Saturday, February 04, 2006

Small scale industries

Somewhere in the 90s, when liberalization began to happen, there was a big worry over what would happen to SSI (small scale industries). Small scale industry is defined as any industry with a capital base of less than 1 or 5 crores.

From the RBI site (incidentally, a very good site with good statistical info on the Indian economy) ...Small Scale Industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 Crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 Crore to be classified under small-scale industry.
The investment limit of Rs.1 Crore for classification as SSI has been enhanced to Rs.5 Crore in respect of certain specified items under hosiery and hand tools by the Government of India...

Small scale industries were deemed to have been set up by individuals rather than companies and enable a somewhat level playing field and hence were rewarded with tax breaks and other incentives. Other than that, there was a particular set of items that were restricted (manufactured only by SSIs) and the railways and central government organizations had to procure a certain set of items only from SSIs.

This, in theory was a good idea to promote entrepreneurship and employment at the grassroots level. Unfortunately, many big companies began to set up many SSIs or when the SSI reached its limit they would start another SSI so that they continued to remain SSIs or continued to gain the incentives or use the quota. They had no incentive to grow (more on this some other time).

Coming back to the SSI story, it was argued that liberalization would spell the doom of these small units and result in large scale unemployment. (Very much like the theory floated by the benefeciaries of globalization that liberalization has not resulted in overnight upliftment of the poor). But what has happened? The number of SSIs has gone up in the face of dereservation of many of the items hitherto restricted to the SSI sector.

The picture isnt great, it is from ET dated 2nd Feb. The figure of SSIs in India as per RBI stats compiled by ETIG has gone up from (101 lakh) 10 million to (118 lakh) 11.8 million. This flies in the face of those who say that liberalization has killed our industries. Remember that these are the net numbers. I am sure many inefficient SSIs did close due to dereservation, Chinese competition and lack of patronate. Therefore, many new SSIs have been set up. And then again, remember that these are perhaps the "authorised" industries. Given Indias track record, there are a larger number of "hidden" small scale units.

Indeed if our labour reforms happened, these units would surely employ more than what they do presently.

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