Future Problems of Small-Scale Industries - Essay Example

The problems and the future prospects of the small scale industries in the post reform period SMALL SCALE INDUSTRIES: AN INTRODUCTION Small scale sector has been a dynamics for a nations economic growth affecting rural development, generating employment, ensuring equal distribution of national resources, contributing significantly to the GDP, education and social capital. Knowing the areas which are so deeply influenced by the small scale industries, it just cannot be ignored or undervalued. The liberalization of this sector has certainly gained enough impetus for future growth and study about the concerned area. Identifying the problematic areas and their possible solutions may help the economy, government, citizens and other stake holders in forging ahead and overcoming the quandary and dilemma of the particular concerned sector. As an example consider the case of Jordan. The strength of SSI in Jordan was 84% of the total established industries during the period of 1990-1998 which escalated to almost 90% of the total industries during the period of1999-2006 (Hachure cited in Lozi, 2008).Contrary to this , the Mexican experience shows that only 70.000 projects go to the second year from 200,000 started annually. (Bencivenga, V. Bruce, S. and Starr, R. 1995). Different countries have different ceiling of labor size for an industry to be labeled as small scale. For e. g. 15 workers in Iraq and Ghana, while Egypt, Belgium and Denmark have raised the ceiling for labor not exceeding 50 workers. In contrast , countries such as France and Italy adopted the criterion of 500 workers to distinguish between small-scale and other industries But in Japan and in the United States the total number of workers working in small scale industries was set at 300 in Japan and 1000 workers in the United States(Subramanian 1995). The globally important sector has not been free from dilemma and troubles in the post-reforms period; whether it is lack of infrastructure, technology or is of credit crunch. The present research is an attempt to analyze national policy decisions and industry initiatives affecting the sector, particularly in the developing nations where these industry have considerable economic importance.. 2. Literature Review 2.1 Pre-liberalization factors affecting SSI In the developing countries, Small scale Industries (SSI) have been pioneer in generating employment. These have greater advantage compared to the large enterprises in manufacturing especially in items that involve a larger share of value added from labor. The SSIs employ not only skilled but semiskilled and even unskilled labor. Manufacturing sector has better prospects in the trade particularly if the product is competitive, durable and upto the standards (Morris and Basant, 2006)). The SSIs were contributing to GDP considerably prior to liberalization also (Table -1) (World Bank, 1986). Morris and Basant (2006) have critically analyzed some of the areas that have affected growth of SSI in India. These are: The researchers have found policies based on reservations, duty concessions, directed credit, and government regulation, controls, and extension and such short sighted policies began initially for SSI; the macro- economy favoring policies such as monetary, fiscal, infrastructure and development oriented remained inadequately addressed. The non-affordability of infrastructure by SSIs is a deterrent to their expansion and survival in this liberalization period. SSIs have capacity to grow upward provided given impetus Table -1. The Japanese experiment has shown the way as to how the traditional industries, producing a wide variety of consumer products, could evolve into small and medium enterprises (SMEs) when these are able to renew technology and do not have financial crunch. India, of all the developing nations, was at greatest advantage to cash on falling tariffs under General Agreement on Tariffs and Trade (GATT) in textile and many light engineering, handicraft and other manufacturing units. But it did not succeed as expected because of state's dithering on the issue of export and inclination towards macroeconomic policies favoring big industries. Moreover, the Mahalanobis plan for setting up SSIs with a regional development focus affected viability of many small firms. According to this plan, the SSI could be set up in any region if it had minimum of basic infrastructure viz. electricity, water and road. While the very important requirement, a central market place, was not considered necessary. Even the surviving SSIs, located regionally, paid heavy price of unfavorable locations. Contrary to Indian Scenario, China, another Asian country, had used SSI for rural development remarkably after ensuring grain security. Oi (1999) appreciates the hugely successful Township and Village Enterprises (TVE) in China. The rural industrialization happened in China, once the rural reforms produced bumper crops and provided grain security. However, the rural industrialization took rural labor away from agriculture to more beneficial industrial sector. Since it not only brought new employment opportunities and better living standards for rural population, but also transformed thousands of villages into towns and towns into cities, turning a agriculture based rural society toward a modern industrial nation (Zhihong, 1999). 