Expansion of industry stimulates faster growth by way of prospects of increased employment, an improved balance of payments, and more efficient use of resources. Industry per se does not face the same market constraints that agriculture does because the demand for manufactured goods is highly elastic.

Industrialisation also makes intangible contribution in raising productivity by encouraging technological innovations, discovering and reinforcing entrepreneurial and managerial talent, promoting the acquisition of technical skills, and creating a more hospitable climate for modernisation throughout the society.

	1.	How successful a country is in reaping the benefits of industrialisation depends on many factors, most notably the policies for industrial development and the strategies for implementation of the policies. Efficient industrialisation requires prices of the productive factors (capital and labour) to reflect their real values, and incentives, if any, are provided in an equitable manner, i.e., incentives for exports are as favourable as incentives for import substitution.
	2.	Within the industry
	3.	Sector, small enterprises alone employ more than half of the industrial labour force and account for a large percentage of total output. In India between 2000-01 to 2004-05, the small enterprise sector registered continuous growth in the number of units, production, employment
	4.	and exports. Table 1: During the period the average annual growth in the number of units was around 4.1 per cent and in employment 4.3 per cent annually. The annual average growth in production, at current and constant prices, was 12.4 per cent and 8.1 per cent respectively. There has been a significant increase in the contribution of the small enterprises to the economic growth and development, particularly, employment generation in the country.
	5.	Performance of Small Scale Enterprises: prices* lakh Year Number of units (lakh) Production (Rs. crore) Employ Exports Regd. Unregd. Total (at current) in (Rs. crore) (at const. ment prices) (Rs. crore) 1. 2000-01 13.10 88.00 101.10 2,61,289 1,84,401 239.09 69,797 2. 2001-02 13.75 91.46 105.21 2,82,270 1,95,613 249.09 71,244 3. 2002-03 14.68 94.81 109.49 3,11,993 2,10,636 260.13 86,013 4. 2003-04 15.54 98.41 113.95 3,57,733 2,28,730 271.36 97,644 5. 2004-05 16.57 102.02 118.59 4,18,263 2,51,511 282.91 n.a. Source: Development Commissioner (SSI) * 1993-94 prices
	6	With the enactment of the Micro, Small and Medium Enterprises Development Act, 2006, the above data (Table 1) has also been changed by the Government (Table 2)
	7	Table 2: Performance of micro and small enterprises prices* lakh Year Number of units (lakh) Production (Rs. crore) Employ Exports Regd. Unregd. Total (at current) in (Rs. crore) (at const. ment prices) (Rs. crore) 1. 2002-03 15.91 93.58 109.49 3,11,993 2,10,636 260.21 86,013 2. 2003-04 16.97 96.98 113.95 3,57,733 2,28,730 271.42 97,644 3. 2004-05 17.53 101.06 118.59 4,18,263 2,51,511 282.57 1,24,417 4. 2005-06 18.71 104.71 123.42 4,76,201 2,77,668 294.91 n.a. Source: Development Commissioner (SSI)
		In terms of the latest classification, micro and small enterprises contribute about 39 per cent of the manufacturing output and 34 per cent of exports, and provide 29.5 million jobs. The potential advantages of the small enterprises are many. First, small firms tend to use less capital per worker than large firms do, not only because of differences in the types of products made but also because of differences in the technology used to make the same products. By combining more labour with capital, small enterprises can also use capital more productively. In summary, small enterprises have significantly higher ratios of value added to fixed assets than do large firms.
	8	Second, small enterprises make use of resources that otherwise might not be drawn into the development process, e.g., workers with little formal training who learn skills on the job, or the small savings of the entrepreneurs and / or proprietors who may not use the banking system but who may invest in their own firms, etc.
	9.	Third, in addition to serving as a seedbed of entrepreneurship, small enterprises occupy a highly useful niche in the industrial structure, sub-contracting with larger firms and engaging in small batch production, made-to-order work, or finishing operations complementary to large-scale industry. However, in India these potentials have not been realised as small enterprises, more often than not, have operated in an unfavourable environment. The small units have been deprived of capital, cold-shouldered by the banks and the financial institutions.
