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Globalisation and
Small Scale Industry
Frequently Asked Questions
Monographs on Globalisation and India – Myths and Realities, #8
Globalisation and Small Scale Industry
Frequently Asked Questions
Monographs on Globalisation and India – Myths and Realities, #8
Published by
CUTS Centre for International Trade, Economics & Environment
D-217, Bhaskar Marg, Bani Park
Jaipur 302 016, India
Email: [email protected]
Website: www.cuts-international.org
Researched and compiled by
Purnima Purohit*
© CUTS International, 2006
* Programme Coordinator, CUTS-CITEE
CONTENTS
Preface ..................................................................................................... i
1. What is a ‘Small Scale Industry’? ........................................................... 8
2. What is the role of Small Scale Industries in the Indian Economy? ...... 11
3. What have been the implications of policy changes for
Small Scale Industries? ......................................................................... 13
4. What is meant by a ‘sick industry’ in the
Small Scale Industries sector? ............................................................... 17
5. What are the main reasons of sickness in industries and
symptoms of becoming sick? ................................................................ 19
6. What is the difference between Sick Industrial Companies
(Special Provisions) Act, 1985 and Board for Industrial and
Financial Reconstruction? ..................................................................... 21
7. What are the procedures determining sickness of the
industries and steps taken to revive them? ............................................ 22
8. Why was de-reservation of Small Scale Industries items
taken up by the Government? ............................................................... 24
9. Could WTO be held responsible for adverse impact on the
Small Scale Industries in the era of Liberalisation
and Globalisation? ................................................................................ 27
10. What is State-wise status of Small Scale Industries in the
post domestic economic reforms in the era of Globalisation
and Liberalisation? ................................................................................ 29
11 What measures can be taken to increase the competitiveness of
Indian Small Scale Industries? .............................................................. 33
Preface
This is the eighth monograph in the series titled “Globalisation and India –
Myths & Realities”, launched by CUTS in September 2001. The series is
addressed to the common man in India, which helps to clarify many basic
issues about economic reforms and trade liberalisation.
This monograph is about Small-Scale Industries (SSI), also known as the Small
& Medium-sized Enterprises (SMEs) in India and rest of the world, and its
importance in the era of globalisation and liberalisation. The small-scale sector
has played an important role in the socio-economic development of the country
during the past 58 years. By its less capital intensive and high labour absorption
nature, SSI sector has made significant contributions to employment generation
and rural industrialisation. The performance of the small scale sector, therefore,
has a direct impact on the overall growth of the economy. This is something,
which can be seen as a global phenomenon.
The post-liberalisation business environment has become harsh for the SSI
sector because of increasing internal and external competition. Clearly, global
business is not a level-playing field with firms of all sizes having different
goals, abilities and stakes. Until recently, high protectionist walls around SSIs
helped them to cope with big business, transnational corporations (TNCs) and
the progressive liberalisation under World Trade Organisation (WTO) trade
regime. Despite sufficient notice and the growing awareness of the impending
threats, the SSI sector does not appear to be adequately prepared for the new
challenges.
However, it is not a unique situation being faced by the Indian SSIs. The SSIs
in developed economies too are encountering unprecedented challenges. And,
this is the reason why a plethora of concessions and schemes supporting SSIs
are provided to this sector. Governments are vigorously seeking ways to promote
and develop them.
There may be genuine apprehensions about the impact of the WTO for the
SMEs sector in India, specifically with regard to their competitive ability and
Globalisation and Small Scale Industry w i
integration with the global markets, but it would be a misconception to solely
blame the WTO regime for some firms in the small sector not doing well. The
sector is suffering from wider problems such as demand related problems or
supply-side constraints. It cannot be ignored that troubles may also arise due
to unorganised nature of this sector, lack of data and information, use of low
technology, sometimes obsolete technology, poor management and poor
infrastructure in the country.
About 95 percent of the SSI units are in the nature of micro enterprises and are
vulnerable. Many of them are one-man shows. Their capital base is poor and
they do not have access to information and modern management practices.
Policy attention to the sector has gained visibility lately, with emphasis on
credit access. But it seems sickness in the industry is a key factor in the
apprehensions of lending institutions. In spite of several committees and study
group reports over the past decade, policymakers are still seeking for a WTOcompatible
policy for this sector. There is a need for better understanding over
a number of issues such as the cap on capital investment, foreign direct
investment (FDI) ceiling, interest subsidy, de-reservation of items, creation of
a technology upgradation fund and so on.
Not surprisingly, though the sector has grown at a rapid pace post-Independence,
the incidence of sickness in the sector has been reported continuously. It seems
the range of reasons for sickness in the sector is not mutually exclusive, and
therefore, corrective prescriptions turn out to be misleading. Firm specific and
industry specific solutions are required.
In India, a number of laws exist for the small-scale sector, which are often
confusing and seemingly prove less effective. Thus, the demand to have a
comprehensive legislation for the SSI is gaining pace. Keeping this in mind,
the Government of India has recently introduced a Small Enterprises
Development Bill but it also needs to take into account the practical concerns
of small enterprises before it takes final shape.
Thus, given the crucial importance of the SSI sector to the economy with around
40 percent share in the total industrial output, 35 percent in direct exports and
over 80 percent in industrial employment, it deserves all the policy support the
Government can offer. What the small entrepreneurs need is not protection but
institutional support to fund modernisation and technology upgradation,
infrastructural support, and adequate working capital finance from the banking
sector.
ii w Globalisation and Small Scale Industry
There is also a need for small entrepreneurs to keep pace with the structural
and technological changes taking place in large industries. The accent should
be on the much greater degree of ancillarisation and on providing services as
the larger companies are keen on offloading a number of job works to smaller
units. True, a section of the SSI sector is already undergoing structural changes
but the process is still quite slow.
Also, the diversity in production systems and demand structures in our country
will ensure long term co-existence of many layers of demand for consumer
products/technologies/processes. This characteristic of the Indian economy
will allow complementary existence for various diverse types of units.
The process of liberalisation coupled with Government support will, therefore
attract the infusion of capital, technology and marketing in the sector. There is
an urgent need to refashion the policies governing the sector so as to improve
its competitive strength and long-term outlook.
This monograph, dealing with simple and basic questions coming to the common
man’s mind, will serve its purpose of generating awareness on the issues relating
to SSI, its significance and coping strategy in the era of globalisation and
liberalisation. There are opportunities as well, which can be better exploited
by the small sector than the big one.
Jaipur Pradeep S Mehta
May 2006 Secretary General
Globalisation and Small Scale Industry w iii
8 w Globalisation and Small Scale Industry
1
What is a ‘Small Scale
Industry’?
www.hindubusinessline.com
The term ‘Small Scale Industry’ (SSI) evokes different meanings for different
agencies. The Planning Commission, Government of India, view the entire
Village and Small Industries (VSI) sector as the SSI sector. The National Sample
Survey Organisation under the Central Statistical Organisation (CSO),
Government of India defines the entire industry sector in terms of organised
and unorganised segments, as also in terms of industrial enterprises run by
households and non-households. The Central Excise Department, on the other
hand, distinguishes SSIs on the basis of annual turnover of the units.
Though employment and turnover are also used to define small industries, as
these indicators are implicit in the requirement for registration under the
Factories Act, the core definition of SSIs in India remains based on investment
limits – ‘historical costs of plant and machinery’.
From the industrial policy perspective, SSIs are defined on the basis of Plant
& Machinery and the classification also covers residual units not included
under the assistance programme of any of the Statutory Boards. In India, the
latest definition of a SSI is any unit with an upper limit on investment (in plant
and machinery) of Rs one crore.
SSIs are usually distinguished from the large scale and medium scale industries
on the basis of size, capital resources and labour force in the units.
Example of SSIs- Food and Allied Industries, Wood and its Products, Paper
Products, Plastic Products, Chemicals and its Products, Glass and Ceramics,
Transport Equipment Boats and Truck Body Building, Auto Parts Components
Globalisation and Small Scale Industry w 9
and Ancillaries and Garage Equipments, Bicycle Parts, Tricycles and
Perambulators Miscellaneous Transport Equipment, Sports Goods, Stationery
Items etc.
In Box 1 different segments of SSI have been defined in terms of investment
ceilings as under:
Box 1: Definitions of Different Segments of
SSI in Terms of Investment Ceilings
(a) Small Scale Industries: An industrial undertaking in which the
investment in fixed assets (plant and machinery) whether held on
ownership terms or on lease/hire purchase basis does not exceed Rs one
crore1 is graded as small scale industrial undertaking.
(b) Medium Enterprises: Those units which have investment in plant and
machinery above the SSI and up to Rs 10 crore.
(c) Ancillary Industrial Undertakings: An industrial undertaking, which
is engaged or proposed to be engaged in the manufacture or production
of parts, components, sub-assemblies, tooling or intermediates or the
rendering of services, is termed as ancillary undertaking. The ancillary
undertaking has to supply or render or propose to supply or render not
less than 50 percent of its production or services, as the case may be, to
one or more other industrial undertakings. The investment in plant and
machinery, whether held on ownership terms or on lease or on hire
purchase, should not exceed Rs one crore.
No small scale or ancillary industrial referred to above shall be subsidiary
of, or owned or controlled by any other industrial undertakings
(d) Tiny Enterprises: A unit is treated as tiny enterprise where investment
in plant and machinery does not exceed Rs 25 lakhs irrespective of the
location of the unit.
(e) Women Entrepreneurs’ Enterprises: An SSI unit/industry related
services or business enterprise, managed by one or more women
entrepreneurs in proprietary concerns, or in which she/they individually
or jointly have a share capital of not less than 51 percent as Partners/
Share Holders/Directors of Private Ltd. Company/Members of Cooperative
Society is treated as Women Entrepreneurs’ Enterprise.
10 w Globalisation and Small Scale Industry
(f) Small Scale (industry related) Service and Business Enterprise
(SSSBEs): Enterprises rendering industry-related service/business with
investment to Rs five lakhs in fixed assets, excluding land and building
are called SSSBEs.
(g) Export Oriented Units (EOU): A unit with an obligation to export at
least 30 percent of its annual production by the end of third year of
commencement of production and having investment ceiling in fixed
assets – plant and machinery – up to Rs one crore is regarded as an
EOU.
Source: http://ssi.nic.in
Globalisation and Small Scale Industry w 11
2
What is the role of
Small Scale Industries
in the Indian
Economy?
The development of SSIs has been one of the major planks of India’s
economic development strategy since independence. Today, SSI sector
occupies a place of strategic importance in the Indian economic structure due
to its considerable contribution in terms of output, exports and employment.
