The Hindu Business Line : ‘Global crisis will hit SMEs badly’

While banking circles and a section of the media have painted a neutral picture of the possible impact of the global economic crisis on small and medium enterprises (SMEs), the emerging scenario is far more grim, the Institute of Small Enterprises and Development (ISED) has said.

Against the backdrop of the US economic crisis spreading to other parts of the world, this is one of the basic, although preliminary findings of a study being conducted by the Institute on the possible spread of the crisis into the Indian SME.

While the interventionists strategies of the Government of India and the Reserve Bank of India have helped to slow down the crisis in the short-run, the impact at best is likely to be mixed, Dr P M Mathew, ISED Director who is coordinating the study said.

While pointing out that consumption levels may not fall quite as significantly as in the US economy, he warned that demand for SME products are likely to be moderated in the domestic economy. But more importantly he warned that the credit flow is likely to shrink.

Though lending to SME means more income, the banks may not pursue this route wholeheartedly, especially in periods of recession. Indications to this effect are given by the Report on Financial Inclusion recently brought out by the RBI, a press release from the Institute has said. Consequently, the measures will have to be taken beyond the realms of the instruments of the credit policy and the direct intervention by the RBI and the Government might be required.

The depreciation of the rupee is expected to jack up the value of foreign remittances inflows and trigger a change in the pattern of demand. This is likely to have significant but mixed implications on the demand for SME products. Further studies on the extent and magnitude of these implications needs to be undertaken, the press release added.

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