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Editorial Articles

Volume-3, 21-27April, 2018


Encouraging Environment for Small Enterprises

Ashwani Mahajan

Small Enterprises have always had an important place in the Indian economy, may it be output, employment or exports. Apart from this, they have been vehicles of growth with equity and decentralisation. Therefore, economic policy should rightfully be targeted at promotion and protection of small enterprises. However, for more than two decades, this sector has been in a serious crisis. Closure of a large number of small enterprises has not only become a stumbling block in the creation of jobs, growth and development of the economy is also getting hurt.

Impact of  Liberalization  and Globalization

Industrial Policy adopted in the post independence period imposed various restrictions on large scale private industries; and industrial policy at that time became synonymous with 'License and Quota Raj'. While existing industries learned the art of living with this policy, the same policy created barriers for new entrepreneurs.

So far as the Small Scale Industries were concerned, the policy allowed SSIs to operate in the consumer goods sector and even many items were reserved for SSIs. Before the advent of the new economic policy in 1991, 812 items were reserved for production in the Small Scale sector. The New Economic Policy (NEP) storm mercilessly killed this policy of reservation. Similarly, Small Industries were given preference in government procurement as well, both in terms of price and purchase preference. Slowly these concessions to SSIs vanished in the name of promoting competition. It was said that reservation policy for SSIs comes in the way of development of technology and kills competition. Protection causes inefficiencies and country would not withstand international competition. It was argued that if we continue protecting domestic industry including Small Scale Industries, Foreign Investors would be discouraged and consumers' choices would also be hampered. NEP's arguments took precedence over arguments of employment, decentralization and equity favouring concessions to SSIs.

Policy of open imports in the era of globalization did help us in getting number of goods and sometimes even technology, but at the cost of closure of millions of Small Enterprises, which couldn't face fierce competition from the rest of the world. Though, in some sectors like automobile, we do find some growth in ancillary small scale units; however, Small Scale sector in general faced extinction especially due to import flood from China. Huge import surge from China, not only caused huge burden of foreign exchange payment on the country due to heavy imports of toys, power equipment, mobile, computer and other electronics accessories, project goods, power plants etc., our industry and businesses were also destroyed, causing widespread unemployment.

How to Encourage ‘Make in India’?

Though, there is hardly any doubt about dumping by China and its ill effects on India's Small Scale sector, it is equally important to understand that Chinese government provides most conducive atmosphere for the development of industry and entrepreneurship in China; and has turned China into a manufacturing hub of the world.

In India, costly electricity, outdated labour laws, complicated tax system, high rates of taxes, problems in getting finance, lack of infrastructure, laws inhibiting start of enterprise, inspector raj and perverted environment laws are some of the problems which have been coming in the way of healthy development of Small Scale Sector. Thus, we can say that not only the problems arising out of unequal competition from imports, there is a whole plethora of problems faced by them ranging from start of enterprise to the marketing of final produce.

Need for Separate Labour Laws

Nobody would deny the importance of protection and welfare of labour. Though, policy of unjustified 'hire and fire' policy is no good and we need to protect workers' interests; however, one can't justify same laws for big and small enterprises. Scenario has changed now and due to complex labour laws, Small Enterprises, instead of hiring regular labour, have started shifting to contract labour. Contract labour is exploited by the intermediaries and organic relationship between entrepreneur and the labour goes missing, affecting welfare of both entrepreneurs and workers. Given this problem, the Second Labour Commission gave an important recommendation to enact separate laws for Small Enterprises. Workers organizations also favoured such initiative. Sometime ago, a bill called 'Micro Small and Medium Enterprises Bill' was formulated. However, need to have separate labour laws for Small Enterprises remains.


Banks and other Financial Institutions feel that it's risky and cumbersome to lend to small enterprises. There is hardly any truth in this thinking, given the NPA crisis being faced by banks due to big loans turning bad. Due to this preconceived notions of banks, they try to avoid lending to Small Enterprises, even circumventing their legal binding of priority lending to Small Enterprises. Further, Small Enterprises get loans at higher interest rates, whereas big borrowers get loan at much cheaper rates and on more easy terms, without hassles.

