Government will set up a Rs 10 crore fund at NID's National Design Business Incubator (NDBI) to help young designers become entrepreneurs in their field.
"Needy young designers desirous of pursuing their business ideas through incubation route at NDBI can now avail this rolling fund support," Commerce and Industry Minister Kamal Nath said in a statement. The need to set up a separate rolling fund has arisen especially when most financial institutions do not support young, fresh designers and first generation entrepreneurs who have just passed out from academic institutions without any industrial experience, it said. Government has also agreed to permit the National Institute of Design (NID) faculty to have a share in their consultancy work. The pattern of consultancy sharing would be on similar lines as those of other premier educational institutions in India such as IITs and IIMs. NDBI was set up by NID in 2005 with an aim to build on India's design strengths. Lack of adequate support in pursuing designers' ideas into business models has so far been a debilitating factor for young designers in setting up their businesses.
Source : The Economic Times
Thursday, October 16, 2008
Indian SMBs To Invest $640 Mn On Packaged Software
SMBs in India are on track to invest about $ 640 million on buying packaged software this year, up more than 25% over what they invested in 2006. Spending on databases, accounting, networking, productivity and system software will account for more than 90% of the total software spending by SMBs this year, according to the latest report by New York-based Access Markets International (AMI) Partners.According to Nirupam Chaudhuri, research manager with AMI Partners. “SMB users have become more alert and they know what they need to be able to accelerate their business. A small percentage of IT-savvy SMBs have progressed to the third wave of IT adoption and are now demanding tailor-made solutions with superior support services.”Small businesses posted a 23% rise in software spending while medium businesses showed 30% growth in software spend last year.Investment in packaged software is driven by business needs. SMBs are most concerned about rationalisation of investments. Having state of the art technology with the latest security features is viewed as a major factor in overcoming competition. Vendors can no longer push anything and everything as a package to users. "These days SMBs need to be convinced on all the features a software package contains, and are only willing to pay for features they plan to use,” Chaudhuri says. “In keeping with this trend, vendors have also launched solutions and packages in which pay-as-you-use features are incorporated, thus allowing SMBs to access only the modules they’ve paid for."
Source : Sme Zone
Source : Sme Zone
SMBs Perturbed By Rising Costs And Insufficient Funds
According to an AMI study, rising operational costs, insufficient access to capital and growing competition is forcing many SMBs to re-evaluate their competitive strengths.In the emerging markets, lack of access to capital is a major concern, as in the mature markets."While firms in mature markets are more concerned with satisfying their current revenue forecasts, SMBs in emerging markets - such as India in particular - are finding it difficult to obtain the necessary capital to grow their operations," claims Spencer Richardson, AMI analyst. "This leads to delays in the launch of new products and services, since cost control often takes the form of curtailed development efforts."In the newly industrialised markets (NIM) in south-east Asia, getting access to market intelligence and information is the greatest hitch."SMBs in NIM are faced with a very real issue; their basic infrastructure deficit disables much of their ability to communicate with the outside world. SMBs in mature markets are taking giant strides in business operations while SMBs in the NIM regions are struggling just to catch up."SMBs rate uncertain economic environment and insufficient access to capital as the top two concerns, across mature markets like US, UK and Japan.
Source : SME Zone
Source : SME Zone
Tuesday, October 14, 2008
Special regime for SMEs in new companies’ Bill
Small companies will now get a say in the corporate sector. The new Companies Bill, 2008 will for the first time define what makes a small enterprise. The bill is up for approval in the coming parliament session.
A small company shall be defined as a company which satisfies three conditions—it should not have a paid-up share capital and a turn-over beyond a specified limit, the company should not be regulated by any sectoral regulator and it should not hold any subsidiary company.
According to the first condition, the company should not have a paid-up share capital and a turnover beyond a specified limit. The limit is to be notified later on by the central government. According to Micro, Small and Medium Enterprises Development Act, 2006, a small enterprise is one having an investment of more than Rs 25 lakh but less than Rs 5 crore if it is dealing in the production of goods whereas if the enterprise is dealing in the rendering of services then the investment in equipment should be more than ten lakh rupees but should not exceed the limit of two crore.
As per the second condition for a small enterprise in the new Companies Bill, the company is not to be regulated by any sectoral regulator, which means that those companies that are governed by a sectoral regulator cannot be classified as small companies.
Banking companies, which are regulated by Reserve Bank of India (RBI), telecom companies, which are governed by Telecom Regulatory Authority of India (Trai) and electric companies by electricity act do not classify under the provision for the small companies in the new Companies Bill.
Jawahar Sircar, additional secretary and development commissioner, ministry of micro, small and medium enterprises (MSMEs) said, “Only a small form of micro, small and medium enterprises in India are in the form of companies, partnerships and lending institutions.
The ministry of MSME has been advocating as a matter of policy lesser thresholds and lowering the compliance cost in order to encourage more and more micro and small enterprises to corporatise. This step has been taken so that the small enterprises would be able to access more finance and graduate upwards.” According to third condition in the new Company’s Bill, the enterprise that is having other subsidiaries does not classify as a small company and hence will not be able to enjoy the privilege of certain exemptions. Besides, there are simplified procedures for mergers and amalgamations of small companies. Rajan Gupta, Partner of India’s leading corporate firm, Fox Mandal Little said, “It is a welcoming step to create a class of small companies and to provide for simpler compliance regime for them. It will also help the entrepreneurs in organizing their businesses in better form and will provide more certainty with regard to a definite code of regulations for smaller businesses.”
The concept of “small companies” is being introduced in the new Companies Bill to allow lower levels of compliance to medium and small size companies. The new bill proposes to exempt small companies from certain provisions of the company’s act. Those exemptions will be notified by the central government separately.
Source : The Financial Express
A small company shall be defined as a company which satisfies three conditions—it should not have a paid-up share capital and a turn-over beyond a specified limit, the company should not be regulated by any sectoral regulator and it should not hold any subsidiary company.
According to the first condition, the company should not have a paid-up share capital and a turnover beyond a specified limit. The limit is to be notified later on by the central government. According to Micro, Small and Medium Enterprises Development Act, 2006, a small enterprise is one having an investment of more than Rs 25 lakh but less than Rs 5 crore if it is dealing in the production of goods whereas if the enterprise is dealing in the rendering of services then the investment in equipment should be more than ten lakh rupees but should not exceed the limit of two crore.
As per the second condition for a small enterprise in the new Companies Bill, the company is not to be regulated by any sectoral regulator, which means that those companies that are governed by a sectoral regulator cannot be classified as small companies.
Banking companies, which are regulated by Reserve Bank of India (RBI), telecom companies, which are governed by Telecom Regulatory Authority of India (Trai) and electric companies by electricity act do not classify under the provision for the small companies in the new Companies Bill.
Jawahar Sircar, additional secretary and development commissioner, ministry of micro, small and medium enterprises (MSMEs) said, “Only a small form of micro, small and medium enterprises in India are in the form of companies, partnerships and lending institutions.
The ministry of MSME has been advocating as a matter of policy lesser thresholds and lowering the compliance cost in order to encourage more and more micro and small enterprises to corporatise. This step has been taken so that the small enterprises would be able to access more finance and graduate upwards.” According to third condition in the new Company’s Bill, the enterprise that is having other subsidiaries does not classify as a small company and hence will not be able to enjoy the privilege of certain exemptions. Besides, there are simplified procedures for mergers and amalgamations of small companies. Rajan Gupta, Partner of India’s leading corporate firm, Fox Mandal Little said, “It is a welcoming step to create a class of small companies and to provide for simpler compliance regime for them. It will also help the entrepreneurs in organizing their businesses in better form and will provide more certainty with regard to a definite code of regulations for smaller businesses.”
The concept of “small companies” is being introduced in the new Companies Bill to allow lower levels of compliance to medium and small size companies. The new bill proposes to exempt small companies from certain provisions of the company’s act. Those exemptions will be notified by the central government separately.
Source : The Financial Express
Friday, October 10, 2008
The pressure point
For the first time in nearly four years, the economy is under strain. And everyone, from the small farmer to large companies, is feeling the burden.
The situation is grim. The big numbers say it. The captains of Indian industry reaffirm it. Most importantly, the
people who live it, day in and day out, feel it. About two months ago, the Outlook Business team fanned out across India to gauge the economic health of the nation. At two levels. The first objective, the short-term one, was to see whether people were better off or worse off than before. The second objective, the long-term one, was whether the nation was riding an economic wind that would blow the fruits of progress and prosperity to all, not just a fortunate few who happened to come in its way.
So, our team of reporters and photographers went out and met people, by the hundreds. We met them in the fields of Ropar district in Punjab, Navsari in Gujarat, Akola in Maharashtra, Hassan in Karnataka, Pollachi in Tamil Nadu, Hajipur in Bihar... We met them in the industrial clusters of Baddi, Moradabad, Ludhiana, Haridwar, Parwanoo, Durgapur, Surat, Coimbatore, Tirpur... We met them in swanky, blue-light offices in Delhi, Mumbai, Bangalore, Chennai... We met them in their homes, on the streets, in chai shops, on highway eateries, under the banyan tree, in the middle of nowhere...
