Tuesday, 8 December 2009

Is small scale more desirable than large scale ?

Why is the Government of India so fixated about small scale ? For some reason, the thinking seems to be that small scale is ethically more acceptable than large scale. This is nonsense – both economically and morally.

I am reacting to the news that the government is considering stipulating that public sector enterprises would be required to source 20% of their purchases from micro, small and medium enterprises. Never mind that such public enterprises have to compete on the open market against enterprises with no such restrictions. Never mind that public enterprises, funded with taxpayers money are supposed to be economic engines – not means of implementing a warped sense of social justice.

Small enterprises need no special support. Just as in every other facet of industry, there are the good and bad among them. The good don’t need any handouts. The bad deserve to die. In some areas, scale is an advantage and small scale, by definition is suboptimal. As a consumer, I have no desire to accept suboptimal costs. In some other areas smallness can be an advantage. Good , then compete on your strengths and may the best man win.

Small scale industry is not a saint. They violate laws too. Often laws relating to safety and labour are least observed in small industry. They do not deserve to be glorified.

The problem is that there is a ministry of micro, small and medium enterprises in the central government. If there is a ministry, there must be netas and babus. They have to find something to do to justify their existence. They therefore create such horrible policy. Without a doubt, detailed rules will be laid down as to what materials have to be sourced from them. PSUs will lobby saying some materials have to be excluded because they are not manufactured by the small scale industry. Small industry will lobby saying that some items have to be exclusively sourced from them. Before you know it, a 1000 page compendium will be published. Case law will be created. The babus can be in bliss.

Reminds me of an incident which P Chidambaram, the current Home Minister of India used to speak about. When he first took over the Commerce Ministry, long ago, he discovered the existence of an organization called the Controller of Imports and Exports. While he could understand why imports were thought to be controlled in the license permit era, he was completely at a loss as to why there was a Controller of Exports. When he asked the worthy official why this was so, he was treated to a lengthy presentation of why that function was absolutely important. The gobsmacked Chidambaram realized that the only way he could make things happen was to simply abolish the whole function.

I suggest that the Ministry of micro, small and medium enterprises be likewise abolished.


Sandhya Sriram said...

I may not take such an adverse position on the subject. I agree with you that consumer is entitled to cost advantage and cannot be penalized coz its manufactured by an SME. But there are certain provisions with respect to SME which are required. for ex: Large companies have to settle their outstandings to SME on time. this is good so that no one who has muscle power gets the right to bully

I would recommend that the SME ministry elevates from being a social engine to an economic engine. They can drive compliances with SME - whether they all have a PAN Number, whether they remunerate their staff properly, providing them a single window redressal for any harrasment from tax authorities or other large scale industries and the like so that the whole process is a mutual win win. But then it would become a completely dry ministry and probably no Neta will take it up and thats why it refuses to transform.

kiwibloke said...

Interesting article, you touch a raw nerve that I'm so passionate about - Govt having no business being in business. Need to write about what happens back home in NZ. 85% of all commerce (Not counting government spending) is through Small and Medium Enterprises -never mind the Fonterras, Carter Holt Harveys, Fletchers and Zespris of NZ, rest of business is run by every day blokes and sheilas with about a maximum of 8- 10 people. What does the govt do to help them - Zilch, Zero. There is no mini/micro industry ministry. As one who ran a small business in Aotearoa, the best help that the govt gave us to not to poke its nose in our business. The Employment Act was tough (designed to protect employees) OSH (Occupation Safety and Health) and ACC (Accident Care and Compensation)rules were not simple and we had to play with the big boys (and yes I have worked with one of the big boys in NZ industry). Yet there is very little that held back the kiwi ingenuity and most of us made good through HONEST means. Keeping the GOVT (& oh yes, I've worked for Her Majesty's Govt in NZ as well)out of business was the best thing that happened in NZ in the late eighties.

Ramesh said...

@Sandhya - A facilitating ministry is a nice concept, but in India such a concept is alien. The mindset of ministries is to control, not let go. On the whole I think we would be better off if they didn't exist.

@kiwi - Can perfectly understand. One reason why the IT industry succeeded in India because the government was too ignorant to interfere in the early days.

gils said...

smallscale or largescale...hmmm..depends on how big the picture u want to draw...the biggest scale i've ever used was 15cms in length..

gils said...

//Small scale industry is not a saint.//

seriously..many a time my scale broke in middle of the fighter games we used to play..

gils said...

heheh :) bayanagara relevanta comment paniruken nenakren...ethachum poatu kudunga :)

VA said...

Point explained beautifully...

I can see no reason why a successful business needs support from any outside engine. I understand that one may need a body to protect certain interests of these enterprises given the fact that big players also lobby and try to control government on several policies, but as rightly said by you, "A facilitating ministry is a nice concept, but in India such a concept is alien. The mindset of ministries is to control, not let go."

Out of curiosity, I googled a little bit on functions of so called national boards establsihed under MSMED Act. And this is what I find over there - Examine the factors, make recommendations, advise central government etc. etc. In turn giving a reason to netas and babus to justify their existence and recommend non-sensical policies.

LG said...

While I go with what Sandhya said, not at all denying your point sir. Almost all visionary companies' history shows that it grown by itself. Of course, good product always fetch market. I also been one among 'em while I was back in India doing / planning not to employ more than 20 employees in order to get away with pf/esi laws.

But now, I realize that I should have not advised those things - when you have bigger picture in your mind. Its nearly next to impossible to implement in India at least for a decade what we are foreseeing here now.

Srivats said...

gils said

//smallscale or largescale...hmmm..depends on how big the picture u want to draw...the biggest scale i've ever used was 15cms in length//

LOL amaanda sema relative vaa comment potrukkey edhukku mudhugula dhaan tharanum da

Srivats said...

Another eye opener post and all these days I thought the small scale industries should be saved more than the large ones ..seriously!

Ramesh said...

@gils - Highly "relevant" comments in your usual inimitable style. Gils - you are the life blood of any blog. Thank you for coming to my boring business stuff and bringing a touch of humour

@VA - Thanks. Usually, its the inefficient who cries for "support". A really successful business does not need sops.

@LG - The IT industry is an example of the possibility of success without government intervention. They rose by their own merit. Similarly in China, I see so many examples of this.

@Sri - Gils is a real star !! I think small or large, the government should not intervene. A philosophical point to muse on is whether the inefficient should be "supported" or should the efficient be encouraged ?

J said...

I agree with the central issue of your argument that there should be no quotas for small-scale sectors irrespective of the cost, etc. However to analyze the benefits of scale I think we need a more complete picture of cost. Which in turn raises the question of cost of what and cost to whom? The old argument to favor small scale sector has been that it generates more employment compared with mechanized large scale factories. If there is any truth to the argument (China probably defies that by simultaneously growing the demand for its output) then as a society/economy, we need to understand what is the real cost of unemployment. Are we better off with high product costs of the small scale sector with low costs of unemployment or are we better off with lower product costs and an efficient system of dole paid for by the efficiencies in manufacturing. Of course, it is not clear whether the premise that small scale generates more employment is a myth or whether it holds for certain industries. Ultimately the consumer pays the total costs one way or the other and we need to understand more transparently what we are paying for before we can evaluate these policies.

Ramesh said...

@J - Very incisive thought. Yes - what is the true cost if we consider the cost of the social consequences. Interesting line for consideration.

Anonymous said...

LOL @ gils. Nothing can ever make him serious, hee hee! :-)

Mentionings netas and babus is enough to make my blood boil. People who have no clue about the portfolios that they are running mess up the whole package and ... sigh!!

The Chidambaram episode was a good one though! :-)

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