SMEs are most vulnerable to the vagaries of peaks and troughs

As far as the present position of the micro, small and medium enterprises (MSMEs) goes one has to factor in the adverse impact of the Great Recession of 2007-08 and its continuation in some forms. The general findings provide significant evidence of an overall decline in SME business during the last three quarters of 2008.

An important aspect of economic recession relating to MSMEs is its strong linkages with the agricultural sector. The SMEs are significantly involved in agro related activities, and rural services and crafts, which have a strong relation with the agricultural sector.

A slowdown in agriculture would also lead to a decline in rural housing and in the production of construction materials. The negative consequences on the rural economy are likely to be significant.

The significant decline in the IT and ITeS (IT-enabled Services) sector has its negative consequences on local tourism and the consumer durables market. Such cross-sectoral impacts are visible in other sectors as well.

Kanpur, once known as the Manchester of India, now presents a picture of neglect, poor infrastructure, and with almost all industries either closing down or shifting from poor to better locations.

Moradabad known for its metal products mainly brass work and has carved its name in the handicraft industry throughout the world is hit because of increase in the prices of raw materials, particularly brass, many workshops have been forced to close, and artisans are left with no work.

The situation in Tirupur, often described as the Manchester of South India, need to be examined in terms of two major problems in the textile sector.

Despite significant support given by the Union and State governments in the past, the city is still constrained by serious infrastructural bottlenecks. Power-cuts and poor transport system have significantly constrained this city for the past several months.

Bhagalpur, once considered as the biggest trade centre of Eastern India, is famous for its unique Tusser silk fabrics called Tussah or Tusser Silk. Silk fabrics made here are being exported to countries like West Asia, Europe, the U.S., and Japan.

Bhagalpur is now losing its market to new centres such as Bangalore and Ahmedabad. Lack of credit, power shortage, and increasing competition from other silk manufacturing centres have put the Bhagalpur craftsmen under jeopardy.

Neo liberal policies around the world have several things in common relating to addressing the impacts on SMEs. These include, credit guarantee, reduction of taxes and several other related measures.

However, the efficacy of such policies needs to be examined against the ultimate impacts they have made on the SME constituency in general.

There are two latent impacts of the present crisis on MSMEs. First is the concept of ‘shadow entrepreneurship', meaning an involuntary choice of an individual to become an entrepreneur.

The next significant phenomenon is something which can be called ‘pseudo entrepreneurship'. By pseudo entrepreneurship we mean, the start-up and sustenance of entrepreneurs who are bereft of the two key elements of entrepreneurship: value creation and business ethics.

The recessionary trend in the economy shows different intensities and dimensions. While, initially, the symptoms appear in the financial sector, it spreads sooner or later into the real sector. While the effect on MSMEs is subject to this broad pattern, as demonstrated by history, a recessionary trend appears in terms of two effects: sentiment and expenditure.

The sentiment effect is triggered by the signals given by the financial system. When stock markets fail and there is crisis in some of the leading sectors, the financial institutions become vigilant, and will try to fine-tune their lending policy.

The next problem is the expenditure effect. As the tremors start, the MSME business orders will gradually come down, forcing them to employ cost reduction methods.

The MSMEs by themselves, will also contribute to the expenditure effect by postponing payments to creditors, and even doing the same with labour.


While the rationale of de-reservation is a question of political economy, there can be difference of opinion on its need and efficacy. Irrespective of such differences, the very operationalisation of de-reservation policy is something which needs to be discussed in detail.

India has a Competition Law and also a Competition Commission in place since 2001.

However, the Commission has not yet worked on issues of competition in the MSME sector. It is important to note that even countries like Indonesia and South Africa have clearly identified a place for SMEs in their Competition Policy.

Limited protection

While the paradigm of ‘flexible specialisation' and ‘global value chains' rule the roost at the international level, India's MSME sector, to a significant extent, work as sweat shops. While, on the one side, there is constant pressure and effort to liberalise labour laws, initiatives in the area of improving labour standards remain half way.

The MSME cluster development programme, which forms the core of public programmes, seeks to enhance competitiveness of individual firms on a ‘collective efficiency' mode, the contribution of labour in this regard remains relatively ignored.

Blanket freedom to import in some sectors is a key problem which has over-shadowed the policy edifice relating to MSMEs.

It is time that this policy is thoroughly reviewed, and the advocacy platforms themselves are strengthened.

The SME sector in India has an unusual resilience compared to the situation elsewhere in the world. Therefore, it would be out of place to conclude that this sector will not be able to withstand the crisis. However, an important point to be noted is that both the cause and consequence of the present crisis in the SME sector is not simply the crisis in the U.S. and Europe.

There are many distortions in public policy, which really harm the interests of the sector in India. The unique advantage of the Indian manufacturing sector is its highly distributed character. While the corporate sector is exposed to a shock, it does not transmit straightway into the SME sector, which has a quite distinct economics and sociology. This explains, to a large extent, why a major recession of the kind found in Europe and the U.S., is rather remote in the Indian context.

However, to maintain this situation, public policy needs to rise above its present neo-liberal approach. Policy needs to be broad-based, both in social and economic terms. The confidence thus maintained in the economy, would have the potential of distributing the pains of the economic crisis, rather than trying to address a serious burden in toto. It is crisis situation that leads to the birth of new policy perspectives.

The writer is Director, Institute of Small Enterprises and Development, Kochi.

More In: Industry | Business