Performance gaps in support schemes

Since Independence, there has been a widespread recognition in India that small enterprises could be engines of economic growth, job creation and relative prosperity. The promotional setup for the MSME sector has, therefore, been elaborate.

In the liberalisation era, the Industrial Policy of 1991 and the Abid Hussain committee report (1996-97) induced a paradigm shift in the direction of promotional policies for the sector. The points of departure have been characterised by a shift away from protection of the small-scale sector to its promotion; from support to individual unit to group of industries (clusters) and involvement of associations and the private sector in the formulation and execution of promotional schemes. The change is evident in the rising number of schemes and the public-private partnership projects in the last decade.The Federation of Indian Micro and Small & Medium Enterprises (FISME) recently studied major MSME development schemes that envisage a role for MSME associations in their design and implementation. The study mapped 42 schemes being run by 10 central ministries/departments. It found that while the broader aim of all schemes was enhanced competitiveness and growth of the sector, different schemes sought to achieve that by focusing on any of the following five areas:

• Provision of infrastructure;

• Soft interventions, including capacity building, training & research;

• Marketing assistance;

• Technology upgradation; and

• R&D/innovation.

The associations’ roles varied with schemes. Some roles were quite generic, like need assessment and design of a scheme or spread awareness about the schemes. Some schemes have envisaged more specific roles: the associations are to implement or help float special purpose vehicles (SPVs) for implementation of projects or to participate in the evaluation/approval committees or monitor the schemes.

Partnerships between public and private institutions hold much promise, especially in MSME development, and from the perspective of outreach, efficiency and sustainability of public support programmes. But how effective these schemes were on the ground?

The study points to the wide gaps between the promise and reality. The off-take under these schemes was very low. And the level of participation of MSME associations was also negligible, especially in schemes envisaging implementation. The study has analysed the causes of the existing gaps and ways to bridge them.

It contends that while conceptually concurrence has come about among higher levels of decision-makers, serious constraints stem from the conflict in the legacy systems in ministries (purveyor of the schemes) and the new role they are expected to play of a facilitator and partner with the private sector. Thus, almost all schemes—supply side—suffer from similar limitations.

Almost in all schemes, no structured need assessment has been made before their design. Dialogue with stakeholders prior to or during the launch of scheme has been rare and, therefore, a scheme’s flaws come to light too late to make any course correction. Training of officials handling the schemes is seldom undertaken, resulting in weak understanding of concepts, which in turn leading to excessive compliance-orientation. Then, there are too many layers of decision-making and guidelines are too rigid, leaving the execution process very difficult. There are inherent conceptual flaws in schemes. For example, in the PPP models there are too many white-spots where clarity is missing: the questions of ownership of assets; need for viability gap funding; requirement of land as upfront contribution and the like. Finally, poor availability of information on the schemes and their operational steps and outcomes is a cross-cutting issue. (Even the study had to resort to a series of RTI applications to access data from respective ministries.) The constraints are not limited to the supply side. The demand side, the MSME associations, also suffer from serious deficiencies. The single-biggest challenge before MSMEs has been in dealing with global competition. As the competitiveness is influenced by several hard and soft factors beyond the control of a lone MSME, collective initiatives and public support for such initiatives are needed. That is the role associations were expected to play.

However, the study points out that MSME associations suffer from some serious weaknesses, which come to fore when they implement collective initiatives. Most MSME associations in India suffer from a classical vicious cycle: weak resources lead to lesser activities, which lead to fewer members and resultant weak resources. Most fail to generate revenue from sources other than membership. As a result, they fail to set up a strong and empowered secretariat to carry out the core functions of associations, and also fail to take up MSME development projects. This also limits their ability to hire professionals for conceiving, planning and executing development projects.

To address the flaws of the schemes, the study recommends a series of steps summarised in accompanying matrix.

The author is secretary-general, Federation of Indian Micro and Small & Medium Enterprises

Courtesy: The Financial Express (September 18, 2009)

Govt may ease up listing for SMEs

Cash-starved small and medium enterprises can look forward to some easier norms to raise capital from the primary market with the government mulling over a plan to relax listing guidelines for such companies.

