Chapter – VIII

GLOBALISATION AND INDIAN SMALL SCALE

INDUSTRIAL SECTOR

Globalisation means gradual integration of economies through free

movement of goods, services and capital which has significant impact on the
economies of both developed and developing countries. Therefore, globalisation
refers to a process of growing economic interdependence among different
countries of the world. Thus, in the globalised era, the whole world is changing
into a global village in the sense that economic activities in one part of the globe
are affecting significantly the rest of the world. For this purpose, it becomes
necessary for India to participate in the process of globalisation (Ashutosh, 2002).
The New Economic Policy of 1991 aimed at making Indian economy competitive
and much better integrated with the rest of the world. The liberalisation and
economic reform process which included both short term and long term measures
have direct and indirect bearing on the manufacturing sector of India in general
and small scale sector in particular. The dynamics of change will bring about
inflow of technology, resources and both human and physical capital that are
scarce or costly to be procured locally in the developing economies like India.
This will lead to rise in the productive capacity of the nation to supply increasingly
diverse economic goods and services to its growing population. Therefore,
globalisation can bring immense benefits to various countries that are able to
harness the resulting opportunities for the proper development of their material
and human resource endowments (Nemedia, 1997). Besides offering greater
opportunities for economic growth, globalisation has also posed some important
challenges which may be viewed as problems from the perspective of developing
countries like India. With the launching of the process of liberalisation,
globalisation and formation of WTO, the Indian small scale industrial sector will

219
have to upgrade its technology, adopt modern marketing and management
practices along with an improvement in the quality of its products to become more
competitive and resource efficient.

In this context, the present chapter aims to examine the relationship

between liberalisation process, globalisation and Indian manufacturing sector in
general and small scale industrial sector in particular. To fulfill this objective the
present chapter has been divided into four broad sections. Section-I concentrates
on the issues of liberalisation and globalisation in the WTO regime. Section-II
examines the relationship between globalisation, liberalisation and Indian
manufacturing sector vis-à-vis other major developing economies of the world
whereas Section-III highlights the opportunities and challenges confronting the
Indian small scale industrial sector in the era of globalisation. The last section
concludes the discussion along with policy implications.

Section – I

When the liberalisation process intensified in most of the developing

countries in early nineties by following market oriented policies alongwith the
widening of the scope of GATT and formation of WTO in 1995, the world started
changing into a global village. The world economy became increasingly
structurally interdependent and the use of the concept „global‟, as distinct from
„international‟ became acceptable and justifiable (Dunning, 1993). Globalisation
represents closer integration of the world economy resulting from increase in
trade, investment finance and multicountry production network of MNCs. It
extends beyond economic interdependence to include dilution of time and space
dimensions as a result of spread of information technology (Yusuf and Stiglitz,
2000). Globalisation is thus, a supranational phenomenon, which has reduced the

220
distances between various countries by the provision of international trade and the
relaxation of quantitative restrictions on commodities and thus has changed whole
world into the world without borders. The positive group of thinkers contemplates
globalisation as purely an objective and descriptive phenomenon that is taking
place under current trends. It is a process of increasing integration into the world
economy, the characteristics of the process is by no means uniform (Chandra,
2004). The normative group of analysts explore the reality from objective, truth,
norms, policies, prescription which are being taken as a form of advice to
developing countries for liberalising and integrating themselves with the rest of
world as far as possible as the definite way to achieve the pace of sustainable
development (Nayar, 1998). Therefore, the process of globalisation has continued
and will intensify further. At micro-level, there is intensified pressure on business
enterprises from both competitors and consumers to continuously innovate and
improve quality of products. At macro-level, more and more countries are
following policies of liberalisation, privatisation, de-regulation of markets,
removal of structural distortions and liberalisation of Foreign Direct Investment
(FDI) etc. In this context, there are rapid shifts towards market-oriented policies
wherein profit motive and price mechanism determine the allocation of scarce
resources.

Since the process of globalisation and liberalisation have significant impact

on the economies of the world especially the developing countries like India, it is,
therefore, imperative to study the issues relating to emergence, activities and
principles of GATT/WTO. In 1944, Bretton Woods conference was held for new
international economic order which recommended setting up of International
Monetary Fund (IMF) to deal with exchange rate and balance of payment
problems, International Bank of Reconstruction and Development (IBRD)
popularly called World Bank, to deal with the problem of reconstruction and

221
development and International Trade Organisation (ITO) to deal with problems of
international trade. From January 1, 1948, General Agreement on Tariffs and
Trade (GATT) became effective for providing a framework for the conduct of
trading relations, a system of rules to avoid unilateral action and framework for the
progressive elimination of trade barriers. The various rounds relating to GATT are
summed up in Table 8.1.

In the year 1995, WTO was set up in the place of GATT to implement the
agreement reached during Eighth Round and to develop co-operation with other
institutions like IMF and World Bank for better results. The Uruguay Round
(GATT-94), establishing the WTO has introduced the most fundamental reforms
in the world trading system since the establishment of GATT in 1947. The initial
focus of GATT (first seven rounds) was to remove trade distorting policies,
including the excess of trade restrictions during 1930‟s and 1940‟s via tariff
reductions only but the Uruguay Round overhauled and strengthened the GATT
rules on trade in goods, covered wide range of products and countries, extended
trade rules to cover services, trade related intellectual property rights and
investment measures and incorporated wide ranging commitments to trade
liberalisation by member countries, thereby infusing dynamism in the world
economy.

