In the reform decade of the 1990s, employment in India?s large industrial enterprises declined. The count was down to 7.9 million by 2003-04, while that for small and micro enterprises rose to 27.1 million. This comparison by itself should have been a good enough reason to give all possible support to the small scale industry (SSI) sector. The announcement by commerce minister Kamal Nath at the Indian Express Idea Exchange on Wednesday that the FDI cap on the SSI sector would be relaxed is more than welcome. Since 1991, the development of the SSI sector has been an example of how the forces of competition can foster development much better than efforts to cocoon enterprise.
Between 1967 and 1989, the government kept adding to the cumulative count of items to be produced exclusively by SSI units. In its heyday, this policy of small scale reservation had 836 products. From that evangelical peak, the list has been slashed to 239 at last count (this January). The sharp reduction has been accompanied by a massive surge in production volumes in the sector. For instance, in the four-year period from 2002-03 to 2005-06, the sector?s total production has grown by nearly 32% according to the government?s database. This was also the period in which the government executed the sharpest reduction?of 319?in the number of reserved items on the SSI list. There has been no looking back for the sector since. The list also shows that it has been the entrepreneur-driven units which have been able to withstand competition from bigger units as well as those from abroad. In any case, the dereservations were an acknowledgment that they had outlived their logic in an open economy where the same items could be freely imported. Instead, it was necessary to address their biggest bottleneck, the shortage of capital to finance their expansion. SSI data shows that of the incremental annual $14 billion pumped into the sector, banks account for less than half. In such a scenario, SSIs should have an automatic claim to more foreign capital. If domestic banks cannot provide them the requisite liquidity, there is little justification in restricting their access to overseas capital. Not just FDI, the ECB route should also be liberalised for them.
