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Globalisation and

Small Scale IndustryFrequently Asked Questions

Monographs on Globalisation and India � Myths and Realities, #8

Globalisation and Small Scale IndustryFrequently Asked Questions

Monographs on Globalisation and India � Myths and Realities, #8

Published by

CUTS Centre for International Trade, Economics & EnvironmentD-217, Bhaskar Marg, Bani ParkJaipur 302 016, IndiaEmail: [email protected]: www.cuts-international.org

Researched and compiled byPurnima 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 forSmall Scale Industries? ......................................................................... 13

4. What is meant by a ‘sick industry’ in theSmall Scale Industries sector?............................................................... 17

5. What are the main reasons of sickness in industries andsymptoms of becoming sick? ................................................................ 19

6. What is the difference between Sick Industrial Companies(Special Provisions) Act, 1985 and Board for Industrial andFinancial Reconstruction? ..................................................................... 21

7. What are the procedures determining sickness of theindustries and steps taken to revive them? ............................................ 22

8. Why was de-reservation of Small Scale Industries itemstaken up by the Government? ............................................................... 24

9. Could WTO be held responsible for adverse impact on theSmall Scale Industries in the era of Liberalisationand Globalisation? ................................................................................ 27

10. What is State-wise status of Small Scale Industries in thepost domestic economic reforms in the era of Globalisationand Liberalisation? ................................................................................ 29

11 What measures can be taken to increase the competitiveness ofIndian 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 isaddressed to the common man in India, which helps to clarify many basicissues 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 itsimportance in the era of globalisation and liberalisation. The small-scale sectorhas played an important role in the socio-economic development of the countryduring the past 58 years. By its less capital intensive and high labour absorptionnature, SSI sector has made significant contributions to employment generationand 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 SSIsector because of increasing internal and external competition. Clearly, globalbusiness is not a level-playing field with firms of all sizes having differentgoals, abilities and stakes. Until recently, high protectionist walls around SSIshelped them to cope with big business, transnational corporations (TNCs) andthe progressive liberalisation under World Trade Organisation (WTO) traderegime. Despite sufficient notice and the growing awareness of the impendingthreats, the SSI sector does not appear to be adequately prepared for the newchallenges.

However, it is not a unique situation being faced by the Indian SSIs. The SSIsin developed economies too are encountering unprecedented challenges. And,this is the reason why a plethora of concessions and schemes supporting SSIsare provided to this sector. Governments are vigorously seeking ways to promoteand develop them.

There may be genuine apprehensions about the impact of the WTO for theSMEs 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 solelyblame the WTO regime for some firms in the small sector not doing well. Thesector is suffering from wider problems such as demand related problems orsupply-side constraints. It cannot be ignored that troubles may also arise dueto unorganised nature of this sector, lack of data and information, use of lowtechnology, sometimes obsolete technology, poor management and poorinfrastructure in the country.

About 95 percent of the SSI units are in the nature of micro enterprises and arevulnerable. Many of them are one-man shows. Their capital base is poor andthey do not have access to information and modern management practices.

Policy attention to the sector has gained visibility lately, with emphasis oncredit access. But it seems sickness in the industry is a key factor in theapprehensions of lending institutions. In spite of several committees and studygroup reports over the past decade, policymakers are still seeking for a WTO-compatible policy for this sector. There is a need for better understanding overa number of issues such as the cap on capital investment, foreign directinvestment (FDI) ceiling, interest subsidy, de-reservation of items, creation ofa 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 seemsthe range of reasons for sickness in the sector is not mutually exclusive, andtherefore, corrective prescriptions turn out to be misleading. Firm specific andindustry specific solutions are required.

In India, a number of laws exist for the small-scale sector, which are oftenconfusing and seemingly prove less effective. Thus, the demand to have acomprehensive legislation for the SSI is gaining pace. Keeping this in mind,the Government of India has recently introduced a Small EnterprisesDevelopment Bill but it also needs to take into account the practical concernsof small enterprises before it takes final shape.

Thus, given the crucial importance of the SSI sector to the economy with around40 percent share in the total industrial output, 35 percent in direct exports andover 80 percent in industrial employment, it deserves all the policy support theGovernment can offer. What the small entrepreneurs need is not protection butinstitutional support to fund modernisation and technology upgradation,infrastructural support, and adequate working capital finance from the bankingsector.

ii w Globalisation and Small Scale Industry

There is also a need for small entrepreneurs to keep pace with the structuraland technological changes taking place in large industries. The accent shouldbe on the much greater degree of ancillarisation and on providing services asthe larger companies are keen on offloading a number of job works to smallerunits. True, a section of the SSI sector is already undergoing structural changesbut the process is still quite slow.

Also, the diversity in production systems and demand structures in our countrywill ensure long term co-existence of many layers of demand for consumerproducts/technologies/processes. This characteristic of the Indian economywill allow complementary existence for various diverse types of units.