According to a proposal before the government, qualified institutional investors, mutual funds and high net worth individuals may be allowed to participate in the process.

The government has held talks with industry bodies including the Federation of Indian Micro and Small & Medium Enterprises (MSMEs) on the issue.

Corporate Affairs Minister Salman Khurshid has said a one-size-fits-all approach on disclosures and accounting will not work for smaller firms, which want separate guidelines.

“The plan is at a nascent stage. A decision on the same would be taken only after much deliberation,” said a government official who did not want to be identified.

At present, companies wishing to go public have to follow stringent disclosure norms and a listing agreement monitored by the Securities and Exchange Board of India.

Anil Bhardwaj, secretary-general, FISME, said his federation had held informal talks on the issue.

“There is need to have easier norms for SMEs and the federation feels that in the initial phase, retail investors should be discouraged from participating,” he said.

In the UK, smaller companies can get listed on the Alternative Investment Market — an arm of the London Stock Exchange. AIM was launched in 1995 and has raised capital for more than 2,200 companies.

More than a decade ago, India had its own over-the-counter (OTC) Exchange of India to aid small companies, but it did not take off.

SEBI may take its time on a model listing agreement for small companies.

Courtesy: The Hindustan Times [September 15, 2009]

Exim Bank window offers 50% capital support to MSMEs

Our Bureau KOLKATA

EXPORT Import Bank of India (Exim Bank) has opened a special funding window for micro, small and medium enterprises (MSMEs) planning to export their products. The development bank has also mobilised the Grassroots Business Fund, a US-based not-for-profit organisation, to offer seed capital to MSMEs for building export units. The initiatives are in sync with the country’s thrust on MSMEs.

According to Exim Bank chairman & managing director TC Venkat Subramanian, the special funding window has been created recently to support export marketing initiatives taken up by MSMEs. Exim Bank will reimburse 50% of the project cost. The CMD, however, did not specify the corpus of the new facility.

“We will offer export marketing finance to MSMEs as a grant. The facility would boost the sector, which has been the government’s focus for quite sometime,” Mr Subramanian said on Wednesday on the sidelines of a ‘Trade & Logistics Symposium, jointly organised by Indian Institute of Foreign Trade (IIFT) and Confederation of Indian Industry. The Economic Times was print media partner for the event.

“We are also acting as facilitator for getting seed capital for MSMEs from the Grassroots Business Fund. The entity would take 20-25% equity in each MSME depending on the size of the unit,” the Exim Bank CMD said.

On the country’s overall export scene, he expected flat growth at 3% for this fiscal. In the inaugural session of the event, IIFT director KT Chacko underscored the need to improve transportation infrastructure in order to achieve sustainable export growth.

“In most of the state, there is no serious effort to improve transportation systems. Transportation cost is very high and this needs to be addressed. There is also largescale inefficiency in export logistics,” Mr Chacko observed.

He mentioned that since the export sector has created large-scale job opportunities, especially since 2004, export growth assumes that much importance for the country’s overall economic health.

In fact, the global economic downturn has impacted specifically the country’s textile and gems & jewellery sectors which are largely export-oriented. Yet, India’s export-GDP ratio is just about 15%, compared with the 30% ratio for China.

Task force soon to solve problems: PM

THE government will soon set up a task force to address problems of the micro, small and medium enterprises (MSMEs) sector, reports Our Bureau from New Delhi. MSMEs have been demanding availability of adequate financing and change in labour laws to facilitate the industry. Prime Minister Manmohan Singh has assured the industry that the task force would submit a report within three months, the industry officials said after meeting the PM on Wednesday. The industry representatives from small and medium scale companies have apprised the PM about the difficulties faced by the sector due to the global economic slowdown. “Prime Minster said that a task force will be formed to help the MSME sector,” Federation of Indian Micro, Small and Medium Enterprises (FISME) Chairman Suresh Mohan said. The MSME sector has also demanded setting up of an SME Stock Exchange to help raise finances easily to encourage product innovation and better risk management.

