The Small Scale Industry in India

An Analysis in the context of Liberalisation

Electronic copy of this paper is available at: http://ssrn.com/abstract=950252

Contents
1. Introduction
2. Small Scale: Rumors and Reality
3. The Small Scale Sector in India
3.1 Historical Context and Definition
3.2 A Few Figures
4. Government Policy
4.1 Introduction Origins and Nature of Policies
4.2 Reservation of Production Lines and Effect on Exports
4.3 Credit Market
5 Other Issues facing the Small Scale Sector in India
5.1 Lack of Institutional Credit
5.2 Quality Standards and Lack of R & D
5.3 Marketing
5.4 Labor Standards and Pollution
6. Concluding Remarks

Tables and Figures

References

Electronic copy of this paper is available at: http://ssrn.com/abstract=950252

Introduction

In the changing scenario of globalization and liberalization, it is crucial to take a long and
hard look at the small scale sector in India. What the numbers; 6% of GDP, 35% of
exports, 30 million employed and so on, hide, is a sector rife with bureaucracy, over-
regulated and over protected, and facing an uncertain future. The small scale sector in
India is very diverse producing over 8000 products, from traditional handicrafts to high
end technical instruments. Generalizations are also difficult because though there are
firms which are growing rapidly, there also exist 1,38,000 sick units within the sector.
This paper attempts to look into some of the problems which this sector faces in India.
The paper focuses largely on the issue of Government policy as it is difficult to have any
discussion on the small scale sector in the Indian context without analyzing the effect of
the policies that surround it. The first three sections of the paper give a brief introduction
to the small scale sector, and more specifically the sector in India. The next section
examines the issue of government policy, the focus area of the paper. The fourth section
is an examination of some of the other issues that small scale producers in India face. The
last section is a summary of the findings and results, and presents some points for the
beginnings of an alternative approach.

Small Scale: Rumors and Reality

Small enterprises are of critical importance to the functioning of an economy and thus
economic development. In developed OECD economies, about 60 percent of GDP is
generated by small enterprises, i.e., enterprises with a maximum of 50 employes. It is
easy to understand why this is the case. A modern market economy consists of thousands
of markets, which require millions of enterprises to be reasonable competitive and
efficient. A large number of small enterprises guarantees a high degree of competition,
and the variety of economic activities is so great that as many enterprises as possible are
needed in a modern economy.

There are however some arguments made in favor of small units which need to be briefly
examined before studying the sector in the Indian context.

Growth: Small firms are often said to grow faster than large firms, thus making the size
distribution shift in favor of small firms would allow the economy as a whole to grow
faster. However empirically what one sees is that though some small firms may have high
growth rates, they as a group have a high death rate, that is, many firms do not last very
long. This means that the total effect on the economy may not be much greater than that
of relatively larger firms. Also an important point to note here is that historically only a
very small percentage of small firms have grown into large ones.

Employment: Small firms and enterprises are an important source of employment in

many developing nations, often employing a sizable share of the labor force. However it
is often suggested that small firms are more labor intensive, and therefore should be

3
encouraged as a way of generating employment. Empirical data however seems to
suggest that small firms may be more capital intensive than large firms in the same
industry. Employment growth as well has been seen as something which small firms can
aid in. Here again, the evidence is mixed: if viewed in net terms (job creation less job
destruction), it is difficult to conclude that small firms do any better than large firms,
since small firms exhibit high birth rates and high death rates, and many small firms fail
to grow.

Efficiency: Productivity is often said to be the highest in small firms. This however
varies greatly, both within and across industries. Studies also seem to suggest that it is not
small firms which are the most efficient; in fact they are the least, but medium-scale
firms. Small and medium scale firms do however have the advantage of being more
dynamic and flexible than larger firms, thus giving them the ability to offer more
customized products to their customers.

Intervention by the state is often argued on the grounds that small firms are more
efficient, contribute to more equitable distribution of income, and generate employment.
Empirical data however does not always support these claims. It is undeniable however
that the small scale sector exists, and is a very sizable sector, often employing large
proportions of the work force. This in itself should give the state a reason to be concerned
with the sector. Its interventions however should be aimed at correcting market
inefficiencies and failures rather than a paternalistic approach of protection, which often
results in actually stinting the growth of the sector. The affects of this ‘paternalistic’
approach are further analyzed in the Indian context, where the small scale industry has
been, and still is largely protected.