After the current government took over the rein of power, it has tried to facilitate Small and Micro Enterprises through Micro Units Development and Refinance Agency (MUDRA), Start up schemes etc. Beneficiaries of MUDRA loans have not only employed themselves, rather they have created many more jobs.

Restricting Flooding and Dumping of Imports

Although foreign trade is a normal phenomenon in modern days, however, it has been a major cause for distress to Small Enterprise. Reason is dumping by some foreign countries, especially China. Central government has now started imposing Anti-Dumping Duty in a big way. In a written reply in Rajya Sabha, the then Commerce and Industry Minister Nirmala Sitharaman had said that Anti-dumping duty is in force on 93 products concerning imports from China. In addition, 40 cases concerning imports from China have been initiated by the Directorate General of Anti-Dumping and Allied Duties.

We find that the imposition of anti dumping duties on some items in the year 2016-17 yielded desirable results. Now since, on many other items of imports from China anti-dumping duty has been imposed, it is expected that imports from China will further decline. This would not only give reprieve to domestic industry, trade deficit wilh China is also expected to come down.

Preference in Government Procurement

In order to protect and promote small enterprises, there used to be a clear and comprehensive policy of preferential procurement from SSIs, which used to take the form of price preference or purchase preference. However, with the passage of time, these preferences were more or less weaned away.

A preferential procurement policy has been made by the government, implemented by making General Financial Rules (GFR). Rule 153 of GFR states:

"In procurement of goods for Rs. 50 lakhs and less, and where the Nodal Ministry determines that there is sufficient local capacity and local competition, only local suppliers will be eligible.

For procurements valued at more than Rs. 50 lakhs (or where there is insufficient local capacity/ competition). if the lowest bid is not from a non-local supplier, the lowest-cost local supplier who is within a margin of 20 per cent of the lowest bid, will be given the opportunity to match the lowest bid.

It is expected that preferential procurement of domestic goods would go a long way in encouraging domestic industry in general and Small Scale Industry in particular.

Ending Inspector Raj

There are more than 40 laws applicable on SSIs and more than 50 Inspectors visit their factories, and many of them have wide ranging powers to penalize SSIs. Living under these threats, SSIs find it difficult to concentrate on core areas like production, marketing and up gradation of technology. There are many such laws which have lost utility in modern times, and there are many others which come in the way of healthy functioning of the economy in general and industry in particular. There is a dire need to end this tragedy. In this context the process has been started to repeal some redundant laws under the present government, for smooth functioning of the economy.

There is a need to facilitate new entrepreneurs by single window clearances of all types. Some states have initiated this process. As more and more state governments are going online, this process will further accelerate. Under new initiatives for Startups, online clearances are given.

Building Infrastructure

It's almost impossible to start and run Small Enterprises in a remote area. They are neither connected with rail or road; nor do they have assured source of power. Even in big and developed places, assured power supply is a big issue. At many places, generators are under rampant usage. This not only raises cost, but is a source of pollution and units equipped with generators are subject to exploitation by concerned departments' inspectors. There is need to develop infrastructure of various kinds including rail, road, power, skill development, markets (including e-portals) etc. Universal electrification of villages, boost being given to solar energy, fast track building of roads by the present government is expected to help promotion of small scale and tiny industries, especially in rural areas. E-procurements have also been started by the government.

By nature Indian people are entrepreneurs, hardworking and enthusiastic. They need conducive environment for entrepreneurship development.  Much has been done by the government and much more is expected.

The author is columnist and National Co-Convener of Swadeshi Jagran Manch and is lecturer at PGDAV College, New Delhi. (E-mail: ashwanimahajan@rediffmail.com 

(The article has also been published in the November, 2017 issue of Kurukshetra magazine.)