2.2 Post -reforms Status Soundarapandian (2004) states that post-reform the problems in front of SSI are loss of protected environment, competition from imports, reduction in subsidy, technology gap, poor labor standards, and increased export risk. Besides, less credit, poor infrastructure, and delayed payments for their produce. Non-availability of skilled labor, competitive market were other problems. In India, presently only the facilities of interest rate concessions and technology support are given to SSI. The clustered zones for small industries in African nations performed exceedingly well in domestic markets. These were having advantages of fast transmission of skills and analysis of competitors' products, also of reduced prices of intermediate service and materials. Post-liberalization, however, these were restricted to a local concept and were uncomfortable in taking advantage of vast opportunities available internationally (Visser, 1999). The developments since beginning of liberalization have focused on movement of FDI. The lifting of WTO restrictions was a favorable move to increase exports however, this move benefited more to the multinational corporation than the SSIs (Lozi, 2008). Of all Asian and other nations, using SSI for development of nation and up gradation of their citizens' life, China provides an exemplary strategy in its Township and Village Enterprises (TVEs). Zhihong (1999) states that the gross output of the TVE sector registered an average annual growth of nearly 25 percent between 1980 and 1995. The stupendous success of China's TVE sector can be seen by its contribution to Chinese economy and development, particularly in the rural areas. By 1995, TVEs were contributing to almost a quarter of China's gross domestic product (GDP), two-thirds of the total rural output, 45 percent of the gross industrial output, and exceeded one-third of China's export worth. It is one of the most phenomenal success of SSI in the world. These industries diversified from raw material to consumer good (TVCE). (Table-2) Table 2. Output Value and Structure of TVCE Industry, 1993 Output value Share of total Sector (billion yuan) (%) Mining 90.3 5.3 Food processing 137.9 8.1 Textiles 184.9 10.9 Apparel 115.9 6.8 Timber 37.6 2.2 Paper 51.5 3.0 Handicrafts 46.9 2.8 Energy conversion 15.8 0.9 Chemicals 172.7 10.2 Building materials 205.3 12.1 Metallurgy 116.5 6.9 Metal products 113.8 6.7 Machinery 300.3 17.7 Other 106.8 6.3 Total 1,696.2 100.0 . The Indian SSIs, however, lagged behind as Morris and Basant (2006) have highlighted the reasons: The raw material such as steel, plastic, energy as electricity or petroleum and the partly made goods had high cost compared to the finished product. It affected small firm badly particularly since these had advantage of manufacturing. The energy costs were further financial problem for these firms as there is no vat on energy even for exports. The economic policies checked supply of finances rather than considering the interests rate revisions. The supply of funds remained scarce even after control of inflation. Fluctuating and often high exchange rates of Indian currency have been a further deterrent to development and at times the very survival of the SSIs in India. Most importantly, in the times of great liquidity, the money including direct investment by foreign institutions is put in the big firms while the small firms remain dependent on credits. The domestic banks also favor big firms which attract FDI. The small firms' credits are tightened particularly when the savings in the lending banks fall steadily. The banks also avoid giving to the small firms since many firms, which close down after receiving grant under planning commission's directions are treated as sick. The banks' money on these units is lost forever. Banks often exaggerate data on sick units. The venture capital industry too focuses on growing and profit earning firms and does not wait for entrepreneurial opportunities to develop for small firms. Reopelle and Steel (1995) do find positive