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P. Jegadish Gandhi

The Growth and Transformation of Small Firms in India By Sebastian Morris et al Publishers: Oxford University Press, New Delhi Price: Rs 595

The growth of small firms in India has its deep roots in indigenous culture and its modem graftings has shown its transformational dynamics. Through the centuries, small firms are an integral part of the Indian economy and have their own spaces. Studies on policy towards small firms, while intending to be critical of policy, actually begin and end by implicitly accepting its terms and ground rules. The major policy changes since 1990s make it imperative that policy regarding small firms be both growth and development-oriented, and that direct interventions and restrictions, besides measures that require continual decision-making on the part of the Government, remain minimal.

The book under review is authored by five analysts, who anchored on solid, theoretical and empirical foundations of small firms dynamics in macro-economic setting. This investigative research is compartmentalised into eight chapters with an overview of the need for the study, objectives, methodology, survey coverage, recommendations, issues for policy and main findings.

The authors have approached the problem with the conviction that to every apparently `behavioural' trait, there ought to be a deeper explanation in terms of history and political economy. It was most rewarding to find an economic and historical basis for some of the peculiarities of industrial structure in India, and of small-firm behaviour in particular. Chapter one makes an explorative study of the industrial structure in India in broad terms, especially with regard to the size and nature of firms. What emerges is that the structure of the economy and its history, and the particular situation of surplus labour, have shaped industrial structure and the role of small firms. The two major policy and structural influences on small firms have been the `schism' in the labour market, and the inward orientation of policy.

Chapter Three, `Nature of Competition, Firm Behaviour, and Performance', brings out, in empirical terms, the types of small firms that exist amongst those that have been captured in the survey. The principal characteristics related to their behaviour, environment, and performance are also covered. It also brings out the technological dimension of small firms, and shows that these are ultimately related to their markets and environment, besides, of course, the industry.

The remaining chapters cover the main areas that are important from a policy point of view: reservation, quality and government purchase; exports; the infrastructural constraint; financing of small firms; the interface with government; and duties and taxes. In the search for an implementable strategy to unleash the potential of small firms, they have discussed at some length the characteristics of the credit market in India, and especially the behaviour of the principal actors therein, the nationalised banks.

Macro-economic and trade policies have discriminated against small firms in a major way, even as the direct policy has attempted to favour small firms. The compensations in the direct policy measures have not been enough; more importantly, the net effect has been to create major distortions in the economy limiting the growth of small firms as a whole. Small firms are not runaway industries, just because they are small. Indeed their dependence upon agglomeration economies, upon city-servicing functions including municipal functions, is larger than in the case of large firms.

Thus, government policies that have sought to use small firms for regional development (dispersal) are flawed. Very high costs have been imposed upon small firms in locating them in remote industrial estates, and in locations poorly served by communications. Backward area subsidies are meaningful only in the case of large and pioneering industries, which can constitute the nucleus of future growth. Similarly, the activity of design and location of industrial estates needs considerable professionalism, and freedom from constraining guidelines related to price, terms of sale or lease, sublease, etc. The book has enlarged the scope and space of small firms in Indian setting. The study is comprehensive in its coverage, inclusive in its analysis and embracive in its suggestive recommendations. It is a useful referral to micro-economic analysts, small entrepreneurs and policy scanners.

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