The role of micro, small and medium enterprises (MSMEs) in employment generation, entrepreneurship, exports and innovation is well understood. Only problem is, in most parts, it 'only' remains understood. Prime issues ailing the MSMEs in India largely remain unappreciated and unattended. And therein lies the problem!
TDB Intelligence Unit | April 2016 Issue | The Dollar Business
Mehfooz Mody, Owner of R. F. International, a small enterprise that is into manufacturing and exports of textile and apparel in Noida, the industrial town next to the national capital New Delhi, believes his business is in dire straits. The company's export consignments have shrunk by about 50% over the last two years, and Mody is finding it hard to obtain loans and keep his business afloat. “Today, the moment factory shutters go up, costs start piling up on your shoulder, and there is hardly any cash supply around. With only family funds and goodwill in the market, we may not survive for long," laments an apparently distraught Mody. He, like many other manufacturers who belong to the micro, small & medium enterprises (MSMEs) camp in India, had once dreamt of taking the world's merchandise supply chain by storm. But that is now an almost forgotten dream, his ship washed ashore by the high and uncertain tides of "fortunately-unfortunately". R. F. International has abandoned its exports dream a couple of years back, and Mody is today busy focussing on just the domestic market. Justifying his changed strategy, he states, "Aren't we a country of 1.25 billion people? That in itself is a big market. So why get stuck with ever-elusive orders, vicious bureaucratic circles, complex paper work, cumbersome inspections, rampant corruption, ports delays, and most importantly payment issues from the importers' ends." Not a rare thought that, Mody is only one of many MSME operators for whom self-justification has overcome logic and thirst for business beyond boundaries. It's not entirely his fault though.
Mohammed Tanveer, a Daryaganj (Delhi)-based fashion jewellery exporter and proprietor of M. T. Enterprises, echoes Mody's concerns. Tanveer is worried about the rising cost of compliance for MSMEs, and the cumbersome procedures that MSMEs are required to go through in order to export. He rues about the lack of financing options for small enterprises and exporters.
Coincidentally, there are many such exporters across the country in the MSME category, who have been letting go of the proverbial "sour grapes", due to issues that can understandably be looked into or best, get sorted with minimal efforts from the government. "But that doesn't seem to be happening, not as of now" Mody tells The Dollar Business.
With working capital in short supply, exports slowing down across the globe, 'ease of doing business' still a distant dream, and a severe lack of infrastructure and government support, most MSMEs are experiencing tough times even running their factories and as some of them, such as the two entrepreneurs mentioned above, are only playing the survival game. Their story sums up the general experience of a large section of MSMEs in our country today.
The MSME sector has always played a vital role in the growth of India’s economy. It is well dispersed across the country's nook and corner and is responsible for producing a diverse range of products and services to meet the needs of not just the local markets but also the national and international value chains. All this, makes it the top vehicle to spread industrial growth across the country, thereby also aiding in inclusive growth of masses across the country.
MSMEs are complementary to large industries such as ancillary units, handicrafts, food processing, textiles, etc., and contribute enormously to the socio-economic development of the country by not just providing large employment opportunities at comparatively lower capital cost than large industries, but also by way of helping in the industrialisation of rural pockets across the country.
Today, with the dismal business outlook hurting even many large enterprises, including the 'multinational' camp, across the country, the MSME sector seems to be withstanding the brunt of decreased levels of production and a reduced cash flow cycle. Several recent surveys have hinted that despite increased cost of raw materials, slow global demand and tough international competition, exports from these enterprises have the potential to grow given the right business environment. With Chinese products hurting our manufacturers in almost all sectors, there is a growing need that our MSMEs innovate by thinking out-of-the-box and storm global markets with products that are world class and competitive in pricing.
Let’s start with a food for thought: With echoes of our PM’s clarion call to Make in India buzzing in every nook and corner of the country, is it also not time to pause for a moment and ponder why only 20% of our MSMEs are reported to be into manufacturing? Are we really Make in India ready, without the participation of this key sector? Do we really have the capabilities, the potential, the infrastructure and the support systems to transform India into a manufacturing hub, much like what China has done over the last few decades? Because if we are to realise the dream of replicating the Dragon’s success story, there is a serious and urgent need to address issues that MSMEs into manufacturing businesses face today.
The Make In India website mentions the government's initiatives and interventions to help MSMEs realise their potential through cluster development, technological upgradation through the National Manufacturing Competitiveness Programme and the Credit Linked Capital Subsidy Scheme, but the reality on the ground remains that MSMEs are today surviving mostly on their own. The government needs to realise that while the schemes are good on paper, if they are to produce results on the ground, creating awareness about the schemes and making them user friendly will be key to success. By nature and definition the micro and small players are widely dispersed and not well-versed with technology and compliances. The government needs to do more to bring them into the fold to truely realise the dream of making India a manufacturing hub.
Although MSMEs contribute significantly to India’s exports (38-40%), the majority of contribution comes from just 15-20% of the MSMEs. Also in what can be considered as quite appalling, the small and medium enterprises (SMEs) are reported to constitute only 5% of the total MSMEs in the country, with the micro enterprises comprising the majority – all this hints at the wide asymmetry prevalent in the sector.
Further, SMEs in India contribute only about 8% to the country's GDP unlike some of its global peers where their contribution to the country's GDP stand above 50% – while SMEs in Taiwan contribute 85% to the country's GDP, their share of contribution to GDP in Singapore stands at 50%. Interestingly, in India, micro enterprises, mostly in the unorganised sector contribute to 30% of India's GDP and this is where the real problem lies!
Without governmental intervention, the micro enterprises are finding it difficult to grow up to become small and medium enterprises, and thus remain inefficient in terms of productivity and competitiveness. Additionally, our MSMEs, by and large, are still not regarded as a force to reckon with in international markets. Studies claim that this is mainly due to their lack of capabilities to innovate and add value to their products in tune with global demands and requirements. Many landmark key legislations, such as the Goods & Services Tax (GST), are still stuck in Parliament. It's high time the government takes necessary corrective measures to create infrastructure, add adequate skilled manpower, hasten up key regulatory reforms, ensure access to credit and technology and bring in labour reforms, else this crucial micro production unit will take the path opposite to growth in these testing times.
Many MSME players while acknowledging the good initiatives announced by Finance Minister Arun Jaitley in the Union Budget 2016 have expressed their sector's specific concerns as well.
Across the MSME fraternity, Jaitley’s announcement on the Budget proposal to offer tax relief for small businesses with turnover of up to Rs.2 crore (u/s 44AD of IT Act), twice the previous limit, has been widely hailed as a positive decision. Experts feel, the move will encourage Indian MSMEs to expand, both domestically and globally. Prior to this, when our MSMEs wished to scale up production, they would slip off the tax exemption bracket which consequently proved a major deterrent for growth for them. It is hoped that the increased exemption limit will indirectly enable them to not only increase their production but invest in modern technologies so as to become more competitive.
Many Federation of Indian Micro and Small & Medium Enterprises (FISME) members whom The Dollar Business spoke to, feel that this time, PM Modi's ambitious project ‘Make in India’ was given a back seat in the Budget, as far as MSMEs are concerned. Their argument? Most concessions given in terms of Indirect Taxes (including Excise and Customs Duties) are for inputs typically used by larger players who are into manufacturing of engineering goods, machinery, electrical equipment, instruments used for semiconductor wafer fabrication and LCD fabrication units, etc.
