Post 1991 and especially after WTO came into being in 1995, the domestic manufacturing sector has had to face intense international competition due to reduction of non-tariff barriers, progressive scaling down of import duties and liberalisation of the FDI policy.
Small and medium enterprises (SMEs) form the backbone of the Indian manufacturing sector due to their significant contribution in terms of output, exports and employment. SMEs, more than the large enterprises, have faced the brunt of the enhanced domestic and external competition post 1991. Without proper government support, SMEs in India have mushroomed everywhere and produce different kinds of products. In several parts of India, some natural industrial clusters, comprising mainly of SMEs, have come up. Some of these have come up as ancillaries of larger companies located in these areas.
Several of these clusters are based on natural and traditional skills but lack adequate infrastructural facilities. Some SMEs, especially in sectors like auto components, IT, drugs and pharmaceuticals, and textiles, have grown rapidly and are increasingly making a mark both domestically and internationally. But these are exceptions and most of the SME sector suffers from technological obsolescence, liquidity crunch, sickness, managerial incapability and skilled manpower shortage.
If SMEs have to act as entrepreneural engines of growth in India and also be major employment providers, we need to provide them a conducive operational environment, facilitation of technology transfers, capital according to their needs, training in skill development and marketing support.
The SME sector faces an acute shortage of capital. The sector needs more pumping of money into capital investment for further growth and competitiveness through better targeted institutional and bank finance, venture capital investment and other innovative sources of funds. Even availing bank finance by SMEs is a challenge on account of high interest rates, unreasonable demands for collateral, restrictive and conditional working capital limits, severe terms of credit and high procedural transaction costs.
Due to rapid technological changes sweeping the world, the competitiveness of SMEs in India is taking a severe hit. Urgent technological upgradation is required cutting across all sectors to enhance cost competitiveness and upgrade product quality. Technology incubation centres from which SMEs can source at cost competitive rates are extremely limited in India. The absence of a well-entrenched industry-academia linkage in India also hampers R&D efforts.
Indian SMEs need to innovate continually and in the process understand, create and respect intellectual property rights. In-house R&D, the modernisation of production processes and skill upgradation of workers is a crucial requirement for product development.
Indian SMEs are also increasingly facing questions about product quality. There are now several competing low-cost manufacturing hubs around the globe. In order to sustain and build upon our market penetration, we need to focus on quality.
Global trade liberalisation and WTO have necessitated the removal of non-tariff barriers and lowering of tariff barriers the world over. But, this has been accompanied in developed countries by fast-increasing regulations and market requirement on account of enhanced consumer awareness. Market entry, therefore, in these markets has become tougher. These qualitative barriers responding to consumer needs and demands are in the fields of safety, health, quality, environment and social and ethical issues.
Product certifications enhance the value of the products and therefore, such products can command premium price in developed markets. Therefore, there is an urgent need for Indian SMEs to make continuous and concerted efforts towards product quality improvement and certification.
Indian SMEs need to imbibe e-commerce to enhance business operations and capitalise on emerging opportunities. We need greater use of information technology, both software and infrastructure, at all levels in manufacturing.
As is well appreciated by now, information technology is revolutionising business at a speed that is catching many companies off guard. SMEs need to be made aware that successful enterprises globally are knowledge-based.
?The writer is joint secretary, PHD Chamber of Commerce & Industry. These are his personal views