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Despite Reforms…:Small Sector Survives Competition, by Dr. Vinod Mehta, 29 March 2007 Print E-mail

Economic Highlights

New Delhi, 29 March 2007

Despite Reforms…

Small Sector Survives Competition

By Dr. Vinod Mehta

More than a decade ago the Abid Hussain Committee had recommended de-reseravation of the small sector on the economic consideration of efficiency, economies of scale and use of modern technology.  The Committee never recommended the wounding up of the small sector, but still doubts persisted.  As for as the small scale sector is concerned there are always the same stereotyped stories like the entry of large sector and multinationals will spell ruin for them.

After one and a half decade of economic reforms one can say that the small, as well as the tiny and the unorganized sectors have responded and are responding well to the challenges not only of the large domestic industrial sector but also of the multinational corporations. Short of entering into an expensive and sometimes unwinable advertising wars, the small, the tiny and the unorganized sectors are concentrating on quality aspects of marketing to retain and expand their share of the market.  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.  First, as the economic historian would say that when the market is growing, in a very general way every manufacturer finds that the absolute demand for its product is also growing whether the manufacturer is a multinational company or a small-scale sector firm; putting it differently, along with an increase in the demand of a commodity, the demand for its substitutes also grows.  For instance, if the demand for multinational soft drink grows, the demand for lemonade produced in the small sector also grows; if the multinationals advertise for biscuits, the tiny sector finds that its sales of biscuits are also growing.

Second, we always perceive one monolithic market for one kind of product.  But reality is somewhat different.  For practical purposes market can be broadly divided into two categories---market of individual or family buyers and 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 buyer is relatively more cost conscious than an individual buyer.  Again in the case of an individual or a family buyer it is the carry home pay 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 quality of edible oil, and hence their sources of procurement would be different.  The products of multinationals and large industrial houses may appeal to the people of upper income brackets and to the institutions patronized by them, the vast majority will still be attracted to goods which are relatively cheaper and produced in the small sector.

With these initial observations, we can now go into the changes that are occurring in the small scale sector. One of the consequences of liberal economic policies has been that both the consumers and the manufacturers of producers have suddenly become conscious of quality. The consumers from all income brackets are now demanding quality products at competitive prices.  The small scale sector including the tiny sector have started responding to this by improving the quality of their products. 

From biscuits and other bakery products to readymade garments to food processors and coolers one can see 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 playing serious attention to packaging.  The goods are now being packed by the small-scale and tiny sector in colourful attractive packages whether it is biscuits or bread, a shirt or a jean, a bath soap or 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 way they are packed in big stores.  Many of the 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 has also started using brand names for their products even if they find difficult to advertise them.  That is to say the small-scale sector has also started attempting product differentiation.  Though these brands are seldom advertised, yet the small-scale sector is attempting to build its own brand following, even though in many cases it is limited to a particular territory.  For instance, a few years ago the citizens of Delhi could buy bread made either by one of the two big manufacturers or from one of the numerous small bakeries.  But in the past ten years apart from the two big manufacturers in Delhi, a large number of other branded breads from the small-scale sector are being sold in large numbers.

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 and one finds the products of small-sale sector getting the same exposure as the products of large sector leaving it to the consumer to make up its mind. 

This was not possible under the old provision store concept where one had to demand an item by name. The arrival of the concept of supermarket has brought the unadvertised products of small sector on the open shelves for the public to choose from. 

As for as non-food sector is concerned, the small-scale units are upgrading their technical base with the help of large companies with which they may have backward linkages like auto parts.  Since large companies outsource the manufacture of their small components they also maintain quality control by helping those units buy and assimilate new technologies.  In these kinds of backward 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  There is an urgent need to study the impact of economic reforms on small scale and tiny units in rural areas and then devise policy measures to help them to sustain themselves.

Therefore, generally speaking, the small scale sector, far from being overawed by the multinational corporations 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 past 15 years, competition from MNCs and large domestic companies has not spelt death knell of the small sector and if the country were to fully dereserve the small sector, it would not only survive but become more robust.---INFA

 (Copyright, India News and Feature Alliance)

 

 

 

 

           

 

 

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