Uruguay Round lists 60 agreements, annexes, decisions and

understandings. These sixty agreements fall in six main parts: an umbrella
agreements (a) the agreement establishing WTO; (b) Agreement covering (goods,
services and intellectual property rights); (c) Dispute settlements; (d) reviews of
governments trade policies. Later on, WTO negotiations were expanded to cover
non-trade issues like environment, child labour standards in Seattle Ministerial
Conference in 1999. GATT-94, covered following agreements in goods and
services:

222
 TABLE 8.1

OUTCOME OF VARIOUS GATT ROUNDS

Year Venue and Outcome

Contracting
Parties
1947 Geneva Round First GATT Agreement Signed, Tariffs item by item
23 Countries negotiated and concession on 45,000 tariff lines.
1949 Annecy Round Tariff item-by-item negotiated and modest tariff
29 Countries reduction on specific products.
1950-51 Torquay Round Tariffs item-by-item negotiated and 8,700 tariff
32 Countries reduction.
1955-56 Geneva Round Tariffs item-by-item negotiated and modest tariff
33 Countries reduction.
1960-61 Dilon Round 39 Tariffs item-by-item negotiated proposal by the EEC
Countries (EC) for a 20% linear cut in duties on manufacturers.
1963-67 Kennedy Round Tariffs formula approach, item by item negotiation,
74 Countries non-tariff measures; anti-dumping, customs valuation,
average tariff reduction of 35% by developed
countries, some 30,000 tariff lines bound agreement
on anti-dumping and customs valuation.
1973-79 Tokyo Round 99 Tariffs formula approach, non-tariff measures, anti-
Countries dumping subsidies, customs valuation, government
procurement, import licensing product standards,
safeguards, average tariff of developed countries
reduced one-third.
1986 Uruguay Round Tariffs combination of item by item and formula
103 Countries in negotiation, non-tariff measures, all Tokyo Round
1986, 117 by end issues, plus pre-shipment inspection, trade related
1993 investment measures, rules of origin; New Issues:
trade in services, intellectual property rights, dispute
settlement procedures, and transparency and
surveillance of trade policies; tariff of developed
countries reduced by about one-third on average,
agriculture, textile and clothing brought into GATT,
WTO created and most Tokyo Round Codes enhanced
and made part of GATT-1994.
Source: Compiled From Various GATT Rounds.

223
A. Trade in Goods

 Market Access for industrial goods.

 Textile and clothing.

 Health regulations for farm products (SPS).

 Product standards (TBT)

 Investment measures (TRIMS)

 Anti dumping measures.

 Customs valuation methods.

 Pre-shipment inspection

 Rules of origin.

 Import licensing.

 Subsidies and countervailing measures.

 Safeguards.

B. Trade Related Intellectual Property Rights (TRIPS)

C. Trade in Services

 Movement of national persons.

 Air Transport.

 Financial services

 Shipping

 Tele-communications

224
 In case of the agreements on trade in goods, it was agreed in Uruguay
Round that developed countries would cut their tariffs on industrial products
import by 40 percent. On March 26, 1997, 40 countries accounting for more than
92 percent of world trade in information technology products agreed to eliminate
import duties and other changes on these products by 2000 (by 2005 in handful
cases). Negotiating Group on Market Access (NGMA), on May 2003 gave
proposals for zero tariff commitments in seven major sectors (auto components,
fish and fish products, textiles, gems and jewellery, leather products and electric
and electronic goods) for special and differential treatment and less than full
reciprocity for developing and less developed countries. The agreement on
„Market Access Negotiations on Non-Agricultural Products‟ is expected to
increase market access of industrial goods by reducing tariffs.

The new GATT agreement agreed to phase out Multi-Fibre Arrangement

(MFA) and agreement on Textile and Clothing (ATC) committed to remove quota
by January 1, 2005 by integrating sector fully into GATT rules. ATC has
following main elements.

 Product coverage;

 Integration of textile products;

 Liberalisation process;

 Special and Safeguard mechanisms;

 Establishment of Textile Monitoring Body; and

 Other provisions including rules, circumvention for quota,

administrative, treatment of non-MFA restrictions and commitments
undertaken elsewhere under WTO agreements.
The products covered under agreement include yarns, fabrics made up of
textile products and clothing. Under the liberalisation process, the former MFA
growth rates applicable to each of these quotas were increased on 1st January, 1995

225
by factor of 16 percent for the first stage of agreement and new growth rate were
to be applied annually. The growth rate was to be increased by factors of 25
percent in the second stage and was to be further increased by 27 percent for the
last stage beginning January 1, 2002. In case of damage to industry, country could
impose „transitional safeguard‟ measures subject to review by „Textile Monitoring
Body‟. Further, Article XX of GATT allowed governments to use Sanitary and
Phytosanitary(SPS) measures, provided they do not discriminate or use this as
disguised protectionism. Key features of SPS measures are: (a) Protection (b)
Justification (c) International standards (d) adopting to conditions (e) alternative
measures (f) risk assessment (g) transparency and (h) dispute settlement.
In respect of the product standards, Uruguay Round ensures that Technical
Barriers to Trade (TBT) measures as well as testing and certification procedures
are not used for restricting trade. Countries have right to establish protection for
human, animal or plant life and environment or to meet other consumer interests.
The Agreement covers processing and production method. Central Government
bodies, local governments and NGOs can prepare, adopt and apply standards. The
agreement further permits the assessments of products through testing in exporting
country to see if product meets importing country‟s standard or not.
Under the new provision of TRIMS, the new arrangement will open the
floodgates of foreign investment in the Third World Countries. The TRIMS
incorporated certain provisions so as to ensure that Government should not
discriminate against foreign capital and compels the member countries to offer
equal treatment to foreign capital at par with domestic capital/investment. Article
V states that members would notify through the WTO all TRIMS that do not
conform with the agreement within ninety days of entry into the force of
Agreement. Developed countries were required to eliminate these measures within
two years (by the end of 1996); developing countries within five years (by the end
of 1999) and least developed countries within seven years (by the end of 2001).

