By Anil Bhardwaj, Secretary-General, FISME
Riding on excess liquidity and demographic dividend-young nation, building homes, buying and spending-Indian small industries have been clocking double-digit growth for the last few years: 10.88% in FY05; 12.32% in FY06; and 12.65% in FY07. The sectors leading the growth have been: housing, auto and white goods in the domestic market and apparel & textiles and gems & jewelry in the export market. All these sectors are small industry-dominated.
But two developments proved spoilers. The sub-prime crisis in the US that later snowballed into a full fledged financial crisis, and, high inflation, particularly in India. In order to contain inflation, RBI squeezed money supply and hiked interest rates over the last four years. The tipping point came in September this year when the tap on excess liquidity was suddenly turned off in the US markets with the fall of their top investment bankers. Panic spread across the financial markets in the world. Indian corporates and banks, which generously tapped these financial markets for cheap short-term funds through ECBs and a range of new-age financial instruments, suddenly found the door firmly shut. They returned to Indian banks. Frightened, the Indian banks refused to part with funds to all borrowers: big or small. By September end, half the small industries were reeling under a severe financial crunch and their day-to-day operations were affected. Even basic banking facilities such as overdrafts and financing of letter of credits were not spared.
Many people criticised RBI’s sole reliance on monetary measures and warned that in spite of India’s unique demographic profile and growth potential, its policies would stifle growth. With the corporate sector delaying payment to small suppliers and banks husbanding capital, small industries were left high and dry—no order, no cash.
The Economist’s analysis on the issue (October 23 ’08) is instructive: “The economic slowdown evident in America and Europe was regrettable, but central bankers in many emerging economies, such as India and Brazil, were busy engineering slowdowns of their own to reverse high inflation. They were more interested in the price of oil than the price of inter-bank borrowing”.
Sectors that were leading growth and creating employment started collapsing one after another: housing, auto, white goods. Exports started dwindling due to the slump in major markets. The cascading impact of these sectors fell on long supply chains down the line.
According to a FISME’s study, there is already an employment loss of one million in these sectors alone There is a 30% rise in delinquent accounts. It is just the beginning. With current dispensation, NPAs will rise alarmingly.
What is to be done? A solution should start at two levels of the problem: financial crunch and demand recession. Measures are required that will help small industries to tide the tight financial year with bearable pain and that push demand for their produce.
Firstly, there should be a moratorium on repayment of loans for at least 12-15 months and along with substantially easier norms for debt restructuring and NPAs.
Secondly, there is an immediate need to address small units’ enhanced working capital requirement and convert sticky receivables from corporates into working capital term loans. There is a strong demand for interest rate subvention of at least 2% for small industries.
Thirdly, since risk-averse banks are husbanding capital despite improved liquidity in the system lately, the credit guarantee coverage for small units may be made mandatory and its cost may be borne temporarily by the government.
Fourthly, although everybody is advocating adoption of Keynesian principles for augmenting demand, the fruits of enhanced government spending would not reach the masses, unless participation of small industries is ensured. It is time India adopted policies of set-asides in public procurement as in the US and earmark 20-25% procurement from small industries. While doing, it should also be ensured that these are not crowded out through ‘bundling’ of contracts.
Finally, the crisis is an opportunity to effect critical reforms as there is remarkable consensus to take corrective measures to arrest the economic slowdown. Such an agenda should encompass preponement of GST before 2010, adoption of modern codes of insolvency and bankruptcy for individuals and small businesses; and, steps to reverse the prevailing ‘risk-reward’ ratio skewed against manufacturing. The residual growth 7-8% of GDP being projected constitutes of agriculture and services and excludes manufacturing. Without the sustained growth of manufacturing where would the mass of un-skilled and semi-skilled labour force turn for employment?
What has been rather surprising in the context is that top policy makers have been in a denial mode for larger part of the crisis period. The gravity of the problem is yet to sink in. The enormous job losses in small industries across production centres in the country may not attract the publicity that a few hundred well-dressed employees of Jet Airways would, but the anger of the masses would be too hot to handle economically, socially and politically.
The writer is secretary-general with Federation of Indian, Micro and Small & Medium Enterprises. Email: sg@fisme.org.in
Courtesy : The Financial Express (December 12, 2008)
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