We visited bicycle units, textile factories, brass and aluminium export houses, pharmaceutical companies, malls, bank branches, housing complexes... We met farmers, labourers, daily wage earners, unemployed, shop-floor workers, managers, CEOs, bankers, economists, consultants, policymakers, DSAs, exporters, job consultants, builders, village mukhiyas, ministers, distributors, wholesalers, kids... And the one nagging thought we came back with is this: the situation is grim and there’s work to be done.
The small squeeze
Three examples, representing the masses in two of the three pillars the Indian economy stands on, epitomise the recent deterioration in the state of affairs that is squeezing many, and making them worse off than before.
Poonabhai, a 50-something farmer, has been sweating it out on a rented 36-bigha land on the Surat-Navsari Road for the last 11 years. For all his labour, his landlord pays him Rs 2,000 a month. His grouse is not so much with his landlord, who has loaned him money in the past, but with the market economy, whose intended benefits bypass him. "My cost of all inputs—from seeds to fertilisers to pesticides—has gone up substantially in the last few months. I sold brinjals for Rs 40 per quintal and you buy the same for Rs 40 per kg," he says ruefully.
Unmanageable input costs is the refrain up North, in Ludhiana, India’s cycle-manufacturing town and home to mostly small- and medium-sized enterprises (SMEs). Manufacturers say runaway prices of steel has resulted in bicycle sales falling 20-25% between December and April. "A cycle needs 18 kg of steel. Our input costs have increased by Rs 270 per cycle, but we have increased prices by only Rs 165," says Charanjit Singh Vishikarma, Managing Director, Vishikarma Industries and President, United Cycle and Parts Manufacturers Association. If managing higher input costs isn’t hard enough, they also have to compete with cheap Chinese imports; steel costs 30% less in China.
Cheap Chinese imports are also turning the screws on SMEs in many other sectors like textiles, pumps, electronic items, even handicrafts that were the legacy of India. Says Shailesh Chandra of RV Handicrafts, an exporter in Moradabad: "A buyer is not attached to Moradabad brass or Indian art work. If he gets a similar quantity at one-tenth the cost of the original, never mind its quality, he is happy." It’s not just manufacturers who are affected by the Chinese deluge. Wholesalers are caught between staying Indian and seeing business dwindle, or start stocking Chinese goods.
That’s pretty much the story on the fringes. If it’s not input prices or the China threat or stiff competition, the fingers are pointed at crippling infrastructure, bad governance, corruption, government apathy—factors that have always existed in the matrix, but the side-effects of which get pronounced during difficult times.
The biggies are worried...
Besides taking on more burden in the recent past, the other thread running through these three stories is that they are about people who don’t have much of a voice in shaping their destinies or the resources to weather difficult times.
India Inc does, but even it is feeling the pressure. The mood is not as despondent as in the fields or in the small factories and workshops, but there is nervousness on whether the current bout of hardship is just a passing phase, or whether it could be of a more lasting nature and end up leaving a deeper bruise.
The circumspection is evident when one gleans from the numbers that showcase various facets of economic decision-making by households. Credit growth has dipped significantly in 2008-09. Housing loans, which grew by 25-158% in the last four years, had grown by just 9.1% in 2008-09 (till February 15). Worse, delinquencies are on the rise. Although numbers aren’t available to quantify the scale of defaults, anecdotal evidence from banks suggests that it is high.
Although realty prices have dropped, they are still high enough to be a deterrent to buyers; banks too, stung by recent reversals, have become conservative in extending loans. Similarly, because of the dip in the stock market, retail mutual fund collections are said to have dipped 30-50% since January. Elsewhere, the IT/ITES sector, one of the big employment generators in the country, is talking in euphemisms that basically mean it is likely to hire fewer people this financial year than in the last one.
Outlook Business, in partnership with the Confederation of Indian Industry (CII), polled 90 luminaries from corporate India on what lay ahead for the economy. The results of the survey corroborate the concerns we derived from our ground-up reporting (See box: The Going Gets Tougher). As many as 88% said their margins were under pressure. And, more importantly, nearly half of them admitted they were seeing a drop in sales and orders, a pile up of inventories and an increase in payment cycles—usually, the first signs of an economic slowdown.
There’s no doubt that India’s economic juggernaut will slow down. By how much is the question. And 63% of the respondents feel that GDP (gross domestic product) growth will fall from 9% in 2007-08 to below 8% in 2008-09; nearly one-fourth think it could fall to even below 7.5%.
Research houses too see a drop to the trend rate of 7-5-8%. Kotak Mahindra Bank has lowered its 2008-09 GDP projection to 7.8%, with a normal monsoon. Standard Chartered Bank has pegged it at 7.4% in 2008-09, with a bounce back to 8.5% in 2009-10. "The moderation in growth is a reflection of cyclical fluctuations, higher local interest rates and a slowing global economy," says Sucheta Mehta, Senior Economist, Standard Chartered Bank.
Morgan Stanley is the most bearish of the lot, projecting a growth of 6.7% in 2008-09. Chetan Ahya, Executive Director, India & South East Asia economist at Morgan Stanley cites three threats that can pull the country’s growth well below its potential: continuing rise in global commodity prices, strengthening of the dollar and consequent depreciation of the rupee, and continuing risk aversion in the global financial markets.
In the Outlook Business-CII poll, India Inc cited high oil prices and rising input costs as the two biggest threats. As many as 91% see crude at $100 a barrel or more in 2008-09 and 85% see inflation at 7% plus. Tackling such high inflationary pressures is going to be a tightrope walk for the Reserve Bank of India (RBI) and the government.
Increase in interest rates in major economies will reduce demand and, possibly, commodity prices, but this will happen over time. Reducing interest rates is not an easy choice to make given that growth is flagging and further throttling may be undesirable. Oil prices are another policy dilemma. There is pressure on the government to keep absorbing the burden, ruining its own balance sheet and that of the oil PSUs. Even if it manages to pass on the rise to consumers, as it managed earlier this month, it will fan inflation. The latest price rise could nudge inflation beyond 10%. "If the government erases the entire subsidy burden and passes it all to the consumer, inflation could cross 20%,’’ says Mehta.
...but remain optimistic
High oil prices and high inflation is turning out to be a bug-bear for economies around the world. As a recent World Bank report noted: "Measured correctly, two-thirds of the world population have double-digit inflation.’’ Such high inflationary pressures are sure to have an adverse impact. Business confidence has dropped, consumer demand has fallen, stock markets are taking a beating and governments are returning to era of protectionism to ring-fence their economies from the turmoil outside.
The biggest source of concern of the ‘turmoil outside’ is the US, which, according to The Economist, is slipping into "its deepest recession for several decades". It estimates the losses from the home mortgage crisis to be about $900 billion, nearly double that in the South East Asian currency crisis of 1997-99. It also describes the US housing boom as "biggest bubble in history’’, far bigger than the Internet bubble of 2000-01. However, while it predicts the demise of the dollar as the main reserve currency and the shrinking dominance of the US, The Economist doesn’t predict a world in crisis. Asia, it says, is more important than the US today as a driver of global growth.
Subir Gokarn, Chief Economist, Asia-Pacific, Standard & Poor’s too expresses this point of view. According to Gokarn, the mild US recession—growth dropped to 0.2% in the first quarter—is unlikely to have any dramatic effect on emerging economies of Asia, which are the new global drivers and have managed to de-couple themselves from the US economy. "The Indian economy is far more resilient today than it was during the last US recession of 2001 or even during the East Asian crisis of 1997," he says.
Gokarn feels the US recession might be a short-lived one—the economy should start looking up after October—because of the government’s ability to set in place the right mix of policies. Rate cuts by the US Federal Reserve will help shore up bank balances, and help them get back in the business of lending to corporates and individuals; plus, a "cheque in the mailbox" of individuals will also foster consumer spending.
Hence, any discussion on the state of the Indian economy should be studied from two perspectives. The immediate, which takes into account the cyclical nature of the Indian economy; the medium and long term, which looks at the structural changes that have come about in the Indian economy in the past decade.
So, the immediate future may look a little cloudy and uncertain. For instance, 40% of Indian exports go to the US and European Union. In case these regions go comatose, Indian exports, which grew a handsome 23% in dollar terms, will suffer. Says Standard Chartered’s Mehta: "Exports in 2008-09 are expected to reel under the triple whammy of a stronger currency later this year, correction in commodity prices and a slow down in trade with major trading partners."
However, over the long-term, the Indian growth story remains intact. "All debates about the recent slowdown is because we have been spoilt by the buoyancy of the past three years," says Gokarn. Indeed, if one steps back from the here and now, the mood is considerably more upbeat. Despite the tightening environment, 68% of the respondents in the poll said they didn’t plan to defer large capital investment plans. Says Mehta: "Although some negatives like a stronger currency, higher interest rates and restricted borrowing options can hit producers, a positive assessment of evolving demand conditions and underlying plans for expanding capacities should keep the engine chugging.’’
Crossing the hump
That’s at a big picture level. Down the ranks, for many SMEs, small exporters, wholesalers and farmers, it’s less a question of expansion and more a question of survival. Even among the more affluent, some belt-tightening and withdrawal is being seen.
In a sense, the Indian economy finds itself at a crossroads. There is a slowdown and the economy's constituents.
are feeling greater discomfort. The global upheavals are having a trickle-down effect. Demand is there, but it is flagging. How the economy responds to these challenges will shape the trajectory of growth and the nature of that growth—whether it is equitable, inclusive and sustainable.