226
 Article VI of Uruguay Round allows governments to act against dumping.
A country cannot use anti-dumping measures if (a) margin of dumping is
insignificantly small (less than 2 percent of the export price of the product), (b)
volume of dumped import is negligible. At Doha, it was agreed that no second
anti-dumping investigation within a year would be allowed unless circumstances
have changed. Further, developed countries would provide special safeguards to
developing countries while enforcing anti-dumping measures. The main objectives
of WTO agreements on custom valuation are fairness, uniformity and neutral
system. The agreement stipulates that customs valuation shall be based on actual
prices of goods to be valued. If declared value of imported goods is in doubt then
custom authorities have the right to get further information and custom value of
the imported good is not be determined on the basis of declared value. Under pre-
shipment inspection practice, specialised private companies check price, quantity
and quality of imported goods. GATT-94 agreement on pre-shipment inspection
requires the governments to follow the principles of non-discrimination,
transparency, protection of confidential business information, avoid unreasonable
delays, use specific guidelines for conducting price verification and avoid conflicts
of interest by the inspection agencies. Further, agreement ensures that rules of
origin should be objective, understandable, transparent, non-trade distorting,
harmonized based on consistent, uniform, impartial and reasonable manner.
Uruguay Round applies only to specific subsidies, which can be prohibited
as well as actionable. These subsidies can be domestic or export subsidies and are
given to meet certain export targets. Safeguard measures are defined as
„emergency‟ action with respect to increased imports of particular product, where
such imports cause or threaten to cause serious injury to the importing country‟s
domestic industry. These safeguard measures have been designed to (a) clarify and
reinforce GATT disciplines (b) re-establish multilateral control over safeguard and
eliminate measures that escape such controls (c) encourage structural adjustment
on the part of industries adversely affected by increased imports, thereby

227
enhancing competition in international market. Safeguard measures rest on four
guiding principles – (a) temporary, (b) MFN principle, (c) progressive
liberalisation and (d) compensation to countries whose trade is affected. In case of
developing countries, safeguard measures will be applied only if single developing
country is supplying more than 3 percent of imports. Developing countries may
extend the application of safeguard measures for an extra two years beyond that
normally permitted. The proposal for Trade Related Intellectual Property Rights
(TRIPS) has extended the area of GATT. The proposal for TRIPS include
protection of patents, copyrights, trademark, trade secrets etc. Finally, as per the
new GATT proposal under trade in services, access of service personnel into
markets of member countries will henceforth be possible on a non-discriminatory
basis under a transparent and rule based system.
India adopted the policies of liberalisation, privatisation and globalisation
as a prelude to the Uruguay Round which signalled a distinct movement towards
market mechanism with a limited role of the government. By pursuing these
policies, domestic liberalisation has been supplemented by increasing
globalisation of the economy and as a result various economic units are
increasingly being encouraged to enter into growing economic relations with the
rest of the world. This developing integration offers both prospects and challenges
to developing countries of the world. In fact, developing countries like India,
require Herculian efforts to bring their trade policies in line with the prescribed
norms of the WTO agreements, while the practices of the developed countries are
already according to those as mentioned by these rules. The developing countries
will have to introduce new laws and new administrative measures to reinforce
their administrative and judicial capacity to apply to WTO regulations. Also these
economies are faced with multitude production and economic bottlenecks such as
scarcity of inputs and raw materials, lack of adequate and efficient infra-structure,
hi-tech manpower, government controls and market regulations, presence of
monopolies and oligopolies, factors and market rigidities. Due to the presence of

228
such economic rigidities, not only is the domestic production rendered inefficient
and sub-optimal but also the externalities of free trade are hindered. Thus, Indian
economy will have to gear up if it is to confront these challenges effectively in the
liberalised regime.

Section – II

In the globalised regime, the industrially advanced countries planned to

dominate the world market by making use of labour and other resources available
in the developing countries through collaborations, agreements or direct
investments. On the other hand, for developing nations, globalisation is a means to
invite foreign investment and to restructure the existing organisations so that they
could enter the world market and survive. In this, context, it is important to study
the growth process of manufacturing sector in different countries of world. Britain
led the world in manufacturing output for most part of the nineteenth century.
However, with the increased industrialisation, other western nations like U.S.A.,
Germany and France surpassed U.K. in terms of industrial output. In 1970, U.S.A.,
Japan, Germany, France, U.K., Italy and Canada accounted for around 75 percent
of world‟s manufacturing output. From 1970 to 1985, the share of these countries
was around 67 percent. During this period, with exception of Japan, whose share
grew by 50 percent, the share of other countries contracted. During the same
period Brazil, Spain and Mexico increased their industrial output to be amongst
the top ten industrial nations of the world. In the developing world, the major
catalysts for growth have been the economies of South East Asia. In 1963, Hong
Kong, Singapore, Taiwan and South Korea accounted for only 0.35 percent of the
world‟s manufacturing output, while, their share had grown to 1.55 percent by
1980. The annual trend growth rate of total manufacturing gross value added
(output) during the last two decades is close to 7 percent, which represents a

229
turnaround compared to the preceding period of „relative stagnation‟ (1965-1980).
The record is modest in contrast to China‟s double-digit growth during this period
and most of other industrialised Asian Economies.

Table 8.2 shows the growth of manufacturing sector in major Asian

Economies during the period 1980-81 to 2001-02. The table shows that developing
nations have shown robust growth in manufacturing activity over the two decades.
China is exhibiting one of the highest growth rates of 13.1 percent. The other
countries that exhibited healthy growth rates during the same period were
Malaysia (11.6 percent), Indonesia (10.6 percent), Thailand (9.9 percent), while
India has shown growth rate of only 6.9 percent. Although the economy has
opened to global competition over the last decade, manufacturing sector in India is
still a long way behind global standards as the growth rate in Indian manufacturing
sector is the least among the major Asian Economies.

