SSI Sector in India: Compulsions

of Globalization and Fund Flow

ARVIND MAYARAM

G l o b a l i z a t i o n h a s r e s u lte d in lo w e r in g o r ab o litio n o f protective

b a r r i e r s f o r t h e s m a ll-s c a le in d u s trie s (S S Is)1 in In d ia as m uch as
i n o t h e r c o u n t r ie s . T ra n s n a tio n a l corp o ratio n s (TN C s) are
c o n s o l i d a t i n g t h e ir a c tiv itie s a n d c o n ce n tra tin g o n their core
c o m p e t e n c i e s , o u t s o u r c in g n o n -c o re activ ities. T h is is bringing
S S I s s i g n i f i c a n t l y in to th e v a lu e c h a in s o f th e T N C s. H ow ever, in
c o u n t r i e s w h e r e s u c h in te g ra tio n is n o t tak in g p lace, SSIs are
m i s s i n g o u t o n th e e m e r g in g o p p o rtu n itie s. W ith o u t adequate
p r e p a r a t i o n f o r t h e tr a n s itio n fro m p ro te c tio n ist reg im es to open
g l o b a l m a r k e t r e g im e s , s c a le d ise co n o m ie s are p u ttin g pressure
o n th e s e c to r.
A s p a r t o f it s e c o n o m ic re fo rm s, In d ia ann ou nced a policy
f o r t h e S S I s e c t o r to m a k e it co m p etitiv e. S in ce 1991, the num ber
o f i t e m s r e s e r v e d f o r th e S S Is h a s stea d ily b e e n red u ced from 842
t o 6 7 5 . A l l i t e m s r e s e r v e d fo r S S I m a n u fa ctu rin g has now been
p u t o n O G L ( O p e n G e n e r a l L ic e n c e ) fo r im p o rt an d therefore
p r o d u c t r e s e r v a t i o n p o lic y h a s a n y w a y lost its relevance.2
C o n c e s s i o n a l c r e d i t h a v e b e e n w ith dra w n. It is resulting in
o p e n i n g o f n e w m a r k e t s , h e n c e n e w o p po rtu nities fo r the SSIs.
I n t e r n a t io n a lly , a n S S I (S M E ) h a s fiv e sp ecia l characteristics:3
 SSI Sector in India 219

i: (i) Credit constraint

(ii) Low business perform ance
(iii) Scale of diseconom y in R&D and low quality of human
jjv resources
(iv) Lack of marketing inform ation
(v) Manufacturing flexibility
|£: Credit constraint, w hich is part of overall capital
§. availability, results in low business perform ance and scale of
diseconomy in R&D and low quality of human resources. For
instance, a low capital base results in a shortage of qualified
personnel, who require a variety of skills to initiate new
programmes in m arketing, R& D etc. A s a result, SSIs face
problems in differentiating their products. This results in low
business performance. Availability o f funds, especially credit, is
| •assuming a very critical aspect in determining the survival o f the
SSIs in the rapidly changing econom ic environm ent
The Indian SSI sector is also passing through a critical
period. Recently, the Prim e M inister acknowledged the need for
creating a legal fram ew ork, w hich would address the problems
of the SSIs, including Inspector Raj, marketing support,
technology upgrading, infrastructure development in SSI
clusters and credit.4 The decline in the fund flow to the SSI
sector, despite the increase in availability, ought to be a matter of
great concern to the policy makers. The SSI sector is the
backbone of the m anufacturing sector in terms of employment in
the country. Recently, the Sm all Industries Developm ent Bank of
India (SIDBI) has announced the operationalization o f Rs. 10,000
crore fund for providing concessional credit to SSIs. SIDBI claims
that the entire am ount would be disbursed in the next two
years.5 The fund w ill cater to the working capital and non-fund
facilities needs also, and w ill be provided through SIDBI
branches, the State Financial Institutions (SFIs) and the
commercial banks. Considering the current status of SSIs in
India, it is unlikely that this m ove would redress the problem in
entirety.
Finance is available through the financial institutions (FIs)
and the banks for new SSI starts as well as developing
businesses but it requires business credibility, reflected in good
 220 Globalization an d D ev elop m en t: P rem ises a n d Perspectives S S I S e c t o r in I n d i a

management, a proven track record, and above all, a sound ratin g s e r v ic e s to S S I s .