For all the noise made by the UPA government, the character of this 9% growth is incredibly skewed. Neither are the rewards being broad-based nor are they gushing down to the people who need it the most. This was a common refrain among the people we spoke to. Many of them—from the landless unemployed who are getting short-changed under the NREGS to exporters facing the brunt of an appreciating rupee—expressed dismay at the general apathy towards their plight.
In order to ensure that India’s growth story remains sustainable, policy, industry and society need to ensure four things: move the excess people out of agriculture by providing them alternate employment; create world-class infrastructure; improve public services such as rural healthcare, drinking water and sanitation; improve the quality of governance. Otherwise, the disparity between the urban rich and rural poor will continue to grow, resulting in huge social tensions. And that is something the country can ill-afford.
Source : Outlook Business
The situation is grim. The big numbers say it. The captains of Indian industry reaffirm it. Most importantly, the
people who live it, day in and day out, feel it. About two months ago, the Outlook Business team fanned out across India to gauge the economic health of the nation. At two levels. The first objective, the short-term one, was to see whether people were better off or worse off than before. The second objective, the long-term one, was whether the nation was riding an economic wind that would blow the fruits of progress and prosperity to all, not just a fortunate few who happened to come in its way.
So, our team of reporters and photographers went out and met people, by the hundreds. We met them in the fields of Ropar district in Punjab, Navsari in Gujarat, Akola in Maharashtra, Hassan in Karnataka, Pollachi in Tamil Nadu, Hajipur in Bihar... We met them in the industrial clusters of Baddi, Moradabad, Ludhiana, Haridwar, Parwanoo, Durgapur, Surat, Coimbatore, Tirpur... We met them in swanky, blue-light offices in Delhi, Mumbai, Bangalore, Chennai... We met them in their homes, on the streets, in chai shops, on highway eateries, under the banyan tree, in the middle of nowhere...
We visited bicycle units, textile factories, brass and aluminium export houses, pharmaceutical companies, malls, bank branches, housing complexes... We met farmers, labourers, daily wage earners, unemployed, shop-floor workers, managers, CEOs, bankers, economists, consultants, policymakers, DSAs, exporters, job consultants, builders, village mukhiyas, ministers, distributors, wholesalers, kids... And the one nagging thought we came back with is this: the situation is grim and there’s work to be done.
The small squeeze
Three examples, representing the masses in two of the three pillars the Indian economy stands on, epitomise the recent deterioration in the state of affairs that is squeezing many, and making them worse off than before.
Poonabhai, a 50-something farmer, has been sweating it out on a rented 36-bigha land on the Surat-Navsari Road for the last 11 years. For all his labour, his landlord pays him Rs 2,000 a month. His grouse is not so much with his landlord, who has loaned him money in the past, but with the market economy, whose intended benefits bypass him. "My cost of all inputs—from seeds to fertilisers to pesticides—has gone up substantially in the last few months. I sold brinjals for Rs 40 per quintal and you buy the same for Rs 40 per kg," he says ruefully.
Unmanageable input costs is the refrain up North, in Ludhiana, India’s cycle-manufacturing town and home to mostly small- and medium-sized enterprises (SMEs). Manufacturers say runaway prices of steel has resulted in bicycle sales falling 20-25% between December and April. "A cycle needs 18 kg of steel. Our input costs have increased by Rs 270 per cycle, but we have increased prices by only Rs 165," says Charanjit Singh Vishikarma, Managing Director, Vishikarma Industries and President, United Cycle and Parts Manufacturers Association. If managing higher input costs isn’t hard enough, they also have to compete with cheap Chinese imports; steel costs 30% less in China.
Cheap Chinese imports are also turning the screws on SMEs in many other sectors like textiles, pumps, electronic items, even handicrafts that were the legacy of India. Says Shailesh Chandra of RV Handicrafts, an exporter in Moradabad: "A buyer is not attached to Moradabad brass or Indian art work. If he gets a similar quantity at one-tenth the cost of the original, never mind its quality, he is happy." It’s not just manufacturers who are affected by the Chinese deluge. Wholesalers are caught between staying Indian and seeing business dwindle, or start stocking Chinese goods.
That’s pretty much the story on the fringes. If it’s not input prices or the China threat or stiff competition, the fingers are pointed at crippling infrastructure, bad governance, corruption, government apathy—factors that have always existed in the matrix, but the side-effects of which get pronounced during difficult times.
The biggies are worried...
Besides taking on more burden in the recent past, the other thread running through these three stories is that they are about people who don’t have much of a voice in shaping their destinies or the resources to weather difficult times.
India Inc does, but even it is feeling the pressure. The mood is not as despondent as in the fields or in the small factories and workshops, but there is nervousness on whether the current bout of hardship is just a passing phase, or whether it could be of a more lasting nature and end up leaving a deeper bruise.
The circumspection is evident when one gleans from the numbers that showcase various facets of economic decision-making by households. Credit growth has dipped significantly in 2008-09. Housing loans, which grew by 25-158% in the last four years, had grown by just 9.1% in 2008-09 (till February 15). Worse, delinquencies are on the rise. Although numbers aren’t available to quantify the scale of defaults, anecdotal evidence from banks suggests that it is high.
Although realty prices have dropped, they are still high enough to be a deterrent to buyers; banks too, stung by recent reversals, have become conservative in extending loans. Similarly, because of the dip in the stock market, retail mutual fund collections are said to have dipped 30-50% since January. Elsewhere, the IT/ITES sector, one of the big employment generators in the country, is talking in euphemisms that basically mean it is likely to hire fewer people this financial year than in the last one.
Outlook Business, in partnership with the Confederation of Indian Industry (CII), polled 90 luminaries from corporate India on what lay ahead for the economy. The results of the survey corroborate the concerns we derived from our ground-up reporting (See box: The Going Gets Tougher). As many as 88% said their margins were under pressure. And, more importantly, nearly half of them admitted they were seeing a drop in sales and orders, a pile up of inventories and an increase in payment cycles—usually, the first signs of an economic slowdown.
There’s no doubt that India’s economic juggernaut will slow down. By how much is the question. And 63% of the respondents feel that GDP (gross domestic product) growth will fall from 9% in 2007-08 to below 8% in 2008-09; nearly one-fourth think it could fall to even below 7.5%.
Research houses too see a drop to the trend rate of 7-5-8%. Kotak Mahindra Bank has lowered its 2008-09 GDP projection to 7.8%, with a normal monsoon. Standard Chartered Bank has pegged it at 7.4% in 2008-09, with a bounce back to 8.5% in 2009-10. "The moderation in growth is a reflection of cyclical fluctuations, higher local interest rates and a slowing global economy," says Sucheta Mehta, Senior Economist, Standard Chartered Bank.
Morgan Stanley is the most bearish of the lot, projecting a growth of 6.7% in 2008-09. Chetan Ahya, Executive Director, India & South East Asia economist at Morgan Stanley cites three threats that can pull the country’s growth well below its potential: continuing rise in global commodity prices, strengthening of the dollar and consequent depreciation of the rupee, and continuing risk aversion in the global financial markets.
In the Outlook Business-CII poll, India Inc cited high oil prices and rising input costs as the two biggest threats. As many as 91% see crude at $100 a barrel or more in 2008-09 and 85% see inflation at 7% plus. Tackling such high inflationary pressures is going to be a tightrope walk for the Reserve Bank of India (RBI) and the government.
Increase in interest rates in major economies will reduce demand and, possibly, commodity prices, but this will happen over time. Reducing interest rates is not an easy choice to make given that growth is flagging and further throttling may be undesirable. Oil prices are another policy dilemma. There is pressure on the government to keep absorbing the burden, ruining its own balance sheet and that of the oil PSUs. Even if it manages to pass on the rise to consumers, as it managed earlier this month, it will fan inflation. The latest price rise could nudge inflation beyond 10%. "If the government erases the entire subsidy burden and passes it all to the consumer, inflation could cross 20%,’’ says Mehta.
...but remain optimistic
High oil prices and high inflation is turning out to be a bug-bear for economies around the world. As a recent World Bank report noted: "Measured correctly, two-thirds of the world population have double-digit inflation.’’ Such high inflationary pressures are sure to have an adverse impact. Business confidence has dropped, consumer demand has fallen, stock markets are taking a beating and governments are returning to era of protectionism to ring-fence their economies from the turmoil outside.
The biggest source of concern of the ‘turmoil outside’ is the US, which, according to The Economist, is slipping into "its deepest recession for several decades". It estimates the losses from the home mortgage crisis to be about $900 billion, nearly double that in the South East Asian currency crisis of 1997-99. It also describes the US housing boom as "biggest bubble in history’’, far bigger than the Internet bubble of 2000-01. However, while it predicts the demise of the dollar as the main reserve currency and the shrinking dominance of the US, The Economist doesn’t predict a world in crisis. Asia, it says, is more important than the US today as a driver of global growth.
Subir Gokarn, Chief Economist, Asia-Pacific, Standard & Poor’s too expresses this point of view. According to Gokarn, the mild US recession—growth dropped to 0.2% in the first quarter—is unlikely to have any dramatic effect on emerging economies of Asia, which are the new global drivers and have managed to de-couple themselves from the US economy. "The Indian economy is far more resilient today than it was during the last US recession of 2001 or even during the East Asian crisis of 1997," he says.
