One of the lessons from Keynes is that a lot of small changes can mean more in aggregate than a few large changes. Small scale industry in India would appreciate this.
In 1989 the President of South Korea had sent an emissary to Prime Minister Rajiv Gandhi arguing that their analysis showed that 1990s were going to be a decade of India and they wanted to diversify their triangular relationship with Japan, from where South Korea imported $21 billion, and the US, to which it exported $29 billion. The emissary wanted Indian policymakers to visit South Korea and to see their strategic policies. I was asked to lead the team. In conversations that I have reported in academic debates and which have been extensively quoted in the literature on strategic planning, I was told by the architect of their growth story not to worry about comparative advantage, but to implement what you plan well. Efficient import substitution and export promotion went hand in hand. The Koreans made and implemented rule-based policies that did not allow any intervention or failure.
As soon as an export order was received, by pre-determined norms developed by their Planning Board, the industrial unit was given in its bank account the set-offs, both for an actual export as well as a deemed export.
Our credit systems and prioritised lending for small industry are detailed and comprehensive. But I would suggest the following two steps. First, as soon as an order is received by a small enterprise, the bank is required to give a certain percentage predetermined by the government in the department of small scale industry to the unit, a loan for working capital. Second, as soon as the consignment is delivered to the unit ordering at home or abroad, with a proof of landing, a fresh loan is given to the unit based on norms decided by the small scale industry department and the loan for working capital is subtracted from it.
The loan is liquidated as soon as the payment is made by the customer. One out of 10,000 cases is investigated by the Special Enforcement Branch, created by the department of small-scale industry, and if any enterprise is found cheating, it is given severe punishment. The department of small scale industry also arranges a reinsurance scheme for default.
Also, do we need special policies in the stimulus period? A case in point is the kind of opportunities that arise in taxation policies to avoid negative protection. India has some experience of this. In global depressions, you are globally efficient if at international prices of outputs and inputs, firms make profits. Still, at market prices, they can make losses. In a partially reforming economy, if the input supplier has not been subjected to competition, even if a firm is efficient, it will make losses, because the global competitor gets components and equipment at cheaper prices, or his interest rate is lower. Clusters of industries would need to be reformed together and tariff policies would need to be determined in an optimal manner, taking these configurations into account.
Indians were once seen, in some of the literature, as following this path, sequencing and phasing reform. In a distorting trade epoch, which to an extent all depressions will be, it is possible to bring in policies of inverted tax structures in a measured and phased manner. India?s budget papers, for the 2009-10 stimulus budget, describe this policy as indirect tax rates compensating for ?deeper cuts on finished goods as compared to their raw materials?. Peak tariff rates, set by reform of the tax system are not changed, but tariff rates reduced on specified inputs, components and capital goods. The department of small scale industry needs to identify these cases in a time-bound manner.
The question of technology support is more critical. To begin with, the recommendations of the V Krishnamurthy Committee on a technology policy for small scale industry must be implemented in a time-bound manner as the PM has underlined. The recommendations are specific and doable.
Dualism in the SME sector is well known. In a number of cases there have been strong linkages with global markets in the reform phase although the process, in some cases, seems to have predated the reforms. Most of these initiatives are from entrepreneurial efforts and traditional networks of information and market knowledge. These are not cases of large firms linking with SMEs as the literature or policy expectations posit. They are more interesting. They are cases of SMEs growing with intrinsic competitive advantages and developing strong global bases. As these firms succeed, they get into global strategic partnerships and acquisitions. They need help. The Chinese do it. We don?t.
The author is a former Union minister