It is a world of competition. India is hurtling down the liberalisation path in the wake of all-round economic reforms. In today’s global village, organisations have to be cost effective, operate on the cutting edge of technology, adopt modern management practices and roll out quality products in order to climb up.

The Indian market was basically a sellers market in the pre-liberalisation era. The industries therefore had no compulsion to invest in the modernisation of either their techniques or their plant and machinery. The protectionism, which offered a cocoon to the Indian industry – even though it helped to lay a sound industrial base – brought about complacency resulting in high production costs. Those days are long gone by, thanks to the reforms mooted by the Narasimha Rao government.

The inflow of various multinational companies gave the Indian manufacturers a run for their money as they had access to the latest technology. The Indian consumer was also offered a wide choice of consumer goods.  The consumer durables boom boosted the requirement for capital goods. But it was mainly met by imports and not by domestic production. The need for quality goods led to a plethora of imports of capital goods, particularly second hand, from various countries.

The growth of the Indian engineering industry is not keeping pace with the rest. Moreover, it is dependent on other allied industries such as automobiles and shipping. A recession there automatically upsets the cart here.

Change of scenario

Previously, the Indian government did not allow the import of second hand machinery. But with a view to accelerate industrial growth and to kick-start the economy, several Quantitative Restrictions (QRs) have been removed along with liberal import policies for capital goods.

The latest EXIM policy has changed the scenario for the industry.  It allows import of second hand capital goods, which are on the Special Import License (SIL) list directly on surrender of SIL. Moreover, the Export Promotion Capital Goods (EPCG) scheme has been extended to the capital goods on payment of five per cent of duty.  The 10 per cent Counter Vailing Duty (CVD) has been withdrawn.

Shot in the arm for SMEs

The latest EXIM policy and the Technology Upgradation Fund (TUF), when implemented, definitely help SMEs  upgrade technology. It does not make economic sense to invest heavily in new machines when second hand ones are available at comparatively very low rates. Moreover, SMEs prefer second hand imports because of the unduly long delivery time quoted by manufacturers in certain segments that delay the commissioning of projects.

The import duties are down. But the excise duties, contract tax and sales tax policies also do not give much leeway to users. The bureaucratic hurdles also frustrate the user. Imports in some areas give an advantage of around 12 to 13 per cent. Given the high borrowing costs and various other related factors present in India, it is not prudent to invest heavily in new machines.

For better technology

The opening up of the second hand capital goods import market is indeed a boon for SMEs.  Since the need of the hour is accelerated industrial growth, they will now be in a position to expand and modernise. There are 200 odd items on the SME list such as electrical appliances, plastics and paper products that face the threat of intense competition from cheap imports from China, Taiwan and various other countries which have better technology.  SMEs will have to give better quality products in order to ward off the threat.  The import of second hand capital goods will help them to have access to better technology at competitive prices, landing them in a position to compete.

The removal of QRs will also have an impact on the small and medium scale enterprises. The QRs are likely to be phased out over a year and more. Around 714 tariff lines have been removed which includes items like switch fuse units, circuit breakers, control and switchgear, voltage regulators and stabilisers, motor starters and motor control gear.  Another 198 items, which were added back after removal, are proposed to be removed again on April 1, 2001.

Beefing up for the future

A number of policies that presently help the small sector will be withdrawn. The Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) have been educating the small sector about the scenario once the QRs are lifted. SMEs will have to forge alliances and scout for new markets abroad. The modernisation process that is being carried out in certain sectors will bear fruit in the coming years.

SMEs can also explore avenues in information technology and e-commerce.  The opening up of the Indian markets will shrink the market share of the SMEs unless they equip themselves with better technology.