INDO-AMERICA RELATIONS

India Must Watch Obama’s SME Plan

Sep 06th, 2010

All eyes will be on US President Barack Obama this week as he promised to unfold a stimulus package that would give a fillip to employment after the US labour department released figures that showed that 54,000 people lost their jobs in August. The unemployment figures for August were 14.9 million jobless compared to 14.6 million in July. There was some comfort that the figures of those who lost their jobs was less than what was predicted by Wall Street (1,20,000), and that the private sector had created 67,000 jobs. The small and medium industries, it is reported, could? be the focus of Mr Obama’s new package. 

There is some scepticism about whether Mr Obama can really print more money to help the economy or the banks to support the SMEs that can create the jobs. He is also planning to do it through tax breaks and has pleaded with the Republicans not to block tax cuts for this sector. However, the bottom line is that the swathe of economic data emanating from the US and across the Western world shows that their economies are decisively weak.

The implications are not good news for India. The effect on India usually comes with a lag of a couple of months so by September-October inflows from foreign institutional investors (FIIs) could slow down and negatively impact the stock markets. This means it could be a dicey time for initial public offers waiting to come to the capital market. Many of them are public sector companies. Exporters, too, will struggle, at least till Christmas, as Indian exporters are still heavily dependent on the US and the West for their export markets. The other way of interpreting the economic data coming out of the US, which still remains the largest consumer market in the world, and the most dynamic as Mr Obama says, is that fear of double-digit recession has been overdone and that this fear is receding. So, while the road to recovery could be long and painful, the positive is that there will be no further decline.

In the context of President Obama’s move, it is a coincidence that in India the Union labour ministry has circulated a paper, according to our sister publication? Financial Chronicle, proposing that the government link bank credit to employment creation. It has proposed the creation of 58 million jobs in two years to meet the aspirations of 10 million educated youth that hit the employment market annually. Among the measures suggested are linking tax holidays, exemptions and duty rates to jobs, easy credit for job-intensive sectors with interest subvention, and facilitating finance to small and medium enterprises. This is a heartening development. But we have heard many of these suggestions routinely, particularly regarding finance for small and medium enterprises.

Seminar after seminar is held to discuss how funds can be transferred from banks to the SMEs, but till date it remains a Herculean task for SMEs to get funds from the banks. The ones who need it most are considered high risk. Bank credit to SMEs has come down to eight per cent from 12 per cent.

Interest subvention seems to be the only concrete suggestion that can be implemented. The government has tried it with the farmers and it has worked. If banks that give credit to SMEs can be given an interest subsidy, they can pass on some benefits to the sector and for the demographic dividend that everyone loves to talk about. To that extent it will be interesting to see what stimulus package President Obama provides for American SMEs because the governments of both countries are facing tremendous resistance to government subsidy for SMEs. While the US faces resistance from the Republicans, in India it is the banks that are resisting assistance to the SMEs, who are the backbone of exports and employment creation.

Source : http://www.asianage.com/editorial/india-must-watch-obama’s-sme-plan-577