SMEconomics

Issue 1 | May 2011

MOUNTING COSTS
Oil prices Raw material prices

Global growth has recovered. Barring Europe and Japan, India's other leading export partners are moving towards robust recovery. Over the last year export earnings have risen due to favourable exchange rates. Within India too, strong household demand has led to rising sales growth for companies. Profits, however, have begun to come under pressure. Rising input costs - crude oil, raw materials including metals and food as well as rising wage cost have increased the costs of operation and production. Borrowing costs which remained favourable throughout the downturn have begun to rise and are being reflected in lower growth of bankborrowing by small enterprises. Borrowing costs for both businesses and consumers will go up further with persistent inflationary pressures requiring the RBI to raise interest rates. As that happens, demand is likely to slow down and this, combined with rising cost pressures, could continue to dent profits.

Interest costs

Sales of Indian companies rise, as demand remains healthy ...

Domestic household consumption is increasing
Household demand growth, %

Exports are growing too

Exports, US$ billion

9.0 73.3 7.3 59.1

51.5 42.6 46.2 54.2

50.8

38.7

37.7

38.4

2.7

Q1

Q2 2009-10

Q3

Q4

Q1

Q2 2010-11

Q3

Q3 2008-09

Q4

Q1

Q2

Q3

Q4

Q1

Q2 2010-11

Q3

Q4

2009-10

SME-intensive industries step up exports as...

Exports, US$ million Dec-08 Dec-09 Dec-10

...global economies recover...

GDP growth, %
2009 2010

6.9 1128 512 6.2 5.4

Processed foods

409

2166 1710 1710

2.6 2.7

2.5

2.2 0.3 0.4 -1.5 0.6 0.4

Basic chemicals & products

Australia 697

Hong Kong

Indonesia

Japan

Germany

France

Electronic goods

557 375

983

1099 951

...and exchange rate turns favourable

Rs. per foreign currency period-end

Readymade garments

1990 1546 1000

GBP 68.3

73.9

Gems & jewellery

Euro 58.9

65.8

54.4 925 619 829 Yen USD US$ Apr-09 Apr-10 Apr-11 47.3 44.4 44.4

Other SME-intensive sectors

 but, the cost of doing business is increasing

Crude oil prices move up sharply
US$ per barrel

Raw materials become dearer

196.5 Index: June - 09 = 100

Higher oil demand expected as recovery sets in

Libya crisis and threat to oil supply

105.1 129.3 130.3 123.9

149.6

82.1 64.2

84.3

200607

200708

200809

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Jun-09

Mar-11 Jun-09 Total

Mar-11 Jun-09

Mar-11 Jun-09

Mar-11 Jun-09 Fibre

Mar-11

2009-10

2010-11

Food article

Fuel & Power Input costs

Metallic minerals

Rising interest rates increase the cost of borrowing

Base rate of major banks, average %

Growth in bank credit to small enterprises slows down

Bank loan growth, %

9.0 39.2

25.1 24.1 20.9 11.0 7.5

7.8 Jan-10 Mar-11 Jan-10 Mar-11 Jan-10 Mar-11

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

Micro & Small

Medium

Large

Did You Know?

GDP or gross domestic product refers to the size of the economy. The rate at which GDP expands is the principal measure of determining the health of an economy. It can be measured in three ways. (i) The output method calculates GDP by adding up the value of all final goods & services produced in India by agriculture, industry and service sectors during a quarter or a year. (ii) The goods and services produced are either consumed or invested by households, businesses, and government and are also used for exports. Hence, GDP also equals the sum of value of all goods and services purchased including exports minus the value of imports since imports are not produced within a country. This method of calculating GDP is called expenditure method. (iii) Finally, consumption and investment should also equal income generated during the given time period, mostly in terms of profits and wages. This is called income method of measuring GDP.

Economic Outlook
India Agriculture Growth (%) Industry Services Total GDP Inflation Interest rate Exchange rate Fiscal deficit Global GDP growth % World United States Euro Area United Kingdom China United Arab Emirates Germany Singapore Australia Hong Kong Belgium Netherlands Source: International Monetary Fund, Central Statistical Organisation, CRISIL estimates WPI (average) 10-year G-sec (March-end) Re/US$ (March-end) % of GDP 2010-11 5.4 8.1 9.6 8.6 9.5 8.1-8.3 43.5-44.0 5.1 2010 5.0 2.8 1.7 1.3 10.3 3.2 3.5 14.5 2.7 6.8 2.0 1.7 2011-12 2.7 7.3 9.4 7.7-8.0 7.5-8.0 8.1-8.3 43.0-44.0 5.0 2011 4.4 2.8 1.6 1.7 9.6 3.3 2.5 5.2 3.0 5.4 1.7 1.5

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