The process of liberalisation coupled with Government support will, thereforeattract the infusion of capital, technology and marketing in the sector. There isan urgent need to refashion the policies governing the sector so as to improveits competitive strength and long-term outlook.

This monograph, dealing with simple and basic questions coming to the commonman’s mind, will serve its purpose of generating awareness on the issues relatingto SSI, its significance and coping strategy in the era of globalisation andliberalisation. There are opportunities as well, which can be better exploitedby the small sector than the big one.

Jaipur Pradeep S MehtaMay 2006 Secretary General

Globalisation and Small Scale Industry w iii

8 w Globalisation and Small Scale Industry

1

What is a ‘Small ScaleIndustry’?

www.hindubusinessline.com

The term ‘Small Scale Industry’ (SSI) evokes different meanings for differentagencies. The Planning Commission, Government of India, view the entire

Village and Small Industries (VSI) sector as the SSI sector. The National SampleSurvey Organisation under the Central Statistical Organisation (CSO),Government of India defines the entire industry sector in terms of organisedand unorganised segments, as also in terms of industrial enterprises run byhouseholds and non-households. The Central Excise Department, on the otherhand, distinguishes SSIs on the basis of annual turnover of the units.

Though employment and turnover are also used to define small industries, asthese indicators are implicit in the requirement for registration under theFactories Act, the core definition of SSIs in India remains based on investmentlimits – ‘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 includedunder the assistance programme of any of the Statutory Boards. In India, thelatest definition of a SSI is any unit with an upper limit on investment (in plantand machinery) of Rs one crore.

SSIs are usually distinguished from the large scale and medium scale industrieson the basis of size, capital resources and labour force in the units.

Example of SSIs- Food and Allied Industries, Wood and its Products, PaperProducts, 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 andPerambulators Miscellaneous Transport Equipment, Sports Goods, StationeryItems etc.

In Box 1 different segments of SSI have been defined in terms of investmentceilings as under:

Box 1: Definitions of Different Segments ofSSI in Terms of Investment Ceilings

(a) Small Scale Industries: An industrial undertaking in which theinvestment in fixed assets (plant and machinery) whether held onownership terms or on lease/hire purchase basis does not exceed Rs onecrore1 is graded as small scale industrial undertaking.

(b) Medium Enterprises: Those units which have investment in plant andmachinery above the SSI and up to Rs 10 crore.

(c) Ancillary Industrial Undertakings: An industrial undertaking, whichis engaged or proposed to be engaged in the manufacture or productionof parts, components, sub-assemblies, tooling or intermediates or therendering of services, is termed as ancillary undertaking. The ancillaryundertaking has to supply or render or propose to supply or render notless than 50 percent of its production or services, as the case may be, toone or more other industrial undertakings. The investment in plant andmachinery, whether held on ownership terms or on lease or on hirepurchase, should not exceed Rs one crore.

No small scale or ancillary industrial referred to above shall be subsidiaryof, or owned or controlled by any other industrial undertakings

(d) Tiny Enterprises: A unit is treated as tiny enterprise where investmentin plant and machinery does not exceed Rs 25 lakhs irrespective of thelocation of the unit.

(e) Women Entrepreneurs’ Enterprises: An SSI unit/industry relatedservices or business enterprise, managed by one or more womenentrepreneurs in proprietary concerns, or in which she/they individuallyor jointly have a share capital of not less than 51 percent as Partners/Share Holders/Directors of Private Ltd. Company/Members of Co-operative Society is treated as Women Entrepreneurs’ Enterprise.


(f) Small Scale (industry related) Service and Business Enterprise(SSSBEs): Enterprises rendering industry-related service/business withinvestment to Rs five lakhs in fixed assets, excluding land and buildingare called SSSBEs.

(g) Export Oriented Units (EOU): A unit with an obligation to export atleast 30 percent of its annual production by the end of third year ofcommencement of production and having investment ceiling in fixedassets – plant and machinery – up to Rs one crore is regarded as anEOU.

Source: http://ssi.nic.in


2

What is the role ofSmall Scale Industriesin the IndianEconomy?

The development of SSIs has been one of the major planks of India’seconomic development strategy since independence. Today, SSI sector

occupies a place of strategic importance in the Indian economic structure dueto its considerable contribution in terms of output, exports and employment.

By the end of March 2002, there were 3.4 million SSI units, accounting formore 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 19.2million persons, which is second only to agriculture (Planning Commission,2002). This contribution has emerged despite the sector being exposed tointensifying competition in Indian economy, which is in a state of transitionsince 1991.

The performance of the small-scale sector in terms of parameters like numberof units (both registered and unregistered), production, employment and exportsis provided in Table 1.

From 2000-01 to 2005-06, the SSI sector registered continuous growth in thenumber of units, production, employment and even exports (till 2002-2003).During this period, the average annual growth in the number of units was around4.1 percent, while employment grew by 4.4 percent annually. Further, the annualaverage growth in production was 12.4 and 8.1 percent respectively, at currentand constant prices.

www.hindubusinessline.com


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 percentOverall 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)

Atcurrentprices

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)

Atconstantprices1993-94

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

Atcurrentprices(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


3

What have been theimplications of policychanges for Small ScaleIndustries?

