Free SMEs from funding woes

Anil Bharadwaj, Secretary General, FISME

The Federation of Indian Micro & Small & Medium Enterprises (FISME) came into being in 1995 to prepare Indian SMEs to the challenges thrown by the changed economic realities. On its agenda is, ensuring better credit facilities for small-scale industries, networking on a national and global scale and encouraging e-commerce. It also wants to ensure for SMEs better access to Markets and market norms.

FISME works as an independent lobbyist with the government for over a lakh of SMEs that it represents. It visualises better understanding of the World Trade Organisation norms for SMEs. In a memorandum presented to finance minister P Chidambaram for Budget 2008-09, FISME has mentioned that, although exports during April-October this fiscal rose 20.9% to Rs 3.47 lakh crore ($85.58 billion), the export performance of most of the SME-intensive sectors has not been up to the mark. During this period, textile exports fell 22%, handicrafts 66%, leather 9% and marine products, almost 20%. All this, while the rupee has appreciated, interest rates have risen and higher inflation have impacted consumer demand, hampering growth of the sector.

It has mentioned that that the rising production costs and the demand for skilled labour have also led to stress for SMEs. The memorandum mentions that the credit-linked capital subsidy scheme (CLCSS), since the process of liberalisation started in 1991, leading to complete removal of quota regimes and de-reservation of a bulk of the sector, has been the only scheme that aimed to address SMEs’ needs for technological upgrade. The scheme came to an abrupt end on March 31, 2007. FISME’s main complaint has been that, in more than 1,000 cases where SIDBI signed agreements with SMEs under CLCSS, appraised projects and sanctioned loans, the small-scale industries were informed that there was no money left under the scheme. The implementation of the scheme, therefore, leaves much to be desired. FISME feels that the CLCSS scheme should be continued and cases in which funds have already been approved should be given.

In terms of finance, 85% of the SME sector does not have access to any form of institutional funds, while the percentage of SME lending as a total percentage of banks’ lending has fallen consistently for over a decade despite public pressure. The association feels that there is an urgent need to revisit the whole premise of priority sector lending. Also, it is felt that new financial instruments need to be encouraged for the SMEs to reduce their sole reliance on debt finance and private equity.

Meanwhile, for SMEs to function, we need to get rid of the rigidity in the system. FISME is hoping that the interest rates for lending to the SME sector, which is currently 12% to 13%, will come down to 10% to 11%.

FISME believes that cluster development is a good way to take growth forward and strengthen the SME sector. Italian clusters have served as a role model for Indian ones. What Italy has faced is that, with almost negligible governmental support due to a rapid fall of regimes (the average tenure of a government in Italy over the past few years has been barely 12 months), it was difficult for that country to have a long-terms policy for SMEs. But, it was a blessing disguise because the basic premises were there and they were left to fend for themselves. Eventually, they became self-dependent and achieved competitive levels and maturity in production, something which was ‘unthinkable’ before. In a cluster, a value chain gets built in a particular segment, such as leather goods, and each shares and exchanges information at a formal and informal level. This results in the achievement of a level of productivity that nobody could think of.

As a result, the SMEs in Italy not only competed with the ones in Germany, the UK and France, but outdid them in many areas—textiles and leather—to name a couple. In a cluster, a local supply chain of a particular product-line will reside at one place. In the medium and large sectors, it is certainly Germany and the UK that a person can look up to for hi-tech operations. France can be emulated for the success of its clusters in food-processing. The Italian model of cluster development has impacted a lot of thinking in India, hoping for quick gains. The ministry of commerce also wants SMEs to cooperate with the IBSA grouping (India, Brazil South Africa) for their own benefit, and FISME has presented a road map to the government on the areas where SMEs could have similar enterprises in these countries.

The government is nevertheless playing a very active role in cluster development of SMEs in India, given that over 90% of the manufacturing units in India are small scale.

Meanwhile, Fisme has a few other suggestions for the finance minister. Such as, graded taxation for Companies on the basis of slabs of income, as that would facilitate the transition of informal SMEs to become Companies and improve their ability to access capital. More than 90% of SMEs tend to remain partnership or proprietorship entities due to the high compliance cost of the Companies Act—the prospect of a higher slab of income tax once they become Companies deters most. FISME is also hoping that small enterprises may be exempted from the fringe benefit tax. In terms of labour laws, FISME feels that a large number of states follow a flawed mechanism of determining minimum wages based on sectors in which a worker is employed. A worker, therefore, in the engineering sector is entitled to a different rate than the one in the food-processing. So, the economic criteria for minimum wage need to be rationalised.