“While these may be welcome steps to promote the electronics industry, the engineering segment of the MSME sector was eagerly looking for some sops in this year’s budget. Make in India cannot happen with just the large companies. MSMEs too play a vital role,” says Anil Aggarwal, Managing Director, PME
Power Solutions India Ltd. He believes more than the small companies, large firms are turning NPAs, which affects the entire economy. As per Aggarwal, the Finance Minister should also think about the MSME sector which, he feels, has largely been ignored in this year's Budget. Talking about the dismal export outlook, he says, “High tariffs and minimum import price on steel products that are primarily used in the production cycle, are making our engineering items highly uncompetitive across export markets and also in exports of projects where Indian industries compete withglobal firms”.
Another entrepreneur from Muzaffarnagar, Naveen Jain, MD, Dayachand Engineering, says, “While in the Economic Survey, there was a mention about the safeguard duties on finished goods, in the Budget there was no mention of it.” Jain believes that the absence of any such measure negatively impacts the Make in India vision of the government and shows lack of concern for India's MSMEs! “The Budget would just benefit the large players as the MSMEs have been completely ignored this time. More interestingly, in other basic metals like aluminium, where prices are on a tailspin in global markets, the Customs Duty has been raised to protect the domestic large manufacturers. For aluminium and zinc alloys, the Basic Customs Duty has been increased from 7.5% to 10%. How this will encourage ‘Make in India’ for MSMEs in electrical and other aluminium and zinc based sectors is anybody’s guess,” declares Jain.
Echoing similar concerns, Animesh Saxena, Managing Director of Neetee Clothing, says, “The skewed view of the government with respect to the MSME sector is further demonstrated in textiles, where the excise duty on readymade garments has increased, the tariff value enhanced and even the basic fibre used (PSF /PFY) is proposed to be taxed at a higher rate. This is definitely going to impact units in the textile industry in the country. The above measures will affect the cost structure of the entire value chain of the readymade garments industry which is predominantly in the MSME sector.”
If the government of the day is serious about turning around the fortunes of this sector, it should review the Budget proposals to address these concerns.
Even though India’s share in global manufacturing has grown from 0.9% to 2% over the last 20 years and GDP share has grown from 1.2% to 2.5%, the relative share of manufacturing in the Indian economy has remained unchanged (as per a recent BCG-CII report titled, 'Make in India': Turning Vision into Reality). The scenario is a bit of a dampener if one were to contrast it with what can be observed globally. In India, the manufacturing sector accounted for 15% of GDP in 1993, a ratio that has virtually remained unchanged till date. This is in sharp contrast to the Rapidly Developing Economies (RDEs) which have increased their share of manufacturing to above 20% of their GDP, particularly Thailand (34%), China (32%), Malaysia (24%), Indonesia (24%) and the Philippines (31%), as highlighted in the abovestated report. Clearly, going by the continued stagnated contribution of manufacturing to the economy's GDP, if India's manufacturing as a whole hasn't learnt to run faster than the overall, larger economy (which practically means budging for the sake of moving, literally), why should we today, in even our faintest fantasies expect India's underfed MSMEs to be sprinting faster than Usain Bolt?
This is further exemplified in India’s exports sector where even though India’s performance has improved, with its share of global merchandise exports up from 0.5% to 1.7% in the past 20 years, this increase has clearly remained modest compared to that of a country like Chinas. China's share in world's exports during the same period rose from 2.4% to 11.5%!
The foremost step to reviving manufacturing is getting the infrastructure execution right. According to the aforementioned BCG-CII report, over the past few decades, while momentous growth rates have fuelled India’s emerging economic prowess, the country has lacked the corresponding investment in infrastructure development. The proportion of manufacturing in GVA (Gross Value Added), a measure that has been adopted by the government, has been stuck at around 17% for last few years, far below the government’s goal to ramp it up to 25%.
Even when it comes to job creation, India has only created 4 million manufacturing jobs since 2010. And, at the current rate, India may only create 8 million jobs by 2022, well below the government’s goal of 100 million! The power sector is in a dire state of affairs, as is the transportation sector which has been limited in growth due to the poor quality of public transport, roads and rolling stock in railways. Indian ports have a turnaround time which is more than twice that of Chinese ports. If this is the health of our infrastructure even in the present day, how could we have expected to see an MSME sector with enviable performance metrics?
Besides infrastructure, driving labour reforms and ease of doing business can greatly enhance an environment that fosters manufacturing oriented development. At present, the effort and time taken in India for starting a business, dealing with construction permits, gaining access to electricity, registering property, paying taxes and enforcing contracts is higher than in many other countries, even developing ones.
All efforts must be therefore made to gain global competitiveness. Building an export eco-system via policy reforms, investments and infrastructure building can greatly enhance India’s attractiveness as a preferred manufacturing hub, thereby helping our MSMEs reach their full potential. Policy reforms aimed at simplification of the prevailing tax regime and building of a robust financial system could also go a long way to make our MSMEs stronger. As India works to transform its MSMEs, entrepreneurs also need to be encouraged to take a longer-term approach to their investments and establish an ‘Indian’ way of manufacturing.
Financial inability to sustain the long periods between marketing the product and realising payments is another reason for the MSMEs being in poor financial health. Currently, as per a report by the Comptroller and Auditor General of India, only 5% of SMEs have access to credit. The main reasons for this have been lack of awareness about the facilities available, high transaction costs and inability to provide collaterals. To add to the sad state of affairs, of the 5% who have access to credit, a considerable number are neck deep in debt.
What The Dollar Business also learnt during its investigation on the ground is that MSMEs on average, operate at gross margins that fall in the sub-10% range (imaginable given that 95% of MSME sector consists of 'micro' enterprises), and that makes debt financing at a 10-14% standard bank rate unviable for them.
As per RBI, the number of sick micro, small and medium enterprises (MSMEs) in India was 5.17 lakh until March last year (the number of sick units had more than doubled in a span of two years) and the incidence of NPAs in these MSMEs was sizeable. To their (bank) lenders alone, these units in total owed Rs.33,378.16 crores (as of March 31, 2015)! On one hand, that gigantic sum – which can be now considered bad debt (assuming that all sick units are found potentially unviable for debt restructuring and therefore rehabilitation by the banks) – reflects how credit has been over the years been pumped into infeasible and unviable industries without any scientific study about their market potential. On the other, it also reflects how subsequent credit needs of many of these sick units were written off for lack of a profitable track record with the initial trance of funding! All in all, it reflects the absence of a monitoring mechanism to gauge the performances of MSMEs at the Centre's level.
This systemic lack of a process at the policymaking level however does not reflect on the competencies of this high-potential sector. If we look at the performance of the MSME sector in comparison to the corporate sector in terms of NPAs, then we find the MSMEs better placed than their bigger peers! “By comparing the Gross NPA levels and the Stressed Assets levels of the MSME segment vis-a-vis the banking system as a whole, it is clear that the build-up of restructured assets is comparatively low among MSMEs. Hence at a systemic level, the risk from MSME loans is relatively low compared to that from the large corporate segment as far as impact on capital ratios of banks are concerned," says Sankar Chakraborti, CEO of SMERA Ratings Limited, an RBI-accredited credit rating agency based out of Mumbai. The recent Mallyagate involving default of over Rs.9,000 crore loan hints at how over the years, the big fish have always been treated differently by our banks (both private or otherwise). [Don't you suddenly feel the need for introspection in India's MSME lending and monitoring policy?]
