The small-scale industries (SSI) sector in India has made significant progress since independence and has contributed significantly to the fulfilment of the socio-economic objective of growth with equity. However, the sector has been confronted with an increasingly competitive environment due to the liberalisation of the investment regime, foreign direct investment (FDI), the formation of the World Trade Organisation in 1995 and domestic economic reforms.
The New Small Enterprises Policy (1991) also changed the very philosophy of dealing with SSIs as the fate of the sector, which grew under a protective umbrella since independence, was left open to the invisible hand of market forces. Now, the government is set to move a step further and remove the 24% FDI cap on SSI units.
The increasing attraction of foreign investors to Indian markets has encouraged them to foray deeper into the economy, including into the SSI sector where the number of units is estimated to be 43.98 lakh in 2006-07 employing 237 lakh workers with a annual output of over Rs 14 lakh crore, and accounting for more than 40% of the gross value of output in the manufacturing sector. It is obvious that the progress of SSIs has attracted the attention of foreign investors and hence arguments for increasing the FDI cap. According to the Union commerce & industries minister, this is necessary for the modernisation of SSIs and for additional employment generation. Thus, the option before the SSI sector is to compete or perish.
What are the likely implications of these developments on the future of the SSI units? The overall performance and contribution of SSIs to the Indian economy is generally described in terms of its absolute growth in units, employment, production and exports, etc. According to estimates, the number of SSI units has more than doubled from 19.48 lakh in 1990-91. But the numbers show that the overall rate of growth of units in the sector has registered strong deceleration through most of the nineties and a positive revival was noticed only after the turn of the decade. This would be the consequence of the intensifying competition in the national as well as international markets.
The central government is now set to remove the current FDI cap of 24% for all companies in the SSI sector. This will prove to be another blow to the prospects of SSIs in the coming years, as this will alter the level playing field when stronger units compete with weaker ones. This will only further complicate the problems of the sector and erode its financial strength. Although government revenue is unlikely to be affected, these developments are likely to trigger other far reaching changes.
For one, FDI will come only to those areas where there are better infrastructure facilities and this will have implications on sectoral development, especially in the more backward states. From a technical perspective, any substantial change in technology is likely to have a multiplier impact on the basic processes and even result in the replacement of labour by capital and cause technological unemployment.
There is also an underlying danger that an opening up of the SSI sector to foreign capital may result in foreign players replacing local entrepreneurs, especially in the more lucrative segments. The removal of the 24% FDI cap will hamper the main philosophy of SSIs and the small will no longer be beautiful.
The writer is a reader in the department of economics, Banaras Hindu University