(fr

CHAPTER-ll

POLICIES
GOVERNING SMALL
SCALE INDUSTRIES
 Policies Governing Small Scale
Industries
Industrial development plays a crucial role in India’s development

strategy, particularly with regard to the objectives of structural diversification,

modernisation and self reliance the progress of industrialisation over the

last fifty years has been a striking features and the Indian economic

development more importantly industrial policies lays stress on the strategy

of development.

The promotion of industries has been regarded as an important

element of the development strategy under lying our five year plans. The

rationale behind such an approach is that industries provide substantia!

scope for increasing employment as they are labour intensive and they

require comparitively less capital. They can be set up easily in rural and

backward areas, stimulating the growth of entrepreneurship, promoting a

more decentralised pattern of ownership, diversification of economic

activities, introducing new product to enrich the living standard of people

and equitable dispersal of industries through out rural and designated

backward areas.

To sustain the pace of industrial growth and enhance, it is necessary

to create a conductive environment and industrial climate. All along new

institution to be created, infrastructure to be developed and technical and

financial support to be provided on an on going basis. The programmes

and policies progressively broaden the very notion of industrial development.

 [26]

The industrial policy would reflect the direction and pattern of

industrial development, the country desires to have to help realise the
economic, social and political objectives of national development by
means of industrialisation. Thus the industrial development of a country

will be guided and fostered by the industrial policy. The industrial policy
would indicate the respective roles of the public, private, joint and Co­
operative sectors and also of the large, medium and small scale sectors
and will underline the national priorities.

(2.1) The Industrial Policy 1948 :

It spelt out the details of some basic and strategic industries to

be established by the State in addition to those, in which the private

sector could be permitted to play a role, subject to control and regulation.
The Policy aimed at balanced growth of different manufacturing sectors
and focused on the co-existence of large industry, along with cottage
and small industries. An emphasis was laid on the promotion of cottage
and small scale industries, as the former could play a crucial role in
the rehabilitation of displaced persons through the establishment of
individual/co-operative enterprises.
An Industries conference, convened in December 1947,
recommended that the government should establish a Cottage Industies
Board to foster the growth of Small scale industries. The government
accepted this recommendation and proposed to create suitable machinery
to implement the recommendations that included the setting up of a

cottage and small scale industries directorate. Entrusted the following role

to Small Scale Industries.

 [27]

“Heavy industries in public sector may obtain some of their

requirements of the lighter components from the private sector, while the

private sector in turn would rely for many of its need on the puolic

sector. The same principle would apply with even greater force to the

relationship between large scale and small scale industries.”

The Government of India would in this context stress the role of

cottage, village and small scale industries in the development of the

national economy. In relation to some of the problems that need urgent

solutions, they offer some distinct advantage. In the subsequent policy

statements, the state followed a policy of supporting small enterprises

in the country.

(2.2) The Industrial Policy Resolution, 1956 :

Although the industrial policy resolution of 1948 laid stress on the

importance of small enterprises, especially cottage and village industries,

the industrial resoluition of 1956 laid down the roles to be assigned to

an approach of the Government towards small scale industries in the

country.

Among other things the industrial policy resolution of 1956 assigns

the following tasks to the small scale industries.

1. To create on a big scale employment opportunities for people with

a relatively low capital investment per head.

2. To make an attempt to meet a substantial part of domestic demand

for consumer goods and even part of capital goods.

 [28]

3. To bring about mobilisation of capital and entrepreneurial skills in

the vast areas of the country especially in rural areas which

otherwise would be lying unused or unutilised.
4. ' To provide assistance to a large number of entrepreneurs, artisans

and craftsman in getting employment, income and reasonable

standard of living.

5. To make available foreign markets for the products small scale

industries by taking measures to make them export oriented.
6. To remove disparities in regional industrial development in area
where such services do not exist or are thoroughly inadequate
so that small scale industries may develop there providing

employment and income to people in the area.

(2.3) The Industrial Policy Statement, 1977 :

The Industrial Policy 1977 categorically criticised the earlier industrial

policies and it mentioned that “the emphasis on industrial policy so far

has been mainly on large industries, neglecting cottage industries

completely, relegating small industries to a minor role.”

This watershed policy provided for a heightened role for this sector,
by considerably expanding the list of products reserved for manufacture
by small industry a facility launched in 1967. Its important planks were.
(i) Whatever can be produced by small, cottage industries must be

produced only by them.

(ii) The small scale industries were divided into three categories as:
(a) Cottage and household industries which provide self

employment on a large scale;

 [29]

(b) A tiny sector was brought in, for enterprises with investment

in plant and machinery of upto Rs. 1 lakh and situated

intowns and villages with population less than 50,000.

