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Thursday, April 12, 2001

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Feel good factor absent among SSIs

WE ARE, with increasing frequency and tempo, being bamboozled and bombarded with words like `maha', jumbo, bumper, super and the like. Gone are the days when small used to be beautiful and useful. Successive governments, even till last year, used to go out of their way to encourage small scale players, be it investors or entrepreneurs. This attitude is slowly but surely witnessing a seachange, witness the Central budget 2001-02. One connotation of the world `small' is `of little importance' as it seems that the powers that be have taken this meaning to heart, while dealing with the small scale sector (SSS) or small scale industries (SSI).

It is now well-known that this fundamental change, that is, to leave SSIs to their own devices, was caused by the WTO compulsions and/or hectic lobbying by major players in the field. It is difficult to comprehend what made the Government to cave in, when even as late as September 2000, it announced a reduction in basic customs duty on certain items used by SSIs. The Economic Survey for 1999-2000 had this to say. ``Our SSIs have contributed greatly to the growth of our economy, employment and exports. But to meet the challenges of the future, some of the existing policies need to be reframed to emphasise positive promotional programmes of credit supply, technological improvement and marketing assistance, while phasing out inefficient protectionist policies". Alas, the budget belies these protestations!

Coming to the proposals in the budget, 14 items relating to leather goods, shoes and toys have been dereserved (termed as 14 key export industries by Mr. Prem Shankar Jha). This step has been denounced as `a retrograde step' by the SSIs and hailed as overdue by the major players. That dereservation was on the cards was well-known for some months now. In fact, a proposal was being bandied about for a policy prescription for complete dereservation with April 1, 2001 as deadline, in the context of lifting of quantitative restrictions on the remaining 715 items that would result in free flow of imports, seriously eroding the domestic competitive edge, unless the items reserved for SSIs were permitted to be produced by others. It was recommended that it would be better to dereserve the SSI sector instead of allowing it to be squashed in which case Indian presence in the production of these items would disappear. In this context, it is difficult to understand why the Government developed cold feet and did not dereserve the entire sector in one go. Is it that the Government wants to feel its way slowly, study the consequences and reactions and then come out with more drastic announcements at a more congenial time? More woes for SSIs!

It is a sad fact that many small units (an estimate puts it at 1.5 million), are closed. The reasons attributed are many - lack of orders, shortage of funds, estimates going awry, managerial incompetence, labour intransigence and the like. Dumping of cheaper goods, especially from China, seems to have added to their trouble. And gradual dereservation coupled with complete integration of the Indian market with the world's will further aggravate an already unhealthy situation. There is, however, a glimmer of hope in some quarters. That the budget is positive towards both automobile/ auto components and food processing sectors, which are closely linked to SSIs and this augurs well for small entrepreneurs.

A second proposal in the budget that has agitated SSIs is the withdrawal of excise exemption for some items. To quote the Finance Minister, ``Products of SSI units are exempt from excise duty up to Rs. 1 crore. This exemption is intended to provide fiscal support to the genuinely small producers. I propose to withdraw this exemption in respect of the following items, in which misuse of the exemption is more than likely - cotton yarn, ball or roller bearings, arms and ammunition for private use".

The powerful associations of mill owners had lobbied hard to get this exemption withdrawn. They had argued that ``small scale units have sprung up with absolutely no inherent techno-economic advantage after excise relief was given to them". The modus operandi is either by fragmenting existing mills or creating new entities with old second-hand machinery or under-invoiced reasonably old machinery, as it is impossible to create a viable spinning mill in small scale". They also confessed that ``pressed against the wall due to unequal competition and huge benefits given to an unviable sector of the textile industry, many large scale mills have started evading excise duty either by....".

As expected the big players have warmly welcomed the budget proposal - ``happy that the long pending plea for withdrawing excise exemption for small scale units has been conceded thereby removing the distortion in fiscal structure", ``a major factor for tilting the playing field in favour of duty evaders had at last been withdrawn", ``a very positive indication of a new realism in government policies overriding ideological considerations". On the other hand, vehement protests have been made by the affected units which have stated that this ``would seriously hurt the high employment opportunities for rural people, especially women". It is relevant to note here that about 35 million workers are employed in SSIs. The question arises: ``Is the Government not strong enough to take action against the offending units? Is it not armed with enough authority and men to weed out the black sheep? Should the entire segment be penalised for the aberrations of a few? Or is it the Government's view that all the units were evaders of duty?

It is also the right time for the bigger units in the organised sector which have evaded excise duty, to own up and pay the dues inclusive of penalties.

Finally it is hoped that the budget proposal to bring the Small Industries Development Bank of India (SIDBI) under the tax net would not affect the flow of funds to SSIs. It may be recalled that the Government's policy statement on SSIs in July 1990 had highlighted the important role assigned to SIDBI to ensure ``adequate and timely flow of credit to SSIs". The Government cannot be faulted for its proposal to withdraw the tax shield as SIDBI's earnings have leapfrogged. According to SIDBI's own estimates, the impact could be around Rs. 100 crores based on current profit figures. With SIDBI enjoying good health, it should be in a position to continue with its ``series of schemes providing soft assistance".

The `feel good' factor is definitely absent among SSI units.

S. Balakrishnan

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