During the era of planned development, the entire stress was on production of goods and services for meeting the country’s requirements and the exports were confined to incidental surpluses or imbalances in supply and demand. The entire philosophy will now have to undergo a sea-change.

The Small Scale Industries (SSI) sector in India has, over the last five decades, played a significant part in building a strong and stable national economy. Today, it is producing more than 7,500 products accounting for almost 40 per cent of the total production of the manufacturing sector and 35 per cent of the total exports. It also acts as a nursery for promoting entrepreneurial talent and as a catalyser of industrial growth through a wide network of more than three million units in the country, accounting for about 95 per cent of the total industrial units in the country.  It is one of the largest employers in the country, providing direct employment to an estimated over 17 million persons and thus meeting key objectives of providing employment, facilitating regional dispersal of industrial units and earning foreign exchange.  The performance of the small scale sector during the decade of 1990s is given in Table -1. 

The SSI sector in India is defined in terms of limits on investment in plant and machinery, excluding investment in land and buildings, testing equipment, antipollution measures etc. This limit has been gradually increased over the years, primarily to take into account the inflation and today it stands at Rs. 1 crore for small scale sector and Rs. 2.5 lakh for the tiny sector. 

The small scale sector can broadly be divided into two sub-sectors : 

(i)  Modern small scale industries 
(ii) Traditional industries 

The modern small scale sector is akin to the large and medium industries  sector  in  terms  of technology in use, production facilities, labour intensity, capital intensity, etc.  while the traditional industries include segments like  handlooms, khadi & village industries, handicrafts, sericulture, coir, etc.). These are generally artisan based, located mostly in rural or semi-urban areas, with only nominal investment in plant and machinery. 

The SSI sector has been receiving special attention from the policy-makers in addressing its requirements of credit, marketing, technology, entrepreneurship development, fiscal and infrastructural support etc. It enjoys the status of priority sector for seeking financial assistance. Banks are required to provide 40 percent of net bank credit to priority sector including agriculture, SSI and service  sectors. Of the priority sector credit earmarked for the SSI sector, 40 per cent is required to be extended for units having an investment in plant and machinery up to Rs. 5 lakh and 20 per cent for units having an investment in between Rs. 5 lakh and Rs. 2.5 lakh. Borrowers belonging  to the lower end of these categories have had the benefit of getting loans at concessional rates of interest. However, with the onset of banking sector reforms and deregulation of interest rates, availability of concessional finance to the sector is slowly drying up. 

As is well-known, until 1991, the Indian economy was practically isolated from the world economy, with stress being on indigenous production of manufactured goods and the domestic industries being protected from both Internal and external competition. The protection from internal competition was through a system of licensing and controls and that from external competition through restrictions on imports as well as high tariff barriers. In this background, the entire industrial sector became inward-looking, with hardly any attention being paid to exports. While building up a highly diversified industrial structure, it resulted in inadequate attention to upgradation of products and process technologies, R & D and cost reduction, resulting in lack of competitiveness. This was responsible for a gradual reduction in India’s share of world trade from almost 2 per cent at the time of independence to about 0.6 per cent in 1991. 

Good Response 

Since 1991, the economy is gradually being opened up and integrated with the global economy and the stress is on qualitative upgradation of the industrial structure and improving international competitiveness of manufactured goods and services. The small scale sector has also responded well to the challenge of opening up of the economy and in fact, its rate of growth has generally been two to three percentage points higher than the industrial sector as a whole. The government has been taking measures to promote growth and development of small scale enterprises. This includes provision of infrastructural facilities, reservation of products for exclusive manufacture in the small scale sector, preference in the allocation of credit through inclusion in priority sector for lending purposes, excise duty concessions, provision of raw materials, marketing support, facilities for technology upgradation etc. All policies meant to give a boost to the exports are also applicable, to the small scale sector.  These include: 

• Free import of capital goods/raw materials and other essential inputs, and in certain cases duty free or with concessional rate of custom duty, so as to ensure higher production for exports. 
• With a view to making Indian products competitive in the world market, a large number of incentives have been provided to the exporters from time to time. Such incentives include refund of duties paid on raw materials used in export production by a system of duty draw-back, pre & post-shipment credit to the exporters at concessional rate of interest, etc. 
• Export policy of the government has remained liberal as there are hardly any restrictions on exports of item from small scale sectors. Export procedures have been simplified from time to time so as to promote exports from all the small scale sector. The efforts of the government have always been to regulate and simplify procedures so as to create a congenial environment for the exporting community. 

