Though phasing out exclusive production rights to small-scale industries (SSIs) has been at the core of the reforms strategy, there have been hardly any serious attempt to investigate its impact at the macro and micro (manufacturing unit) levels. But a recent National Productivity Council study gives interesting insights into the impact the removal of exclusive production rights had on the small-scale industry sector.

A policy granting exclusive production rights to the small sector was germane to the developmental strategy adopted in the late 1960s. Eventually, the number of products manufactured under exclusive rights by the sector went up to more than 1,000 products in the late 1990s. The product mix ranged from tooth paste to steel furniture.

But the liberalisation policy pursued from the early 1990s led to a reversal of this policy. As competition, especially from imports, stiffened, the policy slowly became redundant and ineffective. Product-specific reservations given to the sector and the exclusion of large enterprises from the manufacturing process became meaningless once imports of reserved products flooded the markets.

The removal of this production rights began at a slow pace, with the exclusion of 39 products during 1997-2001. In 2002, 51 more products were taken off the list and the momentum gathered pace with another 75 items ticked off from the list during 2002-03. A big push came in October 2004 when 85 more items were opened up for all producers.

Later in March 2005 and May 2006, 108 and 180 more items were dereserved. In 2007, in two tranches 87 and 125 items were removed from the list, in January and March. In 2008, the list had been further shrunk by 79 in February and then by 14 in October.

The NPC study investigated the impact of these steps by analysing the growth in output of all the 843 items in which exclusive production rights were given to SSIs irrespective of their size. The study also documented the history of policy changes and its impact on technology, employment, exports, foreign investment and income generated in the sector. The NPC sample survey was limited to 95 products from the total list of 1,023 reserved products that were eventually removed from the reserved list and 777 units that were resurveyed from the list of SSI units that were surveyed during third SSI census of 2001-02.

The study notes that a majority of the SSI units resurveyed by NPC has experienced positive growth in terms of gross output after dereservation. Out of the 95 dereserved products taken up for the detailed study, 79 products have performed well, showing an increase in the value of gross output per unit after dereservation. The units which performed well were those manufacturing miscellaneous products like stationery items, transport equipment, glassware & ceramics, mechanical engineering products and leather & leather products.

However, the units manufacturing chemical products reported a decline in gross output after dereservation. Out of nine subproducts of chemical products, five did not perform well after dereservation. But this needs to be interpreted with caution, as environmental regulations and the need to adhere to strict environmental safety standards have compelled many units either to modify production lines or relocate to remote areas.

The unit-wise survey results show that out of 656 SSI units that have performed well in terms of production and employment after dereservation, 488 units (75.2%) reported positive growth in production, while 128 units (19.7%) reported a decline in production after dereservation. Further, employment opportunities have increased across 320 units (49.6%) while 111 units reported decreased employment opportunities after dereservation.

As many as 344 units (44%) reported an increase in employment opportunities for skilled employees after dereservation, while 413 units (53.15%) reported that employment opportunities for skilled employees have not increased. Altogether, employment opportunities for skilled employees decreased after dereservation.

From the field survey, it was found that only 9% (69 units) of the sample units (777) are involved in exports. These 9% (69 units) are scattered over 34 product groups. According to the third SSI census, only 509 units out of 72,251 units (manufacturing 95 dereserved products) were able to export in 2001-02 (as recorded in the census), or 0.71%. The reason for this low percentage is that most SSIs are too small to access the global market.

Out of the 95 products studied, there is no data available on 15 products on exports or imports. Presumably, these units did neither. Of the remaining 80 export products, 18 reported negative compound annual growth rate (CAGR) value while exports of 62 products had positive CAGR for exports. On imports, 11 products showed a negative CAGR while 69 products reported a positive CAGR.

According to exports & imports data from the department of commerce for 2007-08, out of the 95 products considered for the study, 33 were net importers. The majority of these 33 products belong to mechanical engineering, miscellaneous (including stationery items and sports goods), plastic products, glass & ceramics products and leather products. The export-to-import ratio (trade ratio) had decreased during the ten-year period between 1997-98 and 2007-08. For 44 products, the trade ratio had increased during the period.

The survey also found that from the total of 777 units manufacturing dereserved products, 588 units (77.8 %) reported an increase in capital investment, while 129 units (17.1%) showed a decrease in capital investment and 39 reported no change in capital investment for operations.

Summing up, the NPC study concludes that dereservation did not lead to a slowdown in a majority of the dereserved SSI product categories in terms of gross output, employment and exports.

The writer is the group head (economic services) at the National Productivity Council. These are his personal views