Off the mark

To the extent that the new Bill relating to small-scale industry (SSI) will help put an end to the inspector raj, its introduction in the winter session of Parliament would be a welcome step—especially since such units account for around 40 per cent of the country’s industrial output, 45 per cent of exports (small hosiery units in Tirupur alone export knitwear worth $800 million annually), and employ 20 million people.

Indeed, at the same seminar where the SSI minister announced the Bill may be passed in the winter session, the Small Industries Development Bank of India announced it had got commitments worth Rs 325 crore for its venture fund for small and medium units, and also that it would soon be setting up a credit rating agency for SSI units.

All this is good news, but may be missing some of the main points. For one, it is clear that the system of reservation (around 590 items remain on the list) of items for production by only SSI has less and less meaning; over 80 per cent of the total SSI output is of unreserved items.

In any case, half the reserved items are freely importable, so in effect there is no protection for SSI units, and large domestic units are shut out for no good reason.

Some of the other measures prevalent today, like tax incentives and price preferences, are an equal waste of effort since it is too costly to avail of such benefits, in terms of the time taken to do the necessary paperwork and the speed money involved.

At around Rs 1 crore, the investment limit in plant and machinery today is not very different from the Rs 5 lakh limit set in 1955, if one were to adjust for inflation in the intervening period.

Indeed, the FDI limits being talked about (up to 24 per cent is the figure the SSI secretary spoke of) don’t serve much purpose and may in cases prevent SSI units from getting access to needed capital.

There are other issues that a Bill cannot deal with, like the poor quality of infrastructure, which has a disproportionate effect on SSI operations (since back-up power generation, for instance, may not always be affordable or will be done at heavy cost in terms of diversion of capital).

The poor quality of power, a World Bank study estimates, results in SSI units locking up around a fifth of their working capital in captive gensets, to avoid loss of production. As for the Bill itself, what is particularly regrettable is that there is no thought paid to the concept of exit.

According to an estimate made by Bibek Debroy of the Rajiv Gandhi Institute for Contemporary Studies, as many as 60 to 80 per cent of SSIs are either sick or financially distressed.

While this in itself is a serious matter, what makes things worse is that, unlike large businesses, SSI have no access to any programmes for rehabilitation.

Given the large amounts of capital locked up in such businesses, and keeping in mind the relatively small amounts of capital that SSI entrepreneurs possess, not allowing entrepreneurs to exit businesses is only hurting the sector, not benefiting it.