MSMEs - separating wheat from chaff Do not look for easy interventions to help small-scale enterprises - carry out the reforms that will let them grow big

Realisation that the small-scale industries (SSI) reservation had failed to deliver on employment creation while impeding export growth led India to systematically roll back that policy beginning in 1997. While we have barely reached the tail end of the rollback with 20 items still remaining on the reservation list, the old view that small-scale enterprises are the silver bullet that will solve India's jobs problem has resurfaced. We are being advised to forget about labour lawreforms and labour-intensive manufacturing in the organised sector and count instead on micro, small and medium enterprises (MSMEs) in the manufacturing sector for good jobs for the masses.

Possibly, these commentators feel exasperated by the hesitant response of large-scale firms to the removal of theSSI reservation. But the hesitant response is due to yet another layer of regulations embedded in Indian labour and exit laws. These regulations have continued to hold back entry of large-scale firms into labour-intensive sectors, such as apparel, footwear and electronic assembly. The apparel industry remains overwhelmingly populated by small, low-productivity firms with the result that much smaller Bangladesh and, recently, even tiny Vietnam have surpassed India as exporters of this product. Chinese apparel exports, of course, remain more than 10 times those of India.

While not all firms have to be large for a country to succeed in the global marketplace, a significant number of them do. Small and medium firms usually flourish in sectors in which large-scale firms are flourishing. The latter operate in the global marketplace, where they must compete against the super-efficient firms. The competition in turn forces them to constantly look for cost-cutting technologies and management practices and seek high-quality inputs at competitive prices. Small and medium firms within the sector must then shape up as well either because they must compete with the large ones directly or because they are their ancillaries.

In manufacturing, India officially defines micro-enterprises as those investing Rs 25 lakh ($40,000) or less in plant and machinery. Small manufacturing enterprises are those investing between Rs 25 lakh and Rs 5 crore and medium ones those with investments between Rs 5 crore and Rs 10 crore. The corresponding categories for services enterprises are defined by investments in equipment of less than Rs 10 lakh, Rs 10 lakh to Rs 2 crore and Rs 2 crore to Rs 5 crore.

These wide investment ranges imply that the MSMEs constitute a highly heterogeneous amalgam. A key fact is that the vast majority of them are tiny low-productivity firms whose owners are not capitalists in waiting. For most part, they generate barely sufficient income for their owners to get by and, with rare exceptions, lack the ability to create good jobs.

The MSME censuses reveal that 95 per cent of all the MSMEs are micro-enterprises. With less than Rs 25 lakh invested in machinery and equipment, these enterprises serve local markets within a few kilometres of their location. Little is known of the quantity and quality of their output, or of their sales profiles since they are not registered even with district industry centres.

At the other extreme, few reform sceptics are even aware that many small and medium firms bear the full brunt of our pernicious labour and exit laws. According to ongoing research of economists Rana Hasan and Nidhi Kapoor of the Asian Development Bank, 10 per cent of the organised sector manufacturing enterprises officially defined as small employed 164 or more workers each in 2010-11. Among medium enterprises, 50 per cent employed more than 128 workers each in the same year. These enterprises must naturally comply with the full range of labour and exit laws principally aimed at large corporations.

Mr Hasan and Ms Kapoor also find that firms with less than 20 workers each employed 73 per cent of all manufacturing workers but produced just 12 per cent of the total economy-wide manufacturing output in 2010-11. That is to say, 27 per cent of all manufacturing workers in firms with 20 or more workers produced a staggering 88 per cent of the total manufacturing output. Well-paid jobs are concentrated in these overwhelmingly organised sector firms.

Findings from the Employment and Unemployment Survey of 2011-12 confirm this inference. According to it, workers in firms with less than 20 employees are paid Rs 1,581 a week on average. This wage is just a third higher than the modest Tendulkar poverty line for a family of five, confirming that the vast majority of the small firms lack the wherewithal to create well-paid jobs. In contrast, manufacturing firms with 20 or more employees pay a wage more than twice the poverty line.

A key reason why small firms remain stuck at low productivity and, therefore, low wages is that they are too small to take advantage of modern technologies. In apparel, for example, Mr Hasan's and Ms Kapoor's ongoing work cites a variety of machines and tools available for pre-sewing, sewing and post-sewing operations. The costs of these machines are for the most part out of reach of the smaller firms. But the harsh reality is that these machines are essential for the manufacture of high-quality apparel in sufficient volume for just-in-time delivery that buyers in the global marketplace demand.

