Like any other developing countries, in India also, the Small Scale Industry (SSI) plays a very significant role in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. As at the end of March 2002, there were around 3.6 million SSI units – constituting 95 per cent of the industrial units in the country – which produced a large number and a wide range of items with associated technology varying from traditional to state-of-art. These SSI units provided employment to nearly 20 million persons, accounted for 40 per cent of the value added in the manufacturing sector, 34 per cent of total national exports and 7 per cent of GDP during 2002-03.
In the Indian context, the definition of the SSI sector is largely framed in terms of cumulative investment in plant and machinery while most of the countries adopt the level of employment as the criterion for defining the SSI sector.
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Among the developing countries, India was the first to display special consideration to SSIs. As alluded to earlier, the basic focus of Indian Government has been that, employment generation is of paramount importance in a labour surplus economy. Small enterprises manufacturing labour-intensive
products make economical use of capital and absorb the abundant labour supply that characterise an underdeveloped economy. Various measures used for the development of SSI have included product reservations, fiscal concessions, preferential allocations of credit and interest subsidy in a credit rationing framework, extension of business and technical services by the government and preferential procurement by the government. SSIs have been given preferential treatment through the provision of lower interest rates as well as requirement for a minimum credit allocation from the commercial banks.
Since 1986, fiscal incentives have also been provided to the SSI units in terms of complete exemption from excise duties or payment of lower rates, under specified conditions. Since April 1995, SSI units are allowed a deduction of 25 per cent of the profits for a period of ten years, for taxation purpose. In case the SSI units set up in specified backward area, full tax exemption is allowed for the first five years and a deduction of 25 per cent in the subsequent five years.
The limit for collateral free loans to tiny sector is Rs. 0.5million and that for other SSI units was Rs. 0.1 million. This limit has since been raised to Rs. 0.5 million for other SSI units also. Many small-scale entrepreneurs are facing difficulties in providing collateral security as per the requirements of the financing banks. The limit of 0.5 million has been further increased to Rs.1.5 million in respect of SSI units with good track record and financial position. The problem is addressed to a certain extent with the introduction of the Credit Guarantee Fund Trust Scheme under which collateral free loans up to a limit of Rs. 2.5 million are guaranteed.
Cost of loans
The high cost of borrowings was a major constraint affecting the growth of the sector. The Bank Rate changes by the RBI combined with CRR and repo rate charges have emerged as signalling devices for interest rate changes. The reduction in Bank rate announced in the last Monetary and Credit Policy or outside the policy from time to time has resulted in a consequential reduction in the lending rates.
Banks have now the flexibility to offer lending rates on a fixed rate or on a floating rate. The reduction in interest rates and the offer of floating rates will help the SSI units to procure funds at lower costs than what was prevailing in earlier years.
Considerable delay in settlement of dues/payment of bills by the large-scale buyers to the SSI units adversely affected the recycling of funds and business operation of SSI units. Though the Government has enacted the Delayed Payments Act, many of the SSI units are reluctant to pursue cases against major buyers. The Act since amended in 1998 has made it compulsory that the payment of SSI suppliers should be made within 120 days. To improve the plight of SSI entrepreneurs due to delayed payments, steps for strengthening and popularizing factoring services, without recourse to the SSI suppliers may have to be thought of seriously.
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The banks have also been advised about sub-allotting overall limits to the large borrowers specifically for meeting the payment obligations in respect of purchases from SSI. It is expected that these measures will improve the situation of delayed payments.
Marketing remains the most critical area for the SSI Sector as some of the units are very small and so is their output individually. Adopting consortium approach could best solve the marketing problems of the SSI sector. Besides finance for marketing related activities, dissemination of requisite information
on demand pattern, futuristic trend, etc. could be made available by the Development Institutions/SSI Associations, etc.
Challenges emanating from the WTO
To face the challenges emanating from the WTO agreement, SSI units irrespective of their size need technology up-gradation and modernisation. An awareness about the implications of WTO agreement has to be created. The preparation for competitiveness needs to be done by the Government as well
as entrepreneurs and the corporate. The Government should provide good infrastructure and create level playing field for the industry. Considering the fund constraints with SSI Sector Government has introduced the credit linked capital subsidy scheme for Technology up gradation of Small Scale Industries under which 12% back ended capital subsidy would be admissible on the loans advanced to the SSIs by banks/financial institutions for technology up gradation in certain select sectors.
