Current Economic Statistics and Review For the Week Ended September 15

There has occurred a drastic slowdown in the growth of the general index of industrial production (IIP) with base 1993-94=100 has slowed down drastically during February 2005. The index has registered an increase of only 4.9 per cent, as against a significantly higher growth rate of 8.3 per cent a year ago in the February 2004. The lower rate of expansion has been due to the negative growth rates witnessed by the mining sector (-2.3 per cent) and electricity generation (-0.9 per cent). In contrast, mining sector had expanded by 10.7 per cent and electricity generation by 8.3 per cent in February 2004. On the other hand, manufacturing sector has continued to show a decent performance, registering a rise of 6.2 per cent in February 2005 as against 7.6 per cent a year ago. The dip in the industrial growth was expected, as the index of six core infrastructure industries, which account for about 30 per cent of the index of industrial production, fell by 0.6 per cent compared with the level in February 2004. However, the cumulative rate of expansion (April 2004-February 2005) of the general index of industrial production was at 8.1 per cent, which was higher than the rise of 6.9 per cent in the corresponding period last year.

Under the used-based classification, basic goods, capital goods and intermediate goods industries have expanded at the rates of 5.3 per cent, 11.8 per cent and 6.0 per cent during, respectively, during April 2004-February 2005. The consumer goods sector has been able to maintain a healthy growth rate of 11.6 per cent in the period under review as compared to 7.2 per cent in the corresponding period last year. The highest rise has occurred in the index for consumer durables at 14.7 in the first eleven months of the fiscal year 2004-05; consumer non-durables too have experienced a satisfactory growth of 10.6 per cent.

Within the two-digit industry group, two industries, namely, food products and wood and wood products have registered negative growth rates during April 2004-February 2005. On the other hand, five industries under this classification, have posted double-digit growth rates in the concerned period. Of the remaining ten industries, five have recorded low growth rates, between 0 per cent and 4 per cent, while the other five industries have posted growth rates between 4 per cent and 10 per cent.

New ventures
The Ispat group has shown interest in setting up a 5 million tonne shore-based steel plant at Paradip in Orissa. The company has submitted a proposal to the state government in this regard.

Vijay Mallya’s Kingfisher Airlines has decided to outsource its major support requirements, including ground handling and engineering maintenance facilities, to Indian Airlines.

The country’s second oldest automobile manufacturer Premier Automobile Ltd is making a modest comeback with complete restructuring of its operations. To start with, the company has been renamed as Premier Ltd, with effect from April 1, 2005. The company’s top management had decided to stay within the automobile sector, but will focus on three niche segments.

Reliance Industries Ltd is likely to start drilling development wells in the Krishna-Godavari basin in January-April next year. Commercial output is likely to begin by end 2007.

GlaxoSmithkline plans to outsource more knowledge-based and value added services like clinical management and analysis and packaging to India.

Rasna Pvt Ltd, the Rs 275-crore soft drink concentrate major, is focusing on ramping up its distribution network to 20 lakh outlets from the existing 16 lakh by year-end.

MMTC, the state-owned trading company will invest Rs 1,000 crore to raise the capacity of its steel producing subsidiary, Neelachal Ispat Nigam Ltd and Rs 600 crore in free-trade warehousing zones.

Bennett Coleman & Co Ltd is gearing up to launch a business channel.

Board for Cricket Control of India is planning to launch a 24-hour cricket channel of its own.

Madras Fertilizers informed the stock exchanges that the Board for Reconstruction of Public Sector Enterprises has recommended measures to help the company tide over its financial problems. The company has promised to rely on market for future funding and prune staff strength to 1,000. The financial benefits to the company would come through changes in fertilizer pricing, an interest waiver on government loans, and a government guarantee to debt that Madras fertilizers is to raise to solve its liquidity problems.

The UK-based Lotus Engineering, the design and engineering arm of Group Lotus is planning to establish a commercial presence in India in the next 12-18 months.

Volvo India, a subsidiary of AB Volvo, plans to focus this year on city bus segment.

Ventures abroad
The Hinduja group has announced major investment initiatives totaling up to $ 10 billion with Qatar for infrastructure projects through Indo-Qatar fund with initial corpus of $ 1 billion.

Policy issues
The signing of a memorandum of understanding (MoU) between South Korean steel major Posco and the Orissa government is off. The MoU was meant for setting up a mega steel venture in the state, envisaging investments of Rs 40,000 crore, the largest ever foreign direct investment in any single project in the country. The cancellation of the signing of the MoU follows disagreement between the two sides on export of ore. Posco had sought permission to export a substantial portion of ore raised from the mines to be allocated to it. The state government did not agree to the condition owing to the policy constraints.

The Tatas-controlled Videsh Sanchar Nigam Ltd (VSNL) has come under sharp criticism from US companies, which have complained about the restrictive trade policies adopted by it on international bandwidth access.

The information and broadcasting ministry has decided to allow foreign direct investment of up to 20 per cent in private FM radio companies.

Essar Steel has received approval for its capital restructuring from the High Court of Gujarat.

The Company Law Board has given Morpen Laboratories a final reprieve of a few more days to reply on the status of repayment of overdue fixed deposits.

Led by the National Textiles Corporation, a handful of textile mills have moved to the Supreme Court challenging Bombay High Court’s order halting the development of mills’ properties in the city.

Company issues
Maruti Udyog Ltd has exited the diesel vehicle market for now by stopping production of the diesel versions of its Zen and Esteem.

The Indian BPO industry has witnessed the arrest of a handful of BPO employees which were charged with illegally transferring funds from customer accounts. The sector has called for comprehensive checks and balances in organizations and also adopting clear procedures in recruitment.

Bharat Sanchar Nigam Limited (BSNL), the country’s second largest GSM service provider, has overloaded the cellular network in 17 of its 24 cities. Against a cellular capacity of 8.4 million, the number of BSNL customers has crossed the 9.4 million mark.

Global professional services firm Pricewaterhouse Coopers (PwC) will not take up the audit assignment of Reliance Energy for 2005-06.

Ratan Tata has stepped down as chairman of the NYSE-listed Videsh Sanchar Nigam Limited (VSNL). Subodh Bhargava, former Eicher group chairman, has been appointed as the new chairman.

Steel Authority of India (SAIL) has announced that the company is set to achieve the status of a virtual zero debt company in 2004-05.

Company results
NTPC has reported a provisional net profit of Rs 5,300 crore in 2004-05, an increase of 15 per cent compared to corresponding period of the previous year.

Power Finance Corporation, the power sector development finance institution, has reported a 39 per cent decline in net profit, from Rs 1,606.99 crore in 2003-04 to Rs 980.20 crore in 2004-05, on account of the shift from cash to accrual basis accounting.

Infosys Technologies has reported a net profit of Rs 558.64 crore, an increase of 66.64 per cent for the quarter ended March 31, 2005, as compared to the corresponding quarter of the previous year. However, it forecasted a weaker than expected growth as US customers busy implementing new accounting rules slowed their outsourcing orders.