It is all too seductive to think that there are easy interventions that would turn micro-enterprises into manufacturing dynamos. The reality, however, is that 50 years worth of interventions on their behalf have not produced any tangible results. Each time we want to intervene yet another time, we tell ourselves that it will be different this time. But, alas, we unwittingly end up encouraging small firms to stay small and unproductive.

Support to the MSMEs should be about incentivising them to grow larger and competitive in the global marketplace. It should not be turned into yet another social programme that perpetuates weak and inefficient enterprises. If good jobs are what we seek, it is a folly of the first order to lean against the Schumpeterian process of creative destruction. At the end of the day, we will need flexible labour and exit laws for the success of not just large firms but small and medium ones as well

Nirbhay will be backbone of ‘cold-start,’ say experts

Nirbhay, India’s first long-range subsonic cruise missile, which was test-fired on October 17, can be a game-changer in India’s strategic calculus, defence analysts and strategic experts feel.

Capable of flying at a tree-top altitude for over 1,000 km, Nirbhay can carry out surgical strikes and thus back up India’s “cold start” doctrine that envisages limited, precise strikes across the border. The introduction of nuclear weapons in the subcontinent has virtually stalled a conventional Indian response to Pakistan’s cross-border terrorism.

“India is confronted with the problem of developing a strategy to counter Pakistan’s ‘first-strike’ and continuing proxy war,” says Dr. Monika Chansoria, Senior Fellow at the Centre for Land Warfare Studies. She points out that Pakistan cites “India’s conventional military threat” to maintain its own offensive strategic posture and India will have to develop a response to this.

In this context, “cold start” has been put forward as an offensive doctrine by the Indian strategic establishment. Though “officially denied,” its presence is widely acknowledged in strategic circles.

In the event of an Indian offensive, a volley of missiles flying low can effectively take out key command and control centres, blunting the resistance to the advancing armoured columns.

“The successful indigenous development of Nirbhay cruise missile will fill a vital gap in the war-fighting capabilities of our armed forces,” Avinash Chander, Director-General, Defence Research and Development Organisation, said after the test launch on October 17.

Defence analyst Rahul Bedi observes that Nirbhay will be a force multiplier to the in-waiting “cold start” doctrine, but the doctrine itself is a non-starter as of now for lack of critical assets such as artillery, armour and helicopters. The Army has to fast-forward acquisition and induction of these platforms.

In the short-term, experts believe that Nirbhay, along with its shorter-range supersonic sibling BrahMos, will form the backbone of the doctrine.

IAS MAINS Current affairs based essay,SAMVEG IAS DEHRADUN

Important essay for IAS 2014 mains based on current affairs 

1) INCLUSIVE GROWTH-most effective way for all round development of india.

2) SWACHHCHA BHARAT: comprehensive approach in all dimension requires people participation to produce result rather mere sloganeering.

3) India's foreign policy:democracy,demography,demand(3D) is key to rise of india.

4) MOM : India's scientific achievement is necessary for economic and democratic development.

Beware of fiscal complacency Other challenges for India's deficit besides oil subsidies

In a few short weeks, India's fiscal state has undergone a dramatic change. When the government's first Budget was presented in July, there was great scepticism about its ability to meet the fiscal deficit target of 4.1 per cent of gross domestic product, or GDP. Now, there is virtual unanimity that it will be more than met. In the meantime, global rating agency Standard & Poor's raised India's outlook from "negative" to "stable", implying a reduced likelihood of a rating downgrade over the next two years. The primary reason for this swing of the fiscal pendulum is the drastic fall in global crude oil prices. From somewhere around the $108-a-barrel mark when the Budget was presented, the benchmark Brent crude oil has fallen to around $86 a barrel. This has effectively terminated the subsidy on diesel, facilitating the much awaited and appreciated deregulation of this product, and significantly reduced the subsidies on liquefied petroleum gas, kerosene and, importantly, fertilisers. Overall, assuming that it endures, this development will prove to be a huge windfall for public finances. However, it is important that the government should not allow complacency to lower its guard against fiscal stress. There are a number of potential threats looming, which could erode much of the benefits of reduced subsidy bills.