(c) Small Scale industries comprising industrial units with an

investment upto Rs. 1 lakh and in the case of industries

with an investment of fixed capital up to Rs. 15 lakhs.

(iii) Legislation to be introduced to recognise and protect the self

employed in cottage and household industries.

(iv) The focul point of development to be shifted away from big cities

and state capitals to district head quarters where the District

Industries Centre would be the nodal agency for the sector.

(v) Special arrangements for marketing to be made by providing

services such as product standardisation, quality control, marketing

surveys etc.

(vi) The reserved items list was increased from 180 to 504 and further

to 807 itmes.
Thus, if we compare the provisions of 1977 policy with the industrial

policy of 1956 we will find that there are no major structural changes

but only a shift in emphasis. The industrial policy statements of 1977

laid down more explicit emphasis on small scale and cottage industries,

khadi handloom and development of rural industries.

(2.4) The Industrial Policy Statement 1980:

The industrial policy 1980 indicates the need for intensifying the

development of small industries through integrated industrial process and

 [30]

fostering complementarity between large and small sectors. The policy

also recognised the importance of ancillary industry and accelerated the

development of rural and backward areas. Its main planks were:

(i) Investment limit raised to Rs. 20 lakh for small scale industries

as a whole.

(ii) Investment limit for tiny sector raised from Rs. 1 lakh to

Rs. 2 lakh.

(iii) Higher limit for capital investment in ancillary units at Rs.

35 lakh.

The upward revision of limit of investment for small units, the

Government opined that

(a) . this would eliminate the tendency of circumventing the present

unit by under estimating the value of machinery and

equipment, falsification of accounts or resort to benami units.

(b) to help genuine small scale units particularly those being

setup by young and technically qualified entrepreneurs to

. come up.
(c) to facilitate long overdue modernisation of the existing small

scale units.
Besides, with the policy, Government had also proposed the following

initiatives
(i) Approval of project proposals for 100 percent export oriented units

and the expansion of existing units exclusively for exports.

(ii) A ‘modernisation package’ envisaged for small and village industries

to suit the requirements of each industry and included aspects

 [31]

such as appropriate location, the optimum use of energy and the

adoption of the right type of technology.

(iii) Maximum time for approval of technology projects was reduced

to 30 days.

(iv) For the import of technology, entrepreneurs were allowed to

collaborate directly, provided the royalty payment was below 5

percent on domestic sales and 8 percent on exports.

The policy shows that there is no major conflict of interest between

the small scale and large scale sector. However, it fails to encourage

the cottage and small scale industries having lower capital output ratio

for initiating higher growth and expansion of employment opportunities.

Studies suggest that thereare 50 percent bogus small scale units. Moreover,

the SSI’s are labour intensive units and they are unable to compete

with capital intensive units and they will loose all benefits. Upward revision

in investment limits and redefinition of small scale units is a recognition

of cost realities but it will in noway contribute to curbing benami ownership.

(2.5) The Industrial Policy Statement 1985 :

Due to inflationary pressure on the economy the Government had

raised the investment ceiling for small scale industries to Rs. 35 lakhs

and for ancillaries to Rs. 45 lakhs.

(2.6) The Industrial Policy Statement 1990:

The Government had taken following measures to reorient growth

to serve the purpose of employment generation, dispersal of industry

in the rural areas, and to enhance the contribution of Small Scale

Industries in exports.

(i) The investment ceiling in plant and machinery was further revised
to Rs. 60 lakhs, (from Rs. 35 lakh), for ancillaries to Rs. 75 lakh
(from 45 lakh) and tiny units to Rs. 5 lakh (from Rs. 2 lakhs)
however, locational condition of population limit of 50,000 as per
1981 census would continue to apply.
(ii) The small units which undertook to export 30 percent of their annual
production by the third year were to be permitted a hike in investment
to Rs. 75 lakh.
(iii) A new scheme of central investment subsidy exclusively for Small
Scale Industrial sector in rural and back ward areas capable of
generating higher level of employment at lower capital cost to be
implemented.
(iv) To ensure timely flow of credit to the small sector, the Government
has setup the Small Industries Development Bank of India (SID6I)
under the control and management of IDBI.
(v) Special emphasis was to be laid on training of women and youtn.
expansion of activities of Khadi and Village Industries Commission
(KVIC) as well as KVIB. A special cell to be established in SIDO
and state Directorate of Industries to assist women entrepreneurs,
import training and conduct Entrepreneurship Development Programme
(EDPs) with a view to widen entrepreneurial base.
(vi) To reduce bureaucratic controls and simplify proceedures particularly
in the field of labour legislation as-a step to eliminate interference

of inspectors in Small Scale Industrial units.

