India pickles are no longer preserve of SMEs

Pickles and chutneys; glass bangles; mustard oil; incense, candles and matches.

No, this is not the shopping list for an Indian religious ceremony and post-rite meal. These are items, along with locks, steel cupboards, wooden furniture, fireworks and school exercise books, which India only allowed to be produced by small and medium-sized enterprises. Until now.

New Delhi this week decided to relax restrictions on the production of the last 20 items that were still "reserved" exclusively for small-scale industries.

The highly symbolic move cleared away the last vestiges of a reservation policy that was once a vital pillar of India's economic development strategy but that critics blamed for promoting fragmented, globally uncompetitive industries and shoddy products.

"After 59 years of mucking around with industrial choice and production scale, we are finally giving small-scale industry reservations a decent burial," said Subir Gokarn, director of research at Brookings India, an arm of the US think-tank.

Prime minister Narendra Modi's administration has prioritised cutting red tape and making it easier to do business in India, as part of its effort to spur growth, and promote more job-generating manufacturing industries.

In a statement, the government expressed hope that the deregulation would stimulate new investment and technological upgrades of existing production lines, encourage economies of scale and foster globally competitive Indian industries.

It was in the 1950s that India's socialist-oriented economic policy planners declared that some consumer items would be reserved exclusively for production by small-scale industries, as part of their effort to reduce the influence of large private capital over the economy.

In New Delhi's economic schemes, heavy industries such as steel would be the preserve of large public sector enterprises, while lighter consumer goods would be supplied to the markets by small-scale private industries.

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Initially, the list of goods reserved for small-scale industries was about 200 long. But at the peak of the industrial reservation policy in the 1970s, more than 800 products were reserved exclusively for SMEs, which were also supposed to enjoy preferential access to bank finance.

There were exceptions to the rules, as older companies were grandfathered in and permitted to carry on their business. Mumbai-based Godrej & Boyce, for example, has made locks and steel almirahs in India - two items that were reserved for small enterprises until now - since the 19th century, and was permitted to continue.

But Mr Gokarn said the small-scale industry reservation rules prevented large, established companies from making new investments in upgrades or expansion, a constraint that contributed to the devastation of the once-flourishing Mumbai textile industry.

Other large Indian companies sold "reserved" items - including matches - under their own brand names but instead of investing in their own manufacturing capacities relied on multiple third-party, small-scale suppliers.

Critics argued that many so-called "small-scale industries" were all parts of companies, which simply broke up their production units into small fragments at different sites to preserve the facade of being small enterprises.

India began a piecemeal pruning of the list in the 1980s, a process accelerated in the 1990s and now, finally, completed.

Yet many Indian industries still have at least one compelling incentive to remain small - a labour law that prevents employers of more than 100 workers from firing any of them without government approval.

Until that goes, many employers will remain convinced that small is beautiful.

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