Another area of concern for our MSMEs relates to their inability to effectively exploit technology for their benefit. This is despite the fact, that India has the third largest pool of technologically trained manpower in the world. At present, India has one-fifth the numbers of researchers per million as compared to China and an even lesser proportion as compared to developed countries. This could be the reason why high-technology exports from India currently form less than 7% of the total exports, while this number is in mid-twenties for most of other countries that India competes with. Indian MSMEs, over the years, have largely ignored R&D requirements and have not embarked on new product development or technological upgradation at the requisite pace. The policy to aid this way forward for the MSMEs hasn't been one unique plan either. The MSME Ministry conveyed their approval for continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for technology upgradation of Micro and Small Enterprises, but with a ceiling of Rs.1 crore and subsidised loan at 15%! First, what's the rationale behind choosing a one-size-fits-all ceiling of Rs.1 crore? [Is it because 95% of MSME units are those that fulfil the "scientific" condition of the value of plant and machinery not exceeding Rs.25 lakh? Perhaps.] Second, that ceiling probably sounds encouraging to the likes of noodle manufacturing units, doll makers, artificial jewellery craftsmen, and poultry farmers. But how about the interest rate of 15%? [And the MSME ministry calls it "subsidised"!]
In this regard, there is a need for industry-wise technology upgradation loans that are tailormade as per specific needs of those in need [like Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles]. Blanket schemes don't do MSMEs much good.
Though currently, the Ministry of Commerce offers a host of marketing tools and platforms for the benefit of exporters, a lot of them are not turning out to be as effective. For example, not many MSME players know about or are making use of the Market Development Assistance (MDA) scheme that is being implemented by the Indian government to assist individual exporters for export promotion activities overseas. The government though is taking steps to monitor the scheme. Union Minister for Micro, Small & Medium Enterprises (MSME) Kalraj Mishra recently reviewed the MDA Scheme with officials from Khadi Village Industries Commission (KVIC). More such reviews are the need of the hour across policy segments and across the broader MSME spectrum.
In the case of handicrafts sector, many exporters with whom The Dollar Business spoke to, wanted the government to support them through mechanisms like opening of warehouses in major world markets, exemption from service tax and inclusion of artisans in Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA). They believe MNREGA scheme could provide stability of production and supply and potential availability of volumes which in turn, would lead to reduction in prices of handicrafts and better development of MSME artisans across the country. The same has also been urged by the Handicrafts Export Promotion Council (EPCH) recently but as has been the case with many other well-intented suggestions from the industry, the ministry is yet to pay heed to this one. According to Gokhale Utpal, General Manager, EXIM Bank, the best performing sectors when it comes to exports from MSMEs are textiles, pharmaceuticals, food processing, engineering and gems & jewellery. Yet all these sectors also face their unique challenges. Let us turn our eyes then to these sectors to see what ails them.
The Indian textile industry is going through a challenging phase. Global demand is at a low ebb. The decline of cotton prices in Indian and global market continues to be a bad, long nightmare. And imbalances in domestic textile intermediary goods supply and credit crunch are further ruining the sector's health. Pointing at difficult times ahead for India’s textiles exports, Atul K. Mishra, Economist, Confederation of Indian Textile Industry, while talking to The Dollar Business, says, it’s been a decade now that the government has not accepted major demands of the industry like a correction in inverted duty structure prevailing since long, a reduction of excise duty on man-made fibres, putting textile industry under priority sector lending, and providing credit to industry at 7%. Also, according to Atul, the Trans-Pacific Partnership (TPP) – a preferential trade agreement between
12 countries including US and EU – can pose a major challenge for the Indian textile industry, as the proposed trade bloc accounts for more than 40% of the global trade and to counter that, India needs to intensify its existing bilateral trade ties and forge new ones that are profitable for its exports community (unlike most existing pacts).
And in that sense, the very thought of TPP enabling Vietnam to run away with world demand is making Indian textile MSME export-manufacturers feel a surge of anxiety. “Exporters are concerned with the zero duty access to EU markets by Vietnam. Vietnamese exports are likely to grow faster due to implementation of zero duty from 2017. (India faces an import duty of 9.6%). TPP allows export opportunities from Vietnam to USA with a benefit of 17-30% export duty relief. The India-EU Broad-based Trade and Investment Agreement (BTIA) is yet to be finalised and exporters are expecting conclusion of the talks so that they can compete with Bangladesh and Vietnam," Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC), tells The Dollar Business.
Wool, which is a primarily rural-based, export-oriented industry, faces a similar challenge. This segment is increasingly said to be impacted by the low production of raw wool indigenously. However, our traders are of the view that the industry is subject to high rates of Customs duty on many specified textile garment machinery and spare parts for general machinery – a concern also shared by Ashok Jaidka, Chairman, Wool & Woollens Export Promotion Council (WWEPC), who for the betterment of the sector wants lowering of Customs duty and a revision of incentives scheme for exporters in this segment. This, he believes, will encourage more exporters to join the trade. The other challenges hurting productivity and growth of the sector are high transaction costs, problems of power supply and power cost, a rigid labour policy and shortage of skilled/semi-skilled manpower, and lower rates of incentives.
Despite the fact that today, the Indian pharma sector can boast of being a Rs.2 lakh crore-a-year turnover industry (with about 50% of the revenues coming from exports), yet the industry is plagued with many-a-bottleneck. Ashok Kumar Madan, Executive Director, of The Indian Drug Manufacturers’ Association (IDMA), tells The Dollar Business that MSME players in this capital intensive sector are losing out on many fronts. In addition to asking for a change in the investment ceiling oriented definition of an MSME by the government, he says, “most of the pharma players, given the very nature of their business operations, fall outside the Rs.10 crore bracket and are unable to benefit from any MSME-oriented scheme of the government. Besides ease of doing business, we want implementation of the Katoch Committee’s recommendations for the bulk drug industry in the country, as it outlines ways for creating a level playing field for our indigenous bulk drug manufacturers and supporting the ‘Make in India’ initiative.”
While India remains the largest provider of generics globally (accounts for 20% of the world exports of this class of drugs), apprehensions remain about the utility of many preferential trade agreements (PTAs) signed with some of its trading partners. For example, the industry body, Assocham recently noted, “India’s pharmaceutical exports have not benefited from tariff reductions under the India-Japan CEPA, mainly because it’s too cumbersome to deal with Japan’s drug regulator. No surprise, the utilisation of India’s PTAs for export promotion remains very low”. The government needs to take into account the changing paradigm in this much-valued sector so that it continues growing at a stable pace.
Despite being one of the largest food producing countries in the world across several categories, the country’s processing level in this sector stands at only 10%, unlike many other smaller countries like Thailand, Malaysia and other EU nations that are able to process up to 80-90% of their agricultural produce!
Food processing is recognised as a priority sector in the new manufacturing policy and in the recent budget, attractive fiscal incentives have been announced by the government. These mainly relate to FDI, subsidies, tax rebates, depreciation benefits, as well as reduced Customs and Excise duties for food processing machinery.
Harsimrat Kaur Badal, Union Minister for Food Processing Industries, Government of India, had for long been urging the Centre to allow FDI in multi-brand retail for food products that are fully grown and processed in India. Her efforts finally paid off this Budget. Speaking to The Dollar Business, she said that the government's nod to allow 100% FDI into this segment will be a game changer for the sector. “I believe this can play a catalytic role in setting up the infrastructure from farm-to-fork. We are at 10% of our potential today and have 90% to go. This will not only boost infrastructure and strengthen the local supply chain in the agriculture sector, but will also benefit farmers and MSMEs across the country, in a big way,” she says. In a bid to support export-related activities in the sector, the food ministry is planning to set up 42 mega food parks (of which two are already operational and 35 have got final approval) and these food parks could really change status quo for a large number of MSME players in the sector.