Bharat Electronics Ltd, the public sector defense electronics firm, has posted profit after tax of Rs 429 crore on a turnover of Rs 3,224 crore in 2004-05. Profit grew 36 per cent and turnover rose 15 per cent during the year.

Hero Honda Motors’s net profit has declined by 2 per cent to 207.11 crore for the quarter ended March 31, 2005, against Rs 211.30 crore in the same period last year.

Reliance Energy has posted a 42.52 per cent increase in its net profit for the quarter ended March 31, 2005, to Rs 147.93 crore as compared to Rs 103.79 crore in the same quarter of the previous year.

Bharat Earth Movers Ltd has posted a sharp improvement in performance. Net profit for quarter ended March 31, 2005, is Rs 123.62 crore compared with Rs 18.71 crore for the corresponding quarter of the previous year.

Finolex Industries has posted a 22 per cent drop in its net profit at Rs 27.65 crore for the quarter ended March 31, 2005, compared with a net profit of Rs 35.7 crore for the quarter ended March 31, 2004.
ABB’s net profit for quarter ended March 31, 2005, has increased by 62.72 per cent to Rs 27.5 crore.

Mphasis BFL has posted 18.4 per cent increase in the net profit at Rs 21.32 crore for the quarter ended March 31, 2005, compared with Rs 18 crore in the same quarter of the previous year.

Global IT application outsourcing company Mastek has announced a 28 per cent growth in consolidated income and a 37 per cent rise in net profit for the quarter ended March 31, 2005. The net profit grew to Rs 13.8 crore during the quarter.
Merck Ltd has reported a 35 per cent decline in net profit over a 2.55 per cent decline in sales during the quarter ended March 31, 2005. Net profit declined to Rs 9.36 crore during the quarter from Rs 14.34 crore in the corresponding quarter of the previous year.
iGate Global Solutions has reported a net profit of Rs 2.2 crore for the quarter ended March 31, 2005, as against a net loss of Rs 5.6 crore for the corresponding quarter of the previous year.

Jessop & Co has reported a net profit after 16 years since 1989. The ailing public sector company was taken over by the Ruia group a couple of years ago and reported a net profit of Rs 4.82 crore for 2004-05.

Mergers & Acquisitions
Larsen & Toubro has informed the stock exchange that it has acquired a 50 per cent stake in L&T Vadel Engineering Pvt Ltd for a total consideration of Rs 9 crore.

HLL is transferring its tea gardens to a subsidiary.

Joint ventures
Win Medicare (P) Ltd has tied up with Leo Pharma, the Denmark-based pharmaceutical firm, to market its dermatological products in India.

Private equity funds management company ICICI Venture funds management company has formed a joint venture with the US-based Tishman Speyer Properties to focus on developing real estate projects in India.

Acquisitions abroad
VSNL has got clearance from a US government agency for acquisition of undersea cable assets of Tyco Global Network for $ 130 million.

Consign Technology has entered into the UK market through a partnership with Hemro Associates Ltd, a company specializing in messaging and mobile applications.

Essel Propack, the speciality packaging company promoted by the Essel group, has acquired the UK-based Telecon Packaging, a laminated tube supplier in Europe.

Foreign acquisitions
Helios and Matheson Information Technology is set to acquire IT outsourcing company vMoksha for $ 19 million in an all-cash deal.

Holcim’s open offer for Associated Cement Companies (ACC) has closed with a subscription of nearly 21 per cent. This takes Holcim’s stake in ACC to nearly 35 per cent, which is 15 per cent short of its target 50.1 per cent.

A consortium of banks have put on hold Idea Cellular’s borrowing plan following the objection raised by the Department of Telecommunications over Singapore Technologies Telemedia and Telekom Malaysia International picking up a 47.7 per cent in the company.

The Tata group has sold its 47 per cent stake in Bangalore’s International Technology Park to Singapore real estate firm Ascendas Pte Ltd.

After a gap of four years, the Reserve Bank of India (RBI) is likely to permit public sector banks to set up insurance subsidiaries, provided the new ventures are widely held. About six new licences, are scheduled to be sanctioned to banks. The banks include Bank of Baroda, Punjab National Bank (life insurance) and the State Bank of India (non-life insurance). Since 2002, the RBI has not allowed public sector banks to set up insurance subsidiaries as it is opposed to a single bank holding of 74 per cent stake in an insurance venture. However, in 2001, RBI allowed the State Bank of India to hold a 74 per cent stake in SBI Life.

The Reserve Bank of India (RBI) has revised the exposure limit of urban co-operative banks (UCBs) to a single borrower and a group of borrowers at 15 per cent and 40 per cent, respectively, from the current 20 per cent and 50 per cent respectively effective from April 1, 2005. However, in case of the existing borrowers where the outstanding or the sanctioned exposure limit exceeds the revised limit, it has permitted banks to bring down the existing limit within the revised limits, by March 31, 2007.

As per the weekly statistical supplement of the RBI, investment by banks in stocks increased by Rs.3,356 crore (39 per cent) from Rs.8,667 crore to Rs.12,023 crore as on March 18, 2005, the last reporting Friday of the financial year 2004-05, whereas, banks’ share of investments in bonds and debentures decreased by Rs.1,530 crore (2.0 per cent) from Rs.76,549 crore to Rs.75,109 crore.

The RBI has directed banks that the rates of interest to be charged on group loans under Swarnjayanti Gram Swarozgar Yojana may be linked to per capita size of the loans so as to mitigate the burden on the below poverty line beneficiaries on the analogy of IRDP group loans.

The Oriental Bank of Commerce (OBC) has initiated criminal action against 30 borrowers to recover Rs.980 crore. The list of borrowers includes Shirpur Gold of Maharashtra and the south-based Balaji Group. These loans were given by the erstwhile Global Trust Bank (which was merged into OBC in August 2004) for business purpose but were diverted into the capital markets. Other borrowers such as the Videocon group (for Rs.30 crore) and the Zee group have made settlements with OBC and returned their dues. After taking over the Global Trust Bank, OBC inherited bad loans to the tune of Rs.1,293 crore. Out of this Rs.200 crore has been recovered in cash and Rs.57 crore has been upgraded from the bad loans category. Accounts worth Rs.445 crore were approved for compromise proposals, Rs.410 crore was restructured and re-scheduled and in cases worth Rs.57 crore civil action was initiated.

The RBI has reiterated that banks must pay compensation in case of delayed credit of ECS funds to beneficiaries/customers. It has been brought to RBI’s notice, that compensation is not being paid until customers demand for it. RBI said compensations have to be paid in line with the existing instructions on delayed credit to customer accounts for collection of outstation cheques.

Bajaj Allianz Life Insurance company has entered into an agreement with Janakalyan Sahakari Bank for distribution of life insurance products. The scheduled urban co-operative bank will sell Bajaj Allianz’s life insurance products through its 25 branches in Mumbai, Thane, Navi Mumbai and Panvel.

