. The multiple financial options from the capital market have also compelled
banks to take more risks in the case of SMEs. The increased lending to SMEs is propelled
by the compulsion of the market as well as by the rapid expansion of these companies.
There was no agreement among the banks on what constitutes an SME. This confusion
was removed by the new Act. But private and foreign banks have their own definition of
SMEs. They follow the International standard of turnover between Rs. 10 crore and Rs.
700 crore. The lending to the SME sector grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs
sector. Loans to bigger companies are growing at a faster pace than loans to the SSI
sector. By the end of 2006, the proportion of SSI loans to total loans has remained small at
6.4 per cent.
9
Presently, private banks are adopting new methodologies for priority lending to
SMEs. In the past, loans were made without proper study of the viability of the project and
mostly bankers in this sector had no expertise in handling small loans. Now private banks
like ICICI and Kotak Mahindra Bank have separate SMEs division. Today, most of the
lendings are concentrated on priority sectors like auto ancillaries, pharmaceuticals and IT
sector where India had a proven record of competitive advantage. The SMEs sector is still
facing an acute shortage of capital. It needs more pumping of money into capital
investment for further growth and competitiveness of SMEs. For further growth of the
SMEs, in addition of loan facilities, there is need for venture capital investment.
The Small Industries Development Bank of India (SIDBI) was set up in 1990 under
the Act of Indian Parliament as the principal financial institution for promotion, financing,
development of industry in the small sector and coordinating the financial activities of other
institutions engaged in similar activities. Since its inception, the bank is promoting SSI
sector to meet the requirement of setting up of new projects, expansion, diversification and
modernisation of the sector. However, after working more than 1-1/2 decades, the
institution has not proved to be sufficient to meet the requirement of SMEs in India. This
can be mainly attributed to the governmental clutches on the banks.
The main identified sources of finance to SSI units are:
• Public Sector/Commercial banks
• State Financial Corporations
• Small Industries Development Bank of India
• Informal sources
Out of these financial resources, banks are a preferred source of financing by virtue of their
better reach and accessibility. Two-thirds of the small entrepreneurs meet financial
10
requirements from their own funds and informal sources. They have to resort to other
sources of finance because raising finance from the financial institutions has the following
draw backs:
• The rate of interest charged is higher
• Insufficient collateral
• Restrictive and conditional working capital limits
• Time consuming and cumbersome procedures
• Indifferent attitude of the branch manager/staff
• Non-availability of assistance at banks for completion of forms and formalities
• The terms of credit are hard
• Improper assessment of requirements
• Arbitrary curtailments of credit limits
• Repeated and time consuming visits to banks
• Release of limits sanctioned in installments
ii. Marketing
Next to finance, marketing is the big problem area for small entrepreneurs. The survival of
small entrepreneurs very much depends on sound marketing techniques. One of the most
important tools in the hands of small entrepreneurs for promoting their sales is low prices
coupled with credit to buyers, which give rise to number of problems at a later stage.
Marketing as a profession has not yet developed in the SME sector. Professional agencies
are not engaged by small entrepreneurs on account of paucity of funds. The concept of
marketing is not known to the majority of small entrepreneurs. For majority, marketing
means advertisement or personal contacts. There are many ad-hoc initiatives taken by the
11
Government to promote marketing of products/services of small units but no concrete action
plan has been chalked out or targets made.
iii. Technological Upgradation
Modernisation, technological and quality upgradation have assumed great significance in
the present day context. With the inflow of latest technology reducing the cost of production
and the increasing competition from within and outside, the small scale sector will have to
attach more importance and pay attention to the areas of technology upgradation and
modernization. However, due to lack of information on the areas of technology
upgradation, entrepreneurs who have plans for technical upgradation are not to go ahead.
iv. Sickness in SSI Sector
A host of developmental schemes launched by the Government for solving the problems of
small scale industries have yet to achieve their goals to arrest sickness in SSI sector. The
plight of existing small scale industries is visible in many industrial complexes wherein the
industrial sheds have been converted into allied activities like showrooms, banquet halls,
restaurants, etc. There seems to be some lacuna in the implementation part of the
developmental schemes.
v. Removal of Inspector Regime and Simplification of Procedures One of the major grievances of the small scale sector is that the frequent inspections by
multiple government agencies are a source of harassment. At present, 55 inspectors of
different levels are visiting the small scale units, which is a cause of major concern to the
small scale units. It is suggested that the government should stream line the inspection
procedure. It should also include repeal of laws and regulations applicable to the sector
that has become redundant.
