Innovation can make global leaders

Written by Mahesh Y Reddy | Updated: Dec 28 2007, 04:00am hrs
Now that the FDI cap of 24% of paid-up capital is being removed, what does this measure translates to in terms of growth prospects of small businesses It is after all only fair that small-scale industries (SSIs) are allowed to access foreign equity on a par with their large-scale counterparts. However, the moot point is whether this enhanced access to FDI would benefit the SSIs as much as it would the bigger companies.

Even assuming that an SSI unit opts for double the amount of FDI to 48% without losing management control, it would still be a miniscule amount given the very low paid-up capital of most of our SSI units. No doubt, there could still be some units in the yet to be unreserved 114 industries which could avail of the increased FDI access.

This measure is not of any significance for a majority of SSIs because, even under the current policy FDI in excess of 24% would have meant only losing their SSI status, which is not of any great commercial value. The only tax exemption available is with respect to excise duty, which is linked to turnover. Perhaps the SSI status would have benefitted the small units substantially, if there had been better access under the priority lending schemes. But as the 11th Plan approach paper acknowledges, commercial banks are reluctant to meet SSI credit needs on account of high-risk perceptions on the one hand, and higher transactions involved in dealing with a large number of borrowers on the other.

They continue to seek collaterals from small and medium enterprises (SMEs) in spite of guidelines from RBI to the contrary. Many of the State Financial Corporations set up with the primary objective of meeting the credit needs of SSIs are also defunct.

One obvious advantage of the removal of the SSI-FDI cap could be the attraction for SMEs in other countries to invest in India particularly in areas still reserved for SSIs. What comes out most clearly is the fact that the Government is committed to carrying the reform process forward. The removal of SCI-FI cap is also an extended expression of the basic intention of the government to find solutions for SSIs, which work well within the overall framework of economic liberalisation. Unfortunately, this is not as easy as one would wish. How can we force the banking sector, for example, to ignore its own competitiveness, while trying to beef up the competitiveness of SSIs What needs to be recognised is the fact that it is easier to change policies than change the economic viability of businesses.

A large number of SSI units had indeed come up to take advantage of reservation and other incentives like preferences in government purchases. Removal of these policies has no doubt altered their business feasibility completely. It has to be a collective effort of both government and industry to find ways that facilitate the transition of such SSIs in to the new world of global competition. However, there are no easy solutions available within the framework of economic liberalisation. The most urgent need, therefore, is to shift SSI promotion into the social development agenda, since social perspectives are rooted in longer time dimensions and more humane values. SSI promotion is as important as education or healthcare. It may happen that only one out of 1,00,000 SSI would strike pay dirt and become a global company. We would still need the 99,999 to nurture and sustain the entrepreneurial aspirations in society.

More importantly, the social costs of not having a vibrant small business sector are far more heavy than the economic costs involved in promoting it. Just as the big banks find it uncompetitive to extend small loans to a large number of borrowers, big companies would also find small markets unattractive. Obviously, large enterprises would be ready to swoop in once the small and niche markets grow in size and offer adequate economies of scale. In fact, when the market size expands significantly, small businesses really have no inherent power left to face the competition from their big brothers, unless they have the advantage of innovative technology or long-standing customer loyalties. Indeed, customer loyalties play a key role in the sustainability of and prosperity of ancillary units.

A major factor that calls for integrating SSI promotion with the social development agenda is the existence in the country of a large unskilled and less-skilled workforce. Every newly industrialising country inherits it from its past, primarily because of the long time it takes to build its education and training infrastructure. While the new generation of relatively better educated are easily absorbed by modern enterprises, SSI units that are still usingthe not-so-competitive labour intensive technologies continue to be the only refuge for the less trained.

The SSI employment data proves it: food products are the largest employment generator among the SSIs (13.1%) followed by non-metallic mineral products (12.2%) and metal products (10.2%). Eight other industry groups that account for about 50% of the employment force are not the high profile, hi-tech industries.

A daunting dilemma is already before us. The approach paper to the 11th Plan succinctly refers to it. The organised manufacturing sector accounting for about 67% of the value addition employs only 12% of the workforce. While its total employment has not increased since the mid 1990s, its labour productivity rose by about 10% per annum. On the contrary, labour productivity in the unorganised manufacturing sector comprising mostly unregistered SSIs has stagnated. This is certainly unsustainable. What can we do to increase labour productivity in the SSI sector Many schemes such as those for technology modernisation, retraining of employers and employees have been in operation for sometime. Yet, the number of units benefitting from such schemes has not been many. Even in the case venture capital funds operated by SIDBI, the outflow has not been impressive.

It is imperative ensure that all our SSI incentive schemes are slab-based. The excise duty exemption, for example, can be 100% for the first-base slab and 75% in the next and perhaps 5% in the final slab. It is only such calibrated schemes that encourage SSIs to grow and prepare them for facing global competition.

Meanwhile, modern SMEs are innovation-based and can become global leaders in not too distant future. This is a category which most developed countries are promoting by offering them incentives.

The series of steps that the government has been taking to promote SSIs are all the in the right direction. What important is to target them correctly and ensure that such schemes really benefit the SSIs.

The author is director, Ficci. These are his personal views