The Hindu Business Line : To ignite growth, put the smile back on SMEs

The time is ripe not only for a quick revival of small and medium enterprises, badly affected by the open-door policy, but also for newer ones to bloom.

GLOBALISATION in India was initiated in the early-1990s by

Dr Manmohan Singh in his earlier avatar as Finance Minister, and Mr P. Chidambaram followed this up with an open-door policy. But the door was swung wide open and too fast, resulting in the closing down of tens of thousands of small and medium firms. This showed the policymakers understood little about the consequences of globalisation and how it was practised in other countries.

Japan, Taiwan and China, despite having huge trade surpluses and reserves, adopted protectionist policies with regard to agriculture and some sectors of industry. And even as other countries were in a hurry to meet the WTO requirements, the trio adjusted their policies only to the extent needed to allow global trade go on smoothly.

In India, the slashing of import duties, as part of the open-door policy and the WTO requirement, has had its ill-effects. Towards the late 1990s, thousands of small businesses wound up, leading to negative employment growth. In the Hiduapur region of Andhra Pradesh, for instance, 60 per cent of those engaged in sericulture lost their livelihood as the cutting of the import duty from 100 per cent to 30 per cent led to the dumping of silk by China.

Kick-starting SMEs

The time is ripe not only for a quick revival of small and medium enterprises (SMEs), badly affected by the open-door policy, but also for newer ones to bloom. One way could be to use the thousands of crores parked in bank deposits for creating infrastructure, and producing goods and services, which would result in large-scale employment. But such a step will require political will and a change in the policies and guidelines for disbursement of funds by banks.

The American experience

In 19th century America, as small agricultural enterprises grew rapidly, the farmer embodied many of the ideals of the economic individualist. But as the nation's population grew and cities assumed greater economic importance, the dream of being in business for oneself evolved to include small merchants, independent craftsmen, and self-reliant professionals as well. In many industries, small enterprises had trouble raising funds and operating on a scale large enough to produce most efficiently all of the goods demanded by an increasingly sophisticated and affluent population.

In this environment, the modern corporation, often employing hundreds or even thousands of workers, assumed increased importance. Today, the US economy boasts a wide array of enterprises, ranging from sole proprietorships to some of the world's largest corporations.

But only a few are aware that the backbone of the American economy is the 22.5 million independent enterprises (as of mid-1990s). The US economy is by no means dominated by giant corporations. According to the Small Business Administration (SBA) of the US, small enterprises employ 52 per cent of the US workforce. And nearly 20 million Americans work for companies with less than 20 workers.

Small businesses are a continuing source of dynamism for the American

economy. They accounted for three-fourths of the new jobs in the mid-1990s (in the 1980s their contribution was even higher) and also represent an entry point into the economy for new groups.

Small firms also tend to hire a greater number of older workers and people who prefer to work part-time. Small businesses include computer-related ventures in California's Silicon Valley and other hi-tech enclaves, which are sources of technical innovation. Many computer-industry innovators began as `tinkerers', working on hand-assembled machines in their garages, and quickly grew into large, powerful corporations — Microsoft, Federal Express, Nike and America-On-Line are but a few.

Conducive policies for small enterprises: Small companies are exempted from many federal regulations. In 1953, the US Government had created the SBA to provide professional expertise and financial assistance — 35 per cent of federal contracts is set aside for small businesses. In a typical year, the SBA guarantees $10,000 million in loans to small businesses, usually for working capital or the purchase of buildings, machinery, and equipment. SBA-backed small business investment companies invest another $2,000 million as venture capital.

The SBA runs an aggressive programme to identify markets and joint-venture opportunities for small businesses that have export potential. In addition, the agency sponsors a programme in which retired entrepreneurs offer management assistance for new or faltering businesses. Working with individual state agencies and universities, the SBA also operates about 900 Small Business Development Centres that provide technical and management assistance. Unlike big enterprises, the smaller ones cannot afford to shield a mediocre workforce or be liberal with their working capital. Nor can they camouflage failures in design or production. Small companies are often bamboozled by the buyers of their finished goods, generally larger companies, unless they are captive feeder industries. Thus, the quantum of problems for the small enterprises are the same, if not more, than for the bigger ones.

Of course, many businesses fail in the US. But the key difference is, it does not carry the social stigma as in India. Often, failure is seen as a valuable learning experience for the entrepreneur, who may succeed on a later attempt. Failures demonstrate how market forces are dynamic and are subject to change with new policies, products or innovation.

The Chinese phenomenon

The world is awe-struck at the continuous and rapid strides China has made in past two decades. Much less time elapses between conception, planning and execution in China. It did not focus on an open-door policy but rather on dumping its products at others' doors.

Conscious of its size and power, China's internal and external policies were more directed at protecting its markets rather than appease the WTO. It harnessed the existing political and economic structures to its greatest advantage. The Government and the people worked in tandem. When the country made quick and massive distribution of capital, the economy is said to have `overheated' and non-performing assets gone past 50 per cent. This is, perhaps, a manageable transient status and a small price to pay for the massive employment that has catapulted a significant part of the populace to higher economic levels. China seems to have recognised that unused assets, including cash, are liabilities and that the real capital assets are human resource and time. China Inc. has worked hard to lift the country into a higher base camp.

The imperatives

In India, the Government must initiate massive capital deployment and employment generation efforts. Also required is a fresh look at the policies of the lending institutions, which can be corrected by well thought-out guidelines, to rapidly deploy the `stored capital ` with banks. This would help accelerate economic growth, which is especially imperative for a country whose population is expected to exceed China's by year 2035.

(The author is a Chennai-based industrial consultant.)