Journal of Scientific & Industrial Research Vol. 60, March 2001 , pp 220-23 1

Performance of the Selected Clusters of Small and Medium Industries

in India in the Post-Reform Period - An Overview

Saurabh Bandyopadhyay National Council of Applied Economic Research (NCAER), 1 1 Indraprastha Estate,

New Delhi 1 1 0 002, Tel. 3 3 1 7860-68

The factor conditions for the development of small scale industry in India, were determined by the availabil­ity of skilled labour, raw materials and infrastructure in and around clusters; while the demand conditions were generated through the existence of home market initially and international demand in the latter stage. Both the factor and demand conditions were associated uniquely to determine the level and extent of supporting indus­tries. In the backdrop of reform process undertaken in India, present study was aimed at analyzing the perfor-mance of some of the product clusters, which played an important role in developing inter-firm relations and � inter-firm competition in the economy. Data on various performance indicators of clusters were collected and collated from different firms in the select clusters. Data was also collected from various small and medium units. While aggregating different indicators, a weighted aggregate approach was taken, being the relative value share of each firm in the respective indicator formed the weights. Economic performance of the firms in the clusters was studied with the help of such indicators as tentatively reflected financial performance, productivity, mode of finance and export intensity. Two key ratios, gross margin to gross block, and earnings before depreciation and taxes (EBDT) to net worth, were employed as indicators to study the performance of clusters as well as to compare them. Apart from these tangible indicators, qualitative factors were also considered which were: the impact of reforms in creating positive attitude towards enterprenuership, competition, innovation, diffusion, cost competitiveness, quality improvement and global standardisation and developing core competence to inte-grate multiple skills in an efficient manner. The study conducted in various clusters shows that the message of reform successfully penetrated in most of them.

Introduction Product clusters have been defined as those where

locations of productions were primarily determined by a strong, relatively homogeneous cultural and social background linking economic agents and having an intense set of backward, forward, horizontal and labour market linkages, based on both the market and nOI1-market exchange of goods, services and information . The clusters emerged due to comparative advantages a region offered, ensuring and faci litating production of typical items in-and-around the region. With time, economic activity related to the production process of the cluster internalized itself into a societal dimension, thus intensifying backward and forward linkages.

The small-industry clusters in India typically devel­oped under certain conditions . The factor conditions were determined through availability of skilled labour,

raw materials and infrastructure in and around clus­ters; while the demand conditions were generated through the home market in the initial period and the international demand in later stages. Both the factor and demand conditions were associated uniquely in determining the level and extent of supporting indus­tries . The concentration of small units at "clusters" could be linked to economics of agglomeration. Some of the clusters played a major role in their respective industries making them famous for specialised skill­oriented products, eg, the roles of Ludhiana and Tirupur clusters in woollen and cot.ton hosiery or that of Sivakasi cluster in safety matches industry, and brass parts manufactured at Jarnnagar. These clusters could be cited as good examples of structure and growth of clusters in India. It has been noted that firms' com­petitive strategy in clusters has became more pro­nounced since 1 99 1 .

BANDYOPADHYAY : SMALL & MEDIUM INDUSTRIES IN INDIA I N POST-REFORM PERIOD 22 1

In the backdrop of reform process undertaken in India, the performance of some of the product clus­ters, that played a significant role in developing inter­firm relation and inter- competition in the economy has been analysed and reported in this paper. Data on various performance indicators of clusters were col­lected and collated from different firms in the selected clusters. Data was also collected from various small and medium units. While aggregating different indi­cators, a weighted aggregate approach was taken, with weights being the relative value share of each firm in the respecti ve indicator. Economic performance of firms in the clusters was studied with the help of such indicators that tentatively reflected financial perfor­mance, productivity, mode of finance and export in­tensity. Two key ratios, gross margin to gross block, and earnings before depreciation and taxes (EBDT) to net worth, were employed as indicators to study the performance of clusters as well as for inter-compari­son. Apart from tangible indicators, qualitative fac­tors were also considered, viz., the impact of reforms in creating positive attitudes towards enterprenuership, competition, innovation, diffusion, cost competitive­ness, quality improvement and global standardisation and developing core competence to integrate multiple skills in an efficient manner. The study conducted in various clusters showed that the message of reform penetrrated successfully in most of them.

Background Studies In a cluster, increasing operational flexibility within

firms could be observed. Increasing linkages of a firm with other firms was often described as important which resulted into a more pronounced division of labour and simpler technology diffusion. Schmitz) introduced the term 'collective efficiency' to describe positive effects of working in a cluster. Such a collec­tive efficiency was distinctive and lied in between unplanned or incidental effects and planned or con­sciously pursued activities. Different types of econo­mies and co-operative effects needed to be distin­guished to explain collective efficiency. First of all, within clusters, economies of scale and scope were achieved by the participating enterprises. Economies of scale, as was well known, occurred when the per­centage increased in production was higher than the percentage increase in factors of production. The con­cept of external economies was first introduced by MarshalF when he analysed industry production costs as a function of output. Marshall described several examples of external economies: the increased knowl-

edge about markets and technology with the expan­sion of industrial output, the creation of a market of skilled labour for specialized services and for subsid­iary industries, the possibility of splitting the produc­tion process into specialized phases and, finally, the improvement of physical infrastructures such as roads and railways. For individual firms, external economies essentially ran into cost reductions as a consequence of industry growth, ie, economies external to the firm, but internal to the industry. The analysis of these ex­ternalities remained firmly within the framework of a static analysis, as they referred to the allocative effi­ciency of given resources and expressed collective efficiency as a positive function of cluster's size and of the density of interactions which occurred within the cluster.

