Protection of small domestic industries was a key reason to maintain a closed economy. But with the 1991 economic reforms, how would the resilience of the sector be maintained? Recognizing the critical need to enhance financial access for small-scale industries (SSIs) in a more open market, S. Venkitaraman, the Governor of the Reserve Bank of India established a committee under Deputy Governor P. R. Nayak in December 1991. Members included S. L. Kapur; V. Mahadevan; A. N. Srinivasa Rao; K. J. Reddy; R. S. Agrawal; V. G. Kalantri; Ashim Chatterjee; P. Kotaiah; N. Dutta; A. W. Bhadkamkar; S. L. Shetty; M. S. Parthasarathy; Sarita J. Das; Jagdish Capoor; Chakradhari Agrawal; and R. K. Jalan.

The committee’s terms of reference were to examine the adequacy of institutional credit for the sector (especially given the increased costs of raw materials), the delayed realization of sale proceeds from large private and state-owned enterprises, term finance for SSIs’ capital expenditure, and the Reserve Bank of India’s banking norms regarding SSIs. At the time, the SSI sector employed around 43 million people, second only to agriculture. It accounted for greater than 27 percent of total exports and produced an estimated INR 1,79,523 crores of output in the financial year 1990/91. Although it was essential for rural upliftment and poverty alleviation that SSIs receive investment, they had a weak capital base and inadequate infrastructural and technological access. With limited exposure to capital markets and limited financial or managerial expertise, they were forced to rely on borrowed private funds and indigenous money lenders.

The New Small Enterprise Policy, which was tabled in Parliament in 1991, had relaxed a host of restrictions on small, tiny, and village enterprises. It had increased the investment ceiling on tiny enterprises from INR 2 lakh to INR 5 lakh, subsumed service-providing enterprises under the heading of industry (which earlier included only manufacturing), and loosened the location criteria for classification as an SSI. In 1990, the Small Industries Development Bank of India was established by an act of Parliament to serve as principal financier to the MSME (micro, small, and medium enterprise) sector. The Nayak Committee’s recommendations complemented these measures.

In its report, the committee observed that the Reserve Bank of India’s 1988 guidelines to commercial banks for financing SSIs were not being followed adequately. It found that the sector received working capital worth only about 8.1 percent of its output. Village industries and tiny industries obtained working capital of just 2.7 percent, and the larger industries, 18.8 percent. Thus, the first step was for all banks to ensure all their branches financed the working-capital requirements of SSIs. The new priority-sector credit dispensation, pertaining to a government mandate that banks allocate a certain percentage of their loans to specific sectors deemed important for national development, would prioritize tiny and village industries, and the report pointed out the need for flexibility in applying inventory norms, especially for tiny units per the Tandon Committee recommendations. For larger SSIs, the committee set a minimum level of working capital—20 percent of output—that banks could provide. The committee also studied the demand for and availability of resources for the SSI sector during the Eighth Five-Year Plan (1992–97) period. It proposed three options to ease potential financial constraints: (i) allocating a portion of the liquidity made available by the recent relaxation of the statutory liquidity ratio, (ii) extending central-government loans to credit institutions, and (iii) establishing a supplementary refinance facility, which could be housed either at the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, or the Reserve Bank of India, to assist commercial banks in extending credit to the SSI sector. At the end of the plan period, the government appointed another committee to review the performance of the sector and make fresh recommendations.

Two committee members, N. Dutta and C. Agrawal, wrote notes disagreeing with the majority opinion on the report. They expressed several concerns: The report went beyond the terms of reference set by the Reserve Bank of India. It failed to align its recommendations with the government’s policy statement from August 1991, which was crucial for governing the credit policy regime. Additionally, the notes criticized the inadequate allocation of priority-sector lending to SSIs, highlighting that it fell short of the required 25 percent.

The Nayak Committee highlighted the urgent need for enhanced credit access to sustain the small-scale industries sector amid the sweeping liberalization of the Indian economy. By addressing systemic gaps in financing, proposing flexible credit norms, and recommending new mechanisms for resource allocation, the committee sought to secure the resilience of SSIs as engines of employment, exports, and rural development in a rapidly changing economic landscape.