Operational Advice
With economies of Europe and US are hard-hit by recession, SMEs in India has also witnessed decline in the last three quarters of 2008. The strong linkage with agricultural sector is one reason for micro, small and medium enterprises’’ (MSMEs) economic recession. But it would be wrong to conclude that this sector will not withstand the crisis as Indian SMEs are resilient lot.
There are sectors and business places in India that are hard-hit and are struggling in the aftermath of the recession.
- Decline in IT and ITeS sectors (IT enabled services) have curved the graph of negative consequences on industries like Tourism and consumer durables.
- Moradabad, famous in the entire world for its handicraft industry is now witnessing closing of its workshops due to price rise of raw materials like brass. The artisans are left unemployed.
- Kanpur, the Manchester of India, is neglected, has a poor infrastructure and its industries are closing down.
- The famous Tussar silk fabric of Bhagalpur, exported to places like US, Europe, West Asia and Japan, is jeopardized by competition from new silk manufacturing centres like Bangalore and Ahmedabad. Lack of credit and power shortage has added to the decline of this big trade centre of Eastern India.
- Tirupur has serious infrastructural constraints, despite Union and State government’s support in the past. For past several months, the city is struggling with power cuts and poor transport system.
Neo Liberal policy
Neo liberal policies offer solutions to problems faced by SMEs. The policies offer reduction in taxes, credit guarantee and related measures.
The efficacy of such policies can be analyzed from the impacts on SMEs. The impact can be categorized as under:-
- Shadow entrepreneurship where an individual is left with no other choice but to become an entrepreneur.
- Pseudo entrepreneurship meaning the start up and sustenance of entrepreneurs who are lacking in the key elements of entrepreneurship like value creation and business ethics.
Recessionary Trend
The symptoms of recessionary trend spread from financial sector to real sector. Its effects on MSMEs follow this pattern. Recessionary trend shows up in the economy in terms of effects like ‘Sentiment’ and ‘Expenditure’. The sentiment effect results from signals received from financial system. It may be failure of stock markets and crisis in leading sectors. In such a case, financial institutions become more cautious about their lending policies. The expenditure effect is a curb on expenditure by MSMEs as business orders start reducing due to recession. Postponement of payments to creditors and workforce also become common due to the expenditure effect.
Less Protection
Initiative taken to improve labor laws is half-way inspite of efforts to liberalise labor laws. Paradigms like ‘flexible specialisation’ and ‘global value chains’ as found in international level are absent in MSME sector in India as it functions as ‘Sweat shops’. Then ‘blanket freedom’ in some sectors is another key problem that has hidden the policy advantages related to MSMEs.
The interests of MSME sector is jeopardized by distortions in public policy. However, attempts are being made to bring about improvements. For example, the ‘MSME cluster development programme,’ enhances individual firm’s competitiveness on a ‘collective efficiency’ mode. The advantage of the Indian manufacturing sector is its highly distributed character. So, because of its distinct economics and sociology, any recessionary shock does not straightway percolate in the sector. To provides resistance to economic downturns and toendure upon this situation, public policy needs to amplify from its current neo-liberal approach. When policies are broad-based, it will be possible to distribute the loads of a recession in the entire economy.
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to info@biz2credit.com
