What are the main obstacles to SME ?

Some SME products ready for marketing.. PHOTO: STAR

I would like to cite the following examples in support of my claim. There are about 300 shops selling electronic components in two markets in Dhaka, many of which have come into existence only within the last few years. An intelligent estimate suggests that components from these shops serve at least 3000 small industries in the country with a total yearly turnover of about 3 billion taka. Again, in only one area in the suburbs of Dhaka city there are about 400 small industrial units producing electrical switches, plugs and holders with an yearly turnover of about a billion taka. One important aspect is that they cater to a market well within the country which has a potential to grow. Many indigenous enterprises has sprung up in the country in other light engineering sectors as well.

It is heartening to see quite a bit of interest and activities within our government and among the foreign donors regarding micro-enterprises, and Small and Medium scale Enterprises (SME). Similar interests have been observed at different times over the last few decades, but most plans and programmes concentrated on offering training and loans in order to create new entrepreneurs. On the other hand, no plans or activities have been observed to get a first hand feedback from entrepreneurs who have already taken initiatives to set up small industries at their own risk, in order to understand the difficulties and obstacles they are really facing, and to remove these obstacles. Had we taken this approach, we could have achieved maximum success at the least cost and within least time. Besides, we could have seen good use of the people's money which was disbursed to hundreds of new entrepreneurs with results far from satisfactory.

The problem: Small industries usually distribute their products through well established wholesale dealers. The producers have to deliver the products fully on credit. Collection of dues is a Herculean task, only the victims will know. The dues are paid back bit by bit over a long period of time; some are never realised. A news item published a few days back reported the result of a research organisation on SMEs, which has correctly identified this as the main impediment to the growth of SMEs. However, as a solution they have suggested increased loan flow to the entrepreneurs. In my opinion this is not the right approach. An influx of money with this aim will further increase the amount of unrealised dues and will go against the entrepreneurs. Ultimately, the finance providers will also lose interest.

Bad products drive away good products: There is a big negative aspect of the existing distribution system. Since our small industries do not have any 'brand' identification, the wholesale dealers naturally promote cheaper products, whatever the quality. Copying names of well known foreign or local brands on the products is also a creation of this system. Therefore the quality of products keep going down. Following a well known saying in economics I find this slogan appropriate under the present system, "bad products drive away good products". This eventually creates a negative impact among the customers -- "local products are bad", leading to the ultimate collapse of the particular industrial sector.

Main obstacle to solution: "Brand" identification of a product gives an industry a responsibility for achieving and maintaining quality and it also helps in getting due price for quality products. Participation in trade fairs and advertising are essential ingredients for promoting such brand names. However, as soon as a company goes into such a promotion venture, which itself is very expensive, our tax officials think that this company has already sold a lot and has made a windfall profit. So they book the company for payment of VAT for amounts many times in excess of the real sales. This naturally leads to an atmosphere of undue harassment and corruption. For this sole reason, our small entrepreneurs shy away from advertisements or promotional activities, and this weakness is exploited heavily by the wholesale dealers. Among the different forms of taxes, VAT (value added tax) poses the single most obstacle because the producer has to deposit the VAT, which is quite high at 15 per cent of the sale value, almost immediately after delivery of the products. On the other hand he gets his price for the products from the wholesale dealers much later as mentioned before. A part of the dues may remain unrecoverable for ever, thoughtful VAT has been paid alright. So a producer is pressurised severely from both sides.

Solution: Do not collect VAT at production point: In my opinion, the solution lies in not collecting VAT at the production point, particularly for indigenous technology based small industries in electronics, electrical and light engineering sectors. VAT should be collected only at the retail point, where the purchaser makes an immediate cash payment, which makes sense, and makes a justification for this proposal too. Besides, many products use imported raw materials which are taxed right at the point of import. So the government is not losing any revenue at all. This proposal only calls for a rearrangement of the VAT collection point. This will allow the producer to concentrate in facing other challenges for survival in this competitive environment, particularly the one created by the recent free economy. This will naturally remove the insecurity an entrepreneur feels in going for brand identification, business promotion and further investment, as discussed before.

Revenue officials frequently put forward the argument that it is hard to collect VAT at retail points for which it is better to collect at the production point. This is a failure of the VAT officials and needs to be looked into for a remedy, but why disturb the producers? The real contributors to the GDP of the nation are the agricultural and the industrial producers, and we will have to push them forward at any cost. Regarding collection of VAT at retail points, it can be successful if it is done through societies of retailers, and not through exercising power through VAT officials, which has a colonial flavour.

Make duty structures favourable in competition to traders: The next obstacle for the small industries come from wrong revenue policies some of which give much competitive advantage to traders of imported appliances. In the electronics sector, UPS for computers can be cited as a striking example. Carrying out a detailed analysis it has been found that for the local manufacture of a 500VA UPS a total amount of about one thousand taka has to be paid to the government exchequer while one has to pay only one hundred taka for importing a completely foreign made one, and nothing if it is imported together with a computer. Even if policies are adopted by the government to give support to local industries, sometimes these are not practically implemented due to the disinterest of relevant officials. In the budget of 2000 the VAT was reduced from 15 per cent to 2.5 per cent on electronics items (excepting Televisions and VCR/VCP) produced locally, on a truncated cost basis. In spite of repeated requests to the NBR this has not been implemented so far, giving various excuses at different times. On the other hand VAT for electronics items at trading point was reduced from 2.2 per cent prior to 2000 to 2 per cent and 1.5 per cent in subsequent years and were immediately implemented. Because of this adverse situation most of the indigenous technology based industrial entrepreneurs are gradually switching over to trading business. One can imagine how bad this news is for the country.

Many talented and enterprising individuals are trying incessantly to set up indigenous technology based industries from an inner urge to take our country forward, in spite of the scores of obstacles lying ahead. Many of them are now ready to make a transition from small scale to medium scale industries and contribute significantly to the nation's self sufficiency. There are challenges of technology, challenges of lack of infrastructure, challenges of not getting the right components at the right time, and challenges posed by the new free economy. The entreprenures are overcoming all these with zeal, innovation, and a lot of courage, but VAT collection at the production point and unjust tax policies in the name of our own government are posing challenges unsurmountable by the ordinary people. We can expect a huge wave of indigenous industrialisation if only the two remedial actions mentioned above are taken immediately.

Dr. K Siddique-e-Rabbani is Professor of Physics, University of Dhaka.