Since the beginning of 1990s, policy changes have been taking place atthree different levels – global, national and sectoral – which have

implications for the functioning and performance of SSI in India.

Reforms at the International LevelThe first and the foremost development is the ‘globalisation’ process at theinternational level. Globalisation commonly refers to free movement of factorinputs (both labour and capital) as well as output between countries.

However, the developments that have been taking place since the early 1990sare mostly with reference to the free movement of capital, commonly knownas FDI and free movements of goods, particularly from the developed todeveloping countries. The increase was more significant in developingcountries. This would have led to intensifying competition in the national aswell as international markets for small firms.

The formation of WTO in 1995 has only accelerated the process of scalingdown of tariff and non-tariff restrictions on imports. India, as a member of theWTO has substantially done away with its quantitative2 and non-quantitativerestrictions by April 01, 2001 (Ministry of Finance, 2002). As a result, industrywill have to face much stronger international competition (PlanningCommission, 2002).

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The process of removal of quantitative and non-quantitative restrictions acrosscountries has led to the free movement of goods between countries includingIndia. The reduction of restrictions on the movement of goods between countriesand the subsequent increase in world exports would have benefited multinationalcorporations (MNCs) much more than small enterprises.

Reforms at the National LevelThe reforms at the international level has to be viewed along with the processof economic reforms launched by the Government of India at the nationallevel. This has resulted in considerable freedom for enterprises – domestic aswell as foreign – to enter, expand or diversify their investments in the Indianindustry. India’s economic reforms have two major outcomes, among others:

(i) The growth of the public sector has come down considerably since 1991 ascompared to the earlier period in terms of not only investment and employmentbut also production. Public sector has been a major customer of SSI in India.The reduced growth of public sector undertakings (PSUs) would have resultedin reduced growth or even absolute reduction in public sector demand for SSIproducts in the 1990s. The relative role of the public sector as a distinct entitywill decline further in the course of the Tenth Five-Year Plan as the incrementalcapacities will be mainly in the private sector and the process of disinvestmentconverts many of the existing public sector enterprises from governmentcontrolled enterprises to non-government enterprises in which government mayhave a minority stake (Planning Commission, September 2001). This will mostprobably bring down public sector demand further for SSI products.

(ii) There has been a rapid increase in FDI inflow into diverse sectors of Indianindustry. FDI inflow increased from Rs 3514.3mn in 1991 to Rs 161344.4mnin 2002, at the rate of about 42 percent per annum (SIA, 2003). This wouldhave created not only threats through greater competition, particularly in non-durable3 consumer goods industries, but also opportunities for outsourcing indurable consumer goods and capital goods industries, to small enterprises.

Sectoral ReformsThe introduction of an exclusive policy for SSI, which laid emphasis onimparting more vitality and growth impetus to the sector, is the sectoraldimension of the major policy changes relevant to SSIs (Ministry of Industry,1991). The policy marked:


• 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 manufacturinghas 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 duringthe 1990s (RBI, 2003). The number of products reserved exclusively forpurchase from SSI by Directorate General of Supplies and Disposals for thepublic sector has been changed to 358 items from 409 items after deletingitems having common nomenclature and making the entries more generic aswell as addition of new items (DCSSI, 1999).

On the whole, the protection emphasis of India’s SSI policy has undergone dilutionsince 1991. Thus, policy changes occurred at the global, national and sectorallevels have radically changed the environment for the functioning of SSI in India.The cumulative impact of all these is a remarkable transformation of theeconomic environment in which SSI operates implying that the sector has nooption 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 forexclusive manufacture in the SSI sector de-reserved in 2004-05 tobring down the total number of reserved items to 506. Afterconsultation with stakeholders, more items are proposed to be de-reserved in 2005-06.

• As announced in the budget 2005-06, the turnover eligibility limitunder the General SSI Excise Exemption Scheme raised from Rsthree to four crore.

• With a view to integrating SMEs, facilitating their growth andenhancing their competitiveness (including measures to reduce therigours of the ‘Inspector Raj’ faced by the sector), the ‘Small andMedium Enterprises Development Bill 2005’ was introduced in theLok Sabha on May 12, 2005.

• A Policy Package for stepping up Credit to ‘Small and MediumEnterprises’ was announced on May 10, 2005.


• Under the ‘Credit Linked Capital Subsidy Scheme’ (CLCSS) fortechnology upgradation, amendments made with effect from September29, 2005, which, inter alia, raise ceiling on loans from Rs 40 lakh toRs one crore and the rate of subsidy from 12 to 15 percent.

