Boost small industries to end economic crisis

The cost of production of small businesses, however, is higher than their large counterparts. They use small machineries and are not able to harness economies of scale. The cost of production of cloth is more and the quality is less in a small power loom than in a Sulzer Loom. Small businesses also often use older and less-efficient technologies. The small biscuit manufacturer uses more electricity in the batch process of baking than the large industries that use assembly line type of continuous production systems. Small businesses have to buy small amounts of raw materials from the intermediaries while large businesses buy large quantities directly from the manufacturers. The cost of compliance of regulations is also more because the Weights and Measures Act requires the same compliance from a small- and large business. Thus, per unit cost of the small business is much higher. The small businessperson has to undertake all functions of purchase, labour management, production, sale, finance, banking and accounting herself. As a result her proficiency in each function is less

The present lockdown will affect small- and big businesses differently. Small businesses often live hand-to-mouth. A power loom operator, for example, sells the manufactured cloth and uses the money to buy thread for the next production. Or a small shopkeeper buys goods from the sale proceeds of the previous day or week or month. These businesses have consumed part of their working capital in order to remain alive. The interest payable to the banks has also mounted. Some have paid salaries to their employees during the lockdown. These small businesses do not have the working capital to buy the raw materials for the next batch of production. The big businesses, in comparison, have deep pockets to survive through the lockdown. Salaries paid during the lockdown constitute a small part of their expenses. They can approach the banks and have the interest accrued during the lockdown rescheduled. They have an army of officials who can liaise with the banks and arrange fresh loans. Therefore, we may expect the large businesses to bounce back soon after lifting of the lockdown while many small businesses will close forever. This imbalance will create huge problems for the economy.

The socio-economic impact of small- and big businesses is quite different. Small businesses create jobs. They use labour-intensive technologies. The creation of employment reduces the welfare burden on the economy. The need to provide relief under programmes like MNREGA and Indira Awas is less. More importantly, employed persons do not have to engage in crime. A Professor of Dr Babasaheb Ambedkar Marathwada University, Aurangabad said that MA degree holders were engaging in crimes like stealing from ATMs since they had no jobs. Employment, therefore, reduces the burden on police and judiciary. A deterioration in law and order is also a disincentive for new investment. Another beneficial impact of small businesses is that they are the incubators of our future entrepreneurs. Dhirubhai Ambani was once a small businessman. At that time many items were reserved for production by small industries. He may not have been successful as a small businessman if such protection had not been provided. And, in that case we would not have got a business like Reliance Industries.

The cost of production of small businesses, however, is higher than their large counterparts. They use small machineries and are not able to harness economies of scale. The cost of production of cloth is more and the quality is less in a small power loom than in a Sulzer Loom. Small businesses also often use older and less-efficient technologies. The small biscuit manufacturer uses more electricity in the batch process of baking than the large industries that use assembly line type of continuous production systems. Small businesses have to buy small amounts of raw materials from the intermediaries while large businesses buy large quantities directly from the manufacturers. The cost of compliance of regulations is also more because the Weights and Measures Act requires the same compliance from a small- and large business. Thus, per unit cost of the small business is much higher. The small businessperson has to undertake all functions of purchase, labour management, production, sale, finance, banking and accounting herself. As a result her proficiency in each function is less.

Two models of economic development stand before us. One model is to support and protect small businesses, buy the higher-cost goods produced by them and assume that the additional cost so borne by the economy will be compensated by the benefits from generation of employment and entrepreneurship. The alternative model—one that we have adopted in the recent past—is to allow free play to large industries, collect taxes from them and then provide welfare benefits to the people rendered unemployed from the closure of the small industries. In due course of time, the big businesses will also come under trouble because there will be less demand in the economy. A small business creates fresh demand. The welfare benefits provided to the unemployed do not create fresh demand. They only shift the demand from, say, highway to building of houses. In fact, the slowdown we have faced after demonetization is due to such loss of demand from the small businesses. We must therefore adopt the small industry model to revive the economy after the lockdown is withdrawn.

The government has routinely implement certain measures to support the small industries. One, the public sector undertakings are directed to buy certain percentage of goods from MSMEs. This is ineffective because more often than not this directive is not followed. Further, the classifications of "small" industries has been enlarged over the last two decades such that industries employing even 100 workers are considered as "small." Two, the Government has tried to establish "clusters" of MSMEs so that certain facilities can be pooled. For example, a number of dyeing factories can establish a common pollution control plant. This step is in the right direction. However, it is too small. The main problem of high cost of production remains unsolved. Three, the government wants to improve the skills of MSMEs. This is ineffective because skill-development has become a hotspot of NGO corruption. Four, the government has asked banks to provide loans at concessional rates of interest. This step too is in the right direction but a small businessperson will take a loan only if she can sell the goods produced. Thus, the Government needs to go much farther than these steps.

The government should immediately establish a task force keeping away the experts who have been involved in giving the abovementioned ineffective suggestion. This task force must immediately identify sectors where there is a concentration of small industries. Then it must identify the large industries with whom the small industries are not able to compete. The Government must put a ban on production by these large industries and bring back the reservation for small industries of the yesteryears. The revival plan of small industries must be in place on day one of lifting of the lockdown. At present the small and large industries are both frozen. Lifting of the lockdown will enable large industries to rev up immediately while small industries will still be waiting for relief. That delay of even two weeks will permanently incapacitate the small industries. That will spell doom for the larger economy because large industries will not be able to sell goods produced by them in absence of fresh demand from employees of the small industries.

(The writer is formerly Professor of Economics at IIM, Bengaluru)