The first of these is the recommendations of the Seventh Pay Commission, which will be implemented in 2016. As in the past, this commission is virtually certain to suggest significant increases in compensation while asking for changes in performance evaluation and a leaner organisational structure. In the past, governments have typically accepted the first bit and rejected the second. If this trend continues, there will be a large bump up in the salary bill without any commensurate increase in efficiency. The government would do well to take an integrated view of the recommendations made by the Pay Commission and the Expenditure Management Commission, but if this does not happen, it should brace itself for a wages and salaries shock. Second, the report of the 14th Finance Commission will be submitted by January 2015. Being mandatory, these recommendations will have to be immediately built into the Budget for 2015-16. While this has not been a disruptive process in the past, larger commitments to states might have to be made. Add to this the compensation provisions that the Centre will have to make to get the states to sign on to the goods and services tax (GST) and the fiscal dividend from oil prices could be substantially reduced.

Third, public-sector banks are reeling under an unusual asset-quality burden, due significantly to their large exposures to stalled or unviable infrastructure projects. There is a larger need to address infrastructure problems here, but meanwhile, if banks have to keep lending to businesses and individuals, they will need regular infusions of capital, which, realistically, only the government can provide, given the asset-quality situation. Substantial funds will have to be provided for this, more so if the government shrinks from firm handling of the unhealthiest banks for political reasons. In sum, while the fiscal consequences of the drop in oil prices are significant and positive, it would be wise not to give into the temptation to see it as a justification to go slow on other fiscal initiatives. The road to fiscal hell is paved with complacency

The great oil price game Will oil prices continue to decrease, and will Saudi Arabia then step in to arrest their decline?

It has taken just a few weeks for oil prices to drop by close to 25 per cent, sending shockwaves around the world and raising as many economic questions for the future, as well as geopolitical and strategic ones - these three domains being always closely intertwined when it comes to oil.

The key question that comes to mind is whether this steep drop in prices is the result of cyclical factors - economic stagnation in Europe, the slowdown in countries such as China, Brazil and Indonesia - or whether it reflects a more fundamental trend.

The most likely answer is the latter. On the one hand, the demand for fossil fuel will continue to grow for the foreseeable future, whatever progress is made in the development of alternative energies, with emerging markets - the new growth countries - representing more than 80 per cent of the increase in demand for the next 20 years. But on the other hand, we are just beginning to see the impact of the shale oil and gas revolution in the United States over the last few years, which has turned on their heads many assumptions regarding the global oil picture.

As has been often mentioned, the United States is well on its way to becoming energy self-sufficient over the next 15 to 20 years and has already reduced very substantially its reliance on external energy sources, with oil and gas imports declining steadily since 2009. As an example,Nigeria - which used to be the fifth external supplier of oil for the United States - has not exported a single barrel to this country since July. The United States shale oil and gas revolution is complemented by a similar development in Canada and the soon to be felt impact of the structural reform of the energy sector in Mexico, which should rapidly translate into additional production capacity. So a slowing down of demand combined by an increase in supply capacity is bound to create a sustainable downward pressure on prices.

There are, of course, clear winners and losers from this trend. Among the winners come the economies of countries completely dependent on oil imports, with India and Japan coming first to mind; but also the consumers in Europe and in the United States - Moody's estimates $1.2 billion in savings for United States consumers for each percentage-point decline in the price of gasoline every year. On the losing side, one has to look at Russia whose economy - already on the verge of recession - is so dependent on oil revenues; at countries such as Venezuela, on the verge of bankruptcy; and Iran. The Tehran regime is crucially dependent on its oil revenues to finance the subsidies that help maintain social stability. It is now selling oil at $85-86 a barrel, against $114-115 a barrel last spring. One can imagine the impact on the Iranian economy as this steep drop in prices is aggravated by a reduction of production since July.

The picture is more complex when it comes to Saudi Arabia. Riyadh has so far refused to reduce its production to contain the decrease of oil prices. The key strategic objective for the Saudis is to preserve their role as the global swing producer and the economic and strategic benefits gained from such a privileged position. So they seem ready to stomach the loss created by declining prices. The fact that Saudi Arabia has around $750 billion of reserves makes it relatively easy for the kingdom to sustain a sharp decline of revenues for the time being. It could expect that the sacrifice would be worth it if such a decline in oil prices were to hamper the development of United States shale oil and gas that require higher energy prices to be economically sustainable. Thus, Saudi Arabia would be able to "neutralise" or to slow significantly the development of a competition that threatens its role as a swing producer capable of shifting the global oil market in one direction or the other.