• The Reserve Bank of India (RBI) formulated the scheme of ‘SmallEnterprises Financial Centres’ (SEFC) to encourage banks toestablish mechanisms for better coordination between their branchesand 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 toRs five crore in respect to 69 items reserved for manufacture in thesmall-scale sector and all items in the drugs and pharmaceuticalssector. 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 toencourage adequate credit flow, provide further incentives fortechnology upgradation, infrastructure and marketing facilities,capacity building of micro and small enterprises, and support towomen entrepreneurs.

Source: Economic Survey, 2005-2006


4

What is meant by a‘sick industry’ in theSmall Scale Industriessector?

In layperson term, any industry, which is not economically viable, may becalled as sick industry. The definition of a ‘sick industrial company’ (which

got amended in the year 1993) has been defined under the provisions of Section3(1)(o) of Sick Industrial Companies (Special Provisions) Act (SICA) whichmeans an industrial company (being a company registered for not less thanfive years) and having at the end of any financial year accumulated lossesequal to or exceeding its entire net worth.

Accordingly, sick industrial company means a company having fulfilled allthe 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 doesnot include an ancillary industrial undertaking or a small scale industrialundertaking as defined under IDRA.

ii. The company should be in an existence for at least five years since the dateof incorporation.

iii. The company should have an accumulated losses equal to or exceeding itsnet 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 whoseaccumulated losses is more than 50 percent or more of its peak net worthduring the immediately preceding four financial years.

The Financial Express


Box 3: Status of Sickness in SSI Sector

Data on closed SSI units is not maintained centrally. However, the RBIcompiles data on sick SSI units financed by the scheduled commercialbanks. According to RBI, the sickness in the SSIs has also declinedfrom 3,06,221 in 1998-99 to 2,49,630 in 2000-01, and further to1,77,336 in 2001-02. The status of these units from the year 1999 to2002 is given below:

The RBI data shows a declining trend in sickness, whereas there arereports of growing sickness. This data depicts declining trend becauseof the following: (i) data does not include closed units; (ii) decline isdue to prudential write off undertaken by the banks as a result while thesick units continue to exist; technically, they do not find mention in thebalance sheets; (iii) due to one time settlement scheme of RBI announcedon July 27, 2000 old dues worth Rs 1757 crores have been settled.

As at theend 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


5

What are the mainreasons of sickness inindustries and symptomsof becoming sick?

The reasons for industrial sickness may differ from industry to industry andwithin the industry from unit to unit. These can be categorised as follows:

1. Internal Reasons2. 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 companyand 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


• 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 symptomsof 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.


6

What is the differencebetween Sick IndustrialCompanies (SpecialProvisions) Act, 1985 andBoard for Industrial andFinancial Reconstruction?

In the wake of sickness in the country’s industrial climate prevailing in theeighties, the Government of India enacted a special legislation namely, the

Sick Industrial Companies (Special Provisions) Act, 1985 commonly knownas the SICA. The main objective of SICA is to determine sickness and expeditethe revival of potentially viable units or closure of unviable units. It was expectedthat by revival, idle investments in sick units will become productive and byclosure, the locked up investments in unviable units would get released forproductive use elsewhere.

Later on in January 1987, under the provisions of SICA, the Central Governmentestablished Board for Industrial and Financial Reconstruction (BIFR) (presentlysituated at New Delhi) consisting of experts for timely detection of sick andpotentially sick companies, speedy determination of remedial and othermeasures with respect to such companies and for expeditious implementationof these measures.

www.newsdata.com


7

What are the proceduresdetermining sickness of theindustries and steps taken torevive 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 daysfrom the date of finalisation of the duly audited accounts of the companyfor the financial year at the end of which the company has become sick.

ii) The BIFR will make such enquiry for determining whether the concernedcompany has become sick. Such enquiry can be made by BIFR upon thereceipt of information from the Board of Directors of the concernedcompany or from other agencies like Central Government, RBI, etc. orupon its own knowledge as to the financial position of the company.

iii) The BIFR may appoint any Operating Agency (any Public FinancialInstitution, State Level institution, scheduled bank or any other person asmay be specified by BIFR) to enquire into within 60 days and make areport.

iv) If the Board is satisfied after the completion of inquiry that the companyhas become sick, the BIFR has to make an order in writing whether it ispossible for the sick industrial company to make its net worth exceed theaccumulated losses within a reasonable time.

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v) If the Board is not satisfied after the completion of inquiry that it is notpractically possible to make its net worth exceed the accumulated losseswithin a reasonable time, may direct operating agency to prepare a schemefor such measures in relation to such company. The operating agency shallprepare a scheme, which may provide any or more of the followingmeasures:• 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 willperiodically monitor the sanctioned scheme.

vi) Considering all the relevant facts, if the BIFR is of the opinion that the sickindustrial company is not likely to make its net worth exceed the accumulatedlosses within a reasonable time, then it may form an opinion to wind up thecompany and forward its opinion to the concerned High Court.

The High Court on the opinion of the Board may order winding-up of the sickindustrial company by complying the provisions of the Companies Act, 1956.