 [33]

(2.7) The Industrial Policy Statement 1991 :

The small enterprises have emerged as a dynamic and vibrant

sector of the economy. At present it accounts for 55 percent of industria'
production, 40 percent of exports and above 88 percent of manufacturing
employment. Though their contribution, remains significant in the country
the small scale enterprises have emerged as the leaders in industrial
sector in India. In recognition of their significance and stature, the
Government announced policy measures for promoting and strengthening

of small, tiny and village enterprises on August 6, 1991 for the first

time in the post. Independence period.

(2.7.1) Objectives :

The primary objective of the Small Scale Industrial policy during

the nineties would be to impart more vitality and growth impetus to the

sector so that the sector could contribute in terms of growth of out put,

employment and export.

The Other Objectives are :

(i) To decentralise and delicense the sector.

(ii) To deregulate and debureacratise the sector.
(iii) To revive all statutes, regulations, procedures and effect

suitable modifications where necessary.

(iv) To promote small enterprises especially industries in tiny

sector.
(v) To motivate small and sound enterepreneurs to set up new

enterprises in the country.

 [34]

■ (vi) To involve traditional andreputed volantary organisation in

the intensive development of (Khadi Village Industries) KVI

through area approach.

(vii) To maintain a sustained growth in productivity and attain

competitiveness in the market economy, especially in the

international markets.

(viii) To industrialise backward areas of the country.

(ix) Accelerate the process of development of modern small

enterprises, tiny enterprises and village industries through

appropriate incentives, institutional support and infrastructure

investments.

(2.7.2) Salient Features of New Policy :

Equity participation up to 24 percent by other industrial under

takings (including foreign companies.)

1. Hike in investment limit for tiny sector from Rs. 2 lakhs to Rs. 5

Lakhs.
2. Legistation to limit financial liability of new and nonactive partners/

entrepreneurs to the capital invested.

3. Service Sector to be recognised as tiny sector.

4. Support from national equity fund for projects up to Rs. 10 lakhs.

5. Single window loans to cover projects up to Rs.20 lakhs, banks

too to be involved.
6. Relaxation of Certain provisions of labour laws.
7. Sub contracting exchanges to be set up by industry association.
 [35]

8. Easier access to institutional finance.

9. Factoring service through SIDBI to over come the problem of delayed

payments. Also legislation to ensure payment of bills.

10. Women enterprise redifined.

11. .Marketing of mass consumption items by National small industries

corporation under common brand name.

12. Composite loans under the single windows scheme also to be given

by banks.

13. Tiny sector to be accorded priority in Government purchase

programemes.

14. Priority to Small Scale Industries and tiny units in allocation cf

indigeheous raw materials.

15. Promise to deregulate and debureacratise small and tiny sector.

16. Janata cloth scheme to be replaced by a new scheme which will

provide funds for loom modernisation.

17. Compulsory quality control for products that pose risk to health and

life.
18. Legislation to ensure payment of Small Scale Industries bills.

19. A special monitary agency to be set up for the Small Scale sectors

credit needs.
20. A new scheme of integrated infrastructural development to be

implemented.

21. A technology development cell to be set up.

22. Incentives and services package to be delivered at the district level.

23. An export development centre, to be set up.

(2.7.3) Steps taken by the Government :

Government took some steps for the promotion of Small scale

industries persuant to the policy measures announced on 6th August
1991.
(i) Restriction on registering new Small scale Industrial units for the
manu facture of certain products was disbanded.
(ii) The eligibility limit of projects under national equity fund scheme
has been doubled from Rs. 5 lakhs to Rs. 10 lakhs.
(iii) The Single window scheme was extended to be operated by schedule
banks also in addition to state financial institutions.
(iv) An ordinance was promulgated on 23rd September 1992 making
payment of interest obligatory on delayed payments to small scale
add ancillary industrial under takings. It has been re-promulgated

in January 1993.
Recently, various proceedural simplications including new registration
forms have been introduced. In order to ensure prompt payment to small
scale units a new legistation viz interest on the delayed payment act
1993 has been enacted by parliament. A scheme has been formulated
to train unemployed non-technical graduates so as to augment the

availability of managers at affordable rates for the small scale sector

and reduce educated unemployment.

(2.8) Thrust Areas of the policy for Small scaie
industries:
The new policy for enterprises has several features and indicates

a reorientation of policy on crucial small scale units like speedy

modernisation, upgradation of technology, availability of cheap, adequate

and timely credit and quality control. The integration of the Indian

economy with the global economy will call for greater exposure of small
and medium sized industries to international and domestic competetion

and appropriate development of the skills and management capabilities

of small entrepreneurs.

(2.8.1) Payment Mechanism :

The new policy seeks to improve the payments mechanism as

also introduce legislation to enforce payments on time, this is necessary

to ensure that small industries do not get into the grip of the large

scale enterprises which may also control them through equity & technology.

In less trying times than the present, the shift from cheap credit to

prompt payment would have meant immense relief to small enterprises.