Courtesy: The Economic Times (August 27, 2009)

Recession takes a toll on Ludhiana textile cluster

Seema Sindhu / New Delhi

The smaller units are applying both strategic and tactical shifts to fight the slowdown.

The micro, small and medium enterprise (MSME) textile cluster in Ludhiana, Punjab, has rewritten some of its practices to adjust to the global recession according to the findings of a study commissioned by the International Labour Organisation (ILO). The study was conducted in June by the Federation of Indian Micro, Small and Medium Enterprises (FISME) in association with Market Insight Consultants.

The study found that the cluster suffers from a serious shortage of labour. Anil Bhardwaj, secretary general of FISME says: “The key finding of the study is that there is a serious dearth of employable people.”

The labour shortage was found to be a result of the National Rural Employment Guarantee Scheme (NREGS) which led to reverse migration of labour to the rural areas. About 5-15 per cent of the workers are from eastern Uttar Pradesh, Bihar and West Bengal and prefer to work closer to their villages. The study notes that there is a need to enhance the Ludhiana textile cluster’s attractiveness, to attract migrant labour from other states.

Other factors causing labour shortages were the growth of SME clusters in Kolkata, and growing demand for manpower in Uttarakhand. Machinery at the units was lying idle due to the insufficient availability of skilled labour, the study says.

The cluster has sought to cope with the recession — which led to cancellation of orders and a pile-up of stocks of both raw materials and finished goods, uncertainties in future contracts, and delays in payments for goods exported, the combined effect of which was erosion of profits — through both strategic and tactical responses.

The strategic shifts have taken five forms. The first is a higher focus on the domestic market. Second, those with diversified businesses began investing more resources in other ventures and reducing their focus on textiles.

Third, the larger units — in search of higher margins — are attempting to build their own brands in the domestic market, though few have yet managed to gain competencies in retail marketing. Fourth, cost-cutting initiatives through process optimisation have been set in motion (this, too, is restricted to the larger units in the cluster). These efforts have taken the form of de-bottlenecking, mechanisation, multi-skilling and target enhancements.

The fifth strategic shift was an effort to train unskilled workers — especially the unskilled female workforce. The study observes that the enterprises’ effort to invest in the training of young females is apparently facilitated by the female workers’ desire to save money for their weddings; however, infrastructural inadequacies and the high payback time are acting as impediments.

Tactical shifts have taken four forms, according to the study. Firstly, wherever possible the SMEs have countered the pressure of delayed payments from their customers by merely delaying their own payments to their suppliers. Secondly, they have shown a willingness to renegotiate contracts, trading in profitable contracts for assured orders.

Thirdly, textile units have changed the formula for bonus payments from a fixed basis to a per-piece, productivity-linked basis. Fourthly, they have seized the opportunity offered by the recession to downsize manpower levels, retaining only the more competent personnel (though the respondents never openly acknowledged this).

The study recommends that the industry, its representative associations and the government should come together to educate, train and promote local labour to reduce the dependence on migrant labour. There should also be special schemes for female trainees, including subsidies to recognised NGOs. The government should make significant investments in local training institutes and open PPP model-based institutes for developing highly skilled labour, the study suggests.

The cluster’s overall dependence on exports is a moderate 15-20 per cent, with only about 25 per cent of the MSMEs involved in direct exports. That’s why, says Bhardwaj of FISME, “the impact of the recession has been very brief on Ludhiana,” compared to the Tirupur textile hub in Tamil Nadu.

The vast majority of textile units in Ludhiana comprise contract manufacturers that supply only to larger firms or the domestic market. The cluster consists of about 10,000 units (of which fewer than 50 are large) and has total revenues of some Rs 10,000 crore.

The study was based on face-to-face interviews with a cross-section of 20 micro, small and medium enterprises; employer networks and associations; worker groups; banks, financial institutions and government agencies; and support service providers such as transporters.

Courtesy: Business Standard (July 14, 2009)

Industry facing ‘hostile’ conditions in UP: Study

Pioneer News Service, Lucknow

Even as the government is trying to create an investor-friendly atmosphere, jobs in the private sector are shrinking fast owing to the “hostile” conditions prevailing in the state.

