Small is bountiful, the German way

The scene is gigantic. More than 3.2 million small-scale units produce about 8,000 items of goods, ranging from textiles to auto-parts. But it has had more than its share of challenges. For one, the sector is facing rising competition from foreign companies. Then again, the formation of WTO in 1995 has compelled its member nations 8212; which includes India 8212; to scale down import restrictions. In other words, small-scale units in India with their narrow resource base and acute shortage of capital have had to compete with multinationals.

It was to put the sector on a par with its global counterparts that the Micro, Small 038; Medium Enterprises Development MSMED Act, 2006, was passed. The Act provides for the first time a legal framework for the development and promotion of the MSME sector. It defines enterprises on the basis of investment and machinery. Plant and machinery would be less than Rs 25 lakh in small enterprises and less than Rs 10 crore for medium enterprises. In contrast, in the EU, the definition of what constitutes a small and medium sector is more in terms of number of employees and turnover. An enterprise is regarded as medium-sized if it has a maximum of 250 employees and a turnover of not more than 50 million euros; a small enterprise is expected to have not more than 50 employees, with about 10 million euros turnover; and micro-enterprises have been defined as those with 10 employees and not more 2 million euros turnover. The European definition is, therefore, more specific.

In terms of scale, the MSME sector in India tends to be smaller, and therefore more vulnerable. The Act, hence, also provides for a procurement preference policy. The government has proposed a policy of 20 per cent of annual value of purchases by central governments and departments as well as public sector units from MSMEs. In the new policy, the reservation for the exclusive purchase of 358 items out of 7,500 that are manufactured by small-scale industries has been dispensed with. This should help facilitate growth.

Another area of stress for first-generation entrepreneurs has been the inability to access bank credit due to their inability to provide collateral security. Although the government has launched the Credit Guarantee Fund Scheme for micro and small enterprises with the objective of making available loans up to Rs 50 lakh without collateral or third party guarantee, few entrepreneurs are aware of the existence of the fund. There is need to advertise the existence of this fund which is jointly operated by the government and Small Industries Development Bank of India as the Credit Guarantee Fund Trust for Micro 038; Small Enterprises. Until the end of August 2007, the government and SIDBI have jointly contributed Rs 1,346.55 crore to the corpus. Adequate publicity will ensure that the target entrepreneurs will benefit from government largesse. Educational institutions, such as the Indian Institute of Foreign Trade, also conduct workshops to train entrepreneurs on how to draw contracts and even negotiate with buyers, which have been fairly successful.

Germany has in the past helped India8217;s small-scale industries and provided technical collaborations in the area of tooling to various state governments to establish Indo-German tool-rooms in Ludhiana, Ahmedabad, Indore and Aurangabad. The one in Kolkata was established with the help of the Danish government. Entrepreneurs can acquire technical training here in tool design and manufacture, precision machining and technical consultancies.

The German chancellor8217;s visit has, to some extent, refocused attention on small and medium enterprises. Germany has encouraged its small-scale sector to grow and has gained economically from such an approach. India could benefit by drawing the right lessons from the German model and understand how small-scale industries in that country have achieved economies of scale.