Growing incidence of sickness of SSIs is yet another area of concern. When the sickness prolongs it leads to the closure of units and unemployment. Lately mortality of the SSI units has been showing increasing trend. This has wider implications including locking of funds of the lending institutions, loss of scarce material resources and loss of employment. The number of sick SSI units as a percentage to the total number of SSI units is around 10. The number of units identified as potentially viable as a percentage to total sick SSI units is around 8. The causes of sickness are both internal and external.
The major causes are limited financial resources, lack of organisational, financial and management skills and expertise, diversion of funds, diversification/expansion before stabilisation, non-availability of power supply shortage of raw materials, marketing difficulties, delayed and inadequate credit,
globalisation and liberalisation of the economy, obsolete technology, inadequate infrastructure, etc.
The Indian industry remained within an inward oriented policy framework up to the 1990s. With globalisation, liberalization, financial and real sector reforms, the country adopted an outward looking approach. At present, both the industrial sector in general and SSI sector in particular are exposed to international competitive environment. However, the most significant aspect is that India has evolved a sound institutional set up for financing of the SSI sector. New industrial policy was announced as part of the structural reforms in 1991, which eliminated various controls on the industrial sector, provided a greater role for the private sector and encouraged inflow of foreign investment and technology, but also contained specific initiatives for the development of the SSI sector.
The pace of de-reservation of SSI items, needs to be accelerated so as to ensure that size does not remain a constraint to higher production, cost-efficiency and technological upgradation.
Ministry of SSI under Govt. of India has been laying more emphasis on cluster-based approach for development of SSI sector. So far Ministry has identified 60 clusters for focused development of SSI and banks in these areas are initiating necessary steps to meet their credit requirements effectively.
As the evidence shows, several initiatives are being taken at the national and international levels to foster the development of SMEs and improve their access to finance. Notwithstanding these initiatives, impediments to SME finance remain, in different degrees, in both developed and developing economies, which constitute the single most important factor that could circumscribe their growth trajectory. Accordingly, the attention of policy makers may need to focus on the following three broad issues, viz., creating a conducive business environment, development of clusters, and enhancing credit flows to SMEs as these are widely debated in the contemporary discussions.
Governments need to take initiatives to ensure that the overall policy environment encourages industrial activity in general, and SME activity, in particular, given the latter.s significant contribution to general economic activity in many countries. This would entail efforts to maintain macroeconomic
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stability in terms of low fiscal deficits and debts (such that private savings are not pre-empted), low and stable inflation, low real rates of interest and a sustainable current account. This apart, initiatives would need to be taken, wherever necessary, to remove outdated and anomalous restrictions on domestic production, bring about a reduction in tariff and tax rates to internationally competitive levels, create a competitive environment through appropriate legislation, if necessary provide public infrastructure support, reduce inflexibilities in the labour market with due cognizance to the need for
appropriate social safety nets and invoke necessary reforms in bankruptcy and exit procedures. Streamlining of procedures to disburse loans to SMEs, creating a regulatory/legal framework that ensures timely payment of dues to SMEs, providing technical training to staff of financial institutions and organising general awareness programmes on SME financing would also be necessary. These measures would not only encourage SME activity but also have a salutary impact on their efficiency and hence, on their overall requirements of finance.
Newer forms of SME financing need to be fostered viz., venture capital and leasing. Commercial banks and local government funding agencies would need to play a major role in venture capital financing while insurance funds and pension funds could be tapped as important sources of finance.
Leasing, on the other hand, requires a less rigorous legal and regulatory framework vis-à-vis bank lending, since the leasing company retains the ownership of assets till the end of the lease. Even so, strengthening of leasing laws, encouraging banks and financial institutions to support leasing companies and appropriate training through technical assistance would help foster the development of this alternative important source of finance for SMEs.
In conclusion major problems/challenges faced by SSI sector in India are:
__ availability of collateral free loans
__ cost of loans
__ delayed payments
__ challenges emanating from WTO related issues
A number of steps have been initiated to promote the healthy growth of SSI Sector. However, to ensure the prospects of these enterprises, SMEs, in the coming years will have to gear up to face the challenges of liberalisation. I am confident that given the inherent strength, the sector will develop a global vision, respond to more demanding standards of the customers and adopt key strategies that could take them ahead in competition. Credit should not be a constraint for viable projects.