Licence Raj's last sigh

Reservation for small enterprises is ended, finally

The National Democratic Alliance (NDA) government deserves to be congratulated wholeheartedly for at long last bringing to an end one of the most pernicious vestiges of the licence-permit Raj. Early this week, a notification was issued taking the last 20 products off the "reservation list" - the list of products that can legally be made only by small and medium enterprises, or SMEs. While this last step is welcome, it is worth noting exactly how long it has taken to end this counter-productive restriction. After all, industrial policy was freed up in 1991; only now, 24 years on, has this forced stunting of certain sectors come to an end. The dangers of "gradualism" in reform are revealed here for all to see. Indeed, while the government deserves full credit for taking the last bold step, it is worth noting that the notification took almost six months to be issued, since the committee that decides such matters under the Industries Act of 1951 had recommended the delisting of the final 20 items as long ago as last October.

This is more than a symbolic step. These are not marginal, unimportant items that were still on the SME list. They included bread, matches, locks, domestic utensils, fireworks, soap, wooden furniture, and mustard and groundnut oil. In all these sectors, new large-scale enterprises were forbidden. Is it any surprise that almost every lock in Indian markets is made in big, efficient Chinese factories? Once, in the mid-1980s, there were as many as 873 items on this list. From 2002 to 2009, under the first NDA and the first United Progressive Alliance governments, about 790 of these items were removed - including such things as garments. Is it surprising that, with garments on this list, India failed to reach its potential as a garment exporter in spite of ample human resources? The average size of a garment factory in India is about a tenth of their competitors in Bangladesh. It is no wonder that India's eastern neighbour has grown its garment exports much faster than has India.

Typically for such economic restrictions, this reservation for SMEs was counter-productive in more than one way. Not only did it stunt the sector, but it ensured the perpetuation of monopolies. After all, when the restrictions were first introduced, existing companies were granted what were called "carry-on business" licences. Thus Bata could continue to make footwear in-house if it chose, but no large Indian competitors could come up to challenge it. One other aspect of this gradualism is worth noting: that, even if there is no will to reform domestically, openness to the world economy can force the government's hand. After all, if Indian SMEs are competing with large-scale enterprises from China under free trade, why not with large-scale enterprises from India? The value of trade as the engine of domestic reform can hardly be overemphasised.

Finally, it is worth noting that the biggest beneficiary of this reservation will likely be SMEs themselves. For 'Make in India' to thrive and for India to become a genuine manufacturing hub, growth must be driven by SMEs that become big companies. By ending the reservation policy, the government has helped make that possible.