Role of Public Policy

OUTLOOK/ SIZE MATTERS

A good business scenario rather than subsidies

Has our public policy played an important role in the development of SMEs in the country? Has it laid the foundation of better competitiveness for this sector? Has it helped in poverty reduction, employment generation? What is the key determinant of growth in SME sector? How do we compare with other countries in this regard? Are we changing our policy stance with the changing business environment and the evolving role that SMEs play today?

These and similar other questions seek research responses for ascertaining the course of public policy thrust, as we enter the world of globally integrated SMEs, a phenomenon hitherto restricted to, by and large to big corporates earlier.

Cross-country research by World Bank throws up interesting findings on some of the issues raised earlier. Firstly there is a strong correlation between a large SME sector and a fast growing economy but is not a cause of their rapid growth. Perhaps the reverse can be also true and that is that the SME sector grows well as a result of a fast developing economy. Secondly the SME sector development does little in terms of income improvement in the poverty class, little in terms of reducing the depth and breadth of poverty, across countries. Therefore while there is no evidence that SMEs cause economic growth or reduce poverty, there emerges strong evidence that an effective business environment does in fact cause economic growth and thereby supports growth of SMEs as a very important factor. The benefit of this economic growth is, however, limited to GDP per capita income improvement and does little for poverty reduction.

Public Policy implications based on these findings therefore seem to suggest that the focus should not be on subsidising SMEs in any way but on fostering a better business environment for both entrepreneurs as well as their financiers. The positive correlation with Business Environment is with three basic characteristics viz

1.Easy and effective protection of property rights,

2.Quick, cheap and easy enforcements of contractual obligations &

3.Reduction in aggregate measures of costs for

* Starting/registration of new ventures, * Compliance in managing ongoing companies and * Winding up efficiency of insolvent businesses.

There is also another interesting view that the size of an optimal successful firm in an economy is as a result of factors such as natural resource endowment and factors, technologies, policy and regulation and institutions, which in turn determine the relative costs of production (in-house costs) and marketing costs (out-house costs). Further, difference in these relative costs determines the size of a successful firm in the economy. E.g. As 'out-house' costs lower in an economy; the optimal size of the successful firm also reduces. This is true today with the development of information technology based solutions and the emerging trend of global SMEs.

In India, the policy that restricted labour intensive sectors for SMEs in sectors such as toys, shoes, garments etc, have also greatly influenced the outcome of SME development, sometimes as hindsight brings out unambiguously, at the cost of having missed large global opportunities for the country as a whole, by distorting market responses beyond imagination. In addition, the traditional policy approach of subsidising SMEs have led them to compete mainly on cost basis and this has crippled away their innovation capability over the years, which is infact the primary need of SMEs today and tomorrow.

In conclusion therefore there is a clear case for both central and state governments and institutions like SIDBI, BSE IndoNext, ICICI and other banks to develop and fund programmes that deliver a better business environment than subsidise SMEs of the future, to ensure their sustainable development.