The RBI’s draft guidelines for purchase or sale of bad loans, issued recently suggested that banks purchasing non-performing assets (NPAs) should keep them on their books for at least 15 months. As per the draft any re-structuring, rescheduling or re-phasing of the repayment schedule of the non-performing financial assets would render the account as a non-performing asset. NPAs purchased cannot be sold before 15 months and will have to be assigned 100 per cent risk weighted for the purpose of capital adequacy. In case the non-performing asset purchased is an investment, then it will attract capital charge for market risks also.

ICICI Prudential Life Insurance company annual new business premium rose by 77 per cent to Rs.1,256 crore in 2004-05. Its total premium rose by 139 per cent to Rs.2,363 crore, as a result ICICI’s market share has increased to 7 per cent from 4 per cent a year ago. A total of 6,14,519 policies were issued in 2004-05, a rise of 41 per cent over 2003-04. ICICI Prudential efforts to grow rural business beyond regulatory requirements, led the insurer to cross the milestone of covering 2 lakh farmers, with over 1 lakh policies issued in 2004-05. The company settled 770 claims worth Rs.9 crore in 2004-05, 86 per cent of them within 10 days, against the regulatory 30-day period.

Geometric Software Solutions Company has posted a net profit of Rs.5.55 crore for the quarter ended March 31, 2005 as compared to Rs.3.86 crore for the corresponding period previous year, an increase of 30.45 per cent. The net profit for the year ended March 31, 2005 stood at Rs.20.66 crore as compared to Rs.16.66 crore for the year ended March 31, 2004.

According to a study by Nasscom, venture capital funds and private equity investors disbursed an estimated $1.3 billion in India, in 2004, a growth of 49 per cent over the previous year. IT, ITES, media and healthcare were the key sector witnessing venture capital funds and private equity investment activity in 2003. A total of 46 investments were made in 2004 with a total funding of $1.3 billion. Over 90 per cent of these investments were made in the existing and in more cases profitable companies while 43 per cent were in managment buy-outs including the largest deal of $500 million where Oak Hill and General Atlantic bought GE’s stake in Gecis. About 27 per cent of the funding was for expansion of existing profitable companies, 28 per cent of the investments were private investment in public equities where venture investors buy stakes in listed companies including companies like Moser Baer, Max India and Jubilant Organosys. Despite the hype surrounding the biotech sector, the investments made in the sector is below $70 million spread over nine firms. Semiconductor, another high-profile sector also failed here, attracting less than $100 million investment till date. In the media, large companies like UTV, Sony, Zee and Vijay TV got large chunk of funds. However India’s achievement is not satisfactory if compared with other Asian countries. During 1995-2004, Indian Venture capital funds and private equity firms have invested around $4.8 billion, barely 5 per cent of the total invested in Asia. Whereas, China and Hong Kong accounted for nearly 40 per cent of all Asian investments. There are 83 firms in India but the top 10 firms account for over two-thirds of the total investments made. However, the amount invested is low suggesting that the industry is extremely fragmented.

India has crossed the 100-million mark in the number of telephone connections and has become the fifth largest network in the world after China,US, Japan and Germany. The number of telephone connections in the country now stand at 100.27 million and the teledensity (telephone per population) has gone up to 9.13 per cent. However, the rural teledensity is 1.70 per cent against 20.79 per cent in urban areas. The government has set a target of 250 million telephones and a teledensity of 22 per cent by 2007.

The Telecom Regulatory Authority of India (Trai) has announced that roaming calls made by subscribers within India would be treated STD calls and global roaming calls would be considered incoming international calls for the calculation of access deficit charge (ADC). Customers on national roaming will have to pay an ADC of 30 paise per minute, equivalent to the deficit charge on STD calls, while a subscriber on international roaming will pay Rs.3.25 per minute. For all calls from a roaming subscriber, the access deficit amount is to be collected by the visited network operator and paid to BSNL. Trai has defined roaming as the ability for a cellular subscriber to automatically make and receive voice calls, data and to access other services while travelling outside the geographical coverage area of the home network.

Capital Markets
Primary Market
Oriental Bank of Commerce is to offer for sale 5.8 crore equity shares of Rs 10 each through 100 per cent book building process, wherein up to 50 per cent of the net issue is allocated for qualified institutional buyers (QIBs) and not less than 15 per cent to non-institutional bidders and not less than 35 per cent to retail investors. The issue would constitute 23.15 per cent of the fully diluted post issued paid-up capital of the bank.

India Infoline, an online broking firm, is to tap the market through issue of 1.18 crore equity shares of face value Rs 10 each, in a price band of Rs 70 to 80 per equity share. The offer is to open on April 21 and close on April 27. The issue would constitute 27.31 per cent of the post issue paid-up capital of the firm.

Allahabad Bank has fixed the issue price for its public offers at Rs 82 per equity share of Rs 10 each.

Allsec Technologies, a voice-based BPO service company, is making an initial public offering of 31.41 lakh equity shares through the book-build process. The price band for the issue has been fixed at Rs 135 to Rs 162 per equity share.

Secondary Market
Infosys Technologies have reported a surge in profits, but a weak guidance for the first quarter of the 2005-06 led to a nearly 7 per cent fall in the stock price and thereby dragged the BSE sensex (1978-79=100) by 219.58 points and NSE nifty (Nov 3, ‘95=100) by 69.15 points from Thursday, April 14 to Friday, April 15. Over the week the stock indices have ended lower due to earning’s forecast by Infosys Technologies, a sharp fall in global stock markets, particularly the Dow Jones, slow down in FII inflows . The BSE sensex fell by 3.57 per cent over the week to close at 6248.34 and NSE nifty fell by 3.69 per cent to close at 1956.3 points. The market capitalization on NSE fell from Rs 15,80,500 crore on April 11 to Rs 15,46,977 crore on April 15, a fall of Rs 33,523 crore.

Among the sectoral indices of BSE, all the indices registered a fall over their previous week’s close; however, the worst performance has been registered by the BSE IT and BSE Teck which fell by 7.06 per cent and 6.46 per cent, respectively. Even BSE Metals fell by 4.68 per cent amid reports of slowdown in China.

During the week, the FIIs were net sellers in the three out of four days. Between April 1 and April 15, they have been net buyer of Rs 972.80 crore with purchases of Rs 8,195.60 crore and sales for Rs 7,222.90 crore.

Along with other factors such as slowdown in FII flows, corporate results, the hike in stamp duty on all the stock market transactions with effect from April 1, has affected the turnover in the cash and derivatives market adversely. In the F&O segment of the NSE, the turnover has fallen from about Rs 20,000 crore per day in March to about Rs 7,000 crore till April 13. Also, the daily turnover in NSE’s cash segment has fallen from Rs 5,754 crore as on March 31 to Rs 3,825 crore as on April 13. On BSE, the daily turnover has fallen from RS 2,202 crore to Rs 1,829 crore.

