The Hindu : Small industry faces big problems

Online edition of India's National Newspaper
Wednesday, Feb 25, 2004

Opinion

Opinion - Leader Page Articles

Small industry faces big problems

By R. Gopalakrishnan

The major political parties and alliances shouldspell out their stand on policy issues relatingto the small scale sector.

THE UNION Finance Minister, Jaswant Singh, declared on January 9 that the Government would "operationalise" within four weeks a fund with an initial corpus of Rs.10,000 crores over two years to finance small and medium enterprises (SMEs). Many eyebrows were raised, given the none-too-happy experience of the small and tiny industries sectors in getting their due share of credit.

More surprising is that the fund is supposed to operate in such a manner that the cost of finance for the "ultimate borrower" is two percentage points below the prime lending rate (PLR) — the rate at which banks lend to their most favoured customers. The less-than-enthusiastic welcome that greeted the Finance Minister's announcement is understandable, considering that banks are known to have been sitting on a pile of cash and investing in risk-free Government securities well above the mandatory minimum, while avoiding financial support to the small entrepreneur.

It is possible that when the proposed Rs. 10,000-crore fund is operationalised by the Small Industries Development Bank of India (SIDBI), the apparent contradiction will be solved. This is because the concept of "SMEs" subsumes in itself what are now called small and tiny sector units (the former with investment in plant and machinery not exceeding Rs. 1 crore and the latter Rs. 25 lakhs) and "medium" enterprises, which are larger than the SSI/tiny units but are not officially defined. The January 9 announcement indicates as much by saying that one reason for launching the fund is the absence of "SIDBI coverage" for medium industries.

Going ahead with a restructured financial support scheme without a clear stance on major pending issues on SSI and tiny sector development is not the best way to inspire confidence. Irrespective of whether SSIs and tiny industries continue to be neglected in the matter of financial assistance in future under a common umbrella called "SMEs," the declaration of intent by an outgoing government in respect of the fund is a proper occasion to look at issues that the entire political spectrum should address ahead of the general elections in view of the large role this sector plays in employment creation.

It is only fair to demand that contestants in the poll arena, instead of taking cover behind expressions such as "commitment to development of entrepreneurship/small and tiny industries," (viz, objectives, not policies), should spell out in their manifestoes where they stand on broad policy issues. These include whether the small sector should be re-defined in terms of turnover and employment and not classified on the basis of investment in plant and machinery as prevalent now, whether they support or oppose phased de-reservation of products as has been happening, and whether they would bring in a single, simplified piece of legislation along the lines suggested by the Second National Commission on Labour to replace the tiny sector's (including service enterprises') obligations under as many as 15 laws.

The model bill suggested by the Commission for businesses with up to 19 employees is likely to be acceptable to most stakeholders in this segment. It will indeed be a progressive step towards liberation from bureaucratic tyranny, except in the case of labour, because it would leave workers faced with hire-and-fire at one month's notice with some compensation.

This provision, apart from becoming a trigger for industrial unrest at the grassroots, is likely to encourage the enterprises to continue to incur the cost of training manpower that will end up serving only the large sector on re-employment on better terms.

Giving statutory recognition to hire-and-fire in any sector is a soft option. It would minimise what little chances there are of the owners/managements learning human resource development and creation and retention of skilled and highly motivated workforce — elements becoming increasingly relevant to survival in a competitive environment.

The present Government, despite commanding a majority in the Lok Sabha, has never come out with its own stance on this bill, as also on the Small Enterprise Development Bill drafted and revised (according to some SSI leaders, `diluted') by a committee headed by a former chief of the Administrative Staff College of India.

Also, major political parties/alliances should spell out in broad outlines their approach to retention/modification of the fiscal incentive regime for the SSI/tiny sectors, autonomy for States in areas of SSI legislation, Limited Partnership Act, exit policy and use of globally allowed types of support to SMEs.

Even in respect of such a simple but important an issue as starting a mechanism to facilitate SSIs to undertake "WTO audits" or consultancy, crucial for deciding business strategy, nothing has happened in years beyond organisation of seminars.

The concept of private-public partnership (PPP) in nourishing entrepreneurship remains by and large on paper. Vagueness over broad policy issues is not likely to make things easy for the SSI sector when a new Government takes office and new norms are legislated.

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