The Small Scale Sector in India

Historical Context and Definition

India has traditionally always had a very vibrant and competitive small scale sector. Even
after the dawn of industrialization, British producers of textiles found hand made Indian
textiles such a threat that they lobbied hard to have its import banned, succeeding in the
late eighteenth century.

After independence, Indian planners and policy-makers felt that protection was essential
to the development of a strong, indigenous economy. The Indian state played an integral
role in the industrial and economic development of the country resulting in a dominant
public sector and heavily regulated private sector. Public policy, immediately post
independence, ensured this through the reservation of certain industries for the public sector
and also controlling and regulating the private sector, so as to channel investment into desired
areas. India also followed a policy of ‘import substitution.’ This was followed by putting
strong emphasis on indigenous production, and discouraging imports through import
licensing, stiff quantitative restrictions and high tariff rates. Thus the first four decades after
independence saw the development of a highly protected economy. Owing to the feeling that
the small scale sector was an important tool in employment generation, value creation and
poverty alleviation, small-scale units were given further protection. Small scale units were

4
given the reservation of over 800 products’ exclusive production in the small-scale sector,
reservation of some of the products produced in the sector for purchase preference by
government agencies, supply of scarce materials, input price concessions like lower
interest rates and numerous fiscal measures such as excise duty exemptions and other tax
concessions.

The role of the state in the development of the small scale sector has not always been
greatly beneficial to the sector itself as will be studied in greater length later in the paper.
The government has also been very muddled in its definitions of the word ‘small-scale’
itself. In 1997 the definition stood at a unit with investment in plant and machinery of Rs.
60 lakhs or less. This was raised to Rs. 3 crore, so as to encourage small units to expand
and grow and upgrade their technology. In 2000 however the government lowered the
limit to Rs. 1 crore, ostensibly because dilution of the small industry category as a result
of setting the investment ceiling too high works against the genuinely small units which
really need the government's support. In 2006 a new bill was passed, ‘The Micro, Small
and Medium Enterprises Development Act,’ which defines the enterprises as the
following, “a small enterprise, where the investment in plant and machinery is more than
twenty five lakh rupees but does not exceed five crore rupees.” The act also envisages the
setting up of a National Board for Micro, Small and Medium Enterprises which is
supposed to “examine the factors affecting the promotion and development of these
enterprises and review the policies and programmes of the Central Government in regard
to the facilitating the promotion and development and enhancing the competitiveness of
such enterprises.” This Board is also to make recommendations to the government on the
matter of the development of such enterprises and how to overcome their problems.

Post 1990 has seen a gradual opening up of the sector due to the policy of liberalization
with some of the products being de-reserved and increasing competition from within
India and abroad as well. However a large number of the products remain reserved,
making this a sector which is still highly regulated. The new challenges and the
opportunities which globalization and liberalization gives rise to for the small scale
industry are analyzed in greater detail later in the paper.

A Few Figures

Before one goes on to analyze the small scale industry and its various shortcomings and
advantages, it would be beneficial to keep some facts about the sector in mind.

Category 2005-06 figures 2001-02 figures

No. of Units 12.34 million 10.52 million
Employment 29.49 million 24.93 million
Production Rs. 4, 70, 966 crore Rs. 2, 82, 270 crore
Share in GDP 5.81 percent∗ 5.77 percent
Share in Industrial 38.55 percent∗ 39.12 percent
Production
Share in National Exports 34.38 percent∗ 34.29 percent
Share in Net Bank Credit 8.5 percent 12.5 percent

∗
2004-2005 figures

5
Sick Units 1, 38, 000 1, 77, 000
No. of Products 8000 -
Manufactured
Source- Business Today, September 10, 2006.

What the above table shows quite clearly is that the small scale sector is anything but
small. It accounts for nearly 40 % of our industrial output and 35% of our national
exports, while employing nearly 30 million people, the second largest after agriculture.
The table also shows that the small sector has been growing rapidly, even in the face of
growing competition, internally and globally, and decreasing protection levels. However
this is not to say that there are no shortcomings within the industry, or in public policy
relating to it. There are numerous problems that small scale units face today like
maintaining quality standards, access to credit, over- regulation etc., all of which are
looked at in the following sections.

