Econometric Analysis of the performance of SSI Sector in India during 1980-81-2014-15

ABSTRACT

In this paper, author attempts to establish relationship among output, employment, average productivity of labour and export of SSI sector in India and GDP in India during 1980-81-2014-15 through simple regression analysis, causality test, cointegration and vector error correction models. The paper concludes that output of SSI sector has been increasing at the rate of 10.12% per year and exponentially at the rate of 0.554% per year during 1980-81-2014-15.The series is stationary, stable and divergent as indicated by ARIMA and AR models. Average productivity, employment and export of SSI sector have been rising at the rates of 1.68%, 8.43%, and 13.34% per year respectively during the same period. One per cent increase in export led to 0.48% increase in GDP per year during the specified period. Production, employment, average productivity and export of SSI showed two cointegrating vectors whose vector error correction model is stable, divergent and insignificant error correction process. India’s GDP,SSI sector’s output, employment, average productivity and export have two cointegrating vectors but its vector error correction model is stable, divergent and insignificant error correction having problem of autocorrelations. New policy recommendations of RBI and new government policy on MSME are likely to accelerate the performance of SSI and its contribution to the national economy.   

I.Introduction

The promotion of the small-scale sector in India has been an important thrust of industrial policy since independence though the focus of concern changed with the priorities of each five year plan. A Small Scale Industries Board was set up in 1954. Small Scale Industries and Agricultural & Rural Industries and the Small Industries Development Organisation (SIDO) which was under the Development Commissioner, Small Scale Industries were set up in 1956. At the State level, the Commissioner/ Directorate of Industries were the main institutional authority for SSIs. This structure has remained, though several other institutions have come into being in the 1970s and 1980s, particularly at the State level.

The Karve Committee Report (1955) was one of the earliest of these exercises which recommended a protective environment for the growth of small industries in India. Since then, policies targeted for the SSI sector have aimed at fostering its growth through positive policy interventions in the areas of finance, technology, infrastructure and extension services, among several other requirements of the sector. Supportive policies through the 1960s, 70s and 80s took the form of reservation of products exclusively for the SSI sector (836 products are reserved exclusively for SSIs at present) grant of fiscal concessions and government procurement of supplies from the sector. Due to liberalization, globalization and privatisation, SSI sector has so far been insulated to a large extent from pressures of competition both domestically and internationally. There are at least 3lakh units declared as sick and out of production, accounting for 10 percent of the recorded units.

The sector now employs 17 million persons and is the second largest employer of India's workforce after agriculture. It now accounts for 95% of all industrial units in the country and 40% of total output. About 7,500 products are manufactured in the small-scale sector. The export share is 35%.The composition of exports shows the largest shares of SSIs are in the industry groups : hosiery and garments (29.0%) , food products (21.4%) and, leather products (18%). The industry groups which have recorded high growth rates and a large share in total production of SSIs are: textile products, wood, furniture, etc., paper and printing, and metal products.
The total number of SSI working units in the country is estimated to be around 3 million. In terms of ownership, the vast majority of SSI units are proprietary concerns (80.5%) with only 16.8% functioning as partnerships and private limited. A UNIDO study defines clusters as 100 registered small-scale units. There are estimated 350 SME clusters in India which contribute directly and indirectly to 60% of India's exports. The location-wise distribution of clusters shows 65% concentrated in cities and metros and only 13% in small towns and rural areas. There is scope for encouraging the development of clusters in rural areas and rural-based artisan centres. The micro, small and medium enterprises (MSMEs) currently employ 12 crore individuals and contribute 15 percent to GDP. 

II. Objective

In this paper, the author tried to find out the growth of output, employment, average productivity and export of small scale industries in India during 1980-81-2014-15 and relate among them with GDP in India by causality, cointegration and VEC models.

How much Indian GDP is affected by those factors was also calculated by the author during the specified period. The new policy of the Government of India on MSME is an added area of this paper.

III. Methodology and data

Semi-log linear and exponential model were used to calculate growths of output, employment, average productivity, and export of SSI sector during 1980-81-2014-15. Double log multi-variable models were used to show relationship between GDP, output, employment, average productivity and export of SSI sector of India in the same period. Granger Causality, Johansen cointegration and Vector Error Correction Models were used to relate among them. The data of production, employment, average productivity of labour, exports of SSI sector in India and GDP at factor cost of India during 1980-81-2014-15 were collected from the Reserve Bank of India.