The engineering sector, long recognised as a key driver of the nation building process, has been on a downhill trip for quite some time now. As per data from Engineering Export Promotion Council of India (EEPC), engineering exports from India (comprising 23% of the total merchandise shipment in January 2016) to 19 of the 25 top countries – to which India supplies products in this category – have shown a decline. Further, out of the 33 broad engineering products, 22 recorded a fall. Capacity utilisation across India also remains relatively low hurting the MSME sector involved in this segment. Currency fluctuations in various global markets have also added to their woes. Yet, the sector holds immense potential considering the talent pool that India has.
In a bid to safeguard the interest of MSMEs in the sector, Engineering Export Promotion Council of India (EEPC) has urged the government to address the issue of a sharp fall in engineering exports, saying the promotional schemes for external trade must be realigned immediately in the wake of worsening conditions in the global market.
“The situation has been worsened by excessive protection given by the government to the domestic large scale steel firms by way of safeguard duty and anti-dumping duty. There is also a proposal to fix a minimum import price. All these measures are lopsided and overlook the interests of the MSMEs, which are then made to buy their raw material at higher costs, losing competitive edge in the tough international market,” T. S. Bhasin, Chairman, EEPC, recently told The Dollar Business.
EEPC also blamed the government for failing to address the issues of technology upgradation and infrastructural bottlenecks. “Within the country, issues like lack of technology upgradation in the Indian engineering industry and small and medium enterprises (SMEs) facing infrastructural bottlenecks are hampering both production and exports. Lack of harmonisation between Indian and International standards is the prime cause for India being behind its competitors. There have been instances where ‘Made in India’ products were refused entry in the major export markets due to lack of harmonised standards. Most of the time, our MSMEs are not even aware of the quality standards and necessary document requirements for exports. In certain cases, the required certifications are also expensive. Lack of market intelligence and market access schemes are among other key reasons,” added Bhasin, who feels that plans like MEIS (Merchandise Exports from India Scheme) should be done away with and a new scheme where the benefits accrue for all tariff lines and for all countries should be announced. Really simple a solution as Bhasin suggests. But why go even that far? How about modifying the very 'investment-related' definition of MSMEs and allowing investments beyond Rs.10 crore for all units and most necessarily an industry like engineering goods. Learned parliamentarians, how difficult is this to understand – you need very different machines to (a) produce machines to be used in power, steel, infra, and other projects, and (b) make glass noodles or cut glass for handicrafts! And what we've done is, for the sake of convenience of policymaking, we've shoved them all – small and big, and blue, red and green – into one coop. Again, a generalised rule won't do much good. How difficult is that difference to understand?
It is relatively easy to enumerate and expound on the ailments that hinder exports from the MSME segment. Having been on the ground with MSMEs and having talked to experts from industry associations and financial institutions, The Dollar Business also received various recommendations from stakeholders on how to alleviate the pain of MSMEs. There are also several models of regulatory frameworks and MSME-oriented developments across the globe that have seen success. How should the government then go about their business to ensure that MSMEs perform to their potential when it comes to exports? There is no panacea, but here are a few strategies, if implemented well, can help MSMEs grow organically and contribute more towards India's exports.
The existing cap on investment in plant and machinery for the purpose of classifying the units as SMEs does not encourage Indian SMEs to move up the value chain. Presently, under the MSMED Act 2006, within the manufacturing sector, micro enterprises are classified as those with investment in plant and machinery not exceeding Rs.25 lakh, investments for a small enterprise has been kept in the range between Rs.25 lakh and Rs.5 crore, and a medium enterprise is defined as one with investment in the range between Rs.5 crore and Rs.10 crore. Here, the Indian policymakers must appreciate the fact that each sector has its own unique capital requirement, standard revenue, growth rates and business cycle.
Globally, annual turnover, headcount and potential export revenues are some of the key metrics being used to define MSMEs. Further, emerging economies have taken a step ahead to constantly revise and raise the turnover and headcount caps to match the global standards. For instance, Brazil categorises its MSME sector as individual entrepreneur, micro and small businesses. Similarly, South Africa classifies its MSME sector into micro, very small, small and medium businesses thereby encompassing all the small businesses in its purview. Also, countries like South Africa and Argentina have extensively defined their MSME sector based on industries (agriculture, trade, services, industrial, etc.) Isn’t that the best way to maintain unique characteristics of each industry and best channelise resources to support their development requirements? In India, owing to such low level of investment ceiling, Indian MSMEs are forced to either expand laterally or to remain engaged in low-tech/low-value products – a fact that Indian Drug Manufacturers Association’s Madan also highlighted to The Dollar Business. He said, a large chunk of pharma players (belonging to an industry characterised as capital intensive and hi-tech) when making inroads globally have to make adequate investments needed to adhere to various international quality standards and certifications. Due to added investments in plant and machinery, they don't remain MSMEs, and eventually lose out on many much-needed benefits due to them.
On the same note, it is worth mentioning that China defines SMEs as those firms having investment ceiling of 300 million Yuan (~Rs.309 crore); another country with similar economic demographics as ours, Thailand prefers to define SMEs with a ceiling on investment capital of up to 200 million Thai Bahts (~Rs.40 crore), Singapore defines SMEs with a ceiling on investment capital of upto S$15 million (~Rs.75 crore); meaning that most of the leading and developing economies around the world have positioned the ceiling on investment for medium enterprises at much high levels, so as to encourage technology upgradation, quality improvement and most critically, export orientation.
In order for our MSMEs to develop a competitive advantage to operate in the global market, a strong focus on implementing new-age technology, and technology collaboration with global partners is likely to play a crucial role. New areas for technology application, opportunities for commercialisation of R&D, and hand-holding of MSMEs in their R&D intensification are the need of the hour. Institutions should also collaborate with the industry, particularly MSMEs, on research initiatives and help provide technology support to commercialise innovative product and service ideas. But technology needs capex. And that means the limits defining MSMEs have to be relooked into. [It is worth mentioning here that the new MSMED
Act 2015, which has been tabled in the Parliament has proposed redefining of these limits.]
Then there is a need for deepening and widening the delivery of credit to MSMEs. Also, with regards to all those small businesses that wish to go global, the biggest concern is the lack of funding avenues. For example, in the textile sector, which is among the largest and highest net foreign exchange earner for the country, new investments remain scarce – a concern also echoed by Rashmi Verma, Textile Secretary, GoI. “Of our domestic textile sector – 80% represents the unorganised sector and this large chunk includes a majority of our handloom weavers, the power loom weavers and the biggest challenge for them is lack of access to credit and working capital – so we need to find ways to link them to government’s schemes such as Mudra, etc,” she tells The Dollar Business.
SMEs with business models revolving around import substitution and exporting from India often require funds to set up facilities and scale up operations. Schemes for speedy financial assistance should be formulated, including funding for market access and development.
India has a long way to go when it comes to providing alternative sources of capital like angel funds and risk capital to Indian MSMEs. At present, there is almost negligible flow of equity capital into this sector. The Australian Government has been supporting Venture Capital Limited Partnerships (VCLPs) and Pooled Development Funds (PDFs) with tax incentives for providing equity capital to the growing SME sector in Australia. Thailand with its 'Market for Alternative Investment' plan offers access to capital for smaller companies.