Gokarn feels the US recession might be a short-lived one—the economy should start looking up after October—because of the government’s ability to set in place the right mix of policies. Rate cuts by the US Federal Reserve will help shore up bank balances, and help them get back in the business of lending to corporates and individuals; plus, a "cheque in the mailbox" of individuals will also foster consumer spending.
Hence, any discussion on the state of the Indian economy should be studied from two perspectives. The immediate, which takes into account the cyclical nature of the Indian economy; the medium and long term, which looks at the structural changes that have come about in the Indian economy in the past decade.
So, the immediate future may look a little cloudy and uncertain. For instance, 40% of Indian exports go to the US and European Union. In case these regions go comatose, Indian exports, which grew a handsome 23% in dollar terms, will suffer. Says Standard Chartered’s Mehta: "Exports in 2008-09 are expected to reel under the triple whammy of a stronger currency later this year, correction in commodity prices and a slow down in trade with major trading partners."
However, over the long-term, the Indian growth story remains intact. "All debates about the recent slowdown is because we have been spoilt by the buoyancy of the past three years," says Gokarn. Indeed, if one steps back from the here and now, the mood is considerably more upbeat. Despite the tightening environment, 68% of the respondents in the poll said they didn’t plan to defer large capital investment plans. Says Mehta: "Although some negatives like a stronger currency, higher interest rates and restricted borrowing options can hit producers, a positive assessment of evolving demand conditions and underlying plans for expanding capacities should keep the engine chugging.’’
Crossing the hump
That’s at a big picture level. Down the ranks, for many SMEs, small exporters, wholesalers and farmers, it’s less a question of expansion and more a question of survival. Even among the more affluent, some belt-tightening and withdrawal is being seen.
In a sense, the Indian economy finds itself at a crossroads. There is a slowdown and the economy's constituents.
are feeling greater discomfort. The global upheavals are having a trickle-down effect. Demand is there, but it is flagging. How the economy responds to these challenges will shape the trajectory of growth and the nature of that growth—whether it is equitable, inclusive and sustainable.
For all the noise made by the UPA government, the character of this 9% growth is incredibly skewed. Neither are the rewards being broad-based nor are they gushing down to the people who need it the most. This was a common refrain among the people we spoke to. Many of them—from the landless unemployed who are getting short-changed under the NREGS to exporters facing the brunt of an appreciating rupee—expressed dismay at the general apathy towards their plight.
In order to ensure that India’s growth story remains sustainable, policy, industry and society need to ensure four things: move the excess people out of agriculture by providing them alternate employment; create world-class infrastructure; improve public services such as rural healthcare, drinking water and sanitation; improve the quality of governance. Otherwise, the disparity between the urban rich and rural poor will continue to grow, resulting in huge social tensions. And that is something the country can ill-afford.
Source : Outlook Business
Industrial convolution
Small and medium units have been hit the hardest by soaring raw material costs, exchange-rate volatility and cheap Chinese goods
Walk around Moradabad today, and you’d find it hard to understand why this was once considered India's brass city.’ This industrial centre in Uttar Pradesh, which was founded by Mughal emperor Shah Jahan’s son Murad early in the 17th Century, has now become more of an ‘aluminum city,’ having almost abandoned its brass heritage.
The shift has been swift. When brass prices started soaring, small-scale industries exporting artefacts to the West passed on the higher cost to end consumers. Meanwhile, the Chinese banked on huge volumes, copycat designs using brass-like materials, and, more importantly, government control over costs. Moreover, as Shailesh Chandra of RV Handicrafts points out: "The buyer isn’t attached to Indian artwork. If he gets a similar product at one-tenth the cost of the original, he’s happy." The result: demand for Moradabad’s artefacts slumped.
Almost 70% of the small-scale industries that fed the large export houses closed shop, consequently. Those who shifted to aluminum survived, but may have only delayed the inevitable. "Even aluminum prices are rising," says 50-year-old Haji Mohammad Saleem, owner of a small unit. "At best, it’ll be a couple of years before we close too."
In Ludhiana, another North Indian industrial hub, the situation is eerily similar to the one in Moradabad. The difference being that it’s steel and not brass that’s the commodity in question. Here, Sanjay Gupta’s 35-year-old cycle pedal-making unit is already history. "My clients were unwilling to take on the added burden," he says, referring to the soaring cost of steel.
Each day, over 5,000 small and medium enterprises (SMEs), employing more than 600,000 people, churn out about 40,000 bicycles in India’s bicycle capital. That bicycle economy is now under threat. "Steel costs have risen by about Rs 270 per cycle, while we have increased prices only by Rs 165. We are incurring a loss," says Charanjit Singh Vishwakarma, MD of Vishwakarma Industries and President of the United Cycle & Parts Manufacturers Association. One simple fact makes the picture crystal clear: steel sheets cost Rs 46,000 a tonne in India and Rs 32,000 in China.
Down South, the 5,200-plus members of the Coimbatore District Small Industries Association may not be on the verge of closure, but they’re certainly feeling the heat from rising commodity prices. "In March, our production loss was 15% due to non-availability of steel and other raw materials," says the association’s President, C Muthusami. "Margins will surely take a hit." In what was an unprecedented act for the association, its members took to the streets recently. They want the government to intervene and control raw material prices, a la the Dragon Nation. Says HP Kumar, Managing Director, National Small Industries Corporation (NSIC): "How long can China carry on with hidden subsidies? They will have to fall in line with WTO norms."
Moradabad’s Saleem echoes Muthusami’s views: "The policy changes and schemes don’t even touch us, and we are unaware of any move to bail us out. We just want metal prices to come down." Making a similar request, the South India Mills Association recently asked the government to regulate cotton exports, which it linked to soaring cotton prices (cotton prices contribute over a third of the cost of making yarn).
Mani Chinnaswamy, Partner at Appachi Cotton in Pollachi village, Tamil Nadu, says: "Cotton prices don’t look like they’re coming down much. There’s a crop failure every other day and consumption is soaring."
Seeking intervention from above
Although each of the stories highlighted above is disparate, the theme is the same. And, it tells us that small enterprises have got used to a stable cost environment all these years. When that stability is punctured violently, it is natural for them to look to the government to put things in order. This has something to do with the fact that SMEs have been a government priority for long. They account for almost 7% of India’s GDP.
Data from the office of the development commissioner indicates a 5.6% growth in the number of micro and small enterprises between 2006-07 and 2007-08, as well as a 3% increase in employment in these units. But perhaps the small units are expecting too much from the government. Ajay Sahai, Secretary-General, Federation of Indian Export Organisations, reckons that liberalisation and the new business environment have reduced the government’s ability to dole out sops.
It has to be said that small units are doing more than just seeking governmental intervention. There’s a sense that rising commodity prices are here to stay, and that a more practical approach is the need of the hour. The NSIC, for instance, is buying steel from the Steel Authority of India and selling it to SMEs that wouldn’t be able to reach long-term agreements with large steel makers on their own.
Interestingly, the Coimbatore District Small Industries Association is taking another look at a bulk purchase system that worked for it more than a decade back. It has requested the Small Industries Development Corporation of Tamil Nadu to carry out bulk purchases of materials on its behalf.
Challenges galore
Unfortunately for SMEs, commodity prices haven’t struck in isolation. You would expect an original equipment maker to have the ability to pass on cost increases. But that’s not the case. Take the example of Coimbatore-based Mahendra Pumps, which makes and sells pumps predominantly for the agri sector. Its Managing Director, Mahendra Ramdas, says: "We aren’t able to increase prices due to intense competition. Also, agri sector sales are sluggish because of a serious crisis in the sector." Hence, he expects annual revenue growth to slow down to 5-7% in the coming years, from 10-15% over the previous five years.
The hosiery and knitwear sector faces competition from across the border. Pramod Kumar Aggarwal, Director at Himker Knits, says there haven’t been any orders from European countries, including France and Germany, this year. "The absence of import duties on Bangladeshi products makes them 33% cheaper than Indian products, which attract a 14% import duty," says Aggarwal. "And economies of scale make Chinese products at least 20% cheaper."
The other problem that export-oriented industries, including textiles, faced over the last year was a sharply weakening dollar. Ramesh Kannan, CMD of Kaynes Technology, a Mysore-based provider of electronic manufacturing services, puts the issue in context: "SMEs don’t have rich surpluses and huge reserves, whereas big companies do." In the process of managing an unprecedented quantum of change in forex equations, some of the bigger companies got into exotic derivatives that they never understood, and incurred losses.
Though the rupee has weakened slightly, of late, there are many concerns on the forex front. "If you ask me the scenario for the next few years," says Ramdas of Mahendra Pumps, "I’d say it depends on how the rupee behaves." His view is that the rupee at 44 would be great for exports.
Finance doesn’t come easy either. Banks do not extend credit without securing some sort of collateral. Even though they operate in priority sectors, many small units do not approach financial institutions for loans due to the paperwork and processes involved. A general reluctance to give loans to this ‘high-risk’ sector also remains a cause of worry.
There’s some relief in sight with the NSIC roping in seven rating agencies, including Fitch, Dun & Bradstreet, and SMERA, to provide credit ratings to small enterprises. Under this plan, NSIC will reimburse 75% of the performance and credit rating fee levied by the agency to the enterprise. Banks have also been mandated to aim for 20% year-on-year growth in lending to SMEs. But banks and financial institutions are also under close scrutiny and responsible to their shareholders—they are unlikely to extend credit just because the government wants them to.