The industrial production in developed countries is decreasing due to the

outsourcing of industries to other countries that possess favourable conditions for
factors such as labour costs etc. Hence, the manufacturing industries are shifting
from U.S.A. to countries like China, Korea, and Thailand. In case of major
developing Asian Economies, the share of manufacturing sector in GDP is
increasing. Table 8.3 shows the growth of manufacturing sector as percentage of
GDP in major Asian Economies. The table shows that the share of manufacturing
sector as a percentage of GDP increased to 39 percent in China, 25 percent in
Brazil, 35 percent in Malaysia, 28 percent in Korea, 27 percent in Indonesia, 30
percent in Thailand and 19 percent in India.

The government in order to achieve self sufficiency in the manufacturing

sectors of the economy, protected and nurtured indigenous firms and small
industries on one hand and prevented private sector monopolies on the other. Over
a period of time these policies had the detrimental effect of breeding
inefficiencies, low productivity and lack of professional management. In 1991-92,

230
as a result of liberalisation and globalisation, Indian industry has opened up to
competition from global players. Indian manufacturing sector is freer to grow,
invest and compete in the global markets. However, the pace of these reformative
measures has been slow, especially with regards to freeing government controls.
Also, procedural and bureaucratic delays in approvals and decision-making added
to the already existing problems As a result, Indian manufacturing sector has not
developed to keep pace with other developing Asian Economies of the world.

In order to analyse the performance of India, vis-à-vis its global

counterparts in manufacturing sector, it is important to compare the export
performance of major Asian Economies. Between 1973-74 to 2001-2002 the
merchandise exports of developing countries grew at an average annual rate of 13
percent as compared to 10.2 percent for the world as a whole, resulting in their
shares in the world trade increasing from less than one fourth to almost one third.
During this period, developing countries also became important for each other‟s
product, the share of trade among themselves reached 40 percent of their total
exports at the end of the last decade. During the 1970s and early 1980s, the share
of manufactured exports was around 20 percent, while the share of agricultural
commodities fell from about 20 percent to 10 percent during the same period.
Earning from mineral and oil exports fluctuated considerably due to changes in
prices, but the overall trend was in a downward direction. Table 8.4 shows the
percentage share of major developing Asian Economies in the total world exports
from 1973-74 to 2001-2002. It can be seen from the table that the share of China
in World exports grew by 3.70 percent whereas for Korea, Singapore and
Malaysia this share grew by 2.60 percent, 2.11 percent and 1.62 percent,
respectively for the period 1973-74 to 2001-02. For India, Brazil and Indonesia the
share was 0.69 percent, 0.84 percent and 0.94 percent, respectively for the same
period.

231
 TABLE 8.2

GROWTH OF MANUFACTURING SECTOR IN ASIAN

ECONOMIES (1980-81 TO 2001-2002)
(Percent)

Country Growth Rate

China 13.1

India 6.9

Indonesia 10.6

Korea 9.7

Malaysia 11.6

Singapore 8.0

Thailand 9.9

Source: World Development Report, 2005.

232
 TABLE 8.3

SHARE OF MANUFACTURING SECTOR

IN GDP (1973-74 TO 2001-02)
(Percent)

Country Growth Rate

China 39

India 19

Indonesia 27

Korea 28

Malaysia 35

Brazil 25

Thailand 30

Source: World Development Report, 2005.

233
 TABLE 8.4

PERCENTAGE SHARE IN WORLD EXPORTS

(1973-74 TO 2001-02)
(Percent)

Country Growth Rate

China 3.70

India 0.69

Indonesia 0.94

Korea 2.60

Malaysia 1.62

Brazil 0.84

Thailand 1.22

Singapore 2.11

Source: World Development Indicators, 2005

234
 Table 8.5 shows the per capita value added in manufacturing sector in

major developing Asian Economies of the world. The Table shows that the highest

per capita value added in manufacturing sector in 2001-2002 was experienced by

Singapore ($6064), followed by Korea ($2142), Brazil ($1078), Thailand ($582),

China ($286) and Indonesia ($115), whereas, the per-capita value added in

manufacturing sector in India was only $70 in 2001-2002. The slow down of India

in comparison with other developing nations is further demonstrated by the fact

that despite tariff reductions during the 1990s, India continues to be amongst the

most protected economies of the world. India had the second highest average tariff

rate in 2001-02 and continues to have a higher percentage of products covered

under non tariff barriers. Hence, cross country comparisons on direct and

surrogate measures of competitiveness point towards a significant lack of

competitiveness in Indian manufacturing sector.

Table 8.6 shows the WEF ranking on selected indicators of competitiveness

in 2001-2002. The table shows that there are significant barriers, which stand in

way of Indian manufacturing sector growing to its full potential. The major barrier

in the growth of manufacturing sector has been poor infrastructure as compared to

its Asian counterparts. The Global Competitive Report shows that India ranked at

54th position (out of 59 surveyed) in case of the quality of infrastructure and

absence of world class infrastructure affects information flow and decision making

and thus hampers business development. Further, starting a business in India

entails considerable procedural delays and requires the management to spend a lot

time with government officials. According to the Report, India ranked at 39th

position at the parameter-base of starting a new business, while Taiwan and

235
Malaysia ranked at 6th and 10th positions respectively. Moreover, India lagged

behind in the parameter of efficient production process, which leads to low quality

levels adversely affecting Indian exports. Also, labour laws in India make it

difficult for firms to terminate employment. This makes it difficult for firms to

take business decisions and forces them to continue operating, even under

inefficient conditions. In case of labour flexibility, India ranked at 53rd position

negated by low productivity levels. This is mainly due to the fact that the majority

of labour force in India is employed in the unorganised sector.

