Nobody’s children

Despite historic growth figures and a new law to help small-scale industries in the last year, small industries continue to suffer from their traditional problems.

In June last year, the President gave his assent to the Micro, Small and Medium Enterprise Development (MSMED) Bill, 2006, whose aim is to promote and develop “small and medium enterprises”. The phrase used before this bill was introduced in 2005 was ‘small-scale industries’, but the MSMED Act sought to create two categories — ‘small’ and ‘medium’. After some small-scale industry associations objected, the term ‘micro’ was introduced. These divisions are based on the size of a company. By bringing larger companies into the bracket, it has been feared that most of bank lendings would go to what has been described as ‘medium’ enterprises. An indication of this is that private and foreign banks regard a company with a turnover between Rs 10 crore-700 crore to be a ‘small and medium enterprise’ (SME). The MSMED Act regards a ‘tiny’ enterprise to be one whose plant and machinery is worth Rs 25 lakh or less, a ‘small’ industry as one whose investment in plant and machinery is between Rs 25 lakh-5 crore, and a medium enterprise as one whose investment is between Rs 5 crore-10 crore.

A small-scale industry unit was earlier one whose investment was within Rs 1 crore. Industry units used to deliberately try to remain ‘small’ on paper even if their investments were more than Rs 1 crore (sometimes by dividing companies) so that they could avail of various exemptions and benefits accorded to the small-scale industry (SSI) sector. This also led to a situation where small industries remained small.

There were 1,400 items on the SSI list, which meant that those not classified as SSIs could not manufacture these items. These items ranged from auto parts to brass, fisheries to agricultural items. Since 1997, each Budget has removed dozens of items from this list — by now the list is down to 373, mostly agri-items, and the 2007-08 Budget is expected to remove some more. “The de-reservation policy has been responsible for many of us closing our shops,” says Amit Agarwal, president of the Indian Industries Association’s (IIA) Ghaziabad chapter, adding that the withdrawal of State protection and support has been worsened by the coming of Chinese goods into the market.

This has forced Indian SSIs to face competition from both Indian and foreign large companies, without having access to reliable credit facilities or basic infrastructure facilities like electricity. “The most important problem we face is lack of electric supply. That is the single most important factor in increasing our production costs,” says Sri Prakash, additional secretary of the Lucknow chapter of the IIA. There is also the problem of stringent labour laws, but this has become easier as the MSMED Act allows state governments to relax labour laws for enterprises with 50 or less employees. Other infrastructure problems that continue to plague SSIs include transport, market information, water, telecom, technology upgradation and quality certification. Small industries are often run alone by an entrepreneur or a family and a lot of their quality entrepreneurial time is compromised in obtaining government clearances, especially environmental ones, and abiding by the complicated tax procedures.

The tax procedures may become simpler as the Centre has indicated doing away with exemptions in the 2007-08 Budget, but that only adds to the woes of the small industry. Sunil Vaish, chairman of the Kanpur chapter of the IIA, says that not only have SSIs been long demanding simplification of the taxation and exemption procedures, but also the raising of the excise exemption limit from Rs 1 crore-Rs 3 crore. “The last time this was raised was in 2001 and in five years our costs have doubled,” says Prakash.

The SSI sector’s main woe remains credit. The growth rate of the SSI sector has been declining since 1989-90 and its recession seems to have been over by 2001, but during this period the number of sick SSI units also piled up. The new growth is coming from the larger SSIs who have survived this recession, and they are the darlings of the banks now.

According to the third all-India census of small-scale industries, the total worth of about 98 percent of SSIs was less than Rs 10 lakh, including the cost of plant and machinery. This means that new policies, particular the emphasis on credit rating, are going to help the 2 percent cream.

Several new schemes by banks have emphasised on credit ratings for SSI units so that a criterion can be evolved for lending at different rates as well as reducing the burden of non-performing assets on banks, a large chunk of which comes from sick SSIs. “Credit rating and other financing measures look at balance sheets and small industries have very low marginal profits, so we lose out on this count,” says IIA’s Vaish.

The MSMED Act talks of the composition of the Micro and Small Enterprises Facilitation Council but a number of such institutions established over the years have failed to check recession and sickness in the SSI sector. These institutions include the ministry of small scale industries, the SSI Board, the Small Industries Development Organisation, the Small Industries Service Institute, the Product-cum-Process Centres, Regional Training Centres, National Small Industries Corporation etc. Though it adds another such institution and promises help, the MSMED Act does nothing new to alleviate the problems of the small and tiny industries.

[First published in Tehelka.]