What adds to the gloom on the input front is the state of manpower. In many industries, manpower is getting expensive. As Roorkee-based consultant Hemant Arora points out: "The shortage of skilled labour has made SMEs a training ground for workers before they are poached by large corporates." And companies catering to the agri sector would like to see the manpower situation in the agri sector sorted out. Labourers are increasingly shunning farm work, preferring the higher wages they earn in the manufacturing or construction sectors instead. Many industries are seriously looking at automation as a partial solution to this problem.
The silver lining
Amid the cost-side assault on SMEs, there is some good news. Consumption is still good. "There certainly is demand," says D Bala Sundaram, Chairman of cast iron industrial components maker, CPC. He is also the President of the Indian Chamber of Commerce and Industry, Coimbatore. "Even if economic growth drops to 7%, that’s still good growth."
The smaller you are in the unorganised realm, the worse it is for you. And though things appear better in the organised space, Sanjay Agarwal, Executive Director (SME) of KPMG, reckons that small units’ ability to survive would be severely tested in a downturn. "They have to reinvent themselves."
That’s already happening. For instance, even in Moradabad, exporters like CL Gupta and Globe Metal Industries have quickly changed tack, and diversified into products made of glass and wood. They did this even as small units supporting artisans folded up.
In Coimbatore, companies are looking to get into newer markets or rising up the value chain. That, they say, is the only way for higher realisations, given that there isn’t much they can do to control costs. For instance, Bala Sundaram’s company is in the process of increasing manufacturing capacity by 60% to 800 tonnes. And the company is slowly bagging more value-added and high precision work. Says Jawhar Sircar, Development Commissioner, Micro, Small and Medium Enterprises: "The nimble and flexible nature of these players has enabled them to survive the vagaries of industrial change."
Mahendra’s Ramdas has two alternative markets. One is exports, which currently contributes only about 12% of his sales. He wants this to go up to 30% in the next five years. Secondly, he wants to look beyond agricultural pumps, and get into the housing sector aggressively.
Sharp Pumps’ chief Kannan Ramachandran wants to get into the high-margin game. He’s looking at a drastic shift from the current focus on the domestic and agricultural segments to industrial pumps. "Or else, it’s a volumes game. You need to get into the newer categories, otherwise you’ll be out of the market," he says.
New segments where large players aren’t venturing is the other destination for the SMEs. For instance, Zircon Products’ CS Gupta supplies zirconium powder to nuclear power plants. He also hopes to benefit from opportunities that would arise if the India-US nuclear deal is ratified. However, that doesn’t appear likely to happen any time soon.
Taking the inorganic route
Some players are also looking at acquisitions and joint ventures. Like the big players, they’ve been bitten by the M&A bug. And their stage for this mode of expansion is global. Companies like Ajanta Watch and Muzaffarnagar-based Bindal Duplex already have a China footprint, and others like Shivani Locks and Imperial Auto have European technology partners.
In fact, a British government delegation visited Lucknow and its surrounding areas in an attempt to get SMEs to form joint ventures, partnerships and alliances with British firms. However, by taking the inorganic route and increasing in size, many of these firms would cease to be SMEs, at least not by the government’s definition. They would thus cease to be eligible for government sops to the sector.
"We’ve gained confidence and are exploring opportunities," says DS Verma, President of Indian Industries Association of Lucknow. The size of some of these could be as small as Rs 1 crore. Understandably, therefore, the support from the investment banking fraternity is lacking. "The potential for M&As and consolidation is there, but most advisors are busy with big-ticket deals," contends KPMG’s Sanjay Agarwal.
Apart from the broad economic indicators, there is apprehension over the kind of government that will come to power after next year’s polls. That’s despite the fact that India’s top two political groups have a broad consensus on economic reforms.
Too much volatility in economic factors is surely a challenge for SMEs. But these units would do well to remember they’ve survived numerous changes in India’s economic landscape over the decades. Despite volatility in many sectors, India has been adding almost 200,000 new micro, medium and small enterprises every year, with the old giving way to the new.
Source: Outlook Business
Walk around Moradabad today, and you’d find it hard to understand why this was once considered India's brass city.’ This industrial centre in Uttar Pradesh, which was founded by Mughal emperor Shah Jahan’s son Murad early in the 17th Century, has now become more of an ‘aluminum city,’ having almost abandoned its brass heritage.
The shift has been swift. When brass prices started soaring, small-scale industries exporting artefacts to the West passed on the higher cost to end consumers. Meanwhile, the Chinese banked on huge volumes, copycat designs using brass-like materials, and, more importantly, government control over costs. Moreover, as Shailesh Chandra of RV Handicrafts points out: "The buyer isn’t attached to Indian artwork. If he gets a similar product at one-tenth the cost of the original, he’s happy." The result: demand for Moradabad’s artefacts slumped.
Almost 70% of the small-scale industries that fed the large export houses closed shop, consequently. Those who shifted to aluminum survived, but may have only delayed the inevitable. "Even aluminum prices are rising," says 50-year-old Haji Mohammad Saleem, owner of a small unit. "At best, it’ll be a couple of years before we close too."
In Ludhiana, another North Indian industrial hub, the situation is eerily similar to the one in Moradabad. The difference being that it’s steel and not brass that’s the commodity in question. Here, Sanjay Gupta’s 35-year-old cycle pedal-making unit is already history. "My clients were unwilling to take on the added burden," he says, referring to the soaring cost of steel.
Each day, over 5,000 small and medium enterprises (SMEs), employing more than 600,000 people, churn out about 40,000 bicycles in India’s bicycle capital. That bicycle economy is now under threat. "Steel costs have risen by about Rs 270 per cycle, while we have increased prices only by Rs 165. We are incurring a loss," says Charanjit Singh Vishwakarma, MD of Vishwakarma Industries and President of the United Cycle & Parts Manufacturers Association. One simple fact makes the picture crystal clear: steel sheets cost Rs 46,000 a tonne in India and Rs 32,000 in China.
Down South, the 5,200-plus members of the Coimbatore District Small Industries Association may not be on the verge of closure, but they’re certainly feeling the heat from rising commodity prices. "In March, our production loss was 15% due to non-availability of steel and other raw materials," says the association’s President, C Muthusami. "Margins will surely take a hit." In what was an unprecedented act for the association, its members took to the streets recently. They want the government to intervene and control raw material prices, a la the Dragon Nation. Says HP Kumar, Managing Director, National Small Industries Corporation (NSIC): "How long can China carry on with hidden subsidies? They will have to fall in line with WTO norms."
Moradabad’s Saleem echoes Muthusami’s views: "The policy changes and schemes don’t even touch us, and we are unaware of any move to bail us out. We just want metal prices to come down." Making a similar request, the South India Mills Association recently asked the government to regulate cotton exports, which it linked to soaring cotton prices (cotton prices contribute over a third of the cost of making yarn).
Mani Chinnaswamy, Partner at Appachi Cotton in Pollachi village, Tamil Nadu, says: "Cotton prices don’t look like they’re coming down much. There’s a crop failure every other day and consumption is soaring."
Seeking intervention from above
Although each of the stories highlighted above is disparate, the theme is the same. And, it tells us that small enterprises have got used to a stable cost environment all these years. When that stability is punctured violently, it is natural for them to look to the government to put things in order. This has something to do with the fact that SMEs have been a government priority for long. They account for almost 7% of India’s GDP.
Data from the office of the development commissioner indicates a 5.6% growth in the number of micro and small enterprises between 2006-07 and 2007-08, as well as a 3% increase in employment in these units. But perhaps the small units are expecting too much from the government. Ajay Sahai, Secretary-General, Federation of Indian Export Organisations, reckons that liberalisation and the new business environment have reduced the government’s ability to dole out sops.
It has to be said that small units are doing more than just seeking governmental intervention. There’s a sense that rising commodity prices are here to stay, and that a more practical approach is the need of the hour. The NSIC, for instance, is buying steel from the Steel Authority of India and selling it to SMEs that wouldn’t be able to reach long-term agreements with large steel makers on their own.
Interestingly, the Coimbatore District Small Industries Association is taking another look at a bulk purchase system that worked for it more than a decade back. It has requested the Small Industries Development Corporation of Tamil Nadu to carry out bulk purchases of materials on its behalf.
Challenges galore
Unfortunately for SMEs, commodity prices haven’t struck in isolation. You would expect an original equipment maker to have the ability to pass on cost increases. But that’s not the case. Take the example of Coimbatore-based Mahendra Pumps, which makes and sells pumps predominantly for the agri sector. Its Managing Director, Mahendra Ramdas, says: "We aren’t able to increase prices due to intense competition. Also, agri sector sales are sluggish because of a serious crisis in the sector." Hence, he expects annual revenue growth to slow down to 5-7% in the coming years, from 10-15% over the previous five years.
The hosiery and knitwear sector faces competition from across the border. Pramod Kumar Aggarwal, Director at Himker Knits, says there haven’t been any orders from European countries, including France and Germany, this year. "The absence of import duties on Bangladeshi products makes them 33% cheaper than Indian products, which attract a 14% import duty," says Aggarwal. "And economies of scale make Chinese products at least 20% cheaper."
