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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

220

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

221

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

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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:

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TABLE 8.1

OUTCOME OF VARIOUS GATT ROUNDS

Year Venue and

Contracting

Parties

Outcome

1947 Geneva Round

23 Countries

First GATT Agreement Signed, Tariffs item by item

negotiated and concession on 45,000 tariff lines.

1949 Annecy Round

29 Countries

Tariff item-by-item negotiated and modest tariff

reduction on specific products.

1950-51 Torquay Round

32 Countries

Tariffs item-by-item negotiated and 8,700 tariff

reduction.

1955-56 Geneva Round

33 Countries

Tariffs item-by-item negotiated and modest tariff

reduction.

1960-61 Dilon Round 39

Countries

Tariffs item-by-item negotiated proposal by the EEC

(EC) for a 20% linear cut in duties on manufacturers.

1963-67 Kennedy Round

74 Countries

Tariffs formula approach, item by item negotiation,

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

Countries

Tariffs formula approach, non-tariff measures, anti-

dumping subsidies, customs valuation, government

procurement, import licensing product standards,

safeguards, average tariff of developed countries

reduced one-third.

1986 Uruguay Round

103 Countries in

1986, 117 by end

1993

Tariffs combination of item by item and formula

negotiation, non-tariff measures, all Tokyo Round

issues, plus pre-shipment inspection, trade related

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.

224

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

225

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

226

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).

227

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

228

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

229

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

230

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,

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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.

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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.

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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.

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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

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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

236

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.

237

TABLE 8.5

PER CAPITA VALUE ADDED IN MANUFACTURING

SECTOR (2001 – 2002)

(US dollars)

Country Per Capita Value Added in

Manufacturing Sector

China 286

India 70

Indonesia 115

Korea 2142

Malaysia 946

Brazil 1078

Thailand 582

Singapore 6064

Source: World Development Indicators, 2005

238

TABLE 8.6

WEF RANKING OF SELECTED INDICATORS OF

COMPETITIVENESS (2001-02)

Parameter India China Korea Malaysia Indonesia Taiwan

Overall Quality of

Infrastructure 54 46 28 18 42 26

Sophistication of

technology available 38 42 23 27 48 16

Import Fees-

Combined Effect of

imports

59 45 32 25 40 24

Tariffs, Licence Fees

and Time Required

for Administrative

Procedures Average

Tariff Rates

59 57 40 41 45 13

Base of Starting a

New Business 39 37 33 10 24 6

Local Development

of Product Designs 47 35 22 50 51 19

Efficient Production

Processes 42 43 28 29 46 21

Labour Flexibility 53 32 18 38 25 13

Pay Related to

Productivity 52 15 23 29 42 2

Average Ranking 50 39 37 29 40 15

Source: World Global Competitive Report, 2004.

239

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/

240

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.

241

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

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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

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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

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(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

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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.

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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.

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TABLE 8.7

SWOT ANALYSIS OF INDIAN SMALL SCALE

INDUSTRIAL SECTOR

Strengths Weaknesses

Flexible Manufacturing system Inadequate capital for investment/ expansion

Lower cost of production Inadequate working capital

Low level of capital investment per unit of

output and employment

Expensive bank loan

Utilization of local resources Technologically weak due to inadequate

capital

Inherent ability to innovate Weak bargaining power

Ability to make quick adjustments to the

changing economic and trading scenario

Absence of brand equity‟ for „Made in India

labels

Operational Flexibility Lack of Development policy framework

Knowledge of internal markets 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.

Opportunities Threats

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

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.

Source: Bala (2007), Economic Reforms and Growth of Small Scale Industries, Deep and Deep

Publications, New Delhi.

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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

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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.

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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

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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

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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.

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