Government Policy
Introduction, Origins and Nature of Policies
The small scale sector, has since independence enjoyed a special status regarding
government policy. It was, in the pre 1990 protectionist era, further cocooned with extra
protectionary measures, and even today post liberalisation, continues to enjoy numerous
privileges. The reason given for this was primarily two-fold, one being the beneficial role
the sector plays in employment generation, and income dispersion, and secondly because
of the market imperfections the sector faces.

The policy regulations relating to the small scale sector are such that they ensure that
units stay just that, small. In the second plan (1956-61), the importance of the small scale
sector was highlighted and it was felt that as this sector, due to its importance in “a)
creation of broad-based employment opportunities and b) wide dispersal of industrial
production.” The policies proposed then, were, and remain the main backbone of public
policy relating to the small scale sector. What we see however is that this policy has been
largely unhelpful, if not detrimental to the development of the sector. This section
analyses the effect of the government’s misdirected policies on the sector.

To quote Gurcharan Das from his article ‘The Indian Model’

“Post-independence, Nehru attempted a state-directed industrial revolution. Since he

didn’t trust the private sector, he tried to replace the entrepreneur with the government
with unhappy results. He shackled private enterprise with Byzantine controls and denied
autonomy to the public sector. Perhaps the most egregious policy was reserving around
800 industries, designated "small-scale industries" (SSI), for tiny companies that were
unable to compete against the large firms of competitor nations. Large firms were barred
from making products such as pencils, boot polish, candles, shoes, garments, and toys --
all the products that helped East Asia create millions of jobs. Even since 1991, Indian
governments have been afraid to touch this "SSI holy cow" for fear of a backlash from
the SSI lobby. Fortunately, that lobby has turned out to be mostly a phantom -- little more
than the bureaucrats who kept scaring politicians by warning of a backlash. Over the past

6
five years, the government has been pruning the list of protected industries incrementally
with no adverse reaction.”

The Industrial Policy Resolution 1956 clearly stated that “…the aim of state policy will
be to ensure that the decentralized sector acquires the sufficient vitality to be self-
supporting….The state will therefore, concentrate on measures designed to improve the
competitive strength of the small scale producer.” This shows how, though the sector was
seen as crucial in increasing employment and increasing dispersion, it was also felt that
they would be able to do so only if they were economically viable. The policies were
meant to aid the development of the sector by rectifying some of the market failures it
faced, and not to shelter it to such an extent that it was stifled.

What actually transpired was a set of policies designed to make the sector dependant on
outside help, economically unviable, and with perverse incentives to stay small. The
policies have all aimed at helping the small scale sector, but instead of tackling the real
problems, only circumvented them, or in some cases created bigger ones. The policies
have been largely protective instead of promotional, continuous instead of one shot, and
non-discretionary instead of discretionary, all which have given positive disincentive to
improve competitive strength.

Promotional measures aim to increase the efficiency and economic viability of small
units by providing infrastructure facilities and improving access to markets. On the other
hand, protective measures give small units preferential treatment. Government policy has
been largely of this kind, and reservation for small scale production, purchase preference
by the government, lower interest rates etc. are all examples of this kind.

Continuous measures are those benefits which a small unit may avail of as long as it falls
under that category, while one-shot are those which may be availed of only once, and
tends to be discretionary in nature. Most policies like preference in government
purchases; lower interest rates etc. are continuous in nature.

Discretionary measures are those which require an examination on a case by case basis
and are not blanket measures available to all units which fall under the definition of
small. Non discretionary, by implication, are those measure which are based on some
objective criteria and are applicable to all units that meet the criteria.