Reference may again be made to MarshaIF while discussing dynamic external economies. Some of his examples connected the dynamic effects of industrial growth, which promoted a kind of ' industrial atmos­phere' , capable not only of reducing cost disadvan­tages of small firms compared to large ones, but of also helped them in their growth and innovation strat­egy. Examples of dynamic externalities suggested by Marshall were the accumulation of skills, know-how and knowledge taking place in a spontaneous and so­cialised way within a district. Stewart and Ghani' iden­tified three types of dynamic external economies : changing attitudes and motivations; skill formation; and changing knowledge about technologies and mar­ket. One crucial aspect of reform pertained to innova­tion as well as technical and marketing strategy of the small-scale units. The process of innovation raised the level of technology to the standard of best practice techniques and, thus, had the most direct bearing on the rate of technological progress. Study by Mansfield4 revealed profitability to be an important factor in de­termining intra-industry and intra-firm technical dif­fusion. Other than profitability, factors such as size of investment, proportion of firm that already introduced innovation and the intensity of R&D played role in explaining innovation and diffusion.

Inspite of operating under labour surplus conditions (which led to low wage competition) there were some indications of endogenous process of innovation and dynamism in some of the small and medium enter­prises and product clusters in India. It was observed from some of the case studies of clusters in India that active export market involvement of a few clusters was

222 J SCI IND RES VOL 60 MARCH 200 1

strongly associated with its dynamism, and those clus­ters, which depend on domestic market were much less dynamic. The basic theme of agglomeration tied the productivity of agents in a region to the regional ag­glomeration of resources. In complete negation of the neo-classical distribution theory, it gave emphasis on dynamic externalities associated with knowledge spillover or learning-by-doing for the spatial concen­tration of production and trade. Similarly the innova­tion model predicted a divergent growth path for a re­gion5 depending on the region's ability to innovate and to acquire productive capabilities compared to other regions in a typical federal structure. It was only in the I 970s that diversity and structural change within in­dustrial sectors came into focus, for instance, in the theory of industrial restructuring. With the introduc­tion of new institutional economics6,7, theories of flex­ible specialisationK•9, the static view of the enterprise was replaced by an understanding of the enterprise as an outcome of enterprise strategy. The content of the enterprise was now no longer taken for granted, but has become a central research theme. The 'network externalities' was supposed to work better in a rela­tively open economic environment. The idea of doing the present study was to highlight the performances of the select clusters in the post- 199 1 period and to have an assessment of the relative impact of the reform measures.

Data, Data Sources and Methodology Data on various performance indicators of clusters

were collected and collated from different firms in the select clusters. Data was also collected from various small and medium units. While aggregating different indicators, a weighted aggregate approach was taken, the relative value share of each firm in the respective indicator constituted the weithts. Economic perfor­mance of firms in the clusters was studied with the help of such indicators as tentatively reflected finan­cial performance, productivity, mode of finance and export intensity. While doing the study, the method of purposive sampling was adopted. The advantage of purposive sampling in this frame was that whereas a random sample might vary widely from the average, a purposive sample would not.

To analyse the financial performance, two key ra­tios were chosen for quantitative analysis: gross mar­gin (GM i. e . , profit before depreciation, interest charges and taxes) to gross block (GB i. e., fixed as­sets plus cumulative depreciation) and EBDT (earn-

ings before depreciation and taxes (a simulation of both the equity fund plus retained profit. Where equity fund is non-existent, own fund has been chosen). The GM to GB ratio measured profitability performance that was not affected by interest charges, tax payments or depreciation. It focused only on business performance as returns to fixed capital. The EBDT to net worth ratio reflected the profitability on the capital invested by the owners of the firm. It has been regarded as a very important measure as it reflected the productiv­ity of the 'risk' (ownership) capital employed in the firm. Therefore, analysis of the above two ratios de­picted the productivity of gross fixed assets (GFA) as well as risk capital employed. On the other hand, over­all productivity of factors was measured by the simple ratio between variable expenses to total sales turnover for the aggregated firm level analysis of the surveyed

. clusters. The sample selected being purposive only and was expected to reveal only the pattern in performance indicators. The overall productivity of factors was measured by the ratio between variable expenses and total sales turnover at aggregated level for the listed companies and the firms in the surveyed clusters. Vari­able expenses included raw material cost, marketing cost, advertisement cost, indirect business tax and the cost related to using utilities (power, etc.) in the pro­duction process. The study of efficient factor utilisation was important in the context of developing countries where resources were l imi ted and their proper utilisation was warranted. India's current drive on eco­nomic reforms depended largely on the growth of pro­ductivity to impart dynamism as well as to meet the chal lenge posed by an increas ing degree of global isation through gradual opening up of the economy.

At a time of liquidity crisis and inflationary pres­sure, mode of financing became an important issue. The response of the firm to a liquidity crisis was often through a change in composition of debt and/or a change in debt-equity ratio. The financial leverage, in essence, reflected the capital structure of firms under study. The wider the equity base, the lower would be the leverage and vice versa. In this study, debt to eq­uity relationship was chosen to indicate degree of le­verage that showed the mode of finance of listed com­panies in the organised sector as well as for the vari­ous manufacturing units in the specified product clus­ters. A higher value of the debt to equity ratio signi­fied lower average cost of capital and greater finan­cial risk. In contrast, a lower value of the ratio exhib-

".A

BANDYOPADHYAY : SMALL & MEDIUM INDUSTRIES IN INDIA IN POST-REFORM PERIOD 223

Table I - Summary results for product clusters - post-reform position in comparison to pre-reform

Product clusters Return to fixed Return to Productivity Debt - Export I mport capital risk capital equity ratio intensity intensity

Mostly export oriented (Glass and glass products) i i i .1. i i

Raw material import intensive (Safety matches) i .1. .1. .1.* i

Small scale units (Scientific i nstruments) .1. .1. i .1.*

Small ancillaries (Lock-making) i i .1. .1.*

Mostly export oriented (Woollen hosiery and knitwear) i* .1. i .1.* i* i*

EOUs (leather and leather products) .1. .1.* i i Mixed .1.

