SME sector facing challenges

Dr. Gyan Pathak
Small and Medium-sized enterprises are widely regarded as the backbone of economies around the world. Their contribution to gross domestic product and exports is unique and they employ a greater share of population than many bigger enterprises globally. In Asia they typically comprise more than 90 per cent of enterprises while contributing to immensely to job and job creation and exports. However, they are facing insurmountable challenges which urgently require strengthening of Credit Guarantee Schemes and other services.
This is the major recommendation of a recent ADP study titled “Financing Small and Medium-sized Enterprises in Asia and the Pacific: Credit Guarantee Schemes” that scrutinized evidence from six Asian countries which included China, India, Japan, the Republic of Korea, Malaysia, and Sri Lank and compared them from European Union (EU) and United States (US).
India has 95 per cent of its enterprises in SME sector. Among the selected Asian and Pacific Economies only Mongolia has lower participation of 75 per cent. In all other countries percentage of SMEs are much higher than India. Among the high-income countries Japan has 99.7 per cent and Republic of Korea 99.9 per cent, while among upper middle-income countries Indonesia has 100 per cent, Kazakhstan 96.3, Malaysia 98.5 per cent, Fiji 97 per cent, and Thailand 99.8 per cent. India is among the lower middle-income countries and barring Mongolia all has larger share of their enterprises in SME sector and they are performing better as a country. Even Bangladesh has 99.9 per cent of enterprises in this sector, while Cambodia 99.8 per cent, and Sri Lanka 99.8 per cent. Thus it is clearly visible that India has still scope of more SMEs in the country so that larger number of people could be provided with jobs amidst an unprecedented job crisis in the country.
By focusing on providing larger support to greater number of SMEs all other countries are providing more employment to their people. India is just providing 40 per cent of total available employment in all sectors in the country. SMEs of Japan are employing 70 per cent of their citizen while Republic of Korea 89.7 per cent, China 90 per cent, Fiji 60 per cent, Indonesia, 97 per cent, Malaysia 66.2 per cent, and Thailand 85.5 percent. Even in the lower middle-income countries group, our neighbours Bangladesh and Sri Lanka are providing 85.5 and 75.1 per cent of jobs in SME sector. Barring Kyrgyz Republic where SMEs are employing only 20.5 per cent of their citizens, all other countries in this group are providing more jobs than India in SME sectors.
SMEs contribute 40 per cent in India’s exports, while this sector in China is contributing 80 per cent of the country’s exports. It means, India has a great potential of increasing its export through SME sector.
SME sector’s contribution in the national economy of India is still only 28.8 per cent, while in China it is 70 per cent, Japan 53 per cent, Republic of Korea 51.2 per cent, Indonesia 61.1 per cent and even Sri Lanka 52 per cent.
All these figures have a lesson for India and the Modi Government, and by strengthening CGS in India, our SMEs base can be enlarged, their productivity and sustainability be enhanced, and larger number of people can be provided employment.
There are four types of Credit Guarantee Schemes in the world – Public Guarantee Schemes as CGTMSE in India, MGS as Confidi in Italy, PPP schemes as CGC Berhad in Malaysia, and International Schemes such as USAID’s Loan Portfoli Guarantee Scheme. A major weakness of India’s CGS is that it operates with a lean staff with no credit assessment services. India’s Services from Credit Guarantee Schemes include only Guarantee Subsidy as is given in the US and the Republic of Korea. However, India does not provide Financial Advisory as provided in Republic of Korea, Malaysia, and European Union; Business Advisories as provided in Republic of Korea, Malaysia, and EU, Trade Insurance as provided by China, Korea, US, and EU; Refinancing as done in Sri Lanka and EU; and Credit Assessment as provided in Korea, Japan, Malaysia, US, and EU.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has 60 per cent fee income, 33 per cent investment income, and 7 per cent other income. It presents a case of rethinking on the scheme’s income shares for leveraging their ratio.
It should be noted that India’s Credit Guarantee Structure has two agencies with no private player. However, in the United States it includes Agency of Government Department, in Korea 16 regional and 2 central agencies, in Japan 51 regional guarantee corporations and 2 central agencies and in China over 6000 CGCs with private domination.
India does not provide Re-insurance of Credit Guarantee Schemes, while China and Japan provide such facilities. In China, it is chiefly done through government. Capital funding is entirely public in US and Japan, while through Central Bank in Sri Lanka. India does it through public and specialized financial institutions.
Coverage of CGS in India is lower than any of the six major country which stood in the range of 50-80 per cent, while in Japan it is 80-100, in Korea 70-85 per cent, in Malaysia 50-100 per cent, in Sri Lanka up to 80 per cent, and in the United States up to 90 per cent.
India has launched three major credit guarantee schemes worth $40,368 million, which included PM SVANidhi, CGS sub-debt, and Rs 3 trillion worth loan guarantee scheme of May 2020, but their performance is very slow paced and therefore could not attain the targets due to which dates had to be extended until March 2023.
All these data show that India needs overhauling of its policies and programmes regarding its small and medium-sized enterprises to grow fast and to provide jobs to the jobless. (IPA)