Reservation of Production Lines and Effect on Exports

The reservation of certain production lines solely for the small scale sector has been and
remains the most important instrument of policy regarding the sector. The objective of
this policy was to improve the competitive strength of the small scale sector, and
protection was seen as a transitional step. In 1997, more than 40 years after the adoption
of this policy, the Abid Hussain committee, an expert group was set up to look into the
matter of small scale sector policy. They made a strong case for the abolition of these
reservations and went to the extent of saying, “Reservation of products for the small-
scale sector must be totally abolished. It has been so ineffective that even a phased
abolition will serve no purpose.” The primary problem with this policy is that instead of
being an instrument of transitional protection, it has become an end in itself. This has

7
ensured that the primary objective of improving the sector’s competitive strength has
been completely side-lined and forgotten.A successful small scale industry, instead of
expanding to achieve its economies of scale and increase quality levels, is forced to
remain small if producing a reserved item. This has only had a detrimental effect on the
growth of manufacturing, exports and employment generation.

Exports especially has been badly hit as firstly no firm was able to gather the experience
needed in the home market to exploit the global market, and secondly because, due to
reservations, no firms are large enough to handle large orders. An important and common
factor in the economies of the East Asian ‘Tigers’ was the high growth in manufactured
exports accompanied by high growth in manufacturing employment. If one examines
export data of countries like Thailand, Korea, China etc. a clear trend emerges whereby
the initial engine of growth seems to be low- tech, labor intensive products like toys,
footwear, clothing and so on, and then a gradual shift towards more advanced products
like electronics, computers and other sophisticated products. The Indian case on the other
hand is noteworthy in that there is almost no change in the structure of exports since the
early 1980’s. India’s exports of low technology products grew from $2.5 billion in 1985
to $13 billion in 1995, while Chinese low technology exports grew from around the same
level of $ 3 billion to as much as $72 billion in 1995. The relative positions have not
changed over the last 10 years, if anything the Chinese lead has increased. The difference
is stark and is a critical factor in making China’s economic growth much more broad-
based than that of India. A direct link can be made here between the reservation policy
and India’s inability to kick start its exports as a large number of items of a simple nature
which could have been manufactured at an early stage of development, like toys, sporting
equipment, electrical appliances, bicycle parts and so on; were reserved.

This policy of reservation becomes even more meaningless when seen in the light of
liberalization, under which over 75 percent of the reserved items are freely importable.
What this essentially means is that competition from abroad is permissible, whereas
Indian competition from the large scale sector is not!

Credit Market

There are primarily two market imperfections the small scale sector faces regarding the
credit market:
1. Capital costs faced by SSEs (Small Scale Enterprises) are typically higher because of
market imperfections in the availability of information for investors and lenders.

2. Transaction costs in bank lending exhibit pronounced economies of scale with respect
to loan size. Thus, the unit transaction costs for SSEs are higher than those for large
firms. Moreover, provision of collateral or other risk-reducing securities is often difficult
for SSEs.

In the credit market, small scale units face a disadvantage due to the greater behavioral
risk of default as well as the higher cost of lending. To solve this, the aim of the
government should have been to aid the credit market in developing techniques and
practices specific to the sector which would have reduced risk and cost of lending. The
government attempted to counter the problem by enforcing mandatory credit allocation to

8
the sector. It did this, in an already protected environment, by offering the sector lower
interest rates and through the requirement that at least 15 percent of all bank credit was to
be allocated to the small scale sector. This ensured that the sector not only got used to
‘easy money’ and very often remained economically unviable, but also that those units
which most deserve credit did not necessarily get it as banks were only looking to fill
their quotas. The government also set up specialized lending institutions for the small
scale sector at the state level. These however were rife with bureaucracy and
irresponsible in their lending, as visible in their recovery record: an average of 37 percent
over the past thirty to forty years!

What the protectionist stance of government policy has ensured is that productivity is not
really a concern for small units selling in the local market. Their concern is not so much
with labor productivity as with utilizing the various concessions given to small
enterprises –reservation of production lines, excise duty and interest concessions, or even
evading excise duty altogether. The profits of small-scale units are more related to what
is nowadays called ‘rentseeking’ than to productivity. This distorts the market mechanism
in the small scale sector and ensures that numerous small units are set up instead of
growth of units vertically, into larger units.

