Balancing act

TRADE ZONE: MACRO VIEW

Only three issues can stop the SME growth story now: Inflation, wonky import duty structure and a prolonged disturbance in Persian Gulf.

The global growth numbers of the last three financial years coupled with high domestic manufacturing growth stories have indeed been a boon for the small and medium enterprise (SME) sector in India. Over the last three years, one finds that SMEs have been able to add to a lot of valuable flesh to their skeletal manufacturing units, which were on the verge of closure due to the recession of 1999-2001. But a lot has changed since.

The markets have also taken note of this and the launch as well as good performance of SMALLCAP and MIDCAP funds can be considered as a barometer of how SMEs are performing. Also witness the number of events that are being suddenly sponsored by state government outfits, ratings agencies for SMEs and banks.

Overall, one can say that SMEs have now come of age. They are no longer only contributors to employment, but have carved out a role for themselves from the lens of invention, value-driven-growth and profit.

The sudden challenges that have emerged on the horizon of SMEs at the beginning of 2007 are: the entry of inflation in a danger zone of 6-7 per cent, an import duty structure that can hit them badly in the absence of a level playing field back home and the threat of prolonged disturbance in Persian Gulf.

While the third phenomenon is beyond control of the Indian government, the government has to be sensitive towards addressing the first two phenomena. Lack of regulatory will on part of the government in the context of 'inflation rate "� import duty' compact will erode a certain percentage points of the SME growth story.

The government, in its forthcoming Budget, will have to be really careful while using the instrument of customs duty to arrest inflation. The government needs to carefully choose sectors wherein it would like to drastically reduce customs duties from 12.5 per cent to 5 per cent.

It should not rush into reducing basic customs duties because it wants to reach ASEAN-level tariffs. The Comprehensive Economic Cooperation Agreement with ASEAN has yet to be inked and, therefore, the government should not act in haste to embark on a duty reduction agenda, which it has promised as a deliverable to ASEAN at a much further date.

Data on the manufacturing sector shows that Indian SMEs are largely involved in the intermediate part of the value chain in the manufacturing sector. An across-the-board reduction on intermediate metal products (e.g. copper winding wires), intermediate chemicals, plastics, textiles and readymade garments wherein concentration of SMEs is high, will expose domestic SMEs to competition when they are already facing the brunt of higher raw material costs, frequent power cuts and escalating borrowing costs.

This Budget really provides an opportunity to the Finance Ministry to show how it can delicately

balance concerns of SMEs and large industries towards ensuring a 9 per cent growth trajectory with a human face.

Let's wish the Finance Ministry all the best!

(The author is chief economist at Economic Laws Practice, Advocates & Solicitors)