“The industry in the state is facing a far greater hostile condition than previous years,” a nationwide study carried out by the Federation of Indian Micro and Small and Medium Enterprises (FISME) in collaboration with FNF (Germany) and Rajiv Gandhi Institute for Contemporary Studies (RGICS) said.

The study was discussed threadbare at a seminar ‘Economic Freedom: Relevance for Economic Development’ on Monday where speakers discussed how the state was lagging behind in the industrial sector.

“Indifference of the leadership towards the industry is responsible for the continuous decline in the sector and is driving out business from the state,” senior vice-president of FISME VK Agarwal said.

“Residents of Uttar Pradesh are fast replacing the workers from Bihar as major migratory labour force in the country,” he added.

Dr PD Kaushik, one of the chief researchers, said while Uttar Pradesh was finding itself among the states having potential for reforms, it was continuously going down on key parameters which were critical for industrial growth.

To gauge the investment-friendly atmosphere in India, a study ‘Economic Freedom Index for States of India’ was carried out in 2008.

The Economic Freedom Index (EFI) figure measures the degree in which policies and institutions of state support economic freedom. Twenty-six variables were used to chalk out a composite index for the states in India.

The study showed that though Uttar Pradesh held seventh position in Composite Economic Freedom Index, better than Haryana and Punjab, it failed to induce optimism among the investors.

Dr Kaushik, also Director of RGICS, said that in crime control, Uttar Pradesh continued to be a laggard. “There is only 28 per cent chance that stolen goods will be recovered in the state while the national percentage is 53. The rate of recovery in Tamil Nadu and Haryana is 75 per cent,” he said.

Recovery of stolen property is globally considered as a benchmark in effective administration.

The study further revealed that the degeneration in law and order situation was adversely affecting the business environment and the state was finding itself in league with West Bengal, Jammu and Kashmir, Bihar, Assam and Jharkhand in terms of industrial investment.

Similarly, the state figures last in terms of power scenario and number of SEZs.

“If there are a few parameters where Uttar Pradesh has done well, there are others where the state has lagged behind,” Dr Kaushik said.

The speakers said that there was no freedom when it came to speaking regarding development. “We wanted the officials from the state to put forth their stand as to why the state is trailing in all the indices. But no one came forward,” he said.

According to FISME, the problem in the state emanated from weak dialogue between political leadership and business community, particularly micro, small and medium enterprises.

Courtesy: The Pioneer (July 14, 2009)

FISME Union Budget 2009-2010 MSME Poll: Have your say

The Union Budget 2009-2010 has been announced. Did it meet your expectations? Is a million-dollar question which is swirling in everyone’s mind?

To have a say of yours about the key issues brought in the Budget, FISME is carrying out a Union Budget 2009-2010 MSME Poll from the micro, small and medium enterprises (MSME) sector for its immediate feedback. The last date of filling in the Form is July 13, 2009.

Click here to fill in your response.

Did Pranab Mukherjee's Union Budget 2009-2010 meet your expectations?

According to a recently carried out pre-budget ET FISME MSME Poll, 70 per cent said access to credit for MSMEs has not improved after the announcement of the two stimulus packages; however 81 per cent witnessed slump in their domestic sales in the last quarter of 2008-2009. At the export front, 74 per cent respondents accepted there has been drop in exports in the same duration. To the question: Do you expect the government to announce new packages for MSMEs? Out of 100 MSME participants, 78 per cent said they do expect the government will dole out special packages for them. Now with the announcement of the Union Budget 2009-2010, the million-dollar question is: Did it meet your expectations? Have your say, here

The recession has taught Jivrajbhai Surani, 60, a diamond exporter from Surat, some invaluable lessons. Joint sourcing, eschewing credit sales and localising assorting operations not only helped him survive these trying times but also saved his firm 10% in operating cost over the last three months. But the scars of the struggle aren’t going away soon. “I haven’t seen such a hard time during my four decades in this business. There is hardly any demand and we have had to lay-off 50% of our staff,” says Surani, a diamond worker-turned-entrepreneur. Varaccha Road, where his office is located, is home to around 8,000 diamond cutting and polishing units that employ over six lakh workers. Like him, every unit in the unorganised diamond industry—estimated at Rs 50,000 crore—has taken a hit due to the global economic meltdown.