By the end of March 2002, there were 3.4 million SSI units, accounting for
more than 40 percent of the gross value of output in the manufacturing sector,
about 35 percent of the total exports and provided employment to over 19.2
million persons, which is second only to agriculture (Planning Commission,
2002). This contribution has emerged despite the sector being exposed to
intensifying competition in Indian economy, which is in a state of transition
since 1991.
The performance of the small-scale sector in terms of parameters like number
of units (both registered and unregistered), production, employment and exports
is provided in Table 1.
From 2000-01 to 2005-06, the SSI sector registered continuous growth in the
number of units, production, employment and even exports (till 2002-2003).
During this period, the average annual growth in the number of units was around
4.1 percent, while employment grew by 4.4 percent annually. Further, the annual
average growth in production was 12.4 and 8.1 percent respectively, at current
and constant prices.
www.hindubusinessline.com
12 w Globalisation and Small Scale Industry
Table 2: SMEs in India
Total Units 3.57mn
Employment 19,96mn
Share in Industrial Valued Added 39 percent
Share in Total Exports Direct 34 percent
Overall 45 percent
Total Number of Items Produced Over 8000
Number of Reserved Items 675
Source: Sido Online, Figures for 2002-2003.
Visited www.smallindusryindia.com/ssindia/statistics/economic.htm on April
2006.
Table 1: Performance of Small-Scale Sector
Year
2000-01
2001-02
2002-03
2003-04
2004-05
Regd.
13.10
13.75
14.68
15.54
16.57
Unregd.
88.00
91.46
94.81
98.41
102.02
Total
101.10
(4.1)
105.21
(4.1)
109.49
(4.1)
113.95
(4.1)
118.59
(4.1)
At
current
prices
2,61,289
(11.5)
2,82,270
(8.0)
3,11,993
(10.5)
3,57,733
(11.6)
4,18,263
(16.9)
At
constant
prices
1993-94
1,84,428
(8.0)
1,95,613
(6.1)
2,10,636
(7.7)
2,28,730
(8.6)
2,51,511
(10.0)
Employment
(in lakh)
239.09
(4.4)
249.09
(4.2)
260.13
(4.4)
271,36
(4.3)
282.91
(4.3)
Exports
At
current
prices
(in crore)
69,797
(28.8)
71,244
(2.1)
86,013
(20.7)
97.644
(13.5)
NA
Production
(in crore)
No. of Units
(in lakh)
Note: Figures in brackets show percentage growth over previous year
Source: Development Commissioner SSI, Economic Survey 2005-2006
Globalisation and Small Scale Industry w 13
3
What have been the
implications of policy
changes for Small Scale
Industries?
Since the beginning of 1990s, policy changes have been taking place at
three different levels – global, national and sectoral – which have
implications for the functioning and performance of SSI in India.
Reforms at the International Level
The first and the foremost development is the ‘globalisation’ process at the
international level. Globalisation commonly refers to free movement of factor
inputs (both labour and capital) as well as output between countries.
However, the developments that have been taking place since the early 1990s
are mostly with reference to the free movement of capital, commonly known
as FDI and free movements of goods, particularly from the developed to
developing countries. The increase was more significant in developing
countries. This would have led to intensifying competition in the national as
well as international markets for small firms.
The formation of WTO in 1995 has only accelerated the process of scaling
down of tariff and non-tariff restrictions on imports. India, as a member of the
WTO has substantially done away with its quantitative2 and non-quantitative
restrictions by April 01, 2001 (Ministry of Finance, 2002). As a result, industry
will have to face much stronger international competition (Planning
Commission, 2002).
www.morris.um..edu
14 w Globalisation and Small Scale Industry
The process of removal of quantitative and non-quantitative restrictions across
countries has led to the free movement of goods between countries including
India. The reduction of restrictions on the movement of goods between countries
and the subsequent increase in world exports would have benefited multinational
corporations (MNCs) much more than small enterprises.
Reforms at the National Level
The reforms at the international level has to be viewed along with the process
of economic reforms launched by the Government of India 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 the Indian
industry. India’s economic reforms have two major outcomes, among others:
(i) The growth of the public sector has come down considerably since 1991 as
compared to the earlier period in terms of not only investment and employment
but also production. Public sector has been a major customer of SSI in India.
The reduced growth of public sector undertakings (PSUs) would have resulted
in reduced growth or even absolute reduction in public sector demand for SSI
products in the 1990s. The relative role of the public sector as a distinct entity
will decline further in the course of the Tenth Five-Year Plan as the incremental
capacities will be mainly in the private sector and the process of disinvestment
converts many of the existing public sector enterprises from government
controlled enterprises to non-government enterprises in which government may
have a minority stake (Planning Commission, September 2001). This will most
probably bring down public sector demand further for SSI products.
(ii) There has been a rapid increase in FDI inflow into diverse sectors of Indian
industry. FDI inflow increased from Rs 3514.3mn in 1991 to Rs 161344.4mn
in 2002, at the rate of about 42 percent per annum (SIA, 2003). This would
have created not only threats through greater competition, particularly in nondurable3
consumer goods industries, but also opportunities for outsourcing in
durable consumer goods and capital goods industries, to small enterprises.
Sectoral Reforms
The introduction of an exclusive policy for SSI, which laid emphasis on
imparting more vitality and growth impetus to the sector, is the sectoral
dimension of the major policy changes relevant to SSIs (Ministry of Industry,
1991). The policy marked:
Globalisation and Small Scale Industry w 15
• beginning of an end to protective measures to SSI; and
• promotion of competitiveness by addressing the basic concerns of the sector,
namely, technology, finance and marketing (Bala Subrahmanya, 1998).
Subsequently, the number of items reserved exclusively for SSI manufacturing
has been gradually brought down from 842 in 1991 to 675 in 2003. Of course,
the contribution of this policy to SSI growth was nothing much to talk about.
Concessional element in lending rates for SSI has been largely withdrawn during
the 1990s (RBI, 2003). The number of products reserved exclusively for
purchase from SSI by Directorate General of Supplies and Disposals for the
public sector has been changed to 358 items from 409 items after deleting
items having common nomenclature and making the entries more generic as
well as addition of new items (DCSSI, 1999).
On the whole, the protection emphasis of India’s SSI policy has undergone dilution
since 1991. Thus, policy changes occurred at the global, national and sectoral
levels have radically changed the environment for the functioning of SSI in India.
The cumulative impact of all these is a remarkable transformation of the
economic environment in which SSI operates implying that the sector has no
option but to ‘compete or perish’. Some Policy Initiatives are given in Box 2.
Box 2: Policy Initiatives for Promoting Small Enterprises
• For allowing small enterprises to grow, 193 items reserved for
exclusive manufacture in the SSI sector de-reserved in 2004-05 to
bring down the total number of reserved items to 506. After
consultation with stakeholders, more items are proposed to be dereserved
in 2005-06.
• As announced in the budget 2005-06, the turnover eligibility limit
under the General SSI Excise Exemption Scheme raised from Rs
three to four crore.
• With a view to integrating SMEs, facilitating their growth and
enhancing their competitiveness (including measures to reduce the
rigours of the ‘Inspector Raj’ faced by the sector), the ‘Small and
Medium Enterprises Development Bill 2005’ was introduced in the
Lok Sabha on May 12, 2005.
• A Policy Package for stepping up Credit to ‘Small and Medium
Enterprises’ was announced on May 10, 2005.
16 w Globalisation and Small Scale Industry
• Under the ‘Credit Linked Capital Subsidy Scheme’ (CLCSS) for
technology upgradation, amendments made with effect from September
29, 2005, which, inter alia, raise ceiling on loans from Rs 40 lakh to
Rs one crore and the rate of subsidy from 12 to 15 percent.
• The Reserve Bank of India (RBI) formulated the scheme of ‘Small
Enterprises Financial Centres’ (SEFC) to encourage banks to
establish mechanisms for better coordination between their branches
and branches of Small Industries Development Bank of India
(SIDBI) in the identified clusters for more efficient credit delivery.
• To facilitate technology upgradation and enhance competitiveness,
the investment limit in (plant and machinery) raised from Rs one to
Rs five crore in respect to 69 items reserved for manufacture in the
small-scale sector and all items in the drugs and pharmaceuticals
sector. Notification to this effect to be issues shortly.
• A new ‘Package for Promotion of Micro and Small Enterprises’
under the formulation to include supplementary measures to
encourage adequate credit flow, provide further incentives for
technology upgradation, infrastructure and marketing facilities,
capacity building of micro and small enterprises, and support to
women entrepreneurs.
Source: Economic Survey, 2005-2006
Globalisation and Small Scale Industry w 17
4
What is meant by a
‘sick industry’ in the
Small Scale Industries
sector?
In layperson term, any industry, which is not economically viable, may be
called as sick industry. The definition of a ‘sick industrial company’ (which
got amended in the year 1993) has been defined under the provisions of Section
3(1)(o) of Sick Industrial Companies (Special Provisions) Act (SICA) which
means an industrial company (being a company registered for not less than
five years) and having at the end of any financial year accumulated losses
equal to or exceeding its entire net worth.
Accordingly, sick industrial company means a company having fulfilled all
the following conditions:
i. It must be an industrial company which is as specified in the First Schedule
to the Industries (Development and Regulation) Act, 1951 (IDRA) but does
not include an ancillary industrial undertaking or a small scale industrial
undertaking as defined under IDRA.
ii. The company should be in an existence for at least five years since the date
of incorporation.
iii. The company should have an accumulated losses equal to or exceeding its
net worth at the end of any financial year.
(‘Net Worth’ means the sum total of paid-up capital and free reserves)
‘Potentially Sick Industrial Company’ means an industrial company whose
accumulated losses is more than 50 percent or more of its peak net worth
during the immediately preceding four financial years.
The Financial Express
18 w Globalisation and Small Scale Industry
Box 3: Status of Sickness in SSI Sector
Data on closed SSI units is not maintained centrally. However, the RBI
compiles data on sick SSI units financed by the scheduled commercial
banks. According to RBI, the sickness in the SSIs has also declined
from 3,06,221 in 1998-99 to 2,49,630 in 2000-01, and further to
1,77,336 in 2001-02. The status of these units from the year 1999 to
2002 is given below:
The RBI data shows a declining trend in sickness, whereas there are
reports of growing sickness. This data depicts declining trend because
of the following: (i) data does not include closed units; (ii) decline is
due to prudential write off undertaken by the banks as a result while the
sick units continue to exist; technically, they do not find mention in the
balance sheets; (iii) due to one time settlement scheme of RBI announced
on July 27, 2000 old dues worth Rs 1757 crores have been settled.