The new policy assigns industry associations a key role in quality

counselling and establishing common testing facilities to ensure standardised

production by small industry.

(2.8.2) Factoring Services:

Factoring have recently been intorduced by the SBI in western

India in collaboration with the small industries development bank of India.

Similar services will be set up shortly in the south by Canara Bank

in collaboration with SIDBI. It is however doubtful in the factoring services

as now visualised by SIDBI and the commercial bank to solve the

problem of delayed payment to small industries.

 [38]

These factoring,, services accept only receivables against first rate

large and medium enterprises in no case, such enterprises can be

accused of delayed payment. In this context, the promised legislation to

ensure prompt payment of bills, will meet one of the acutely felt needs

of small suppliers of goods and services to both private and public sector

enterprises.

(2.8.3) Timely and Adequate Credit:

The. new policy recognised the small units require timely credit

and financing arrangement rather than cheap credit. The scope of the
single window clearance, which has been enlarged to cover project costs
up to Rs. 20 lakhs and working capital up to Rs. 10 lakhs, make things
easier at the entry point. The setting up of a special monitoring agency
is of little help unless it has the powers to force commercial banks to
lend the additional credit required. The new policy is only as good as
its implementation. Considering that more than 1/3rd of manufacturing
out put originates in the small scale sector, and more than 40% of total
export, this sector deserves at least as much encouragement as the

large industrial sector.

A new scheme of integrated infrastructural development including

technological back-up service for small scale industries would be

implemented with the active participation of state government and financial

institutions.

(2.8.4) Nodal Agency :

The small industry development organisation (SIDO) has been

 [39]

recognised as the nodal agency to support the small scale industries

in export promotion. An export development centre “would be set up in

net work of field offices to further augment export activities of this sector,

A technology development cell would also be set up in SIDO to provide

technology inputs for improving productivity and competetiveness of small

scale industries products.

To facilitate location of industries in backward areas and to provide

stronger linkages between agriculture and industry, a new scheme of

integrated infrastructural development for small scale industries would be

implemented with the active participation of state government and financ:al

institutions regulatory provisions relating to the management of private

limited companies are being liberalised.

(2.8.5) Raw Materials :

Adequate and equitable distribution of imported raw materials would

also be ensured for this sector. Now marketing promotion would be under

taken through co-operative/ public sector institutions and other specialised

promotional marketing agencies.

The Government and the representatives of micro and small

enterprises should carefully look into the items reserved for the small

sector and decide as to the items in which foreign investments can be

permitted with out ceasing any hardship to indigeneous small entrepreneurs.

Such permissions have necessarily to be accorded on a selective basis.

The policy statement gave thrust for the development of tiny

enterprises which accounts for nearly 90 percent of all small scale units.
 [40]

In order to strengthen the tiny sector it has been decided to recognise

all industry related service and business enterprises irrespective of their

location as small scale industries.

However the key components of the policy with regard to the hand

loom and handicraft sectors can be assessed only after one knows how

exactly the new packages for these sectors will operate. The success

of new policy depends substantially on the quality of the service provided

by bodies like the small scale industries corporation whose track record

does not inspire much confidence.

The government has raised assets limits and allowing 24 percent

equity participation by other industrial under takings the policy will keep

larger units in the small sector. But the majority will be affected, since

95 percent of small scale industries have below Rs. 2 lakhs worth of

assets.

The- small scale industries classification is given to 836 high

employment low-technology items. It has helped the growth of sectors

which would in any case have remained small. Such as boot polish and

umbrellas there would be marketing synergies in items like umbrellas,

but these would have been exploited by large firms using small firms

as contract suppliers, even if the sector had been dereserved.

The small scale sector does not need reservation of items, where

the technology is low and capital investment small, as in paints and

dystuffs, natural economic forces will ensure that the bulk of production

comes from small companies even if there is no small scale industries

 [41]

reservation for such items. The most sensible policy would be to dereserve

all items for the small scale sector and provide subsidies to any small

unit with turn over below a certain level and for a fixed number of years

after start up. This would ensure that a small company gets the suppod

it needs unit if. reaches a viable level of sales. There fore it would have

to find for it self with its increasing sales and market share helping it

to fixed costs and obtain higher margins.

Though conceptually sound, the new policy for small scale industries

units including the tiny sector opens the flood gates for large industries

and foreign compaines minimising the natural growth of entrepreneurhsip

at the grass root level. More importantly merit of the policy depends

on its implementation as well as in plugging the loopholes. The policy

is expected to provide fresh stimius for growth and international

competetivenes of the small sector if it is matched with timely technological

upgradation, professional management, innovative ideas, entrepreneurial

vision and well trained man power. The need of the hour is an agend

for growth of small enterprises and industries in the tiny sector as a

viable phenomenon.

