‘Rate hikes playing havoc with SMEs’October 25th, 2011 - 10:19 pm ICT by IANS
New Delhi, Oct 25 (IANS) An increase in 375 basis points in the repo rate over the last 20 months or so and the consequent sharp increase in the cost of credit is playing havoc with micro, small and medium enterprises, an industry lobby said Tuesday after the Reserve Bank of India (RBI) revised key interest rates by 25 basis points.
“The indecisiveness of the central government on supply side reforms coupled with its fiscal profligacy has rendered the RBI’s interest-rate hikes more or less ineffective in containing inflation,” V.K. Agarwal, president of the Federation of Indian Micro and Small & Medium Enterprises (FISME), said in a statement.
“We would like to bring to the RBI’s notice that out of the top 200 items produced by MSMEs, the demand for nearly 60 percent is critically dependent on the healthy growth of three sectors - buildings and construction, transportation and the white goods sector,” the statement said.
While the rate hikes have adversely impacted investment decisions in all three areas and thereby the top line growth of MSMEs producing items meant for final consumption in these sectors, the increased cost of credit has become quite unbearable for many MSMEs as this is also eroding their margins and rapidly pushing them towards insolvency, the statement said.
“In view of this situation, and the fact that interest rate hikes have adversely impacted investment in housing, automobiles and white goods due to a sharp weakening of demand as higher financing costs are forcing consumers to defer their purchase decisions, FISME would like the RBI to consider an interest subvention scheme for the MSME sector so that they can survive even as RBI continues to maintain its anti-inflationary stance,” the statement added.
The federation also noted that for MSMEs, it is not just a matter of slower growth “but of survival itself as most of them do not have the financial cushion to survive a sharp decline in sales together with an equally sharp erosion of profitability”.
“While the RBI has itself admitted the adverse impact that rate hikes have had on growth and has revised the growth projection to 7.6 percent of GDP for the current fiscal, we MSMEs are bearing the brunt of the slow down so much so that many MSMEs are facing a real prospect of bankruptcy.
“Hence, some kind of interest subvention for MSMEs is urgently needed in order to ensure their continued survival,” the statement added.
FISME traces its origins to 1967 when the National Alliance of Young Entrepreneurs (NAYE) was established to promote small industries. In the post-liberalisation era, NAYE along with eight state level associations formed FISME in 1995 to lead Indian SMEs into the refurbished economic environment.
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Tags: bank of india, basis points, central government, construction transportation, financial cushion, fiscal profligacy, havoc, indecisiveness, insolvency, interest rate hikes, investment decisions, New Delhi, purchase decisions, rbi, repo rate, reserve bank of india, small and medium enterprises, small medium enterprises, smes, white goods