Can we twist the dragon’s tale?

Small industries in India contribute 40% of the country’s industrial output, producing over 8,000 value-added products. They contribute nearly 35% in direct export and 45% in the overall export from the country. They are one of the biggest employment-providing sectors after agriculture, providing employment to over 28 million people. The 3-million-plus small and medium-sized firms produce a diverse range of very basic to highly-sophisticated products. They are driving the India growth story.

“But, despite their strength, SMEs are facing tough challenges in the present scenario of liberalisation and globalisation. They are finding it difficult to sell their products in the domestic and international markets because of increasing competition,” admits a senior official in the ministry of small-scale industries.

enter the dragon
THE biggest competition comes from China. Small companies in several manufacturing sectors such as chemicals, textiles, consumer goods, electricals & electronic gadgets and toys, among others, are losing business to their Chinese counterparts, not only in export markets, but also at home.

In textiles, for instance, despite being under the quota regime, Chinese manufacturers beat their Indian counterparts by huge margins. The story is similar in the case of durables.

According to experts, the biggest difference is that Indian policymakers do not depend on smaller companies for economic growth. “Though there is much talk of SMEs, the general ideological stand is that only large companies can bring about a critical mass in the economic growth. On the other hand, in case of China, the government trusts the SME sector, which forms 99% of all enterprises in the country and are a vital force for the sustained development of the economy,” says Prof Aditya Mukherjee of Delhi’s Jawaharlal Nehru University.

Ou Xinqian, vice-chairman of the National Development and Reform Commission, China's top economic planning panel, told a press conference last week that China has 42 million SMEs, which represent 99% of all enterprises in the country. It provides 75% of jobs in urban areas. Industrial output and export volume of these enterprises constitute 60% of China’s total. The seriousness with which the Chinese government deals with SMEs is evident from the fact that it is implementing a special law for the promotion and protection of these units.

Drag & play policy
NOT that policymakers in India have not been reactive to the issue of empowering SMEs. As part of the Union budget this year, finance minister P Chidambaram had announced a preferential lending policy for small-scale industries (SSIs). However, this policy is yet to see the light of day.

“True, there have been delays in implementing the SSI policy. But it is very much there. Moreover, we are working on certain other incentives for the SME sector as well,” the official in the Union finance ministry adds.

The finance ministry is also considering an industry proposal for setting up a knowledge enterprise development fund. This fund will have an initial corpus of Rs 500 crore and will be used to finance start-ups and ideas. Access to funds, at present, is perhaps the biggest issue with India’s small companies. “If this fund is created, it will solve many wearies of the Indian SME sector. Moreover, provision for loans at lesser interest rates is important. For a small businessman, paying 15% interest kills business sense,” says Chetan Bijesure, manufacturing and senior assistant director (foreign trade division), Ficci.

the think-big factor
THIS is not all that the SME sector has been lobbying for. They say that the government should look at encouraging commercial banks to look favourable at risk-capital funding for SMEs. “We get hampered, specifically while entering into technology-driven areas, as we can get funding only on the strength of our balance sheets and, due to this fact we get limited in our funding processes. The government should encourage commercial banks to actively look at early-stage risk-capital funding,” says Tiger Logistics managing director Harpreet Singh. The Rs 50-crore Tiger Logistics is a first-generation enterprise, which is seeking to expand into the global markets. Until now, most expansion projects of the company have been debt funded.

Rakesh Malhotra, managing director of Luminous Power Technologies, which makes power invertors, says that the government should aim at being more proactive rather than being reactive. “The government should, through various communication channels, aim at displaying information, which is forward looking rather than putting up information only on rules and laws. They should (also) aim at setting up sources for qualified information that shows how the government plans to match up to the changing scenarios rather than just putting up rules and regulations.”

Another critical challenge that Indian SMEs have been facing is that of mid and senior-level managers. “The government, along with education institutions (and not just the tier-I and II institutions) must aim at developing this category of personnel power so that SMEs can benefit from this. The lack of quality managerial bandwidth actually stunts the growth of SMEs,” says Perry Madan, senior partner of Delhi-based HR and temping firm Elixir Web Solutions.