It has to be commended for its innovative features such as

stengthening of micro (tiny) enterprises, removal of locational constraints,

broad basing of the concept of small industry by including industry related

services and small busness, ensuring access to need based finance and

promising deregulated and de bureaucratised small business administration.

However the success of policy depends on its effective implemenatation.

 [42]

(2.9) Impact of Policy Initiatives:

In the report, an assessment of the impact of different policy

measures initiated by the Government has been attempted briefly. The

issues influencing policy formulation include production, export growth,

creation of employment, reduction of rurai/urban disparities, improving rate

of return on real investment, lowering incidence of sickness, ensuring

wide dispersal of industries, etc. There is a system of evaluation of

various programmes/initiatives by the Government Departments based on

the progress reports and returns submitted by individual units as well

as intermediary agencies. This Report covers some of the studies

conducted' by different agencies on impact of policy initiatives.

(2.10) National Institute of Public Finance and Policies

(NIPFP) Survey 1994-95 and Study 1996 :

A survey carried out by NIPFP to assess the impact of budgetary

changes in central excise policy with regard to small scale industries

showed that the withdrawal of excise concessions on products manufactured

by small scale industral units using the brand names of parent units

adversely affected the units concerned. The budgetary change, thus, had

a negative impact on the process of ancillarisation as well. The NIPFP

Study (1996) on “Central Fiscal Incentives and Concessions to small

scale industries - Impact on Growth and Structure" found that, over the

years, the substitution of capital by labour seemed to be dominating the

 [43]

growth of small scale industries, thus reflecting the use of advanced

technology. There was also increasing importance among the units for

adoption of quality standardisation and quality certification. Capital and

labour productivity was observed to be high in the larger small scale

industrial units indicating potential for growth.

(2.11) Expert Committee Report on Small Enterprises-

New Policy Directives 1997:

The key finding of the Expert Committee appointed under the

Chairmanship of Shri Abid Hussain showed that industrialisation had

occurred mainly in items not reserved for the small scale industries. On

the contrary, the reservation policy potential of some of the important

industries like-engineering, food processing, textile. The industry clusters

needed modernisation through intergrated infrastructural development in

joint efforts by the Government and the private sector. The policy directions

included in the Expert Committee Report cover other issues like technology

support, proactive role of small scale industries associations and a need

for separate law for small enterprises, besides complete dereservation.

In response to the important recommendations given, the Govenment of

India revised definition of small scale industries by making as upward

revision in investment ceiling of Plant and Machinery for small/ancillary

enterprises. De-reservation has been taken up in a phased manner and

the export obligation for large-scale industries to enter in the field of

reserved products has been lowered to 50 percent.

 [44]

(2.12) Feedback obtained from SSI Associations through

SIDBI Seminars 1998:

With a view to getting a first hand feedback on the issues relevant

to policy formulation from the small scale units and Industry Associations/

Chambers of Commerce representing the sector, SIDBI convened a series

of 14 seminars in the country in later part of 1998. Important suggestions

received from industry representatives are summarised below.

With, an objective to co-ordinate the policy initiatives of State

governments and to evolve policies for the small scale industrial sector

at the Central level, the small scale industries Borad came into being

in 1954. The apex-decision making body is expected to meet at regular

intervals. During 1987-97, five meetings of the small scale industries

Board were conducted. In these meetings, the Board considered policy

measures, besides, the Board considered policy measures, besides various

aspects of implementation and co-ordination by other agencies. Operational

problems faced by the small scale industries, from time to time, were

also reviewed.

(2.13) State Industrial Policies:

The State/UT Governments uniformly pursue the central Government

industrial policies and assistance is obtained under different centrally

sponsored schemes incentives for disbursement among eligible small

scale industries. This Central policy framework serves as a guiding

principle for states, which evolve respective policies for small scale

industries promotion depending upon the specific requirements of the

 [45]

state. The state governments also design suitable incentives to encourage

existing units to expand/diversify products and support entrepreneurs to

establish new units.

In this context, State Governments provide technical and other

support services to small scale industries through the Directorate of

Industries and District industries centre. The main areas of support and

facilities are listed below:

1. To develop and manage industrial areas by respective Indusrtiai

Development and Investment Corporations;

2. Financial support services by State Financial Corporations (SFCs);

3. Technical Guidance by Technical Consultancy Organisations;

4. Human resources development by a host of Training Institutions;

5. Infrastructure development by Infrastructural Development

Corporations;

6. Export promotion by Small Industry and Export Corporations;

7. Single Window Assistance by District Industries Centres.

Besides above, State Governments also offer a range of incent:ve

measures for providing an impetus to industrialisation. These

incentives to small scale industries are mainly by way of providing

land and developed plots/sheds on concessional terms, industrial

infrastructural facilities, subsidy on investment (in selected areas)

and on generating sets, sales tax and stamp duty exemptions,

water supply at reduced rates, seed capital assistance for setting

up units, etc.-
 [46]

The key incentives as offered by various State Governments to

small scale industries are highlighted .