The other problem that export-oriented industries, including textiles, faced over the last year was a sharply weakening dollar. Ramesh Kannan, CMD of Kaynes Technology, a Mysore-based provider of electronic manufacturing services, puts the issue in context: "SMEs don’t have rich surpluses and huge reserves, whereas big companies do." In the process of managing an unprecedented quantum of change in forex equations, some of the bigger companies got into exotic derivatives that they never understood, and incurred losses.
Though the rupee has weakened slightly, of late, there are many concerns on the forex front. "If you ask me the scenario for the next few years," says Ramdas of Mahendra Pumps, "I’d say it depends on how the rupee behaves." His view is that the rupee at 44 would be great for exports.
Finance doesn’t come easy either. Banks do not extend credit without securing some sort of collateral. Even though they operate in priority sectors, many small units do not approach financial institutions for loans due to the paperwork and processes involved. A general reluctance to give loans to this ‘high-risk’ sector also remains a cause of worry.
There’s some relief in sight with the NSIC roping in seven rating agencies, including Fitch, Dun & Bradstreet, and SMERA, to provide credit ratings to small enterprises. Under this plan, NSIC will reimburse 75% of the performance and credit rating fee levied by the agency to the enterprise. Banks have also been mandated to aim for 20% year-on-year growth in lending to SMEs. But banks and financial institutions are also under close scrutiny and responsible to their shareholders—they are unlikely to extend credit just because the government wants them to.
What adds to the gloom on the input front is the state of manpower. In many industries, manpower is getting expensive. As Roorkee-based consultant Hemant Arora points out: "The shortage of skilled labour has made SMEs a training ground for workers before they are poached by large corporates." And companies catering to the agri sector would like to see the manpower situation in the agri sector sorted out. Labourers are increasingly shunning farm work, preferring the higher wages they earn in the manufacturing or construction sectors instead. Many industries are seriously looking at automation as a partial solution to this problem.
The silver lining
Amid the cost-side assault on SMEs, there is some good news. Consumption is still good. "There certainly is demand," says D Bala Sundaram, Chairman of cast iron industrial components maker, CPC. He is also the President of the Indian Chamber of Commerce and Industry, Coimbatore. "Even if economic growth drops to 7%, that’s still good growth."
The smaller you are in the unorganised realm, the worse it is for you. And though things appear better in the organised space, Sanjay Agarwal, Executive Director (SME) of KPMG, reckons that small units’ ability to survive would be severely tested in a downturn. "They have to reinvent themselves."
That’s already happening. For instance, even in Moradabad, exporters like CL Gupta and Globe Metal Industries have quickly changed tack, and diversified into products made of glass and wood. They did this even as small units supporting artisans folded up.
In Coimbatore, companies are looking to get into newer markets or rising up the value chain. That, they say, is the only way for higher realisations, given that there isn’t much they can do to control costs. For instance, Bala Sundaram’s company is in the process of increasing manufacturing capacity by 60% to 800 tonnes. And the company is slowly bagging more value-added and high precision work. Says Jawhar Sircar, Development Commissioner, Micro, Small and Medium Enterprises: "The nimble and flexible nature of these players has enabled them to survive the vagaries of industrial change."
Mahendra’s Ramdas has two alternative markets. One is exports, which currently contributes only about 12% of his sales. He wants this to go up to 30% in the next five years. Secondly, he wants to look beyond agricultural pumps, and get into the housing sector aggressively.
Sharp Pumps’ chief Kannan Ramachandran wants to get into the high-margin game. He’s looking at a drastic shift from the current focus on the domestic and agricultural segments to industrial pumps. "Or else, it’s a volumes game. You need to get into the newer categories, otherwise you’ll be out of the market," he says.
New segments where large players aren’t venturing is the other destination for the SMEs. For instance, Zircon Products’ CS Gupta supplies zirconium powder to nuclear power plants. He also hopes to benefit from opportunities that would arise if the India-US nuclear deal is ratified. However, that doesn’t appear likely to happen any time soon.
Taking the inorganic route
Some players are also looking at acquisitions and joint ventures. Like the big players, they’ve been bitten by the M&A bug. And their stage for this mode of expansion is global. Companies like Ajanta Watch and Muzaffarnagar-based Bindal Duplex already have a China footprint, and others like Shivani Locks and Imperial Auto have European technology partners.
In fact, a British government delegation visited Lucknow and its surrounding areas in an attempt to get SMEs to form joint ventures, partnerships and alliances with British firms. However, by taking the inorganic route and increasing in size, many of these firms would cease to be SMEs, at least not by the government’s definition. They would thus cease to be eligible for government sops to the sector.
"We’ve gained confidence and are exploring opportunities," says DS Verma, President of Indian Industries Association of Lucknow. The size of some of these could be as small as Rs 1 crore. Understandably, therefore, the support from the investment banking fraternity is lacking. "The potential for M&As and consolidation is there, but most advisors are busy with big-ticket deals," contends KPMG’s Sanjay Agarwal.
Apart from the broad economic indicators, there is apprehension over the kind of government that will come to power after next year’s polls. That’s despite the fact that India’s top two political groups have a broad consensus on economic reforms.
Too much volatility in economic factors is surely a challenge for SMEs. But these units would do well to remember they’ve survived numerous changes in India’s economic landscape over the decades. Despite volatility in many sectors, India has been adding almost 200,000 new micro, medium and small enterprises every year, with the old giving way to the new.
Source: Outlook Business
Pipedreams of the small and big
A rash of small companies, fuelled by the expanding oil and gas sector, are coming into their own. They herald the era of globalising Indian SMEs
In Sakhalin, a long, elongated island in the North Pacific, off the Siberian mainland, temperatures can drop to -40 degrees Celsius. Thick clouds block out the sun through much of the year.
Despite the bleak, harsh conditions, consortia of oil and gas multinationals jostle for a share of the immense oil and gas reserves. Armies of oil workers and tonnes of exploration equipment are disgorged here frequently.
Amidst the throng of belching and pounding exploration monstrosities, a leviathan ‘oily water separation package’ tackles oil spills, big and small. It sucks in contaminated sea water and draws out oil from it. The Rs 5-crore separator was designed, built and shipped from a nondescript workshop in dusty Faridabad, outside Delhi.
"It was a difficult project. When treated water is finally discharged, it contains a mere one part per million (ppm) of oil traces," says Viney Kumar, head of marketing at Grand Prix Fab, a small, Rs 24-crore company, specialising in fabricating filters and separators for oil and gas pipelines.
Borders are being breached. The worldwide boom in the oil & gas sector that also embraces pipeline manufacturing and laying has, along with giants like ONGC, taken a host of small companies to distant shores—countries in Eastern Europe, Russia, Africa, Middle East and the Far East.
These small companies, like Grand Prix, ride on the back of Indian and multinational groups and engineering, procurement and construction (EPC) contractors of the likes of Schlumberger, ABB, Emerson, Hyundai Heavy Industries, Burgess Manning, Bechtel, J Ray McDermott, Spie Capag, L&T and Punj Lloyd.
The EPC players have, over the years, worked in tandem with a number of small Indian companies. As the oil boom gathered steam, some Indian companies submitted to being bought off or opted for the joint venture (JV) route to dig into the oil and gas pipeline business. For instance, a $20-billion US company wanted to buy out Delhi-based Rs 25-crore Rockwin Flowmeter India, a pioneer in flowmeters that measure the flows of fluids and gas in pipes. But technocrat Vishnu Prakash is holding ground.
The trend heralds the emergence of global Indian SMEs, some with turnovers as low of Rs 11 crore, as in the case of the Mumbai-based Narmada Offshore, a pigging and hydro-testing company. Pigging is an activity that involves the insertion and running of specialised equipment—called pigs—through crude or gas pipelines for cleaning and testing.
"We had anticipated the boom and had been investing in shoring up our heavy equipment base," says Deo Bhandari, CEO of Narmada Offshore Constructions, which recently set up shop in the Middle East. In August, the company bagged a $1.8-million pigging contract for South Pars 9/10, Iran’s largest energy project.
A bevy of small companies in the pipelines space, right from flow-meters and filter manufacturers, pigging, diving and offshore pipeline support companies, to makers of specialised coatings for corrosion protection of pipes, have seen a spurt in business in recent years, in the domestic as well as foreign markets.
Niche companies providing specialised products and services have thrived. While Chennai-based Pipe Supports India is focused on clamps, braces and hangers that hold pipes in position, Bangalore-based Secon undertakes geographic information system (GIS)-driven route planning, corridor mapping and ‘right-of-way’ work with local bodies, even before a cross country pipeline is laid. Secon recently secured a foothold in Libya.
Mumbai-based Fugro (Survey) India is a key player for sub-sea geophysical surveys. It is heavily plugged into the Krishna-Godavari basin foray of Reliance Industries (RIL).
The KG basin work, in fact, has triggered efforts to scale up technologies among EPC contractors and small sub-contractors. This has been necessitated due to the need to work in greater water depths, which Indian companies were not geared for. "We have two saturation diving systems. We also provide remotely operated vehicle (ROV) services to ONGC. If you don’t own assets you are vulnerable," says Satpal Singh, Joint MD of Dolphin Offshore Enterprises (India), a Mumbai-based diving and underwater pipe support services company. Each sat system costs over $7 million. Dolphin acquired two junked sat systems and refurbished them for $3 million.