Thus, it can be concluded that in terms of average ranking with respect to

the selected parameters, Indian manufacturing sector ranked at the lowest with

average ranking of 50, as compared to major developing Asian Economies of the

world. Due to this reason, even in the liberalised era, Indian manufacturing sector

is growing at the slow pace and is unable to compete in the world market in the

WTO and globalised regime. Given the fact that Indian small scale industrial

sector is a major contributor of the Indian manufacturing sector, the sluggishness

in the growth performance of Indian manufacturing sector is well reflected by the

fragile performance and competitiveness of Indian small scale industrial sector in

the world market. A competitive environment imposed upon the small scale sector

through liberalisation and entering in of WTO regime has also failed to exhibit any

significant improvements in its performance. In general, opening up the trade

boundaries through signing WTO has exposed Indian manufacturing sector in

general and small scale industrial sector in particular to world competition and

thus, suggest the need to evaluate these challenges in detail.

236
 TABLE 8.5

PER CAPITA VALUE ADDED IN MANUFACTURING

SECTOR (2001 – 2002)
(US dollars)

Per Capita Value Added in

Country
Manufacturing Sector

China 286

India 70

Indonesia 115

Korea 2142

Malaysia 946

Brazil 1078

Thailand 582

Singapore 6064

Source: World Development Indicators, 2005

237
 TABLE 8.6

WEF RANKING OF SELECTED INDICATORS OF

COMPETITIVENESS (2001-02)

Parameter India China Korea Malaysia Indonesia Taiwan

Overall Quality of
54 46 28 18 42 26
Infrastructure

Sophistication of
38 42 23 27 48 16
technology available

Import Fees-
Combined Effect of 59 45 32 25 40 24
imports

Tariffs, Licence Fees

and Time Required
for Administrative 59 57 40 41 45 13
Procedures Average
Tariff Rates

Base of Starting a
39 37 33 10 24 6
New Business

Local Development
47 35 22 50 51 19
of Product Designs

Efficient Production
42 43 28 29 46 21
Processes

Labour Flexibility 53 32 18 38 25 13

Pay Related to
52 15 23 29 42 2
Productivity

Average Ranking 50 39 37 29 40 15
Source: World Global Competitive Report, 2004.

238
 Section – III

The development of small scale industrial sector has been one of the major
planks of India‟s economic development strategy since independence. India
accorded high priority to this sector from the very beginning and pursued support
policies to make these enterprises viable and vibrant. Despite numerous protection
and policy measures for the past so many years Indian small scale units have
remained mostly small, technologically backward and uncompetitive. The opening
of the Indian economy in 1991 added to the problems of this sector and at present,
the small scale industrial sector in India is at cross roads and intense debate is
centered around questions like what would be the future of this sector? How can
these enterprises survive in the international trade arena? What role can the
government play in making this sector more competitive? In this context, it is
important to re-examine the opportunities and challenges confronting this sector in
the globalised regime.

It has been observed that small scale industrial sector in India has been
facing an increasingly competitive environment due to: (1) liberalisation of the
investment regime in the 1990s, favouring foreign direct investment (FDI); (2) the
formation of the World Trade Organisation (WTO) in 1995, forcing its member-
countries (including India) to drastically scale down quantitative and non-
quantitative restrictions on imports; and (3) domestic economic reforms. The
cumulative impact of all these developments is a remarkable transformation of the
economic environment in which small industry operates, implying that this sector
has no option but to „compete or perish‟. While the WTO engineered trade regime
is likely to affect almost the entire range of industries, its effect would be more
pronounced on the small scale sector because of the largely unorganised nature of
his sector, lack of data/information, obsolete technology, poor infrastructure, weak
capital base and inadequate access to economies of scale. The provisions/

239
agreements which are likely to affect the Indian small scale industrial sector under
the WTO regime are Quantitative Restrictions (QRs), tariff reductions, anti-
dumping practices, subsidies and countervailing measures, Technical Barriers to
Trade (TBT), Trade Related Investment Measures (TRIMs) and Trade Related
Intellectual Property Rights (TRIPs).

Article XVII of GATT provides for imposition of Quantitative

Restrictions(QRs) on imports for balance of payments reasons. India has built up a
large foreign exchange reserve in relation to imports and is under pressure to
remove all QRs at the earliest. India has already removed QRs by brining more
and more items in the Open General License (OGL) category. Due to India losing
its case to USA in the Dispute Settlement Body of WTO, physical controls
(mainly licensing) and the QRs have been removed gradually since then as under.

Year QRS removed

1996-97 488

1997-98 391

1998-99 894

1999-2000 714

2000-2001 715

The process of phasing out of QRs completed in April 2001. This opened
up the direct competition in the domestic market with the imports of high quality
goods from the developed countries and cheap products from the other less
developed countries. The domestic market is now flooded with a plethora of
imported goods: Chinese toys, locks and apparel, Taiwanese gadgets, Swiss
cheese, Thai biscuits, Brazilian chocolates, etc. Moreover, the list keeps on
growing.

240
 With the removal of Quantitative Restrictions, the protection level by the
way of tariffs has also come down, which poses another formidable challenge to
the small enterprises. The small units have been provided with some protection
because they suffer from certain bottlenecks in use and availability of inputs like
credit and technology and have no access to economies of scale. Besides phasing
out of QRs, India is also committed to a ceiling tariff binding of 40 per cent on
finished goods and 25 per cent on intermediate goods, machinery and equipment.
The process of phased reduction to these bound levels has already started.
Although the tariff levels have already been reduced to a great extent during
recent years but the international perception is that the current tariff levels in India
are still very high. There is now a demand for fresh negotiation on industrial tariffs
at the WTO. Any further reduction in tariff levels would intensify the competition
in the domestic market and accelerate the imports thereby crippling the
competitive strength of the Indian small units further.