(2.14) The Policy of Protection/Reservation:

Protection policies have been designed to shield small scale

industries against competition from the large scale sector. The aim has

been to strengthen the small scale industries so as to make them

economically viable. The protective measures adopted from time to time

are as under:

1. Upward revision and expansion of the definition of small scale

. industries, which aimed first at neutralising the increased cost

of plant and machineries and second, to encourage technology

development, improve export performance etc.

2. Identification and reservation of products for exclusive production

by,small scale industries thereby freezing new capacity generation

and expansion of the products concerned in the large scale

sector.

3. Identification and reservation of products for exclusive purchase

by Government from the small scale industrial sector (remaining

products being provided price preference over units in the large

sector).
4. Trade policy restrictions on imports through a licensing system.
(2.14.1) Reservation of Items for the Exclusive Manufacture in

the Small scale industrial Sector:

The policy of reservation was primarily initiated in 1967 as a
 [47]

promotional and protective measure for the small-scale sector vis-a-vis

the large-sdale sector. Selected products are identified for exclusive

production in the small-scale sector. The overwhelming considerations for

reservation are whether the item is economically viable and technically

feasible for manufacture in the small-scale sector, the manufacturing

process is of a simple nature i.e. is essentially labour intensive, and

whether the small scale units can meet the requirements of the

consumers both in terms of quantity and quality.

The policy of - reservation of items for exclusive manufacture by

small scale industries was formulated in order to ensure the bulk production

of. consumer goods in the small scale industrial sector and to expand

employment opportunities through the setting up of small scale industries

units. This policy has been made applicable only to those product lines

that are techno-economically suitable for manufacture by small scale

industries.

The policy of product reservation initiated with 47 items in 1967,

has continued over the years and is reviewed from time to time by

including additional items and excluding certain items already reserved.

As of 1996, the total number of reserved items stood at 836. With effect

from April 1997 when 15 items were de-reserved, the net number of

reserved items came down to 821. Recently, 9 more items have been

de-reserved thereby bringing the total number of reserved items to 812

with effect from 3 February, 1999.

The Industries (Development and Ragulation) Act, 1951 was

amended in 1984 to give statutory backing to the policy of reservation,

 [48]

thereby empowering the Government to reserve selected items for exclusive

production in the small scale industrial sector (under Section 29-B). The
amendament also provided that the Central Government would constitute
an Advisory Committee with a view to determining the nature of any
article or class of articles that might be reserved for production by
ancillary or small scale industries undertakings. Accordingly, an Advisory
Committee on reservation was constituted on 30 March, 1984 under the
Chairmanship of Secretary (Industrial Development) and is now headed
by the Secretary (SSI & ARI). The Committee reviews the list of reserved
items for :(i) de-reservation of items, which are already reserved; (ii)
reservation of new additional items; and (iii) change in the nomenclature
of items.
According to industrial policy guidelines, product reservation was
applicable only to the manufacturing sector and the creation of new
capacity was permitted only in the small scale industrial sector. The
capacities of existing large scale units (which had already been
manufacturing such reserved items as on the date of reservation) were
pegged at the highest production level achieved by the individual large
scale units during 3 years preceding the date of the reservation of the

product.
With a view to expanding exports of such items which fall in the
reserved category (but which cannot be produced both in sufficient
quantity and at a competitive price, while adhering to quality standards),
a policy change has been announced in 1997. All the non-small scale

industrial units manufacturing reserved items have been allowed to

manufacture items under the reserved category, with a reduced export

obligation of a minimum of 50 percent of the new or additional production
 [49]

(to be achieved within a maximum period of 3 years). Those small scale

industries growing in size by crossing the investment ceiling prescribed
for small scale industries have to obtain a licence from the Secretariat
of Industrial Approvals.
It is difficult to assess the effect of the reservation policy because
of the lack of sufficient data at the disintegrated product level. The Office
of the Development Commissioner (small scale industries) had made an
assessment in the early eighties, on the impact of reservation policy.
During the first and second All India Industrial Census of units registered
with the State/UT Directorate of Industries, attempts were made to collect
data on reserved items.
The. Import policy has been continuously adding more reserved
items in the category of free imports thereby creating open competition
for small scale industries even in the domestic market. Since the economic
reforms, the small scale industries that are manufacturing reserved items
are open to competition from national as well as international companies.
The reforms have permitted Foreign Direct Investment for the small
industry, and other relaxations such as the automatic approval of technology

transfer agreements, etc.

