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SSI sector: Still groping for a WTO-compatible policy

S.D. Naik

THE creation of a new Ministry of Small-scale Industry and Agro and Rural Industries has triggered a burst of new ideas and policy initiatives. The compulsions of the emerging competitive business environment and the impact of the agreements with the Wor ld Trade Organisation (WTO) also provided an impetus to these initiatives.

Last November, the Ministry decided to embark on a detailed sectoral study of the impact of the various WTO agreements on the country's SSI sector. However, the Ministry has not been able to shed any light on the likely impact of the WTO regime on SSIs s o far.

As for the policy response, while the Government had announced its intention to come out with a new policy by August this year, it still seems to be groping in the dark for a suitable SSI policy.

There is a great deal of confusion on a number of issues (some of which are actually non-issues) such as the investment cap on capital investment, the foreign direct investment (FDI) ceiling, interest subsidy, dereservation of items, creation of a techno logy upgradation fund for the sector, and so on.

Unfortunately, while promising a new deal for the SSI sector, the successive Governments have been tinkering with peripheral issues rather than dealing with the real problems facing the sector.

For instance, the Government decided in May 1998 that the previous United Front Government's decision to raise sharply the investment limit in plant and machinery for the SSI sector from Rs. 60 lakhs and Rs. 3 crores was unwarranted. Hence the limit was brought down to Rs. 1 crore.

Now the Ministry of Small-scale Industries has mooted a proposal to hike the investment limit selectively for certain sectors reserved for the small-scale sector to Rs. 5 crores from the existing Rs. 1 crore. The Government is also expected to discuss th e issue of raising the foreign investment limit in the sector from the present 24 per cent to 49 per cent.

The above changes are under the active consideration of the Government so as to enable the SSI sector in the country to brace itself for meeting the situation arising out of the total removal of quantitative restrictions (QRs) on all items by April 2001. What is not understandable is the Government's continued reluctance to do away with the reservation of items for the SSI sector even when the items in the reserved list will face open competition from imports.

Once the quantitative restrictions on imports go, reservation of items for the SSI sector would become meaningless. Also, while the Government would like the FDI to flow into this sector, it will not happen as long as the Government does not scrap the po licy of reservation.

As for the investment cap, there is no denying that it is necessary to raise it for the much-needed technology upgradation of the SSI sector. At the same time, one cannot ignore the fact that some 90 per cent of the SSI units in the country have invested less than Rs. 25 lakhs in plant and machinery. What these units need above all is easier access to institutional credit and its adequate availability rather than equity capital. The tiny units, in particular, turn sick when starved of working capital.

Hence the P.R. Nayak Committee, which submitted its report in 1992, had recommended a minimum level of working capital finance by banks to SSI units at 20 per cent of the value of their output. Even today, this recommendation remains on paper.

What is more disappointing is that the S.L. Kapur Committee, set up by the RBI in 1998, had come out with the shocking revelation that only 15-20 per cent of the SSI units in the country were able to access bank credit and there are areas where developme nt banking services are not just available to this sector. This area should receive the highest priority.

In most countries, the small and medium-scale units are clubbed together for policy purposes and they are called SMEs. Perhaps the Government should think in terms of creating a separate category of medium-scale units with investment limit of say Rs. 10 to 15 crores and encourage them to raise equity finance, including foreign equity along with institutional finance. While the broad policies could be the same for SMEs as a class, the tiny units could be given a much higher level of institutional support .