8

Why was de-reservation ofSmall Scale Industries itemstaken up by the Government?

The policy of reservation of items for manufacturing in SSI was introducedin 1967, which received a proper statutory backing in 1984 through

amendment in Industries (Development and Regulation) Act, 1951. Initiallyonly 47 items were reserved in 1967, which went up to 873 in 1984. With theremoval of quantitative restrictions, goods from the outside world started marketedin India. This had raised basic questions about the role of SSI reservation.

Therefore, the rationale behind the policy of SSI reservation was studied bythe Expert Committee on Small Enterprises (the Abid Hussain Committee),which submitted its report in 1997. The Committee listed the followingarguments 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 dynamismin areas where they had to compete with larger units.

• Reservation in many areas has become irrelevant since a large number ofreserved products are not being produced by SSIs. It is also inconsistentwith the new trade policy that allows the items reserved for the SSI sectorto 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’sgrowth. It is, therefore, time to do away with SSI reservation and offer otherforms of promotional support.

The Hindu Business Line


In many labour intensive areas with great export opportunities, SSI reservationin India is handicapping the development of efficient economies of scale, whilefirms in countries such as China are able to compete effectively in theinternational and in the Indian market. The reservation denies the enterpriseseconomies of scale4 and access to technology, both of which are critical tobeing able to compete in a globalising world. For instance, taking the case of‘import competition and need to attain economies of scale’, SSIs sourcinginputs like steel locally and in small quantities must pay more – plus sufferstate and central taxation like excise duty, VAT etc; they will be out-competedby products made from lower-prices steel imports.

Hence, the process of phasing out of SSI reservation, in consultation withstakeholders, is constituting an important element of policies that fosterefficiency and productivity in India.

The total number of items on the reserved list has been coming down year afteryear, and in 2003-04 there were 675 items reserved for SSI units. Even atpresent, the policy of reservation for SSI does not bar large industries fromentering into production of items reserved, provided they agree to export 50percent of their production.

Box 4: Majority of Small Units Surveyeddo not Think Reservation Helps

Interestingly, an all India survey by the All India ManagementAssociation (AIMA) says, “the policy of reservations of specificindustries for SSIs, found limited support: only 29 percent if therespondents considered this beneficial”. Sign of just how poorlyprepared the SSI sector is can be gauged from the fact that (accordingto the survey) just 52 percent of units in the manufacturing sector wereable to exploit opportunities in the market – the figure for service sectorSSI units is marginally higher, at 56 percent. In other words, the sharprise in SSI service units has more to do with the overall market growingthan with their intrinsic abilities. The main reason cited by the units fornot able to do well are lack of marketing skills (70 percent), lack offinance (25 percent), inspector raj (13 percent), power shortages (14percent) and poor technical expertise (15 percent).


Box 5: More Jobs in SSIs Due to De-reservation: Study

Dispelling apprehensions that de-reservation hits employment growthin SSIs, a recent study by the Ministry of SSIs shows that employmentactually grew with de-reservation during 1998-1999 and 2003-04.

“Employment has grown at the rate of four percent per annum in theperiod”, said Secretary, SSI. The number of employed people grewfrom 220.55 to 237.36 lakh during the same period, the study reveals.

The Financial Express, April 01, 2005


Globalisation need not affect Indian SSI adversely only. It would havecreated beneficial opportunities as well. The removal of quantitative

restrictions and the reduction of import duties, particularly after the setting upof WTO in 1995, have opened up foreign markets to Indian SSI as much asIndian market to foreign goods.

Many efficient and export-oriented small firms may have received benefits outof this development. Such global opportunities should act as an incentive tosmall firms in India to enhance their competitiveness to penetrate the globalmarket. This could also be achieved by small firms becoming vendors or sub-contractors to foreign large-scale industries. The trend is outsourcing of suppliesby TNCs and they are always on the look out for firms who could supplyreliable and quality products.

Nevertheless, the umbrella of the WTO (which is one of the tools ofglobalisation) is also indirectly creating far-reaching implications for the SMEsector in India, with regard to their competitive ability and integration with theglobal markets. WTO cannot be exclusively blamed for weak performance ofany SSI.

Having right opportunities and creating right environment to avail theopportunities is easier said than done. In India, most of the problems arise due

9

Could WTO be heldresponsible for adverseimpact on the SmallScale Industries in theera of Liberalisationand Globalisation?

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to the unorganised nature of this sector, lack of data and information, use oflow technology (sometime obsolete technology) and poor infrastructure in thecountry. WTO would affect all types of SSI units whether producing for thedomestic market or for the international market.

The SSI sector which produces over 75000 items will have to be aware of thepatents of products including even the technological patents, trademarks,industrial designs etc. About 95 percent of the SSI units are in the nature oftiny micro enterprises and are weak. Many of them are one man shows. Theircapital 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 modernmanagement practices. Hence, SSI will need to be guided and supported sincethey are also employment generator for the economy.