The Expert Committee on Small Enterprises (Abid Hussain) had
considered various aspects pertaining to reservation of items including
the import policy liberalisation and the export policy thrust for Exterme
Focus Products. Taking also the Vijaya Raghavan Committee report
(November 1996) into account, the Committee felt that the reservation
policy recommended total dereservation of the products reserved for

exclusive production in the small scale sector.

 [50]

(2.14.2) Special Features:

The special features of reservation policy are described as under:

(i) The policy is applicable only to the manufacturing sector. It does
not take into account the service sector including repairs of products.
(ii) No new unit in the medium or large-scale sector is allowed to
be set up after the date of reservation nor any further capacity
expansion permitted for them.
The medium or large-scale industrial units can continue to
manufacture reserved items in cases as mentioned below:
(iii) The existing medium or large unit which has already been
manufacturing an item when it is put on the reserved list has
to obtain a Carry on Business (COB) License from the Ministry
of Industry. The capacity is pegged at the highest production levei
achieved by the unit in the three years preceding the date o*
reservation of the product.
(iv) Creation of new capacity in the reserved areas is permitted among
medium/large - scale units it they undertake to export a minimum
of 75 per cent of their production (50 per cent in case of ready­
made garments).
(v) There is no restriction on the marketing of products reserved for
manufacture in the Small scale industrial sector by large units or
big companies.
(vi) The policy does not prohibit other types of linkages between large/
medium and small industrial units in the field of technology, tie-
ups etc.
In April 1967, the reservation policy was made effective for 47
items only. The number of new additional items reserved, number of
reserved items de-reserved and net number of items in the reserved

list at different points of time are shown.

 [51]

TABLE 2.1

Progressive Reservation of Items for Exclusive Manufacture in

the Small Scale Sector
Date of No. of items No. of Items Cumulative net
Notification reserved dereserved No. of items
Phase I reserved
1 April 1968 47 47
19 Feb. 1970 8 55
24 Feb. 1971 73 128 ;
11 Nov. 1971 4 124 i

26 Feb. 1974 53 177

5 June 1976 3 180
26 April 1978 324 504 I
Phase II
26 April -1978 807 8.7*

30 Dec. 1978 1 806

12 May 1980 27 1 833

19 Feb. 1981 1 1 833

3 Aug. 1981 9 842

23 Dec. 1981 2 13 831

14 Oct. 1982 3 282

19 Oct. 1982 9 837

35 872
3 Sep. 1983
1 1 873
18 Oct. 1984
7 14 886
30 May 1984
1 7 863
30 Oct. 1986
13 850
13 Feb. 1987
3 847
20 July 1987
1 846
18 Mar. 1988
14 835
3 Mar. 1989 .3

1
836
31 July 1989
 [521

The net number of reserved items reached the highest at 873

in October 1984 and thereafter began declining. From July 1989 to

December 1996, the reservation policy has remained stagnant even

though the number of products manufactured in the small - scale sector

has gone up from 2,400 to 8,000 from 1972 to 1986. Reservation has

been concentrated mostly in four industry group.

TABLE 2.2
Concentration of Reservation

Industry Group No. of Products Percentage

Chemicals and Chemical Products 325 31.1

Metal Products 138 13.2

Transport Equipment and Part 107 10.3

Rubber and Plastic Products 112 10.7

All Other Groups 363 34.7

Total 1,045 100.00

Source : Report of Expert Committee on Small Enterprises, p. 103,

(2.15) Abid Hussain Committee Recommendations On

De-reservation of Items:

The Committee has recommended following grounds with regard

to dereservation of items:
(i) The reservation policy has provided an illusion to the Government
and the country that adequate protection promotion was being provided
to small scale industries. It has actually done previously little for

their promotion, and succeeded only in keeping out large enterprises.

 [53]

(ii) The Reservation policy is inconsistence with trade reforms which

allow either free import or import under special import license of
all consumer goods.
(iii) Most of the items manufactured by the small scale sector are not
reserved conversely, a large number of reserved products are either
not manufactured at all by the sector or their sales turnover is
insignificant.
(iv) The opportunity cost of the policy is extremely high. It has hampered
the growth of important sectors like light engineering and food
processing and also export from sectors like textiles and leather
where India is unable to supply large volumes of adequate quantity
in time.
(v) Under the withdrawl of quantitative restrictions small sector is unable
to compete with companies of global standards. As committee felt,
it is the most powerful argument for prompt abolition of all reservations.
The committee further suggested that
(i) small scale industries must have the opportunity to invest
in appropriate size and technology to be able to compete

with imports in comming years.

(ii) It is also imperative for future export growth to remove
reservations so that adequate new investment and technology

upgradation takes place in these industries.

Thus the Committee has considered the option of a phased
abolition to give time to industry to adjust. But in view of the overwhelming

evidence of the ineffectiveness of reservation, it has suggested a total

abolition of reservation - of items for small sector.