EOUs (Cotton hosiery) .1. .1. i* .1. i* i

Legend: i = Increased, i* = Increased substantially, .1. = Decreased, .1.* = Decreased substantially, N.A = Not available

ited a wider equity base with low profit share on risk capital . The ratio of exports to total sales was taken as the performance indicator for revealing the export in­tensity. The reform brought forth new orientation to­wards openness and competition and the variable was supposed to reflect export performance for some of the product clusters for which export data were avail­able.

Quantitative Discussions The economic reforms undertaken in India since

1 99 1 had several dimensions like de-regulation, trade reforms, tax reforms and financial reforms. De-regu­lation showed positive indirect impact on the units un­der investigation, the firms expanded in size, which eventually led to increased turnover and employment generation. One of the major impacts of de-regulation and de-licensing was intensified internal competition. The increased competition resulted in improved fac­tor efficiency and capacity utilisation. The liberalised economic environment enabled setting up of new units, which in tum improved product quality and enhanced diversification. The trade reforms benefitted mostly the export-oriented units. Relaxation in technology imports and low tariffs and quantitative restrictions on imported inputs helped in significant rise in ma­chinery and technology imports. The exportable sur­plus and profit margins of most of the export-oriented units experienced an upward trend. Besides improve­ment in capacity utilisation and employment genera­tion, trade reforms brought in quality consciousness

among the firms engaged in export dealings for adop­tion of ISO 9000. Ancillary units in this categorisation, acted as satellite to the large organised units.

The demand for ancillary components was a kind of derived demand. The demand for these ancillary com­ponents was enhanced due to increased export of the final products . Most of the firms experienced strin­gency in the availability of credit owing to the onset of financial reforms and with the exception of a few units like glass and glass products and woollen ho­siery and knitwear clusters, others appeared affected. However, it was to be noted that the availability of funds from private sources with higher interest cost has simultaneously increased in some cases. This non­availability of easy credit forced units to broaden their equity base leading to higher average cost of capital that adversely affected the financial and productivity performance of the units concerned. The analysis was performed for the period extending from pre-reform (average of 1 990-9 1 and 1 99 1 -92) to the three years of the post reform regime. For some of the industries, data of the period 1 990- 1 992 was merged due to data constraints. Economic performance of sample units from various clusters grouped into various categories was worked out. Table 1 showed a post reform posi­tion of the performances of the manufacturing units in specified product clusters in comparison to the pre­reform periods.

The field study was carried out in various specified and predetermined clusters by visiting sample units

224 J SCI IND RES VOL 60 MARCH 2001

and collecting information on quantitative and quali­tative aspects through specially designed question­naires. The primary survey was conducted between December 1 995 and February 1 996. The findings ema­nating from the detailed analysis of quantitative data including financial ratios compiled separately for each of the clusters described in the ensuing paragraphs with special emphasis on the comparison between pre- and post-reforms periods.

Glass and Glass Products Cluster at Khurja The partial return to risk capital narrowed down sub­

stantially during 1 992-93, but increased in the latter part. The profitability performance indicated by the ratio of GM to GB, showed upward trend during the post reform period, which enabled the industry cluster to reap the advantage of supporting factors like the availability of quality equipment and benefit accrued from the financial institutions (see Table 2 for statis­tical reference). The combined operational efficiency of available resources and supporting factors marked higher productivity performances in the post 1 99 1 pe­riod which was evident by the fact that the ratio of variable cost to sales in this cluster markedly decreased during this period (refer table 2). The post-reform sce­nario showed that the winning firms of this industry cluster significantly increased their equity base com­pared to pre-reform period, and thereby remained more inclined to the owners' fund as compared to the fund available on loan (refer Table 2). The export perfor­mance of the glass and glass product cluster clearly suggested that it improved its export performance to a large extent during the period of economic reform. The cluster enjoyed traditional comparative advantage with regard to the availability of cheap labour and raw ma­terials . Moreover, the government policy of tariff re­duction in the imported components has greatly en­hanced the production base that led to diversification of production structure one hand, and improved ex­port performance on the other. The exports increased steadily in the industry from 1990-92 to 1 993-94, fol­lowed by a steep increase in the share of exports to total sales during the terminal year of the current analy­sis (Table 2).

Safety Matches Cluster at Sivakasi The financial performance of the safety match clus­

ter showed a mixed trend. The business performance could not be improved due to various infrastructural and raw material procurement problems. There was an acute shortage of potassium chlorate, which was pro-

duced, in large quantities in Pondicherry -a town nearby, which remained the main source of supply for the en­tire match industry. On the question of pollution prob­lem, the entire production of potassium chlorate was suspended and consequently the match industry through­out the country faced the problem of procurement of the raw materials to meet the market demand. Com­paratively, the big SSI units imported potassium chlor­ate from Spain, China and other countries, while the small units had paid higher prices for the procurement of raw materials through other sources. The suspension of the production of potassium chlorate was then re­voked but the industry did not improve its efficiency. Therefore, the industry cluster was still to come a long way to cope up with the competitive environment that is characterised by the present scenario (Table 2). The efficiency level in this specific industry cluster was visibly poor with high ratio of variable cost to sales, barring a minor downward trend in the year 1 992-93. On the other hand, the industry was being managed mostly through borrowings in the pre-reform period, while the post-reform era showed altogether a differ­ent trend for this industry cluster, in which reliance was placed more on equity funds than on borrowings in general. It reflected relatively more internal strength among industrial units.

