India News and Features Alliance (INFA) - Growth Of Small Sector:KEEPING UP WITH THE MNCs, by Dr. Vinod Mehta,23 January 2008

It was feared that the economic reforms which generally favoured big industries would undermine the existence and development of small and tiny units. However, the developments of the past one and a half decade show that the small sector far from being undermined is not only surviving the competition but is also growing and changing to adapt to the new marketing environment.

Short of entering into expensive and sometimes unwinable advertising wars, the small, the tiny and the unorganized sector are concentrating on quality aspects of marketing to retain and expand their share of the market. Some have even tied up with the bigger companies in the form of backend linkages for supplying of certain components to one single manufacturer. These are the stories coming out of small and medium towns of India.

Before we dwell on this, let us be clear about three points. One, as an economic historian would say, when the market is growing in a very general way every manufacturer finds that the demand for his product is also growing. Be it a multi-national company (MNC) or a small scale sector firm. Also, along with an increase in the demand of a commodity, the demand for its substitutes also grows. For instance, if the demand for a MNC drink grows, the demand for lemonade produced in the small sector also grows; if the MNCs advertise for biscuits, the tiny sector finds that its sales of biscuits are also growing.

Two, even as we always perceive one monolithic market for one kind of product, the reality is somewhat different. For practical purposes the market can be broadly divided into two categories --- a market of individual or family buyers and a market of institutional buyers (like hotels, hotels, canteens, offices, establishments etc). The individual buyers usually buy things in small quantities while institutional buyers buy in bulk; the institutional buyers are relatively more cost-conscious than individual buyers. Again, in the case of an individual or a family buyer it is the carry home pay-packet which generally determines its demand pattern.

Finally, within these two broad categories of markets, namely individual and institutional, there are various layers of markets catering to different segments of people and institutions. For instance, both a five star hotel restaurant and a dhaba need edible oil for cooking purposes but both will use different qualities of edible oil, and hence their sources or procurement would be different. Besides, the products of the MNCs and large industrial houses may appeal to the people of upper income brackets and to the institutions patronized by them but the vast majority will still be attracted to goods which are relatively cheaper and produced in the small sector.

Coming to the changes that are occurring in the small scale sector, we find that one of the consequences of the liberal economic policies has been that both the consumers and the producers have suddenly become conscious of quality. The consumers are now demanding quality products at competitive prices. The small scale sector including the tiny sector has started responding to this by improving the quality of their products.

From biscuits and other bakery products, readymade garments to food processors and coolers one can see a significant improvement in the quality of their products --- in some products the improvement is more and in some others it is less. But the most important fact is that the small scale sector has come to realize that it cannot survive without improving the quality of its products and that it has to be constantly innovative. Since these units cannot advertise their products, one has to see for oneself the quality of their products in actual shops.

The second consequence of liberalization for the small scale sector has been that it has now started paying serious attention to packaging. The goods are now being packed by them in colourful attractive packages. Be it biscuits or bread, a shirt or a jean, a bath soap or a detergent powder. The individual shopkeepers of groceries can now be seen cleaning bulk products like pulses and packaging them in convenient packs for retail sale. Similarly, new garments being sold on the roadside are being packed in a similar fashion as those in big stores. Many things which the shopkeepers used to weigh in front of us are today sold in a pre-packaged form.

Thirdly, the small and the tiny sector have also started using brand names for their products. Though these brands are seldom advertised, yet the small scale sector is attempting to build its own brand following despite being limited to a particular territory. For instance, a few years ago, Delhi citizens could buy bread made by one of the two big bread manufacturers or from one of the numerous small bakeries. But in the past 10 years apart from the two big bread manufacturers, a large number of other branded breads from the small scale sector are being sold in large numbers in Delhi.

Fourthly, the concept of neighbourhood provision stores is slowly giving way to supermarkets of all kinds where all the products for sale are displayed on the shelves. One finds the products of the small sale sector getting the same exposure as the products of the large sector leaving the decision to the consumers. This was not possible under the old concept of provision stores where one had to demand an item by name.

The arrival of the concept of the supermarket has brought the unadvertised products of the small sector on the open shelves for the public to choose from. Even the highbrow supermarkets are displaying the products of the small and tiny sector and thus helping them enlarge their customer base. The reason supermarkets display and sell the products of small sector is that they earn higher profit margins on these products.

As far as the non-food sector is concerned, the small scale units are upgrading their technical base with help from large companies with which they may have backend linkages like auto parts. Since large companies outsource the manufacture of their small components they also maintain quality control by helping these units buy and assimilate new technologies. In these kinds of backend linkages the small scale units do not have to worry about their sale targets.

There are some problems with the small scale units in rural areas as their demand base is limited to a few nearby villages and have almost no forward linkages with large companies to sustain them. Thus, there is an urgent need to study the impact of economic reforms on the small scale and tiny units in rural areas and then devise policy measures to help them to sustain themselves.

There is no gainsaying that the small scale sector, far from being overawed by the MNCs and by the large domestic sector has not only changed but is still continuing to change with the times, adopting new approaches and strategies to stay put in the vast Indian market.

Going by the experience of the past 15 years, competition from the MNCs and the large domestic companies has not spelt the death knell of the small sector. Besides, if the country were to fully de-reserve the small sector, it would not only survive but become more robust. It has its own dynamics. --- INFA