The Small & Medium Enterprises Development (SMED) Bill is to be tabled during the current Parliament session. It is likely to reduce the red-tapism and multiplicity of laws applicable to the sector and give a growth impetus to it. Dereservation of 108 items (30 from the textiles & hosiery sector), is likely to increase foreign and domestic investments. This is a follow-up on the earlier policy of phased and gradual dereservation (85 items in 2004-05, 75 items in 2003-04, 50 items in 2002-03 and 14 items in 2001- 02). The manufacturing competitivess programme, to be framed by National Manufacturing Competitiveness Council (NMCC) in consultation with the industry, is likely to facilitate the desired growth rate of 12%, and increase the sector’s contribution to over 7% of India’s GDP. The enhancement (from Rs 135 crore to Rs 173 crore) in the corpus of the fund for credit linked capital subsidy scheme (CLCSS) will encourage SSI units to invest in technology up-gradation and boost cost and quality competitiveness.

The SME growth fund, established this year by the Small Industries Development Bank of India (Sidbi) with a corpus of Rs 500 crore, will provide equity support to units in knowledge-based industries such as pharma, biotech and IT. Such an initiative was long needed.

Under the existing provisions contained in sub-section (2AB) of section 35, a company engaged in the business of bio-technology or in the production of drugs, pharmaceuticals, electronic equipment, computers, and chemicals, incurring expenditure on scientific research (excluding cost of land or building) undertaken in-house, is allowed a weighted deduction of a 150% of the expenditure so incurred. However, no deduction with regard to such expenditure incurred was to be allowed after 31st March 2005.

In order to encourage the indigenous development of in-house scientific research, the finance minsiter has proposed to extend the time limit for availing the weighted deduction under the said sub-section by two more years up to March 2007. The proposed amendment will take effect from April 1, 2006 and will, accordingly, apply in relation to assessment year 2006-07 and subsequent years.

Moreover, the ceiling for SSI exemption based on turnover has been increased from Rs 3 crore to Rs 4 crore per year. SSI units will now have only two options: either full exemption on the first clearance of Rs 1 crore, or normal duty on the first clearance of Rs 1 crore with Cenvat credit. A positive impact of this is that SSI units would be discouraged from operating as multiple entities, as has been the common practice for availing the excise exemption till now. On the service front, the proposed exemption from service tax to those service providers whose gross turnover does not exceed Rs 4 lakh per year, will benefit 80% of the present service-tax payers — the small service providers.

However, certain other interventions were expected These include initiatives to address the availability of finance, issue of delayed payments, creation of a think tank and promotion of FDI inflow into the sector. According to one school of thought, initiatives similar to those for the promotion of micro finance could have been undertaken, such as new vehicles and instruments viz. bank promoted (non-deposit taking) NBFCs and SSI credit intermediaries dedicated to SME financing. Also, the formation of an Expert Advisory Council for SSI on lines of an Expert Advisory Council for Agriculture and FDI could have facilitated technology transfer within the permitted ceiling of equity participation by large-scale units.

Mr Finance Minister, I deeply admire you for recognising the manufacturing capabilities of the small industry in your Budget speech — “Worldwide, it is manufacturing that has driven growth. In order to revive the manufacturing sector, particularly small and medium enterprises, and to enable them to adjust to the competitive pressures caused by liberalisation and moderation of tariff rates, I propose to launch a new scheme that will help them strengthen their operations and sharpen their competitiveness”

Surely, the National Manufacturing Competitiveness Council (NMCC) has largely dissected the issues, in its series of meetings with the industry. However, the proposed “Manufacturing Competitiveness Programme” will be a feather in its cap and a milestone for the Indian small industry.

The writer is Deputy Director-General, Confederation of Indian Industry