With a view to promote its new trading platform for small and medium enterprise, indoNext, the BSE has launched BSE Mid-cap and BSE small-cap indices from April 11 with the base year for both at 2002-03 and base value at 1000. Both of them are constituted on the basis of free-float methodology and their performance will be reviewed on a quarterly basis.

As per the data published by AMFI, redemptions from all the mutual funds schemes for the month of March stood at Rs 101,837 crore as compared with sales of Rs 98,539 crore. The total asset under management has come down to Rs 1,49,600 crore in March from Rs 1,53,253 crore in February.

Derivatives
The trading in derivatives segment remained lacklustre with an average daily turnover of around Rs 7,700 crore. Also, there were no additions to the outstanding positions given the caution exercised by the market participants. The FIIs and MFs preferred to carry out hedging activity for their portfolios.

The NSE is to increase the number of securities available for trading in it’s derivatives segment by 70 in three phases over the next one and a half month; with this, the total number of securities would be 122.

Government Securities Market
Primary Market
On April 19, the government is to sell 8.07 per cent 2017 and 7.50 per cent 2034 for notified amounts of Rs 5,000 crore and Rs 2,000 crore, respectively, through a price-based auction using multiple price method.

The state government of Kerala is to sell a 10-year state development loan for a notified amount of Rs 300 crore through a yield-based auction using multi-price auction method on April 20.

Secondary Market
Overnight money rates remained easy throughout the week and hovered around the RBI’s reverse repo rate of 4.75 per cent. The average deployment under the RBI’s LAF reverse repo has been around Rs 30,000 crore.

Following the announcement of the impending auction and higher inflation rate, the yield on 10-year benchmark firmed up to 7 per cent, which had eased slightly in the mid-week due to easing of international oil prices.

Bond Market
Power Finance Corporation (PFC) targets to raise Rs 9,500 crore in the current financial year to assist companies setting up power projects; of this 10 per cent is to be raised from international markets.

The RBI has reduced the minimum maturity period for the commercial papers with immediate effect from 15 days to 7 days with a purpose to provide an option to issuers to raise short-term resources, as well as to provide investors yet another avenue to invest in quality short-term papers.

As per the data published by Prime Database, in the last quarter of 2004-05, corporates raised Rs 23,584.90 crore through private placements, while Rs 10,717.2 crore through public issues and Rs 6,993.4 crore through overseas floatations. Through rights issues a meager amount of Rs 726.73 crore has been raised.

In the full fiscal year 2004-05, the Prime Database states that Rs 61,717.26 crore has been raised through private placement, Rs 25,544.96 crore through public offers, Rs 20,647.26 crore from overseas float and Rs 3,615.71 crore through rights issue.

Foreign Exchange Market
The rupee-dollar exchange rate ranged between Rs 43.70 to Rs 43.75 for the first three days of the week. However, it depreciated to Rs. 43.83 on April 15. This was due to the slowing down of FII inflows and also strengthening of US dollar against major currencies such as the yen and the euro, on the statement by the IMF that US economy is expected to grow faster than the euro region and Japan.

Commodities Futures derivatives
In the first year of the operationalisation of commodity exchanges, Multi Commodity Exchange has emerged as the most preferred bullion trading platform, NCDEX has shown its importance in agro products and National Multi Commodity Exchange for plantation products.

NCDEX has decided to impose penalty on cash settlement of contracts marked for delivery. The penalty rates range from 0.5 per cent to 3 per cent of the final settlement price and this would apply to contracts expiring on and after April 20.

Direct tax collections rose by 26 per cent for the fiscal year 2004-05 over last year’s collections. However, it has fallen short of the target set by the revised estimate. While the direct tax collections stood at Rs 1,30,151 crore during the fiscal year, the revised estimates were at Rs 1,33,929 crore. Corporate tax collections rose by 31 per cent over the same period last year. Income tax collections, however fell short of the targets set by the revised estimates.

The revenue department has resorted to new methods to meet targets by the end of fiscal year 2004-05. It has sent notices to various pharmaceutical companies, steel exporters and a host of other industries asking for taxes to be paid for the past seven years on the Duty Entitlement Passbook Benefits (DEPB), claimed by these units as tax exemptions. Exporters have been arguing that since DEPB is a substitute for advance licence or duty drawback, it cannot be taxed.

Implementation of VAT has resulted in a rise in prices of essential commodities like flour and vegetables by 18-20 per cent in Delhi as a result of a slowdown in wholesale trade. Prices of ready made garments have also risen by almost 20 per cent, while prices of industrial tools have risen by about 25 per cent. Though organized trading is being carried on as usual, it’s the small traders, who have curtailed their activities. The worst affected are commodities where the VAT rate is higher than the earlier sales tax. However, there are indications that prices of electrical items, refrigerators and televisions have gone down in the southern states of the country, except Tamil Nadu, which has not implemented VAT.

Traders across the country are unhappy with the lack of uniformity in the rate of VAT in different states. Trading in some commodities is expected to shift to those states, which have not yet implemented VAT and have a lower sales tax to offer. The traders have pointed out a number of problems that they are facing subsequent to the implementation of VAT. Firstly, traders are unsure of the documentation that needs to be done in the new regime. Most of them do it manually as they do not have computers. Secondly, several states levy an entry tax or an octroi that is yet to be integrated into the VAT structure. Thirdly, traders are unsure as to when the sales tax department will refund their VAT credit and that their money may get stuck for long.

The Associated Chambers of Commerce and Industry (Assocham) has urged the empowered committee of state finance ministers to ensure uniform tax rates across all states and incorporate procedural reforms for better compliance. The association has also urged the committee to permit the use of digital signatures for large companies while issuing computerised tax invoices. It has also suggested that there should be no bar on issuing tax invoices from a central location.

The empowered committee of state finance ministers in a meeting held on April 15, has ruled out any rollback in tax slabs. It has further stated that the variation in rates across states was not very significant. Ramesh Chandra, member-secretary of the empowered committee has ruled out the possibility of a new tax rate of 8 per cent. States like Delhi have raised concerns over 20 per cent rate of VAT on diesel and have complained that this has resulted in about 50 per cent fall in sales as neighbouring states are still continuing with 12.5 per cent rate. The state government has said that it would take up the issue with the empowered committee as it has affected the state’s revenue and interest of traders.

The Delhi government has made some major changes in the newly implemented VAT regime. In the new move, it has exempted as many as 190 items, including life saving drugs and devices. The government has said that there could be a roll back on the tax on diesel and LPG. Other items that have been exempted from tax under VAT are husk, bran, oiled cake, de-oiled cakes, which have been put in the cattle feed category already in the list of commodities enjoying exemption, agarbattis, scrap glass, scrap glass bottles, hosiery items costing up to Rs 50, footwear costing upto Rs 300 and notebooks.

