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Brexit likely to hit India’s SME exporters

business Updated: Jul 11, 2016 11:26 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times

The vote for Brexit has pushed the pound to 31-year lows against the dollar(Reuters)

Raja Shanmugam, partner and one of the promoters of the Tirupur-based garment exporting firm Warsaw International is unsure about his earnings not just by the end of this month, but also in the months to come.

Reason? The garment manufacturer, while inking contracts for exports to the UK four months ago had no idea that Britain’s exit from the European Union (EU) would lead a dramatic fall of the pound and erode his anticipated earnings.

The British pound, which was over Rs 100-102 just a month ago, is now less than Rs 90. The vote for Brexit has pushed the pound to 31-year lows against the dollar and many investors have warned that Britain - until this month the world’s fifth-largest economy - faces years of uncertainty over everything from trade to investment.

Shanmugam, however, has opted for currency hedging -- a mechanism to minimise, or eliminate, foreign exchange risks -- for a chunk of his exports. But a share of exports, which remained unprotected against the currency fluctuation, will fetch him less money.

There are thousands of such small-and-medium enterprises (SMEs), which export their goods to the UK, and have not opted for currency hedging. These firms are in trouble, and fear a significant drop in their earnings in the months to come.

While the Indian economy remained largely resilient despite Brexit, there has been an impact on small exporters dealing with the UK.

Sources said that the government is keeping a close watch, and could consider providing some “breather” in the form of monetary support to such SMEs.

“We are looking into each and every issue that is coming up due to Brexit. We will do our best to ensure that the impact is minimal,” a government official told HT on condition of anonymity.

The government is also looking at negotiating a free trade agreement (FTA) with Britain – a move that will boost bilateral trade. Talks for an FTA between India and the EU, which started in 2007 remained inconclusive, but “this could provide an opportunity to the government to fast track the trade pact with Britain.”

“We have taken up the issue with Niti Ayog and have requested that there should be some support for the SMEs that are dealing with currency volatility, something many did not anticipate,” said Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises.

The uncertainty over the pound continue, and analysts said that it will ease only after the exercise of Britain’s exit from the EU is complete.

The share of micro, small and medium enterprises in India’s total exports is estimated at around 43% and textile and clothing constitute 24% of the country’s total shipment to the UK. The bulk of the garments are manufactured by the SMEs in India.

Meanwhile, the MSMes are already finding the going tough as banks, with high level of non-performing assets (NPAs) -- loans that turn unproductive –are also turning their backs on them. The surge in NPAs and stringent provisioning norms of these loans chalked out by the Reserve Bank of India have forced banks to tighten their lending exercise.

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