1. Editorial: Thinking big on small firms

Editorial: Thinking big on small firms

MSMEs will benefit from the end of protectionism

By: | Published: April 15, 2015 12:15 AM

The government has done well to end the last vestige of the licence raj for small and medium enterprises (SMEs) by scrapping the list of 20 products that were still reserved for SME production. The list includes pickles, chutneys, bread, safety matches, laundry soap, steel chairs and padlocks, among others. Now, any enterprise, big or small, can make these items. How irrelevant the protection was—at its height, 800 items fell in the reserved list—can be seen from the lack of protest from SME groups as, over the years, government after government pruned the list.

For one, bigger firms were able to find ways to circumvent the order anyway. Two, and more important, the protection didn’t really help as what SMEs require to remain competitive in even the local market is to be globally competitive. And they couldn’t be globally competitive if there was an incentive for them to remain small. Indeed, even though the investment  limit for a firm to remain classified as an SME has been set at R10 crore, this is not enough—SMEs have to pay excise duty once revenues cross R1.5 crore. So, SMEs often split up their units in order to remain SMEs and this actually hurts their interests. In the past, there have been several studies on how SMEs didn’t avail most incentives meant for them as it was quite tiresome, and time-consuming, to do so. Indeed, if big firms are to be allowed to make, for instance, pickles, chances are this will help SMEs the most. For one, smaller SMEs can expand and still be allowed to manufacture them. Two, if the SMEs become part of a value-chain of a large producer with a powerful marketing chain, this can only be beneficial.

With over 45% of the country’s manufacturing output—and 40% of exports—coming from the SME sector, this is an important component of GDP. The problem, however, according to a study by India Ratings, is that over 46% of loans to SMEs are stressed. While it is to be hoped that some part of this will be taken care of by the new MUDRA Bank and by RBI Governor Raghuram Rajan’s plans to allow receivables to be securitised and traded, what SMEs require is a more conducive working environment as well. SMEs have been seeking exemptions from various Acts including the Shops & Establishments Act and the Factory’s Act and some states including Odisha, Andhra Pradesh and Madhya Pradesh have worked towards making life easier for small industry. This could be in the form of a single-window clearance and in reduced factory inspections. If the government is able to genuinely free up SMEs from red-tape, this is a sector that is bursting to grow. But for this to happen, enough SMEs have to put in the necessary work to scale up instead of simply looking for more exemptions.

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