As at the
end of
March 1999
March 2000
March 2001
March 2002
Numbers
3,06,221
3,04,235
2,49,630
1,77,336
Amount
(in crore)
4313.48
4608.43
4505.54
4818.92
Numbers
18,692
14,373
13,076
4,493
Amount
(in crore)
376.96
369.45
399.17
416.36
Total sick units Potentially viable units
Globalisation and Small Scale Industry w 19
5
What are the main
reasons of sickness in
industries and symptoms
of becoming sick?
The reasons for industrial sickness may differ from industry to industry and
within the industry from unit to unit. These can be categorised as follows:
1. Internal Reasons
2. External Reasons
Internal Reasons: The reasons, which can be controlled by the company itself.
Some of them are as follows:
• Mismanagement;
• Underestimation of the cost of the project;
• Delay in the implementation of the project;
• Increase in cost due to delay in implementation of project;
• Under utilisation of resources;
• Diversion of funds;
• Lack of management depth;
• Bad industrial relations;
• Bureaucratic management;
• Inadequate working capital; and
• Heavy expenditure in advertisements.
External Reasons: The reasons, which cannot be controlled by the company
and are external in nature. Some of them are as follows:
• Adverse Government Rules & Regulations;
• Adverse Price Control Policy;
• Recession Trend/economic conditions;
• Tough Competition;
Financial Times
20 w Globalisation and Small Scale Industry
• Shortage of manpower, raw materials;
• Changes in technology;
• Changes in consumer behaviour;
• Shortage of power supply; and
• Delay in getting any financial assistance.
Symptoms of Industrial Sickness: The following are some of the symptoms
of industrial sickness:
• Frequent liquidity problems, fall in sale/profits, rapid increase in debtors,
reduced working capital, etc.;
• Unfavourable market development;
• High managerial turnover;
• Labour unrest;
• Rise in staff and customers complaints and failure to respond such
complaints;
• Declining morale of the employees;
• Lack of planning and strategic thinking; and
• Strike, lock-out.
Globalisation and Small Scale Industry w 21
6
What is the difference
between Sick Industrial
Companies (Special
Provisions) Act, 1985 and
Board for Industrial and
Financial Reconstruction?
In the wake of sickness in the country’s industrial climate prevailing in the
eighties, the Government of India enacted a special legislation namely, the
Sick Industrial Companies (Special Provisions) Act, 1985 commonly known
as the SICA. The main objective of SICA is to determine sickness and expedite
the revival of potentially viable units or closure of unviable units. It was expected
that by revival, idle investments in sick units will become productive and by
closure, the locked up investments in unviable units would get released for
productive use elsewhere.
Later on in January 1987, under the provisions of SICA, the Central Government
established Board for Industrial and Financial Reconstruction (BIFR) (presently
situated at New Delhi) consisting of experts for timely detection of sick and
potentially sick companies, speedy determination of remedial and other
measures with respect to such companies and for expeditious implementation
of these measures.
www.newsdata.com
22 w Globalisation and Small Scale Industry
7
What are the procedures
determining sickness of the
industries and steps taken to
revive them?
The follwing are the procedures determining sickness of the industry:
i) If the industrial company becomes sick as per the definition, it is the
responsibility of such company to make reference to BIFR within days
from the date of finalisation of the duly audited accounts of the company
for the financial year at the end of which the company has become sick.
ii) The BIFR will make such enquiry for determining whether the concerned
company has become sick. Such enquiry can be made by BIFR upon the
receipt of information from the Board of Directors of the concerned
company or from other agencies like Central Government, RBI, etc. or
upon its own knowledge as to the financial position of the company.
iii) The BIFR may appoint any Operating Agency (any Public Financial
Institution, State Level institution, scheduled bank or any other person as
may be specified by BIFR) to enquire into within 60 days and make a
report.
iv) If the Board is satisfied after the completion of inquiry that the company
has become sick, the BIFR has to make an order in writing whether it is
possible for the sick industrial company to make its net worth exceed the
accumulated losses within a reasonable time.
www.biomedcentral.com
Globalisation and Small Scale Industry w 23
v) If the Board is not satisfied after the completion of inquiry that it is not
practically possible to make its net worth exceed the accumulated losses
within a reasonable time, may direct operating agency to prepare a scheme
for such measures in relation to such company. The operating agency shall
prepare a scheme, which may provide any or more of the following
measures:
• Financial reconstruction;
• Change in management;
• Amalgamation;
• Sale or lease of a part or whole of any industrial undertaking of such
company;
• Rationalisation of managerial personnel; and
• Such other preventive, ameliorative and remedial measures as may be
appropriate.
The BIFR may on such recommendation sanction the scheme and will
periodically monitor the sanctioned scheme.
vi) Considering all the relevant facts, if the BIFR is of the opinion that the sick
industrial company is not likely to make its net worth exceed the accumulated
losses within a reasonable time, then it may form an opinion to wind up the
company and forward its opinion to the concerned High Court.
The High Court on the opinion of the Board may order winding-up of the sick
industrial company by complying the provisions of the Companies Act, 1956.
24 w Globalisation and Small Scale Industry
8
Why was de-reservation of
Small Scale Industries items
taken up by the Government?
The policy of reservation of items for manufacturing in SSI was introduced
in 1967, which received a proper statutory backing in 1984 through
amendment in Industries (Development and Regulation) Act, 1951. Initially
only 47 items were reserved in 1967, which went up to 873 in 1984. With the
removal of quantitative restrictions, goods from the outside world started marketed
in India. This had raised basic questions about the role of SSI reservation.
Therefore, the rationale behind the policy of SSI reservation was studied by
the Expert Committee on Small Enterprises (the Abid Hussain Committee),
which submitted its report in 1997. The Committee listed the following
arguments against reservation:
• The policy has not actually helped the growth of SSIs.
• The units in the unreserved sector have actually grown faster than those in
the reserved list. In other words, the SSI units have shown more dynamism
in areas where they had to compete with larger units.
• Reservation in many areas has become irrelevant since a large number of
reserved products are not being produced by SSIs. It is also inconsistent
with the new trade policy that allows the items reserved for the SSI sector
to be freely imported.
• Reservation has hurt India’s ability to expand exports in many crucial areas,
including textiles and leather.
A number of subsequent studies also recommended the de-reservation of items,
and said that the government’s reservation policy is hindering the SSI sector’s
growth. It is, therefore, time to do away with SSI reservation and offer other
forms of promotional support.
The Hindu Business Line
Globalisation and Small Scale Industry w 25
In many labour intensive areas with great export opportunities, SSI reservation
in India is handicapping the development of efficient economies of scale, while
firms in countries such as China are able to compete effectively in the
international and in the Indian market. The reservation denies the enterprises
economies of scale4 and access to technology, both of which are critical to
being able to compete in a globalising world. For instance, taking the case of
‘import competition and need to attain economies of scale’, SSIs sourcing
inputs like steel locally and in small quantities must pay more – plus suffer
state and central taxation like excise duty, VAT etc; they will be out-competed
by products made from lower-prices steel imports.
Hence, the process of phasing out of SSI reservation, in consultation with
stakeholders, is constituting an important element of policies that foster
efficiency and productivity in India.
The total number of items on the reserved list has been coming down year after
year, and in 2003-04 there were 675 items reserved for SSI units. Even at
present, the policy of reservation for SSI does not bar large industries from
entering into production of items reserved, provided they agree to export 50
percent of their production.
Box 4: Majority of Small Units Surveyed
do not Think Reservation Helps
Interestingly, an all India survey by the All India Management
Association (AIMA) says, “the policy of reservations of specific
industries for SSIs, found limited support: only 29 percent if the
respondents considered this beneficial”. Sign of just how poorly
prepared the SSI sector is can be gauged from the fact that (according
to the survey) just 52 percent of units in the manufacturing sector were
able to exploit opportunities in the market – the figure for service sector
SSI units is marginally higher, at 56 percent. In other words, the sharp
rise in SSI service units has more to do with the overall market growing
than with their intrinsic abilities. The main reason cited by the units for
not able to do well are lack of marketing skills (70 percent), lack of
finance (25 percent), inspector raj (13 percent), power shortages (14
percent) and poor technical expertise (15 percent).
26 w Globalisation and Small Scale Industry
Box 5: More Jobs in SSIs Due to De-reservation: Study
Dispelling apprehensions that de-reservation hits employment growth
in SSIs, a recent study by the Ministry of SSIs shows that employment
actually grew with de-reservation during 1998-1999 and 2003-04.
“Employment has grown at the rate of four percent per annum in the
period”, said Secretary, SSI. The number of employed people grew
from 220.55 to 237.36 lakh during the same period, the study reveals.
The Financial Express, April 01, 2005
Globalisation and Small Scale Industry w 27
Globalisation need not affect Indian SSI adversely only. It would have
created beneficial opportunities as well. The removal of quantitative
restrictions and the reduction of import duties, particularly after the setting up
of WTO in 1995, have opened up foreign markets to Indian SSI as much as
Indian market to foreign goods.
Many efficient and export-oriented small firms may have received benefits out
of this development. Such global opportunities should act as an incentive to
small firms 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 look out for firms who could supply
reliable and quality products.
Nevertheless, the umbrella of the WTO (which is one of the tools of
globalisation) is also indirectly creating far-reaching implications for the SME
sector in India, with regard to their competitive ability and integration with the
global markets. WTO cannot be exclusively blamed for weak performance of
any SSI.
Having right opportunities and creating right environment to avail the
opportunities is easier said than done. In India, most of the problems arise due
9
Could WTO be held
responsible for adverse
impact on the Small
Scale Industries in the
era of Liberalisation
and Globalisation?
www.seppo.net
28 w Globalisation and Small Scale Industry
to the unorganised nature of this sector, lack of data and information, use of
low technology (sometime obsolete technology) and poor infrastructure in the
country. WTO would affect all types of SSI units whether producing for the
domestic market or for the international market.
The SSI sector which produces over 75000 items will have to be aware of the
patents of products including even the technological patents, trademarks,
industrial designs etc. About 95 percent of the SSI units are in the nature of
tiny micro enterprises and are weak. Many of them are one man shows. Their
capital base is poor and do not have access to the economies of scale.
Their bargaining power is low and do not have access to information and modern
management practices. Hence, SSI will need to be guided and supported since
they are also employment generator for the economy.
Rest of the five percent of SSI units are in the category of modern SSIs and
have already established global links. But, there are also tiny when compared
to SME sector of developed countries. Thus, they have only relative and not
absolute advantage and they also need to be guided on WTO provisions and
safeguards available.
