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Rate hike could hit SME sector

January 27, 2010

INDIA/

The small and medium enterprises (SME) sector, which accounts for almost 45 percent of India’s manufacturing output and 40 percent of its exports, is hoping the Reserve Bank of India (RBI) will keep its key rates unchanged in its policy review on January 29.

Last year had been shaky for the SME sector, but with the course of time and government intervention it regained its foothold in the market.

“If there is an interest rate hike now, it will have an adverse effect on the productivity of the SME sector,” Salil Singhal, chairman of CII’s MSME Council, told Reuters.

Interest rates in India are still very high in comparison to international rates, he added.

Analysts expect Asia’s third-biggest economy to grow 7 percent in the 2009-10 fiscal, and 8 percent in 2010-11, up from the forecasts of 6 percent and 7.5 percent in a similar Reuters poll conducted three months ago.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected that the share of SME growth in India’s GDP of 8-9 percent will be in the range of 22-25 percent, or around $2.7 billion.

This sector accounts for almost 95 percent of the industrial units and contributes about 40 per cent of the value addition in the manufacturing sector.

CHALLENGES AHEAD

Major challenges for the SME sector include access to credit, competing with technological advancements, R&D, product innovation, access to distribution channels, and above all, the appreciating rupee.

The rupee is seen picking up where it left off in 2009, rising another 4 percent on top of the 4.7 percent increase last year.

The government is likely to let the rupee increase about 4 percent to around 44/dollar on the back of rising foreign portfolio inflows, according to a Reuters Poll on BRIC nations’ currencies.

Sixty-eight percent of respondents in an ASSOCHAM Business Barometer Survey have said that the RBI’s accommodative monetary policy stance currently supports economic growth and any hardening of interest rates could affect the GDP growth rate by half a percent.

SURVIVAL OF THE FITTEST

The survival of the SME sector depends on how it tackles increasing input cost which is seen rising in the coming quarters.

The sector has acquainted itself with major cost-cutting measures and this has been one of the key factors driving profitability.

The other factors aiding profitability are marketing strategy, use of new technology, understanding customer demands, removing liquidity constraints and staying in sync with the rest of the world.MICROFINANCE/

As the Indian economy recovered from a global meltdown, an increase in demand pushed sales of consumer goods, metals and automobiles. A tightening of the monetary policy now could see a rise in raw material costs which in turn could pinch margins, say analysts.

“Management of interest rates, making labour laws more conducive for the labour-intensive manufacturing sector, issues dealing with compliance and corruption and GST (Goods and Services Tax) are the major issues that need to be addressed in 2010″, Singhal added.

How do you think the SME sector will fare in 2010?

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