NationalVOLUME 15 ISSUE # 07

SMEs: A neglected sector

The small and medium enterprises (SMEs) play an important role in the economic growth of a country. The sector is labour-intensive and is generally based on indigenous raw material. But it has not received the attention it deserves.
Our economic policies mostly favour the large scale industry which has been the major beneficiaries of government’s concessional policies and special packages. By contrast, the small scale industrial sector, which has immense economic potential, can be tapped for the socio-economic development of the country through effective facilitation from public and private sector. However, it remains neglected.
In Pakistan, the SME sector constitutes more than 90pc of all production capacity. It contributes substantially to economic growth and development, employing 80pc of the non-agricultural labor force with a share of approximately 40pc in the GDP. But it is the large industrial sector that gets the benefits of lower sales tax, import of duty-free and sales tax-free goods, access to financing facilities through the long-term financing facility and export refinance scheme which are not available to the SME sector.
According to a World Bank study, SME sector’s contribution to employment creation and GDP growth is higher for middle-income countries than for high-income countries. In the middle-income countries, the sector contributes over 95pc of the total employment and about 70pc of GDP while for high-income counties it contributes to over 55pc of GDP and around 65pc employment.
SMEs can contribute to Pakistan’s growth through innovation, competitiveness, entrepreneurship, employment generation and poverty alleviation. But, unlike large enterprises in the formal sector, small and medium enterprises face financial constraints and technical limitations due to their small size, disintegration and a lack of organisation. This inherent downside of an SME makes it imperative that there should be a policy mechanism through which they get support in different functions of business, including financial liquidity, technical upgradation, marketing, and human resource training and development.
The small-scale sector assists in local development since SMEs accelerate rural industrialization by linking it with the more organized sector. These sectors utilize domestically produced raw materials as against large-scale units that rely on imported raw materials. They convert local raw materials into semi-finished items which are later utilized by vertically integrated units that have capital, modern equipment, and fine skills to process these into finished products that are then exported. The number of large industrial units is quite small and they provide limited employment in selected location in big cities or their adjoining regions. By contrast, the small sector has the capacity to produce diverse value-added products and create employment in far-flung and under-developed areas.
Pakistan’s economy is largely agrarian and to supplement the agricultural sector, successive governments have focused on large-scale industrialization. The rationale behind this policy was to achieve self-sufficiency through import substitution and earn foreign exchange through enhanced exports. Unfortunately, we have not been able to attain both objectives.
Currently, Pakistan is facing an enormous trade deficit with huge inflows of imports, substituting domestically produced products. With the prevailing economic conditions, alternates are needed to sustain and revive the stagnant economic growth rate.
It calls for shifting the focus towards the small-scale sector since economic indicators, like the high interest rate, record high devaluation of currency, a high cost of doing business and low GDP growth rate are all contrary to the conditions required for the growth of the large-scale production sector. An industrial policy is required that focuses on integrating SMEs and the disaggregated sector into vertically-integrated advanced sectors. SMEs can be the bridge between agricultural sector’s raw materials and formal sectors’ finished products. It has remained the weakest link in our economy and hence we are largely reliant on imported processed raw materials and even imported products for everyday domestic consumption, like textiles, gems and jewelry, grocery items, basic electrical fittings and sporting equipment etc.
Besides, SMEs have huge potential for alleviating poverty in Pakistan. They have the potential for participating and creating previously unsought benefits of a globalised and digital economy. There is a lack in the extent of globalisation and technology utilization in our country as compared to other regional competitors. Against this backdrop, the digital transformation and restructuring of industries in Pakistan is essential for promoting economic growth. One such opportunity lies in developing the cottage industry or small and medium enterprises (SMEs) which are integral to the sustainable growth and development of the economy.
In the past, several measures have been taken to stimulate the small industries sector, including the establishment of the Small and Medium Enterprises Development Authority (SMEDA) in 1998. The contemporary economic slowdown necessitates multipronged policy initiatives, like the establishment of technical services and training centers.
Needless to say, adequate financing facilities at low interest rates are the most critical factor in encouraging investment in small-scale sector along with tax concessions on investment for the new investors. A new credit policy should be formulated to provide funds for labour-intensive units producing intermediately products in small-scale self-employment units which have the potential to provide a cushion to the national economy currently passing through a critical period.