Free Market, Reforms and SMEs

The Indian Economy is booming, with the proliferation of entrepreneurial opportunities and free enterprise. With the 1991 reforms there emerged a new India, an India of new ideas and vision for its future. This India was a hub of business possibilities and innovation. There were technocrats, IT professionals, educated and not so educated but enterprising people all waiting to venture in to the new market arena. Thus was born the new India. 

95% percent of India's industrial units come under MSME, Micro, Small and Medium Enterprises. With around 10 million units, this sector brings out thousands of products renders hundreds of services and contributes approximately 37% to India’s direct exports. This figure is not inclusive of agro and rural industries, enterprises coming under textiles, Khadi and village industries and also enterprises that are not listed in the products and services by SSI ministry. India’s growth is more a success story of its small-scale sector.   

The country has grown so much that the GDP growth today is over 9 %. This is a remarkable growth. Credit goes to the SME sector and also the State for creating an enabling policy framework for enterprises and entrepreneurs. Today, India’s entrepreneurial class is buoyant and taking no chance to be left out. 

As the State re-invented its role as promoter and facilitator of businesses and hence development, it has attempted to create a growth enabling environment. Policy enactments and reform measures were all targeted at that. The MSME Development Act of 2006, subsequent promotional package and emphasis given in the budget to address the issues of the sector as a long-term strategy all underlines the importance and high priority accorded to the sector, though there are issues to be resolved by the government. Today, most of the banks have separate SME divisions to address the financial issues of small sector. It is important to note that promoting SMEs is also relevant for achieving inclusive growth. Fruits of development have to reach all sections of society. To halve poverty, unemployment and to achieve millennium development goals, small sector has to be given much more importance. Poverty can be alleviated only when micro enterprises can grow and mature in to small, medium and beyond. 

But there are hindrances for SME development. The broad regulatory environment is still not so favorable for SMEs in India. SMEs are trapped in a growth-inhibiting framework, where remnants of pre-reform system work hand-in-glove with rent-seeking bureaucracy. The broad regulatory framework, encompasses different aspects: registration & licensing; labour; taxation; local regulations, needs further reforms in India, so that there will be more growth and more employment opportunities. Dr. Manmohan Singh echoes the same concerns when he talked about ‘rigid regulatory environment hampering SMEs in the country’. Finance Minister Chibambaram, said at TERI award function on May 23, 2007, that government’s existing policies do not induce producers to be innovative in judiciously using resources for producing goods and industrial and taxation policies. He also said that administrative rules are not conducive for innovation. 

Contribution of small sector to the global economy is an undisputed aspect. According to UNIDO estimates SMEs comprise more than 90% of all enterprises in the world and are on an average responsible for 80 to 90% percent of total employment. In the entire Asia Pacfic, more than 95% of companies are in SME sector, Japan 99%; Singapore 99.7%, Malaysia 96% etc. Similarly in the US 97 percent firms are in small sector. 

A closer look at the data released recently by the CSO reveals that sectors, where small-scale sector has considerable presence has done well. Sectors that are growing and that would grow further are the various SME segments. For instance, building materials, wood and wood products, furniture and fixtures, food products, etc. And in the days to come, there are innumerable opportunities for small enterprises to get in to and make the Indian growth story consistent and sustainable for the several years to come. 

However, SMEs have many challenges along with its prospects. Indian share in global export trade is less than 1%. Though Indian SMEs could make and render excellent products and services, the problem lies in finding suitable destination and markets says Mr. Hari Narayan, an export consultant. Along with that he cites vague and lack of clarity in compliance requirements act as hurdles to export trade by MSMEs. Mr. Narayan also emphasizes the importance of free trade zones to promote exports by MSME sector. 

That the marketing of products has become complex and difficult for SMEs in open economy is reflected in the findings of the Third Census of Small Scale Industries. The main reason why only a few companies can make their presence felt in foreign markets while others having the same potential are left behind is because of their inability to market themselves abroad. In the increasingly competitive global market, there arises a need to shift the productive base from low value, price-determined modes of operation to higher value, knowledge-based patterns of production and products. Also, SME companies should reorient their focus on exports. 

Here one would find variances in policy focus and priorities of different regions in the country resulting in disparities in SME performance. For instance, as much as 16.23 per cent of the country’s SME units are in UP but its share in export is just 10%. Whereas Tamil Nadu with just 7% share in enterprises accounts for 16% of the export earnings and Haryana’s with as little as 2.12 % share of enterprises has got 10.6 % share in the total export earnings. High value product exporters, better marketing and application of ICT at enterprise level would make the difference. A recent study pointed out that application of IT and e-commerce are crucial for SMEs in today’s global market. ICT has the potential to improve the core business of SMEs in every step of the business process.

Full employment of available resources is the biggest challenge of economic management and policy. Here the rescuer is none other than SME sector. Unleashing entrepreneurial power and developing an enabling environment would do wonders. Expanding economic & social opportunities is nothing more than SME development. Indian growth to be more inclusive and sustainable in the coming days, the state must aggressively implement its policies on SMEs and reach out to skeptics as well.    

Dr. Perumal Koshy is Economist with World Association for Small and Medium Enterprises (WASME). Views are personal and not that of WASME.   


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