Undoubtedly the small sector is poised for change and a big leap; but this will not happen
without a forward-looking policy which will push the sector, against its own will perhaps,
out of its state-designed protective rut.

Other Issues facing the Small Scale Sector in India

Lack of Institutional Credit

For most small enterprises “access to timely and cheap finance is possibly the biggest
problem.” If one looks at enterprises in the segment of Rs.1-5 crore turnover, it is
estimated that only 35-40 percent of them get adequate credit. Traditionally small and
medium enterprises have been seen as risky investments for banks as they did not record
very high growth rates. Added to this, the sector’s informal business practices and poor
information flow has ensured that banks have stayed away. Even the best of small scale
units get loans at rates 175-200 basis points higher than large corporates.

Despite several initiatives to speed up credit-flow, such as setting up of the Credit

Guarantee Corporation, tiny sector credit norms, intervention of specialised institutions
such as NABARD and SIDBI, the purview of institutional credit is still limited only to
14.91 per cent of SSI units in the country. A study by CRISIL showed that small
enterprises have lower access to bank credit, with a significantly lower median gearing
(i.e. debt as a percentage of shareholders’ equity) of .34 times compared to .73 for large
corporates. Adequate information in the form of surveys, credit ratings etc. are also not
available, further decreasing available finance for the sector. These factors have ensured
that the small entrepreneur has no avenue for finance other than expensive loans, or
finance from informal but expensive sources like moneylenders. This premium at which
funds are obtained, again affect the unit’s ability to perform competitively and efficiently,
further accentuating “the vicious cycle of small size and inadequate finance.” The
government, realizing the importance of the small scale sector has tried boosting credit

9
flows to the sector, targeting a doubling of credit flow from Rs. 67,000 crore in 2004-05
to Rs. 1, 35,000 crore by 2009-10.

Things on the ground are however changing as along with an added thrust by the
government, private players too are waking up to this large captive market. Small
entrepreneurs too, realizing that the onus of getting cheap finance lies with them as well,
have begun to improve their business practices.

Quality Standards and Lack of R&D

One effect of the policy of reservation has been production of a sub standard quality, with
little emphasis on Research and Development. This, though not always true, is the
general trend in the sector, especially if one does not look at new service oriented units
like those working in IT. This has meant that the quality of products available to the
Indian consumer is of low grade quality, with little effort to improve. What this also
means in the light of the changing globalised scenario is that the products of these units
are often not competitive in the global market. The scale of production being so small
until now and the sector being highly protected, standardisation and quality checks were
of not much importance. However if these units wish to exist in the new liberalized and
globalised economy these are essential pre-requisites. A recent study by the department
of science and technology of R and D and technological innovation in small industry in
Karnataka, a state that has seen high growth in the last decade, supports this impression.
The study found that most small firms undertake R and D to keep up with or overcome
competition- the concept of ‘innovation’ being nearly non-existent.

Though a direct relationship between size of firm and innovation does seem to exist,
studies also suggest that firms which innovate tend to grow even bigger. This is important
in the Indian context where the small size of the firm also ensures numerous concessions,
thus giving little incentive for firms to grow. In effect, there is a real concern that the very
policies which were directed at ensuring growth may be in the new environment actually
acting as an obstruction to the vitality of those sectors of the industry which are
innovative and dynamic.

Another point that seems to stand out from the study in Karnataka is that the units that
have undertaken R and D have done so with little or no support from the government.
This stands out when seen in the light of the fact that the government, over the last 60
years, has set up a vast and expensive support infrastructure for small sector enterprises.
This seems to be borne out by the facts, The Central Scientific Instruments Organisation
in Chandigarh, an institution under the CSIR, could transfer only 12 of the 48
technologies it had developed at a cost of Rs 18 crore for commercial exploitation.
Similarly, in the National Metallurgical Laboratory, Jamshedpur, none of the 24 projects
completed during 1993-96 had been transferred to industry. Clearly these institutions
appear to be out of sync with the needs and demands of the market and industry.