Rest of the five percent of SSI units are in the category of modern SSIs andhave already established global links. But, there are also tiny when comparedto SME sector of developed countries. Thus, they have only relative and notabsolute advantage and they also need to be guided on WTO provisions andsafeguards available.


While SSIs typically blame inadequate marketing and finance facilitiesfor 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 ofSSI units in the period 1998-2002, this was primarily concentrated in northIndia where SSI output declined by 18.6 percent. By contrast, SSI output insouth India grew 25.8 percent.

A parallel survey by the Confederation of Indian Industry (CII), of primarilynon-SSI units, shows a fairly dramatic decline in the economy of northernstates in the last decade. While the average gross domestic product (GDP)growth for both northern and southern states was six percent per annum in theper-liberalisation decade of the 1980s, post reforms growth in the north fell tofive percent in 1993-99 while it went up to 7.2 in the south. As a result of thedeclining growth, it is natural that demand for, and therefore, supply of outputby SSI units would go the same way in north India.

While units in north India, according to the survey, are hamstrung by rigidlabour laws – 20 percent in Delhi units felt this way, as did 86 percent inRajasthan. And Corruption – from 20 percent in Delhi to 100 percent in UttarPradesh – the south has the most export-oriented units – 11.07 in each stateversus 4.97 for the north – and even the most multinational laboratories – 24 inall southern states versus five in the north. The average number of inspectionvisits by official was higher in the north – 9.7 visits in 1999 in Uttar Pradesh

10

What is State-wise statusof Small Scale Industriesin the post domesticeconomic reforms in theera of Globalisation andLiberalisation?

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compared with 6.1 in Andhra and Tamil Nadu and 6.2 in Maharashtra andGujarat. (Business Standard, September 02, 2005)

With the atmosphere for growth the most conducive in southern India, theAIMA survey shows, SSI units have been the most pro-active in terms of changeas well. Southern units head the league when it comes to increasing their salesstaff or re-training them, and are second – after the west – in making newarrangements for capital; after the east, southern units are also the mostaggressive 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 positivefeature since they are generally strapped for cash.

According to the survey, 58.6 percent of southern SSI units were able to availof 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 unitsclaimed they were able to exploit new market opportunities. Southern unitsalso scored the highest, except for the east where the usual caveats apply, interms of confidence to face the future: 42 percent of the units felt they wouldsurvive 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 ofrising costs (heavy costs of services in the city, combined with fivepercent octroi and other duties and the rising of cost of living), nearly70-80 percent of the units in area like Marol, Dombivili-Ambernathand Thane’s Wagle Estate have closed down. Other issues includemilitant labour unions and frequent disruption of power supply. Mostowners who lost business have sold out their units and moved intotrading.

Karnataka : The IT capital of India ignores the SSI sector. In the lastfive years, the Karnataka government attracted over Rs 60,000 croreinvestment in the large and medium industry segment, but could notpay Rs 325 crore outstanding subsidy for SSI, which resulted in closureof over 40,000 units.

Currently, Karnataka has around three lakh SSI providing employmentto over 18 lakh individuals. This is the only sector where over 30 percentof the workers are women. In fact, Karnataka was the first state in the


country to embark on setting up a dedicated area for SSI in Peenya onthe outskirts of Bangalore, way back in the 70s. Known as the Asia’sbiggest industrial area today, Peenya reflects the badly managed stateof SSIs in the state.

P S Srikantadatta, Secretary, Peenya Industrial Association says, “Thisarea does not have the voting population. Whoever gets elected looksat residential areas because of their vote banks. Even the governmenthas not provided any monetary help to improve infrastructure in thearea”. He says that after taking up the matter with the central government,the centre, along with the state government, is providing over Rs 25crore 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 adifficult phase. Changing markets and demand, poor availability of rawmaterials and their fluctuating prices and stringent pollution norms aretaking a heavy toll on many units.

One factor that has precipitated the present crisis is the pollution controlnorms. These norms have forced the entire cluster to move away fromtheir birthplace to other locations despite taking measures two yearsback to curb air pollution created by smoke and dust particles releasedfrom the foundry-installing devises. Following the decontrol of pig ironproduction after 1990, a number of pig iron manufacturing units cameup in the private sector. This alleviated the problem of scarcity of pigiron temporarily. A new development in the marketing of this item hasput the industry in trouble again.

The manufacturers, both in the public and private sectors, began to selltheir produce in the open market at prices determined by the internationaldemand and supply position. This gave birth to a section ofintermediaries. Gradually, these become the sole suppliers of pig iron.These middlemen have increased prices every week during the pastone year – from Rs 8,000 a tonne to Rs 17,000 a tonne – on the plea ofstrong international prices. This led to the foundries defaulting in theirsupply commitments. In particular exports were hurt very badly.

However, the state is hopeful that they will be able to face all thechallenges to come once the foundry park in the new location iscompleted, fully equipped with modern machinery and technologies.


