Curse of Indian SME’s

Over the years Indian Small Scale Sector has been able to create a significant position for itself in the Indian industrial economy. By employing around 28.3 million people it becomes the second highest source of employment in India. Apart from this it accounts for 49% of overall exports.

SME’s in India are dominant in sectors like textiles, chemicals, auto components, leather and machine tools. With the current slowdown mounting, this sector scores high rank of coming into its grip. This is evident from the fact that despite of 2 fiscal packages announced by government and easing of interest rate by RBI to infuse much needed liquidity in this sector banks are still hesitant to lend them due to their low creditworthiness.

Let’s look at the better picture of it:

Leather Industry
For instance let’s look at the case of leather industry; this sector was registering growth of about 20% in second half of 2008 but got crumpled by global slowdown. The main reason is accounted as slowdown in orders from western markets like UK & USA. The European Union and US markets contributes to about 25% to 65% of Indian export revenue.
Apart from this competition from china is becoming tough as Chinese government helping them to follow aggressive export policy which in turn helping them to bag more orders. If such scenario continues it is estimated that about 2-3 lakhs of jobs will be lost out of 25 lakhs of total workers employed and number can further increase.

Small service industry
In this aspect there is one interesting example to watch out; we all know how radio cabs industry has gained momentum in past few years. Estimates show that chauffeurs use to earn around 15000 per month around few months back, but with downfall in business their incomes have scaled down to 3000-4000 per month. This drastic decline in incomes of these chauffeurs is due to decline in number of duties on daily basis and burden of daily subscription of Rs 700 which is mandatory for them to pay.
If we need to check out an example of particular industry this one I Found out in one of the newspapers was of Chakradhar Chemicals Pvt Ltd, a medium-sized 13,000-tonne capacity micronutrient fertilizer company based in Uttar Pradesh. Company employs around 70 people and has been hard hit by rising cost of raw material and transport while salary expenses have increased by 16% on year-on-year basis.

Textile Industry
If we go 2 years back i.e. around 2007 Indian textile industry was on brink of rapid growth. However in present day the industry is pleading for urgent help for its resurrection. India is the world’s second largest exporter and consumer of cotton. In past few months cotton prices have surged nearly by 30% which has wiped of the demand for cotton textiles and garments from international markets. This has resulted in workers of textile industries to go for forceful voluntary retirement.

As discussed above major demand for Indian textile comes from US and Europe, with these countries battling the slowdown demand has been completely wiped of, this is despite of rupee depreciation, which is beneficial for exporters.
Numerical estimates show that Indian exports declined from $3.9 billion to 3.8 billion from the month of January to August, which was before US meltdown in September. The overall drop in value terms was 1.6 percent, with the drop in exports of garments a much higher 4.8 percent. The situation has worsened; total output of the textile sector has dwindled down to 10%. Study conducted in November by the Federation of Indian Chambers of Commerce and Industry (FICCI) pointed out that investments in the textiles industry were falling and so was its profitability.

I figured out few examples which have been hardly hit by this recession. While traveling by train in state of Punjab , as soon as train arrives in city Ludhiana , the recorded voice says city’s textile industries contributes about 80% of the country’s wool production. However but present day situation is different , most of the garment companies in city have suffer losses more than 50% over the last year , which creates 4,00,000 jobs in Ludhiana itself.

Remedy for This!
According to estimates of ASSOCHAM (Associated Chambers of commerce and industry of India) the SME’s were becoming tender during its first quarter with both manufacturing and hiring dwindling down to 10% and 7% respectively.

Therefore need of the hour is to restructure loan repayment plans for textile companies. According to most of the experts the medicine which can heal this bruised industry is easier terms for bank credit and reduction in taxes for textiles.

Let’s hope the new government which will form after upcoming general elections provide some respite to this beated down sector