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Liberalisation And Small Scale Industries In India
Ranchay Bhateja*, Amit Tyagi** and Mani Tyagi***
Today globalization and liberalization is a major driver that has an
impact on nearly every economy. No country can rely exclusively on its
local resources, capacities and capabilities to steer its economic
growth. There is a profound need to integrate its economy with the
global economy.
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Small scale industries occupy a special place in Indian economy
due to its contribution in employment, production and exports. It
accounts for 95% of the industrial units.
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40% of output in the manufacturing sector.
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35% in total exports.
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Employment of about 30 million people.
From the year 1991 SSI were facing strong competition due to
globalization and economic liberalization. The government when
announces budget normally concentrates on the small and medium
scale enterprises. This sector is always supporting Indian economy. In
terms of units employment outputs and exports.
Different studies were conducted on SSI right from 1961 by different
economists and different responses were received. The performance
of
This sector will help in identifying and understanding its role in
economic development of country.
__________________________
* DR. RANCHAY BHATEJA, Associate Professor, Krishna Institute of Engineering and Technology,
Ghaziabad, U.P, India Contact No. 09319111513, email: [email protected]
** MR. AMIT TYAGI, Associate Professor, Centre For Management And Development, Modinagar.
U.P.India Contact No. 09897814900, email: [email protected]
*** MS. MANI TYAGI, Associate Professor, Krishna Institute of Engineering and Technology, Ghaziabad.
U.P India Contact No. 09259360626, e mail: [email protected]
Review Of Literature
Major studies are conducted on entrepreneurship and small scale industries. Major
focus was conducted on comparison of small, large and medium scale industries. Dhar
& Lydace ( 1961), Sandes are (1954) in their work found that small scale industries are
generating less employment as compared to large scale industries. In the modern time
SSI had become more capital intensive rather than labour intensive.
Biswanath (1988) in his study found that SSI’s have low labor productivity while capital
productivity is very high and overall factor productivity is less.
Goldar also identified that SSI can’t be relied on as a source of employment generation.
Ramsingha (1987) has founded that value added by a rupee worth of fixed investments
in small factories is a t least 3 times as large as for a large factory.
Rakesh basant, Sebastain. Morris (2006) found out that major problems faced by small
scale industries is to deal with government requirement is of simplifying the laws and
regulations ranging from Labor Compensation Act to Unionization Act which are
required to be merged.
Objective Of Study
The main objective of the study is to highlight the importance of SSI in Indian economy
as small scale industries occupy a special place in the economy due to considerable
contribution in terms of production, sales and employment. This contribution has
emerged despite of the fact that this sector has been exposed to intensifying
competition.
Research Question
Attempt has been made to answer the following research questions to answer t he
following research questions; this is the main objective of the study.
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Why liberalization and national policies affect development of SSI? How?
How far SSI been able to cope up with the competitive environment?
What was the growth performance of the last decade?
What policies are required to be considered to strengthen SSI?
Research Metodology
The study is based on data on no. of units, total production, productivity GDP
compiled from secondary sources. The study was based on data available for the
period 1973-2005 for performance evaluation of small scale industries.
Global And National Changes Implications For SSI:
Last decade period was a remarkable period in terms of policy changes nationally as
well as internationally the beginning of 1990 change in policy have taken place at two
different levels- Global and National. Both have the implications for the functioning and
performance of SSI in India. Liberalization& Globalization refers to free movement of
inputs and outputs among countries.
The major developments that have been taking place in early 1990’s are mostly
reference to the movement of capital which is known as FDI and free movement of
goods from the developed economies.
The liberalization policies and strengthening of international standards for the treatment
of foreign investors gives the firm freedom in making international location decisions.
More than 58 countries have introduced change in their investment pattern during 1991
to 2006. In 2001 alone70 countries made a total of 150 regulatory changes of which 147
are more favorable for investors (Stieglitz 2002). Due to which FDI increased from US $
209 billion in 1999 to US $ 1591 billion in 2000. This increased flow has led to maximum
share in gross capital formation in all industries as well as manufacturing industries.
(Table1). Increase was more in developing countries this led to competition in the
national as well as international markets for small firms.
Table (1): FDI in capital formation (1980, 1990, and 2005)
Region
FDI as a percentage of
Gross
capital Formation
(All industries)
World
1980
1990
2005
Developing countries
1980
1990
2005
FDI as a percentage of
Gross
capital Formation
( in manufacturing)
2.3
4.7
9.7
9
14
22
1.2
4.0
8.3
11.7
22.3
29.8
Source: UNCTAD
In 1993 world trade organization was formed which has led the process of scaling
down tariff, non tariff restrictions on imports
India as a member of WTO had done away with its quantitative and non quantitative
restrictions by 2000. The process of removal of these restrictions across the
countries has led to free movement of goods between countries including India.
