ECONOMIC FREEDOM TALK 2009 WINNERS AMONG LOSERS :ECONOMIC FREEDOM TALK 2009 WINNERS AMONG LOSERS Dr. B. YERRAM RAJU REGIONAL DIRECTOR PRMIA, HYDERABAD CHAPTER


Global Recession – Its Impact on Indian SMEs :Global Recession – Its Impact on Indian SMEs


Recession? :What is recession? How does this happen? When does this happen? Is it a domestic phenomenon or Global phenomenon? How and when it becomes normal? Recession?


How did this occur? :How did this occur? You must understand Market economy to answer this question. In a market economy goods and services are traded freely – prices are fixed based on supply and demand Governments hardly control prices When supply exceeds demand prices shrink and vice versa if demand exceeds supply We moved to free market economy since 1991 from centralised planned economy where government was the biggest player in the market place.


Markets? :Markets? Capital Markets – where investors flock to buy shares of companies traded on stock exchanges Financial Markets – where Banks, Insurance Companies and Depositories trade in money market instruments – Money markets and forex markets form part of the Financial Markets Commodity markets, Oil Markets, Metal Markets – Separate exchanges operate Each has a separate regulator – e.g., SEBI, RBI – they regulate whenever there are serious aberrations in the markets and they have certain instruments at their disposal.


Business Cycles :Business Cycles Markets move upward and downward and these influence the economy Upward cycle: Stock prices keep rising and these are indexed and this index keeps rising; investors enthused; put their money in stocks believing in rising trend; this leads to increase in production as firms produce more goods and services to gain more and more profits; employment surges; incomes rise; consumption rises; consumers become more confident in markets; Downward cycle: Reverse happens; sales decline; production declines; jobs decline; incomes decline; consumption declines; stock markets show reverses; investors run away with their stocks – Negative loop


What is recession? :What is recession? Contraction of Demand for goods and services consecutively for two quarters (6months) Employment falls precipitously Consumption declines Exports fall – Imports too fall Credit markets shrink GDP – Total goods and services produced in money terms in the country- declines {C+I+G+(x-m)} where C= Consumption; I= Investment, G=Government spending; x=exports and m= imports


Slide 8:Recession is When your neighbour loses his job Depression is When you lose your job.


Why it happens? :Why it happens? Overproduction Companies produce more and induce demand A situation where supply exceeds demand and the nation’s ability to consume what is produced declines Low Confidence level Banks belied trust: sub-prime crisis; Deliberate faulty ratings from credit rating agencies; credit risk led to banks folding up like a pack of cards Externalities: Terrorist attacks – Sept 11, Mumbai Terrorist attacks; Swine flu; International Airport Blocks (e.g.,Thailand) Leading to vicious cycle Economies turned to Keynes for a solution – moving away from Milton Friedman


Now let me take you to global recession :Now let me take you to global recession Cross border trade is an important means of economic development. Globalisation of the world economy has increasingly drawn most enterprises into global value chains. International trade offers both opportunities and challenges for many firms. International trade helps expanding the horizon of the entrepreneurs.


Slide 11:“The dirty secret of the golden age of finance was that it was obscenely easy to make money.” The Economist, London, May 16,2009 Special Report p.9


Slide 12:BANKS HAVE ALWAYS BEEN A WEAK LINK IN THE FINANCIAL SYSTEM BECAUSE OF A MISMATCH BETWEEN THEIR ASSETS AND LIABILITIES.


Macro Economic Environment :Macro Economic Environment “India’s financial sector is stable and healthy”…Indian Banks affected only peripherally (MTR, RBI Bulletin Nov 2008 p1859) Widening credit spreads led to mark-to-market losses on financial instruments of overseas portfolio Inter-bank markets, unlike in the rest of the world did not freeze in India CAR of commercial banks is 12.7%. Domestic savings continue to rise


Key Economic Indicators (%) :10/30/2009 Copyrights: yerramraju@prmia.org 14 Key Economic Indicators (%) Source: World Project Link, Delhi School of Economics


Phases of Slowdown in Indian Industry (IIP) :10/30/2009 Copyrights: yerramraju@prmia.org 15 Phases of Slowdown in Indian Industry (IIP) Percentage Source: Annual Report, RBI 2008-09 and CSO, Oct 2009


Capacity Utilization :10/30/2009 Copyrights: yerramraju@prmia.org 16 Capacity Utilization Percentage Source: Annual Report, RBI 2008-09


Performance of MSMEs :10/30/2009 Copyrights: yerramraju@prmia.org 17 Performance of MSMEs Source: Annual Report of RBI 2008-09 quoted from Ministry of MSME,GOI


Credit Flow to MSMEsYear on year variation :10/30/2009 Copyrights: yerramraju@prmia.org 18 Credit Flow to MSMEsYear on year variation Amt in Rs. Cr % in brackets


Pleasant AnnouncementsUnpleasant performance :10/30/2009 Copyrights: yerramraju@prmia.org 19 Pleasant AnnouncementsUnpleasant performance 2004-05: Union Ministry of Finance announced that each bank branch on average should finance 5 new units Collateral free Credit up to Rs.25lakhs CGTMSE revised its rules in 2008 to take it to Rs.50lakhs and shared collateral to Rs.100lakhs – No takers among the PLIs Credit Rating picking up but credit not picking up?