India also needs to develop such programmes to support SMEs to access alternate sources of capital. In fact, India can learn a thing or two from Korea too, which has instituted the Korea Technology Finance Corporation (Kibo) that after duly assessing the technological expertise and technological competency of SMEs, enables banks to accept technology as collateral for extending financial support. The unique programme offers a technology guarantee service, which covers losses incurred when borrowers default on loans. Such a policy measure could also be introduced in India.
The MSME sector in many developed economies (UK, USA, Australia, etc.) make use of mezzanine financing, a non-conventional funding that shares characteristics of both debt and equity. There is a need to develop these alternate sources of funding for India's MSMEs.
A cluster development approach for MSMEs, as followed by China, which is a sectoral and geographical concentration of enterprises, manufacturing same or related products facing common opportunities and threats can help achieve high levels of competitiveness, ensuring complementarities, common facilities, collective activities including collective sourcing and marketing tasks. With this, SMEs can also achieve efficiency through collective innovations. However, it is pertinent to upgrade the clusters through strengthening of linkages and creation of value chain. These can be achieved through promotion of linkages among firms, strengthening local position within value chains, building cluster-specific skill centres, enhancing linkages with local suppliers, and facilitating greater level of interactions among the stakeholders of clusters.
Reviewing FTAsConsider this: India has so far signed almost 15 pacts falling in the various categories of bilateral trade treaties like free trade agreements (FTAs), preferential trade agreements (PTAs), comprehensive economic cooperation agreements (CECAs) and comprehensive economic partnership agreements (CEPAs). However, how many of these are really helping our MSME sector compete equally with their foreign counterparts or earn access to markets in partner countries? Rashmi Verma, Textile Secretary, GoI, feels not many of them. “We need to change our course of action keeping into account the changing paradigms of foreign trade for each particular sector. These FTAs are not giving us good returns as the targetted countries are no longer our main markets. Our competitors, i.e. Bangladesh, Vietnam and Sri Lanka, are not only able to export at zero duty rates but also get an edge over us due to their various trade pacts with those markets”. Hence, the government needs to seriously review its FTA strategy and see to it that if it’s really in tune with the changing dynamics of global trade equations and realities.
If we look at many countries that enjoy a similar economic landscape as ours, we find that they have been trying to explore many innovative practices to nurture their MSMEs. For instance, the Mexican government, under its Micro and Small and Medium Enterprises Support Fund tries to increase the competitiveness and knowledge development of its SMEs. Under this, support is being provided through activities related to consultancy, training, studies, innovation and technology development. Also, Mexico, through its ‘Implusoras’ programme provides tailor-made consultancies to inform SME exporters about technical specifications, regulations and quality requirements in target markets.
Of late, even Malaysia has been training its SMEs through collaboration with its various universities. Its SME Corp is implementing a skills development programme for enhancing skills and capabilities of workers of SMEs at technical, supervisory and managerial levels. SME Corp finances upto 80% of the training cost paid by employers to train their employees.
It’s high time, we draw inspiration from them, and work towards establishing skill development programmes focused on MSMEs.
Despite the various challenges plaguing the MSME sector, it has increasingly shown innovativeness, adaptability and resilience to survive. This Indian sector deserves to be given that extra push – to enable it to compete and grow effectively in today’s competitive global marketplace. The government has been making the right noises. Now if we could implement what is on paper, the sector is bound to see better days ahead.
TDB: In your view, is India's current Foreign Trade Policy pro-MSMEs?
Anil Bhardwaj (AB): The FTP 2015-2020 has quite a few new features – Manufacturing Exports Incentive Scheme (MEIS), Services Exports Incentive Scheme (SEIS), simplification of procedures, online submission of applications, etc. While its effectiveness in improving exports from India is yet to be seen, it surely does not address the major pain points of micro, small and medium enterprises (MSMEs). MSMEs lack resources and often cannot follow the nuances of the trade policies and so cannot avail benefits available under FTP. For example, under Advance Licencing, previously advance authorisation with a validity of 18 months and revalidation upto 36 months was allowed. This period has been reduced to 18 months validity with one revalidation upto 24 months. Such straight-jacketing may look fine on paper, but is not pragmatic forMSMEs. Flexibility becomes necessary for MSMEs for various reasons: project gestation may be long, one may have to wait for the import to be viable depending upon prevailing international prices of the commodity, achieving a minimum lot of quantity below which nobody even gives a quote, availability of funds at the disposal of MSME, etc. In any case, wherever export obligation has been met and foreign exchange realised, revalidation should be for the asking so that exporters are not denied their legitimate right to get duty free raw material to replenish duty paid stock used in export production. The government should also consider the 2nd relaxation for all existing cases where export obligation has been completed, and for future the validity may be expanded for 36 months.
TDB: Along with easing of norms in multi-brand retail, the debate – whether mom-and-pop and domestic suppliers can co-exist with big giants, has surfaced again. Your take and recommendations to the government to protect the domestic players. Will it have some impact on MSMEs as well?
AB: Allowing FDI in multi-brand retail is no doubt a gigantic step which is likely to affect several large sections of the population – right from farmers to general consumers to MSMEs or large manufacturers and service(s) providers. It will have both desirable and undesirable consequences. On the positive side, it may induce efficiencies in supply chains because of better technology, processes and economy of scale at the command of large foreign retailers. It may also bring down prices for consumers, enhance income for producers including farmers and MSMEs and because of variety and enhanced choice, could boost demand and increase spending.
On the negative side, while the benefits could be limited to only those MSMEs or farmers who join the supply chains, thousands of small business and retailers could perish. Unfortunately, experiences of advanced countries including USA reinforces this belief.
FISME’s view is that liberalising FDI regime should have been preceded by consultations with stakeholders, impact analysis and a mitigation strategy for those to be affected adversely. The road map for opening up the retail sector could have been more nuanced and properly sequenced. The reforms for making India a common market, introduction of GST and amending APMC (Agricultural Produce Market Committee) regime should have taken precedence.
TDB: What’s your take on the current level of export incentives provided to MSMEs by the government? What further recommendations would you like to offer?
AB: A high-level FISME delegation recently met the Commerce Minister and submitted a detailed memoranda on the issues related to the MSMEs sector that need immediate attention. The EPCG scheme – ease in importing of inputs has a huge bearing on the ability to export. Manufactured exports (especially high-tech manufacturing such as engineering or capital goods, etc.), requires a very enabling import regime. The EPCG scheme is therefore critical for exporters. However, the existing provisions are rigid and do not take into account the vagaries of international trade.
Another anomaly in the scheme is that the export obligation is same whether it is for capital equipment such as machine or for testing equipment. Instead of encouraging imports to make exports competitive, the policy actually becomes a pain for genuine exporters if anything goes wrong in export obligations, conditions of which are very stringent. While the scheme and obligations under it ought to be governed by a far more pragmatic approach, the laboratory or testing equipment should have no minimum obligation to promote – zero effect, zero defect. Irrational conditions such as average export obligations should be done away with.
TDB: How do you see the Make in India initiative? How can MSMEs make most of this initiative?
