Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing nearly 45% of industrial output, 40% of exports, 42 million in employment, creates around a million jobs a year, and produces nearly 8000 quality products for domestic and international markets.
Speaking at the recently concluded Delhi Edition of NASSCOM EMERGOUT Conclave 2010, Som Mittal, President NASSCOM said, “The SME segment represents a huge opportunity for India to retain its competitive advantage and sustain future growth. Over the past few years Indian SMEs, which are a significant contributor to the IT industry, have excelled in building niche products and services and tapping non-core markets.”
There has been a phenomenal growth in the SME sector in Indian context and has moved from industries like manufacturing, precision engineering, food processing, textile and garments to pharmaceuticals, IT, agriculture and even in industries like automobiles, healthcare, education and banking.
According to ICRA Limited, Indian SMEs not only withstood the global economic slowdown successfully, but majority registered profits in the last 2 years.
Speaking at an event organised by FICCI, Britain’s Commercial Secretary to the Treasury has expressed an interest to invite the Indian financial institutions including insurance firms (a first of its kind), to invest in UK. This would be beneficial for the Indian SMEs, as UK is known to have a large non-resident Indian population and also there is a marked presence of the large Indian banks.
The Indian government has invited the Canadian firms to invest in the food processing industry and this would benefit the Indian SMEs in the way of technological transfer. The advanced technological prowess would allow the related companies to increase their sales and exports as there is a growing demand for organic food products in the western countries. The same can also be leveraged by Indian SMEs in Malaysia where the majority of Indian exports constitute of food and manufactured goods.
Challenges
There are a number of challenges faced by the SME sector in India. Firstly, there has been very little monetary and political support from the government; banks are not really forthcoming in extending loans to the companies in this sector; and the large corporations are helpful in encouraging the sector. Apart from these, there is limited knowledge available to these companies, and due to financial issues they have to regularly neglect aspects like proper marketing and put their expansion plans on hold. Another major cost centre and deterrent is the scarcity of the skilled labour at affordable cost, which makes it more difficult for them to increase their capacity or expand in terms of market share. Quality assurance has also been a deterrent.
Though the above were a norm, the recent growth in the SME sector has fueled the breaking of norms and there has been an increasingly growing activity on part of the financial institutions to attract the Indian SME players.
Recent Events
President Obama of USA announced a stimulus package which aimed at spending around $180 billion on infrastructure and tax breaks. Though it is yet to be passed by the American Congress, the tax breaks, amounting to $130 billion over a ten year period, can have grave consequences for the Indian industry. The most visible effect would be on the stock markets with the FIIs withdrawing their money from Indian industries. In September 2010, Indian Union Labour Ministry proposed some major financial changes to be brought about to benefit the SME and create jobs in the process.
It proposes that the incentives given and the bank credits extended to any organisation should be linked to the number of jobs it creates. Agriculture, manufacturing, construction, retail trade, tourism, information and communication technology have been identified as potentially the biggest employers in the medium term.
The policy proposes to link the fiscal incentives, financial support and credit to the number of jobs created by the companies. Financial incentives and tax concessions are to have similar linkages with employment, work conditions and social security provided by domestic companies.
It proposes to banks to grant interest subsidy and easier credit terms to companies that generate more jobs by deploying labour-intensive technologies, equipment and processes. The policy prescription also proposes a sector regulator to ensure that organised large corporate retail houses do not gobble up the livelihood of small vendors and stores. It will also ensure decent work conditions in their businesses. Trade is also identified as a growth driver for jobs.
It calls for duty drawbacks, tax incentives and concessions to be granted in proportion to the number of jobs created by exporters. The labour ministry has justified linking easy credit to employment, saying only 5 per cent small and medium enterprises have access to institutional credit. A mere 5.3 per cent of all bank credit goes to micro-enterprises that account for 98 per cent of all enterprises.
Not only have the Indian SMEs out-performed some of the biggest names across industries and sectors, they are set for a growth marked with increased international presence, large job creation opportunities and huge profits, of all.
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