SME WORLD January-2019.Pdf
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Dr.Gajavelli V S Dr. Deepa Dani SMEs' Growth: the global value chains.It is in this and generate working capital mars context, attracting Foreign Direct SME development further. It is Why FDI Imperative? Investment (FDI) into SME sector believed that foreign equity flows in India's SME sector has truly played a becomesimperative to all the the SMEs can allow small firms to crucial role in the last several stakeholders including SMEs, extract opportunities and position decades in contributing to job industry associations and the themselves better in the global creation, output and industrialization facilitating policy-making agencies. markets. However, several demand in rural and backward regions. The Tactically, such an additional foreign side and supply side challenges faced SME sector accounts for over 40% of investmentis very much needed as by Indian SMEs result in low FDI gross industrial value addition and the country has to grow at a rate absorption propensity. over 50% of total manufacturing higher than 7% to 8% of GDP to find First and foremost, the size does exports. That way SMEs now occupy jobs for millions of additional matter and it reduces SME capability a position of strategic importance in workforce that get added to the job to absorb large chunks of foreign India's economic structure and future market every year. This becomes all equity. Going by this logic, the prospects. the more important to sustain the corollary seems logical. A small Given the liberal business existing growth rates in the long-run foreign direct investor is more ideal environment last three decades in the and maintain India's competitiveness as a match. But bringing them countryand the very convincing on an enduring basis. together and building confidence positive outlook of the Indian poses a challenge. SMEs have Channeling FDI into SMEs: limited access to information economy, SMEs plan to scale-up The Challenges their operations, enhance capital especially related to prospective expenditure and employ more Small and Medium Enterprises foreign suppliers, their clients and people. Besides, SMEs are aspiring (SMEs) are the worst hit since the investors. to expand their businesses to Structural Adjustment & Secondly, SMEs have less ability to overseas. In spite of the SMEs Stabilization Program(SASP) started withstand business cycle shocks and imperative in India's growth and in 1991. This is because the market volatility. They are severely sustaining the market momentum, the economic liberalization in Indiahas affected during cyclical downturns sector is facing daunting challenges created complexities for SMEs' and impacted more intensely by and does not get the required support operations. SMEs are small. They are change in policies as compared to from the concerned Government fragile and unfortunately fail to enjoy large firms. The short-term agencies, banks, financial institutions the advantages of scale economies, implication of demonetization and and corporates which is proving to be global networks, access to adequate introduction of GST on SMEs are an impediment to their optimal scale credit and ability to perform R&D, well documented. Naturally,a risk- and growth potential.The sector is the prerequisites to thrive in a averse foreign investor is also handicapped with the required globalized set-up. discouraged to take such exposure. expertise and technology to realize There are other challenges too. Lack Thirdly, deficiency of talented and their aspirations of expanding into of adequate financeto fund projects skilled human capital in SMEs FEBRUARY, 2019 5 www.smeworld.asia FDI.Irrespective of whether FDI is seeking resources, a market, strategic interest or location advantages, the SMEs and the supporting environment should be robust enough to attract FDI. Only if they are, shall foreign equity flow in them. The FDI inIndian SMEs: The Value Proposition prevents knowledge to emerge as a accounts for Rs. 22.27 lakh crores. SMEs are financially sensitive. A comparative vantage point. The only The balance of Rs. 4.69 lakh crore non-debt supportive finance in the comparative advantage that SMEs amounts to loans extended to form of FDI is a win-win for both the enjoy is low labour cost, which MSMEs.It is not surprising that investor and the SME investee. unfortunately is fast vanishing. banks shy away and extend a small Therefore, input and output proportion of credit to this segment.It Over the years, select SME sectors efficiencies are low in India. This claimed that it is not only a credit such as textiles, food processing, again dissuade foreign investment to worthiness deficit but also the paper and engineering goods among flow-in. liquidity problemsthat SMEs face others have been recipients of FDI. Despite the fragility, FDI have found Fourthly, within the financial that account for this credit behavior by banks. Thishas implicationson these sectors attractive for various framework, owing to the fragility in reasons. Alongside availability of SMEs with respect to economic and their attractiveness for FDI. An industry segment which is considered cheap labour, foreign investors enjoy policy changes, credit flow to SMEs other location advantages which from financial institutions has been risky by domestic banks will obviously attract less foreign these SMEs provide. investment. SMEs dealing in engineering goods Small and Medium Enterprises In India, a significant chunk of for instance are big enough to have a design facility, but not an R&D (SMEs) are the worst hit since the inward FDI flows into services and computers segments. Sectors in facility. “This creates an opportunity Structural Adjustment & which cost of hiring and firing is which can be cashed on by both Stabilization Program(SASP) comparatively lower than in foreign investors and SME firms”, states Mr. Rustom Contractor,MD, started in 1991. This is because conventional manufacturing industries. This FDI behavior forces Rakhoh Industries, Pune. Foreign the economic liberalization in us to rethink and review how our firms get a low-cost production Indiahas created complexities for archaic labour laws discourage center. On the other hand, he adds, a foreign investor using an Indian SME SMEs' operations. SMEs are small. investment flow in labour intensive employment generation sectors. facility transfers technology and tacit They are fragile and unfortunately Notwithstanding the above knowledge during the normal course fail to enjoy the advantages of challenges, the basic question here is: of operations. FDI entry brings in professionalism and market access. scale economies, global networks, how strong are the motivations for foreign equity participation in SMEs? This technology transfer will happen access to adequate credit and A study by Organization for more seamlessly, where FDI uses ability to perform R&D, the Economic Cooperation and Indian SME facility over those cases prerequisites to thrive in a Development (OECD) maintained where FDI plans to have a 100% that skilling the workforce and owned subsidiary. It may also prove globalized set-up. subsequently directing them to gainful if Tier I and Tier II suppliers knowledge based and an up-scale of foreign firms (many of them suboptimal and at the best erratic. economic activities could be a SMEs) are required to have joint Preference to extend credit to large possible answer to enhance SME's venture (JV) with the original enterprises over SMEs is widely market penetration and equipment manufacturer (OEM)'s acknowledged. Arecent study competitiveness. suppliers based in foreign claimed that of the total credit In the Indian context too, this may be countries.This way, the OEMs ensure extended to Industry of Rs. 26.96 a desirable proposition to attract that quality and standardization is lakh crore, loans to large enterprises maintained. This ultimately results in FEBRUARY, 2019 6 www.smeworld.asia SMEs have immense potential. Exploiting the under-tapped growth of SME sector will unleash a host of socio-economic and financial advantages. tech transfer, following of best escalation on account of delays in practices and SME's integration into land acquisition and subsequent Though the government has complex and upscale supply chains. rehabilitation and compensation. This initiated Make in India, Start-up Interest rate differential offers arrangement can potentially reduce India and the like, much needs to their transaction costs too. another gainful opportunity for be achieved in terms of reaching foreign investors and SMEs. Interest Additionally, foreign firms can rate is low in developed countries.In remain asset light with low capex and the objectives of these campaigns. contrast, any structured loan in India focus on their operating strengths Only if their benefits trickle down, while keeping exit costs low. is at least 10%. This differential will growth be equitable, absorb allows foreign firms to bring cheaper Overall, the ability to cope with money to India for production. possible downside risks depends on excess work force and reduce Cheaper money, expands profit how critical is the SME's regional imbalances. margins, gives pricing power and contribution in the supply chain and enhance export earnings. A the strength and motivation of the depreciating rupee only enhance foreign investment in the SME. Though the government has initiated competitiveness, adds to the export Given the Indian business Make in India, Start-up India and the earnings, making production in India environment, there is value in like,