Globalisation and Small Scale Industry w 29
While SSIs typically blame inadequate marketing and finance facilities
for their decline, a more important reason is the location of the units
itself. For, while the AIMA survey shows a 5.2 percent fall in output growth of
SSI units in the period 1998-2002, this was primarily concentrated in north
India where SSI output declined by 18.6 percent. By contrast, SSI output in
south India grew 25.8 percent.
A parallel survey by the Confederation of Indian Industry (CII), of primarily
non-SSI units, shows a fairly dramatic decline in the economy of northern
states in the last decade. While the average gross domestic product (GDP)
growth for both northern and southern states was six percent per annum in the
per-liberalisation decade of the 1980s, post reforms growth in the north fell to
five percent in 1993-99 while it went up to 7.2 in the south. As a result of the
declining growth, it is natural that demand for, and therefore, supply of output
by SSI units would go the same way in north India.
While units in north India, according to the survey, are hamstrung by rigid
labour laws – 20 percent in Delhi units felt this way, as did 86 percent in
Rajasthan. And Corruption – from 20 percent in Delhi to 100 percent in Uttar
Pradesh – the south has the most export-oriented units – 11.07 in each state
versus 4.97 for the north – and even the most multinational laboratories – 24 in
all southern states versus five in the north. The average number of inspection
visits by official was higher in the north – 9.7 visits in 1999 in Uttar Pradesh
10
What is State-wise status
of Small Scale Industries
in the post domestic
economic reforms in the
era of Globalisation and
Liberalisation?
www.hrr.mlil.go.jp
30 w Globalisation and Small Scale Industry
compared with 6.1 in Andhra and Tamil Nadu and 6.2 in Maharashtra and
Gujarat. (Business Standard, September 02, 2005)
With the atmosphere for growth the most conducive in southern India, the
AIMA survey shows, SSI units have been the most pro-active in terms of change
as well. Southern units head the league when it comes to increasing their sales
staff or re-training them, and are second – after the west – in making new
arrangements for capital; after the east, southern units are also the most
aggressive when it comes to looking for new markets or trying out new products.
Southern units used the least amount of generators, which is a big positive
feature since they are generally strapped for cash.
According to the survey, 58.6 percent of southern SSI units were able to avail
of market opportunities compared with a mere 40.6 percent in the north (1998-
2002). While the eastern figure is 60.9, this has to be treated with caution,
considering that output in this region actually fell during the period when units
claimed they were able to exploit new market opportunities. Southern units
also scored the highest, except for the east where the usual caveats apply, in
terms of confidence to face the future: 42 percent of the units felt they would
survive for more than five years, against 35 percent of the northern SSI units.
Box 6: Anecdotal Incidence
Maharashtra: SME owners in Mumbai pointed out that as a result of
rising costs (heavy costs of services in the city, combined with five
percent octroi and other duties and the rising of cost of living), nearly
70-80 percent of the units in area like Marol, Dombivili-Ambernath
and Thane’s Wagle Estate have closed down. Other issues include
militant labour unions and frequent disruption of power supply. Most
owners who lost business have sold out their units and moved into
trading.
Karnataka: The IT capital of India ignores the SSI sector. In the last
five years, the Karnataka government attracted over Rs 60,000 crore
investment in the large and medium industry segment, but could not
pay Rs 325 crore outstanding subsidy for SSI, which resulted in closure
of over 40,000 units.
Currently, Karnataka has around three lakh SSI providing employment
to over 18 lakh individuals. This is the only sector where over 30 percent
of the workers are women. In fact, Karnataka was the first state in the
Globalisation and Small Scale Industry w 31
country to embark on setting up a dedicated area for SSI in Peenya on
the outskirts of Bangalore, way back in the 70s. Known as the Asia’s
biggest industrial area today, Peenya reflects the badly managed state
of SSIs in the state.
P S Srikantadatta, Secretary, Peenya Industrial Association says, “This
area does not have the voting population. Whoever gets elected looks
at residential areas because of their vote banks. Even the government
has not provided any monetary help to improve infrastructure in the
area”. He says that after taking up the matter with the central government,
the centre, along with the state government, is providing over Rs 25
crore for the development of Peenya
West Bengal: The foundry industry in West Bengal’s Howrah district,
the birthplace of the Indian engineering industry, is passing through a
difficult phase. Changing markets and demand, poor availability of raw
materials and their fluctuating prices and stringent pollution norms are
taking a heavy toll on many units.
One factor that has precipitated the present crisis is the pollution control
norms. These norms have forced the entire cluster to move away from
their birthplace to other locations despite taking measures two years
back to curb air pollution created by smoke and dust particles released
from the foundry-installing devises. Following the decontrol of pig iron
production after 1990, a number of pig iron manufacturing units came
up in the private sector. This alleviated the problem of scarcity of pig
iron temporarily. A new development in the marketing of this item has
put the industry in trouble again.
The manufacturers, both in the public and private sectors, began to sell
their produce in the open market at prices determined by the international
demand and supply position. This gave birth to a section of
intermediaries. Gradually, these become the sole suppliers of pig iron.
These middlemen have increased prices every week during the past
one year – from Rs 8,000 a tonne to Rs 17,000 a tonne – on the plea of
strong international prices. This led to the foundries defaulting in their
supply commitments. In particular exports were hurt very badly.
However, the state is hopeful that they will be able to face all the
challenges to come once the foundry park in the new location is
completed, fully equipped with modern machinery and technologies.
32 w Globalisation and Small Scale Industry
Andhra Pradesh: There are 1,45,499 registered SSI units with a total
investment of Rs 4,717.7 crore and about 13,10,071 workers, according
to the official figures. However, in the last decade its size has shrunk.
According to industry sources, almost 60 percent of the units are sick.
The reasons area: ) cheap imports, and b) unable to upgrade technology
and products that the market demands.
Add to that, payment delays by large industries have affected the
financials of the SSIs. Moreover, with many of the large PSUs shut or
cutting down on production, SSIs in Andhra Pradesh are either out of
business or living on oxygen. According to a sickness analysis report
among the small-scale industrial units initiated by the Andhra Pradesh
government, all sick units, as defined by Kohli Committee, are not
eligible for revival. The report says: “…that only 0.5 to 1 percent of
the declared number of sick SSI units could be considered for
rehabilitation considering the changed market trends”. As per
government records, there are over 10,000 SSI units registered as sick
in the state.
However, the report had pointed out that due to the changed market
conditions, about 100 of them might be qualified to get the rehabilitation
package. In fact, most of the units registered as sick, are physically
extinct, says industry sources. The Andhra Pradesh government has
decided to establish ‘industrial clinics’ in each of the banks. The
Industrial and Investment Promotion Policy of Andhra Pradesh 2005-
10 has also proposed revival package for the SSIs which includes
incentives.
Source: SMEs: Ground Report, appeared in various versions of the Financial Express,
2005
Globalisation and Small Scale Industry w 33
11
What measures can be
taken to increase the
competitiveness of Indian
Small Scale Industries?
Before addressing the question, it must be understood that Indian small
enterprises have certain inherent strengths which helped them raise their
share in total exports to 35 percent even in the face of tough global competition.
The sector possesses the advantage of immovableness and flexibility. Their
inventories are low and have weathered many adverse situations successfully.
Indian SMEs also have advantages of local raw material and world class skill
besides cheap labour which could be harnessed to the advantage. At the same
time, it is essential to note vulnerability in the context of emerging global
environment.
According to a paper by United Nations Industrial Development Organisation
(UNIDO)-South Asia, a major problem before the SMEs of India is that as far
as productivity and competitiveness are concerned their performance is poor.
The challenge lies in increasing the technological competence of the SME
sector, with regard to its export basket. The Indian SME sector needs to move
up to higher value added outputs and attract more investment in terms of FDI.
The SME sector requires better facilities in terms of infrastructure, provision
of raw materials and establishing linkages with machinery suppliers and credit
facilities.
In order to become competitive, SMEs will need to link up with global value
chains, which, in turn, will require greater understanding of global structures,
i.e. relationships with various key actors in the value chain and greater flexibility
to respond to external factors.
Business Standard
34 w Globalisation and Small Scale Industry
Globalisation has changed the context and basis for policy and programmes
for SMEs. Protection is not needed as it is no more the case that ‘big will eat
the small’ but rather the ‘faster will eat the slower’. There is a need to adopt a
sectoral and sub-sectoral policy approach at the national as well as at the statelevels.
With the increasing business complexities straightjacketing SMEs into
urban-rural, modern-traditional or tiny-non-tiny is no longer of any economic
use. Policy must focus on certain key sectors where it wants to develop an
edge through its core competency or niche value in the world market.
The informal service provider finds little mention in the government policy
even though an effective services sector has emerged in the SSIs. Small firms
are their own best service providers as they remain untouched by public support
providers. Country needs to build regional and local capacities. Support
requirements of small firms vary considerably with differing regional availability
of infrastructure, local resources, regional markets and level of available private
services.
States need to cater to sectors and sub-sectors depending on their regional
needs. There is also a need for development of entrepreneur-friendly taxation
policies by the government particularly with respect to excise duty, value-added
tax (VAT) and abolition of octroi tax.
Globalisation and Small Scale Industry w 35
Endnotes
1 In respect of hand tools and hosiery/knitware sector corresponding to other 41
items, investment limit has been raised from Rs one to five crore. Similarly,
investment limit for Pharmaceutical & Stationery sectors corresponding to 23
items has been raised from Rs 1 to 5 crore. This permits modernisation and
upgradation of technology and quality.
2 Quantitative restrictions (QRs) are specific limits imposed by countries on the
quantity or value of goods that can be imported or exported. QRs can be in the
form of a quota, a monopoly or any other quantitative means. In other words,
QRs refer to non-tariff measures, which are taken to regulate or prohibit
international trade.
3 Non-durable goods are tangible goods that are consumed fast normally in one or
few uses and are purchased frequently. Examples of non-durable goods include
soap, deodorants. Razor blades, batteries, pens, salt, sugar, beer, cigarettes,
newspapers, toothpastes, napkins, over the counter medicines and many foods
products such as candy, cookies and soft drinks. Durable goods are tangible
goods that normally survive long term uses and are not purchased as frequently.
Examples include clothing, electronics and major alliances (e.g. stereo sound
system, television or radio sets, refrigerator, dishwashers, cameras), furniture
and automobiles.
4 A phenomenon which encourages the production of larger volumes of a commodity
to reduce its unit cost by distributing fixed costs over a greater quantity.