The decision on the issue of bringing imports under the VAT net is unlikely to be taken soon, as the move will require a constitutional amendment. In view of the legalities the finance ministry has asked the empowered committee of state ministers to suggest a legal framework. Import duties are collected by the centre under the Customs Act. If imports have to be brought under VAT, then the duty will have to be collected by the states. This will need a constitutional amendment in the Act.

As per a guidance note released by the Institute of Chartered Accountants of India, goods, which are not under VAT would be taxed under the Sales Tax Act or by making special provisions in the VAT act itself. It further states that if the VAT credit exceeds the tax payable on sales in a month may be carried over to the future months.

Charitable trusts incurring expenses on their employees may be spared of the proposed fringe benefit tax. (FBT). The Finance ministry is weighing the pros and cons of excluding trusts that enjoy and income tax exemption from the purview of FBT.

The Institute of Chartered Accountants of India (ICAI) has submitted to the finance ministry that the taxable value of fringe benefits should be capped at 10 per cent of the expenditure. ICAI has argued that the proposal to levy fringe benefit tax (FBT) on a deemed basis is flawed as it ignores the actual amount of expenditure incurred for extending such benefits to employees.

The annual rate of inflation based on wholesale price index has risen to 5.26 per cent during the week ended April 2, 2005 from 5.05 per cent registered during the previous week. The annual inflation rate was at 4.51 per cent in the corresponding week last year.

The WPI rose to 190.2 from the previous week’s level of 189.4 (Base: 1993-94=100) during the week under review. The index of primary articles’ group rose to 186.2 from the previous week’s level of 186.5, mainly on account of spurt in the prices of food articles. The index of fuel, power, light and lubricants group rose to 289.9 as compared to the previous week’s level of 287. The heavy-weighted manufactured products’ group (63.7 per cent) rose marginally to 169.2 from 168.9, due to a rise in the price indices of food products, beverages, tobacco and tobacco products, paper and paper products, rubber and plastics products, chemical and chemical products, non-metallic minerals products, basic metals and machinery and transport equipments.

The latest final index of WPI for the week ended February 5, 2005 has been revised downwards; as a result both, the absolute index and the implied inflation rate moved up to 188.5 and 4.96 per cent instead of the provisional levels of 188.6 and 5.01 per cent, respectively.

Maintaining the current moderate level of inflation in coming weeks is a major challenge in front of the government. Despite easing of world oil prices, which dropped at $50 per barrel as against $ 58 per barrel in the first week of April, 05, prices may rise further, if the oil PSUs hike prices of petrol and particularly diesel, which forms the bulk of the transportation costs in the country.

The Mid-term Appraisal Report of Tenth Plan brought out by the Planning Commission has supported the recommendations of the Second National Commission on Labour. (NCL). The Second NCL has called for amendments in the Industrial Disputes Act and Act of Contract Labour and proposed automatic time bound (60 days) permission of government for closure of units employing 300 or more workers, flexibility to adjust the number of workers based on economic efficiency and freedom to hire contract workers for non-core activities. However, UPA in it’s National Common Minimum Programme (NCMP), rejected the idea of automatic hire and fire. NCMP says that while the government desires positive changes in the labour laws, such changes must protect the interests of workers and families and must be introduced after full consultation with trade unions.

After termination of quotas, textile exports were expected to rise from the present level. However, contrary to the expectations India’s textiles and clothing exports fell by 7.6 per cent from $1.16 billion in January 2004 to $1.07 billion in January 2005 (according to provisional data compiled by DGCIS). The export of readymade garments, which is the largest segment in the textile basket, fell by 8 per cent to $542 million during January 2005 against $589.1 million, in the corresponding period last year. The decrease in the export of cotton textiles was more prominent and was estimated at $279 million in January 2005 as compared to $333.4 million during January 2004. This is a fall of 16.3 per cent. India’s textiles exports have dropped at a time when China’s garment exports have increased by 14 per cent to $3.73 billion in January 2005. This is because of low base effect. According to industry sources the fall in India’s textile exports is the result of reluctance by exporters to take up orders fearing lower margins for instance the margins in the US market have fallen by 8-10 per cent. However, according to another report, Indian textile exports to the US have recorded a quantum jump in all major categories in the first three months after the dismantling of quotas. In value terms, over 25 per cent export growth was reported in the first two months of quotas being dismantled (January and February 2005) on those textile categories, which had been facing quota restriction.

The information and broadcasting ministry has cleared a proposal for 20 per cent FDI in the FM radio sector, but the ban on news and current affairs programmes will continue. At present, only FII investment up to 20 per cent of the equity capital is allowed, but FDI investment is not permitted.

The government is planning to remove the cap on foreign investment in coal mining for steel and cement companies. Steel and cement companies are allowed only up to 74 per cent foreign direct investment in coal mining but power companies can have 100 per cent equity investment.
According to a Deutsche Bank study, India will grow faster than China and most other countries over the next 15 years. The global research arm of the German bank in its study said that India will grow at an average annual rate of 5.5 per cent and will be among the top five growth centres, between 2006 to 2020.

According to Nasscom, the export of software and information technology-enabled services jumped 35 per cent to $17.3 billion in 2004-05 from $12.8 billion (revised figure) during 2003-04.

The Asian Development Bank (ADB), on April 14, 2005 approved a $200 million loan and grant assistance package to India. This aid has been given for rehabilitation of people and reconstruction of damaged infrastructure in areas of Tamil Nadu and Kerala, affected by Tsunami. The assistance package comprises a $100 million grant and a $100 million loan.

The US may review the anti-dumping duty imposed on Indian shrimps due to the damage caused by tsunami on Indian seafood industry. Shrimps account for nearly three-fourths of the seafood exported by Tamil Nadu, Kerala and AP, which were affected by the disaster.
In an effort to boost the ailing jute industry, the National Jute Policy, announced on April 15, 2005 aims to raise jute exports to Rs 5000 crore by 2010 from the existing value of Rs 1000 crore. The government has also decided to enhance the Minimum Support Price for jute to about Rs 910 per quintal from July.

Crisil has assigned AA/stable rating to the Rs. 15 crore NCD programme of Maharashtra Seamless. The rating reflects its leading position in the Indian seamless pipe segment, with a market share of 37 per cent and its significant presence in the electro-resistant welding pipe segment.

In an another exercise, Crisil has reaffirmed the earlier assigned P1+ rating to the Rs. 575 crore short-term debt programme of Sundaram Finance (SFL). The rating takes into consideration SFL’s good credit profile, especially its asset-quality indicators and its brand image and strong customer relationship.

Icra has withdrawn the LAA- rating assigned to the Rs. 56.67 crore NCD programme of Gujarat Narmada Valley Fertilisers Company (GNVFC), as the said NCD has been redeemed. It has also withdrawn the A1+ rating assigned to GNVFC’s Rs. 200 crore CP programmes at the request of the company since they do not have any outstanding against the rated instrument.

