THE ministry of micro, small and medium enterprises wants to give legal backing to the existing price and purchase preference available to micro and small scale enterprises. This is a retrograde proposal that would discourage scale economies and in the long run compromise their competitiveness. Under the current purchase preference policy the government has reserved 358 items including eight handicraft ones for exclusive purchase from registered small scale units. They also enjoy a 15% price preference in the case of items manufactured by both SSI and large-scale units. However, for want of legal backing and the registration requirement, the scheme has not been effective. Instead of trying to make it work and extend its scope to PSUs, the government would do well to junk the idea all together, in keeping with the progressive de-reservation of the small-scale sector. The list of items reserved the SSI sector has been pruned massively, from nearly 900 in the late 1990s to 114 now. This means that of the 358 items eligible for purchase preference, a large number are no longer reserved for exclusive manufacture by SSIs and would be competing with large private companies. In these products government purchases alone would generate sufficient volumes. In other product categories the 15% price preference is unlikely to make them competitive vis-a-vis larger players who enjoy scale economies. In an increasingly globalised market it has become difficult to shield SMEs from imports in the domestic market. And an implicitly subsidised government procurement alone would not be able to support a vibrant SME sector. We also need to get away from the concept that SMEs have to be enabled to compete with the large players. That is not going to work. What is needed is an environment that ensures that SMEs are not disadvantaged in anyway in terms of access to market, technology, credit and research. Once the facilitating institutions are in place, SMEs would find their niche as suppliers to bigger companies or come together to take on bigger projects. If market principle has delivered a vibrant SME sector in advanced markets there is no reason why that should not happen in India.