New Delhi: Worried by the slow growth in the Indian capital goods sector and competition from China, the government may announce a capital goods sector competitiveness scheme aimed at small and medium entrepreneurs in the Union Budget 2008-09.
“The scheme is being planned as the large firms in the capital goods industry are largely self-sufficient but SMEs are not doing well. The scheme is likely to be announced in the coming Budget,” said a senior government official associated with the formulation of the scheme.
The scheme advocates a cluster-based development strategy as the SMEs are fragmented even while they are in geographical proximity to each other. It is expected to help SMEs achieve economies of scale by achieving common input procurement, pooling of resources besides improving prospects of securing larger contracts.
“A cluster-based strategy is cost-effective, sustainable from a long-term perspective and has an inclusive approach,” the government official added.
The department of heavy industry, the nodal ministry in this sector, has asked for a budgetary support, spread over five years, of Rs860 crore for SMEs in machine tools, textile machinery, heavy electrical equipment, mining and construction equipment and process plant equipment to help adopt a cluster-based development strategy.
To be implemented over the remaining period of the 11th Plan (till 2012), the government believes the scheme will have a positive impact on around 22,650,000 employees. The capital goods industry contributes 12% to the manufacturing activity.
The Indian government has taken cues from the emerging markets of China, Brazil and South Africa where government interventions have accelerated manufacturing growth. In China, manufacturing contributes around 53% of the total GDP compared with 26% in India.
Under the scheme, the government proposes to set up common facility centres, and provide business development and skill development services among others.
These common facility centres will be funded through special purpose vehicles to be formed by the SMEs where the government would contribute 50% of the project cost that would cover expenditure on a common foundry, common heat treatment facility, testing laboratories, coal and ash handling facilities and welding facilities.
The major problems that the capital goods sector faces include lack of modernization, inadequate technology, lack of research and development activities, lack of standardization by SMEs and inadequate skilled manpower.
Satya Poddar, partner, Ernst and Young, said the cluster approach can generate huge benefits if implemented well. “SMEs have intrinsic disadvantages when they are spread all over and they often resort to cutting corners. Bringing them together in a cluster will give them economies of scale through common power, roads and may be even advertising, besides easy access to knowledge sharing,” said Poddar.
However, he said, the real test of the concept will be its implementation.
“Like the government will have to make sure that there (are) no hidden costs and hurdles, that SMEs have to face,” he added.