credit rating. This is also true for funds from factoring. In w ith b u ild in g c a p a c it ie s i
addition, the cost of factoring is a disadvantage. Typically, a c co u n tin g , q u a lity , i
factoring carries an interest that is at par with bank overdraft a b so rp tio n e tc . T h is , in tu
facility, i.e. 1.5 percent to 3 percent over bank base rate. There is cre d it w ith th e F I s a n d in
also a service charge, which ranges from 0.5 percent to 2.5 I t is in te r e s tin g th a t
percent per annum for recourse factoring. It is only marginally In d ia. I n th e A P E C S M
lower at 0.1 percent to 1 percent of turnover for confidential S m a ll a n d M e d iu m En1
invoice discounting. These add to the cost of operation o f the h av e b e e n h ig h lig h te d . T
SSIs making them non-competitive.
(a) S M E s a p p e a r t o re
One way to address the issue is to provide legislation-based in te r n a tio n a l tr a d e
financial support to the SSI sector, which is likely to be d o m e s tic a r e a s , an<
considered by the India's ministry of small-scale industries
while framing the new SSI law. These measures can include (b) S M E s a r e la g g in g
statutory provision for credit flow to the SSIs, protection a c c e s s in g in fo r m a t
against unnecessary and cumbersome security requirements, (c) O n lim it e d e v id e :
supervision of credit facilities by an ombudsman/regulator, am ount o f ban k
access to public funds (debentures, deposits, securities etc.) and r e la tiv e to l a r g e f i
time-bound payment by large industries for the supplies made
T o m e e t t h is c h
by SSIs. However, legal regulation of markets could also lead to
p o lic ie s a n d p r o g r a m !
distortions (alarming increase in NPAs), inefficiencies in the SSIs
(anti-competition) or shrinking of markets for them (large a n d m a k in g t h e m g lo
industries developing in-house facilities instead o f outsourcing). 50 p e r c e n t o f APE<
fin a n c e , 6 6 p e r c e n t ]
There are several small and medium-sized banks (both
1 0 0 p e r c e n t p r o v id e
commercial and cooperative) in south India, which have lent
tra in in g , 7 5 p e r c e n
vigorously and successfully to the SSIs. Their operations can also
c o o p e r a tiv e s a n d 1(
be emulated elsewhere in the country. However, this too cannot
e x p o r t a d v is o r y s e r
comprehensively ameliorate the situation pertaining to the credit
availability to the SSIs. s tr e n g th e n t h e c a p a
ra p id ly g lo b a liz in g e
Two committees set up by the central governm ent looked at
credit availability to the SSI sector specifically. The Nayak I n I n d ia to o ,
Com mittee looked at the long-term credit and the working a p p r o p r ia te p o lic ie s
capital requirem ent of the SSIs and recommended the norm o f 75 A n y p o lic y in b
percent o f credit against capital investment requirem ents and 20 th e lig h t o f t h e fo il
percent o f the value of production as that of the w orking capital. lib e r a liz a t io n , m a n
The Abid H ussain Committee gave several recom m endations to ch an g es acro ss tl
deal with the problem of credit faced by the SSIs, while a c q u is itio n s , c o m p
endorsing the N ayak Committee recommendations. O ne of the s iz e d p r o d u c t io n a
m ore im portant recommendations pertains to extending credit th e p r in c ip le o f
e c o n o m ie s o f s c a le
rating services to SSIs. This w ould m ean back en din g it
with building capacities in the field of m anagerial com p eten ce,
accounting, quality, netw orking, m arketing, techn ology
absorption etc. This, in turn, w ould im prove their cred ibility and
credit w ith the FIs and increase fund flow to them .
It is interesting th at this issue is not plaguing SSIs only in
India. In the APEC SME Profit 2000,6 three factors th at afflict
Small and M edium Enterprises (SM Es) in file con text of FD I
have been highlighted. These a r e :
(a) SMEs appear to rem ain substantially underrepresented in
international trade and FDI relative to their contribution in
dom estic areas, and relative to large firm s.
(b) SMEs are lagging behind (especially in 2020 econom ies) in
accessing inform ation from the internet and e-econom y.
(c) On limited evidence, there seems to be a decline in the
am ount of bank finance being m ade available to SM Es,
relative to large firms.
To m eet this challenge, APEC econom ies have adopted
policies and program m es, which are designed to support SM Es
and making them globally com petitive. As policy interventions,
50 percent of APEC economies provide SM Es subsidized
finance, 66 percent provide subsidized technology assistance,
100 percent provide subsidized consultancy services, HRD and
training 75 percent provide subsidies for netw orks and
cooperatives and 100 percent provide subsidized access to
export advisory servcies.7 M ost of these interventions aim to
strengthen the capabilities of the SMEs to do business in a
rapidly globalizing environment.
In India too, intervention of the governm ent through
appropriate policies is necessary to m eet this challenge.
Any policy intervention m ust see the problem of finance in
the light of the following factors : (i) due to globalization and
liberalization, m anufacturing sector is undergoing structural
changes across the board, and (ii) through m ergers a n d '
acquisitions, companies are creating international econom ic
sized production capacities. All green-field units are adhering to
the principle of minimum economic size. As a result, the
economies of scale achieved by such units cannot be matched by
222 G lobalization and D evelopm en t: Prem ises and Perspectives