36 w Globalisation and Small Scale Industry
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Globalisation and Small Scale Industry w 37
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i hope tis will help u plzz go through it
Globalisation and
Small Scale Industry
Frequently Asked Questions
Monographs on Globalisation and India – Myths and Realities, #8
Globalisation and Small Scale Industry
Frequently Asked Questions
Monographs on Globalisation and India – Myths and Realities, #8
Published by
CUTS Centre for International Trade, Economics & Environment
D-217, Bhaskar Marg, Bani Park
Jaipur 302 016, India
Email: [email protected]
Website: www.cuts-international.org
Researched and compiled by
Purnima Purohit*
© CUTS International, 2006
* Programme Coordinator, CUTS-CITEE
CONTENTS
Preface ..................................................................................................... i
1. What is a ‘Small Scale Industry’? ........................................................... 8
2. What is the role of Small Scale Industries in the Indian Economy? ...... 11
3. What have been the implications of policy changes for
Small Scale Industries? ......................................................................... 13
4. What is meant by a ‘sick industry’ in the
Small Scale Industries sector? ............................................................... 17
5. What are the main reasons of sickness in industries and
symptoms of becoming sick? ................................................................ 19
6. What is the difference between Sick Industrial Companies
(Special Provisions) Act, 1985 and Board for Industrial and
Financial Reconstruction? ..................................................................... 21
7. What are the procedures determining sickness of the
industries and steps taken to revive them? ............................................ 22
8. Why was de-reservation of Small Scale Industries items
taken up by the Government? ............................................................... 24
9. Could WTO be held responsible for adverse impact on the
Small Scale Industries in the era of Liberalisation
and Globalisation? ................................................................................ 27
10. What is State-wise status of Small Scale Industries in the
post domestic economic reforms in the era of Globalisation
and Liberalisation? ................................................................................ 29
11 What measures can be taken to increase the competitiveness of
Indian Small Scale Industries? .............................................................. 33
Preface
This is the eighth monograph in the series titled “Globalisation and India –
Myths & Realities”, launched by CUTS in September 2001. The series is
addressed to the common man in India, which helps to clarify many basic
issues about economic reforms and trade liberalisation.
This monograph is about Small-Scale Industries (SSI), also known as the Small
& Medium-sized Enterprises (SMEs) in India and rest of the world, and its
importance in the era of globalisation and liberalisation. The small-scale sector
has played an important role in the socio-economic development of the country
during the past 58 years. By its less capital intensive and high labour absorption
nature, SSI sector has made significant contributions to employment generation
and rural industrialisation. The performance of the small scale sector, therefore,
has a direct impact on the overall growth of the economy. This is something,
which can be seen as a global phenomenon.
The post-liberalisation business environment has become harsh for the SSI
sector because of increasing internal and external competition. Clearly, global
business is not a level-playing field with firms of all sizes having different
goals, abilities and stakes. Until recently, high protectionist walls around SSIs
helped them to cope with big business, transnational corporations (TNCs) and
the progressive liberalisation under World Trade Organisation (WTO) trade
regime. Despite sufficient notice and the growing awareness of the impending
threats, the SSI sector does not appear to be adequately prepared for the new
challenges.
However, it is not a unique situation being faced by the Indian SSIs. The SSIs
in developed economies too are encountering unprecedented challenges. And,
this is the reason why a plethora of concessions and schemes supporting SSIs
are provided to this sector. Governments are vigorously seeking ways to promote
and develop them.
There may be genuine apprehensions about the impact of the WTO for the
SMEs sector in India, specifically with regard to their competitive ability and
Globalisation and Small Scale Industry w i
integration with the global markets, but it would be a misconception to solely
blame the WTO regime for some firms in the small sector not doing well. The
sector is suffering from wider problems such as demand related problems or
supply-side constraints. It cannot be ignored that troubles may also arise due
to unorganised nature of this sector, lack of data and information, use of low
technology, sometimes obsolete technology, poor management and poor
infrastructure in the country.
About 95 percent of the SSI units are in the nature of micro enterprises and are
vulnerable. Many of them are one-man shows. Their capital base is poor and
they do not have access to information and modern management practices.
Policy attention to the sector has gained visibility lately, with emphasis on
credit access. But it seems sickness in the industry is a key factor in the
apprehensions of lending institutions. In spite of several committees and study
group reports over the past decade, policymakers are still seeking for a WTOcompatible
policy for this sector. There is a need for better understanding over
a number of issues such as the cap on capital investment, foreign direct
investment (FDI) ceiling, interest subsidy, de-reservation of items, creation of
a technology upgradation fund and so on.
Not surprisingly, though the sector has grown at a rapid pace post-Independence,
the incidence of sickness in the sector has been reported continuously. It seems
the range of reasons for sickness in the sector is not mutually exclusive, and
therefore, corrective prescriptions turn out to be misleading. Firm specific and
industry specific solutions are required.
In India, a number of laws exist for the small-scale sector, which are often
confusing and seemingly prove less effective. Thus, the demand to have a
comprehensive legislation for the SSI is gaining pace. Keeping this in mind,
the Government of India has recently introduced a Small Enterprises
Development Bill but it also needs to take into account the practical concerns
of small enterprises before it takes final shape.
Thus, given the crucial importance of the SSI sector to the economy with around
40 percent share in the total industrial output, 35 percent in direct exports and
over 80 percent in industrial employment, it deserves all the policy support the
Government can offer. What the small entrepreneurs need is not protection but
institutional support to fund modernisation and technology upgradation,
infrastructural support, and adequate working capital finance from the banking
sector.
ii w Globalisation and Small Scale Industry
There is also a need for small entrepreneurs to keep pace with the structural
and technological changes taking place in large industries. The accent should
be on the much greater degree of ancillarisation and on providing services as
the larger companies are keen on offloading a number of job works to smaller
units. True, a section of the SSI sector is already undergoing structural changes
but the process is still quite slow.
Also, the diversity in production systems and demand structures in our country
will ensure long term co-existence of many layers of demand for consumer
products/technologies/processes. This characteristic of the Indian economy
will allow complementary existence for various diverse types of units.
The process of liberalisation coupled with Government support will, therefore
attract the infusion of capital, technology and marketing in the sector. There is
an urgent need to refashion the policies governing the sector so as to improve
its competitive strength and long-term outlook.
This monograph, dealing with simple and basic questions coming to the common
man’s mind, will serve its purpose of generating awareness on the issues relating
to SSI, its significance and coping strategy in the era of globalisation and
liberalisation. There are opportunities as well, which can be better exploited
by the small sector than the big one.
Jaipur Pradeep S Mehta
May 2006 Secretary General
Globalisation and Small Scale Industry w iii
8 w Globalisation and Small Scale Industry
1
What is a ‘Small Scale
Industry’?
www.hindubusinessline.com
The term ‘Small Scale Industry’ (SSI) evokes different meanings for different
agencies. The Planning Commission, Government of India, view the entire
Village and Small Industries (VSI) sector as the SSI sector. The National Sample
Survey Organisation under the Central Statistical Organisation (CSO),
Government of India defines the entire industry sector in terms of organised
and unorganised segments, as also in terms of industrial enterprises run by
households and non-households. The Central Excise Department, on the other
hand, distinguishes SSIs on the basis of annual turnover of the units.
Though employment and turnover are also used to define small industries, as
these indicators are implicit in the requirement for registration under the
Factories Act, the core definition of SSIs in India remains based on investment
limits – ‘historical costs of plant and machinery’.
From the industrial policy perspective, SSIs are defined on the basis of Plant
& Machinery and the classification also covers residual units not included
under the assistance programme of any of the Statutory Boards. In India, the
latest definition of a SSI is any unit with an upper limit on investment (in plant
and machinery) of Rs one crore.
SSIs are usually distinguished from the large scale and medium scale industries
on the basis of size, capital resources and labour force in the units.
Example of SSIs- Food and Allied Industries, Wood and its Products, Paper
Products, Plastic Products, Chemicals and its Products, Glass and Ceramics,
Transport Equipment Boats and Truck Body Building, Auto Parts Components
Globalisation and Small Scale Industry w 9
and Ancillaries and Garage Equipments, Bicycle Parts, Tricycles and
Perambulators Miscellaneous Transport Equipment, Sports Goods, Stationery
Items etc.
In Box 1 different segments of SSI have been defined in terms of investment
ceilings as under:
Box 1: Definitions of Different Segments of
SSI in Terms of Investment Ceilings
(a) Small Scale Industries: An industrial undertaking in which the
investment in fixed assets (plant and machinery) whether held on
ownership terms or on lease/hire purchase basis does not exceed Rs one
crore1 is graded as small scale industrial undertaking.
(b) Medium Enterprises: Those units which have investment in plant and
machinery above the SSI and up to Rs 10 crore.
(c) Ancillary Industrial Undertakings: An industrial undertaking, which
is engaged or proposed to be engaged in the manufacture or production
of parts, components, sub-assemblies, tooling or intermediates or the
rendering of services, is termed as ancillary undertaking. The ancillary
undertaking has to supply or render or propose to supply or render not
less than 50 percent of its production or services, as the case may be, to
one or more other industrial undertakings. The investment in plant and
machinery, whether held on ownership terms or on lease or on hire
purchase, should not exceed Rs one crore.
No small scale or ancillary industrial referred to above shall be subsidiary
of, or owned or controlled by any other industrial undertakings
(d) Tiny Enterprises: A unit is treated as tiny enterprise where investment
in plant and machinery does not exceed Rs 25 lakhs irrespective of the
location of the unit.
(e) Women Entrepreneurs’ Enterprises: An SSI unit/industry related
services or business enterprise, managed by one or more women
entrepreneurs in proprietary concerns, or in which she/they individually
or jointly have a share capital of not less than 51 percent as Partners/
Share Holders/Directors of Private Ltd. Company/Members of Cooperative
Society is treated as Women Entrepreneurs’ Enterprise.
10 w Globalisation and Small Scale Industry
(f) Small Scale (industry related) Service and Business Enterprise
(SSSBEs): Enterprises rendering industry-related service/business with
investment to Rs five lakhs in fixed assets, excluding land and building
are called SSSBEs.
(g) Export Oriented Units (EOU): A unit with an obligation to export at
least 30 percent of its annual production by the end of third year of
commencement of production and having investment ceiling in fixed
assets – plant and machinery – up to Rs one crore is regarded as an
EOU.
Source: http://ssi.nic.in
Globalisation and Small Scale Industry w 11
2
What is the role of
Small Scale Industries
in the Indian
Economy?
The development of SSIs has been one of the major planks of India’s
economic development strategy since independence. Today, SSI sector
occupies a place of strategic importance in the Indian economic structure due
to its considerable contribution in terms of output, exports and employment.
