The Growth and Transformation of Small Firms in India
Sebastian Morris et al
Oxford University Press
353 pages/Rs 595
With the liberalisation of the economy, a big question mark hangs over the fate of small firms. It is well-known that a policy of reservations, mandated credit and excise concessions have protected the sector so long.
With the slow and steady erosion of these concessions, what will happen to the small firms? Are they worth preserving?
What policies need to be followed to make small firms stand on their own feet and contribute to the open economy? These are the questions this book tries to answer.
Sebastian Morris, Rakesh Basant, K Ramachandran and Abraham Koshy are all faculty members of the Indian Institute of Management, Ahmedabad, while Keshab Das is with the Gujarat Institute of Development Research, Ahmedabad.
But first, a bit of history. The emphasis on small-scale industries was not, contrary to the popular impression today, a malign socialist policy.
The emphasis on small firms arose because the objective of the Mahalanobis Plan was to allocate to the capital goods sector as much resources as possible.
Small firms, which had much lower capital-output ratios and were capable of providing employment to millions of people, would be the engine of growth for consumer goods.
That is why the capacity of large firms in the consumer goods sector was capped, and a policy of reserving production for the small sector came into place.
The authors put forward the economic case for small firms succinctly. The dual nature of the labour market in India makes viable the existence of small firms that rely on unorganised labour, whose costs are much lower than the unionised labour available to the big companies.
At the same time, the vast economies of scale in modern industry, and the enormous resources needed for marketing, are factors that go against the existence of small firms.
However, the authors point to the existence of modern network economies and subcontracting relationships which have ensured the survival of relatively small firms in countries like Italy and Japan. The flexibility of small firms is an important factor in their favour.
Given the employment generating potential of small firms, allowing them to die out is not a solution.
But the authors say that reservation is not the way to go about helping the small firms. Nor do they believe that small firms should be supported by government orders.
They argue that reservation limits the development of the economy and inhibits the absorption of technology and development of markets.
So scrapping reservation is necessary, but it must be accompanied by policies that enable the development of a thriving small-scale sector.
The authors fear that freeing the credit markets would only result in the flow of credit to the small sector drying up.
According to them, non-performing assets in the small-scale sector are not particularly high, if the loans under political programmes are not included.
They are in favour of lower taxation and lower liquidity ratios for banks that lend to the small-scale sector.
They advocate a strategic depreciation of the rupee to support these firms