AB: So far we have not seen many initiatives to enable MSMEs for Make in India. The series of policies, report, etc., are being announced on Make in India for various sectors but you have to read with a magnifying glass to find ‘MSMEs’. FISME had been called by almost all Committees to give its viewpoints on ‘how MSMEs can make most of the initiative’ and we have submitted well-thought suggestions, but we find most of these have not found any place in the final reports. So, no purposes will be served by repeating them here. I would only like to mention that Indian MSMEs segment is a thriving sector, notwithstanding the oft-repeated ‘high sickness rate’ and enabled with adequate handholding, facilitating ease of doing business, they could be the real pioneers of ‘Make in India’ through innovation, flexibility and competitiveness.
TDB: There are critics who believe that there's nothing much in FTP 2015-2020 that will boost exports from the all-important MSMEs sector. Do you agree?
AB: The FTP may be good or very good depending upon who you are, but it needs to be MSME enabled if the government wants to enhance exports from MSMEs. MSMEs account for 40% of India’s exports, but you can count on your fingers how many times the word MSMEs appear in FTP. MSMEs need special dispensations and it is a global phenomena.
I will cite another example of insensitivity to MSMEs in the trade policy; while the policy allows (even encourages) import from China in yuan to reduce dependence on dollar, a number of consignments are stuck at ports as in the currency section the yuan is not recognised as an eligible currency.
TDB: A huge chunk of manufacturers in the plastics industry belong to the MSME category. How do you see the production levels changing in the months to come?
R. K. Aggarwal (RKA): Generally speaking, I believe, given the domestic consumption of plastic products in the country, its production will not suffer in the long run. Amid the global commodity crisis, though value-wise, we have not-so-encouraging figures, yet volume wise, we are not much affected by the slowdown. On the exports front, yes I would say, we are passing through very challenging times. The government is not doing enough to rescue ordinary factory owners who are being affected by sluggish export demands.
TDB: But what about ‘Make in India’ initiative? Hasn't it made the manufacturing environment better for MSMEs?
RKA: Initially, just like others from the industry, I also had many hopes from the campaign. But sadly, I would say nothing great has happened on the ground so far. I believe despite the government’s strong advocacy that it’s against the ills of inspector raj, license raj, things are still in very bad shape. In fact, lot of issues relating to Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) are yet to be sorted. Each month my representative is told by officials at the MSME Ministry that they have sent the recommendations to the higher authority but are yet to hear anything from officials at the top. We need to urgently sort out these bureaucratic hurdles.
TDB: Where do Indian manufacturers stand vis-à-vis Chinese manufacturers?
RKA: Presently, we are importing PVC heavily from China. The reason is simple. Our production is half of our domestic requirement, so we have no choice but to import. But then we have the classic case of government putting anti-dumping duty on it. I believe, if Indian manufacturers are not able to meet our demands and China offers products at a good price, it makes for a sound business sense to import. Recently, we had a notification for the imposition of anti-dumping duty on injection moulding machine. Interestingly, in India only a few make such machines, and those who do, take ages to produce.
TDB: How do you see the status of the MSME segment in this sector? What are the issues that you would like the government to address on a priority basis?
RKA: Given the gloomy business outlook across sectors, MSMEs segment has also been affected to a large extent. MSMED Act has been pending for more than a year now. This has created many hindrances for MSMEs which are into petrochemical exports. Even bankers these days are not willing to give benefits to manufacturers. Corruption is still rampant in this segment. Many MSME exporters' money is tied up in the VAT refund process. This affects the small players for whom the dollar is in short supply.
TDB: A perception is doing rounds that the government is focussing more on big corporates. Your take?
RKA: No, I don’t think so. Besides small players, I am in regular contact with many big players and all they say is that the status quo is yet to be challenged.
It’s been about 20 years that I am in this business of fashion jewellery exports. Though I am registered as an MSME player, but so far I have not received any benefit from the concerned ministry. I believe the money gets into the hands of only the powerful and never reaches the needy people at the bottom.
Compared to last year, our exports are down to the extent of 50-60%. Although government has inked many MoUs, both in India and outside, I think the government has been unable to convince the corporates to invest money into the economy and hence this logjam in the economy.
Presently, the Indian domestic market is strong, and why should it not be, we have such a huge population. That’s the reason why all MNCs want to come here because we now have increased purchasing power.
In India, power availability is a big issue. Funding is another major issue hurting us these days. Going to a bank is a nightmare for us. They ask for collaterals and guarantors and we are left with no option but to work with funds from family and friends only. Everything works on trust in my sector. Since PM Narendra Modi came into power, I don’t think getting credit has become easy.
I recently visited China and found that for a bulk importer there are huge discounts on offer (especially items that are ready for shipment) but if you order them to make for you, the same gets dearer by 20-25%, which actually could be your profit margin. I believe with global exports down, everyone in China wants to dispose of their unsold inventory. Currency devaluation is also working for them. I can say, there is a huge demand for handmade items because they (Chinese manufacturers) mainly specialise in machinery-work. Kashmiri Shawls, gift items are in big demand in China and we want to do business there but we want the government to support us – by offering us low interest loans and incentives. MSMEs indeed need the support they are not getting at present.
Testing is too complex these days and this factor is fast becoming a major deterrent for MSME exporters. Buyers are insisting on testing to be done at their nominated labs which charge sky high prices. These labs have an arbitrary policy in place and it is difficult to get certification. International compliance is also another big issue. Buyers insist on getting this done from their nominated companies. We need to pay Rs.2-3 lakh each year and then have to renew it every year as well. I believe only big players can afford such investments; micro enterprises like us can’t. I know of people whose shipments worth crores of rupees are stuck due to testing and QC clearances. Then you have CHAs who want commissions for issuing QC clearances. Exports documentations are a big hassle as well. We cannot afford talent and yes, not many of us have IT skills to manage documentation on our own. Duty drawback was good earlier, e.g. on brass, iron items we used to get 20-25% drawback, but it has now been reduced to 1-7%.
We are not aware of the credit rating process and I don’t know how it can really help me get funds. The policymakers need to create awareness about it.
TDB: Please shed some light on your process of setting up the parameters for credit worthiness of an SME firm?
Sankar Chakraborty (SC): SME Rating is a comprehensive assessment of the rated enterprise. The evaluation is based on financial as well as non-financial parameters. SMERA has rated more than 39,000 SMEs in the last 10 years. We re-look at our rating model periodically to check for the relevance of parameters. We also check the defaults of SMEs we have rated and look at rating-wise defaults, i.e. how many SMEs with ratings in the higher categories have defaulted vis-à-vis defaults by entities with ratings in the average category and so on. An SME is compared to its peers in its industry who are in the same line of business. We have created benchmarks of financial and non-financial parameters. Every SME is compared to the above-average, average and below-average performer in its industry and the benchmarks are adjusted periodically.
Our rating process is standardised, transparent, reliable, prompt and customer friendly. We have signed memorandum of understandings (MOUs) with over 40 leading banks, lending institutions and industry associations in the country.
TDB: Currently, only 5% of SMEs have access to credit. What are the bottlenecks that are responsible for the situation?
SC: In emerging countries, small and medium enterprises usually encounter challenges in approaching a bank or financial institution to raise funds. Hence, the credit penetration level remains relatively low. The major reasons for low credit penetration include lack of awareness about the facilities available, high transaction costs, limited or no access to capital markets, inability to provide collaterals, etc. On the other hand, banks and financial institutions in emerging markets find it complex to evaluate SMEs from a credit perspective on account of lack of credit information, lack of credible data, limitations to the analysis, no or limited peer set for a meaningful benchmarking or relative assessment exercise, and so on.
TDB: Why are there so many sick MSMEs, resulting in an increase in NPA levels of lending banks?