By the end of March 2002, there were 3.4 million SSI units, accounting for
more than 40 percent of the gross value of output in the manufacturing sector,
about 35 percent of the total exports and provided employment to over 19.2
million persons, which is second only to agriculture (Planning Commission,
2002). This contribution has emerged despite the sector being exposed to
intensifying competition in Indian economy, which is in a state of transition
since 1991.
The performance of the small-scale sector in terms of parameters like number
of units (both registered and unregistered), production, employment and exports
is provided in Table 1.
From 2000-01 to 2005-06, the SSI sector registered continuous growth in the
number of units, production, employment and even exports (till 2002-2003).
During this period, the average annual growth in the number of units was around
4.1 percent, while employment grew by 4.4 percent annually. Further, the annual
average growth in production was 12.4 and 8.1 percent respectively, at current
and constant prices.
www.hindubusinessline.com
12 w Globalisation and Small Scale Industry
Table 2: SMEs in India
Total Units 3.57mn
Employment 19,96mn
Share in Industrial Valued Added 39 percent
Share in Total Exports Direct 34 percent
Overall 45 percent
Total Number of Items Produced Over 8000
Number of Reserved Items 675
Source: Sido Online, Figures for 2002-2003.
Visited www.smallindusryindia.com/ssindia/statistics/economic.htm on April
2006.
Table 1: Performance of Small-Scale Sector
Year
2000-01
2001-02
2002-03
2003-04
2004-05
Regd.
13.10
13.75
14.68
15.54
16.57
Unregd.
88.00
91.46
94.81
98.41
102.02
Total
101.10
(4.1)
105.21
(4.1)
109.49
(4.1)
113.95
(4.1)
118.59
(4.1)
At
current
prices
2,61,289
(11.5)
2,82,270
(8.0)
3,11,993
(10.5)
3,57,733
(11.6)
4,18,263
(16.9)
At
constant
prices
1993-94
1,84,428
(8.0)
1,95,613
(6.1)
2,10,636
(7.7)
2,28,730
(8.6)
2,51,511
(10.0)
Employment
(in lakh)
239.09
(4.4)
249.09
(4.2)
260.13
(4.4)
271,36
(4.3)
282.91
(4.3)
Exports
At
current
prices
(in crore)
69,797
(28.8)
71,244
(2.1)
86,013
(20.7)
97.644
(13.5)
NA
Production
(in crore)
No. of Units
(in lakh)
Note: Figures in brackets show percentage growth over previous year
Source: Development Commissioner SSI, Economic Survey 2005-2006
Globalisation and Small Scale Industry w 13
3
What have been the
implications of policy
changes for Small Scale
Industries?
Since the beginning of 1990s, policy changes have been taking place at
three different levels – global, national and sectoral – which have
implications for the functioning and performance of SSI in India.
Reforms at the International Level
The first and the foremost development is the ‘globalisation’ process at the
international level. Globalisation commonly refers to free movement of factor
inputs (both labour and capital) as well as output between countries.
However, the developments that have been taking place since the early 1990s
are mostly with reference to the free movement of capital, commonly known
as FDI and free movements of goods, particularly from the developed to
developing countries. The increase was more significant in developing
countries. This would have led to intensifying competition in the national as
well as international markets for small firms.
The formation of WTO in 1995 has only accelerated the process of scaling
down of tariff and non-tariff restrictions on imports. India, as a member of the
WTO has substantially done away with its quantitative2 and non-quantitative
restrictions by April 01, 2001 (Ministry of Finance, 2002). As a result, industry
will have to face much stronger international competition (Planning
Commission, 2002).
www.morris.um..edu
14 w Globalisation and Small Scale Industry
The process of removal of quantitative and non-quantitative restrictions across
countries has led to the free movement of goods between countries including
India. The reduction of restrictions on the movement of goods between countries
and the subsequent increase in world exports would have benefited multinational
corporations (MNCs) much more than small enterprises.
Reforms at the National Level
The reforms at the international level has to be viewed along with the process
of economic reforms launched by the Government of India 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 the Indian
industry. India’s economic reforms have two major outcomes, among others:
(i) The growth of the public sector has come down considerably since 1991 as
compared to the earlier period in terms of not only investment and employment
but also production. Public sector has been a major customer of SSI in India.
The reduced growth of public sector undertakings (PSUs) would have resulted
in reduced growth or even absolute reduction in public sector demand for SSI
products in the 1990s. The relative role of the public sector as a distinct entity
will decline further in the course of the Tenth Five-Year Plan as the incremental
capacities will be mainly in the private sector and the process of disinvestment
converts many of the existing public sector enterprises from government
controlled enterprises to non-government enterprises in which government may
have a minority stake (Planning Commission, September 2001). This will most
probably bring down public sector demand further for SSI products.
(ii) There has been a rapid increase in FDI inflow into diverse sectors of Indian
industry. FDI inflow increased from Rs 3514.3mn in 1991 to Rs 161344.4mn
in 2002, at the rate of about 42 percent per annum (SIA, 2003). This would
have created not only threats through greater competition, particularly in nondurable3
consumer goods industries, but also opportunities for outsourcing in
durable consumer goods and capital goods industries, to small enterprises.
Sectoral Reforms
The introduction of an exclusive policy for SSI, which laid emphasis on
imparting more vitality and growth impetus to the sector, is the sectoral
dimension of the major policy changes relevant to SSIs (Ministry of Industry,
1991). The policy marked:
Globalisation and Small Scale Industry w 15
• beginning of an end to protective measures to SSI; and
• promotion of competitiveness by addressing the basic concerns of the sector,
namely, technology, finance and marketing (Bala Subrahmanya, 1998).
Subsequently, the number of items reserved exclusively for SSI manufacturing
has been gradually brought down from 842 in 1991 to 675 in 2003. Of course,
the contribution of this policy to SSI growth was nothing much to talk about.
Concessional element in lending rates for SSI has been largely withdrawn during
the 1990s (RBI, 2003). The number of products reserved exclusively for
purchase from SSI by Directorate General of Supplies and Disposals for the
public sector has been changed to 358 items from 409 items after deleting
items having common nomenclature and making the entries more generic as
well as addition of new items (DCSSI, 1999).
On the whole, the protection emphasis of India’s SSI policy has undergone dilution
since 1991. Thus, policy changes occurred at the global, national and sectoral
levels have radically changed the environment for the functioning of SSI in India.
The cumulative impact of all these is a remarkable transformation of the
economic environment in which SSI operates implying that the sector has no
option but to ‘compete or perish’. Some Policy Initiatives are given in Box 2.
Box 2: Policy Initiatives for Promoting Small Enterprises
• For allowing small enterprises to grow, 193 items reserved for
exclusive manufacture in the SSI sector de-reserved in 2004-05 to
bring down the total number of reserved items to 506. After
consultation with stakeholders, more items are proposed to be dereserved
in 2005-06.
• As announced in the budget 2005-06, the turnover eligibility limit
under the General SSI Excise Exemption Scheme raised from Rs
three to four crore.
• With a view to integrating SMEs, facilitating their growth and
enhancing their competitiveness (including measures to reduce the
rigours of the ‘Inspector Raj’ faced by the sector), the ‘Small and
Medium Enterprises Development Bill 2005’ was introduced in the
Lok Sabha on May 12, 2005.
• A Policy Package for stepping up Credit to ‘Small and Medium
Enterprises’ was announced on May 10, 2005.
16 w Globalisation and Small Scale Industry
• Under the ‘Credit Linked Capital Subsidy Scheme’ (CLCSS) for
technology upgradation, amendments made with effect from September
29, 2005, which, inter alia, raise ceiling on loans from Rs 40 lakh to
Rs one crore and the rate of subsidy from 12 to 15 percent.
• The Reserve Bank of India (RBI) formulated the scheme of ‘Small
Enterprises Financial Centres’ (SEFC) to encourage banks to
establish mechanisms for better coordination between their branches
and branches of Small Industries Development Bank of India
(SIDBI) in the identified clusters for more efficient credit delivery.
• To facilitate technology upgradation and enhance competitiveness,
the investment limit in (plant and machinery) raised from Rs one to
Rs five crore in respect to 69 items reserved for manufacture in the
small-scale sector and all items in the drugs and pharmaceuticals
sector. Notification to this effect to be issues shortly.
• A new ‘Package for Promotion of Micro and Small Enterprises’
under the formulation to include supplementary measures to
encourage adequate credit flow, provide further incentives for
technology upgradation, infrastructure and marketing facilities,
capacity building of micro and small enterprises, and support to
women entrepreneurs.
Source: Economic Survey, 2005-2006
Globalisation and Small Scale Industry w 17
4
What is meant by a
‘sick industry’ in the
Small Scale Industries
sector?
In layperson term, any industry, which is not economically viable, may be
called as sick industry. The definition of a ‘sick industrial company’ (which
got amended in the year 1993) has been defined under the provisions of Section
3(1)(o) of Sick Industrial Companies (Special Provisions) Act (SICA) which
means an industrial company (being a company registered for not less than
five years) and having at the end of any financial year accumulated losses
equal to or exceeding its entire net worth.
Accordingly, sick industrial company means a company having fulfilled all
the following conditions:
i. It must be an industrial company which is as specified in the First Schedule
to the Industries (Development and Regulation) Act, 1951 (IDRA) but does
not include an ancillary industrial undertaking or a small scale industrial
undertaking as defined under IDRA.
ii. The company should be in an existence for at least five years since the date
of incorporation.
iii. The company should have an accumulated losses equal to or exceeding its
net worth at the end of any financial year.
(‘Net Worth’ means the sum total of paid-up capital and free reserves)
‘Potentially Sick Industrial Company’ means an industrial company whose
accumulated losses is more than 50 percent or more of its peak net worth
during the immediately preceding four financial years.
The Financial Express
18 w Globalisation and Small Scale Industry
Box 3: Status of Sickness in SSI Sector
Data on closed SSI units is not maintained centrally. However, the RBI
compiles data on sick SSI units financed by the scheduled commercial
banks. According to RBI, the sickness in the SSIs has also declined
from 3,06,221 in 1998-99 to 2,49,630 in 2000-01, and further to
1,77,336 in 2001-02. The status of these units from the year 1999 to
2002 is given below:
The RBI data shows a declining trend in sickness, whereas there are
reports of growing sickness. This data depicts declining trend because
of the following: (i) data does not include closed units; (ii) decline is
due to prudential write off undertaken by the banks as a result while the
sick units continue to exist; technically, they do not find mention in the
balance sheets; (iii) due to one time settlement scheme of RBI announced
on July 27, 2000 old dues worth Rs 1757 crores have been settled.