Before considering measures for increasing exports of SME, it would be useful lo have a close look at the status of the SMEs and their present exports.  The small scale sector in India produces a wide range of products from the most mundane to very sophisticated ones, numbering about 7,500.  Out of these, 812 products are reserved for exclusive manufacture in the small scale sector. It is contributing more than 50 percent of  the  total  exports  of  the manufacturing sector and about 35 per cent of the total export of the country. The contribution of the SSI sector in India’s total exports during the last five decades is given in Table-II. 

The total exports by major product groups and the share of SSI sector during 1992-93 and 1997-98 are shown in Table-III. While these figures look impressive, there are some notable weaknesses. The SSI sector contributes about 40 per cent of the gross value of total production of the manufacturing sector, but the exports of SSI sector account for less than 10 per cent of its production. More important, just five items namely, ready made goods, leather products, basic chemicals, engineering goods and marine products and processed foods constitute about 86 per cent of the total exports. Also, in practically all sectors, the exports are in the lowest value segments i.e. the unit value realisation is among the lowest in the world.  Besides, the exports are mostly limited to a few  established markets/countries. 

India is a member of the WTO and is bound by its regulations. This poses a number of threats as well opportunities e.g. with gradual quantitative restrictions on imports and a progressive reduction in import duties, the indigenous manufacturers will have to compete with imports even in the domestic market. On the other hand, this would open up many new markets for exports where the country can develop competitive advantage. 

As mentioned above, during the era of planned development, the entire stress was on production of goods and services for meeting the country’s requirements and the exports were confined to incidental surpluses or imbalances in supply and demand. The entire philosophy will now have to undergo a sea-change,  with indigenous  manufacture  being confined to areas where the country can build up competitive advantage. This would call for achieving economies of scale, continual upgradation of products  as  well  as  process technologies, increased attention to R & D and cost reduction i.e. achieving international competitiveness. 

It would be imperative to look beyond the country’s borders and build up significant export capacities, while utilising imported raw materials and components where the economies of scale and local resource endowments make their domestic production uncompetitive. This would require a complete change of the mindset. 

One of the major weaknesses of the industrial structure in the country is that the linkages between the large scale sector and the small scale sector are extremely weak.  These would need to be cultivated and developed so that the large scale sector can provide the necessary inputs to the small scale sector in terms of assured and timely supply of quality raw materials, technology, marketing support, etc. Such inter-linkages would prove mutually beneficial as the two sectors play a complementary role. 

The country possesses considerable richness of skills as is evident from the substantial exports of handicrafts, handlooms, sericulture, etc. It also has a highly skilled and trained manpower which gives it a major advantage in the knowledge based industries like software.  These, coupled with the advantage of low wage levels, offer a big potential and are clearly areas where the country can expect a sustained and high growth rate in the years to come. 

There are many areas in which the small scale sector would need government assistance if it is to play its role and make its due contribution. The first and foremost is the availability of infrastructure like power, water, telecommunication facilities, tool rooms, common testing facilities, common effluent treatment plants, human resource development, etc.  Besides, the SSI sector would need to be assisted in making available information on state-of-the-art technologies as well as continuous marketing intelligence. 

To sum up, there is a vast potential to increase exports from the small scale sector but this would require well directed and concerted efforts on the part of the government, the industry associations and the entrepreneurs to overcome the major problem and constraints being faced and capitalise on the inherent strengths which the country possesses in plenty. There no is doubt that this is well within our capability and we can look forward to a sustained and very healthy growth in exports from the small scale sector in the years to come.

Adviser, Planning Commission 
(By courtesy of YOJANA)