12
Indian SMEs are finding it difficult to sell their products in the domestic and
international markets because of increasing competition. To make their products globally
competitive, Indian SMEs need to up-grade their technology and put more emphasis on
innovation per se. In India SSI Sector manufactures more than 7500 items. Since its
inception, it continued to maintain more than 8% growth rate. At present there exist about
3.2 million registered and approximately 6. 5 million are unregistered units. Among these
units 97% are tiny. These units contribute 50% of production, 40% export and 65% of
labour employment in manufacturing sector. However, it is surprising to know that most of
the SSI’s investments are less than Rs.7 Lac.
It is estimated that there are 400 modern SME and 2000 rural and artisan based
clusters exist in India. These contribute to 60 % of India’s manufacturing exports. Some of
the clusters are so big that they produce 70 to 80 % of the total volume of that particular
product produced in India. For example, Panipat produces 75 % of the total woollen
blankets produced in the country; Tirupur produces 80% of the country’s cotton hosiery.
Despite its importance, the SME sector has long faceted extreme obstacles in
accessing finance and markets. Some of these obstacles include inability to access finance
and working capital loans from banks, inability to access capital from other sources,
mistreatment by large procurement companies, difficult bureaucratic procedures for
registration, and lack of management skills, etc. The increasing availability of cheap foreign
imports has further hindered the development of Indian micro, small and medium
enterprises. These obstacles have compelled the SME lobbies and the Government of India
to develop government intervention to ensure the continued growth and success of SMEs.
13
The problems faced by the SMEs, particularly in accessing technology and
maintaining competitiveness have been formidable. It has been found that sharing of
information at local and national clusters are mostly informal. Information regarding the
latest development and competency understanding is much less. Work sharing is not seen
in the local and national clusters, as it is a fight for the same customer, in the same market.
Even though the product and technology used by the entrepreneurs are similar, the
tendency to share is less among the cluster participants.
The concept of cluster development offers new insights into the potential role of
SMEs, in enhancing their access to new technology. Characteristics of a successful cluster
are inter-firm cooperation, cooperation blended with competition, the importance of local
value systems, flexibility and innovative capacity, geographic proximity, sectoral
specialization, a local pool of skilled labour and the presence of a large number of firms. It
also includes willingness to work together to resolve potential clashes of interest,
widespread entrepreneurial spirit and ability, promotion of a social compromise.
SMEs find it difficult to match the wage rate, job security and career development
opportunities, available in larger organizations and therefore are not in a position to hire
skilled and competent manpower. Often, as a result a bottleneck develops in the SME
organisation, it may result in just one or two people controlling the organisation, whether at
the decision making level or at the operational level. Even in moderately large sized firms
employing several hundred workers, these bottleneck points seem to exist. The decision-
makers at the bottleneck points are obviously busy people. They must handle many day-to-
day problems that demand immediate attention, e.g., payroll, inventory, finances,
personnel, suppliers, and customer demands. These problems must be solved quickly, or
14
the company will be unable to function. Clearly, there is little chance for them to think about
making major changes or risk taking, which is essentially required for innovation process.
Small traditional enterprises, with poor support system and little exposure face
difficulties in the new e-business environment. SMEs usually are diffident about adopting IT
or solutions based on IT. Limited human resources, especially those familiar with IT or
corresponding backend processes, place these SMEs in an unfavourable position, in an e-
commerce environment where the preferred physical channels of distribution and delivery
still favour large enterprises. Further, adding to the limitations of SMEs, are lack of
formalized contractual relations and the reliance on cash payments.
Today organizations are knowledge based and their success and survival depend on
creativity, innovation, discovery and inventiveness. An effective reaction to these demands
lead to innovative change in the organization, to ensure their existence. The rate of
changes is accelerating rapidly, as new knowledge idea generation and global diffusion are
increasing. Creativity and innovation have a bigger role in this change process for survival.
V. The Micro, Small and Medium Enterprises Act, 2006
The Government of India passed “The Micro, Small and Medium Enterprises Development
Act” in June 2006 after wide consultation with more than 300 industry associations, different
government departments and multiple stake-holders across the country. The Act is geared
towards promotion and enhancing the competitiveness of Micro, Small and Medium
Enterprises. The Act tries to accomplish many long standing demands of multi stake-
holders in the MSME sector. The Act establishes a National Board for Micro, Small and
Medium Enterprises. The main function of the Board is to oversee and regulate the
development of MSMEs in India. The Board’s duties include monitoring cluster
15
development, training enterprise, development infrastructure and promoting financial
access to the MSME sector in the country. The Act provides for representations from
government, industry, finance, civil society organisations on the Board and Advisory
Committees. The Act, first time in India, defines the MSMEs by the level of investment in
plant and machinery. The new definition seems to eliminate all confusion and different
categorisation by government and financial institutions.