As at the
end of
March 1999
March 2000
March 2001
March 2002
Numbers
3,06,221
3,04,235
2,49,630
1,77,336
Amount
(in crore)
4313.48
4608.43
4505.54
4818.92
Numbers
18,692
14,373
13,076
4,493
Amount
(in crore)
376.96
369.45
399.17
416.36
Total sick units Potentially viable units
Globalisation and Small Scale Industry w 19
5
What are the main
reasons of sickness in
industries and symptoms
of becoming sick?
The reasons for industrial sickness may differ from industry to industry and
within the industry from unit to unit. These can be categorised as follows:
1. Internal Reasons
2. External Reasons
Internal Reasons: The reasons, which can be controlled by the company itself.
Some of them are as follows:
• Mismanagement;
• Underestimation of the cost of the project;
• Delay in the implementation of the project;
• Increase in cost due to delay in implementation of project;
• Under utilisation of resources;
• Diversion of funds;
• Lack of management depth;
• Bad industrial relations;
• Bureaucratic management;
• Inadequate working capital; and
• Heavy expenditure in advertisements.
External Reasons: The reasons, which cannot be controlled by the company
and are external in nature. Some of them are as follows:
• Adverse Government Rules & Regulations;
• Adverse Price Control Policy;
• Recession Trend/economic conditions;
• Tough Competition;
Financial Times
20 w Globalisation and Small Scale Industry
• Shortage of manpower, raw materials;
• Changes in technology;
• Changes in consumer behaviour;
• Shortage of power supply; and
• Delay in getting any financial assistance.
Symptoms of Industrial Sickness: The following are some of the symptoms
of industrial sickness:
• Frequent liquidity problems, fall in sale/profits, rapid increase in debtors,
reduced working capital, etc.;
• Unfavourable market development;
• High managerial turnover;
• Labour unrest;
• Rise in staff and customers complaints and failure to respond such
complaints;
• Declining morale of the employees;
• Lack of planning and strategic thinking; and
• Strike, lock-out.
Globalisation and Small Scale Industry w 21
6
What is the difference
between Sick Industrial
Companies (Special
Provisions) Act, 1985 and
Board for Industrial and
Financial Reconstruction?
In the wake of sickness in the country’s industrial climate prevailing in the
eighties, the Government of India enacted a special legislation namely, the
Sick Industrial Companies (Special Provisions) Act, 1985 commonly known
as the SICA. The main objective of SICA is to determine sickness and expedite
the revival of potentially viable units or closure of unviable units. It was expected
that by revival, idle investments in sick units will become productive and by
closure, the locked up investments in unviable units would get released for
productive use elsewhere.
Later on in January 1987, under the provisions of SICA, the Central Government
established Board for Industrial and Financial Reconstruction (BIFR) (presently
situated at New Delhi) consisting of experts for timely detection of sick and
potentially sick companies, speedy determination of remedial and other
measures with respect to such companies and for expeditious implementation
of these measures.
www.newsdata.com
22 w Globalisation and Small Scale Industry
7
What are the procedures
determining sickness of the
industries and steps taken to
revive them?
The follwing are the procedures determining sickness of the industry:
i) If the industrial company becomes sick as per the definition, it is the
responsibility of such company to make reference to BIFR within days
from the date of finalisation of the duly audited accounts of the company
for the financial year at the end of which the company has become sick.
ii) The BIFR will make such enquiry for determining whether the concerned
company has become sick. Such enquiry can be made by BIFR upon the
receipt of information from the Board of Directors of the concerned
company or from other agencies like Central Government, RBI, etc. or
upon its own knowledge as to the financial position of the company.
iii) The BIFR may appoint any Operating Agency (any Public Financial
Institution, State Level institution, scheduled bank or any other person as
may be specified by BIFR) to enquire into within 60 days and make a
report.
iv) If the Board is satisfied after the completion of inquiry that the company
has become sick, the BIFR has to make an order in writing whether it is
possible for the sick industrial company to make its net worth exceed the
accumulated losses within a reasonable time.
www.biomedcentral.com
Globalisation and Small Scale Industry w 23
v) If the Board is not satisfied after the completion of inquiry that it is not
practically possible to make its net worth exceed the accumulated losses
within a reasonable time, may direct operating agency to prepare a scheme
for such measures in relation to such company. The operating agency shall
prepare a scheme, which may provide any or more of the following
measures:
• Financial reconstruction;
• Change in management;
• Amalgamation;
• Sale or lease of a part or whole of any industrial undertaking of such
company;
• Rationalisation of managerial personnel; and
• Such other preventive, ameliorative and remedial measures as may be
appropriate.
The BIFR may on such recommendation sanction the scheme and will
periodically monitor the sanctioned scheme.
vi) Considering all the relevant facts, if the BIFR is of the opinion that the sick
industrial company is not likely to make its net worth exceed the accumulated
losses within a reasonable time, then it may form an opinion to wind up the
company and forward its opinion to the concerned High Court.
The High Court on the opinion of the Board may order winding-up of the sick
industrial company by complying the provisions of the Companies Act, 1956.
24 w Globalisation and Small Scale Industry
8
Why was de-reservation of
Small Scale Industries items
taken up by the Government?
The policy of reservation of items for manufacturing in SSI was introduced
in 1967, which received a proper statutory backing in 1984 through
amendment in Industries (Development and Regulation) Act, 1951. Initially
only 47 items were reserved in 1967, which went up to 873 in 1984. With the
removal of quantitative restrictions, goods from the outside world started marketed
in India. This had raised basic questions about the role of SSI reservation.
Therefore, the rationale behind the policy of SSI reservation was studied by
the Expert Committee on Small Enterprises (the Abid Hussain Committee),
which submitted its report in 1997. The Committee listed the following
arguments against reservation:
• The policy has not actually helped the growth of SSIs.
• The units in the unreserved sector have actually grown faster than those in
the reserved list. In other words, the SSI units have shown more dynamism
in areas where they had to compete with larger units.
• Reservation in many areas has become irrelevant since a large number of
reserved products are not being produced by SSIs. It is also inconsistent
with the new trade policy that allows the items reserved for the SSI sector
to be freely imported.
• Reservation has hurt India’s ability to expand exports in many crucial areas,
including textiles and leather.
A number of subsequent studies also recommended the de-reservation of items,
and said that the government’s reservation policy is hindering the SSI sector’s
growth. It is, therefore, time to do away with SSI reservation and offer other
forms of promotional support.
The Hindu Business Line
Globalisation and Small Scale Industry w 25
In many labour intensive areas with great export opportunities, SSI reservation
in India is handicapping the development of efficient economies of scale, while
firms in countries such as China are able to compete effectively in the
international and in the Indian market. The reservation denies the enterprises
economies of scale4 and access to technology, both of which are critical to
being able to compete in a globalising world. For instance, taking the case of
‘import competition and need to attain economies of scale’, SSIs sourcing
inputs like steel locally and in small quantities must pay more – plus suffer
state and central taxation like excise duty, VAT etc; they will be out-competed
by products made from lower-prices steel imports.
Hence, the process of phasing out of SSI reservation, in consultation with
stakeholders, is constituting an important element of policies that foster
efficiency and productivity in India.
The total number of items on the reserved list has been coming down year after
year, and in 2003-04 there were 675 items reserved for SSI units. Even at
present, the policy of reservation for SSI does not bar large industries from
entering into production of items reserved, provided they agree to export 50
percent of their production.
Box 4: Majority of Small Units Surveyed
do not Think Reservation Helps
Interestingly, an all India survey by the All India Management
Association (AIMA) says, “the policy of reservations of specific
industries for SSIs, found limited support: only 29 percent if the
respondents considered this beneficial”. Sign of just how poorly
prepared the SSI sector is can be gauged from the fact that (according
to the survey) just 52 percent of units in the manufacturing sector were
able to exploit opportunities in the market – the figure for service sector
SSI units is marginally higher, at 56 percent. In other words, the sharp
rise in SSI service units has more to do with the overall market growing
than with their intrinsic abilities. The main reason cited by the units for
not able to do well are lack of marketing skills (70 percent), lack of
finance (25 percent), inspector raj (13 percent), power shortages (14
percent) and poor technical expertise (15 percent).
26 w Globalisation and Small Scale Industry
Box 5: More Jobs in SSIs Due to De-reservation: Study
Dispelling apprehensions that de-reservation hits employment growth
in SSIs, a recent study by the Ministry of SSIs shows that employment
actually grew with de-reservation during 1998-1999 and 2003-04.
“Employment has grown at the rate of four percent per annum in the
period”, said Secretary, SSI. The number of employed people grew
from 220.55 to 237.36 lakh during the same period, the study reveals.
The Financial Express, April 01, 2005
Globalisation and Small Scale Industry w 27
Globalisation need not affect Indian SSI adversely only. It would have
created beneficial opportunities as well. The removal of quantitative
restrictions and the reduction of import duties, particularly after the setting up
of WTO in 1995, have opened up foreign markets to Indian SSI as much as
Indian market to foreign goods.
Many efficient and export-oriented small firms may have received benefits out
of this development. Such global opportunities should act as an incentive to
small firms 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 look out for firms who could supply
reliable and quality products.
Nevertheless, the umbrella of the WTO (which is one of the tools of
globalisation) is also indirectly creating far-reaching implications for the SME
sector in India, with regard to their competitive ability and integration with the
global markets. WTO cannot be exclusively blamed for weak performance of
any SSI.
Having right opportunities and creating right environment to avail the
opportunities is easier said than done. In India, most of the problems arise due
9
Could WTO be held
responsible for adverse
impact on the Small
Scale Industries in the
era of Liberalisation
and Globalisation?
www.seppo.net
28 w Globalisation and Small Scale Industry
to the unorganised nature of this sector, lack of data and information, use of
low technology (sometime obsolete technology) and poor infrastructure in the
country. WTO would affect all types of SSI units whether producing for the
domestic market or for the international market.
The SSI sector which produces over 75000 items will have to be aware of the
patents of products including even the technological patents, trademarks,
industrial designs etc. About 95 percent of the SSI units are in the nature of
tiny micro enterprises and are weak. Many of them are one man shows. Their
capital base is poor and do not have access to the economies of scale.
Their bargaining power is low and do not have access to information and modern
management practices. Hence, SSI will need to be guided and supported since
they are also employment generator for the economy.
Rest of the five percent of SSI units are in the category of modern SSIs and
have already established global links. But, there are also tiny when compared
to SME sector of developed countries. Thus, they have only relative and not
absolute advantage and they also need to be guided on WTO provisions and
safeguards available.
