Chinese competition, interest costs biggest challenges for SMEs

New Delhi: Small is beautiful! So goes the adage. But 2011 was anything but beautiful for India’s 26 million micro, small and medium enterprises (MSMEs).

MSMEs contribute45 percent share of manufacturing output and 40 percent of exports of the total industrial landscape of the country.

The sector provides jobs to 60 million people in different segments such as readymade garments, leather, gems and jewellery, light engineering and handicrafts.

MSME entrepreneurs faced several challenges throughout the year, with the situation worsening as the months went by.

[caption id=“attachment_165590” align=“alignleft” width=“380” caption=“MSME entrepreneurs faced several challenges throughout the year, with the situation worsening as the months went by. Reuters”]  [/caption]

High interest rates, rising cost of raw materials and labour remained the key input challenges. Demand compression and tough competition, both in domestic and foreign markets, confronted the units as they ventured out to market their produce.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

The trade deficit of $12.6 billion between India and China during the April to July period, added to their woes.

“Rising competition from Chinese imports was a cause of concern. The sector faced a lot of heat because of cheap imports from China. Besides, the slowdown in Europe and Western countries also posed a challenge and threat,” H P Kumar,Chairman and Managing Director of National Small Industries Corporation (NSIC) told PTI.

Kumar said Indian MSMEs are at a disadvantage when it comes to interest costs. “We were unable to compete with other Asian economies. The high borrowing cost of 13-15 percent affected our competitiveness, compared to other nations where it was 6-8 percent.”

As the going gets tough, there is widespread sickness among MSMEs. According to government data, as many as 91,400 micro and small units had shut operations as of March, 2011. Of these, about 13,000 were added in the fiscal 2010-11.

The reasons for closure were financial non-viability due to changing business environment, lack of demand, obsolete technology, non-availability of raw material, infrastructural constraints, inadequate and delayed credit and managerial deficiencies.

The government did chip in to ameliorate the situation, but it will be quite some time before the impact filters through. On the policy front, the Cabinet approved the Public Procurement Policy for MSMEs.

Under the policy, a minimum share of 20 percent of total purchases of central ministries/departments/PSUs has been reserved for micro and small enterprises.

Within the 20 percent share of annual procurement from MSEs, 4 percent of government procurements has been reserved for MSEs owned by SCs/STs.

Of 2.6 crore MSME units, around 1.18 lakh enterprises are registered by Scheduled Castes and 44,840 units owned by Scheduled Tribes.

The decline in export growth was witnessed in segments like readymade garments, leather, machine tools, light engineering and gems and jewellery. On the domestic front, automobiles and electronics took a hit due to the high cost of raw materials and high interest rates.

“Interest costs went up by 50 percent. MSMEs were badly affected because of demand constraints,” VK Agarwal, President, Federation of Indian Small and Medium Enterprises told PTI.

To address the situation arising from the global crisis, emanating particularly from European markets, the government announced a 2 percent interest subsidy on rupee export and allowed for credit in handicrafts and hand looms industries.

The government made efforts to address the issue of a lack of financial resources, which acts as a deterrent in the growth of MSME units. Market regulator Securities and Exchange Board of India (Sebi) gave the nod to BSE and National Stock Exchange to open a dedicated exchange for small and medium units.

During the year, the government felt the need to augment market share for ‘khadi’ through better branding, marketing and selling strategies by positioning it as an eco-friendly, handmade product with an attached social objective.

Headquartered in Mumbai, the Khadi and Village Industries Commission (KVIC), which markets khadi and related items through a string of Khadi Gram Udyogs, was also reconstituted.

The Centre appointed veteran Gandhian Devendra Desai as the new Chairman of the KVIC. The khadi outlets are being revamped and 20 new stores will be opened through partnerships with the private sector at an investment of Rs 150 crore.

PTI