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SME package: lingering lacunae

The basic issue is a lack of vision of the Government on the role of a vital sub-sector of the economy

IS REVIVAL IN SIGHT?: A view of some of the small-scale units in Mysore.

THE FINANCE Minister has unveiled a major package for the small and medium enterprise (SME) sector. The much awaited package aims at doubling the flow of bank credit to this sector in five years, thereby reducing their debt burden. The Finance Minister's initiatives, along with the series of policy packages which he announced during the last couple of months, are commendable. But practitioners in this area will welcome it only with some `ifs' and `buts'.

The policy package also envisages a new initiative by the central bank. The Reserve Bank of India will issue guidelines for revamping the debts of viable SMEs on the lines of the corporate debt restructuring (CDR) mechanism, applicable to big companies. The package provides for a one-time settlement (OTS) scheme during the current financial year for defaulting SSI units which have NPA (non-performing assets) accounts in banks.

Similar packages were announced by the former Prime Minister, Vajpayee, as also by the Minister for SSI, Mahavir Prasad. However, for such packages to have a real impact, there needs to be co-ordination within the Union Government. The new policy package does not even make a reference to a rather parallel initiative being taken by the Ministry of SSI — the Small and Medium Enterprises Development Bill, 2005, tabled in the Lok Sabha on May 12. It is important to note that the SME Development Bill is expected to be passed in the current session of Parliament.

Lack of vision

A basic issue in this context relates to the vision of the government for such a vital sub-sector of the economy. Traditionally, the role of small industry has been perceived in terms of employment generation, regional balance in development as also contribution to economic development. While several committees have looked into these aspects, especially against the various government programmes, the SME Development Bill and the Finance Minster's policy package lay significant emphasis on the growth contribution of small industry. The preamble of the SSI Bill clearly focusses on the growth and competitiveness aspects.

However, the question is something different. Have we entered a stage of "pre-conditions" for such a policy shift? A careful reading of the SME Development Bill does not indicate any such change in approach by the Government. The introduction of the debt restructuring mechanism, as also credit rating, will be useful to a small section of SSIs, provided the pre-conditions are fulfilled.

The June 2004 report of the Third All India Census of SSIs has brought out an alarming picture of the sector. The report highlights the poor performance of SSIs in some crucial aspects. Units maintaining account books constitute only 9.53 per cent. Only 60 per cent of the units were using electric power. The employment capability, expressed in terms of employment per unit, is only 2.37.

Employment in the registered SSI sector is estimated at 61.63 lakh, indicating an average employment of 4.48 persons per unit. Besides, 37.47 per cent of the total employment was in rural areas. The situation, as it prevailed in 2001-02, needs to be compared with the much higher level of employment in 1987-88, as documented by the Second Census (6.29 persons).

Service units on the rise

There is enough evidence to suggest that the globalisation era has led to the closure of a large number of units. The percentage of working units declined from 62.75 per cent in 1987-88 to 60.77 per cent in 2001-02. Another important finding of the Census is a significant move towards service industries from manufacturing activities. The decline in the share of SSIs, from 96.24 per cent to 65.55 per cent, and increase in SSBEs (small service business enterprises) from 3.24 per cent to 34.45 per cent, indicate the decline of autonomous enterprises. While nurturing autonomous enterprises was the policy thrust during the pre-liberalisation period, the recent growth experience demands a major support system for SMEs. The role of individual units needs a thorough investigation.

The per-unit fixed investment has gone up from Rs. 1.60 lakhs in the Second Census to Rs. 6.68 lakhs. While this, to some extent, indicates capital-intensity of production, it also implies a decline in the number of labour-intensive units. The picture in terms of sources of credit itself indicates the significant informal nature of firms.

The number of units having outstanding loans with institutional sources was only 4.55 per cent, which indicates the need for a much greater formalisation of production, in order to overcome the challenges thrown up by globalisation.

Despite all these constraints, per-unit investment, employment-investment ratio, and output-labour ratio, are positive factors which favour small industry.

The findings of the Census are, in fact, a result of the failure of downstream activities which ensure effective institutional mechanisms, and ensuring the flow of good quality `real services' for the SMEs. The Government itself admits the failure of the DIC and SISI network. In such circumstances, on lines of the latest international thinking, there should be initiatives for promotion of alternative structures which ensure the flow of `real services'.

The Finance Minister has rightly emphasised the importance of technology upgradation, and the primacy of manufacturing. While these objectives are commendable, one needs to worry about the operational methods.

There is a Manufacturing Competitiveness Council under the chairmanship of V. Krishnamoorthy. What are its interim findings on the SME sector? An articulation based on such findings would have strengthened the package.

It is, of course, useful to identify a sub-sector (within the SME sector) having an identified growth potential. But the question then is `What is our sub-sectoral understanding? Even in trade-sensitive sub-sectors, we are not able to say anything concrete about the SME contribution. What we have is some general all-purpose data available with the DGFT. While in the European Union and the U.S., they talk voluminously on innovation (which is a comprehensive concept), we still think in terms of `modern technology', which is often equated with `imported technology'. Private-public partnership is often suggested as a strategic approach in the Indian literature, whereas in the context of small industry, no such worthwhile initiative has taken place.

Credit rating

A lending approach based on credit rating is obviously beneficial to a section of SMEs which are significantly on the growth path. But there are some questions to be answered:

1. How many SSIs will benefit from this scheme? According to the Third Census, a large number does not even keep proper accounts! 2. Will it not give an indirect signal to SIDBI and the banks that "they better focus on the well-to-do businesses, and leave the rest to their fate"? Going by the track record of SIDBI, and the venture capital funds, it is quite likely that the vast majority of SSIs will suffer.

This is not just to paint a gloomy picture of the new policy package. The purpose is to suggest that there are enormous possibilities of improvement. First, there needs to be a professional approach to SME policy through proper co-ordination between the Finance Ministry's initiatives and that of the Ministry of SSIs.

Besides, it is important to think of introducing new private windows for `real services'. This will ensure the flow of `business development services' on market principles.

At present, every new policy announcement brings in a new administrative instrument or a strategy, the benefits of which do not actively trickle down. A pro-active approach of ensuring the flow of real services should come from the Government.

P. M. Mathew

The author is Director, Institute of Small Enterprises and Development (ISED), Kochi. He can be reached at laghu@asianetindia.com

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