Care has assigned a PR1+ rating to the CP programme of Rs. 40 crore of Amtek Auto (AAL), which would be a part of overall working capital limit (fund based). At the same time, it has also reaffirmed the earlier assigned AA + rating to the NCD programme of Rs. 55 crore of AAL. Both the ratings take into account the company’s continuous growth in operations, steady profitability margins over the years, comfortable coverage ratios and financial profile.

In an another exercise, Care has assigned a PR1+ rating to Allahabad Bank’s proposed certificate of deposits programme aggregating to Rs. 1000 crore.

Fitch has assigned a rating of F1+(ind) to the Rs. 1000 crore certificate of deposits programme of the Indian branch of Hongkong and Shanghai Banking Corporation (HSBC).

The Background
India is one of the few developing countries that sought to put in place, early on in its development programmes, a definitive role for small enterprises. The Indian economic history during freedom movement as well as in the immediate post-independence period was full of fascinating debate on the requirement of state policy to provide for countervailing environment to curb the natural tendency in a capitalist system to result in concentration of economic power. Apart from better distribution of income and dispersed ownership of assets and economic power, the state support for the promotion of small-scale enterprises has been based on a number of their positive characteristics: their labour intensity, potentials for achieving decentralisation and regional spread of industries, promotion of entrepreneurship, and their flexibility and ability to adapt to changing circumstances.

Definitional Problems
Dealing with small-scale industries and small businesses is replete with issues of definition and coverage. At one extreme, there is the entire non-farm informal sector segment consisting of what are come to be known as directory establishments (DEs), non-directory establishments (NDEs), and own account enterprises (OAEs). The latest NSSO's Census study on the informal sector has placed all of them together at 44.41 million in 1990-2000 and their employment at about 80 million out of a total labour force of 406 million or employment of 397 million on the basis of the widest coverage. But, even this non-farm 'informal sector' excludes small-scale enterprises covered under the Factories Act. About 60 per cent in terms of the number of factories, 24 per cent in terms of employment and 13 per cent, as output of the total factories sector, belong to the category of unincorporated enterprises; such factories had numbered about 81,400 and employed 2.40 million in 1997-98.

Once we introduce government regulation and registration, the nature of small-scale industry coverage undergoes a radical change, but in it the problem of definition gets magnified. This registration is quite different from the factories sector registration and the definition of small-scale for it has undergone changes for about 13 times, the definition ranging from Rs. 5 lakh to Rs. 300 lakh and embracing six varieties including tiny units and ancillaries. These give rise to serious problems of comparability of data on their performance over time.

What is more, even amongst the registered units, defined 'small-scale industries' constitute only one category administered by the Small Industry Development Organisation (SIDO); there are seven others, namely, khadi, village industries, coir fibre, handlooms, power looms, raw silk and handicrafts, which are controlled by other ministries. These seven account for about 36.6 million of employment, while the SSI sector accounts for only 20.0 million.
(Table1).

Again, the latest Third Census (2001-02) tells us that the registered SSI sector constitutes only about 13 per cent of the total, or in terms of employment 25 per cent. Of the registered SSI sector surveyed (22.62 lakh), about 8.87 lakh or 39 per cent were closed. The 13.75 lakh units cited in Table 2 refer to working units; their value of production was Rs. 203,255 crore (72 per cent of the total), while output of the unregistered units was 79,015 crore (or 28 per cent).

Focus on registered manufacturing

When we study the SSI sector, we generally focus on the manufacturing sector. About 34.5 per cent of the registered units are in the ‘services’ sector, which is a development of the 1990s. The promotional policies such as reservation of the products for the small-scale sector, fiscal in conceives, access to bank credit, capital subsidy for technology upgradation and training and technical skills imparted – all these essentially concerned the registered modern SSI sector.

A caricature description of the official writings on the importance of SSI sector is as follows:
“The small-scale sector in India today contributes over Rs. 4.6 lakh crore of output, which is nearly half of the gross turnover in the manufacturing sector. SSI units also contribute around 45 per cent manufacturing exports and 34 per cent of total exports thereby earning precious foreign exchange for country. Besides it’s contribution to the national economy the sector serves important goals of employment generation, more equitable distribution of income, exploitation of local resources, capital and development of entrepreneurial skills.

“The Tenth Five Year Plan launched by the government has placed heavy reliance on the sector for achieving the overall GDP growth rate of 8 per cent and creation of 10 million jobs per year. The SSI is expected to achieve a growth of 12 per cent per annum and provide additional employment to 44 lakh persons during the five-year plan period.

“Keeping view of the above socio-economic issues, the government has been providing support to the SSI sector on a protective basis by offering subsidies, fiscal concessions, priority lending, reservation of items of manufacture and has directed financial assistance through various banks and financial institutions. The sector has been growing robustly at a pace higher than the average industrial growth. As a result, there has been a gradual shift in the policy from protection to promotion.”

Evolution of Public Policy on the SSI sector:
Broadly, post-Independence SSI policy interventions can be categorised into three distinct periods:

• 1948-1991
• Post liberalisation (1991-1999)
• 1999 onwards (period of de-reservation)

Pre-liberalisation: 1948-1991
Beginning with the Industrial Policy Resolution of 1948, recognition was given to the small-scale and cottage sector. A number of measures were followed in the 1950s such as the establishment of the Small Industries Development Organisation (SIDO) and the National Small Industries Corporation (NSIC). Several Policy measures were introduced which provided:-

• Reservation of products lines for exclusive manufacture in the small-scale sector. Thus a large unit could not manufacture such items without an export stipulation.
• Access to bank credit on priority basis through the Priority Sector Lending programme of commercial banks.
• Relief on excise for small-scale units.
• Reservation of certain items for exclusive purchase from small-scale sector by State agencies.
• Price preference of up to 15 per cent was allowed to small business products in respect of Government purchase.
• Industrial estates were promoted at Government cost to provide better infrastructure.
• Training institutes for entrepreneurs were established to promote budding entrepreneurs and train existing entrepreneurs.
• A marketing corporation was established to assist small units in marketing their products.

Post -liberalisation: 1991 (and up to 1999)
The global economy is characterised by greater integration, a more liberalised international trade regime following the set up of the World Trade Organisation (WTO) in 1995, a rapid pace of technological change, especially in some high-growth areas such as information and knowledge-based industries, and intensified international competition. The policy for small, tiny & village enterprises announced on 6th August 1991 laid down the framework for government intervention in the context of liberalisation. Liberalisation itself implied considerable opening up of the economy and encouraging internal competition.