Marketing

One of the most difficult challenges that small scale units face is marketing their products
effectively. These units often lack the economies of scale required to undertake large

10
marketing initiatives. This is one area which has also been neglected by the sector due to
the disincentives to grow that exist in the system of reservations and protection. However
rising pressure to de reserve products and increasing imports of these products mean that
the sector will now be forced to look at the matter of marketing more seriously if they
wish to survive. This is also one problem which most government policies do not tackle
directly but try and solve by circumventing it through reservations and preferential
buying by the government. This is not really a long term solution to the problem, and in
fact may give rise to further problems, as already shown.

What the sector needs are associations within the sector itself which will help in building
common brands and marketing initiatives so that they may be able to compete with larger
firms. Instead of competing severely against each other through undercutting in prices,
the small manufacturers could try a collaborative approach by setting up marketing
consortia. The small- and medium-scale bulk drug manufacturers based in Hyderabad
have jointly set up a company to facilitate execution of large export orders which they
were not able to do individually. A similar step has been taken by four small leather
goods manufacturers in Calcutta. This will allow them to grow and reach out to larger,
newer markets and at the same time share the costs and expertise required for marketing.
E-commerce too is an interesting avenue that has opened up recently and may provide a
cost effective solution for small scale marketing initiatives.

Labor standards and pollution

The small sector has an abysmal record when it comes to labor standards and following
environment and pollution norms. Though the small scale sector has been protected for
nearly five decades now, it has not meant a protection of those whose livelihoods depend
on it. Small sector workers have neither benefited economically nor have they gained a
political platform for articulating their demands. Blatant violations of labor norms are a
well known feature of the small sector. Much has been said about the small sector's
potential for creating employment; yet the state has imposed few norms and conditions
on the creation of safe and healthy working environments in the small and tiny units. In
fact, time and again, the small sector has got away with gross negligence of worker safety
on the plea that creating better conditions of work would involve investments which the
units are not capable of making. A combination of structural, administrative and political
factors has combined to ensure that there has been no sustained articulation of labor
demands from this sector. While the small entrepreneur has been provided protection, the
state has quite callously denied the provision of similar protection to small industry
workers. Contrarily, although infant mortality in the sector has hardly registered a change
in the last 40 years, and its performance has been far below expectations (except in the
last few years with the coming of the IT sector) there has been pressure from the small
and the growing section of middle entrepreneurs to expand credit availability and ease
restrictions of all kinds.

Small units are today very major polluters, producing over 3900 million liters of waste
water everyday. Small units in industries like dyeing have led to serious problems in
towns situated on small rivers like Pali, Balotra and Jodphur in Rajasthan, Jetpur in
Gujarat and Tiruppur in Tamil Nadu. Units producing dyes and dye intermediates have
also become major sources of both groundwater and surface water pollution. The village

11
of Bichhri has seen all its wells become black in one monsoon. Small sector units are
major pollutants partly because of the old and obsolete technologies they use, but mostly
due to the general lack of concern for these aspects. These units are very often able to get
away with there infringements of the law, as they are small and therefore do not attract
attention, and also using the fact that they are small as an excuse for not being able to
improve conditions. Time and again, as for instance in the well known Delhi pollution
case, when these industries have been forced to close, the workers have been the worst
affected. And yet neither the courts nor the state authorities come up with concrete
proposals to ensure that small industries do not pollute by making mandatory provision
for effluent treatment of all emissions and other measures.

What must be encouraged and enforced is responsibility. Small entrepreneurs have

enjoyed numerous benefits for decades now without having to give any thought to labor
standards and environmental considerations. This will have to change with more stringent
laws and regulations, and not allowing them to use the fact that they are ‘small’ as an
excuse.

Concluding Remarks
An analysis of the small scale sector in India is in some ways both heartening and
disconcerting at the same time. What one sees is a sector with enormous potential, and
which seems to be growing despite the restraints on it. It is a sector where, after
liberalization, only 20 of 700 toy manufacturing firms in Delhi managed to stay out of the
red, due to Chinese competition, and yet in a matter of less than five years had regained
their lost ground, driving even the dreaded Chinese out of the toy market. This is an
example of the unleashing of the potential of the sector, something which hasn’t really
been allowed to happen yet.

