For SMEs, challenges abound: India Ratings & Research economist

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Rituparna Kakati | 07 May, 2014
Lack of financing, inadequate infrastructure, ineffective implementation of the government schemes, limited access to international markets, technological obsolescence and poor exposure to social and environmental risks are some of the biggest obstacles that are hindering the progress of the Indian Small and Medium Enterprise (SME) sector, Sunil Kumar Sinha, Director - Public Finance & Principal Economist, India Ratings & Research, a Fitch group company, said in an exclusive e-mail interview with SME Times.

Sinha also shared his critical views on a vast range of issues, their implications and solutions with regard to entrepreneurship development, banker-SME relations, exports and export prospects, economic outlook, monetary policy and global economic condition.

Excerpts of the interview...

Please, tell us a few lines about India Ratings & Research (Ind-Ra).
Sunil Kumar Sinha: India Ratings & Research (Ind-Ra) is part of the Fitch Group, which in turn is a jointly-owned subsidiary of Fimalac, S.A. and Hearst Corporation. Ind-Ra provides credit ratings and research services for India based credits. Ind-Ra is committed to providing the India's credit markets with accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open & balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade gaining significant market presence in India's fixed income market. Ind-Ra currently maintains coverage of corporate issuers, financial institutions, which includes banks and insurance companies. Finance & leasing companies and managed funds, Urban Local Bodies and Project Finance. Ind-Ra has six offices in India located at Mumbai, Delhi, Chennai, Bangalore, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank.

What are the biggest challenges, according to you, the Indian small and medium enterprise sector is facing at this moment? What policy measures the next government should urgently introduce to address these issues?
Sunil Kumar Sinha: The key challenge for SME sector is adequate and timely financing. As the face of technology is changing quite rapidly SMEs are also facing the heat of technological obsolescence. These challenges also get magnified for the SMEs due to high cost of credit, low access to new technology, lack of exposer to emerging social/environmental risks, limited access to international markets, poor infrastructure facilities etc. A number of policy has been framed in the past to improve the health of SME sector and there are a number of schemes already in place to support them. However, either the implementation of these schemes has been tardy or in a number of cases SMEs were not even aware of such schemes. We believe SME will benefit more if the new government focuses on the execution/ implementation of the existing policy/schemes rather than revisiting the policy or coming up with new schemes.

SMEs often complain about lack of funds and banks' unfriendly attitude toward them. Bankers, on the other hand, are hesitant in fear of bad loans. How can we narrow this gap? Should the government engage banks to some extent in educating SMEs on how to prepare for applying loans? How to remove the bureaucratic hurdles?
Sunil Kumar Sinha: It is like a chicken and egg situation. In a competitive world on the one hand banks would not like their NPA's to bloat and on the other SMEs would like better access to funds to remain afloat. There is no easy way out as both of them have their genuine problems/concerns. No doubt, a more effective execution/implementation of the existing policy/schemes can go a long way in mitigating the problems of SMEs, in our view the best remedy is higher GDP growth. It has been observed that during the high growth phase typically the SME sector thrives, enjoys better access to funds and bank also encounter lower NPAs. As we are currently passing through a growth slowdown India Ratings & Research (Ind-Ra) has found that 46.3% of the banks loans provided to small and medium enterprises (SMEs) are under significant stress.

What steps would you like to suggest to promote SME entrepreneurship nationwide? Lack of information, lack of training, ineffective implementation of MSME schemes, power problems, bureaucratic hurdles - how SMEs can overcome these challenges and what the government should do to help them, according to you?
Sunil Kumar Sinha: As we said above, there are enough policy and schemes in the country to support and nurture the SMEs. What is absent is its proper and effective execution and implementation. By this we are not suggesting that there is no need to modify/improve the current policy environment or formulate new strategy to support SME. All we are saying is that we often end up making more policies/strategies/schemes but overlook the most crucial part which is effective execution/implementation.

In which areas India is lacking in promoting exports, compared to the developed nations, particularly with regard to a policy point of view? What policy measure should be most emphasized to push exports, according to you?
Sunil Kumar Sinha: India needs to focus on removing bureaucratic and infrastructural hurdles. These hurdles pinch SMEs more than they do to the large enterprises. They enhance transaction costs and erode the competitiveness of SMEs. Trade facilitation and improved infrastructure including better access to power, roads, ports, airports etc will go a long way in promoting exports.

Please share your views on export prospects in 2014 and 2015.
Sunil Kumar Sinha: Ind-Ra expects 7.2% yoy growth in exports for FY15.

The Indian economy is going through a difficult phase. What factors are most responsible for it? What domestic developments and policy decisions/indecisions harmed the economy most in the last few years, according to you?
Sunil Kumar Sinha: After the 2008 crisis, the fiscal and monetary stimuli that spurred consumption demand did raise the GDP growth. However, they also sowed the seeds of the challenges that the Indian economy is facing today as it increased demand without easing the supply side constraints. The high growth was, therefore, accompanied by inflationary pressures. To tame inflation, the RBI reversed the monetary policy stance and pursued a tight monetary policy leading to higher interest rate. This dragged down both investment and consumption demand in the economy and GDP growth fell to 4.5% in FY13. The single most important area where UPA-II failed was in sustaining investment. Since 2009, the number of projects stalled kept rising and included crucial infrastructure sectors such as electricity, roads, telecommunication services, steel, real estate and mining. Consequently, the investment to GDP declined from 38.1 per cent in 2007-08 to 35.6 per cent in 2012-13.

The world economy is improving gradually. Please let us know what important developments are happening across the major economies and how will they impact the Indian economy in the coming days?
Sunil Kumar Sinha: There are signs of improvement in both the US and the core economies of the eurozone. However, the recent economic data from China and Japan are not very encouraging. Ind-Ra expects the momentum in global recovery to continue in the near term and expects US to grow at 2.6%, the eurozone at 0.9% and China at 7.0% in 2014. Though global recovery is still fragile and uneven, it will provide some support to the India exports which Ind-Ra expects would growth at 7.2% in FY15 as compared to 4.0% in FY14.

For quite some time now, there has been a controversy regarding RBI's monetary moves. The industry usually demands rate cuts while it is equally important to reign in inflation to support the common man. In addition, somewhere it seems we lack the balance between monetary and fiscal policies. What is the solution to this, according you? Should the Parliament decide the inflation target?
Sunil Kumar Sinha: In its first bi-monthly monetary policy review on 1 April 2014, RBI maintained a status quo on the policy rates. Consumer Price Inflation (CPI) in March 2014 came in at 8.3%, down from 8.8% in January 2014. Although this is closer to the RBI's target of below 8.0% CPI inflation by January 2015, the decline was mainly due to the improved winter supply of vegetables and fruits. Ind-Ra believes that as the winter supply begins to wane, the prices of vegetable and fruits may again surprise on the upside.

The argument that loose fiscal and tight monetary policy have weakened the fight against inflation in India no longer holds. For the past two years fiscal deficit has been contained at the budgeted or lower levels and RBI has pursued a tight monetary stance.

The RBI has already started acting on the recommendation of the Urjit Patel Committee Report. One of the key recommendations of this committee was to have CPI as nominal anchor as this measure of inflation closely reflects the cost of living and influences inflation expectations relative to other available metric. With this RBI has come closer to targeting inflation. A policy rate cut by RBI will be contingent upon a predictable and sustained downward trajectory of inflation. Ind-Ra believes this is unlikely in the short term and therefore RBI may remain in the pause mode for an extended period of time.