The initiatives for the SSI during this period included:-

• A Technology Development and Modernisation Fund by SIDBI.
• Setting up of Testing Centres by Government and industries associations.
• Increased focus on tool rooms with latest equipment and machinery to address tooling requirements of small units.
• Strengthening of entrepreneurship development institutes.
• Enactment of a Delayed Payment Act for ensuring prompt payment to SSI units of their dues from large industry.
• Setting up of Sub-Contracting Exchanges to facilitate buyer-seller interaction.
• Subsidisation to SSI entrepreneurs for participation in international fairs.
• Training programmes on export packaging.
• Reimbursement scheme in respect of ISO 9000 Quality Certification for individual SSI units.
• Technology up-gradation in industries specific clusters.
• IT based initiatives for information sourcing.
• Simplification of Labour Laws governing SSIs.
• Services given enhanced importance in small sector.
• Focus on the tiny sector.
• Prime Minister's Rozgar Yojana for educated unemployed youth.
• Integrated Infrastructure Development (IID) Scheme for setting up industrial estates exclusively for SSI units.
• Prior licensing requirements were reduced to the minimum.

Despite these initiatives, SSIs are facing acute problems to survive in an open economy.
(i) Dereservation
Number of items de-reserved since 1997 are:

• 108 items in February 28, 2005
• 85 items on October 20, 2004
• 75 items on May, 2002-03
• 51 items on May 20, 2002
• 39 Items during 1997-2001

Since 1997, 250 items (30 per cent) of the 836 reserved items have been de-reserved. De-reservation allowed large, medium and small-scale industries to produce the de-reserved items. Initial de-reservations became sudden and hence in general, SSIs un-welcomed the competition as they were unprepared to face it and unwilling to forgo the benefits of the protectionist policies and programmes. This is not surprising due to the smallness of SSIs. For instance, 88 per cent of the registered and 98 per cent of the unregistered SSIs in 2001-02, employ seven persons or less each. 72 per cent of registered and 94 per cent of unregistered units show turnover of Rs.10 lakh or less. Similarly, 78 per cent of registered and 96 per cent of unregistered units have investment on plant and machinery of Rs. 1 lakh or less. Consequently greater opportunities for expanding production and trade created by economic reforms and WTO agreements have become less attractive and less convincing for SSIs.

(ii) Possible impact of WTO
The important fact to be made clear is that WTO does not discriminate between large and small-scale industries. Not a single agreement of WTO directly deals with the small-scale industries. Moreover, SSIs across the world do not have uniform definition in terms of investment or size. WTO has no provision on SSI and yet the indirect effect is going to be enormous. The SSIs till now protected by law are going to directly face the harsh realities of markets as well as owing to the increased accessibility resulting from tariff reduction and withdrawal of Quantitative Restrictions (QRs). At the sectoral level, WTO’s agreements on Textiles and Clothing have completely phased out quota restrictions for exports on January 1, 2005. Under this full integration, SSI’s can export as much textiles and garments from India as demanded at globally competitive prices and quality. However, the question here is not merely the policy framework, but also whether these SSI’s are competitive and efficient enough to face globally competitive environment in terms of prices and quality. The issue in question is how SSIs, can cash on these merits of globalisation without a strong domestic back-up?

This process of liberalisation of the Indian economy initiated since 1991 has not only thrown up myriad opportunities for the SSI sector, but has also exposed it to the inherent risks of a free economy. Despite satisfactory performance exhibited by the SSI sector for the first seven years after liberalisation, opening of an economy does pose a number of challenges in immediate future to the sector. MNC’s are setting up production bases in and around India, in the SAARC region eying India as a market; on top of it there are bilateral and multilateral agreements or free trade pacts fuelling competition that is complex and fierce.

(iii) Support policies for SSIs
In view of equitable distribution of income and several desirable objectives of healthy social and economic growth, Abid Hussain Committee (1997) made out a strong case for support policies for SSIs even as it recommended dispensing with reservations. The Committee examined the problems of the SSI sector and recommended a package of policies to restructure the industry in the context of current global economic changes. The Committee was of the view that the extant institutional structure for delivering credit to Small Scale Enterprises (SSEs) needed a thorough overhaul. It endorsed the recommendations of the Nayak Committee (1991-92, set up by RBI) and urged the RBI to implement the same. The Nayak Committee had recommended restructuring of financial support through State Finance Corporations (SFCs) and SIDCs, tapping of other sources of funding for SSEs, extending credit rating servcies to small units, and addressing the credit needs of tiny units to ensure that they are not bypased by the commercial banking system. The overall credit availability for SSIs during 1991-1996 amounted to only 13 per cent of the value of production. The Abid Hussain Committee also emphasized that more than 83 per cent of SSI’s produce non-reserved products and compete in open markets; one could easily gauge the extent of aid that the whole SSI sector derive from the government’s reservation policy catering to just 16.39 per cent units producing reserved products.

(iv) Institutional credit
(a) Bank assistance
The Nayak Committee had recommended a desirable norm of 20 per cent of the value of production to be made available by way of working capital through term-lending institutions and commercial banks. A norm of 75 per cent was set for fixed capital assets whereas actual availability was only 55 per cent. Lack of finance has been one of the major causes of sickness in the SSI sector, blocking access to technological modernisation and other growth possibilities. There is an urgent need to enlarge flow of credit to the SSI sector from institutional sources.

A disquieting development has been the steady decline in the number of loan accounts and the share in total bank credit from scheduled commercial banks enjoyed by the SSI sector. The number of loan accounts has slipped from 2.10 million in March 1991 to 14.31 million. (Table 3)

Table 4: Credit to Tiny Sectors
	March 1995	March 1996	March 1997	March 1998	March 1999	March 2000	March 2001	March 2002	March 2003
Net Credit To Tiny Sector (Rs. Crore)	7734	8183	9515	10273.13	8837.47*	22,742**	26,019**	27,030	26,937
Tiny Credit as percentage of net SSI credit	29.93	27.76	30.2	27.0	20.7	54.03	53.7	54.34	50.84
* Refers to units with investment in plant and machinery upto Rs.5 lakhs. ** Refers to units with investment in plant and machinery upto Rs. 25 lakhs. Source: Ministry of small scale industries

(b) Assistance to SSIs by SFCs
The main objective of State Financial Corporations (SFCs) is to meet term loan/ fixed capital needs of the small scale industries. There are 18 SFCs in the country. Table 5 below gives the total assistance and assistance to SSIs by SFCs:-

1999 Onwards : From “Protection” to “Promotion”
The establishment of an independent Ministry of SSI in October 1999 ushered in a new phase of SSI development. Advocacy for the sector found a new and effective platform. In its early days itself, it became clear that liberalisation in world trade and globalisation were emerging as huge challenges for the sector. Extensive consultations and discussions spread across the length and breadth of the country culminated in a comprehensive policy package for the sector. This was announced in August 2000, within 10 months of the formation of the Ministry. The package aimed at enhancing competitiveness of Indian SSIs in the context of global competition. The focus of the effort was on:-

• Excise exemption to Rs. 100 lakhs.
• Technological upgradation – 12 per cent Capital Subsidy Scheme
• Credit Guarantee Fund Scheme for Small Industries (CGFSI) by Credit Guarantee Fund Trust for Small Industries (CGTSI), a trust set up jointly by Government of India and SIDBI (upto Rs. 25 lakhs by way of term loan or working capital facilities).
• Raising of limit of composite loans to Rs. 25 lakhs.
• Raising of project cost limits under National Equity Fund to Rs. 50 lakhs.
• Infrastructural Development (IID) Scheme extended to all areas.
• New scheme for up gradation of industrial estates.
• Testing Centers with involvement of Industry Associations.
• Marketing Development Assistance Scheme for SSIs.
• Third Census of the SSI sector
• Enhancements of family income limits under PMRY

In spite of all these, SSI’s toady find it extremely difficult to survive in the domestic as well as internationally competitive environment due to various growth constraints like obsolete labour laws, octroi problems, problems with customs and excise matters, delays in clearance by pollution control boards, delay in sanctions of loans/advances, lack of co-operation from banks and financial institutions, increase in various charges by industrial development corporations such as MIDC and GIDC, lack of transparency in government regulations due to corruption and extensive legal requirements.

