K. B. Suri (ed.) Small Scale Enterprises in Industrial Development: The Indian Experience.

Sarmad, Khwaja

K. B. Suri (ed.) Small Scale Enterprises in Industrial Development: The Indian Experience. New Delhi: Sage Publications India Pvt. Ltd., 1988. 348 pp. Rupees (Indian) 195.00 (Hardbound Edition).

The emergence of the small-scale manufacturing sector and its growing importance in the economy is a phenomenon common to most developing countries. This sector plays a vital development role by spreading industry in the underdeveloped areas, by encouraging entrepreneurship and providing employment. In India the small-scale manufacturing sector has grown rapidly since the mid-Sixties, particularly in the 'modern' sector, i.e., engineering, chemicals, and plastics industries, largely as a result of a shift in the production of components from large enterprises to smaller ones. In terms of total value-added in the small-scale sector, the modern subsector now contributes much more as compared with the traditional industries like handlooms. In recent years, the small-scale manufacturing sector has been producing increasingly for the final consumer, though a large part of the output is for intermediate consumption.

This raises two issues which have an important bearing on the development of the small-scale manufacturing sector. One is concerned with the relative efficiency of the small- as compared with the large-scale manufacturing sector; and the second with the quality of the relationship between the two. Both these issues are taken up in this book, but the .focus is on the comparative economics of small and large manufacturing enterprises in India based on field studies of selected product-specific industries. Besides these issues, the papers in the book also deal with data problems related to the small-scale manufacturing sector and with government policy.

In the closely regulated Indian economy government policy has played an important role in the way the small-scale manufacturing sector has developed over time. But within the overall system of industrial development in India, the small-scale sector got little priority, despite the government's concern for this sector as reflected in its development policy objectives and various industrial policy resolutions. Thus, while much government effort has gone into the provision of consultancy services, training, technology support, etc., only around 2 percent of the total outlay in the public sector has been allocated to the small-scale manufacturing sector. Apart from this, government policy has been poorly coordinated and loosely implemented, which, as Dipak Mazumdar points out in his paper on Indian Textile Policy, has adversely affected the growth of the industry. Mazumdar highlights a number of dilemmas in Indian textile policy; for example, enterprises which received assistance from the government have not performed as well as the others, and have grown at a much slower rate.

Another paper shows that the location of small-scale enterprises within industrial estates has retarded performance, though such enterprises had access to institutional finance and other incentives. Given that industrial estates were set up to protect small enterprises from the competition of larger ones by reducing their production costs, this is a surprising result. It only shows the ineffectiveness of the prevailing government policy, and its lack of coherence and coordination. But this does not mean that small-scale enterprises should not receive government attention or institutional support and all that the government needs to do in this regard is to remove obstacles which exist in the form of government regulations--the unremarkable World Bank policy prescription. What it does mean is that government policy needs to be streamlined and premised on observations about the small-scale sector which arise from empirical studies, including the ones reported in this volume. For example: as compared with the large enterprises small enterprises have a relatively higher average cost of production per unit of output; they generate lower output per worker, have lower wages, and usually employ the most vulnerable sections of the working population; they generate higher output per unit of capital; small enterprises using modern technology have enormous growth potential, and are important also because of spatial linkages; the very small enterprises are only rarely more labour-intensive, etc.

The rapid growth of the small-scale manufacturing sector in the late Sixties was due partly to industrial recession, particularly in the engineering sector, which forced industries to off-load manufacturing of the simpler components to smaller units. Given low overhead costs and lower wages in small-scale manufacturing, this reduced the production costs and fostered a close relationship between the large- and the small-scale manufacturing sectors, which is known as industrial subcontracting. It is reasonable to expect that a complementary and mutually beneficial relationship would have developed between the two sectors. But the evidence provided in the paper by Banerjee, from a case study of the electric fan industry in Calcutta, presents an entirely different picture. The author shows that the smaller firms are used by the larger ones to meet the sporadic excess demand. The small firms in turn pass on the burden of market uncertainty to their workers, who are retrenched when there is no work and paid low wages otherwise. In any case, the smaller firms are much less efficient as compared with the large firms, produce poor quality goods, have low profits, and exist mainly as a source of employment to the owners.

The relative inefficiency of the small as compared with the large enterprises is brought out in almost all the related papers in the book, though the focus of each is quite different. Waardenburg's study of small enterprises in shoe manufacturing, which focuses on factor intensities and efficiency aspects, shows that without protection small enterprises would be unable to face competition from the larger ones. I.M.D. Little summarizes the results of World Bank studies on small enterprises and comes up with similar conclusions. The evidence emerging from the Indian case studies is generally in line with cross-country results, showing that the inter-industry variations in capital intensity are much more numerous as compared with the intra-industry variations, and that low capital productivity is most often associated with the manually-operated enterprises employing traditional methods of production. These are important results, but the policy conclusions derived from them by the author are, as discussed above, debatable.

The papers in this volume make a precise study of efficiency and related aspects of the small-scale manufacturing sector in India, including evaluation of the empirical foundations of the idea that small firms promote a more labour-demanding developments; and it provides a critical assessment of the role of government policy in the development of the small-scale manufacturing enterprises. The appearance of this collection of papers is welcome, for it provides an opportunity to take stock of the new literature on small-scale enterprises. Though the editor has done a good job by providing a flavour of the arguments in a clear and non-technical language in the introduction, the non-professional cannot get more than the illusion of understanding the issues involved. Still it deserves to be read widely.

Khwaja Sarmad

Pakistan Institute of Development Economics, Islamabad