Writing on the wall

BS OPINION

Many, if not most, of today's small-scale units are unlikely to survive for long in their current form "" according to the AIMA survey, 60 per cent of firms were not confident of surviving for more than five years.

The reason for this is simple. The old methods by which small units flourished have disappeared or are disappearing.

One was tax benefits and sundry concessions (on power tariffs and interest rates, for instance), which helped units in sectors like air-conditioners and detergent powder.

Another was the reservation policy, which has played itself out in terms of usefulness "" as the AIMA survey suggests.

A third was the nature of the Indian market: brands were not very important, and the market tolerated varying (including indifferent) quality as well as limited batch production.

All these are changing rapidly as markets consolidate in sector after sector.

Fourth, many small units have used basic production methods that were ruinous to the immediate environment; but environmental issues are now getting more attention, as the leather units of Tamil Nadu have discovered.

And finally, technology is becoming more important, especially to downstream industrial customers who have their own quality demands, and technology costs. In short, India has to re-think its small industry model. In sectors like automobile components and readymade garments, for instance, markets are increasingly dominated by a few players whose order sizes are so large "" a single order by retailer WalMart on Levis for their Signature brand of jeans very recently required 60 million meters of fabric "" they cannot be serviced by companies that have small capital bases.

As the global textile market opens up 16 months from now, India will discover that its small garment units will have to give way to giant companies if they are to exploit the new opportunities that get thrown up.

Neither duty concessions nor low levels of production will continue in any significant form as suppliers exert pressure on India and the logic of market opportunity forces the government to adapt policy.

While duty concessions, of the type given to powerloom weavers in the past, can sustain small-scale units in competition against the larger mill sector, this has resulted in such fragmentation of the industry that it is not globally competitive in many areas "" few Indian firms can produce the large volumes of cloth of a consistent shade and quality that are required to meet orders of the WalMart type.

What is to be done, given that the sector employs around 19 million people (much more than large-scale industry)? The AIMA survey has some pointers.

For one, in the period 1998-2002, when the growth rate of small units in north India was minus 5.2 per cent, that of southern units was a healthy 26 per cent. This has to do with two things.

There are fewer bureaucratic hurdles in the southern states (inspectors' visits to factories are a third less, compared to the north), and there is a lot more over-all investment and economic growth in these states, leading to a more conducive atmosphere for small units as well.

Liberalising labour laws, now that ill-conceived excise benefits for the powerloom sector have been removed, will remove another advantage for small units as the labour market gets more integrated.

It will also lead to a textile and readymade garments boom "" and the textiles sector is a large source of employment.

To the extent specific incentives have worked in the past, these relate to removing infrastructural bottlenecks through setting up industrial parks or export zones (37 per cent of AIMA's sample used industrial estates).

Another pointer from the AIMA survey is that, even at the worst of times, small units in the service sector have fared well.

So SSI units need to work at becoming the service arms of big manufacturing firms, not just ancillary manufacturers, though that too is a viable model.

And since areas like tourism and retail are big employment generators, everything should be done to encourage growth in these sectors.