Damjibhai Patel is a medium size entrepreneur manufacturing pens in some part of Gujarat. He has been exporting pens for over a decade now, turning his proprietorship from small scale firm to a medium enterprise.
Damjibhai Patel is a medium size entrepreneur manufacturing pens in some part of Gujarat. He has been exporting pens for over a decade now, turning his proprietorship from small scale firm to a medium enterprise. Things were manageable then. However, his business has now grown to a size which needs attention to details, especially in calculating the sales figures and actually cash that arrives in his bank. His exports in terms of USD and Euro have been growing at 25% per annum. But, this doesn’t seem to happen when he receives money in his bank in INR. The difference is sometimes large enough to erode all profits on his exports.
Gujarat has been identified as an entrepreneurial hub of India primarily due to the innovative and entrepreneurial nature of the Gujaratis. It is this spirit that ushered the emergence of many small and medium scale industries in the state. So, it’s not Damjibhai alone who faces such a situation. Across Gujarat, a host of SMEs exporting to USA and Europe have been increasingly facing this issue. With slowdown in these zones, the situation is further worsening. The numbers are large enough to put on our thinking caps. As per United Nations Industrial Development Organization (UNIDO) estimates, there exist around 350 Small and Medium Enterprises (SMEs) clusters in India, of which Gujarat commands a large share.
At present Gujarat has 3.5 lakh units in the small and medium sector (SME), providing employment to more than 15 lakh people. Nearly 2.9 lakh units of these are proprietorship or partnerships in the manufacturing sector. These units have invested nearly Rs 25,000 cr into fixed assets and are selling goods in excess of Rs 40,000 cr every year.
Gujarat has a strong presence in various sectors like Dyes & Intermediates, Chemicals, Pharmaceuticals, Textiles and Engineering products. Gujarat is poised to substantially increase its share in total exports with the completion of 10 more Ports in Joint & Private Sector.
Some important SME clusters in Gujarat include Readymade Garments, Drugs & Pharmaceuticals, Dyes & Intermediates at Ahmedabad; Ship breaking at Alang; Re-rolling Mills at Bhavnagar/ Shior; Plastic Industry at Dhoraji; Brass Parts at Jamnagar; Wall Clocks at Morbi; Chemicals at Nandesari, Vapi & Ankleshwar; Diesel Engines, Electric motors, Ferrous Castings, Gold & Silver Ornaments, Machine Tools, Wrist Watch & Components at Rajko; Powerlooms, Diamonds, Gems & Jewellery, Jari at Surat; Pottery & Ceramics at Surendranagar (Than) & Wankaner; Ceramic Products at Thangadh and Petrochemicals at Vadodara.
India’s manufacturing sector exported goods worth over Rs 9 lakh crore in CY2010. Gujarat accounts for a little over 20% of India’s export, taking the tally of Gujarat exports to the world at nearly Rs 2 lakh crore or $50bn. The SME share of exports is seen at 10% of the total exports from Gujarat. This means that SMEs exported worth over Rs 20,000 cr or $5bn in CY2010. Most of the exports are US dollar and Euro denominated.
Now consider this. In the previous one year, the dollar has depreciated 5% before closing 1% down for the year when compared to the INR. Similarly, the Euro closed the year down 10% compared to the INR. However, it went down 15% during the year. What happens here for an exporter? If the exporter exported goods worth Rs 100 in dollar terms at the beginning of the year, he would get only Rs 99 at the end of the year. However, most exporters open a line of credit because they need money to manufacture goods to export. This may give them lower returns as the USD traded 5% lower during the year. So, the exporter loses more than 7% during the year. With no bargaining power for SMEs leading to wafer thin margins, a 7% loss may actually work out huge losses for the small and medium exporter. Consider the same case if the small exporter was exporting to Euroland. Losses would be in excess of 15%.
What is the alternative available for such small and retail exporters, which are nearly 3-lakh in number in Gujarat? Is there any possible way out of this mess? Can an exporter lock in the value of the exchange rate so that he / she exactly knows what is his / her profit on the export? The answer to all these questions is a BIG yes.
What these small time entrepreneurs require is a cover to mitigate these risks. They need a hedge to protect their sales. Financial inclusion for them is important. And this service comes at a small cost. People like Damjibhai have taken help of Banks for hedging. However, due to their size of business they would not get personalised attention as the banks have standard products for corporates and do not offer tailor-made solutions.
Thereby they’d be missing out on appropriate advice. With Exchange Traded Currency Products being available, a good brokerage with an expertise in Currency and having a dedicated advisory can be of big help to businessmen like Damjibhai Patel. There are a host of intermediaries such as Alpari, which are willing to offer customised solutions to suit diverse requirements of SME business. At less than 0.5% of the cost, an SME can exactly know the exports in INR. All they need to do is lock-in their exports in INR by buying cover through these intermediaries such as Alpari. What these intermediaries essentially help you do is to protect to your downside in case of adverse movement in the foreign currency. All these at a fraction of a cost.
With their share exceeding 30% of total manufacturing and exports, SMEs are rapidly justifying the important role earmarked for them in the state’s economy and are proving to be a vibrant manufacturing base in Gujarat. However, with rapid globalization, SMEs must mitigate business risks and possess a nimble outlook to meet the ever growing challenges. The MSME sector is going to grow 15% during the 11th Five Year Plan (2008-20013). Gujarat has retained second rank in respect of state wise contribution in the national aggregate of Net Value Added generated by organized sector as a result of State Industrial Policies of 2003 and 2009.
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