However, the regime in Riyadh has to take into account some troublesome realities: first, Saudi Arabia's per capita energy consumption is the highest in the world due to a considerable waste of energy that all efforts deployed so far have been unable to constrain. Saudi Arabia has now to take away three million barrels a day for domestic consumption and an even higher percentage of production will be eaten up by domestic needs in the coming years. Second, the regime has had to devote more and more subsidies and handouts in the last few years to trying to assuage the growing frustration of the young and a fledgling middle class that is more and more exasperated by the lack of freedoms and rigidities imposed on Saudi society, thanks to religious taboos enforced by a hated religious police.

The regime is now spending an estimated $130 billion a year on subsidies, and pressures are mounting given the explosion of the population from 20 million people in 2000 to 28.5 million in 2013 - and increasing water scarcity. Five year ago, Saudi Arabia needed an oil price of about $85 a barrel to balance its budget. Today, it needs $100 a barrel.

So the Saudis will have to calibrate their position in the coming period. According to some estimates, pushing a barrel of oil back to around $100 would require a reduction of production of about two million barrels a day - a cut that would fall predominantly on Saudi Arabia. Riyadh may expect to face some pressures at the next meeting of Organization of the Petroleum Exporting Countries, scheduled for mid-November. Any calculation by the Saudi rulers on their oil strategy will almost surely be influenced by their concerns about what they perceive as the Obama administration bending backwards to get an agreement with Iran on the nuclear issue - which would re-establish the international legitimacy of Tehran and impact negatively on Saudi Arabia in its contest for power and influence in the Gulf.

However, the situation is also complex - albeit in a different way - in the United States. The tremendous benefits derived from the decline of oil prices for the American consumer have to be weighed with the impact such decline might have on the development of shale oil and gas, and, thus, on the United States achieving its strategic objective of energy self-sufficiency by 2030-35. The shale industry should be able to pursue its development at price levels of $80-85 a barrel. The key issue is, thus, to ensure that prices don't drop further. But the dynamics of the market are difficult to predict at the moment.

As a new global picture for oil is emerging the levers of control of the market are changing hands and the rationales for decisions on production levels and prices are also changing. If the United States emerges as one clear winner of the present shift, and countries such as Russia and Iran as losers, there is no way this will not have strategic and geopolitical implications in the medium term. The rulers in Riyadh are certainly pondering their game very carefully at the moment to make sure that whatever they decide will help protect their position - and their alliances - in the future.

Government to commemorate Sardar Patel’s birthday on October 31 as ‘Rashtriya Ekta Divas’.

Government of India has decided to commemorate the birth anniversary of Sardar Vallabhbhai Patel on October 31, as‘Rashtriya Ekta Divas’ or the National Integration Day. Briefing media persons, after attending an official meeting called by the Governor of Maharashtra in Mumbai today, Union Minister for Information & Broadcasting, Prakash Javadekar said, government wants to create awareness about the contribution of Sardar Patel during India’s Independence Movement and towards ensuring national integration in India. He said Sardar Patel, who is also known as the iron-man of India was instrumental in merger of princely states, to create a modern India, just after independence. “Celebrating his birth anniversary as national integration day is very appropriate” added the Minister. Union Energy Minister Piyush Goyal, who also attended today’s meeting, said that awareness about Sardar Patel’s contribution is very low, which is very unfortunate. He said, recently he came to know that in the history book of Class X, there is mention of Sardar Patel only once. The government has decided to make ‘Rashtriya Ekta Divas’ a popular mass movement, inviting participation from all sections of the society. The participation will be voluntary. Giving details of the action plan for the day, Mr. Javadekar said, ‘run for unity’ will be organized at various places, including towns and villages all over the country, on the morning of October 31. Prime Minister Narendra Modi will himself participate in the event and also broadcast a short radio address on the occasion. Mr. Javadekar informed that in the evening, Police and other organizations like NCC, NSS, Scouts and Guides, Home Guards etc would perform a march-past on the streets in all the district headquarters. He said, necessary instructions have been issued to concerned departments. The Minister also informed that details about how people can register for the run, will be communicated through website and advertisements in a day or two. Vallabhbhai Patel was born on October 31, 1875 at Karamsand in Gujarat. A barrister with a successful law practice, Vallabhbhai Patel joined the Indian National Movement under Mahatma Gandhi and grew up to become one of its tallest leaders. He played key leadership roles in organizing peasants’ movements in Kheda, Borsad and Bardoli in Gujarat and promoting the Quit India Movement against the British Raj.. The credit for the integration of over 500 independent princely states in 1947-49 by their merger from what was then a divided India to make it what it is today is due solely to Sardar Vallabhbhai Patel.

UPPCS-2014 MAINS TIME TABLE,SAMVEG IAS DEHRADUN

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