While the domestic market is going to be fully exposed to external

competition, the small enterprises may have to be cautious against possible
dumping by their competitors from abroad, which may be difficult to establish in
many cases. What is also significant is that the cost of anti dumping investigations
may be prohibitive. On the other hand, anti dumping charges by the importing
countries may do serious damage to the export prospects as well. The small
enterprises would need to understand the challenges posed by the Agreement on
Anti-Dumping Measures. There are certain provisions (Special and Differential
Provisions) that are intended to benefit the developing countries, but may act
against the small and medium enterprises when it comes to trade among the
developing countries. Article 5.8 of the Agreement provides that the volume of
dumped imports shall normally be considered negligible if dumped import from a
particular country is found to be less than 3 per cent of imports of the like
products, unless countries which individually account for less than 3 per cent of

241
the import of the like products collectively account for more than 7 per cent of the
import. There has been an increase in number of anti-dumping cases initiated
against low and middle income countries particularly by OECD countries to
protect their own domestic industries. In US, 2/3 of anti-dumping duties and in
EU, 90 percent of anti dumping duties are against developing countries, thus
hindering market access of developing countries in general and of India in
particular. Small enterprises in India may be unable to defend or take
counteractive measures primarily due to their ignorance, weak NGOs, lack of
necessary data and problem of accessibility to information.
As far as subsidies are concerned, all major subsidies such as Duty
Entitlement Pass Book (DEPB) Scheme, Export Promotion of Capital Goods
(EPCG) Scheme, Income Tax Benefits under Section 80 HHC of the Income Tax
Act etc., are considered as “actionable” subsidies. These are not prohibited
subsidies and, therefore, can be continued by the government. However, the
importing country can take action (by way of imposing countervailing duty) if it
feels that subsidised imports are causing injury to their domestic industry. Indian
industry should learn to be competitive even without the present set of subsidies.
This is perhaps the most serious challenge for the small enterprises in India. Small
enterprises should be aware of what is permissible and what is not. Experts hold
the view that the subsidies by the government to small enterprises are non-
actionable. WTO presupposes that an enterprise knows the implications of all
provisions. In a country where most of the small enterprises are tiny units, this
“knowledge” needs to be transmitted to them for effective implementation.
The small enterprises would have to take note of growing Technical
Barriers to Trade (TBT) in view of high technical standards, set by the developed
countries. Agreement on TBT provides that mandatory standards adopted by
governments to protect health and safety of the people and to protect environment,
should not be applied as to cause unnecessary obstacles to trade. These are

242
emerging as major non-tariff barriers which limit access to markets of the
developed countries. The agreement on TBT may become increasingly important
in future and become significant barrier to trade due to difficulties in
implementation of TBT by developing countries. These difficulties include high
cost of adaptations, irrelevance of foreign standards to local conditions, lack of
timely and adequate information and consequent transaction costs, understanding
the requirements and in testing and monitoring them, lack of scientific data for
specific limiting values and uncertainties. Costs using environmentally friendly
methods may be three times higher. This has been the case with the dye sector in
India, where the industry is dominated by small and tiny enterprises. Germany has
stipulated the usage of the environmentally friendly Busan-30 instead of the
regular PCP (pentachlorophenol) in dyes used in cotton fabrics. However, shifting
to the specified dye would entail costs nearly thirty times that of PCP, thus
proving prohibitive for the Indian industry. Yet another example of the increased
costs of compliance with eco-labelling scheme is the footwear sector where these
costs were found to be nearly 33 percent of the export price. Though TBT
measures provide differential treatment to developing countries but rich nations do
not respect them. As a result of TBT measures, India‟s exports of leather and
leather manufacturers, wood and wooden products, toys etc. will be adversely
affected.
Another area of concern for the small enterprises is the agreement on Trade
Related Investment Measures (TRIMs) as its enforcement will intensify the
competition further in the domestic market. The agreement on TRIMs does not
allow the imposition of local content requirements, trade balancing requirements
and foreign exchange neutrality. The local content requirement makes it
mandatory for domestic companies including multinationals to use a proportion of
inputs bought locally. The trade balancing requirements limit the imports of
foreign firms to their earnings of foreign exchange through exports and the foreign
exchange neutrality requires some balance between foreign exchange inflows

243
(through exports and investments and other transfers) and outflows of foreign
exchange. In India, the local content requirements which has been used
extensively by the policy-makers in the past had led to the development of a vast
range of ancillary units. The possible scrapping of the criteria of local area
content and trade balancing may hit the development of sub-contracting hard,
leading to loss of domestic market for the small scale industries, especially in the
sectors such as automobiles, consumer electronics, electrical appliances, electrical
machinery, white goods, etc. When foreign/joint venture companies become free
from the obligation of indigenisation, there may be little incentive for obtaining
material from local units. Thus, with the implementation of the agreement on
TRIMs, the input supplying units particularly small ancillary units would not
automatically get their market share. These units have to compete in the wide open
markets for their market shares. In these circumstances, Indian small enterprises
particularly engaged in sub-contracting activities may have a real problem if they
are not competitive and do not emphasise technology upgradation.
The enforcement of the Agreement on Trade Related Intellectual Property
Right (TRIPs) will threaten the survival of several small enterprises in the country.
The WTO‟s TRIPs agreements seek to promote and foster technological
innovation by ensuring the certainty of intellectual property protection. The strong
argument in favour of protection of intellectual property rights is that it encourages
innovation by investing in R&D and rewarding the inventors with the grant of
monopoly right over the commercial exploitation of their inventions for a
specified period. However, TRIPs agreement is bound to favour handful of
developed countries, as most R&D activity is undertaken in developed countries
and top ten rich countries will get benefit. TRIPs agreement will take away India‟s
sovereign right to frame its own intellectual property legislation.

