The Hindu Business Line : Mid-size wonders

If proof were needed that various sectors in the economy have learnt to adjust wonderfully to policy initiatives that may, at first sight appear unpalatable, one need look no further than the financial sector that is learning to adapt to interest rate changes that have reduced spreads. India’s second largest bank, ICICI Bank is focusing on business banking services and fee-based income. The bank has found in the SME sector a rich lode to mine; despite the slowdown i n developed country markets for apparel and IT-related services, 14 per cent of the bank’s fee income came from this sector. And why not? The SME sector has provided ample proof of its ability to position itself for growth in a changing policy environment.

The most illustrative evidence of that repositioning lies in the number of mid-sized companies that have ventured into global markets in search of technology and new synergies through mergers and acquisitions. In 2005-06, the Export-Import Bank of India financed 144 ventures by 120 SMEs in 45 countries, including Taiwan, Romania and Norway. While top-drawer firms such as those in the Tata group and the UB group have made their mark acquiring iconic brands, an increasing number of mid-size firms have not been far behind in the pursuit of scale economies; noteworthy is the tendency of non-IT firms to use this route to ramp up operations. This response to an increasingly liberalised industrial environment represents a sea change from the sector’s tendency to cry foul whenever the protectionist walls of reserved lists were lowered. What has helped is the burgeoning foreign exchange reserves that have permitted the RBI to raise the ceilings on external commercial borrowings — the latest being just late last month — thus encouraging SMEs with proven ability to foray into global markets.

The SME sector has been called the backbone of the Indian economy, accounting for 95 per cent of the industrial units, contributing about 40 per cent of the value addition in the manufacturing sector and about 35 per cent of the exports. Such numbers can be deceptive about the quality of output or enterprise if innovation, technological capability and access to capital to enable both are not available, as was the case till a short while ago. SMEs may still grumble about capital. But these are fortuitous times; the current slowdown and fears of recession in the West provide SME’s ample opportunity to raise capital globally to fund their acquisitions. Such investments may appear expensive with export markets turning more sluggish but the domestic economy promises to more than compensate. In the longer term, building capabilities across a wider manufacturing base will pay dividends when world trade improves.

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