The global economic crisis is delivering a new script in financial engineering. In an anxiety to resurrect economies in difficulties we reopened Keynesian economics. Fortunately for India, which is outside the ring of the whirlpool, the government of India and the Reserve Bank of India have identified liquidity crunch as the problem to be attacked and have injected more than Rs 300,000 crore and thanks to the accounting gimmicks, headline inflation is made to look southwards, while in reality, the common man did not see any of his normal consumables and condiments available at prices lower than June 2008 prices. RBI eased prudential norms for sensitive sectors like the capital markets and real estate. And ?digging holes and filling them up? is the versatile art of all the Municipal Corporations and the irrigation departments!
There is one sector which lacks lobbying and clout – the SME sector. The growth of SMEs, in spite of banks and the government, grew at a minimum of 2% more than the large scale manufacturing sector. Even in the midst of extensive home and real estate lending period, dependent SMEs were languishing for credit as revealed by the most disappointing RBI’s latest Mid-Term Monetary Policy Review in terms of which, credit for SMEs declined in absolute terms from 31% in August 2007 to 9% in August 2008 and for Transport Sector from 44% to 27.5% for the priority sector. But this sector’s contribution to employment cannot be ignored. When India Inc is writing a new script of retrenchment of jobs and holding the order book to their chest as a result of global recession, is it fair to expect SMEs alone to fend for themselves? Do they not deserve attention?
TELCO and Ashok Leyland moved to five shifts a week with export markets declining. Lakhs of SMEs in the auto component sector, foundries were asked to stop supplies. Stocks are piling up. SMEs are not able to lay off employees as their elder brothers did or could enter into a negotiated settlement for reduced wages in an island of riches unleashed by the government implementing Sixth Pay Commission wages and salaries in sectors that progressively deteriorated in their contribution to the GDP. Credit is choked up in the name of growing NPAs in the SME sector. It is time to look at ways of pump priming the demand for the manufacturing sector.
All states have road transport undertakings running an aged fleet of vehicles that are contributing to pollution. The government of India could pump equity to replace all such vehicles that would pump prime the demand for buses and trucks domestically. This would enable the truck and bus manufacturers to work at least 50-60% of their capacities in the near term and eventually pump in oxygen into the dependent SMEs that are otherwise sinking. Although PSBs would appear to be keen on more car and scooter loans, the most congested traffic of all the cities in the country can hardly bear additional vehicles on the roads until the infrastructure significantly improves. On the other hand, it makes lot of sense to fund the State and Private Road Transport Undertakings for buying new and additional fleet. If the banks additionally fund road infrastructure projects with the speed they require, supplemented by government support, financing cars and motorcycles can be taken up at the subsequent stage. Election time is certainly not the time when the banks can fund the automobile sector when several taxies would be commissioned by the government for election purposes at will and the repayments would not come forth for such engagements. Banks would end up in disaster and the incentive loans would drive the self-employment tourist and travel industry in misery.
Secondly, RBI should immediately change the prudential norms for the SME sector. All outstanding credit to the March-end/pre-crisis well-functioning SMEs should be converted into interest-free long-term loans, with a gestation of twelve months. Fresh working capital should be granted at a flat 8-9% per annum in tune or 4-5% less than the PLR, with fresh projections of cash flows to be submitted by the enterprises without any additional collateral security. All enterprises within the reworked out consolidated limits of Rs 100 lakh should be covered by the CGTMSE scheme under their recently-announced shared collateral mechanism with their member-lending institutions as a rule, so that the provisioning norms would automatically be eased for such enterprises. Redefine the NPAs from the current level of 90 days to 180 days past dues.
In respect of export-oriented SMEs affected by contraction of overseas demand, all payments held over in the pipeline or affected by the currency crisis should also be given reprieve by the banks on a case-to-case basis. Pharmaceuticals, electronics, auto components, gems and jewellery, textiles and ready made garments, sweat garments are all under such category. GoI should postpone collection of all taxes by at least another six months subject to review thereafter from the SMEs. All these facilities should be made applicable only to those enterprises, which do not lay off employees. It is also the time when RBI should clear the recommendations of the KC Chakraborthy Working Group on the SME sector without any further delay.
The government of Indi,a under its Market Development Assistance, should encourage SMEs wanting to explore new markets overseas through sponsored exhibitions, extensive education, extension services and technology transfers. Banks should be enjoined upon to treat all branding, co-branding, IPR and marketing costs as capital expenditure and to grant term loans with at least 24 months gestation for such purposes. Sidbi should open a separate window of refinance for such term loans. These measures do not brook delay, as the ability of SMEs to tolerate cash losses simply does not exist. I am sure, the government, keen on ensuring at least 7% growth, would move swiftly in this direction.
?Yerram Raju is regional director, PRMIA-Hyderabad Chapter and leading SME consultant