Wrong prescription

The government is believed to be considering, as this newspaper has reported, enhancing the investment limits for firms to qualify as small-scale industry (SSI) from the present Rs 1 crore to Rs 5 crore, as well as raising the FDI cap for this sector from 24 per cent to 49 per cent.

If and when that happens, the move is certain to be hailed as progressive, and rightly so. But what the government needs to look at seriously is whether the SSI classification has outlived its utility.

Just a fourth of the top 200 products manufactured in the sector, according to the third All India Census of Small Scale Industries, were in the category of items that are reserved for production by SSI units—indeed, the census also showed that if you look at the top 100 items manufactured by the sector in terms of value of output, these accounted for just a tenth of the registered SSI sector’s output.

And since most products produced by the SSI sector are freely imported anyway, from countries where they are produced in much larger factories and therefore have lower prices, what use is the SSI protection?

The census, in fact, shatters many other myths about how SSIs are supposedly protected by the law.

Of the total of 10.5 million units in 2001-02, around 9.15 million were unregistered, and half of these said they were not even aware of the process of registration and therefore clearly did not avail of the benefits available for the sector.

Another 40 per cent of the unregistered units said they were not even interested in the benefits. Clearly, reservation is a “benefit” that few SSI units benefit from.

Another benefit of the SSI scheme is supposed to be that it makes getting credit from banks easier, but there is enough evidence to show SSI units don’t get credit easily from the formal banking sector and fall back on informal lending mechanisms.

The problem the SSI sector faces, like the larger industries but to a greater extent since its capacity to bear the problem is lower, is that of an unfavourable micro-level operating environment in the country.

A recent World Bank-CII study on the firm-level operating environment has some shocking statistics.

Over 60 per cent of firms in the country, it says, have back up generators— apart from the fact that this means a huge loss of productivity since it increases production costs, this locks up very large amounts of capital, which is a serious problem as far as SSI units are concerned.

The survey also showed it takes 89 days to start a business in India (compared to a mere two in Australia), 425 days to enforce a contract and 10 years to close down a business. Since small businesses have, by definition, less capital to begin with, it is easy to imagine what such delays do to their finances.

The Bank-CII model has an interesting exercise on the impact of fixing this micro-environment.

If power problems are fixed, and firms no longer need generating sets, the model shows, labour productivity would rise 80 per cent and if tax reforms happened this would hike labour productivity another 60 per cent. Hiking investment and FDI limits is a step forward, but the real cure lies elsewhere.