These sprightly band of entrepreneurs are catering to the domestic demand and eyeing pieces of the global pipelines market.
At The Golden Threshold
Worldwide, 70,421 miles of pipelines are planned or are under construction, according to Pipeline and Gas Journal’s 2006 report. The Asia-Pacific region accounts for the bulk, 26,849 miles. As India slowly transits towards gas, the demand for pipelines will be staggering. Government projects the share of natural gas in India’s energy basket to grow to 20% by 2024-25 from the present 9%.
The public sector Gail is already building a national gas grid of over 5,000 km, investing Rs 20,000 crore. City gas distribution (CGD), present in a few cities across Gujarat, Delhi and Mumbai, is expected to expand to 230 cities in the near future.
While much of the momentum will come from an expansion of the gas pipeline infrastructure, product pipelines are also growing. Indian Oil Corporation (IOC), with a pipeline length of 9,273 km, plans to invest over Rs 3,000 crore in capacity expansion. RIL, after commissioning its 1,400-km east-west pipeline by December 2007, is expected to make major investments in pipelines in eastern India.
The replacement market is also huge. All of the 30-year-old undersea pipelines in Mumbai High are currently being replaced. "The replacement project is to the order of $120 million every year for the next six years," points out Satpal Singh.
The Indian pipeline market is estimated at around Rs 32,000 crore. Over 20,000 km of pipelines are to be held in the next five years. "The period between 2008 and 2012 will be the golden period for Indian pipe manufacturers," says Indresh Batra, Managing Director of Jindal Saw, which has an order book of over $1.2 billion.
The clutch of pipe makers, in fact, is among the fastest growing companies in India today. Welspun Gujarat Stahl Rohren draws 75% of its revenue from exports. Man Industries, a mid-size company, is increasing capacity at Anjar in Gujarat and targeting a topline growth of 90% this year.
Expectedly, small companies in the pipeline ecosystem, which are riding the wave, are also growing fast. Dolphin Offshore, a Rs 45-crore company just three years ago, touched a turnover of Rs 205 crore in 2006-07. Narmada Offshore languished at a turnover of around Rs 1 crore for years, till it hit double digit last year. Rustech Products, a pipe coatings company, raced from a turnover of Rs 4 crore in 2002 to Rs 35 crore in 2006-07. "A Rs 100-crore target within the next five years is conservative," says Bimal Jhaveri, Vice Chairman of Rustech. The company’s product portfolio was recently spruced up to contain contemporary cold applied tapes and heat-shrinkable sleeves, an expensive polymer used to cover welded joints on pipelines.
Ingenious Stratagems
Growth, however, didn’t come easy to these entrepreneurs. The oil and gas sector is punishing, with an array of entry barriers. It is driven by specifications and every product and process is scrutinised against stringent standards, usually set by American and Western coalitions. "It is conservative, clannish and functions like an old boys club," explains Batra.
The degree to which ‘specs’ drive the sector can be gauged from the growing business of the Navi Mumbai-based Offshore Testing and Inspection Services. It receives over 100 samples of pipeline-related products each day, all scrutinised against an array of specs, including the ones laid by the American Petroleum Institute.
Before the start of any pipeline project, pipe metals used are subjected to radiographic and corrosion tests. "Even during the laying process, samples are tested for welding procedure," says TRK Chari, General Manager of Offshore Testing, with a turnover of Rs 2.6 crore.
While big companies have the resources to conform to the rules of the game, small companies have had an agonising run over the years. Dolphin Offshore’s long association with ONGC did not help when it wanted to graduate to design engineering. It couldn’t bid because prior experience was demanded. So a joint venture—IMPaC Dolphin—with a German company was set up. "We are now in the game," says Navpreet Singh, Joint MD, now competing with big players like Engineers India (EIL) and L&T. In 2005, the company issued $15 million of foreign currency convertible bonds (FCCBs) to fund its growth plans. It has graduated from a sub-contractor to main contractor and can now bid for Rs 4,000-crore of contracts coming up in the next two years.
The conservative Narmada Offshore has also been thrown into the arms of a foreign player. It struck a deal with the Singapore subsidiary of a Norwegian company, IKM Testing, to move up the value chain. "We are not comfortable with conducting nitrogen-helium leak tests. This expertise will help us work on pipelines in the KG basin," says Bhandari.
Technocrat Bighna Nayak, however, has no qualms about conceding 50% stake to Fugro in the JV, Fugro Surveys (India). Nayak now presides over cutting-edge technologies in a company that has presence in scores of countries and is pushing a turnover of $20 million.
"It’s a fair arrangement. I have also absorbed the exacting work ethic of European companies. I now focus on clients like Reliance. It seeks high-tech solutions. We are now perfectly matched," says Nayak.
However, technological advancements needn’t always flow from market leaders in the West. They can be difficult to deal with. A small company with limited resources or negotiating skills may hit a wall. That’s when they try out alternate routes. For instance, Rustech entered into a JV with a cost-efficient Chinese company that had a short while ago severed a tie-up with Polykem, a global market leader. Recently, he bagged 20% of a project for cold applied tapes in Rajasthan. Interestingly, the rest 80% was bagged by Polykem. Rustech, thus, suddently found itself among the global biggies. "I am now priming the cold applied tapes business," says Jhaveri.
Grand Prix, however, had recognised the worth of a foreign hand early on. This resulted in a JV with an industry major—Burgess Manning India. This trading outfit was in place almost 10 years ago channelising overseas orders for Grand Prix. "We are fabricating 17 pressure vessel separators for a client in the US. It’s worth Rs 10 crore," says Viney Kumar. Over 50% of his Rs 24-crore turnover (2006-07) comes from exports. In two years, he plans to double the turnover.
In another smart move, Chander Bhalla, the promoter of Grand Prix, thought it fit to plant himself in London as the MD of the European arm of Burgess Manning, with a strong presence in Europe and Africa. The Faridabad shopfloor has had a stream of orders from the two continents. It is readying a filter/separator, which is headed for Algeria.
For companies engaged in offshore work, it had become imperative to seek out other markets, for work comes to a standstill during the monsoons in India. Both Dolphin and Narmada have benefited immensely from their presence in the Middle East.
Challenges To Managing Growth
The ability to scale up operations has been a major problem with some of the small companies. Rockwin’s Prakash, for instance, rebuffed feelers for a takeover but is now finding it difficult to expand into various markets. "We just do not have the marketing bandwidth," concedes Prakash. "Despite our standing in the Indian market, we weren’t even invited to bid for a Rs 200-crore flowmetering order by RIL recently."
The biggest impediment to sustained growth of small companies is the ability to attract and retain manpower. In the early days, Dolphin coaxed the sons of Indian Navy’s divers to join the company. It paid dividends. Over 20 divers in the team belong to this clan. In Narmada Offshore, the only experienced engineer who resisted the call of foreign shores is the one with a medical condition.
At Dolphin, brothers Satpal and Navpreet are trying hard to delegate work down the line. Managers are sent to business schools for honing project management skills. "Going ahead without losing our business ethos and values is our biggest challenge," says Navpreet Singh.
Bonds nurtured by the Jhaveris, Rustech’s promoter family, with employees have helped it retain talent. Supervisory staff is encouraged to form their own companies and project work is unloaded to them. "Employees are our partners and should benefit from the company’s growth," says Jhaveri. The attitude shows in many ways. The office boy who served tea years ago now heads Rustech’s coatings plant in Kolkata.
Source : Outlook Business
In Sakhalin, a long, elongated island in the North Pacific, off the Siberian mainland, temperatures can drop to -40 degrees Celsius. Thick clouds block out the sun through much of the year.
Despite the bleak, harsh conditions, consortia of oil and gas multinationals jostle for a share of the immense oil and gas reserves. Armies of oil workers and tonnes of exploration equipment are disgorged here frequently.
Amidst the throng of belching and pounding exploration monstrosities, a leviathan ‘oily water separation package’ tackles oil spills, big and small. It sucks in contaminated sea water and draws out oil from it. The Rs 5-crore separator was designed, built and shipped from a nondescript workshop in dusty Faridabad, outside Delhi.
"It was a difficult project. When treated water is finally discharged, it contains a mere one part per million (ppm) of oil traces," says Viney Kumar, head of marketing at Grand Prix Fab, a small, Rs 24-crore company, specialising in fabricating filters and separators for oil and gas pipelines.
Borders are being breached. The worldwide boom in the oil & gas sector that also embraces pipeline manufacturing and laying has, along with giants like ONGC, taken a host of small companies to distant shores—countries in Eastern Europe, Russia, Africa, Middle East and the Far East.
These small companies, like Grand Prix, ride on the back of Indian and multinational groups and engineering, procurement and construction (EPC) contractors of the likes of Schlumberger, ABB, Emerson, Hyundai Heavy Industries, Burgess Manning, Bechtel, J Ray McDermott, Spie Capag, L&T and Punj Lloyd.
The EPC players have, over the years, worked in tandem with a number of small Indian companies. As the oil boom gathered steam, some Indian companies submitted to being bought off or opted for the joint venture (JV) route to dig into the oil and gas pipeline business. For instance, a $20-billion US company wanted to buy out Delhi-based Rs 25-crore Rockwin Flowmeter India, a pioneer in flowmeters that measure the flows of fluids and gas in pipes. But technocrat Vishnu Prakash is holding ground.