Third All India Census of SSI Sector
The results of the third All India Census of SSI, 2001-2002, published by the Ministry of Small Scale Industries are finally out after roughly 13 years of the publication of the Second All India Census. The census data is composed of the census of registered units and sample survey of unregistered units only. The Census records reasons of sickness in which the following issues stand out:

(i) Market related lack of demand for their produce and problems in marketing and shortage of working capital
(ii) Access to finance
(iii) Reservation -
Just a fourth of top 200 products manufactured in the sector, were in the category of items that are reserved for the production by SSIs. Since most products produced by the SSI sector are freely imported from countries where they are produced in much larger factories with lower cost and therefore, lower prices, what is the use of SSI protection?
(iv) Registration -
The Census shatters many other myths about how SSIs are supposedly protected by the law. Of the total of 10.5 million units in 2001-02, around 9.15 million were unregistered and half of these said that they were not even aware of the process of registration and therefore did not avail the benefits available. Another 40 per cent of the unregistered units clearly showed their disinterest in availing the benefits due to higher transaction costs associated with registration Clearly, reservation is a ‘benefit’ to very few SSI units. Even within registered SSIs, as large as 39 per cent of the units are closed and 61 per cent of the units are working.

Budget 2005-06
In the context of the government’s National Minimum Programme (CMP), the budget for 2005-06 paid greater attention to the problems of the SSI sector.

Features of the Budget 2005-06 for SSIs are:

1. One of the initiatives announced is SMED Bill (Small and Medium Enterprises Development) tabled in the current Parliament Budget session, which will reduce the burden on Inspector Raj by reducing red-tapism and multiplicity of laws applicable to the sector.
2. Other initiatives include dereservation of 108 items leaving about 497 items protected for the production, exclusively by SSIs. This is expected to boost domestic as well as foreign investment.
3. The Manufacturing Competitiveness Programme to be framed by National Manufacturing Competitiveness Council (NMCC) which will facilitate the desired growth rate of 12 per cent and increase the sector’s contribution to 7 per cent of India’s GDP.
4. Budget has also announced a hike in the corpus (from Rs. 135 crore to Rs. 173 crore) for Credit Linked Capital Subsidy Scheme (CLCSS), which will encourage SSIs to invest in technological upgradation to achieve quality competitiveness.
5. Additionally, the SME Growth Fund established by SIDBI this year with a corpus of Rs, 500 crore will provide equity support to units in knowledge-based industries such as pharma, biotech and information technology.
6. It also proposes to reduce the peak rate of customs duty from 20 per cent to 15 per cent.
7. The clearance limit for the previous year is enhanced to Rs.4 crores from Rs. 3 crores. It means that if the aggregate value of the clearances for the year 2004-05 was less than Rs.4 crore, the SSI unit is eligible to avail the concessions for the year 2005-06.
8. Registration – The SSI units outside the duty purview were required to file a declaration to the Divisional office, when their clearances reach Rs.90 lakh, i.e. exemption limit minus ten lakh. The notification is amended to make the requirement of filing a declaration when the clearances cross Rs.40 lakhs (exemption limit minus Rs.60 lakhs).

Despite the progressive measures featured in the budget, there is much more to be done by the government. It includes initiatives to address the availability of timely and adequate credit, which remains an all-time need of the hour for SSIs. Apart from the measures to infuse competitiveness to face the challenges emanating from free trade agreements, as announced in the current budget, the need is to wipe out the structural and operational bottlenecks. e.g. higher transaction costs associated with registration provide the trigger for staying unregistered and benefits from government programmes don’t compensate for costs of obtaining registration.

SSI’s, after liberalisation have suffered to a great extent. To say that one learns to swim when pushed in water has it’s own limitations in the absence of other conducive conditions. The structure of SSIs essentially require some degree of protection and effective promotion at this stage of development. In fact, unlike large-scale industries, SSIs do not require very huge infrastructure facilities and heavy plant investments. With sufficient backup of adequate and timely availability of credit, SSI’s would be competent enough to sustain and mature. This will not only help in generating employment and growing exports, but also arrest concentration of population in cities and towns leading to balanced economic growth through equal opportunities.

Deceleration in Growth
There has been significant deceleration in the growth of SSIs, from 17 per cent per annum during 1990-91 to 1995-96 to 11 per cent during 1995-96 to 2002-03 in terms of output and 4.6 per cent to 1.4 per cent per annum in terms of employment. (Table1)
Recent trends in the sector’s production, employment and exports presented in the table 6 also broadly confirm these results.

Problems faced by the SSIs

(i) Sorry state of Indian manufacturing due to sharp reduction in public sector investment and more severe impact on manufacturing SSIs;

(ii) Impact of tariff reductions far below the bound WTO rates, creating a sudden unequal situation of competition; now it is compound by the decision to reduce duties to the ASEAN levels; also, the free trade which India connives with;
(iii) Bank credit delivery is slack; SFCs have been in a sorry state.
(iv) Absence of entrepreneurial innovativeness, unlike in China and other south and East Asian countries.

In short, for implementing the overall re-structuring process in the SSI sector, India needs more technocrats and entrepreneurs rather than only software engineers and MBA’s. Out of the total MBA’s from the top schools and engineers from IITs and reputed engineering colleges very few opt for being entrepreneurs. This is sure to be the greatest constraint on India’s SSI development and not Government policies; the policies, undesirable as some of them are, may have to be taken as given and entrepreneurial promotion has to be persuaded.

Larger issue of poor industrial growth
It should be admitted that in a broader sense, the problem of the SSI Sector in India is arising from the unduly low share of industry in total GDP (Table 7). It is quite disquieting that, as per the National Accounts data, the share of manufacturing in total GDP, has remained at about 17 per cent in 2003-04 while it was 16.6 per cent in 1990-91. While the share of registered manufacturing has edged from 10.5 per cent to 11.4 per cent, that of unregistered manufacturing has shifted down from 6.1 per cent to 5.9 per cent during the period.

(Such data are not available in the ASI data set for subsequent years.)

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

Table 5: Assistance For SSIs From SFCs