…Then Why the Knee-jerk Action in September 2008? :…Then Why the Knee-jerk Action in September 2008? Jobs are falling Demand for consumer goods shrunk NPAs on the rise in all sectors Real Estate sector that pump-primed demand receded with declines in prime and rental values throughout the country Auto components, gems & jewelry, Leather products, FMCGs are all on decline following the order book closures and postponed payments by their principals All links in supply chain severed and the banks backtracked on any further credit Risk aversion loomed large


…Government and RBI moved in tandem :10/30/2009 Copyrights: yerramraju@prmia.org 21 …Government and RBI moved in tandem Sep 16-08: RBI allows Banks to participate in Forex market; FCNR and NRE deposit rates increased Sept 22: Finance Ministry raised the overseas borrowing caps for infrastructure companies from $100mn to $500mn with average maturity of 7 years to boost capital flows. Oct 22; RBI also announced confirmatory statement.


…Government and RBI moved in tandem :…Government and RBI moved in tandem Oct 7:Infrastructure to include Mining, Exploration and Refining Companies, for ECB purposes. Borrowing cap raised ten times from $50mn to $500mn. SEBI said it would effectively monitor FIIs for preventing short-selling. Oct6: SEBI lifted restrictions on issue of Participatory Notes by FIIs to arrest outflow of FII funds; FIIs allowed to issue PNs against securities including derivatives as underlying assets. Limit of 40% of FIIS total assets to issue PNs done away with.


Credit Policy announcements by the RBI :Credit Policy announcements by the RBI CRR cut effectively to 5% Repo Rate cut to 4.75% Reverse Repo Rate reduced to 3.25% Buy back of Market Stabilisation Scheme (MSS) dated securities Special Refinance window – 1% of net of demand and time liabilities of Banks Bank rate retained at 6% SLR – 24% SIDBI given refinance to help flow of credit for MSMEs – Rs.7000crores in Dec 08 – Reported full utilization Signaled Rate cut from commercial banks easing the credit flow. Liquidity improves – Rs.4.60lakh crores injected into the economy Banks are flush with funds Markets reacted favourably. This is in tune with the global trends.


Slide 24:Choosing the right business to be in Creating the right strategy Building the right systems Designing the right organization Getting the right people But Fundamentals have not altered


SME Competitiveness (I) :SME Competitiveness (I) In a knowledge-based economy, competitiveness of enterprises, including SMEs, is increasingly based on ability to provide high-value-added products at a competitive price Globalization and trade liberalization has made it crucial for most enterprises, including SMEs, to become internationally competitive even when operating wholly in the domestic market


SMEs Competitiveness (II) :SMEs Competitiveness (II) To become and remain competitive, SMEs need a coherent business strategy to constantly improve their efficiency, reduce production costs and enhance the reputation of their products by: Investing in research and development Acquiring new technology Investing in people Improving management practices Developing creative and appealing designs Effectively marketing their products


Innovation Process :Innovation Process The adoption of an innovation by similar firms Usually leads to product or process standardization Products based on imitation often are offered at lower prices but with fewer features


POLICY INTERVENTIONS :POLICY INTERVENTIONS WHERE FROM AND WHERE TO? Courtesy: The Hindu Business Line 16.10.2009


1. Enabling an easy start--up and market exit :1. Enabling an easy start--up and market exit Tasks for Implementation Expanding the basis for growth of start-up enterprises Reforming start-up related regulations and procedures Conducting business conversion and restructuring Helping start-up business with financial strain Establishing Business Incubators Encouraging start-ups through EDIs Simplifying the procedures for establishing legal entity and factory Creating environment favorable for SMEs Enacting the Act on Business Conversion and Restructuring (LLP Act 2008) Establishing Assistance Centers (BDS providers)


2.Fostering Creative Innovation Capability :2.Fostering Creative Innovation Capability Strengthening innovative capacity through increased R&D Fostering innovative SMEs with increased R&D budget and technological development Facilitating commercialization of technology and marketing Establishing the basis for healthy venture ecosystem Establishing market-oriented venture business environment Promoting venture investment market and secondary market Strengthening capacity for innovation on management Establishing the basis for nurturing management-innovative SMEs Assisting in terms of production and management digitalization


3.Establishing Growth Basis that Promotes Competition :3.Establishing Growth Basis that Promotes Competition Tasks for Implementation Providing policy finance based on future value Enhancing efficiency of Credit guarantee assistance Improving infrastructure for SME financing Strengthening assistance through lending programs based on technology and future value Expanding consumer market and promoting export Expanding public purchase of SME products Promoting the entry into foreign market Upgrading manpower structure and improving demand and supply Providing SMEs with production and technology manpower Developing workers’ skills and inducing their long-term employment


4.Alleviating Polarization through Mutual Growth :4.Alleviating Polarization through Mutual Growth Tasks for Implementation Strengthening practical cooperation between large and small business Strengthening audit of unfair trade and mediation of disputes Dispatching joint trade mission, using overseas logistics facilities, holding cooperation fair Ensuring competitiveness for micro-enterprises Enhancing Innovation management, Developing market management, Improving facilities, Developing commercial complex Establishing micro-enterprise centers, providing financial assistance, reducing tax burden Assisting local, Women-owned, Handicapped-run business Revitalizing start-up of women-owned business, enhancing their management ability, providing financial and marketing assistance Framing rules in the MSMED Act to facilitate handicapped-related enterprises and establishing assistance centers


5. Providing practical services for SMEs :5. Providing practical services for SMEs Tasks for Implementation Strengthening promotion of SME policy States to reform the DICs to set up Strengthen Single Window Delivery Customized information system, and call center approach Each employee to be in charge of several customers under customer management system sectorally SME Administration Innovation Activating innovation forums to build capacity of SMEs and internal employees Formulate Exit Law for SMEs for draining out the inefficient and loosing enterprises


Outcomes of Policy :Outcomes of Policy Continuous build up of infrastructure for technology innovation Effective tie-up of SMEs with the R&D Institutions of Government and Universities Financial Innovations and Credit Insurance Mechanisms Continuous rising satisfaction with SME policy SMEs emerge as winners among the losers


Slide 35:Thank You YERRAMR@GMAIL.COM