What therefore should be the outlook for the sector in the future? Where are its growth
opportunities and how can government policy help it reach there? What the focus of the
sector, and the policies surrounding it, needs to be is to isolate the advantages and
strengths it enjoys, and work on those. Small-scale industries enjoy certain inherent
strengths such as lower over-head costs, flexibility in production, informality in labour
relations, exploitation of local resources and skills, capacity to execute small orders and
to offer customized services. The small scale sector is often able to offer the niche
services which the larger manufacturers are unable to. For example, countries such as
China, Bangladesh, Malaysia, Philippines, Sri Lanka have no reservation for the garment
industry and yet the small-scale units, are thriving. The large units specialize in executing
large orders of institutional garments while the small units take on smaller orders of high
fashion, seasonal garments. Collaborative relations between the large, medium and small
units through subcontracting arrangements are well established. This can be used in the
Indian context as well. The government’s policies should seek to strengthen and promote
such collaborative efforts rather than keep them apart through protectionism.

To counter competition in the long run and to be economically viable, the small scale
sector needs to improve its productivity and quality, reduce costs (given the higher
qualities) and innovate. Government policy should promote the small scale sector by
helping them increase their efficiency and competitiveness within a market driven

12
economy. For this it is essential that it no longer follows a protectionary stance, as that
has already been shown to be harmful to the sector. What is required is an enforcement of
time bound concessions, emphasis on core advantages of small scale sector, emphasis on
innovation, an increasing of the amount of credit information on the sector, and
strengthen local associations of small units as collectively they can counter many of their
problems. Till date however, the policies have been paternalistic in nature, leading to
dependency. The skewed approach of the government ensured that small units had no
incentive to actually solve their common problems of inadequate finance and lack of
information. Instead the policies only created perverse incentives for these units to
remain small, while being unable to provide infrastructure and to remove the basic
problems of small units such as limited access to markets and finance. New approaches
like the cluster approach or harnessing the power of industry associations should also be
encouraged.

Undoubtedly the small sector has enormous potential, and is a crucial aspect of the Indian
economy. However for the sector to fully realise its potential, it is essential that it firstly
wakes up to the new reality of a liberalising India and therefore the need to get out of its
state-designed protective rut, and secondly that the Government realises the urgent need
for a shift in policy regarding the sector, so as to allow it to flourish.

13
Tables and Figures

List of reserved items

• Food and allied industries (9)

• Wood and wood products (9)
• Paper products (19)
• Plastic products (53)
• Chemicals and chemical products (7)
• Natural essential oils (2)
• Organic chemicals, drugs and drug intermediates (33)
• Other chemicals and chemical products (67)
• Glass and ceramics (27)
14
 • Mechanical engineering excluding transport equipment (137)
• Electrical machines, appliances & apparatus (17)
• Electronic equipments and components (1)
• Transport equipment boats and truck body building (3)
• Auto parts components and ancillaries and garage eqpt (36)
• Bicycle parts, tricycles and perambulators (41)
• Miscellaneous transport equipment (4)
• Sports goods (7)
• Stationery items (13)
• Others (21)

Source: GOI (2005)

Evolution of Investment limits for Small Scale Industries

Year Investment Limit for Small Scale
1950 Up to Rs. 0.5 million in fixed assets
1966 Up to Rs. 0.75 million in plant and machinery
1875 Up to Rs. 1 million in plant and machinery
1980 Up to Rs. 2 million in plant and machinery
1985 Up to Rs. 3.5 million in plant and machinery
1991 Up to Rs. 6 million in plant and machinery
1997 Up to Rs. 30 million in plant and machinery
1999 Up to Rs. 10 million in plant and machinery
2006 Up to Rs. 50 million in plant and machinery
Source: GOI 2006

Increase in number of items reserved

Year No. of items reserved

1967 47
1970 55
1974 177
1978 504
1980 833
1986 863
1989 836
Source: Rakesh Mohan(2002)

15
Source: Hallberg, Kristin (1999)

16
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