What was the main drawback of small-scale industry reservation policies?
- AOption (a)
They encouraged monopoly power
- BOption (b)
They eliminated export opportunities
- COption (c)
They excluded rural entrepreneurs
- DOption (d)
They restricted economies of scale and technological upgrading
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Correct answer
They restricted economies of scale and technological upgrading
Why this answer is correct
The correct answer is They restricted economies of scale and technological upgrading.
Key Points
- The reservation policy for Small-Scale Industries (SSIs) was primarily designed to protect small producers from the competition of large-scale manufacturers and to promote employment generation.
- A significant drawback was the investment limit placed on plant and machinery; firms that expanded their capital beyond a specific threshold lost their SSI status and associated government incentives.
- This policy created a perverse incentive for entrepreneurs to keep their units small, which prevented them from achieving economies of scale, leading to higher marginal costs of production.
- Due to the fear of losing protection, these industries avoided technological upgrading and modernization, resulting in technological obsolescence and lower productivity compared to global standards.
- The lack of scale and modern technology eventually made these units uncompetitive in the international market, as they could not match the quality or price of goods produced by large-scale global firms.
Additional Information
- Karve Committee (1955):
- Also known as the Village and Small-Scale Industries Committee, it first suggested using small-scale industries as a tool for rural development and social justice.
- Abed Hussain Committee:
- This committee later recommended the de-reservation of items, arguing that reservation hindered the export potential and growth of the manufacturing sector.
- Industrial Policy Resolution 1956:
- It laid the foundation for the Public Sector and provided various fiscal concessions, like lower excise duties and bank loans at lower interest rates, to the SSI sector.
- Post-1991 Reforms:
- Following Liberalization, the government began a phased de-reservation process to allow Market Competition to drive efficiency and innovation within the industry.