While TRIPs would have far-reaching implications on the almost entire

spectrum of business, its effect would be more pronounced on small scale

244
industries since reverse engineering, the main source of technology for small scale
industries, would be difficult under the stricter IPRs regime. Thus, the stronger
protection to intellectual property rights will make it more difficult for industries
in developing countries like India to use reverse engineering and other means of
the technology developed by foreign companies and for which the latter hold
patent rights. In the past, reverse engineering has been an important source of
technology particularly for the small scale industries. With the implementation of
the Agreement, the companies with registered patent rights can be expected to be
more vigilant about ensuring that their patented technology is not used without
payment of royalty The strengthening of intellectual property rights also brings
forth the dangers of small enterprises losing their manufacturing potential to other
companies who have prudently patented either the raw material or the product.
Some small enterprises may lose business potential due to these dynamic changes
in the business environment owing to intellectual property rights. It is expected
that the TRIPs provisions would effect the Indian pharmaceutical industry
severely. The strong system of patents would threaten the existence of large
number of small and medium enterprises who have been producing drugs that are
under patent in other countries, taking advantage of the weak patent law in India.
Moreover, the small enterprises engaged in high-tech industries such as
electronics, machine tools, bio-technology, etc., may face the problem of
accessing appropriate technology under the TRIPs regime. It is apprehended that
both terms and conditions and the cost of technology may be prohibitive. In the
new regime ignorance of law will be no excuse as the burden of proof is on the
infringer. While transfer of technology cases may increase, any counterfeit trade
may invite deterrent action. Care will have to be exercised in choosing the name of
companies or products. Problems may come before those small enterprises who
sue protected designs as in the case of garment industry. Employees,
subcontractors, etc. might have to be restrained from divulging confidential
information.

245
 Indian small enterprises must brace themselves against the issue of child
labour which of late is attracting a lot of global attention. The ability of small units
to supply labour intensive commodities at low prices has already pushed many
large manufacturers in developed countries against the wall. Unable to compete
against these low priced goods, attempts are being made to keep out goods from
developing countries on non economic considerations. An example is Harkins Bill
debated in the United States Assembly. The Bill attempts to ban the import of
commodities from India on the ground that it involves child labour. Harkins Bill
targeted the diamond cutting and polishing, hand knotted carpets, leather and
leather products, glassware industries etc., which are front runners in terms of
foreign exchange earnings. These industries exports are quite competitive and
rapidly increasing their shares in the international market on account of advantage
of cheap child labour. Germany introduced a similar bill in the Bundestag in 1994
and is devoting considerable attention to parliamentary hearings on child labour.
Switzerland has also planned similar legislations. The number of commodities that
are being placed on the banned list as being products of child labour are quite
exhaustive and if finally implemented could have a severe impact on the efforts to
augment trade and increase foreign exchange earnings of Indian economy,
particularly with reference to small scale sector.

Since liberalisation and globalisation process is exposing small enterprises

to market competition to a greater extent, therefore it is imperative to examine and
understand the strengths, weaknesses, opportunities and threats, confronting this
sector in the changing economic scenario. Table 8.9 highlights SWOT analysis
for Indian small scale industrial sector which reveals its strength in terms of
flexibility, resilience, efficient management and organization; the challenges
thrown open by domestic liberalisation and new world trade regime; also new
opportunities existing in the exports market; and threats from new world trade
order. From Table 8.9, we can enumerate unfolded and numerous opportunities for
the growth of Indian small scale industrial sector.

246
 TABLE 8.7
SWOT ANALYSIS OF INDIAN SMALL SCALE
INDUSTRIAL SECTOR
Strengths
 Flexible Manufacturing system
 Lower cost of production
 Low level of capital investment per unit of
output and employment
 Utilization of local resources
 Inherent ability to innovate
 Ability to make quick adjustments to the
changing economic and trading scenario
 Operational Flexibility
 Knowledge of internal markets
Opportunities
 Untapped exports potential in sectors such as
computer software, leather and leather
products, light engineering products, hand
tools and implements, auto components and
ancillaries, garments including hosiery .
 Growing service sector
 Sector and stability of access under the WTO
regime.
 Tariff reduction by all countries
 Phasing out of MFA
 Establish backward forward linkages, both
nationally and internationally
 Joint venture
 Technology upgradation
Source: Bala (2007), Economic Reforms and Growth of Small Scale Industries, Deep and Deep
Publications, New Delhi.
247
Weaknesses
 Inadequate capital for investment/ expansion
 Inadequate working capital
 Expensive bank loan
 Technologically weak due to inadequate
capital
 Weak bargaining power
 Absence of brand equity‟ for „Made in India
labels
 Lack of Development policy framework
 Product reservation Policy
 Low recognition and appreciation of this
sector in view of its contribution to industry
output, exports
 Lack of infrastructure facilities
 Lack of Well-developed data/ information
system
 24 percent cap on formation of joint ventures
(JVs) with foreign companies.
Threats
 Technological Obsolescence
 Inadequate use of information and
communication technologies
 Slow adoption of quality culture
 Poor infrastructure support
 International environmental agenda which is
in stark contrast to low emphasis by Indian
firms
 Non–compliance with non-tariff barrier
particularly environment, health and safety
standards.
 Growth of cheap imports
 High cost of funds.
 WTO regime allows the small scale sector to avail the Most Favoured
Nation Treatment and National Treatment for its exportable items the world over.
These are unquantifiable benefits, which India enjoys as a founder member of
GATT and the WTO and to gain these benefits, at least 30 countries (including
China and Russia) made numerous concessions in return for accession to WTO.
Tariff standstill on Electronic Commerce is one new area agreed to through the
Geneva Ministerial Conference in 1998, major beneficiaries of which would be the
small scale sector which is steadily gaining better market access through internet.
The new opportunities are opening for the small scale industries as a result of
liberalisation. The sectors, which have great potentials to flourish are: (a)
knowledge-based industries particularly the IT sector (b) communication industry
and its allied industries; (c) healthcare and pharmaceuticals; (d) food processing;
(e) light engineering; and (f) products by which the unit can ancillarise or supply
to larger corporations.

