Protection racket

The Suresh Chandra committee on dereservation has recommended that the production of 85 consumer items need not any longer be reserved for the small scale industries (SSI) sector.

While any change for the better is good news in itself, it’s a pity the government is not moving faster in a world where such reservations are increasingly irrelevant. Around half the 590 items that will remain on the reserved list after these 85 items are removed from it can be freely imported anyway.

The core issue is how to make small units competitive. What they need is new technology and investment, but that is precisely what they won’t get when the whole idea is to define SSIs on the basis of investment limits.

These limits are often farcical, as exemplified by the manner in which they have been changed over the years. To qualify for SSI concessions, the official investment limit in plant and machinery is currently fixed at Rs 1 crore—not very much more in inflation-adjusted terms than the Rs 5 lakh limit set in 1955.

Indeed, the government has had to relax this limit to Rs 5 crore for hosiery and hand tools (in October 2001) and for stationery and pharmaceuticals (in June 2003) when SSI units themselves protested against it saying they needed to have more capital to grow.

While the changes are a healthy sign of responsive government, it is equally obvious that the limits are fixed arbitrarily. Political and other clout is required to have them relaxed.

Another important issue is whether SSIs need all that much of mollycoddling. A few notable exceptions apart, the SSI sector as a whole has tended to grow much faster than the overall manufacturing sector.

In 1994-95, the manufacturing sector grew at 8.5 per cent, but SSIs grew faster at 10.1 per cent. The corresponding numbers for the next year were 13.8 per cent versus 11.4 per cent, and in 2002-03 the relevant figures were 6.0 per cent and 7.5 per cent.

The macro-level data suggest that the sector hasn’t fared too badly despite occasional bouts of dereservation and import liberalisation. There have been several CII polls of SSI units which show that they’re not too bothered by the opening up of imports in items reserved by them.

With over a third of the country’s exports coming from SSI units, it’s clear that the sector has competitive strengths of its own and these have little to do with the tax incentives received from the government. Most FMCG units and pharmaceutical companies, for example, choose to ou tsource manufacturing to the small sector, and they wouldn’t do this if there was no advantage in doing so.

Anecdotal evidence also suggests many SSI units do not even take full advantage of the benefits they’re entitled to due to the cumbersome procedures involved.

Instead, thanks to poor infrastructure conditions, SSI units, according to one World Bank study, lock up around a fifth of their working capital in captive gensets to avoid production losses due to frequent power outages.

Inspector raj remains gloriously alive, and SSI units find it tough to even get themselves registered as such. Some of these issues are being addressed by the Small Enterprises Development Bill that is awaiting introduction in Parliament—and these are the ones that need addressing. If at all reservations serve any purpose, it must be a political one. It’s time to put an end to this protection racket.