	10.	Overlooked in development plans, and until recently ignored by most of the foreign capital aid programmes / projects. Small enterprises, therefore, have had to rely on internally generated funds for expansion and modernisation, and to compound the problem; their profitability and incentive to invest are often undermined by both overt and covert subsidies to large-scale industry. No wonder, deployment of bank credit to the SSI sector has exhibited a declining trend (Table 3). Table 3: Deployment of gross bank credit to the SSI sector Sector Outstanding as on last reporting Friday (Rs. in crore) March, 2004 March, 2005 March, 2006 1. Gross bank credit 7,64,383 10,40,909 14,45,837 2. Non-food gross bank credit 7,28,422 9,99,788 14,05,146 3. Gross bank credit to industry 3,13,065 4,26,892 5,49,057 4. Gross bank credit to SSI 65,855 74,588 90,239 Source: Trend and Progress of Banking in India, Reserve Bank of India It may further be observed that the lack of flow of bank and institutional credit to the small enterprises has occurred and still continues to occur despite the number of committees constituted by the central and the state governments, other regulatory bodies, etc., and despite existence of number of incentives to encourage the flow of bank and institutional credit to the small enterprises. As on the last reporting Friday of September, 2006, gross bank credit to small scale industry was Rs.94,934 crore (Rs. 77,827 crore in September, 2005), while the corresponding figures for the industry sector were Rs.5,96,894 crore (2006) and Rs.4,81,513 crore.
	11	Why our banks, particularly, commercial banks, feel shy to befriend small enterprises? Is it because of risk
	12	or is it because of attitude?
	13	This article is not the first one (neither it will be the last) to find answers to these questions. Answers are known though the answers appear to have eluded our commercial banks and financial institutions. It is true that the banks and the financial institutions operate within legal and institutional frameworks, and more often than not (so far as small enterprises are concerned) these frameworks are not consistent with the conflicting goals of economic efficiency, free choice, and market stability and safety.
	14	And finally the made-to-fit all enterprises types of solutions prescribed by the government and the regulatory bodies have not helped. n additional to the attitudinal, policy and implementation issues, the small enterprises have to compete with the threat of globalisation on one hand and the lack of infrastructure as well as the rising costs of the inputs, particularly, power, on the other hand. At the grassroots level non-availability of power or lack of availability of quality power have resulted in many small enterprises opting for their own diesel generating sets resulting in not only doubling the cost of power but also have resulted in avoidable pollution to the environment. And these small units unlike their large counterparts are unable to pass on the higher costs to the consumers for the fear of losing their market share. In my view, the first and foremost step that needs to be taken by our banks and financial institutions is to look at each enterprise / firm as unique units,
	15	Appraise their technical feasibility, financial viability, and bank ability as well as apply the risk and sensitivity analysis. Second, the banks should draw lessons from their own successful lending to the SSI units and other small enterprises. Experience shows that the small firms or SSI units have flourished more in relatively free market scenario, and particularly, when small and large firms are put on a more equal footing. Such equal footing could be for import of raw materials, for increasing the range of marketing opportunities, absence of hidden incentives and subsidy to the large firms, etc. Third, banks should ensure that the small firms make better use of their potential advantages while at the same time they do not tend to neglect adaptation of technological innovations, both for products and processes (Process innovations may include appropriate use of information and telecommunications technologies).
	16	Fourth, banks and financial institutions should evolve simpler procedures that are understood by the small firms while dealing with the banks.
	17	And finally, banks should change their own mind-set and look at lending to small firms as profitable activity rather than an activity thrust on them because of government or Reserve Bank directive. The pro-active role of banks could include specific measures and steps like – • Providing information and advice to make it easier for small firms to compete, particularly, in the context of global competition so that the small enterprises look at globalisation as a challenge and not as a threat; • Aiding the process of sub-contracting; • Financing industrial infrastructure that promote better links between large and small firms; • Providing working capital in time; • Rationalising requirement of collateral security, or by innovating alternative means of securing loans while ensuring that such alternative means do not increase the risk to them; • Designing simpler lending criteria and procedures19 that will aim to collect the essential data and information so that set standards (or templates) can be arrived at while eliminating non-essential details; and • By putting in place an effective monitoring system together with concurrent evaluation of the units financed.
	18	Success of lending to small enterprises and firms will, therefore, depend on resources, particularly, human resources, on one hand, and on the ability of the banks to develop commercially viable new products and processes. And the banks should price these products in such a manner that the cost can be borne by the small firms (Quite often small firms end up by paying interest totalling more than the quantum of capital borrowed / repaid). This in turn will require thorough knowledge and understanding of the working of each small firm financed by them. Sadly, most of the Indian banks and their leadership shun innovations and rather prefer to fall back on tried and tested methods despite the failure of such methods in the past in achieving success on a large scale. As a result they often fail to take advantage of the new technology and the new ideas because their implementation will require changes in their own management policies and processes. Instead of lending in a routine manner, banks should formulate strategic plans to lend to the small firms. In the absence of transparency and governance many small enterprises and even public in general have serious doubt and apprehension about not only the policies but also about the ways the policies are implemented. Banks should realise that in a society they are also accountable to the masses besides to their stakeholders. Risk management is not avoiding risk, but taking risks and managing them well!
