Global economic crisis and Indian slow down

Early assessment of short and medium term impact on Indian SMEs Background The fall out of economic crisis that first appeared on global scene in 2007, has spread its tentacles in India too by 2008. Its impact is clearly visible on money markets, exports and sectors that have been driving the Indian industrial growth since 2004. However, the waves of global negative cues in 2008 have only exacerbated the Indian economic situation which was in any case preparing ground for a forced slow down. Whereas the global commodity price bubble did influence the inflation, the policies initiated by central bank to contain inflation only through monetary measures by increasing CRR, Repo and Interest rates steadily stifled industrial growth. In 2008, the US financial crisis added the woes of economies reeling under high commodity prices and high inflation. The money markets are now tight world wide and liquidity crunch is a global phenomenon. Experts are predicting a sticky slow down- many developed economies have already slipped into recession and growth has battered in emerging markets. In India in spite of three CRR cuts and recent slashing of interests rates by PSBs, there is no improvement on ground. Besides liquidity, banks are fear stricken. Impact on Indian SMEs The net result of Indian policies and global financial crisis has been experienced on three fronts: a.Sectors growth of which was fuelled by demand based on EMI financing such as Housing, Auto and White goods b.Access to Finance: i. As liquidity crunch spread, access to long term finance became difficult. It impacted expansion plans of SMEs and capital goods sector was hit. ii. In third quarter of 2008, the money supplies became so tightened that SMEs faced problems in even day today functioning such getting over-drafts, financing of L/Cs. iii. SME exporters that subscribed to exotic Forex derivatives to manage their forex risks took a severe beating as losses mounted during 2008 with unexpected fall of Rupee against the Dollar defying the conventional wisdom (largely due to massive selling of equity by FIIs ). Losses worth more than Rs. 2000 cr. are reported to be absorbed by SME exporters alone. c. Exports: Slower demand in major markets particularly in US have hugely impacted SME dominated exports sectors Impacted sectors Based on the feedback from FISME associated SME associations (525), the matrix of affected sectors is as follows: Sectors SME Products Degree of impact Reasons SME sector SMEs as a whole Moderate to high *Slackening of domestic demand *Tightening of money markets; high cost of finance * High volatility in raw material prices Housing Building hardware; Electrical fitting; paints; home furnishing; related services High Economics of EMI based financing becomes unviable due to high interest rates Auto Auto components High -do- White goods SME component mfg. of Refrigerators, Colour TVs, Washing Machines, ACs etc. High -do- Capital goods sector Suppliers of SME plants and machines in all sectors High Access to long term finance/ term loans becomes difficult Textiles/ Garments Knit, handlooms, power looms Severe Demand slump in major markets Handicrafts Especially metal based handicrafts Severe -do- Gems and jewelry Especially with precious and stones High -do-