 [54]

(2.16) Dereservation of Items in Small Scale Industrial

Sector:

Since 1991, liberalisation process is going on in our Indian economy.

So there a need to make the small scale industries units more competitive

and viable. Keeping this fact in mind, the Government has started

dereservation process in small scale industrial sector. At the end of 1997-

98, as per the recommendations of Abid Hussain Committee, the

Government anounced the dereservation of 24 items including icecream,

biscuits, synthetic symp and vinegar from the list of 836 items exclusively

reserved for production by the small scale sector. The other items include

rice and dal milling, poultry feed, a variety of automobile parts and

corrugated paper and boards.

Imports have been allowed under four categories: free, special

import license, canalised and restricted. When the reserved items list
containing 1,045 products is compared with the import policy for items
it is found that 563 products enjoy free imports. This could be seen
from categorisation of reserved items under various norms of import
policy followed by Minister of Commerce.
To increase production capacity for various export items which fall

in the small scale industries reservation list, the Ministry of Commerce

has been supporting the proposal that larger units may be allowed to

be set up in such reserved areas provided such units accept a 50 per

cent export obligation. This would enable India to cater more efficiently

to large volume orders placed for reserved items such as garments,

footwear and plasitc products, which cannot be met from many separate
 [55]

units in the small scale industrial sector with the same standard of
uniformity and quality assurance. Many items currently reserved for the

small scale industrial sector have also been identified as having sound
export potential, and have been termed ‘Extreme Focus Products’. Thirty
four such products have been identified and targeted for achieving a
30 per cent growth in value/volume, in the reserved list, these extremefocus
products are concentrated around the dyes group covering basic, direct,
acid, reactive dyes, naphols and fast colour bases accounting for about
150 products. Exhibit shows the distribution of extreme-focus products
under different categories of import policy; 38.7 percent of the reserved
products falling under the free import category are extreme focus for
exports.

(2.17) Current views on reservation policy:

Economic reforms have permitted foreign direct investment, automatic

approvals of technology transfer agreements as well as 51 per cent

foreign equity proposals. In this changed scenario, views and suggestions

of various associations and departments were sought on the small scale

industries reservation policy. These views can be categorised as follows: 1

(2.17.1) No de-reservation:

Certain small and cottage Industries associations have suggested

that 836 items reserved for exclusive manufacture in the small sector
should not be reviewed for de-reservation. Many tiny and small units
would be close down if investment limits are raised for small scale
industries and imported automotive plants are installed. Reservation is

beneficial to the sector.

 [56]

The Development Commissioner (small scale industries) New Delhi

is of the view that reservation can help enact special plan to develop

small scale industries in hi-tech areas such as electronic and software.

The list of reserved items may not be changed till the Sub-committee

report is available and considered by the Adviosry Committee. Out of

8,000 products, only 1,045. products (836 items), 13 per cent are reserved.

The small scale industrial sector is able to manufacture internationally

competitive products, and in several areas, their exports are substantial.

Medium/large/Multi National Companies are already permitted to enter the

reserved areas with a 75 per cent export obligation. DC (small scale

industries) is of the view that de-reservation should be done in phases,

as recommended by the Vijayaraghvan Committee.

(2.17.2) Partial de-reservation :

Certain Small industries associations, Confederation of Indian

Industry, New Delhi, Department of Science and Technology, New Delhi,

Associated Chamber of Commerce and Industry, New Delhi, Department

of Economic Affairs, New Delhi have suggested partial de-reservation.

They are of the opinion that the list be scrutinised item by item and

reservation retained only where necessary. De-reserve initially items which

are not being manufactured by small scale industries, those whose output

accounts for an insignificant part of the total, and items with expert

potential. Productus which can be manufactured economically in the small

scale sector may continue in the reserved list.

 [57]

(2.17.3) Product-specific de-reservation:

Some other associations and companies of medium and large

scale sector are of the opinion that conditionally it would be better to

de-reserve certain product under the conditions. When product is

manufactured by the fermentation route and when the manufacturer

makes products for specific use.

1. Shukla.M.B. Business Entrepreneurship and small scale industries

management.

2. Report of the Expert Committee on Small Enterprises, p. 102.

3. Report of the Expert Committee on Small Enterprises, p. 103.

4. Mishra S.K. and Puri V.K. Indian Economy.

5. Desai Vasant, management of small scale industries.

6. Dhar, P.N. and Lydall H.F., The role of small enterprises in Indian

economic development, Asia Publishing House (Mumbai).

7. Kuchchal S.C., Industrial Economy of India.

8. Rudra Dutt and Sundaram K.P.M., Indian Economy

9. Agarwal D.C., Indian Economy.

• ••