Chapter 3
42 M. Rajeev
10 lakh = 1 million
Source: Annual Report, 2004–05, Ministry of Small-scale Industries, Government of India.
Fig. 3.1 Employment (in lakh persons) and percentage growth of employment in the SSI sector in India
0 20 40 60 80 100 120
1990-91 1991-92
1992-93 1993-94
1994-95 1995-96
1996-97 1997-98
1998-99 1999-20
00 2000-01
2001-02 2002-03
2003-04 Year
Number of units in Lakhs
Source: Ministry of Small-scale Industries, Annual Report, 2004–05. Government of India.
Fig. 3.2 Total number of SSI units over the years in India (numbers in lakhs)
impressive. The number of small-scale units has increased from an estimated 8.74 lakh units in the year 1980–81 to an estimated 31.21 lakh units in the year 1999.
Furthermore, on comparison with the performance of the industrial sector in gen- eral and the manufacturing sector in particular, one observes that the SSI sector is
3 Investing in Labor and Technology 43 Table 3.1 Certain indicators relating to the SSI sector
Year Fixed (Rs. crore) Exports
investment Constant (Rs. crore)
(Rs. Crore*) prices (1993–94)
1990–91 93555 68295 9664
1991–92 100351 (7.26) 79180 (15.94) 13883 (43.66)
1992–93 109623 (9.24) 93523 (18.11) 17784 (28.1)
1993–94 115795 (5.63) 98804 (5.65) 25307 (42.3)
1994–95 123790 (6.9) 109116 (10.44) 29068 (14.86)
1995–96 125750 (1.58) 121649 (11.49) 36470 (25.46)
1996–97 130560 (3.82) 135380 (11.29) 39248 (7.62)
1997–98 133242 (2.05) 147824 (9.19) 44442 (13.23)
1998–99 135482 (1.68) 159407 (7.84) 48979 (10.21)
1999–2000 139982 (3.32) 170709 (7.09) 54200 (10.66)
2000–01 147348 (5.26) 184428 (8.04) 69797 (28.78)
2001–02 154349 (4.75) 195613 (6.06) 71244 (2.07)
2002–03 162533 (5.3) 210636 (7.68) 86013 (20.73)
2003–04 170726 (5.04) 228730 (8.59) NA
Figures in bracket represents growth rates.
∗1 crore=10 million.
Source: Ministry of Small-scale Industries, Annual Report, 2004–05. Government of India.
not left behind. The growth of the SSI sector has surpassed overall industrial growth from 1991 onwards.
As far as its share in the export market is concerned, the SSI sector plays a major role by contributing around 45–50% of the Indian exports earnings (Annual Report, 2001–02 of the Ministry of Small-scale Industries). Direct exports from the SSI sec- tor account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use in finished exportable goods. It is important to note that non-traditional products account for more than 95% of SSI exports (referred from www. smallindustriesindia.com). The sector in general has been exhibiting impressive growth rates in export performance during the 1990s (Table 3.1), the major contributors being the garment, leather, gems and jewelry units from this sector.
However, given the increased competition in the economy and the challenges of the WTO norms,4 it is essential to take a fresh look at the policies concern- ing our small-scale sector. For example, if we consider the electronic instruments sector, small units are involved in two different categories of their manufacture viz., high-cost, low-volume products and low-cost, low-technology, high-volume products. According to the Small Industries Development Bank of India (SIDBI) report5 most SSIs do not have the technical background or financial risk taking
44 M. Rajeev ability to enter into high-tech field and rather like to slog in the low technology, highly competitive market and as a result are unable to improve productivity. Most SSIs still adopt 40 year-old technology and hence any sophisticated products have to be imported. Difficulty in adopting appropriate technology by the small firms is observed in many developing nations. Lack of information is a key problem affect- ing the SSE’s access to technology in many developing nations including India and the African nations (Ogbu, 1995). Thus, unless appropriate policy measures are undertaken for the SSI sector, entry of competitors from other nations like China or Mexico has the potential to make the export scenario quite bleak for India.
While talking about policies6concerning this sector, it is essential to remember that there are innumerable sub-sectors within the SSI sector, producing a variety of goods in different regions of the country. Each such region has a distinct political and economic background and hence these units operate under differing institutional structures, which should not be undermined while formulating policies.