ET FISME MSME POLL

While it all starts with lending issues, there are other problems that are unique to each sector and region. Ludhiana has had a fledgling industry dedicated to bicycles and bicycle parts. The installed capacity of 6,000-odd units here is around 50,000-60,000 cycles a day which accounts for Rs 100 crore worth of business daily. There is a similar amount of cycle parts sold everyday. The going has been good through the years, except for the last two years since steel prices started fluctuating more than ever. “This has increased import of bicycles from the cheaper China market,” explains Charanjit Vishivkarma, president of the United Cycle and Cycle Parts Manufacturers Association, and managing director of Vishivkarma Industries, which makes bicycle parts.

Last year, steel prices spiked 55% and with very small margins of around 5%, a quarter of the units in Ludhiana closed down. This increase also fuelled cheaper import of bicycles from China. Exports from India have declined from Rs 840 crore in 2007 to Rs 600 crore last fiscal. The consequent gain has been in imports from China which have grown from Rs 50 crore odd in 2007 to Rs 400 crore today. What this done to Ludhiana’s cycle industry is irreparable, says Vishivkarma: “Many companies closed offices here and setup shop in China to re-export directly from there to their clients.” Some of the major export markets for these bicycle and bicycle parts manufacturers are the Gulf countries, Latin America and Africa. The past 6-8 months have been a double whammy for these manufacturers as demand from these major markets has declined on account of the global slowdown. The only thing that is helping them sustain is demand from the domestic market. Apart from expecting a stability in steel pricing, at least on a quarterly basis, which will help in the short run, Vishivkarma says the government should develop a bicycle cluster in Ludhiana. With subsidy for automation and help from government run R&D centres, the units can become more competitive globally, he says.

Input costs determine the fortunes of most manufacturing-based businesses, and for the paints industry rising crude prices played havoc last year, particularly on the smaller players. The paints industry in India is valued at Rs 17,000 crore of which 40% is contributed by small and medium sized companies. During the period from October 2007-2008, when the world saw the biggest spike in crude prices, about 10-15% of the units closed down, says Indian Small Scale Paint Association president D Shivaram, who’s also owns Supercoat Paints.

As crude prices came down, recession set in reducing any chances of a recovery for the sector. “The entire industry is suffering. The paints industry is completely dependent on the health of other sectors,” says Shivaram. As the real estate sector tanked, so did the demand for decorative paints. The decorative segment shrank 15-20% in the third quarter of 2008-09 while the industrial sector is worse hit—down 20-30% month-on-month since September. The industry expects the government to increase the MRP abatement from 30% to at least 40-45%. Shivaram says the recent excise duty reduction from 14% to 8% has helped the industry offset its losses.

IT exports are also facing the heat of global recession. “Of India’s total IT exports last year, SMEs accounted for 40% of the total electronic hardware exports. In software they accounted for 30% of total exports,” says Sunil Vachani, vice-chairman of the Electronics and Computer Software Export Promotion Council of India. Mahendra Baid, AVP at Netcore Solutions, says that appreciation of the rupee hurts even more now that clients are much harder to come by. “The government must keep a tab on the rupee—too much rise hurts firms like us who export services. Clients are shying away from new investments, and that has made the work harder. So the tax breaks need to continue for sure and the fringe benefit tax needs to be withdrawn,” he says.

However, apparel exporters who are among the major sufferers sought a slew of sops including a Rs 5,000 crore market development fund besides expecting a complete exemption from fringe benefit tax, income tax and reduction in interest rates and service tax refunds. Most of the members expect a fresh investment of over Rs 1 lakh crore in the garment sector to revive it.

Newly appointed Minister of State for MSME, Dinsha Patel assured of prompt action to assuage the impacted sectors. “We are highly concerned about small players who have been consistently contributing towards economic growth. We are evaluating all the sectors independently and will try to provide support to all,” he says, hinting at the creation of a independent fund for enterprises in the unorganised sector to address the credit needs of the small enterprises that have often been marginalised under the existing institutional mechanism.