Facilitate greater flow of funds to SME sector

This year’s budget should equip the sector to face global competition

The central government’s policy thrust in sustaining a high GDP growth has helped the economy register remarkable growth over the past few years.

It is necessary to provide employment opportunities to the productive masses to sustain this growth. 

Harnessing the SME sector, particularly more labour-intensive sub-sectors of manufacturing, is the answer for achieving more equitable growth. Notwithstanding the higher growth rate of 10.8% recorded by the SME sector compared to the overall industrial growth of 7.7% during the preceding five year plan, the projected growth of 14% in the current five year plan is not going to be easy.

Also, there is a growing concern about the lacklustre performance of some of the key export-oriented sub-sectors like textiles, leather, rubber, jewellery and consequent job losses due to appreciation of rupee. 

With India’s position in the global trade gradually rising, the country needs to frame policies commensurate with the rule based multilateral trading system advocated by the WTO. 

Despite the advantages of being an active member of the free trading community, there is no denying that Indian industry will have to face more competition and SMEs will be the first in the block to feel the heat.

As we move to a more open, transparent and competitive regime, many of the previous policy initiatives for providing protection to the SMEs have already taken place. 

Some of the crucial steps taken by the government include pruning down the list of reserved items, gradual reduction of high import tariffs for brining the level at par with Asean, doing away with the policy of purchasing preference given to the SMEs for long, removal of equity/foreign investment restrictions etc.

Consequently SMEs have started facing intense competition not only from external suppliers but also from the large companies within. 

Therefore, there is an urgent need to address these issues for infusing more competitive spirit among the SMEs.  SMERA, through its initiative of profiling clusters across the country, has identified some of the key areas which require attention in the Union budget. 

Ensuring greater credit flow through cluster-based financing is very important for the fund-starved sector. 

Considering the diversity of the problems varying from one cluster to another, depending upon the nature of operation & products produced, financial institutions need to develop cluster-specific lending products suited for SME requirement rather than offering a generic product developed for all.  Popularising SME rating will surely help.

Acute shortage of skilled manpower has been affecting the operations severely.  Even simple welders, plumbers, mechanics, electricians, let alone technical personnel with formal qualifications, are in short supply. 

Funds should be set aside for setting up of cluster-level training institutes/tool rooms. A PPP model must be adopted by involving local associations and other stakeholders for need gap analysis and effective implementation.

Budget should facilitate greater flow of funds for start-ups at right terms. Promotion of investments by angel investors, venture capitalists and PE funds will be right step towards this. 

Till such investors find it attractive to finance SMEs, banks and other formal lending institutions could also invest in equity or capital of SMEs so that they could also benefit from the SME business upswings. 

The early warning signals and opportunities are first detected by the markets.  SME unit level information is available, which could be harnessed in providing investment and exit opportunities through local SME exchanges. 

This would also bring in greater amount of transparency and accountability.

Information asymmetry is another crucial area. SMEs/policy makers/stakeholders suffer from availability of information for formulating their strategies. Setting of a ‘SME intelligence centre/SME information exchange’ which will act as one stop source for SME related information can be the answer.

The writer is CEO, Small and Medium Enterprises Rating Agency