Andhra Pradesh: There are 1,45,499 registered SSI units with a totalinvestment of Rs 4,717.7 crore and about 13,10,071 workers, accordingto 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 technologyand products that the market demands.

Add to that, payment delays by large industries have affected thefinancials of the SSIs. Moreover, with many of the large PSUs shut orcutting down on production, SSIs in Andhra Pradesh are either out ofbusiness or living on oxygen. According to a sickness analysis reportamong the small-scale industrial units initiated by the Andhra Pradeshgovernment, all sick units, as defined by Kohli Committee, are noteligible for revival. The report says: “…that only 0.5 to 1 percent ofthe declared number of sick SSI units could be considered forrehabilitation considering the changed market trends”. As pergovernment records, there are over 10,000 SSI units registered as sickin the state.

However, the report had pointed out that due to the changed marketconditions, about 100 of them might be qualified to get the rehabilitationpackage. In fact, most of the units registered as sick, are physicallyextinct, says industry sources. The Andhra Pradesh government hasdecided to establish ‘industrial clinics’ in each of the banks. TheIndustrial and Investment Promotion Policy of Andhra Pradesh 2005-10 has also proposed revival package for the SSIs which includesincentives.

Source: SMEs: Ground Report, appeared in various versions of the Financial Express,

2005


11

What measures can betaken to increase thecompetitiveness of IndianSmall Scale Industries?

Before addressing the question, it must be understood that Indian smallenterprises 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. Theirinventories are low and have weathered many adverse situations successfully.Indian SMEs also have advantages of local raw material and world class skillbesides cheap labour which could be harnessed to the advantage. At the sametime, it is essential to note vulnerability in the context of emerging globalenvironment.

According to a paper by United Nations Industrial Development Organisation(UNIDO)-South Asia, a major problem before the SMEs of India is that as faras productivity and competitiveness are concerned their performance is poor.The challenge lies in increasing the technological competence of the SMEsector, with regard to its export basket. The Indian SME sector needs to moveup to higher value added outputs and attract more investment in terms of FDI.The SME sector requires better facilities in terms of infrastructure, provisionof raw materials and establishing linkages with machinery suppliers and creditfacilities.

In order to become competitive, SMEs will need to link up with global valuechains, which, in turn, will require greater understanding of global structures,i.e. relationships with various key actors in the value chain and greater flexibilityto respond to external factors.

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Globalisation has changed the context and basis for policy and programmesfor SMEs. Protection is not needed as it is no more the case that ‘big will eatthe small’ but rather the ‘faster will eat the slower’. There is a need to adopt asectoral and sub-sectoral policy approach at the national as well as at the state-levels. With the increasing business complexities straightjacketing SMEs intourban-rural, modern-traditional or tiny-non-tiny is no longer of any economicuse. Policy must focus on certain key sectors where it wants to develop anedge through its core competency or niche value in the world market.

The informal service provider finds little mention in the government policyeven though an effective services sector has emerged in the SSIs. Small firmsare their own best service providers as they remain untouched by public supportproviders. Country needs to build regional and local capacities. Supportrequirements of small firms vary considerably with differing regional availabilityof infrastructure, local resources, regional markets and level of available privateservices.

States need to cater to sectors and sub-sectors depending on their regionalneeds. There is also a need for development of entrepreneur-friendly taxationpolicies by the government particularly with respect to excise duty, value-addedtax (VAT) and abolition of octroi tax.


Endnotes

1 In respect of hand tools and hosiery/knitware sector corresponding to other 41items, investment limit has been raised from Rs one to five crore. Similarly,investment limit for Pharmaceutical & Stationery sectors corresponding to 23items has been raised from Rs 1 to 5 crore. This permits modernisation andupgradation of technology and quality.

2 Quantitative restrictions (QRs) are specific limits imposed by countries on thequantity or value of goods that can be imported or exported. QRs can be in theform 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 prohibitinternational trade.

3 Non-durable goods are tangible goods that are consumed fast normally in one orfew uses and are purchased frequently. Examples of non-durable goods includesoap, deodorants. Razor blades, batteries, pens, salt, sugar, beer, cigarettes,newspapers, toothpastes, napkins, over the counter medicines and many foodsproducts such as candy, cookies and soft drinks. Durable goods are tangiblegoods that normally survive long term uses and are not purchased as frequently.Examples include clothing, electronics and major alliances (e.g. stereo soundsystem, television or radio sets, refrigerator, dishwashers, cameras), furnitureand automobiles.

4 A phenomenon which encourages the production of larger volumes of a commodityto reduce its unit cost by distributing fixed costs over a greater quantity.


