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Small vs large

Print edition : Jul 27, 2012 T+T-

A critical examination of the claim that micro units have new opportunities in the era of reforms.

Production units variously known as cottage industries, village industries, household industries and small-scale industries have been assigned an important role in discussions during our economic evolution over time and in our economic policy formulation. Mahatma Gandhi, in fact, provided them pride of place in his economic agenda and his political fight against the colonial rulers. When Independence came and Jawaharlal Nehru assumed leadership, there were doubts as to whether in the future development strategy of the country these entities would have the kind of prominence they had enjoyed for a while, or whether independent India would opt for modernisation with large-scale industry as its representative.

Somewhat strangely this small versus large issue (also seen by some as the Gandhian versus Nehruvian ideology) was resolved, for a while at least, by the strategy put forward by P.C. Mahalanobis as the basis for the Second Five-Year Plan (1956-61). That strategy was to take up large-scale and basic industries to make use of our natural resources as well as to form the basis for long-term development, but to rely on small-scale industry to produce the immediately required consumer goods (especially textiles) as also to provide employment for the growing labour force. Some problems arose in this attempt to walk on two legs but its inevitability as a pragmatic solution has been accepted.

It is often claimed that in the era of reforms that started in the 1990s, small units, now also referred to as micro units, have new opportunities. Critically examining this claim is the theme of this volume edited by Keshab Das with contributions by 14 other scholars.

The book points out that together these entities constitute a significant part of the Indian economy. Those familiar with the Indian economy know that in terms of employment, its organised sector, consisting of those in government services, public sector enterprises and the corporate segment of the private sector, accounts for less than 10 per cent. This is not surprising in a country where the bulk of the labour force is still engaged in agriculture. Even taking into account only the manufacturing activity, the unorganised sector (consisting of the small enterprises) dominates. The units of the Small-Scale Industries (SSI) segment are indeed tiny ones, over 90 per cent of them, being designated in official statistics as Own Account Manufacturing Enterprises (OAMES) consisting of a self-employed person, working possibly with the help of family members. Strictly speaking, therefore, they are not manufacturing enterprises at all, at best just household production units primarily concerned with livelihood issues in rural areas. It is not surprising, too, that they do not maintain any accounts (as business enterprises are supposed to do). The rest are officially classified as Non-Directory Manufacturing Establishments (NDME) hiring one to five workers and as Directory Manufacturing Establishments (DME) hiring six to 10 workers. The organisational structure of the former is mostly proprietorship, tending to be largely informal in nature.

There are further differences as well. Few, if any of the OAMES, use power or sophisticated tools. In terms of capital investment also there are sharp distinctions. Indeed, major differences can be seen in terms of the standard business practices that may be taken into account. Most of the papers in the volume deal with these differences at the all-India level as also in different States.

Unfortunately, when it comes to policy formulation these crucial distinctions tend to be largely overlooked, with the emphasis being almost exclusively on size as denoted by small, tiny, micro, and so on. Some papers in the volume trace the evolution of the policy regime towards these units over time, especially during the planning era. But the emphasis is on The Era of Reforms. There is clearly a shift in terminology. If during an early period the main issues were employment and livelihood and, to a limited extent, capital intensity, the discourse today is in terms of entrepreneurship, efficiency, supply chains, subcontracting, networking, equity participation, and so on. If handlooms symbolised cottage or village industries in an earlier period, the shift in emphasis is seen by the attention given to pharmaceutical firms in contemporary discourse. Says the editor in his introductory piece: The post-reform period has, hence, witnessed a significant shift that emphasises the predominance of larger, modern SSI units and those geared towards the export market as well as business service (as different from manufacturing) units. Such a policy move has been justified on the grounds that it would result in the decline of dependence of small enterprises on state subsidies and other concessions by the state.

Not that there is a total change. Interestingly, one finds in subcontracting the similarities between the old and the new. It is well known that in the days past many handloom weavers were engaged in work assigned to them by a master weaver who was aware of the demand for specific kinds of products. The weaver himself solved two problems simultaneously by working for a master weaver: ready availability of raw materials supplied by the master and an assured market for the product. Considerations of raw material and technology on the supply side and markets on the demand side still form the basis of subcontracting, except that the master today is likely to be in some other part of the globe.

The paper concludes: On the one hand, there are benefits of subcontracting in the form of an assured market, technological improvements, and other pecuniary benefits such as raw materials, machines and tools, but on the other hand, there is exploitation in terms of low wages, delayed payments, stringent quality controls, irregular orders, and rejection and/or cancellation of orders. An instance of continuity, of course.

There have been changes also. While continuing the pre-reform practice of defining units of SSI in terms of capital investment in plant and machinery, the limits have been enhanced. The upper limit was Rs.35 lakh and Rs.45 lakh for main and ancillary units respectively on the eve of reforms, with a category designated as tiny industry with an upper limit of Rs.2 lakh added in 1977. The new Small Industry Policy in 1991 raised the limits of main, ancillary and tiny units to Rs.60 lakh, Rs.75 lakh and Rs.5 lakh respectively. In 1997, the SSI limit was raised to Rs.300 lakh, but in 1999 it was brought down to Rs.100 lakh. An official survey in 2001-02 showed that as high as 98.62 per cent of the units had less than Rs.25 lakh in plant and machinery. In other words, as before, the small really dominates the SSI sector.

Among the new measures introduced in the post-reform phase is the cluster development programme initiated by the United Nations Industrial Development Organisation, which attempts to bring together SSI units in a given area for mutual support in terms of technological linkages, marketing opportunities and financial arrangements. While it has been given a great deal of publicity, the programme has not been satisfactorily worked out so far. In particular, it has not been easy to draw the tiny units effectively into the scheme. Encouraging self-help groups has been one of its major initiatives. It is, therefore, clear that the shift in policy that has come about since the reforms in terms of favouring small entrepreneurs, equity participation, technological upgradation, modernisation, clustering, outward orientation, competitiveness, and so on are meant for the few big among the small, while the vast majority, especially in the rural areas, will continue as before with not many opportunities to improve their living conditions.

There is much more in this volume to be taken up for detailed study by those academics, policymakers, administrators and others who have a special interest in matters relating to this major segment of the Indian economy.