	Mumbai February 28, 2007 N.B.:
	1	Views expressed are personal. (3) The author acknowledges the contributions of the participants of these two seminars in enriching the article.
	2	The article is based on author's (a) Inaugural address on November 30, 2006, at the National Seminar on "Technology and Risk-sensitive Banking: Management of operational risk in relation to credit deployment to SME segment" organised by Department of Computer Science, Thakur College of Science & Commerce, Kandivli, Mumbai, as part of University of Mumbai sesqui-centennial celebration academic programme, and (b) address as Chief Guest on "Strategic Planning and Risk Management for SMEs" on February 14, 2007, at the Seminar on "SME – The World of Opportunities"  organised by The Express Group SME World and the Indian Merchants' Chamber, Mumbai.

	1.	This, however, does not mean or support development of industry in an imbalanced manner and at the cost of other sectors like agriculture. Interested readers may refer to "Special Economic Zones – Should State act as a promoter?" by Prabir K. Biswas – being published in Towards Socialism.
	2.	Keith Mardsen, Trade and Employment Policies for Industrial Development, Washington D.C., World Bank, 1982.
	3.	Industry has been defined to include manufacturing, mining, construction, and utilities (Lyn Squire, Employment Policy in Developing Countries: A Survey of Issues and Evidence, New York, Oxford University Press for the World Bank, 1981).
	4.	Small enterprises generate more employment than large firms because of their labour-intensive nature of investment.
	5.	Economic Survey, Government of India, 2005-06.
	6.	Under this Act, micro, small and medium enterprises have been classified on the basis of investment, Rs.25 lakh, above Rs. 25 lakh to Rs. 5 crore, and above Rs. 5 crore to Rs. 10 crore for manufacturing enterprises, and Rs. 10 lakh, above Rs. 10 lakh to Rs. 2 crore, and above Rs. 2 crore to Rs. 5 crore for service enterprises.
	7.	Economic Survey - 2006-07, Government of India, pages 136 to 157.
	8.	The optimum combination of capital and labour on one hand and selection of appropriate technology on the other hand can be arrived at by use of the concept of time value of money with particular reference to crossover discount rate.
	9.	Owners of small enterprises, even those whose incomes are quite low, often have a surprisingly high propensity to save and to reinvest.
	10.	This has happened despite the known role of the banks and the financial institutions in an economy. The banking and the financial system play the key role of mobilising savings of a society and in channelling these savings into productive uses and investments. Gains to the real sector of an economy depend on how efficiently the banking and the financial system performs this basic function of financial intermediation through the four well-known transformation mechanisms, namely, liability – asset transformation, size transformation, maturity transformation and risk transformation. In India either this role (commercial banks being the best conduit for transfer of financial resources from net savers to net borrowers) has been taken for granted or our regulators have been content with issuance of directives, guidelines, and instructions. We need to realise that one cannot legislate virtue!
	11.	Economic Survey – 2006-07, Government of India, page 64.
	12.	P. K. Biswas, Risk Management – VINIMAYA, Volume XX, No. 2, July – September, 1999, National Institute of Bank Management, Pune.
	13.	Prabir K. Biswas, Banks and customers – yesterday, today and tomorrow, being published in The Views.
	14.	The reason for such inherent difficulties is not difficult to comprehend, and it is an almost classic blend of bureaucratic, political and economic considerations that have their roots in the crucial functions being performed by and / or asked of the banks and the financial institutions in a market economy.
	15.	Banks and bureaucracy need to realise that one size does not fit all.
	16.	There is a Government of India Fund, "Technology Upgradation Fund", which extends assistance to the small enterprises to a maximum amount of Rs.25 lakh. There is scope for increasing this threshold limit besides expanding the list of eligible activities, both these actions mean that Government of India has to enhance budgetary allocation to this Fund.
	17.	Banks can take a cue from the private equity investments. It is worth noting that private equity investments in India has been increasing steadily, and in 2006 alone there were reports of about 300 deals amounting to more than US$ 7 billion (The figures are inclusive of all the sectors and all types of financing including merger and acquisition).
	18.	Large firms often resort to extracting cost-free credit from the small enterprises by delaying payments due to the small enterprises, and small enterprises are unable to do anything because of losing market.
	19.	In the UK, US and in many European countries, vast majority of the SMEs, if not all of them, are not required to follow the general accepted accounting practices. They are required to get their accounts audited by following simpler practices and less voluminous formats.