The trend heralds the emergence of global Indian SMEs, some with turnovers as low of Rs 11 crore, as in the case of the Mumbai-based Narmada Offshore, a pigging and hydro-testing company. Pigging is an activity that involves the insertion and running of specialised equipment—called pigs—through crude or gas pipelines for cleaning and testing.
"We had anticipated the boom and had been investing in shoring up our heavy equipment base," says Deo Bhandari, CEO of Narmada Offshore Constructions, which recently set up shop in the Middle East. In August, the company bagged a $1.8-million pigging contract for South Pars 9/10, Iran’s largest energy project.
A bevy of small companies in the pipelines space, right from flow-meters and filter manufacturers, pigging, diving and offshore pipeline support companies, to makers of specialised coatings for corrosion protection of pipes, have seen a spurt in business in recent years, in the domestic as well as foreign markets.
Niche companies providing specialised products and services have thrived. While Chennai-based Pipe Supports India is focused on clamps, braces and hangers that hold pipes in position, Bangalore-based Secon undertakes geographic information system (GIS)-driven route planning, corridor mapping and ‘right-of-way’ work with local bodies, even before a cross country pipeline is laid. Secon recently secured a foothold in Libya.
Mumbai-based Fugro (Survey) India is a key player for sub-sea geophysical surveys. It is heavily plugged into the Krishna-Godavari basin foray of Reliance Industries (RIL).
The KG basin work, in fact, has triggered efforts to scale up technologies among EPC contractors and small sub-contractors. This has been necessitated due to the need to work in greater water depths, which Indian companies were not geared for. "We have two saturation diving systems. We also provide remotely operated vehicle (ROV) services to ONGC. If you don’t own assets you are vulnerable," says Satpal Singh, Joint MD of Dolphin Offshore Enterprises (India), a Mumbai-based diving and underwater pipe support services company. Each sat system costs over $7 million. Dolphin acquired two junked sat systems and refurbished them for $3 million.
These sprightly band of entrepreneurs are catering to the domestic demand and eyeing pieces of the global pipelines market.
At The Golden Threshold
Worldwide, 70,421 miles of pipelines are planned or are under construction, according to Pipeline and Gas Journal’s 2006 report. The Asia-Pacific region accounts for the bulk, 26,849 miles. As India slowly transits towards gas, the demand for pipelines will be staggering. Government projects the share of natural gas in India’s energy basket to grow to 20% by 2024-25 from the present 9%.
The public sector Gail is already building a national gas grid of over 5,000 km, investing Rs 20,000 crore. City gas distribution (CGD), present in a few cities across Gujarat, Delhi and Mumbai, is expected to expand to 230 cities in the near future.
While much of the momentum will come from an expansion of the gas pipeline infrastructure, product pipelines are also growing. Indian Oil Corporation (IOC), with a pipeline length of 9,273 km, plans to invest over Rs 3,000 crore in capacity expansion. RIL, after commissioning its 1,400-km east-west pipeline by December 2007, is expected to make major investments in pipelines in eastern India.
The replacement market is also huge. All of the 30-year-old undersea pipelines in Mumbai High are currently being replaced. "The replacement project is to the order of $120 million every year for the next six years," points out Satpal Singh.
The Indian pipeline market is estimated at around Rs 32,000 crore. Over 20,000 km of pipelines are to be held in the next five years. "The period between 2008 and 2012 will be the golden period for Indian pipe manufacturers," says Indresh Batra, Managing Director of Jindal Saw, which has an order book of over $1.2 billion.
The clutch of pipe makers, in fact, is among the fastest growing companies in India today. Welspun Gujarat Stahl Rohren draws 75% of its revenue from exports. Man Industries, a mid-size company, is increasing capacity at Anjar in Gujarat and targeting a topline growth of 90% this year.
Expectedly, small companies in the pipeline ecosystem, which are riding the wave, are also growing fast. Dolphin Offshore, a Rs 45-crore company just three years ago, touched a turnover of Rs 205 crore in 2006-07. Narmada Offshore languished at a turnover of around Rs 1 crore for years, till it hit double digit last year. Rustech Products, a pipe coatings company, raced from a turnover of Rs 4 crore in 2002 to Rs 35 crore in 2006-07. "A Rs 100-crore target within the next five years is conservative," says Bimal Jhaveri, Vice Chairman of Rustech. The company’s product portfolio was recently spruced up to contain contemporary cold applied tapes and heat-shrinkable sleeves, an expensive polymer used to cover welded joints on pipelines.
Ingenious Stratagems
Growth, however, didn’t come easy to these entrepreneurs. The oil and gas sector is punishing, with an array of entry barriers. It is driven by specifications and every product and process is scrutinised against stringent standards, usually set by American and Western coalitions. "It is conservative, clannish and functions like an old boys club," explains Batra.
The degree to which ‘specs’ drive the sector can be gauged from the growing business of the Navi Mumbai-based Offshore Testing and Inspection Services. It receives over 100 samples of pipeline-related products each day, all scrutinised against an array of specs, including the ones laid by the American Petroleum Institute.
Before the start of any pipeline project, pipe metals used are subjected to radiographic and corrosion tests. "Even during the laying process, samples are tested for welding procedure," says TRK Chari, General Manager of Offshore Testing, with a turnover of Rs 2.6 crore.
While big companies have the resources to conform to the rules of the game, small companies have had an agonising run over the years. Dolphin Offshore’s long association with ONGC did not help when it wanted to graduate to design engineering. It couldn’t bid because prior experience was demanded. So a joint venture—IMPaC Dolphin—with a German company was set up. "We are now in the game," says Navpreet Singh, Joint MD, now competing with big players like Engineers India (EIL) and L&T. In 2005, the company issued $15 million of foreign currency convertible bonds (FCCBs) to fund its growth plans. It has graduated from a sub-contractor to main contractor and can now bid for Rs 4,000-crore of contracts coming up in the next two years.
The conservative Narmada Offshore has also been thrown into the arms of a foreign player. It struck a deal with the Singapore subsidiary of a Norwegian company, IKM Testing, to move up the value chain. "We are not comfortable with conducting nitrogen-helium leak tests. This expertise will help us work on pipelines in the KG basin," says Bhandari.
Technocrat Bighna Nayak, however, has no qualms about conceding 50% stake to Fugro in the JV, Fugro Surveys (India). Nayak now presides over cutting-edge technologies in a company that has presence in scores of countries and is pushing a turnover of $20 million.
"It’s a fair arrangement. I have also absorbed the exacting work ethic of European companies. I now focus on clients like Reliance. It seeks high-tech solutions. We are now perfectly matched," says Nayak.
However, technological advancements needn’t always flow from market leaders in the West. They can be difficult to deal with. A small company with limited resources or negotiating skills may hit a wall. That’s when they try out alternate routes. For instance, Rustech entered into a JV with a cost-efficient Chinese company that had a short while ago severed a tie-up with Polykem, a global market leader. Recently, he bagged 20% of a project for cold applied tapes in Rajasthan. Interestingly, the rest 80% was bagged by Polykem. Rustech, thus, suddently found itself among the global biggies. "I am now priming the cold applied tapes business," says Jhaveri.
Grand Prix, however, had recognised the worth of a foreign hand early on. This resulted in a JV with an industry major—Burgess Manning India. This trading outfit was in place almost 10 years ago channelising overseas orders for Grand Prix. "We are fabricating 17 pressure vessel separators for a client in the US. It’s worth Rs 10 crore," says Viney Kumar. Over 50% of his Rs 24-crore turnover (2006-07) comes from exports. In two years, he plans to double the turnover.
In another smart move, Chander Bhalla, the promoter of Grand Prix, thought it fit to plant himself in London as the MD of the European arm of Burgess Manning, with a strong presence in Europe and Africa. The Faridabad shopfloor has had a stream of orders from the two continents. It is readying a filter/separator, which is headed for Algeria.
For companies engaged in offshore work, it had become imperative to seek out other markets, for work comes to a standstill during the monsoons in India. Both Dolphin and Narmada have benefited immensely from their presence in the Middle East.
Challenges To Managing Growth
The ability to scale up operations has been a major problem with some of the small companies. Rockwin’s Prakash, for instance, rebuffed feelers for a takeover but is now finding it difficult to expand into various markets. "We just do not have the marketing bandwidth," concedes Prakash. "Despite our standing in the Indian market, we weren’t even invited to bid for a Rs 200-crore flowmetering order by RIL recently."
The biggest impediment to sustained growth of small companies is the ability to attract and retain manpower. In the early days, Dolphin coaxed the sons of Indian Navy’s divers to join the company. It paid dividends. Over 20 divers in the team belong to this clan. In Narmada Offshore, the only experienced engineer who resisted the call of foreign shores is the one with a medical condition.
At Dolphin, brothers Satpal and Navpreet are trying hard to delegate work down the line. Managers are sent to business schools for honing project management skills. "Going ahead without losing our business ethos and values is our biggest challenge," says Navpreet Singh.
Bonds nurtured by the Jhaveris, Rustech’s promoter family, with employees have helped it retain talent. Supervisory staff is encouraged to form their own companies and project work is unloaded to them. "Employees are our partners and should benefit from the company’s growth," says Jhaveri. The attitude shows in many ways. The office boy who served tea years ago now heads Rustech’s coatings plant in Kolkata.
Source : Outlook Business
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