Globalisation and Small Scale Industry w 29
While SSIs typically blame inadequate marketing and finance facilities
for their decline, a more important reason is the location of the units
itself. For, while the AIMA survey shows a 5.2 percent fall in output growth of
SSI units in the period 1998-2002, this was primarily concentrated in north
India where SSI output declined by 18.6 percent. By contrast, SSI output in
south India grew 25.8 percent.
A parallel survey by the Confederation of Indian Industry (CII), of primarily
non-SSI units, shows a fairly dramatic decline in the economy of northern
states in the last decade. While the average gross domestic product (GDP)
growth for both northern and southern states was six percent per annum in the
per-liberalisation decade of the 1980s, post reforms growth in the north fell to
five percent in 1993-99 while it went up to 7.2 in the south. As a result of the
declining growth, it is natural that demand for, and therefore, supply of output
by SSI units would go the same way in north India.
While units in north India, according to the survey, are hamstrung by rigid
labour laws – 20 percent in Delhi units felt this way, as did 86 percent in
Rajasthan. And Corruption – from 20 percent in Delhi to 100 percent in Uttar
Pradesh – the south has the most export-oriented units – 11.07 in each state
versus 4.97 for the north – and even the most multinational laboratories – 24 in
all southern states versus five in the north. The average number of inspection
visits by official was higher in the north – 9.7 visits in 1999 in Uttar Pradesh
10
What is State-wise status
of Small Scale Industries
in the post domestic
economic reforms in the
era of Globalisation and
Liberalisation?
www.hrr.mlil.go.jp
30 w Globalisation and Small Scale Industry
compared with 6.1 in Andhra and Tamil Nadu and 6.2 in Maharashtra and
Gujarat. (Business Standard, September 02, 2005)
With the atmosphere for growth the most conducive in southern India, the
AIMA survey shows, SSI units have been the most pro-active in terms of change
as well. Southern units head the league when it comes to increasing their sales
staff or re-training them, and are second – after the west – in making new
arrangements for capital; after the east, southern units are also the most
aggressive when it comes to looking for new markets or trying out new products.
Southern units used the least amount of generators, which is a big positive
feature since they are generally strapped for cash.
According to the survey, 58.6 percent of southern SSI units were able to avail
of market opportunities compared with a mere 40.6 percent in the north (1998-
2002). While the eastern figure is 60.9, this has to be treated with caution,
considering that output in this region actually fell during the period when units
claimed they were able to exploit new market opportunities. Southern units
also scored the highest, except for the east where the usual caveats apply, in
terms of confidence to face the future: 42 percent of the units felt they would
survive for more than five years, against 35 percent of the northern SSI units.
Box 6: Anecdotal Incidence
Maharashtra: SME owners in Mumbai pointed out that as a result of
rising costs (heavy costs of services in the city, combined with five
percent octroi and other duties and the rising of cost of living), nearly
70-80 percent of the units in area like Marol, Dombivili-Ambernath
and Thane’s Wagle Estate have closed down. Other issues include
militant labour unions and frequent disruption of power supply. Most
owners who lost business have sold out their units and moved into
trading.
Karnataka: The IT capital of India ignores the SSI sector. In the last
five years, the Karnataka government attracted over Rs 60,000 crore
investment in the large and medium industry segment, but could not
pay Rs 325 crore outstanding subsidy for SSI, which resulted in closure
of over 40,000 units.
Currently, Karnataka has around three lakh SSI providing employment
to over 18 lakh individuals. This is the only sector where over 30 percent
of the workers are women. In fact, Karnataka was the first state in the
Globalisation and Small Scale Industry w 31
country to embark on setting up a dedicated area for SSI in Peenya on
the outskirts of Bangalore, way back in the 70s. Known as the Asia’s
biggest industrial area today, Peenya reflects the badly managed state
of SSIs in the state.
P S Srikantadatta, Secretary, Peenya Industrial Association says, “This
area does not have the voting population. Whoever gets elected looks
at residential areas because of their vote banks. Even the government
has not provided any monetary help to improve infrastructure in the
area”. He says that after taking up the matter with the central government,
the centre, along with the state government, is providing over Rs 25
crore for the development of Peenya
West Bengal: The foundry industry in West Bengal’s Howrah district,
the birthplace of the Indian engineering industry, is passing through a
difficult phase. Changing markets and demand, poor availability of raw
materials and their fluctuating prices and stringent pollution norms are
taking a heavy toll on many units.
One factor that has precipitated the present crisis is the pollution control
norms. These norms have forced the entire cluster to move away from
their birthplace to other locations despite taking measures two years
back to curb air pollution created by smoke and dust particles released
from the foundry-installing devises. Following the decontrol of pig iron
production after 1990, a number of pig iron manufacturing units came
up in the private sector. This alleviated the problem of scarcity of pig
iron temporarily. A new development in the marketing of this item has
put the industry in trouble again.
The manufacturers, both in the public and private sectors, began to sell
their produce in the open market at prices determined by the international
demand and supply position. This gave birth to a section of
intermediaries. Gradually, these become the sole suppliers of pig iron.
These middlemen have increased prices every week during the past
one year – from Rs 8,000 a tonne to Rs 17,000 a tonne – on the plea of
strong international prices. This led to the foundries defaulting in their
supply commitments. In particular exports were hurt very badly.
However, the state is hopeful that they will be able to face all the
challenges to come once the foundry park in the new location is
completed, fully equipped with modern machinery and technologies.
32 w Globalisation and Small Scale Industry
Andhra Pradesh: There are 1,45,499 registered SSI units with a total
investment of Rs 4,717.7 crore and about 13,10,071 workers, according
to the official figures. However, in the last decade its size has shrunk.
According to industry sources, almost 60 percent of the units are sick.
The reasons area: ) cheap imports, and b) unable to upgrade technology
and products that the market demands.
Add to that, payment delays by large industries have affected the
financials of the SSIs. Moreover, with many of the large PSUs shut or
cutting down on production, SSIs in Andhra Pradesh are either out of
business or living on oxygen. According to a sickness analysis report
among the small-scale industrial units initiated by the Andhra Pradesh
government, all sick units, as defined by Kohli Committee, are not
eligible for revival. The report says: “…that only 0.5 to 1 percent of
the declared number of sick SSI units could be considered for
rehabilitation considering the changed market trends”. As per
government records, there are over 10,000 SSI units registered as sick
in the state.
However, the report had pointed out that due to the changed market
conditions, about 100 of them might be qualified to get the rehabilitation
package. In fact, most of the units registered as sick, are physically
extinct, says industry sources. The Andhra Pradesh government has
decided to establish ‘industrial clinics’ in each of the banks. The
Industrial and Investment Promotion Policy of Andhra Pradesh 2005-
10 has also proposed revival package for the SSIs which includes
incentives.
Source: SMEs: Ground Report, appeared in various versions of the Financial Express,
2005
Globalisation and Small Scale Industry w 33
11
What measures can be
taken to increase the
competitiveness of Indian
Small Scale Industries?
Before addressing the question, it must be understood that Indian small
enterprises have certain inherent strengths which helped them raise their
share in total exports to 35 percent even in the face of tough global competition.
The sector possesses the advantage of immovableness and flexibility. Their
inventories are low and have weathered many adverse situations successfully.
Indian SMEs also have advantages of local raw material and world class skill
besides cheap labour which could be harnessed to the advantage. At the same
time, it is essential to note vulnerability in the context of emerging global
environment.
According to a paper by United Nations Industrial Development Organisation
(UNIDO)-South Asia, a major problem before the SMEs of India is that as far
as productivity and competitiveness are concerned their performance is poor.
The challenge lies in increasing the technological competence of the SME
sector, with regard to its export basket. The Indian SME sector needs to move
up to higher value added outputs and attract more investment in terms of FDI.
The SME sector requires better facilities in terms of infrastructure, provision
of raw materials and establishing linkages with machinery suppliers and credit
facilities.
In order to become competitive, SMEs will need to link up with global value
chains, which, in turn, will require greater understanding of global structures,
i.e. relationships with various key actors in the value chain and greater flexibility
to respond to external factors.
Business Standard
34 w Globalisation and Small Scale Industry
Globalisation has changed the context and basis for policy and programmes
for SMEs. Protection is not needed as it is no more the case that ‘big will eat
the small’ but rather the ‘faster will eat the slower’. There is a need to adopt a
sectoral and sub-sectoral policy approach at the national as well as at the statelevels.
With the increasing business complexities straightjacketing SMEs into
urban-rural, modern-traditional or tiny-non-tiny is no longer of any economic
use. Policy must focus on certain key sectors where it wants to develop an
edge through its core competency or niche value in the world market.
The informal service provider finds little mention in the government policy
even though an effective services sector has emerged in the SSIs. Small firms
are their own best service providers as they remain untouched by public support
providers. Country needs to build regional and local capacities. Support
requirements of small firms vary considerably with differing regional availability
of infrastructure, local resources, regional markets and level of available private
services.
States need to cater to sectors and sub-sectors depending on their regional
needs. There is also a need for development of entrepreneur-friendly taxation
policies by the government particularly with respect to excise duty, value-added
tax (VAT) and abolition of octroi tax.
Globalisation and Small Scale Industry w 35
Endnotes
1 In respect of hand tools and hosiery/knitware sector corresponding to other 41
items, investment limit has been raised from Rs one to five crore. Similarly,
investment limit for Pharmaceutical & Stationery sectors corresponding to 23
items has been raised from Rs 1 to 5 crore. This permits modernisation and
upgradation of technology and quality.
2 Quantitative restrictions (QRs) are specific limits imposed by countries on the
quantity or value of goods that can be imported or exported. QRs can be in the
form of a quota, a monopoly or any other quantitative means. In other words,
QRs refer to non-tariff measures, which are taken to regulate or prohibit
international trade.
3 Non-durable goods are tangible goods that are consumed fast normally in one or
few uses and are purchased frequently. Examples of non-durable goods include
soap, deodorants. Razor blades, batteries, pens, salt, sugar, beer, cigarettes,
newspapers, toothpastes, napkins, over the counter medicines and many foods
products such as candy, cookies and soft drinks. Durable goods are tangible
goods that normally survive long term uses and are not purchased as frequently.
Examples include clothing, electronics and major alliances (e.g. stereo sound
system, television or radio sets, refrigerator, dishwashers, cameras), furniture
and automobiles.
4 A phenomenon which encourages the production of larger volumes of a commodity
to reduce its unit cost by distributing fixed costs over a greater quantity.
36 w Globalisation and Small Scale Industry
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TRADE AND DEVELOPMENT
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their implications for India. Its aim is to create an informed society through better
Globalisation and Small Scale Industry w 37
public knowledge, and thus enhance transparency and accountability in the system of
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This monograph is the third in the series of “Globalisation and India – Myths and
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