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Friday, December 07, 2007

It's Muddled Capitalism

Every Way But The Right Way?

UPA finally, after four years in power, has a plan to generate employment opportunities, apparently based on markets, instead of on subsidies and brainless government run employment schemes that only promote corruption and political patronage. The plan is not to simply de-reserve the existing 114 SSIs and allow existing SSIs to seek capital to expand to generate economic growth and employment opportunities, but to allow large companies compete with the existing SSIs!

Explaining its implications, Nath said: “This is important because we have got to modernise our SSIs. It is not that some reservations that are there would go away. Excise and other benefits will remain. The SSI sector needs foreign equity.” “If today someone wants to set up an SSI unit and ancillary units, they cannot fund it because it is not allowed. Now there is no limit. They can own an SSI. FDI would be allowed, but it will be governed by the investment policy. So if a large industry is allowed 51 per cent in that sector, then they will also be allowed 51 per cent in SSIs as well.” [To open up small scale industry, Govt set to remove restrictive law - IE]

If this is not a muddled way of doing things, I don't know what is? While competition is a great thing - the competition should be on a level playing field.

The reserved list of 114 items for SSIs still remains. Now larger, much better capitalized companies, will open shop to under cut the existing SSIs and send them out of business within a few years! Soon the large cap companies will have a monopoly in these 114 reserved industries, will enjoy the excise tax breaks, and they can do little for generating employment in these reserved industries, because they can't grow as the industries have to be SSIs!

What a mess. This is not crony or free market capitalism - it's muddled capitalism. The ultimate beneficiary will be shifted with this policy - now it will be new, but large, companies, where as de-reservation would have allowed the existing small companies a fighting chance. The losers will be the unemployed, as is currently, but also the existing industries which can't compete with the big dogs. Smart SSIs will sell to interested large companies, at the earliest, and get out of those industries. The not-so smart ones will be out of business soon enough, probably bankrupt. The government again is picking the winners, with little to gain in terms of employment opportunities, with its muddled policy instead of allowing the market to sort it out and in the process actually generate much needed employment.