Small and Medium Enterprises (SMEs): Issues in the changing global economic environment (part IV)
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]
Problems facing the SSI sector
The SSI sector confronts several problems despite its strategic importance in any industrialisation strategy and its immense potential for employment generation.
The problem which continues to be a big hurdle for the development of the sector is lack of access to timely and adequate credit. The Abid Hussain Committee on SSIs (1997) examined the problems of the SSI sector and recommended a package of policies to restructure the industry in the context of current global economic changes. The Expert Committee was of the view that the existing institutional structure for delivering credit to SSEs needs a thorough overhaul. It endorsed the recommendations of the Nayak Committee and urged the RBI to implement the same. The Committee recommended restructuring of financial support through SFCs and SIDCs, tapping of other sources of funding for SSEs, extending credit rating servcies to small units, and addressing the credit needs of tiny units to ensure that they are not bypased by the commercial banking system. The overall credit availability for SSIs during 1991-1996 amounts to only 13% of the value of production (AIMA figures).
The Nayak Committee had recommended a desirable norm of 20% of the value of production to be made available by way of working capital through term-lending institutions and commercial banks A norm of 75% was set for fixed capital assets whereas actual availability is only 55%. Lack of finance has been one of the major causes of sickness in the SSI sector, blocking access to technological modernisation and other growth possibilities. There is an urgent need to enlarge flow of credit to the SSI sector from institutional sources. The creation of a facilitating environment for SSIs will centre on access to credit. The Ninth Five Year Plan (1997-2002) estimates additional working capital funds at Rs. 1420 to 1460 billion for the small sector. Lowering interest-rates, specifying a time-frame to clear loan applications and adherence to norms set down by the Nayak Committee are some of the minimum measures that need to be taken.
Legislative measures have a role to play with regard to funding and financing of small scale units. There are measures which can basically ensure that impediments to credit availability are removed. (Gopal Choudary). These measures include:
Right to reasonable credit from commercial banks as per RBI guidelines framed after consultation with representative Board
Protection against non-normative demands for security
Appeal and enforcement by Ombudsman/Board
Access to public funds by way of debentures, deposits, securities
Government guarantee for loans from banks
The measures to support Marketing and Competitiveness are as follows:
State to exempt from contract security
Prompt return of contract securities in case of others
Prompt payment measures
Protection against undue bundling of contracts by the state
Protection against restrictive and monopolistic trade practices
Ombudsman/arbitral services for enforcement
Impact of WTO
The emerging challenges to the small-scale sector are to come from the impact of the Agreements under WTO to which India is a signatory along with 134 member countries. The setting up of the WTO in 1995 has altered the framework of international trade towards non-distortive, market-oriented policies. This is in keeping with the policy shift that occurred worldwide since the early 1980s in favour of free market forces and a tilt away from State regulation/intervention in economic activity. This is expected to lead to an expansion in the volume of international trade and changes in the pattern of commodity flows. The main outcomes of WTO-stipulated requirements will be brought about through reduction in export subsidies, greater market access, removal of non-tariff barriers and reduction in tariffs.
There will also be tighter patent laws through regulation of intellectual property rights under the TRIPS Agreement which lays down what is to be patented (both products and processes), for what duration (20 years instead of the present 7 years under India's 1970 Patent Law), and on what terms.
The responses by trading countries and the reframing of domestic economic policies which will result from the impact of WTO and the repercussions on the global economy of all these changes are highly uncertain as they involve several unforeseeable factors. However, there are certain indications of the shape of future trade patterns.
Increased market access to imports (of around 3% of domestic production to be raised to 5%) will mean opening up the domestic market to large flows of imports. The removal of quantitative restrictions (QRs) on imports has been speeded up to 2001. At present 714 items are in the restricted category but imports of these items will soon be freed from all restrictions as announced in the recent EXIM policy.
Increased market access under WTO requirements will also mean that our industries can compete for export markets in both developed and developing countries. But the expected surge in our exports can come about only if the SSI sector is restructured to meet the demands of global competitiveness which is the key to the future of small industries in the present context.
This is six part feature and will conclude with future outlook for Small and Medium Enterprises (SMEs).
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