SC: While MSMEs are more vulnerable to economic downturns and industry specific scenarios, they have managed to repay their loans and fulfil their debt obligations. With the thrust of government on MSME sector reflected through campaigns like Make in India, Digital India and formation of MUDRA, the growth potential is immense. However, banks can further reduce their NPA levels within the MSME segment, if they encourage the use of external credit ratings assigned by agencies like SMERA amongst their SME clients and staff.
TDB: Information asymmetry in MSMEs is one factor that has so far made underwriting a challenging task for financial institutions. Your take?
SC: Information asymmetry continues to remain a major challenge in this segment. MSMEs are wary of rating exercises and apprehensive that they may not get a high rating because the financial statements that they have prepared to get rated do not reflect the true and fair picture of their performance. Further, most SMEs operate in an unorganised manner, and also lack transparency and financial discipline, which makes sourcing the required information from them a difficult task for credit rating agencies (CRAs). However, CRAs like SMERA, in association with SME development institutions and Ministry of MSME, are working towards the financial inclusion of the sector and bridging information asymmetry.
TDB: What factors beyond financial parameters can one look at while rating an MSME?
SC: We are already using parameters such as the educational and professional background of promoters, number and quality of customers and suppliers, banking conduct and relationship with stakeholders, and many such relevant factors. We also look at the age of the business and their investment in processes as a measure of performance.
TDB: In what can be considered as quite appalling, the small and medium enterprises constitute only 5% of the total MSMEs in the country, with the micro enterprises comprising the rest. Why is this the case?
Dr. A Didar Singh (ADS): This scenario is prevalent not only in India but also worldwide. The percentage of micro units is far higher than the small, medium as well as large enterprises. In fact, the micro units have the largest proportion when it comes to number of units operating in an economy followed by SMEs and a very small portion of large enterprises. One of the prime reasons for this is because of the fact that over 90% of the output generated by micro-enterprises is meant for consumption in domestic market. A very minuscule amount of output generated by micro-enterprises caters to the requirement of SMEs and a very small percentage of SMEs are then catering to the large enterprises as their ancillaries. Of course, the lack of financial support, market accessibility, technology upgradation, etc., do impact the growth of these micro units.
Another reason could be the geographic spread of micro units. Rural enterprises comprise over 54% of the overall enterprises and are mostly associated with the production of traditional goods and handicrafts with limited technology and scale of operations and therefore the number of micro units is very high as compared to SMEs.
TDB: Indian MSMEs, by and large, have not been able to gain a foothold in the international markets? Do you think it is because MSMEs lack capability and capacity to innovate and add value to their products in tune with global demands and requirements? If so what solution do you suggest for boosting exports from MSMEs?
ADS: Majority of MSMEs across different industries are not able to identify their competitive strengths within their value chain. Also, they lack the critical dimension necessary to support adequate R&D and training costs, particularly in the context of increased participation in the global value chain (GVC), thus restricting their ability to grow further in the value chain. Lack of working capital is also one of the obstacles. The fulfilment of strict product standard and quality required for participation in GVC is costly as every country/company has its own standard, which makes the cost of compliance burdensome for MSMEs.
In order to foster growth of the sector, both central and state governments have come out with various schemes to support MSMEs. However, there is a lack of awareness among MSMEs on the schemes available.
According to a FICCI-Grant Thornton report, creating awareness of the schemes available for MSMEs to build their competitiveness, organising training and coaching programmes for training MSMEs on global standards and educating them on how to effectively target global value chains, encouraging multinational corporations and large corporation to develop key vendor capabilities among MSMEs to help them move up the value chain, creating funds for facilitating R&D among MSMEs and facilitating ease of doing business for MSMEs are some of the measures that could be taken up to help MSMEs integrate with GVC. This will help them in overcoming compliances and regulatory hindrances, which are some of the key challenges being faced by Indian MSMEs.
TDB: Protective measures like additional import duties on raw materials are considered to be a major impediment to the growth of the MSMEs. Your views.
ADS: Imposing additional import duties on raw materials generally are deliberative steps taken by the government aimed towards safeguarding the local industry. If, in case, the raw material cannot be procured domestically, then of course the government tries to reduce the import duties on raw materials. Therefore, this should not be seen as an impediment to the growth of MSMEs. The development of MSMEs has been assigned an important role in India’s national plan. Hence, the government, besides maintaining duties, should consider taking measures towards integrating our MSMEs with the global value chain, which would help in knowledge sharing, link to customers, link to global buyers, access to latest technology and building quality standards.
TDB: In many countries benefits like credit support and related guarantees are provided to MSME exporters to overcome this situation. In India also some financial institutions like EXIM Bank provides such support. Do you think this support is sufficient? If not, what are your suggestions?
ADS: India is a large country and we should realise that the government also has limited resources which need to be best utilised and allocated. But at the same time, in my view, opportunity should be given to every MSME to prove its potential as a winner. Hence, the government’s support system should be based on multiple factors and one of them could be how an MSME is performing.
TDB: A considerable number of MSMEs are neck deep in debts and are declaring insolvency and bankruptcy. Does it not reflect that loans have been pumped into infeasible and unviable projects and industries without any scientific study about their market potential? Does it also not reflect absence of monitoring mechanism to gauge their performance from time to time?
ADS: Banks have defined certain parameters for doing the due diligence before sanctioning and disbursing loans. It is not feasible and possible for a bank employee to ascertain each and every business model. Consultants and experts in a particular field having practical exposure should be deployed by the bank to understand the financial needs of the unit and should be given the responsibility of due diligence.
There is a mechanism in place defined by RBI for rehabilitation and restructuring process for MSMEs to help them before they turn NPA. External factors such as prolonged power cuts, delayed payment, etc., also at times lead to losses. These factors need to be taken care if NPA levels have to be reduced.
We have been participating in the EPCH fair for the last seven-eight years, but this year there were fewer buyers compared to last year. Most of the buyers that we have today have come from this fair only. This time we had orders from Spain, US, EU countries. We do not work with wholesalers, rather we prefer working with branded chain stores that put emphasis on quality.
Currently, the export demand is very low and international testing is adding to our woes. Buyers generally insist on getting tests done at their nominated labs only which charge very high rates.
Also, many buyers insist on getting tags/labels (for the items) from a designated company in Hong Kong. This results in delays in many of our consignments and we also then have to add this cost to the final price and this eventually increases our price. For example, a scarf without a tag and international testing costs $4 per piece, but with the addition of these costs, the unit price of the same scarf increases by $2.5- $3. A customer ultimately bears this cost.
Despite the Prime Minister trying his best to revive the markets, we are having hard times these days. Our factories are running at 30% capacity. Global markets are down as well. Also as China has devalued its currency, our exports are hurt. When it comes to value additions, yes, we are lagging behind Bangladesh where in every home there is a (unregulated) factory and they also enjoy the Least developed Nation status. Yet, I believe, compared to Bangladesh, an international buyer prefers India because he knows that we will have all international compliances and certifications.
Generally, I believe wholesalers who want to pick large quantities prefer Bangladesh or China but still there are many good brands that prefer India for its strong adherence to quality.
In India, we still are plagued with electricity shortages, rigid labour laws and taxation issues. GST will be good but we really don't know when it will get cleared in the Parliament. As of now, we are not able to see any silver lining.
Our industry is flooded with many unscrupulous players who deal in cash, and don’t give any taxes, unlike us, who do only online transactions and prefer everything to be transparent. The government should take steps to stop these malpractices, else we will never have a level playing field.