I. Definition of SMEs
A well-debated issue, the definition of small and medium enterprises in India was very
recently settled. The Micro, Small and Medium Enterprises Act, 2006, defines enterprises
on the basis of investment in plant and machinery.
According to the new Act, the MSMEs are defines as follows:
Category Investment (Plant & Machinery) Service
Micro Enterprises Less than 25 lacs Less than 10 lacs
Small Enterprises Less than 5 crores Less than 2 crores
Medium Enterprises Less than 10 crores Less than 5 crores
On the other hand, in the European Union, SMEs are defined in the Commission
Recommendation of May 6, 2003. An enterprise is regarded as medium sized if it has not
more than 250 employees, not more than 50 million Euro turnover and if not more than 25%
of the shares of such an enterprise are in the ownership of another enterprise (OECD,
2005). A small enterprise is with 50 employees, not more than 10 million Euro turnover and
less than 10 million Euro in balance sheets. The micro enterprises are with 10 employees,
not more than 2 million Euro turnovers and less than 2 million Euro in balance sheet.
16
Small and medium enterprises, both in size and shape, are not uniform across the
globe. This asymmetry exists due to the nature of economic development in each country.
The EU’s definition is based mainly on the number of people employed. The UK definition is
on the basis of turnover. The US definition is based both on number of employees as well
as turnover. In China, the categorization is between the sectors based on number of
employees and turnover. The Indian definition based only on the basis of investment in
plant and machinery is not in consonance with the growth of the economy in the recent
past.
The Act simplifies the registration process for new MSMEs by submitting simplified
Memoranda. The Act stipulates that Central Government may, from time to time, for the
purpose of facilitating and promoting the competitiveness of Micro, Small and Medium
Enterprises, by way of development of skills in the employees, management and
entrepreneurs, provision for technology upgradation, market assistance, infrastructure
facilities and cluster development with a view to strengthening backward and forward
linkages which is necessary for the development of MSMEs in the rural areas. The
Reserve Bank guidelines, from time to time, may ensure timely and smooth flow of credit to
the enterprises, minimize the incidents of sickness and enhance the competitiveness of
MSMEs. The Act provides for constituting a fund by the Central Government for providing
necessary credits to the MSMEs.
The Act sets the agenda for specific policies that it will create and implement, the
procurement preference policy, which will guide Government bodies on how much of their
supplies should be purchased from MSMEs. Another important policy is the closure of
business or excide policy, which will regulate the liquidation of sick units. Another policy
measure under the Act is penal provisions for delayed payments to Micro and Small
17
Enterprises. The Act compels big manufacturers and buyers to make payments within 45
days. If the buyer fails to make payments in time, he will be liable to pay compound interest
from the due date. Any dispute with regard to the amount or payment will be referred to
Micro and Small Enterprises Facilitation Council. The Council has the powers of an
Arbitrator to deal with the dispute. The State Governments have to notify the constitution of
Micro and Small Enterprises Facilitation Councils in each State.
The finalisation of the new Act raises many question and controversies among the
industry as well as the government. First, the expansion of the investment limits extends
the priority sector. Banks have to lend upto 40% of their priority lending to this sector. Too
many banks use the methodologies of “Pick and Chose” by looking at safest borrowers,
most of which are larger companies with better financial capacity and strength. Indirectly,
this will be disadvantage to small enterprises and the priority lending will go to the largest
enterprises among MSMEs.
Secondly, any Indian business enterprise, with net worth of less than 10 crores,
cannot raise capital from the stock market. The larger companies can bargain with banks
on interest rates and lower lending rates. The smaller enterprises have no other choice of
finance and they will be forced to borrow on higher interest rates and some will end-up in
closure and sickness.
Third, the Act provides for need for procurement preference policy, which is yet to be
formulated under Section 11 of the Act. The Government proposed a policy of 20% of
annual value of purchases by PSEs, Central govt. departments etc. from MSMEs.
Presently, 358 items, out of 7,500 items that are manufactured by SSI, are reserved for
exclusive purchase from Micro and Small enterprises. In the new policy, this reservation is
dispensed with.
18
ii. The Proposed Procurement Policy
The Central Government Ministries, Departments, its aided institutions and public
enterprises to procure at least 20% of the value of their total annual purchases from
MSMEs, whether it is products or services. There is a special reservation for
disadvantages section of the Society (SCs/STs/Women). At least 22.5% of the value of
total annual procurement of goods and services should be procured from the above section.
