FDI AND SSI – A POWERFUL INTERCONNECTION

The Small Scale Sector, which is the cradle of entrepreneurship, is going through bad times. A sector which contributes to approximately 80% in industrial employment cannot be and should not be allowed to degenerate. A healthy and kicking SSI sector in a globalised environment can be an asset that can act as a magnet for FDI inflows and thus be a powerful tool for wealth creation with a remarkably positive trickle down effect for consumerism.


The essence of liberalization lies in knowing your strengths, being aware of your weaknesses and working towards redressing them. The role of the Government in enabling liberalization is essentially of migrating from statist policies of control to ones that encourage and liberate the spirit of entrepreneurship. This alone is the golden path for India to march towards an economic growth of 10% +, in wealth creation lies our future both as producers as well as consumers.

THE FDI SOLUTION
Much has been written and said about FDI (Foreign Direct Investment). But restrictions such as ceiling on ownership of equity, lack of infrastructure, bureaucratic red tape in the form of numerous approvals and clearances both at the central and state levels; additionally, the opacity, whether by chance or intent in the whole regulatory process serves as a big dampener for FDI. We need FDI in every sector of development, in fact, from the sunrise to the low-value sunset sector. In other words, time has clearly come to discard old statist structure of reserving certain products for the domestic sector and welcome whole-heartedly capital inflows even into ‘mundane’ fields; FDI is thus vital not only for fabricating units making silicon chips but also for food processing units making potato chips, papads and the like. Investment, whether foreign or local follows identified needs, market potential and infrastructural availability. And, it is the investor’s, venture capitalist’s sole prerogative to decide where to put his money in. Any governmental interference in this regard under the guise of protecting shoddy mediocrity as reflected by the oft-used words ‘empowerment’ and ‘upliftment’ obstructs investment, creation of wealth, and above all, opportunities for expanding the job market. The Government is clearly trying to do its best, but, a fractured electoral mandate that brings up diverse political coalitions clearly slows down the impetus of the Government’s machinery in attracting FDI.

INDUSTRIES SMALL ON SCALE, BIG ON IMPACT
Wealth creation is not just about FDI; removal of barriers to internal trade within the country across state and city borders in the form of levies such as the octroi can help realize an immense boom in wealth creation. 71% which translates into 742 million people in our country are below 35 years of age. Yes, India is demographically speaking a sunrise nation, a country with a future because its youth have aspirations, ambitions and desires that have to be met. In an increasingly globalizing world enterpreunership needs to be encouraged. And since the beginning of any enterprise is on a small scale; self-sustaining activities and small-scale industries (SSI) should be given a fillip. Unfortunately, lop-sided and thoughtless interpretation of regulations has sabotaged the growth of the SSI; rather than regulate, the goal of the regulators here appears to be extortion. In a liberalized, globalized economy the trend for MNCs to outsource their production to local manufacturers who will meet the requirements will be on the rise, and in such a scenario, a flourishing SSI sector can help bring about growth. All these years of misguided efforts in the name of helping the SSI sector have not yielded the desired results. If at all, they have contributed to the decay and sickness in the SSIs. Given the significant importance of the SSI sector to the economy with 40 per cent share in the total industrial output, 35 per cent in exports and over 80 per cent in industrial employment, it deserves all the policy support the Government can offer. Small entrepreneurs need institutional support to fund modernisation and technology upgradation, infrastructural support, and adequate working capital finance from the banking sector. Protection for SSIs in the form of a long list of items and products to be manufactured exclusively by them is a thing of the past; in fact such a reservation policy has hindered the growth of this sector. The Abid Hussain Committee, an Expert committee on Small Enterprises, appointed by the Government of India, which submitted its report on the rationale behind the policy of SSI reservation in 1997 found that:-
• SSI units in the unreserved sector have actually grown faster than those in the reserved list. In other words, the SSI units have shown more dynamism in areas where they had to compete with larger units.
• Reservation in many areas has become irrelevant since a large number of reserved products are not being produced by SSIs. It is also inconsistent with the new trade policy that allows the items reserved for the SSI sector to be freely imported.
• Reservation has hurt India's ability to expand exports in many crucial areas, including textiles and leather.

SPECIAL ECONOMIC ZONES
The Chinese experience shows that huge Special Export Zones (SEZ) where clusters of SSIs can prosper in an assured infrastructural ambience has lessons which show the way ahead for India to emulate. But this should be done in a proper manner and intent. Recently, in fact in February 2006, the honourable Commerce minister Mr. Kamal Nath announced a new SEZ policy where participants will pay no tax for five years, get a 50% tax break for the next five years, and get a further five-year tax break for reinvested profits. Seven of the eight old Export Processing Zones were government built, but the new SEZs will be open to private and international developers, who will also get a tax holiday for 10 years. Commentators in economic matters feel that such a policy due to its inherent flaws will lead to investment diversion rather than wealth creation as envisaged! “Many companies planning to invest anyway will migrate to SEZs for the tax breaks.” Alarmingly enough, the scheme aims to encourage hundreds of small SEZs (or should we say tax shelters?) in every state. Clearly, the way ahead for SSIs, due to a lack of political intent or due to lopsided mode of policy making and implementation, looks quite thorny. It is quite a nice idea to be a global manufacturing hub; but do we have the political will to reform labour laws and have labour flexibility? In case of the SEZs this aspect has been left to the State Governments. As a rising market and as a young nation, we add 29 million people every year; India will have an immensely huge consumer base that will be the envy of every MNC worldwide, export is fine; but why not have these SEZs (call them Special Economic Zones) have a share in utilizing our very own consumer base as well? In an economic sense, there is a powerful interconnection between a healthy and buoyant SSI sector and FDI inflows, which the Government could do well to promote.
–Dr. V. R. Shenoy