However due to removal of these restrictions and free movement of goods &
services and increase in world exports have benefited multinational corporations
(MNC) more than small enterprises.
This situation was not examined by the government which resulted considerable
freedom for enterprises domestic a well as foreign to enter, expand and diversify
their investment in Indian industry.
Limitations Of The Study
Lack of sufficient data base is the major limitation. Data are not available for all the
years. The census for SSI has not been conducted after 2003. Major source of
information was SIDA and CSO.
Observations
For the period 1973-2003: From the table (1), it is observed that the compound annual
growth of SSI units, output (in terms of money), employment and SSI exports has been
14.18%, 12.87%, 6.74%, 21.28 % respectively with the exception of a very low growth
rate in the production per employee at 1.48%. The t-values of all the growth rates are
significant except for the growth rate of PPE. The obtained R2 are also satisfactory
except for PPE.
Table 2: Compounded growth rates for the period 1973-2003
Items
CAGR
T values ( calc)
No of units
14.18
16.59*
Total output
12.87
28.61*
Employment
6.74
38.81*
Production
per 1.48
-2.59*
employee (PPE)
SSI exports
21.28
51.68*
GDP
14.01
101.11*
*Significant at 1% level of confidence.
R2
0.89
0.96
0.98
0.18
0.98
0.99
Table 3: Compound growth rates for the period 1973- 1990.
Items
CAGR
No of units
11.63
Total output
19.4
Employment
7.24
Production
per 3.66
employee (PPE)
SSI exports
18.66
GDP
13.22
*Significant at 1% level of confidence.
T values ( calc)
9.18*
66.49*
29.87*
13.70*
R2
0.84
0.97
0.97
0.14
29.33*
55.75*
0.98
0.99
Table 4: Compounded growth rates for the period 1991-2003
Items
No of units
Total output
Employment
Production
per
employee (PPE)
SSI exports
GDP
CAGR
11.64
18.198
7.54
1.80
T values ( calc)
9.18*
23.88*
27.75*
1.67*
R2
0.84
0.97
0.97
0.14
19.12
13.40
31.05*
57.51*
0.98
0.99
The table number 3 and 4 indicate that CAGR of units of SSI during 1973-1990 is less
than the CAGR of the post liberalization period. But the output has grown at 18.098% in
the post liberalization period as compared to 19.4% in the pre liberalization period; it
indicates higher productivity per unit of small scale enterprises in the previous period.
Further it can be seen that the CAGR of productivity per employee at 1.80% in the post
liberalization period whereas at was 3.66% in the pre liberalization period. The growth of
SSI Exports has been 19.12% after 1991 whereas it was little less at 18.66% during
1973-1990. It might be attributed to government initiatives taken to promote exports in
recent years. Comparing the CAGR of different parameters in two sub periods, we can
conclude that there has not been any significant change in the performance of small
scale enterprises despite a number of policies, schemes initiated by the government
after 1991.
Annual Average Growth Rates of various parameters in SSI pre-liberalization and postliberalization period
AAGRPrL*
AAGRPoL**
No of units
9.637006
4.063012
Total output
21.16277
12.79051
Employment
7.196365
4.236112
Production per employee 3.977058
3.721566
(PPE)
SSI exports
21.31401
20.09276
GDP
13.39709
12.9651
Total exports
16.70459
18.73837
** AAGRPrL stands for Annual average growth rate for the pre liberalization period
**AAGRPoL stands for annual average growth rate for the post liberalization period
Performance Of SSI In Globalisation Era
Globalization has stretched the social, political and economic activities of countries
beyond political frontiers, regions and continents. This has resulted in a rapid flow of
investments, trade, finance and migration.
SSI’s were deeply affected by a globalization of the markets; Globalization has rapidly
gained momentum as a result of certain factors. They are: Rapid technological
advances in accessing and disseminating information have resulted in reduction of
costs and complexities of going global. The world markets are now open to new
products and services, and the SSI’s which were earlier limited by cost considerations
are open to export opportunities.
The protective tariff and non tariff barriers, which separated domestic markets from
international markets, are slowly coming down. This has given SSI’s an option to either
operate in the protective domestic environment or accept the challenge of facing
competition in the international arena.
The SSI segment has its strength and weaknesses and therefore created a niche for
itself by its unique positioning in terms of offering value added services and being
flexible and yet cost effective. Being a small setup, the decision making process is
quicker and services and product offered are more customizable. The entrepreneur is
ideally the sole decision maker or at the most a small group of people who reach a
consensus relatively easily. The committee approach is avoided and the lag time
between getting an offer on business opportunities and grabbing the offer is kept as a
minimum. When it comes to the question of improving the competitive strength of their
SSI sector, the developing countries, despite realizing the need and urgency to do so,
are constrained to extend the required kind of support to them because of their own
limitations, some of which could be grouped as under:
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Financial limitations.