the SSIs. This is resulting in the steady decline in the

com petitiveness and profitability of the SSIs. The FIs, including
those providing factoring services, seek credible, low risk
exposures. M ost SSIs fall out of this net.
G overnm ent m ust provide specific focus to making the S 3
sector globally com petitive through policy interventions. In this
context, there are three sets of policies that the government must
consider. First is to encourage integration of the SSIs in the value
chain of large industries. V ertical integration is suggested as a
good strategy to generate immense strategic value.8 This can be
done through a m ix of prom otion and incentive programmes. At
every stage large m anufacturing units should be involved in and
com m itted to supplier development program me. There should
be one agency for supplier development programme at works
closely w ith other governm ent agencies and the large industries
and which is capable of identifying suppliers' needs and find
solutions. A t the sam e tim e, TNCs and large domestic industries
should be encouraged to become partners, as is happening in
some other countries (Table 1).
Events are also instruments of investment promotion and
creating linkage between TNCs and SSIs. The World Association
of Investm ent Promotion Agencies (WAIPA) has conducted
capacity-building workshops on event management as a tool for
investment promotion in several countries successfully. Events
have been organized in the past where 'buyer-seller meets' have
attem pted bringing together potential customers and suppliers.
INTECHMART and INVESTMART9 have been very popular in
India. To make these events effective, three types of activities can
be planned to promote matching10:
(i) Supplier fairs and exhibitions give the customers ('mother'
companies) the opportunity to display (he products they
would like to source from the local vendors. However,
these events have limited utility because it is difficult for the
customers to display a large number of components that are
required.
(ii) Sub-contracting exchange schemes offer lists of. potential
suppliers to interested 'custom ers' ('mother' companies).
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TABLE 1
LINKAGES
Name of livefim /agency Name of Key elements Exceptionsform §Mis
% programme
a.
Toyota, Thailand Global Optimum —Global cost comparison Excel in S'
Purchasing —New supplier and - Quality
Framework technology programme -"Cost
—Reinforcement - Delivery
programme for current
- Engineering (including technology)
suppliers
- Management

Intel, Penang —Partnership readiness - Technical competencies

- Manufacturing capabilities
- Ability to respond to multiple and
sudden change
- Meet stringent environmental,
health and safety requirements
- Competitive from a total cost
perspective
8
f i a t /u n i d o Partnership - Establishment of Willingness to extend control over
Programme structured industrial the entire value chain to the reduce
network dependence on a single partner.
- International

Globalisation and Development: Premises and Perspeeft^

orientation

Irish Trade and National Linkage - Gathering information Flexibility to quickly adapt to change
Technology Board Programme on purchasing
specifications of TNCs
- Supplier audits
- Supplier training
Source: TNC-SME Linkages for Development, UNCTAD 2000

