Small, Vulnerable But Beautiful
Prosenjit Datta August 19, 2019
While big companies, typically listed at the bourses and actively followed by investors, lenders and myriad analysts, tend to hog the limelight in the business press, the small and medium Enterprises (SMEs) play an immensely important role in industry. Every big company needs suppliers, vendors and distributors - many of whom are small- or medium-sized enterprises. Consider this: Almost 45 per cent of manufacturing output in the country can be credited to SMEs, as well as 40 per cent of exports. If you included the micro industries as well, at last count the number of micro, small and medium enterprises (MSMEs) added up to almost 63 million, employing over 111 million people. Together the MSME sector accounted for close to 28 per cent of India's GDP.
Traditionally, the entire MSME universe has suffered from some major handicaps - including access to capital, the ability to hire the best talent, and also having to deal with excessive regulation. They are also far more vulnerable to economic slowdowns and commodity price fluctuations as well as policy disruptions.
Over the past five years, SMEs have had to contend with a flurry of disruptions - in government policy as well as technology and in the financial/capital-raising landscape. Most of these, like demonetisation and GST, hit them hard because of the way they have been implemented. The latest problem that the SME sector faces is the credit crunch caused by the NBFC crisis.
Illiquidity, caused by demonetisation and GST, has quickly turned into insolvency for the more vulnerable SMEs.
But it has not been an universal picture of gloom and doom. Some disruptions have actually helped. For example, till a few years ago, SMEs were handicapped by the fact that they could not keep up with the technology deployment of bigger companies because of the capital investments required. Now, with cloud computing and software as a service, many SMEs are able to take advantage of new technologies.
The government, too, has taken note of the problems that small businesses are facing in capital raising and has come up with its quick collateral-free loan scheme to help them out.
I do believe that the government needs to do much more. Mudra loans are not enough to solve the credit problems of SMEs. The SMEs typically find themselves borrowing at much higher rates of interest, while putting up much higher collateral. This has to be fixed.
Other issues like ease of doing business at the ground level also need to be looked at. The cost and reliability of power supplies is another handicap where the Union and state governments as well as distribution companies can work together.
The SMEs also suffer because they are often forced to wait endlessly for payments of goods and services supplied, especially to the government. This needs to be rectified.
Despite the disruptions and problems, some SMEs have managed to perform exceptionally well in the past few years, and we take a look at them in this issue.
Also, don't miss the big stories on how Ravneet Gill is trying to fix Yes Bank, and the crisis in the auto sector.