Unpalatable, but needed

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: From the record of recent Union budgets, another bout of de-reservation is on the cards. It is interesting to see the evolution of this policy, whereby certain products have been earmarked for exclusive manufacture in small-scale industries (SSIs). The first Five-year Plan (1951), which influenced economic policies till 1991, expou-nded the vision of small-scale development and advocated “reservation of spheres of production.” The process began with reservation of 47 items in 1967 and the list kept growing, to reach 836 in 1989.

The criteria? Nothing captures it better than the Industrial Policy of 1977, which declared: “Whatever can be produced by small and cottage industries must only be so produced.” Reservation was one of the two ways on which ‘protection’ of the sector rested. This was ‘internal’ protection, from large industry; there was also ‘external’ protection, from foreign competition, by quan-titative restrictions or QRs (strict import licensing) and by enacting high tariff walls.

However, due to reforms in 1991), import dut-ies came down substantially and QRs on imports gradually reduced, being removed almost completely by 2001. During the Uruguay Round of Gatt/WTO (1986-94), it became apparent that QRs were unsustainable. With their removal and all items becoming freely importable, the reservation policy lost purpose. It only meant non-SSI units couldn’t manufacture a reserved product, but it could be imported. The Abid Hussain panel (1995), set up to review the policy, advocated complete de-reservation and the SP Gupta panel (2001) suggested calibrated de-reservation in consultation with the sector.

The government began this cautiously, later getting bolder. 39 items were de-reserved in four phases, from 1997 to 2001. Then, almost every year has seen de-reservation of some items: 51 in 2002; 75 in 2003; 85 in 2004 and 108 in 2005. Today, only 497 items fall under the reservation list.

How important has the policy been for the sector? Accor-ding to the 3rd SSI census, 83% units produce ‘non-reserved’ products and compete in open markets. Only 16.5% units are engaged in producing reserved products, employing 17.2% of all labour, for 13.6% of all output. Even during the census period, when 877 items were reserved for SSIs, the contribution of reserved items was not more than 10% in exports. With de-reservation of items having greater export concentration, like readymade garments, leather products, etc., the contribution of reserved items to exports would have come down substantially.