There is a special reservation for 10% of the value of total annual procurement of goods
and services from MSMEs owned by women enterprises.
The MSMEs quoting prices higher upto 15% of the lowest eligible price bid, will be
given preference for procuring at least 50% of the required quantity, in case such enterprise
agrees in writing to match the lowest eligible price.
VI. Future Policy Frame Work i. Priority Sector Lending
The target fixed for priority sector lending by domestic and foreign banks is 40% and 32% of
their net bank credit (NBC) respectively. The declining share of the SSI sector in the
outstanding priority sector advances of public and private sector banks since 1999-2000 is
a cause for concern. The share of SSI advances in the NBC declined from 16% at the end
of March 2000 to 11% at the end of March 2003 in respect of public sector banks. For the
private sector banks, the share declined from 19% to about 8% in the same period. The
limited access of SSI sector to funds needs to be addressed on a priority basis. Large
corporates are able to access bank loans at below PLR besides accessing international
markets. But, for the SSI sector, the cost of funds continues to remain high despite falling
deposit rates.
19
The RBI in the mid–year reviews of monetary and credit policy for 2003-04 had
announced a number of measures aimed at improving credit delivery to the SSI sector.
These measures included raising the loan limit from Rs.1.5 million upto Rs.2.5 million
without the requirement of collateral, rationalizing interest rate on the deposits of foreign
banks placed with the Small Industries Development Bank of India (SIDBI) towards their
priority sector shortfall (reduction of interest from 6.75% to the prevailing bank rate).
ii. Price Preference for SSIs
In the past, 15% price preference was being extended to SSI units for supplies to
PSUs/Government bodies. Now it is fixed as 20% and at the same time, the exclusion list
will go. The price preference should be fixed on empirical data which will act as a measure
of assistance to SSI units for utilizing their capacity adequately.
Iii Reformation of Labour Laws
Multiplicity of labour laws is responsible to a large extent for slow growth of industry in our
country. Labour laws provide too much protection to labour force by the provision of
minimum wages, PF, bonus, gratuity and ESI etc. On the other hand, the employers are
required to seek prior permission even for getting overtime work from labour, on payment
and in spite of mutual consent. There has to be performance or productivity linked wage
structure. The more efficient and hard workers may be suitably rewarded, and there should
be a provision to deduct the wages for shirking and laziness. Supportive labour laws are an
important pre-requisite for Indian industry to face the international competition.
IV The Opportunity
Globalisation and liberalisation need not affect Indian small industry only adversely. It
would have created beneficial opportunities as well. The removal of quantitative restrictions
20
and the reduction of import duties, particularly after the setting up of WTO in 1995, have
opened up foreign markets to Indian small industry as much as the Indian market has
opened up to foreign goods. Many efficient and export-oriented small firms would have
gained out of this development. Such opportunities should act as an incentive to many a
small firm in India to enhance their competitiveness to penetrate the global market. This
could also be achieved by small firms becoming vendors or subcontractors to foreign large-
scale industries. The trend is outsourcing of supplies by TNCs and they are always on the
lookout for firms that could supply reliable and quality products.
V. Networking of SMEs for Competitiveness
The promotion of inter-firm linkages is another issue deserving more recognition. The
increasing presence of transnational corporations (TNCs) in the country would open up new
opportunities for subcontracting / outsourcing. This is because FDI has flowed into
industries such as telecommunications, transportation, electrical equipment (including
computer software), metallurgical industries and automobiles, among others, where
opportunities for obtaining subcontracting / outsourcing are high for small industry. The
potential of such outsourcing opportunities must be tapped to the maximum possible extent
to the advantage of small and medium industry. Infrastructure of SME is the route to growth
of world economy.
VII. Conclusion
Small industry in India has found itself in an intensely competitive environment since 1991,
thanks to globalisation, domestic economic liberalisation and dilution of sector-specific
protective measures. The international and national policy changes have thrown open new
opportunities and markets for the Indian small industry. Concerted effort is needed from the
government and small industry to imbibe technological dynamism. Technological
21
upgradation and in-house technological innovations and promotion of inter-firm linkages
need to be encouraged consciously and consistently. Financial infrastructure needs to be
broadened and adequate inflow of credit to the sector be ensured taking into consideration
the growing investment demand, including the requirements of technological transformation.
Small industry should be allowed to come up only in designated industrial areas for better
monitoring and periodic surveys. A technologically vibrant, internationally competitive small
and medium industry should be encouraged to emerge, to make a sustainable contribution
to national income, employment and exports. It is essential to take care of the sector to
enable it to take care of the Indian economy.