Sunday, August 19, 2007

Should reservation for SMEs to be done away with?

Backward march on SMEs, says today’ ET editorial. Is it?

The paper took strong objection to the proposal of the government, which seeks to give a legal backing to the existing price and purchase preference available to micro and small enterprises.

At present the government has reserved 358 items for exclusive purchase from registered small scale units. They also have a 15% price preference in case of items manufactured by both SSI and large-scale units.

It says that this step is retrograde for the following reasons:

  • It discourages scale economies and in the long run compromises their competitiveness.
  • The idea runs counter to the intended progressive de-reservation of small-scale sector.
  • As the list of items reserved for manufacture by the SSI sector has been pruned from 900 in the late 1990’s to about 114 now, it implies that a large number of the 358 items reserved for exclusive purchase from the SSI sector are competing with the large private companies.
  • The 15% purchase preference enjoyed by the SSI sector is unlikely to make them competitive vis-à-vis the larger players who enjoy scale economies.
  • In globalizing world, it has become increasingly difficult for shielding the SME sector from imports in the domestic market.
  • The idea that SME sector needs to be enabled to compete with large players is flawed in the first place.
  • When market principles have delivered a vibrant SME sector in advanced countries, there is no reason why that should not happen in India.

What is needed is that SME sector is not disadvantaged in anyway in terms of access to market, technology, credit and research.

While very cogent and persuasive, the above line of argument is flawed.

Even advanced countries like the US have some sort of reservation for the SME sector. Thinking that pure market dynamics have delivered a vibrant SME sector there, is not correct. True, there are factors other than reservation that enabled them to be vibrant. Of the two prongs of the approach that are required for delivering a vibrant SME sector, reservations is the easiest. When this easier approach itself has not delivered the results for this long, expecting the other alternative – that of ensuring market access, technology, credit and research etc., to deliver is nothing but wishful thinking. Do we have an alternative mechanism that grants access to markets, technology, credit and research to SME segment? Without such a tool or mechanism, why should the existing one be given up?

Nobody can understand our culture, ethos and capabilities better than ourselves. So, why should we keep importing solutions to our problems? Those solutions may or may not work. Why should we keep forgetting solutions architected by our own economists, leaders and people? Even after six decades of independence, what Gandhiji said remains relevant – that India lives in its villages. A natural corollary to that is the better deliverance capacity of dispersed manufacturing/wealth generating capacities over large scale manufacturing behemoths. Encouraging them would ensure a more rapid percolation of economic growth benefits than large scale industry.

Giving a legal backing to the reservation of certain items from SSI sector should not be seen as a retrograde step.