Opening up of the economy in the early 90s, with accelerated pace of

liberalisation has thrown a number of opportunities in many areas of the service
sector where small and medium enterprises can play a significant role in utilising
these opportunities. One such sector is information technology. Information
technology business including computer software is one area of the service sector
which has globally grown at a fantastically high rate during the last decade and its
growth in years to come would be consistent and quite high. Besides enormous
opportunities in service sector, the small enterprises have great opportunities in the
manufacturing sector. The new world trade regime has opened the global market
for Indian enterprises where they can now compete with the other enterprises of
the developing and developed countries. However, the success of small enterprises
engaged in exports market heavily depends on the quality and price of their

248
product relative to that of others. This really needs technology upgradation and
modernisation. It is worth to mention here that Indian textile sector is now going
to have a large open market for exports with the dismantling of Multi-Fibre
Arrangement. To tap these opportunities, however, an improvement is needed in
competitiveness since other countries especially China and Pakistan have already
flexed their muscle.

The small enterprises need to look at the possible market expansion within
the country since outside competition can never snatch the full market from small
enterprises. Improvement in product quality and reduction in manufacturing costs
through productivity increase are two indispensable conditions for the survival of
small enterprises in both domestic and world markets.

Section – IV

Indian manufacturing sector in general and small scale industrial sector in

particular are undergoing metamorphic changes amidst new world trade regime.
The WTO agreements coupled with liberalisation policy are likely to create some
far–reaching implications for these sectors, specially with regards to the
international trading norms, their competitive ability and integration with global
markets. The Indian industry needs to prepare itself to encounter challenges in the
post GATT era as the system of protection through imports restrictions or high
tariffs are virtually going to disappear. The fundamental strategy of both the
Indian industry and government should be not to shy away from international rules
and disciplines coming into vogue but to focus on raising the efficiency and
competitiveness of Indian industry, including the small and medium enterprises.

249
 The examination of the relationship between globalisation and Indian
manufacturing sector vis-à-vis other major developing Asian Economies of world
shows that inadequate development of Indian manufacturing sector is due to lack
of basic parameters required by the industrial sector. The results showed that
although the Indian economy has opened to global competition over the last
decade, yet manufacturing sector in India is still a long way behind global
standards. Even in terms of average ranking with respect to selected parameters,
the performance of Indian manufacturing sector is dismal. This may be due to
improper development of key enablers like infrastructure availability, utilities and
efficient processes with low level of research and development expenditure etc.
The slow growth of Indian manufacturing sector may be due to slow pace of
reforms especially with regard to freeing government controls. Therefore,
investment in industrial infrastructure, technology and human skills holds the key
for Indian manufacturing sector being in a position to meet the challenges arising
in the international industrial area.

The liberalisation policy has posed certain challenges as well as

opportunities to the Indian small scale industrial sector. The challenges are in the
form of increased competition arising out of reduced protection due to removal of
restrictions on imports and lowering of tariffs. Opportunities have come in the
form of access to better technology, availability of a variety of raw materials and
components, impetus to quality, efficiency and opportunity to restructure and to
diversify. The emergence of multilateral trade regime; WTO conditionalities have
added urgency to the task of enhancing competitiveness. It is essential to remove
the constraints which limit the competitive strength of Indian industry. It is not
only the question of India coping with the WTO regime but for greater issue of
how India can leverage the benefits of large access of global market. The fast

250
changes brought out by global trade and new marketing strategy over the past few
years has necessitated bringing about structural changes affecting the micro, small
and medium enterprises throughout the world. The developing countries need to
evolve new policies to suit the requirements of several changes in the field of
industry and trade, besides entrepreneurs adjusting to the new environment.
Moreover, the removal of Quantitative Restrictions may affect the small scale
industrial sector, provided import surge is witnessed in those items. With the
removal of Quantitative Restrictions all reserved items have become freely
importable, therefore small scale industrial sector will have to be safeguarded by
the government.

In the new scenario, the West needs to be followed where the small units
are the efficient engines of production for larger units who only do the branding,
R&D and maintain logistics. This calls for strengthening a vertical integration
between large and small scale sector, rather than infusing competition between the
two. The small scale sector should work more as supporting industry rather than a
producer of finished goods. Consequently the large scale sector will protect them
for their own interest. There is also a need to provide immediate protection to
industries such as chemicals and pharmaceuticals against adverse implications of
TRIPs on patents by suitably amending Patent Act to have automatic licensing
provision and making patent information freely available to small scale
enterprises. The efforts need to be directed towards ensuring environmentally
clean production of Indian products for international acceptability wherever
essential by involving industry associations and providing them support from
international level sources and experts. Also, Government needs to make anti-
dumping measures more stringent to take prompt action against unfair dumping
for protecting domestic industry. Lastly there is a strong need to create a

251
knowledge network wherein small enterprises can access all information
pertaining to technology, patenting and trade regulations from one place.

As competition from within the country and outside increases, this small
sector, nurtured hitherto in a protective framework, needs to be enabled to take on
the challenges posed to it by the process of on-going globalisation. It calls for
proper harnessing of the strengths it has built up over the last five decades and
imbibing newer capabilities to meet emerging requirements of the new world trade
regime. Thus, the process of liberalisation and globalisation would help to explore
the existing opportunities for the Indian small scale industrial sector only if
government focuses on improving infrastructural facilities, encourages research
and development, improves process efficiencies and bench marking against global
players in the current economic scenario.

*********************

252