‘CUTS’ PUBLICATIONS

TRADE AND DEVELOPMENT

Monographs

1. Social Clause as an Element of the WTO ProcessThe central question is whether poor labour standards result in comparative advantagefor a country or not. The document analyses the political economy of the debate ontrade and labour standards. (pp 14, #9804, Rs 50/US$10, ISBN: 81-87222-10-7)

2. Is Trade Liberalisation Sustainable over Time?Economic policy is not an easy area for either the laity or social activist to comprehend.To understand the process of reforms, Dr. Kalyan Raipuria, Adviser, Ministry ofCommerce, Government of India, wrote a reader-friendly guide by using a question/answer format. (pp 29, #9805, Rs 50/US$10, ISBN: 81-87222-11-5)

3. Globalisation, Economic Liberalisation and the Indian Informal Sector – ARoadmap for AdvocacyCUTS, with the support of Oxfam GB in India, had undertaken a project on globalisationand the Indian informal sector. The selected sectors were non-timber forest products,handloom and handicraft. The rationale was based on the premise that globalisationand economic liberalisation can result in potential gains, even for the poor, but there isthe need for safety measures as well. This is mainly because unhindered globalisationcan lead to lopsided growth, where some sectors may prosper, leaving the vulnerableones lagging behind. (pp 42, #0401, Rs 50/US$10, ISBN: 81-8257-017-4)

4. Trade Policy making in India – The reality below the water lineThis paper discusses and concludes the issues, in broad terms, that India struggles withtrade policy making, essentially because domestic and international thinking ondevelopment and economic growth is seriously out of alignment, and that there are fewimmediate prospects of this changing, for a variety of entirely domestic political reasons.(pp 51, #0415, Rs 100/US$10, ISBN: 81-8257-031-X)

5. Globalisation and India – Myths and Realities, #1 (English & Hindi)This monograph, the first in our series is an attempt to examine the myths and realitiesso as to address some common fallacies about globalisation and raise peoples’ awarenesson the potential benefits globalisation has to offer.(English: pp 32, #0105, Rs 50/US$10, ISBN: 81-87222-44-1);(Hindi: pp 32, #0201, Rs 50, ISBN: 81-87222-53-0)

6. ABC of the WTO, #2This monograph is an attempt to inform the layperson about the WTO in a simplequestion-answer format. It is the second in our series covering WTO related issues andtheir implications for India. Its aim is to create an informed society through better


public knowledge, and thus enhance transparency and accountability in the system ofeconomic governance. (pp 25, #0213, Rs 50/US$10, ISBN 81-87222-59-X)

7. ABC of FDI, #3This monograph is the third in the series of “Globalisation and India – Myths andRealities”, launched by CUTS in September 2001. “How is FDI defined?” “What doesit constitute?” “Does it increase jobs, exports and economic growth?” Or, “Does itdrive out domestic investment or enhance it?” are some of the topics addressed to in alayman’s language in this monograph.(pp 48, #0306, Rs 50/US$10, ISBN: 81-87222-77-8)

8. WTO Agreement on Agriculture: Frequently Asked Questions, #4As a befitting reply to the overwhelming response to our earlier three monographs, wedecided to come out with a monograph on WTO Agreement on Agriculture in a simpleQ&A format. This is the fourth one in our series of monographs on Globalisation andIndia – Myths and Realities, started in September 2001. This monograph of CUTS-CITEE (CUTS Centre for International Trade, Economics & Environment) is meant toinform people on the basics of the WTO Agreement on Agriculture and its likely impacton India. (pp 48, #0314, Rs 50/US$10, ISBN: 81-87222-86-7)

9. ABC of TRIPs, #5This booklet intends to explain in a simple language the Trade-related IntellectualProperty Rights (TRIPs) Agreement (TRIPs), which came along with the WTO in1995. TRIPs deals with patents, copyrights, trademarks, etc. and continues to be oneof the most controversial issues in the international trading system. This monographgives a brief history of the agreement and addresses important issues such as lifepatenting, traditional knowledge and transfer of technology, among others.(pp 38, Rs 50/US$10, #0407, ISBN: 81-8257-026-3)

10. ABC of GATS, #6The aim of the General Agreement on Trade in Services (GATS) is to gradually removebarriers to trade in services and open up services to international competition. Thismonograph is an attempt to educate the reader with the basic issues concerning trade inservices, as under GATS. The aim of this monograph is to explain in a simple languagethe structure and implications of the GATS agreement, especially for developingcountries. (pp 31, #0416, Rs 50/US$10, ISBN 81-8257-032-8)

11. WTO Agreement on Textiles and Clothing – Frequently Asked Questions, #7The WTO Agreement on Textiles and Clothing (ATC) is a complex one. This monographattempts to address some of the basic questions and concerns relating to textiles andclothing. The aim is to equip the reader to understand the fundamentals of and underlyingissues pertaining to trade in textiles and clothing.(pp 34, #0419, Rs 50/US$10, ISBN 81-8257-035-2)

CUTS Centre for International Trade, Economics & EnvironmentD-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India

Ph: 91-141-228 2821-3, Fx: 91-141-228 2485Email: [email protected] Website: www.cuts-international.org

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