IV. Literature review

Rao and Kiran(2014) studied that the sector has characterized by low investment, operational flexibility, location wise mobility and import substitution. The Sector has been undergone a metamorphic change in the era of globalization. Many changes have taken place both national and international markets. The sector is playing a prominent role in ensuring the inclusive growth and regional balance. The sector is consistently registered a higher growth rate than the rest of industrial sector. There are over 6000 products ranging from traditional to high-tech items manufactured by this sector. Besides, the sector is facing challenge in the form of competition and opened opportunities due to improved technology, collaborations government intervention. Malapati(2011) showed that small-scale industries have been playing a momentous role in overall economic development of a country like India where millions of people are unemployed or underemployed. This sector solves these two problems through providing immediate large-scale employment, with lower investments. According to Dr. Manmohan Singh, “the key to our success in employment lies in the success of manufacturing in the small scale sector.” In a country like India, where capital is scarce and unemployment is wide spread, growth of small-scale industries is vital in order to achieve balanced economic growth. The strength of small-scale enterprises lies in their wide spread dispersal in rural, semi-urban and urban areas, fostering entrepreneurial base, shorter gestation period, and equitable distribution of income and wealth. Susmita Mohan(2014) described that in Kerala the amount of investment and the value of production has increased but, with respect to the amount of employment and the number of enterprises, a marginal decline has been observed. The total number of small enterprises does not show a real progress. If the potential of SSI is properly harnessed, it can help in accelerating the pace of socio-economic development and balanced regional growth apart from creation of employment opportunities. It is very essential to develop the industrial sector of Kerala mainly through the development of SSI sector. Hussain(2004) showed that the growth, production, export potentiality of SSI sector of India are high. Bayiuei(2004) explained that paper highlights the role and performance of small-scale industries in the economy with the parameters of number of units, production, employment and exports. The Report of Loksava Secretariat (2014) showed the export, credit and sick industries and government policies of SSI sector of India. Garg(1996) analysed the growth of SSI sector especially after 1980 and examined structure of fiscal incentives which improved the growth of SSI sector. Vanipriya and Venkatrumaraju (2011) studied that Small scale industry is widely recognized as a powerful instrument for socio economic growth and balanced sectoral development. One of the distinctive characteristics of small scale sector is that the development of these industries would create broader employment opportunities assisting entrepreneurship and skills development and ensure better use of scarce financial resources and appropriate technology. The small enterprises have by now established their competence to manufacture a wide variety of sophisticated goods in different product lines requiring a high degree of skill and precision. Chowdhury and Saini (2015) indicate that small manufacturers are affected in the globalization era and facing lot of problems to run their businesses. It has been observed that units from all surveyed industries irrespective of age and turnover believed that liberalization has resulted into more competition, increased quality consciousness, difficulty in marketing, dumping of cheaper goods by other countries, reduction in profit margin and high level of customer satisfaction. Small units are not using latest machinery to manufacturer quality product with latest design as per international standards.

There is absence of clear policies relating to marketing and human resource management. Most of the units do not have separate marketing and human resource departments. Small manufacturers are unable to attract the professionals because of their financial limitations. Another problem of the small units is that there is lack of cluster association for the small industry. The operational cluster associations are ineffective and not helping much to the industry. The domestic and foreign markets have become highly competitive due to the process of liberalization. Sonia and Kansal(2009)showed the growth of output, employment and export of SSI sector of the Indian economy after reform. Jena(2009) emphasized in the Vishesh Krishi and Gramin Udyog Yojana (VKGUY) including other incentives and concessions, the export obligation period for cottage and tiny industrial sector in  SEZ Schemes the export oriented Small Scale Industries and the clusters approach for development of small and medium scale industries and potentiality of export. Shivani Mishra(2012) threw light on the role of MSME to uplift the social disadvantage group and highlighted the MSME status in the era of globalization and also mentioned review for the same. Lastly she suggested that apart from governmental role it is also responsibility of MSME sector to be empowered about awareness, access and usage of government policy and programme. This proactive approach helps MSME sector to sustain in liberalization era.

V. Econometric observations on small scale industries in India.

Production of SSI in India during 1980-81-2014-15 has been increasing at the rate of 10.12% per year significantly.

Log(x₁)=6.066699+0.10126t 

             (35.307)*  (12.16)*

R²=0.817  ,F=147.94* ,DW=0.2298 ,where x₁=output of SSI sector , *=significant at 5% level.

Even the SSI production has been increasing exponentially at the rate of 0.554% per annum during 1980-81-2014-15 which is significant at 5% level. 

The estimated AR(2) process in the model of ARMA Maximum Likelihood  method of the SSI production during 1980-81-2014-15 is highly good fit and stable but its AR(1) is significant and AR(2) process in insignificant and thus the model is divergent.

X_1t=8.107859+1.168611x_1t-1-0.187227x_1t-2+0.06178σ²_t

          (5.55)*       (3.66)*       (-0.608)             (7.27)*

R²=0.95  , F=203.61*  , DW=2.01 , Inverted AR root=0.98 and 0.19 respectively.

Similarly the ARIMA(1,1,1) model of SSI production is estimated as stable, stationary and divergent because its AR(1) is significant and convergent but its MA(1) is insignificant and divergent and its root is imaginary .The estimated equation is a good fit and is given below.

X_1t=8.119189+0.9800x_1t-1+ε_t+0.1557ε_t-1+0.0621σ²_t

          (5.50)*      (7.30)*             (0.396)     (7.26)*

R²=0.95,F=202.26* , root of AR=0.98 , root of MA=-0.16

Average productivity of SSI in India during 1980-81-2014-15 has been increasing at the rate of 1.68% per year significantly

Log(x₃)=4.3707+0.016822t

                 (33.40)* (2.65)*

R²=0.1758 ,F=7.04 ,DW=0.289,*=significant

VIII. Conclusions

The paper concludes that output of SSI sector has been increasing at the rate of 10.12% per year and exponentially at the rate of 0.554% per year during 1980-81-2014-15.The series is stationary, stable and divergent as indicated by ARIMA and AR models. Average productivity, employment and export of SSI sector have been rising at the rates of 1.68%, 8.43%,and 13.34% per year respectively during the same period. One per cent increase in export led to 0.48% of GDP per year during the specified period. Production, employment, average productivity and export of SSI showed two cointegrating vectors whose vector error correction is stable,divergent and insignificant error correction process. India’s GDP, SSI sector’s output, employment, average productivity and export have two cointegrating vectors but its error correction model is stable, divergent and insignificant error correction having problem of autocorrelations. New policy recommendations of RBI and new government policy on MSME are likely to accelerate the performance of SSI and its contribution to the national economy.

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