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Banking > features> Small & Medium Enterprises                                      click here for Part III of the feature

Small and Medium Enterprises (SMEs): Issues in the changing global economic environment (part II)
- Dr B. Yerram Raju

[Dr Raju is Dean of Studies & Senior Faculty Member at Administrative Staff College of India at Hyderabad. He is foremost authority on Development Banking in India & is in advisory group of banknetindia.com]

The Small Scale Industries (SSI) Sector in India

The promotion of the small-scale sector in India has been an important thrust of industrial policy since independence though the focus of concern changed with the priorities of each five year plan. The six Industrial Policy Resolutions which have been framed since 1948 have set out the guidelines for the country's industrial development with different degrees of emphasis on the main objectives. The Industries Development and Regulation Act of 1951, as mentioned earlier, provided the basic framework for the post-independence industrialisation strategy. Since the model for industrialisation in the 1950s was based on capital-intensive heavy industries, the priority of employment generation required the development of widely dispersed, mass consumption-good producing, labour-intensive, small-scale industries. As the process of economic development led to changing priorities, the policy focus shifted to regional imbalances (1977), ancillarisation (1980), exports and dispersal in rural areas (1990) and then to Small, Tiny and Village Industries (1991).

The organisational structure for SSIs was set up in the 1950s with the establishment of a Small Scale Industries Board in 1954. Other important institutions at the national level were the Department of Small Scale Industries and Agricultural & Rural Industries and the Small Industries Development Organisation (SIDO) which was under the Development Commissioner, Small Scale Industries. At the State level, the Commissioner/ Directorate of Industries was the main institutional authority for SSIs. This structure has remained, though several other institutions have come into being in the 1970s and 1980s, particularly at the State level.

During the last forty years, several Committees have been constituted by the Government of India to examine the functioning of SSIs with a view to promoting their growth and efficiency within the context of the main objectives of the national economic plans. The Karve Committee Report (1955) was one of the earliest of these exercises which recommended a protective environment for the growth of small industries in India. Since then, policies targeted for the SSI sector have aimed at fostering its growth through positive policy interventions in the areas of finance, technology, infrastructure and extension services, among several other requirements of the sector. Supportive policies through the 1960s, 70s and 80s took the form of reservation of products exclusively for the SSI sector (836 products are reserved exclusively for SSIs at present) grant of fiscal concessions and government procurement of supplies from the sector. At present 836 products are reserved exclusively for SSIs. For increased credit flow to the SSI sector, a policy of priority sector lending through nationalised banks has been followed, though this has not been adequate for the growth requirements of the sector.

Since the 1980s and, more particularly, in the 1990s, there have been marked changes in the policy climate across the globe towards freer markets and reduced government intervention. The global economy is characterised by greater integration, a more liberalised international trade regime following the set up of the World Trade Organisation (WTO), a rapid pace of technological change, especially in some high-growth areas such as information and knowledge-based industries, and intensified international competition. India's economic policies are in the process of being restructured, through the second generation reforms, to adjust to the emerging challenges. The main emphasis of future policy will be to promote the growth of this dynamic sector through focussed, sustained and wide-ranging interventions, as the SSI sector has so far been insulated to a large extent from pressures of competition both domestically and internationally.

What are the problems and prospects for the development of the SSI sector over the medium-term? Before turning to the issues involved, the economic profile of the SSI sector is useful. as an indicator of the success or failure of past policies.

The SSI sector is non-homogenous in structure and includes diverse types of production units ranging from traditional crafts to high-tech industries. The total number of SSI working units in the country is estimated to be around 3 million. In terms of ownership, the vast majority of SSI units are proprietary concerns (80.5%) with only 16.8% functioning as partnerships and private limited companies. The first census of SSIs in the country was undertaken in 1972 and the second in 1987-88. Tamil Nadu occupied the first rank in both years in terms of number of units and employment, followed by Maharashtra. Andhra Pradesh was placed at No. 6 and 7 respectively. By 1993, Punjab emerged at the top. (AIMA, 1997) One important factor to be noted in the statistics on small industries is the mortality rate. While the industries may get registered at the entry point, ther is no record of their exit. There are at least 3lakh units declared as sick and ot of production, accounting for 10 percent of the recorded units.

The potential of SSIs to generate employment has remained the strongest argument in their favour. The sector now employs 17 million persons and is the second largest employer of India's workforce after agriculture. The role of SSIs in the economy can be seen from the fact that it now accounts for 95% of all industrial units in the country and 40% of total output. About 7,500 products are manufactured in the small-scale sector. The export share is 35% . The composition of exports shows the largest shares of SSIs are in the industry groups : hosiery and garments (29.0%) , food products (21.4%) and, leather products (18%). The industry groups which have recorded high growth rates and a large share in total production of SSIs are: textile products, wood, furniture, etc., paper and printing, and metal products.

The future policy focus for SSIs will be on the development of industrial clusters which have been found in several studies to be efficient in terms of resource use and in promoting inter-industry and inter-sectoral linkages. A cluster is defined as a geographically bound concentration of similar, related or complementary businesses. A UNIDO study defines clusters as 100 registered small-scale units. (Mukesh Gulati, 1998). There are estimated to be 350 SME clusters in India which contribute directly and indirectly to 60% of India's exports. However, the spatial concentration in clusters will ean a slower dispersion of industrial activity to backward areas. The location-wise distribution of clusters shows 65% concentrated in cities and metros and only 13% in small towns and rural areas. There is scope for encouraging the development of clusters in rural areas and rural-based artisan centres.

In third part of this feature
, read about problems facing SSI. This is six part feature and will also cover impact of WTO & future outlook.

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