At Customs, many a times, they seize our items and each time give different reasons for doing so – there is no fixed policy there. Some times they let the stuff pass too. We believe, the policy is arbitrary there. Customs duty is too high as well. On invoice value, we are taxed presently up to the tune of 25%- 35%.
China has less corruption than us. Their government also wants to help their exporters. If an MSME player here in Noida wants a piece of land, it will be a herculean task for him to get it allotted in his name, unlike for big industrial players who can lobby and lubricate their way to the top of the decision making chain.
TDB: You claim that MSMEs are not treated at par with bigger companies. Any experience that you would like to share?
S. K. Midha (SKM): We have put in limited efforts due to limited funds; but we are satisfied with our efforts. We had faced a major problem in August 2014, when we wanted to move into a bigger office in the same town. When we submitted an application, the DGM of that department said you need to close your business and then re-apply. Had I closed operation, I would have lost a lot of my customers. We had to face a lot of hassles due to the government’s complicated policies. There was no assistance from the government.
TDB: Has 'Ease of Doing Business' raised your confidence?
SKM: Not yet. Concept-wise, this is an amazing initiative. But on the ground level, not much has changed. I wanted to expand my business, wanted to have a bigger unit, but I was taken aback with all the running around I had to do just for trivial issues. Today, whenever an entrepreneur tries to expand his business, he does not get much support from the government. In most of the cases, there are 20-30 types of different clearances required. There are almost 20 types of returns one has to file. Some government policies have no logic; they should be reassessed and reworked.
TDB: How complicated is it to take credit facilities from banks?
SM: Taking a loan from a bank is a complicated process. It is only against pledging of your property. Not otherwise. There is no subsidy as well. There is suppose to be a subsidy on interest, but it’s not there. Just because I run a small-scale unit, I am not entitled to an interest subsidy. Recently, I had taken loan from a bank, and I had to pledge my house. And to top that my rate of interest is somewhere between 10-11%. It is huge!
I don’t think the government helps small-scale industries grow. Earlier small-scale units used to get a concession on excise duty. The government now doesn’t differentiate between a small scale business and a medium or a large unit.
TDB: What other challenges would you like to highlight?
SM: Our infrastructure is very poor. When consignments are dispatched from the country, they have to face huge queues at depots. Sometime it takes 24 hours for our goods to get unloaded in Delhi. And then it takes time to be loaded and sent to Bombay and shipped from there. It adds to our cost. Things need to be much better organised.
TDB: What percentage of your revenue comes from international markets?
SM: It is 50% at the moment. We export to around 10 countries including Sri Lanka, Peru, Colombia, Slovenia, Indonesia and a few South American countries. Global slowdown hasn’t affected our business, but I think the growth could have been much better. Our exports have been stagnant during the last two-three years.
TDB: EXIM Bank has schemes for both project exports as well as merchandise exports. What is the percentage of allocations for commodities vis-à-vis project exports and what is the basis for the allocation?
Gokhale Utpal (GU): EXIM Bank is a major agency for extending ideas to ECGC (Export Credit Guarantee Corporation of India Limited). We have developed the Indian Development and Economic Assistance Scheme (IDEAS) under which we have extended short-term loan to overseas buyers to import from India. We believe these key projects will enhance our country's exports. It will be difficult for me to give a commodity wise or project exports wise breakup. But, we support all types of commodities and destinations. In recent times, as part of the initiative, we have reached out to many countries in Africa and Latin America as well.
TDB: What is the criteria for selection of MSMEs when it comes to extending LoCs (line of credits) and other loan facilities?
GU: We have the same criteria for MSMEs and large enterprises. We have product development financing, which can be used as a lever for augmenting loans to MSMEs.
If there are some usual requirements, loans can be extended at affordale interest. We also provide finance to viable medium and small enterprises. We have links with multinational funding agencies and the World Bank and we charge MSMEs a one-time success fee for loan facilitation.
For grassroot enterprises, we have a training programme. This programme is very intensive and extends support and promotes grassroots enterprises by providing specific interventions such as assistance in skill development, product development and export readiness, etc. We train them for four months, we give them certificates and some funding. We also go to villages and identify people who can work for these enterprises. We give weavers, artisans, and others from the village equipment, so that they can work even from home and in this way we try to bring in a trained workforce to work for MSMEs.
TDB: Is EXIM Bank providing loans for technology upgradation in export-oriented MSME units? If so, what is the process involved in identifying beneficiaries for technology upgradation?
GU: Yes, we do provide funds for technology upgradation. With technology upgrades, MSMEs can have better bargaining power and are able to realise better price and arrive at payment terms that suit them. It is important for us to be involved in technology upgradation as a funding body.
TDB: Is LoC extended only to manufacturer-exporters or is it even for merchant traders involved in exports business?
GU: Anybody can export under LoCs as long as he/she is qualified for exports. There are some products where the government is trying to strengthen economic ties through economic diplomacies. Typically, this is what is happening with African countries and Latin American countries. Incidentally, there are a large number of importers and exporters. So, manufacturers and traders from any sector and of any size can avail LoCs. I must say that LoCs definitely give a boost to trade ties.
TDB: Are MSMEs which have availed loans from different financial agencies also eligible for EXIM credit facility?
GU: Absolutely, we provide loans to all MSMEs even if they have availed loans from other financial agencies. In fact, we would also encourage them to take certain capital from other financial institutions. This helps in stabilising these MSMEs as they are not dependent on one agency.
TDB: EXIM Bank's LoC policy or rule makes it mandatory for the recipient country to source 75% of the imports from India. Does this import have to be from EXIM Bank specified exporters or can the products be sourced from any Indian exporter? If so, can you explain dynamics of LoC and market linkages? Has this instrument been effective in ensuring loyalty to Indian exporters by recipient countries?
GU: No, they can source products from any Indian exporter. It can be a small commodity exporter, an MSME export-manufacturer, a small subcontractor or a large exporter. Speaking about the dynamics of LoC, EXIM Bank signs LoCs under the aegis of the Government of India. This is a kind of contract that happens with any other bank, and we follow the same kind of due diligence. Borrowers should normally use a shorter term LoC, but at the same time the borrower has to keep in mind that the LoC should be for a term that enables the entity to successfully complete the order.
TDB: What is EXIM Bank’s success rate in terms of achieving credit targets and also credit recoveries from the export oriented MSMEs during the past five-year period?
GU: I cannot give the success rate in terms of percentage. But I can tell you that we have been seeing great success. We can say that there are externally oriented proposals which finance even the imports made by companies for products which would otherwise have no exports.
TDB: When it comes to export performance, what is the success rate achieved by EXIM Bank-supported enterprises?
GU: Again, I cannot give you a number as such. But then the success rate of these enterprises has been quite good. The top performers would be from services, jewellery, textiles, pharmaceuticals and food processing industries. Exports from these sectors have seen a good growth over the last few years. However, we still see a little instability in these industries and that needs to be fixed.
TDB: From EXIM Bank’s perspective and experience, can you elucidate on the reasons for indebtedness and sickness among a considerable number of MSMEs?
GU: The sickness among MSMEs is due to various reasons. It could be difficulty in getting the financial support, or lack of market accessibility or institutional funding and host of other reasons. Export procedures are still not entirely MSME friendly. We can say that these are various reasons which prevent the sector from seeing the light of the day. However, we have been seeing good improvement in these sectors in recent times.
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