Scientific Instruments Cluster at Ambala The operating performance indicator measured by

gross margin over gross block recorded a downward trend in the post reform era. The factors responsible for this outcome could be attributed to the fact that in response to reduction in Government subsidy in gen­eral and to the educational institutions in particular, the cluster was not been able" to respond positively to cope up with the changed situation either in the way of diversification of products or venturing out in the export market through systematic management. On the other hand, the return to risk capital was higher during the first two years of the reforms but recorded a dras­tic fall thereafter. The variable cost and sales data for scientific instruments was available till 1 995-96. The ratio for the year showed an impressive downward shift compared to the previous two years, which was due to efficient marketing and improved business scenario that had emerged in the wake of economic reforms in India. The cluster at Ambala showed a gradual down­ward trend of financial leverage ratio from 1 993-94 onwards till the latest availability of data reflecting lower preference for financial risk (Table 2). Lock Making Cluster at Aligarh

�

Year

1 990-92 1 992-93 1 993-94 1 994-95

Year

1 990-92 1 992-93 1 993-94 1 994-95

Year

1 990-9 1 1 99 1 -92 1 992-93 1 993-94 1 994-95

Year

1 990-92 1 992-93 1 993-94 1 994-95

Year

1 990-92 1 992-93 1 993-94 1 994-95

Year

1 990-9 1 1 99 1 -92 1 992-93 1 993-94 1 994-95

Year

1 990-92 1 992-93 1 993-94 1 994-95

BANDYOPADHYAY : SMALL & MEDIUM INDUSTRIES IN INDIA IN POST-REFORM PERIOD 225

Table 2 - Quantitative data of the clusters

Glass and glass product

GM/GB EBDTINW VC/Sales DebtlEquity Export/Sales

0.28 0.57 0.624 1 .32 0.02 0. 1 6 0.2 0.6 1 8 0.45 0.05

0.23 0.29 0.6 1 1 0.47 0.063 0.24 0.3 0.573 0.5 0. 1 1 5

Safety matches GM/GB EBDTINW VClSales DebtlEquity Export/Sales

0.3 1 0.62 0.59 1 0 NA 0.45 0.83 0.48 3.8 NA 0.43 0.98 0.61 4 NA 0.46 0.72 0.68 3.7 NA

Scientific instruments GM/GB EBDTINW VC/Sales DebtlEquity Export/Sales

1 .43 2.49 0.56 2 NA 1 .52 3.5 0.4 2.3 NA 1 .5 3.41 0.5 1 3 NA 0.72 2 0.63 2.2 NA 0.7 1 .9 0.58 1 .7 1 NA

Lock making

GM/GB EBDT/NW VC/Sa1es DebtlEquity Export/Sales

3.8 4 0.69 3.43 NA 3 3.3 0.62 3.36 NA 5.8 4 0.62 3. 1 1 NA 4.7 4.3 0.64 3 .26 NA

Hosiery and woolen products GM/GB EBDT/NW VC/Sales DebtlEquity Export/Sales

0.5 0.6 0.7 1 .58 0.08 0.48 0.5 0.7 2.5 0. 1 3 0.64 0.55 0.7 3.5 0.3 0.98 0.2 1 0.56 1 .56 0.29

Leather product GM/GB EBDTINW VC/Sales DebtlEquity Export/Sales

1 .6 0.36 0.4 1 0.3 1 .03 1 .2 0.3 1 0.42 0.26 1 .0 1 0.72 0.24 0.43 0.32 1 .0 1 0.88 0.37 0.47 0.38 0.96 0.6 0.23 0.44 0.54 0.89

Cotton hosiery GM/GB EBDT/NW VC/Sales DebtlEquity Export/Sales

0.82 0. 1 0.4 0.8 NA 0.8 1 0. 1 1 0.38 1 0.38 NA 0.69 0. 1 3 0.374 0.4 NA 0.67 0. 14 0.358 0.46 NA

(a summation of both the equity fund plus retained profit. Where equity found is non-existent, own fund has been chosen)

226 J SCI IND RES VOL 60 MARCH 200 1

The lock-making cluster at Aligarh was likely to take some time for upgradation of their products in comparison to the level achieved already by its com­petitors abroad. The winning firms were trying their best to upgrade quality of products with significant variation in technological usage. They faced steep ad­justment cost during the initial phase. Exports of locks from Aligarh insignificant. The lock industry was based on the age-old ' lever' technology, whereas in the inter­national market the modern 'pin-cylinder' technology made locks much more secure and better in quality. The industry in India was still doing well because of its cost advantage in meeting the local demand. The price of lock produced here was almost one-fourth of price of that in the developed countries. Reforms threw up a challenge to this industry in the field of exports which could be faced only by adopting pin-cylinder technol­ogy. There was awareness among the enterprises, but mass scale change in technology through wide diffu­sion could take place after sometime as it would in­volve additional investments, training of workers in the use of new machines and processes, securing export orders, etc. Globalisation induced them to adopt mod­ern technology and it might be termed as a positive im­pact of the new economic policy. The profit on gross fixed investment in the winning firms of this cluster showed an impressive upturn during 1 993-94 and it implied that manufacturers started responding posi­tively to market forces. The return to risk capital vari­able initially suffered a marginal setback but recov­ered in the later period of the ongoing process. A sub­stantial rise in productivity could also be noted in the post reform period. A phase of changing skill compo­sition of labour might have affected the overall pro­ductivity performances during the terminal year of the present observation. On the other hand, the industry was marked by high debt to equity relationship both in the pre-reform as well as in the post-reform peri­ods, except the year 1 993-94 ( Table 2).

