Fiscal reforms, SMEs' hope

Though it makes up for a very large part of the industrial structure in any country, especially in India, the Small and Medium Enterprise (SME) sector is often characterised by the use of outdated technologies. According to a World Bank study India: Strengthening Institutions for Sustainable Growth, South Asia Environment and Social Development Unit, SME contributes to nearly 70 per cent of industrial pollution load in India. The major forms that have been highlighted include, air pollution, water pollution, soil contamination, radioactive contamination, noise pollution, light pollution, visual pollution, and thermal pollution. Though information on their total energy demand or share in the total consumption of energy is unavailable, small and medium enterprises (SMEs) in India are also generally considered less efficient in material and energy use compared to larger enterprises. A recent study by the Bureau of Energy Efficiency (BEE), which takes into consideration the SME sector, revealed that the overall energy saving potential of the clusters is about 72,432 TOE (tonnes of oil equivalents) which is 27.4 per cent of the total energy consumption in SMEs. Though individually the SMEs may not have a significant effect on the environment and resource use, but together they exert a substantial impact. More so, given their large numbers in emerging economies like India and China, there is a growing need to address the problems of pollution and the efficiency of use of energy and raw materials that these enterprises pose.

Policy makers are many a time thwarted, by lack of knowledge of the actual environmental impacts of the sector, and have only a limited understanding of how to balance employment creation within SMEs with environmental protection. As for the SMEs, constraints on using environment-friendly technology vary from shortage of capital, limited access to technology, underdeveloped infrastructure, inadequate research and development, and the lack of awareness of the options available to them for pollution control and prevention. Smaller industries have the added burden of using obsolete, inefficient production processes, which are typically more polluting.

Can fiscal policy play a role in both enhancing the adoption of more efficient technologies and practices as well as in the control of pollution? The answer lies more in the affirmative as the discussions presented below highlight.

Fiscal instruments can be used as a key to persuasion, and pollution charges (charges on emissions of pollutants or on products whose use or disposal causes pollution) and are becoming an increasingly popular instrument for environmental policy and management, thereby facilitating a transition towards more eco-efficient and sustainable enterprises. They are now widely applied in the OECD countries and are a key pollution abatement instrument in most transition economies. They have also recently been introduced in developing countries, particularly in Latin America and East Asia.

Tax disincentives on the usage of carbon-based energy, such as the carbon tax, can discourage the consumption of fossil fuels that are analyzed on the basis of their carbon content. These disincentives combined with positive subsidies on the promotion of installing renewable energy or clean technology devices, will further facilitate the move to renewable energy sources.

Financial incentives/support for promoting common effluent treatment plants (CETPs) among the SME clusters, reduces the burden of individual treatments. The CETP subsidy scheme by the Ministry of Environment and Forests (Gol) is one such example. Under this scheme, the central and state governments each subsidise 25 per cent of total project costs for constructing the CETp, 30 per cent is secured through loans from financial institutions, and the remaining 20 per cent is covered by the participating small industries themselves. However, poor operations and maintenance and insufficient treatment capacity have been quoted as some of the reasons for the limited performance of this scheme.

Small Industry Development Bank of India (SIDBI) also has schemes for providing assistance to small industrial units for adoption of cleaner production technologies and installation of pollution controls. Under its Credit Linked Capital Subsidy Scheme (CLSS). There is provision of financial support of up to $225,000, which includes a 15 per cent subsidy from SIDBI and the National Bank for Agriculture and Rural Development (World Bank, 2006). MSME textile dyeing and printing units in and around Surat have been assisted by SIDBI to set up treatment storage and disposal facilities (TSDF) in Surat, to ensure that these units have a proper waste disposal system in place. A majority of 300 MSME member units have been able to achieve compliance with pollution control norms.

Water, another important resource for the industry, has now been included in the exhaustible category, with efforts being initiated to promote water efficiency. A fiscal instrument that can be used to achieve this end is the rebate on water cess. Industries that comply with effluent standards are connected to a wastewater treatment plant, and do not consume water in excess of the prescribed limit, are entitled to a 25 per cent rebate in the water cess in India. However, given the current low water charges as well as the cess, the instrument may not be able to_ alter the demand for water by industries. If water charges are defined correctly, they would in fact be several times higher than the current rate, and would make for a successful fiscal instrument.

In addition, tax exemptions for the profits and gains made from energy efficiency projects by ESCos and venture capital funds have also been introduced. For instance, VAT has been reduced for energy efficient equipment (e.g. CFLs). A revolving fund to promote carbon finance has also been rolled. Subsidies and tax concessions, by contrast, might appeal to these firms because of the cost savings which they might accrue.

As per the mandate laid down by the National Action Plan on Climate Change, fiscal instruments need to be developed to promote energy efficiency. The Perform Achieve Trade (PAT) which is a trading scheme announced under the National Mission for Enhanced Energy Efficiency (NMEE), aims to reduce energy consumption in industries across India using market oriented mechanisms. Schemes like this could also be designed for the SME sector to promote energy efficiency.

New markets have also started emerging in the recycling sector and this might also encourage the enterprises. If these markets are large enough, service providers could collect waste for a fee.

The advantage offered by such economic instruments over uniform command-and-control regulations lies in their greater flexibility and cost-effectiveness. They also make the SMEs realize their responsibility about protecting the environment. But careful designing of the fiscal instruments is important, if the desired economic and environmental benefits are to be reaped.