Lack of necessary infrastructure.
Lack of know-how the expertise.
Lack of expertise to forge cooperation among SSUI’s of different countries.
Problems related to transition such as rigid mind set, resistance to change both
at administrative and enterprise levels.
Role Of Government In Development Of Khadi And Village Industries
All our 5 years plans and Industrial policy resolutions/ statement have stresses the need
to accelerate the development of village and small industries to create large scale
employment opportunities, promote decentralization and dispersal of industries, achieve
diffusion of ownership and prevention of concentration of economic power, promote
entrepreneurship, develop agro based and ancillary industries, improve the skills of
artisans and quality of their products, reduce the role of subsidies and to step up the
productions of essential articles and those having potential for exports.
The Government, Central and States, have taken a number of measures to help solve
the age old problems of these industries, such as lack of credit facilities, outmoded
methods and techniques, absence of organized marketing, unsatisfactory raw material
supply and competition from large scale units.
The Government, Central and States, have taken a number of steps, including the
establishment of a number of agencies to foster the development of the village and
small industries.
Promotional Measures
Measures taken by the government, from time to time, includes reservations, upward
revision of investment ceilings in the definition, reservation of products for the SSI’s,
increasing credit flows, preference in government purchases, modernization, technology
up gradation and improving export performance.
In the post reform period, a number of new steps have been initiated by the government
with regard to foreign direct investment, development of infrastructural facilities, and
establishment of growth centers, export promotion, marketing etc. detailed aspect of
these measures are:
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Industrial estates (IE) programme
EPZs/SEZs Export industrial Parks.
Integrated infrastructural Development Scheme (IID)
Cluster development
Industrial growth Centre Schemes.
Recent Measures
Recent initiative and measures taken by the Government of India to enabler micro,
small and medium enterprises to enhance their competitive strength, address and
challenges of competition and avail the benefits of the global market include a
promotional package and certain legislative measures. Capacity building of micro, small
and medium enterprises associations and to support to women entrepreneurs are also
important features of this package.
The Khadi and Village Industries Commission Act 1956 was amended during 2006-07
introducing several new features to facilitate professionalism in the operation of the
Commission as well as field level formal structured and consultations with all segments
of stakeholders.
Micro, Small And Medium Enterprises Development Act 2006
The MSME Development Act 2006 provided the first ever legal framework for
recognition of the concept of enterprise and integrating the three tiers of these
enterprises viz micro, small and medium.
Women Entrepreneurs
The 1991 Industrial policy has envisaged special training programs to support women
entrepreneurs. Accordingly, women entrepreneurs are receiving training through
Entrepreneurship Development programmes conducted by various institutions and
organizations both at the Central and state levels.
The SIDO, with its field offices all over the country, had been carrying out development
programmes for women entrepreneurs and is providing technical schemes for the
setting up of SSI units.
The SIDBI has instituted various developmental initiatives towards promoting women
enterprises. The Bank has designed programmes, with a focus on women, viz, Mahila
Vikas Nidhi, Mahils Udhyam Nidhi, Micro Credit Scheme, Women Entrepreneurship
Development programmes etc.These programmes have been formulated with the twin
objectives of:
i) Providing training and extension services support to women entrepreneurs
through a comprehensive package suited to their skills and socio economic
status,
ii) Extending financial assistance on liberal terms, to enable them to set up
industrial units, in the small sector.
Conclusion
Development of small scale industries has been given a lot of emphasis in India
because of number of avowed objectives such as promotion of entrepreneurship,
generation of employment opportunities, development of decentralized development,
prevention of concentration of economic development, utilization of local resources,
protection of interests of artisans, preservation of craftsmanship and heritage of country
etc.
Liberalization is always seen a s negative factor for the SSI,s as many industries got
demolished in the wave of it. But this paper is inclined towards the classification of this
myth.
Now when this industry has crossed the road of infancy after liberalization government
is required to strengthen it by resolving some of the basic issues which are still
unanswered. The measures to strengthen this sector are:
1. Government has to see the implementation phase of developing industries in
backward areas so that ancillary units can get their share.
2. Role of Panchayats has to be increased to develop the sector.
3. After railways the Rural Development Ministry has got the biggest share in
budget but the expenditure is very less. The role of administration is to be seen in
it.
4. The territory industry is looking forward for their share in developing this sector
very antagonistically and it should be fueled in proper manner
5. Women entrepreneurs are required to be promoted more forcefully s they are
playing an important role.
6. PPP role model can be applied in it while it is ignored for this sector as it has
immense potential to be tapped out.
7. The government is required to watch out its policy of financing as it is more of
exploiting in nature rather complementing it.
Many other administrative issues are there which are “de-promoting” this sector
whereas it has potential to increase its share in GDP.
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