Woollen Hosiery and Knitwear Cluster at Ludhiana

Profitability performance of the woollen hosiery and knitwear products cluster recorded a substantial in­crease during the reform period particularly during 1 994-95. The cluster at Ludhiana was able to diver­sify their products through adoption of modern tech­nology, which was also instrumental in increasing the export market. The cluster shared 95 per cent of the country's production of woollen hosiery. As regards improvement in technology, usually the improved ma­chines were replacing older machines. From circular

type machines to flat knitting machines to fully fash­ioned machines and then to automatic computerized machinery technology was adopted by the hosiery units at Ludhiana. Distributed over different stages, all types of the newly imported machines were fabricated by lo­cal machinery manufacturers. However, since 1 992 when computerised hosiery-knitting machines were made available in the world market, industrial units at Ludhiana did not lag behind. About 50 units possessed the sophisticated machines installed either in replace­ment of old machines or otherwise, freshly installed in the newly established units. A number of units under­went trade agreements with foreign companies under R&D pacts for designs and international brand names such as Monte Carlo, Casablanca., Pringle's of Scot­land, etc. came into play. Consequent upon devaluation, prices of imported wool tops increased thereby snatch­ing away the export benefits. The cluster showed a marked improvement in its productivity performance during 1 994-95 compared to the earlier years of the reform processes. The return to risk capital in the clus­ter declined as was evidenced by the falling trend of the EBDT to net worth ratio. A significant fall was observed in the debt-equity ratio during 1 994-95. Therefore its broader equity base marked the latter part of the post- reform period for the industry. During the reform period, particularly at the latter stage , hosiery and woollen knitwear products cluster generally ex­perienced a high export growth though it came down marginally during 1 994-95 compared to 1 993-94 (Table 2).

Leather Industry Cluster at Agra

One particular feature of the leather industry clus­ter was that throughout it had maintained low and stable return to risk capital. The operating performance also declined s ignificantly in the post-reform period . Though the cluster enjoyed pool of cheep unskilledl semi-skilled labours, it could not make much head­way in terms of application of modern technology for quality upgradation, at par with its foreign competi­tors. It signified, therefore, that the comparative ad­vantage alone was not sufficient to take edge over dy­namic factors relating to innovation, upgradation and strategic management. As already mentioned, the in­dustry cluster failed to make a dent in the changed competitive atmosphere in spite of having an enriched resource structure within its fold. The same inference was arrived at if one looks into factor efficiency pat-

BANDYOPADHYAY : SMALL & MEDIUM INDUSTRIES IN INDIA IN POST-REFORM PERIOD 227

tern of the cluster. The low variable cost to sales ratio during the initial years of reform proved to be short­l ived and subsequently it started revealing high oper­ating cost and low productivity. This could also be at­tributed to a levy of full rate excise duty with effect from April 1 st 1 994. on products bearing brand names of others, which led to hardship to smal l units work­ing on contract basis either through reduced supply orders or cancellation of contracts by large enterprises . The brand owning units thus paid excise duty on the products they got manufactured from small units, re­sulting into higher operating costs.

The financial leverage ratio for the leather industry was observed to be increasing over the period since 1 99 1 -92 onwards. During the initial period of the re­form, the debt-equity ratio for this industry decreased marginally which could not be sustained in the latter part of the reform. It impl ied that the leather industry was going through a phase of an increasing debt bur­den. Mostly export-oriented units were chosen in the sample for the leather industry cluster. The cluster in general maintained an extremely high percentage of exports to sales in the first two years of the post re­form period, but suffered a set back in the subsequent years. It might be attributed to low technology adop­tion, lack of entrepreneurship, failure to diversify the products, adverse effects of policy changes etc (Table 2) .

Cation Hosiery Cluster at Tirupur The cotton hosiery cluster at Tirupur comprised

mostly 1 00 per cent export oriented units. The avail­able ratio showed a slightly upward trend in terms of partial returns to risk capital . On the contrary, its op­erating performance reflected a slight downward trend due to major investments made in plant and machin­ery. The Business Association in Tirupur complained that it had limited infrastructure facil ities which was compounded with stricter RBI norms for export credit, affected the business performance adversely in the re­cent years. The productivity as reflected by the ratio of variable cost to sales turnover has showed a marked improvement in the post-reform period as compared to its pre-reform annualised 8verage for the years 1 990-9 1 and 1 99 1 -92. The available data showed that gar­ment industry recorded a very high debt to equity ra­tio during the period 1 990 to 1 992 which declined sig­nificantly in the post-reform years (refer to Table 2). The trend pointed out that industry 's equity base broad-

ened up during the later phase of the ongoing economic reforms in the country.

Qualitative Responses of the Clusters to Economic

Reforms

The earlier section dealt with tangible measures, which needed to be supplemented by qualitative in­puts. The basic purpose here was to get an idea about the impact of reforms in creating positive attitudes to­wards enterprenuership, competition, innovation, dif­fusion, cost competitiveness, quality improvement and global standardisation and developing core competence to integrate multiple skills in an efficient manner. The study conducted in various clusters showed that the message of reform successfully penetrated most of them. Qualitative information furnished by the entre­preneurs of different other clusters was also included to asses the impact of reforms on them. The current phase of on-going reform brought about a change in the perception and functioning of various units in the product clusters. The primary data generated from the large, small and medium enterprises (SME) and the small scale industries (SSI) clusters confirmed a posi­tive response towards the reform measures in enhanc­ing their production base and in improving the quality of products/services. However, a special note of the export-oriented units could be taken in various clus­ters such as woolen hosiery and knitwear, cotton ho­siery, glass and glass products and leather and leather products. Units in these clusters were more respon­sive and showed better profit margin, productivity, employment and management of their gross fixed as­sets. In effect, a broader competitive base enabled these units to be more efficient in resource management over those competing in the domestic market.