S& $ector
j$
SSI Sector in India 225

(iii) Information and motivation events for the suppliers offer

information to the suppliers on the advantages and
potentials of sub-contracting and the promotional schemes
of the government.
Secondly, forward linkages need to be encouraged. These
are generally in the form of franchising. Although this type of
relationship between large industries and the SSIs does not
require government intervention or support, some of the more
proactive countries have evolved schemes to encourage such
forward linkages. The Government of Singapore has formed a
Franchise Development Centre and a Franchise Development
Assistance Scheme. In Malaysia, separate Franchise/Vendor
Division has been created within the Ministry of Entrepreneur
Development to look after franchise/vendor development
activity. In some countries multilateral or bilateral agencies have
created support systems. ILO in Indonesia and USAID in South
Africa and Russia are two such examples.11 Measures to develop
franchise include the following:
(i) Organizing events for building awareness of the potential
benefits of franchising, contractual requirements, best
practices, etc.
(ii) Reviewing the existing regulatory framework that affects
the franchising system, making necessary changes to permit
seamless entry of SM Es in this activity and creating a one-
stop facilitating agency for assisting franchises.
(iii) Facilitating contacts between international franchisers and
potential domestic franchisees by organizing franchise fairs.
These kinds of fairs are organized on an annual basis in
countries such as the USA, France and Germany.
(lv) Encouraging establishm ent of Franchising Association both
at the national and state levels.
(v) Providing tax or other incentives to large industries that
develop franchise networks in the country, by providing,
where possible, equity and technical support. Special focus
areas as non-m etropolitan towns can be identified for
special attention.
(Vl) Providing finance for franchise operations through
establishm ent of venture capital funds. Innovative mo es o
 226 Globalization and Development: Premises and Perspectives

fund flow can be considered. For instance, finance can be

routed to the franchisees through the franchiser industry or
through the Franchise Association.
Thirdly, joint ventures between TNCs and local SSIs can be
strong development driver. This also reduces the rigours of the
transition from a protected economy to a more market
determined economy. This will not only strengthen the SSI
sector but also create backward and forward linkages between
the TNCs and SSIs that would make the operations of the former
more competitive. Matching the demand and supply between
the TNCs and the SSIs has been successfully managed in several
countries under the 'Sub-contracting Exchange Programme.'12 It
is believed that building up interdependence between the two is
not only beneficial to the local SSIs but also the TNCs.
International best practices indicate that governments offer
support in three areas to encourage SME JVs.13 These are:
(i) Information services for and training SMEs to become
efficient and mutually beneficial partners with the
TNCs. This includes capacity building in relationship
management, contractual obligations, risk benefit analysis,
sequencing stages of joint venture (JV) development etc.
(ii) Match making between TNCs and local SMEs is also an
important function. This does not necessarily result in the
formation of JVs but deepens the TNCs, understanding of
local capabilities and opportunities of working together
with the local firms. It also helps the local SMEs in
identifying potential JV partners.
(iii) Financing the local SMEs to match up to the requirements
of a JV becomes a critical element in the development o|
SME-TNC relationship. The local SMEs may not have
adequate capital to match up to the JV requirements and the
government can provide bridge capital on soft terms.
Both central and state governments in India are pursuing
many of these policies in different forms. But these efforts add
up to very little because focus is missing. Secondly, programmes
are mostly credit driven through the FIs and available only to
successful SSIs, those who would have obtained credit from
normal channels anyway and these do not systematically cover
 SSI S ector in In d ia 227

SSIs in terms o f num bers or coverage o f sectors. Focused, tim e-

bound and result-oriented policies should be put in place to
integrate SSIs into rapid ly globalizing econom y and improve
their credit w orthiness.

NOTES AND REFERENCES

JcM. A 'small-scale industry' (SSI) has been defined under the

ric Industries Development and Regulation Act (1951). Currently, a
jy, unit having fixed capital investment in plant and machinery to the
extent of Rs. 10 million (Government of India notification, 2001) is
defined as SSI u n it There is no definition of medium scale
industry although the Study Group on Development of Small-
Scale Enterprises, constituted by the Planning Commission, has
proposed that a unit having fixed capital investment in plant and
p machinery between Rs. 10 million and Rs. 100 million be defined
as medium scale industry (MSI). In this article, the terms SME and
SSI are used interchangeably.
2, Bala Subrahmanya, M H. 2003. "SMEs in India in the Era of
Globalization : Performance and Prospects," ASCI Journal of
L ^Management, 32 (1&2) : 54-67.
3* Refer Chung Chiang Chen. 2004. "Globalizing Environmental
Problems and SMEs' Survival Strategies : Perspectives from a
y. Developing Country. Journal of Social and Economic Development.
j Reported in The Hindu, 31 August, 2004.
3. SIDBI press note.
3. Working draft by Chris Hall Pacific Economic Cooperation
Council.
7- Ibid.
8. r W i n n , J. 1993. "Performance Measures for Corporate Decline and
Turnaround." Journal of General Management, 19(2): 48-63.
9- UNIDO supports such programmes in the developing countries.
^O.' UNCTAD 2000.
jy UNCTAD 2001.
U UNIDO.
13.< UNCTAD.