There is therefore a need to study these sub-sectors separately to arrive at a coher- ent picture of the structure of the small-scale industries (SSI) sector product-wise and location-wise. In fact, the SIDBI has brought out a report on ‘Technology for small-scale industries, current states and emerging needs’. This document deals with important technology-related problems of small-scale industries for different prod- uct groups. However, the report does not concentrate on the institutional framework under which these firms operate. A study incorporating the institutional factors would enable one to take a fresh look at India’s policies regarding the SSI sec- tor, which are currently primarily characterized by ‘subsidy and protection.’ The state of West Bengal in this connection provides some interesting and distinguish- ing features. In this regard, a paper by Benerjee et al. (2002), which deals with the economy of West Bengal in general, shows its concern about the poor condition of the SSI sector in West Bengal in spite of having all the necessary ingredients for growth.7
The present work is an attempt to study an important industry in the SSI sector of the state, viz. the foundry industry, in order to bring out the specific features that are region-based and examine the prospective policy instruments that may be necessary for its revival (see also Rajeev, 2003).
“One of the most labor-intensive industries, around 6000 foundries in the coun- try, mostly in the SSI sector, produces nearly 3.3 million tons of castings annually (Hindu, Jan 25, 1999).” Though scattered across the country, the three biggest clus- ters of foundries are located in Agra in Uttar Pradesh, Howrah in West Bengal and Coimbatore in Tamil Nadu. As is well-known this industry is mainly engaged in iron casting produced by melting pig iron where hard coke is added as a fuel. Melted iron is poured into moulds of different shapes and sizes according to product specifica- tions. Once the iron has solidified, it can be taken out of the moulds and processed further to get a better finish.
The industries at Howrah, which initially catered to the railway industry, made the region a flourishing industrial belt in the post-independence era with the foundry as one of its major components. In fact, it is said that the manhole covers on the roads of Paris were once all made at Howrah. Also the engineering units of the district,
3 Investing in Labor and Technology 45 engaged in different products, had backward linkages with the foundry industry. At present the district accommodates 152 foundries out of the 297 registered foundries in the state.
However, once the concentration of railway industries in West Bengal began to disperse to different parts of the country, almost the entire industrial belt at Howrah felt a major threat to their existence as a result of a drastic fall in local demand, compounded by the absence of product diversification as well as lack of search for alternative markets.
Of late, the condition of the foundry industry in particular is characterized by near-stagnation which the government officials associated with this industry (like the Director of the Indian Foundry Association or the General Manager of the Small Industries Development Bank of India, Kolkata Branch) attribute to the risk averse and non-entrepreneurial behavior on the part of the respective factory owners. An attempt to investigate further (methodology of the study is presented in the next sec- tion) into this perception led us to believe that it is to a large extent due to the manner in which industrial activities are organized in this belt. More precisely, our interac- tions with individuals associated with the foundry industry at different levels reveal that many entrepreneurs have reduced themselves to being just agents who are only renting out their capital goods rather than acting in the spirit of entrepreneurship.
This has been the result of heavy dependence on outside intermediaries for supply orders and also for labor supply, which has created distortion in the firms’ activi- ties.8This is not to deny that there still exist some units in Howrah district which function in an impressive manner, but their proportion is rather small. To get a bet- ter comparative scenario we also visited several foundry firms in Coimbatore and interacted with individuals and organizations related to the foundry industry. In the Coimbatore district of Tamil Nadu there are 613 registered foundry units in opera- tion (in the year 2000). The absence of a large intermediary network, unlike in the case of Howrah, has given rise to a different dynamism in the same industry located at Coimbatore. Capital investment in general appears to be much higher in Coim- batore vis-à-vis the industry at Howrah. Use of technologically advanced machines has brought about a marked difference in the final quality of products as well.
On the other hand our interviews with the foundry owners at Howrah reveal that they do not consider credit as a binding constraint, rather they believe that declining demand for their products acts as a primary bottleneck, which in turn has a dampen- ing effect on the credit demand. However, if there is no credit constraint and, within the same country, Coimbatore entrepreneurs are finding investment profitable, why are the Howrah firms lagging behind? This question instigated us to explore the matter further.
The major problem in this entire study has been the availability of reliable quan- titative data. The small foundry owners of Howrah were reluctant to provide any information relating to investment, production, cost and profit. This may be because they were not convinced of our academic intentions and were afraid of some addi- tional tax liabilities. Absence of such data from any other sources forced us to depend on the experience we gathered through our visits and the qualitative infor- mation that has been revealed through interviews with various persons.9Our effort
46 M. Rajeev in this paper therefore is limited to ‘an exploration of a theory’ (rather than an econometric analysis) based on information gathered from a series of open-ended interactive discussions carried out in a number of foundries, and related associations and organizations.
Against this backdrop the paper is arranged as follows. The next section describes the methodology of the study. This is followed by a description of the technology of production, since investment in technology is our main concern. A related issue that arises from the technology discussion is the pollution problem, which is taken up in the next section. We then move on to discuss the specific features of the Howrah foundry firms. The Coimbatore counterpart is taken up in the following section. A comparative analysis is presented thereafter and policy implications are discussed in the penultimate section. A concluding section appears at the end.