The other notable feature was the way ancillarisation emerged to serve the needs of bigger and medium scale industries. Ancillaries were coming up for supplying components for the original equipment manufacturers (OEM) as well as for the replacement of spare-parts. Import intensive clusters such as the brass part manu­facturer units in Jamnagar specified that the reduction of import duty on raw materials of this industry cluster was not large enough to offset the impact of devalua­tion and depreciation of the Indian currency, the rupee. The safety matches industry cluster, which is also an import intensive one, also showed a decline in its per­formance. The package of reforms opened the gates for ancillaries to industrial collaborations on manu­facturing technologies, marketing aspects, adoption of international standards for boosting their exports, im-

228 J SCI IND RES VOL 60 MARCH 200 1

port of raw materials and components and reschedul­ing product mix. For example, units manufacturing forged parts extended the product mix to forged parts, crankshafts, axle beams etc. Ancil lary units realised that their products should conform to the international quality standards besides reaping the advantage of the scale economies. They became more vigilant about their competitors and made additional investments to modernise technology usage, upgrade the standards, and impart training to its workers for better skill for­mation.

On the whole, the deregulation regime emerging from the current reform measures brought about a mixed change in the performances of different prod­uct clusters. The relative productivity performances improved for woolen hosiery and knitwear, lock-mak­ing, glass and glass-products, cotton hosiery and sci­entific instruments manufacturing units, while it de­clined in the cases of safety matches, leather and auto ancil lary clusters. However, the auto ancil lary cluster was coming up with new plants to improve productiv­ity as it recognised that technology was the driving force. The industry clusters passing through a transi­tory phase with h igh in itial adjustment costs. Still, the m1nufacturing units proved more responsive in the present framework. The qualitative discussions with the industry people of different clusters could be di­vided into two parts: (a) general view related to re­form measures undertaken since 1 99 1 , and (b) the spe­cific problems they confronted in their tryst with the present situation.

Clock Manufacturing Cluster

Morvi, a small town in the district of Rajkot, has a number of industries to its credit. The manufacturing of clocks started here with the establishment of the Scien­tific Clock Manufacturing Company in the early 1 950s. It was very successful and soon became a popular wall clock brand all over India. The success of the Company attracted others to start their own clock manufacturing units. Initially, these units were importing components for mechanical clocks and then assembling them. But production of components started within a few years. Stil l , some of the components were being imported. At the time of the study there were about 1 1 5 units manu­facturing clock and clock components. Mosaic tiles pipes and ceramjc products were other important in­dustries of the selected cluster.

Among the clock manufacturing units of Morvi, the major gainer was the Orpat Industries Limited, the manu-

facturer of Ajanta and Orpat brands of clocks. The com­pany was able to increase its turnover by threefold over the last four years. This was possible mainly due to a phenomenal increase in exports of the company. Pres­ently, the company was exporting about two-thirds of its total production. The economic reforms helped in increasing exports volume of the company. Recently the company diversified and started producing tele­phones and calculators, apart from clocks. Another unit, the Victor Clock Industries, was also doing well . The company received orders more than its production ca­pacity could supply. This demand was from the domes­tic market and it, thus was not in a position to enter the export market. However, the company had plans to ex­pand its production capacity in the near future. Interest­ingly, the pioneering unit, the Scientific Clock Com­pany became a sick unit due to its inability to adjust in the present competitive scenario.

Lock-Making Cluster

Lock manufacturing has been a tradition in Aligarh since very long. Not only that some small-scale indus­tries were manufacturing locks here, but many artisans also made locks at their houses at Aligarh and in the neighbouring villages. So, i"t was very difficult to esti­mate units manufacturing locks. About 1 00 units were in the small scale and tiny sector. To get an idea about the impact of economic reforms on this cluster of in­dustries, discussions were held with many people in­volved with lock manufacturing here. The lock manu­facturing units of Aligarh remained traditional . How­ever, the cycle locks were exported along with the cycles. The lock industry here was based on the age-old 'lever' technology. But in the international market this was not acceptable as the modern 'pin-cylinder' technology made the locks much more secure. The industry was doing well even though it was using the obsolete tech­nology due to the cost advantage. The price of lock pro­duced here was almost one-fourth of the price of that in the developed countries. So they did not face any im­mediate threat from foreign manufacturers due to liberalisation. But, they would not be able to survive in the long run unless technological upgradation took place.

Safety Match Cluster

The match cluster Cit Sivakasi had several produc­tion units producing potassium chlorate. The produc­tion of chlorate involved electrolysis of chloride chemi­cals using large amounts of electricity� which made the production process costly owing to high power tariff. Thus, it was suggested that the State Government could reduce the power tariff rates consistent and regular