impact of liberalization as SSI have greater access to imported inputs and less restrictive regulations for private business. The SSIs have changed equipments and products and are seeking new export markets. The negative side, they state, is more competition from imports and greater number of self employed workers. Visser (1999) also feels that SSIs, though can compete well with the domestic firms, are at disadvantage when it comes to international firms. The superior technology makes not only the price of foreign goods less but also gives better quality. Riopelle and Steel (1995) emphasize that by changing strategy from state-led to market oriented may change the fate of small scale industries. These industries need to invest their profits in up gradation of technology, staff training, sales strategy and exploring wider markets. .3. Research Objectives: The intended research aims to answer following questions. These questions are part of the objectives of this study: 1. How did reforms affect SSI globally Does the growth performance of SSI in the last decade indicate their competitiveness to the changing market. 2.How do global and national policy decisions have affected SSI globally 3. What are the main constraints to SSI post-reforms 4. What was their effect on employment, production, and sales post -reforms 5. Are Small Industries moving away from their principle to create social capital and ensure equal distribution of resources in this market oriented era 4. Methodology This study is to be based on the analysis of primary and secondary data. The data would be collected from published studies and reports from government and financial institutions. The primary data would be collected by interview and structured questionnaires to SSI and funding agencies about post-reform status of the sector. Both quantitative and qualitative aspects would be considered in the study. There would be statistical analysis of data quantitative and logical interpretation of qualitative data, to arrive at rational conclusion about present status and also find effective future strategy. 6. Conclusion: The post- reform period brought both challenges as well as opportunities for the Small Scale Industries. Opportunities provided a restrictions free market, technology up gradation and availability of skilled labors, though the industry lost many protection and reservations granted to it by some nations (Suresh & Shashidhar, n.d.). The biggest challenges were competition from imports due to traditional marketing practices, non availability of the credits leading to scarcity of inputs and inadequate capital for up gradation. Also, the costly labor due to better opportunities to the workers and Increase in the cost of raw materials resulting in under utilization of capacity and high production costs respectively. As a result, the SSI sector has shown survival and up gradation however policies are needed in developing countries for thriving SSI sector, their main source of economy boosting and social capital generating vehicle 5. The main tasks of research program REFERENCES Bencivenga, V, Bruce, S & Starr, R 1995, 'Transaction Costs, Technological Choice, and Endogenous Growth'. Journal of Economic Theory, No. 67, 53-117. Lozi, BM 2008, 'Small-Scale Industries in the Globalization Era: The case of Jordan', Journal of business and Public Affairs, VOL.2, no1, pp1-11. http://www.scientificjournals.org/journals2008/articles/1348.pdf Morris, S & Basant, R 2006, 'Small-scale Industries in the Age of Liberalization, Asian Development Bank', http://www.adb.org/Documents/Papers/INRM-PolicyBriefs/inrm11.pdf [17 fEB 2009] Riopelle, R & Steel, WF 1995. 'Small Enterprises Adjusting to Liberalization in Five African Countries'. World Bank Publications. Subramanian, KK 1995,'Technology dimensions of small scale industry'. Productivity, Vol. 36, No.1, 26-30. Visser, E-J 1999, 'A Comparison of Clustered and Dispersed Firms in the Small-Scale Clothing Industry of Lima', World Developmen,t Vol. 27, no. 9, pp. 1553-1570, http://time.dufe.edu.cn/wencong/clusterstudy/n3edc342a6072d.pdf [16 FEB 2009] Soundarapandian, M 2004, Rural Industrialisation: Problems & Prospects, Anmol Publications PVT. LTD Suresh, V. & Shashidhar, P. (N.D.).'Competitiveness of Small-Scale Industries of India' http://dspace.iimk.ac.in/bitstream/2259/501/1/439-453.pdf [16 Feb 2009] Oi, J C 1999, 'Two Decades of Rural Reform in China: An Overview and Assessment', The China Quarterly, No. 159, Special Issue: The People's Republic of China after 50 Years. pp. 616-628 http://www.case.edu/affil/tibet/tibetanNomads/documents/TwoDecadesofRuralReforminChina_000.pdf [15 Feb 2009] World Bank. 1986, 'World development report', 184-185. Read More