New Delhi: The ministry of micro, small and medium enterprises is seeking a fixed 15% target under priority sector lending to increase money supply for the sector, which contributes 39% of the country’s total manufacturing output.
Letters to this effect have been sent to the finance ministry and the Reserve Bank of India, said a ministry official.
“In most cases, small enterprises get lost among other sectors and receives very little of the kitty. The move is to ensure that the sector gets its due,” said the official, who did not want to be identified.
In need: A pottery unit in Dharavi, Mumbai. Low bank credit flow, coupled with poor fiscal incentives, is hampering growth of the SMEs. Photograph: Abhijit Bhatlekar / Mint
India’s small and medium enterprises, or SMEs, represent 6% of gross domestic product lower than Brazil’s which contributes 20%, while South Africa’s accounts for 24%. It constitutes 68% of Chinese exports and nearly 90% of all factories in Bangladesh.
In India, industry observers say, low bank credit flow coupled with poor fiscal incentives, such as allowing foreign institutional investors to infuse capital in the sector and lack of tax relief, is hampering growth.
Priority lending is made to sectors such as agriculture, housing, retail, education and small businesses, among others. It has been fixed at 18% for agriculture and 10% for economical weaker sections of society.
While there has been a growth in lending in absolute terms in the SME sector, gross bank credit to the sector has fallen, losing out to housing, retail and education, said the government official.
RBI data show that while there has been a good growth of 17% in 2004, and 21% and 15% in the subsequent years, it has fallen as a percentage of gross bank credit.
In percentage terms, gross credit to the sector has declined from 12.6% in 1996 to 6.34% in 2006. Total advances stood at Rs11,6908 crore in 2006-2007.
According to government statistics, there are nearly 21.8 million SMEs, but the numbers could be larger as the 2006 Micro, Small Medium Enterprises Development Act encompasses units that fall under the services sector. The ministry is undertaking its third census, which will be ready.
The current high interest rate is killing the industry, drying up demand and raising manufacturing costs, said Anil Bhardwaj, secretary general of Federation of Indian Micro, Small and Medium Enterprises, a New Delhi-based industry lobby. “It’s difficult for a person to start a business in India unless he’s wealthy. The recent interest hikes is a reminder to all politicians that short-term measures do not work.”