•

BANDYOPADHYAY : SMALL & MEDIUM INDUSTRIES IN INDIA IN POST-REFORM PERIOD 229

power supply. The match industry generally did not re­quire any import of raw materials . Indigenous supply of local raw materials was sufficient for the production. Export markets could be established only when specific brands having exclusive rights of ownership and pro­duction were developed and when these brands had regu­lar demand. Moreover, the profitability ratio of export market to the domestic market was required to be main­tained at a reasonably higher level through the provi­sion of export incentives by the govemment. The in­dustrial liberalisation policy of the government resulted in the numerical expansion of tiny units from the mother units. The advantages provided, due to soft treatment of tiny sector units, were often misappropriated by some big traders. These traders purchased sub-standard input materials and employed women and children and pro­duced inferior quality matches and finally dumped their products in the market at low prices. The consumers being unaware about brand and quality were forced to purchase sub-standard products. These traders in gen­eral , according to the Association, were the main threat and competitors to the SSI units. Apart from strict con­trol by government over these unscrupulous traders, the Association also suggested the establishment of a sepa­rate organised marketing sector for the products of SSI units. The Minimum Wages Act itself needed amend­ments with regard to wage structuring, according to the Association. The amount of wages fixed for SSI units was required to be comparable with the prevalent wage rates in and around Sivakasi , as was the case with other sectors. Regarding industrial infrastructure facilities available at Sivakasi town, nicknamed as "Town of packet light and sound", - it faced acute shortage of water supply both at the household level and in the industrial sector, especially during summer days. According to the Manager of All India Chamber of Match Industries, Sivakasi did not have a proper communication system. There was no electronic exchange. About 2000 new connections for both domestic and industrial use were pending. The competition from the unorganised tiny cottage sector affected the market share of SSI units. Previously the proportion of total sales was apportioned at 60 per cent and 40 per cent respectively between SSI sector and cottage sector units. Now the trend was reversed. There were quite a lot of "benami" (illegal) units functioning in Sattur and Kovilpatty.

Ceramic Industry Cluster

The Central Glass and Ceramic Research Institute in Uttar Pradesh and the District Industries Centre at Bulandshahar conducted Master Craftsmanship Train­ing Courses for the young masters. Each unit engaged

in producing pottery items invested amounts ranging from Rs. 0. 1 million to Rs. 1 .5 million. Each unit put up on average 2-3 furnaces. The Ball mills used for crush­ing stones were bought from dealers . Each ball mill was installed to cater to different specifications and uses. Apart from this, hand presses are also put to use for crushing. The power availability to these units was very poor and inadequate as compared to their demand and as such these units were forced to restrict themselves from maximis ing capac ity u t i l i sat ion . Capac i ty utilisation ranged betwen 25 to 50 percent only. Power supply was irregular and at times characterised by high voltage fluctuations. However, ground water resource was plenty in the region. The coal requirements of the furnaces were generally met by supplies of good qual­ity coal, but at exorbitant prices made available at Khurja by private traders. The supplies of coal from Govern­ment sources being inadequate, the manufacturers pre­fer red private traders for their supplies. Exports of items manufactured here were mostly done through export­ers based at Delhi. At times, it was exported through Uttar Pradesh Export Promotion Council. Supplies were being made to exporters as per requirements. Advances for purchasing raw materials and meeting costs of tech­nological upgradation were available from banks and financial institutions.

Woollen Hosiery and Knitwear Cluster

The initial idea of setting up of industrial units for manufacture of hosiery items at Ludhiana itself was con­ceived, based on the increasing demand for man made knitted and embroidered goods, by Kashmiri skilled craftsmen who used to migrate to Ludhiana town every winter season and worked with various traders. In the early 1 900s, the increasing demand for woolen yarn was also used to be met by the first group of spinning mills set up by Swadeshi Syndicate (nationalists). Gradual development of hosiery industry using knitting machines started during the years 1 925-30, when Shri Hansraj Dhanda made hectic efforts to promote hosiery units by organising, promoting and encouraging entrepreneurs to start units to provide supporting facilities like dyeing of yarn, repair of hosiery machinery, training of work­ers, etc. Due to varieties of efforts, more and more spin­ning mills for yam manufacture started coming up. Hosiery industries of Ludhina cluster started exporting hosiery items in the year 1 964. By the year 1 970, 20 hosiery units ofLudhiana became direct exporters. Their main international market was the former USSR. Later, with the assistance of Export Promotion Council, ex­port of knitwear commenced to various other countries

230 J SCI IND RES VOL 60 MARCH 200 1

of Europe, Middle East and Canada. For meeting the demand of customers at national and at international levels, designs of hosiery products played a great role. Ludhiana units went into collaborations with foreign companies under R&D pacts for designs as well as for brand names in order to meet demands. Monte Carlo, Cassablanca, Pringles, etc. brands were being manu­factured at Ludhiana as a result of such collaborations and technology transfer agreements.

Even though a vast development of hosiery Indus­tries cluster took shape at Ludhiana and Government also announced a package of reform measures, the in­dustry was sti l l facing a few problems. The problems are briefly stated below : electricity shortage; inad­equate credit faci l ities from banks besides high rates of interest and of col lateral security ; high rate of cus­tom duty on i mport of machinery; imposit ion of ex­cise duty on spinning and combing of wool throttled production ; appreciation of dol lar created i mports problems; etc . Information gathered from industrial­ists , industrial associations and export Promotion Council revealed that there was a significant positive impact of l iberalisation pol icies on hosiery industry of the Ludhiana cluster. It opened the gates to growth of this industry cluster; it improved the business sce­nario; import of computerised machines benefited the industry; capacity util isation improved; exports and domestic sales were increas ing due to foreign collabo­ration for designs and brand names; and industrial units started realising the importance of cost competi­tiveness.

Leather Industry Cluster

The leather Industry in India underwent many changes in the recent past. Initial l y it was a part of cottage industry catering mainly to the domestic mar­ket and employed its work force from the weaker sec­tions of society. The leather industry then rapidly moved over to modern factory production, contribut­ing significantly to the export market and therefore, the labour division in production was consequently becoming broader based. The industry gradually at­tracted a number of medium and large-scale entrepre­neurs, and, very recently, attracted even the multina­tionals. The entry of new modern factories, to some extent, changed the traditional requirements of this in­dustrial c luster while the production base stil l remained largely under the purview of small scale sector. On the other hand, despite the concentration of this In­dustry in the pri vate sector, the Central and State Pub­lic Sector Undertakings occupied a tiny share too and there were two such undertakings of the Central Gov-

ernment viz. , (i) Tannery and Footwear Corporation, Kanpur (TAFCO) engaged both in manufacturing and marketing, and ( i i) Bharat Leather Corporation (BLC) providing mostly marketing assistance to the smal l scale and cottage sector units besides manufacturing standard shoe items for the benefit of the artisans desiring manufacture of shoes.

