LAHORE: What will happen to our small and medium business sector once Safta is actually implemented? "Nothing. Some (efficient and cost-effective) would survive, others won't," came this apt reply from a leading economist.

Though it is a good enough response to close further discussion on the subject, the issue is not that simple. Or is it?

More than two million small and medium enterprises (SMEs) spread across the country contribute 30 per cent to GDP and generate around 25 per cent of manufacturing sector's export earnings, according to Smeda, a federal agency responsible for creating a conducive regulatory and financial environment for SMEs.

Their contribution to the value-added sectors of manufacturing industry rose to 35 per cent in 1998 from 27 per cent in 1981, Smeda officials say.

The SMEs constitute 90 per cent of business and are responsible for 80 per cent of non-farm based employment, federal industries and production secretary Javed Ashraf Hussain told an OIC seminar early this week.

In spite of being a major non-farm employment generator and contributor to the country's GDP, the competitiveness of the SMEs is marred by their structural weaknesses and lack of institutional support from the government.

Smeda officials candidly admit that no study has so far been conducted to analyze the possible implications of free trade on regional SMEs.

"I say the (Safta) pact is still in its early stages. We have not studied its implications on SMEs, but we do intend to undertake this project soon," a senior Smeda executive said.

However, it is generally believed by most small and medium entrepreneurs spoke to Dawn that implementation of Safta would lead to plant closures and unemployment.

"Our SMEs do not have the kind of strength they need to compete in a free-trade environment," says an auto vendor.

But the way the Safta pact was greeted even by the businessmen, who have never favoured trade with India, is remarkable and unprecedented.

Once the hullabaloo over the signing of the Safta agreement subsides, most of us would be in a better position to see that our small and medium-sized industries, already grappling with numerous structural and institutional weaknesses, remain the most vulnerable sector, says Pervaiz Hanif, an exporter of readymade garments and hand-knotted carpets.

Though smaller in number, we can find many people who genuinely view the development as a window of opportunity to improve quality and efficiency through greater exposure to a regional competition, especially with India, despite the challenges of free trade.

"We have survived cheap imports (and smuggling) from China. We would survive India. Don't fear," says economist Shahid Kardar.

But, he warns, certain industries like those of sugar, home appliances, automobile, Pakistan Steel etc., that should never have been there (because of their being inefficient), would be wiped out.

Pervaiz Hanif believes that only those industries would be able to hold out against Indian products which are already into export.

The exporting industries of readymade garments, knitwear and hosiery have already achieved a minimum level of efficiency and become competitive enough. The problem will be faced mainly by those who market their products only within the country and do not or cannot export, he insists.

His remarks clearly betray fears and apprehensions of the SMEs that they might be swamped by cheaper products from India once the free trade opens up.

"India is one of the most protected economy and it wouldn't be an easy task for our SMEs to compete with its neighbour under existing conditions," says chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers, Nabeel Hashmi.

"In addition to high protective tariffs, Indians have also built certain non-tariff barriers to protect their indigenous industry," he adds.

Shahid Kardar agrees that Indian industrial base is stronger than ours. On top of that, their industry is heavily supported by subsidies.

He says our businessmen and their representative associations would have to remain vigilant to head off any intentional or unintentional effort on the part of the Indian government to support its industry to wipe out ours.

"Safeguards are available under the WTO regime to avert such efforts through anti-dumping proceeding," the economist says.

A major contributor to the fears of getting swamped by Indian goods is the incompetitiveness and inefficiency of the SMEs due to various factors.

The SMEs are fraught with problems ranging from their smaller size to higher production cost, to lack of access, to easy and cheap finance, modern technology and capital goods, non-availability of local raw material, lower productivity etc., says a senior official of Smeda.

Expensive labour, skill gaps and flawed tax structure in Pakistan have also impeded growth of small and medium units.

A major problem is that over 90 per cent SMEs are very small in size, both in terms of investment and workforce," says an official of the Punjab Small Industries Corporation (PSIC).

"And almost all of them are outside the documented, formal economy. This means that these units can neither have access to finance to support their production nor capacity to upgrade their technology to improve efficiency and productivity. This results in higher input and production costs as well as lack of efficiency and competition," he says.

All these problems weaken our SMEs in the Saarc region, government officials and businessmen concur.

They urge the need to address all these issues facing the SMEs and call for a policy framework and a conducive regulatory environment in this regard.

"The challenge of enhancing SMEs competitiveness remains the most formidable task for the government," says the PSIC official.

"They need a lot of financial and technological support from the government to sustain and compete in a free trade era."

Smeda officials contend that the country has ample time to develop the SMEs on modern lines before they have to face a competition in the region.

But exporter Pervaiz Hanif says: "When we signed WTO in 1995, we said we had sufficient time to put our house in order. But we didn't do any thing."