The post- 1 99 1 reforms witnessed radical changes in the policies, which showed a mixed impact on the leather industry. A substantial raw material base, competitive wage levels, traditional ski l ls and l inks with markets of the affluent countries were the notable features that de­veloped during this period. At the same time the policy framework governing this industry in the country re­sulted in confining this industry to cottage level pro­duction units - leading to al l inherent drawbacks of such a system of production process such as low capacity of production, lack of standardisation, lack of quality con­sistency, lack of product development and marketing, absence of technological upgradation, etc. Though a different set of policy support to such units exporting 75 per cent of their productions was available in the shape of l iberal import policy for capital goods, con­sumer durables, components and the l ike at reduced level of import duties - these differential instruments did not appear to make a mark. It resulted in the emergence of only a smal l modern sector catering to export market and remaining dependent almost exclusively on import of various inputs . In the absence of mechanised pro­duction, the demand for indigenous machinery and equipment, and for the components was not adequate and thus supporting industries did not come up in a significant way. The net effect was the tardy growth of this industry, despite a remarkably attractive global market.

Concluding Observations

The fundamental message of economic reforms was deregulation - ie freedom to acquire resources and se l l products at a market driven rate. In other words, a re la­tively scale neutral factor and product market was on the way of development which needed to be furthered if the trend of higher profitabi l i ty and competitiveness was to be achieved and maintained in the course of t ime to come. The smal l industry showed signs of adopting an integrated approach to combine multiple s k i l l s in p roduc t ion and wh i .ch led to fl e x i b l e specialisation in some of the product clusters, specia\\y the clusters located at Ludhiana, Jamnagar, Kolhapur and Rajkot. Indian clusters showed the capabil ity to move a long way, provided the non-intervention from

BANDYOPADHYAY : SM ALL & M EDIUM INDUSTRIES IN INDIA IN POST-REFORM PERIOD 23 1

various regulatory authorities was ensured, and per­formed well. The deregulation and delicensing regime emerging from the current reform measures brought about a mixed change in the performances of different product clusters. While the relative productivity per­formances improved for woollen hosiery and knitwear, lock-making, glass and glass-products, cotton hosiery and scientific instruments manufacturing units, it went down in the cases of safety matches, leather and auto ancillary units. However the auto ancil lary cluster is coming up with new plants to improve productivity as it recognised technology as the driving force. Discus­sions revealed that the scope of new economic policy needed to be a broad-based one. The general view al­most unanimously favoured privatisation and less gov­ernment control. Only a few of them remained skepti­cal about the reform process.. Regarding specific prob­lems, various constraints faced by the units came up in the discussions. As regards infrastructure facilities, al­most 70 per cent of respondents suggested that the State Government was required to ensure regular power sup­ply. Some of them explicitly stated that if private sources could provide better services, then they were even ready to pay higher tariffs per unit of supply. The match in­dustry association members were of the view that in order to ensure timely and easy availabil ity of quality splints at reasonable prices, the Government was re­quired to start the afforestation programme of soft wood trees in the forest base of South India. The raw material supply from Kerala involved higher transportation cost and higher wage rates.

The indicators of financial performance reflected in the ratios of gross margin to gross block and return to risk capital exhibited a varying trend. For glass prod­ucts, it declined significantly in the year 1 992-93, but showed signs of improvement in the next three years. The performance turned out to be relatively better in the following product clusters: Safety Matches, Lock­making, Hosiery and Woolen Products and Auto Pis­ton. Other clusters in th is set registered mostly a de­clining profitabi lity. The financial leverage ratio for most of these clusters revealed that except leather­footwear cluster, there was a distinct shift towards in­creasing equity fund in the post reform period. This shift was perhaps attributable to liquidity crunch and stricter income-recognition norms in the banking in-

dustry. There is no denying the fact that the clustered units were facing difficulty in fully realizing the ben­efits of the undertaken reforms due to the liquidity crunch. Liquidity crunch implied imperfection in flow of funds. The private sector was complaining of liquid­ity crunch as one of the most serious hurdles in their growth path; they also felt that good results achieved as a result of the economic reforms might all come to naught if the problem was not addressed quickly. The lack of availability of funds for purposes of expansion placed the domestic industries at a disadvantage. The various trends of economic performance indicators exhibited a revealing pattern. The industry having high productivity but low profit would perhaps be a poten­tial gainer in the medium to long nm . In the face of competition, the investment requirements would be rising and consequently, the results of economies of scale would be realised only after a time lag. The in­dustry clusters were passing through a transitory phase with high initial adjustment costs. Still , the manufac­turing units showed greater and positive response to the presen t framework of deregulat ion and globalisation.

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About the author

Saurabh Bandyopadhyay is Ecol1ol1'l.ist ill the National Council of Applied Economic Research

(NCAER), 11 Indraprastha Estate. New Delhi 110 002, Tel. 331 7860-68; PhD in Economics from lawaharLal Nehru University, New Delhi. He has completed severaL research projects on varieties of

industry sectors of Indian economy, with special reference to the post liberalisation phase. CurrentLy also an associate editor of the journal 'Margill ', he has to his credi! �evef"{tl research articles.