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Why should SMEs consider growing Exports, how does it help?

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Small Business Owner Using Laptop - Nuphi.trade

SMEs (Small and Medium-sized Enterprises up to Rs. 250 Crore Turnover)  are responsible for the majority of employment in India. They cover up to 40% of the workforce and contribute 49% in exports and SME’s contribution in International Trade is growing rapidly.

A text diagram about small and medium enterprises. The centre of the image has SME written in bold sky blue letters, to the top left corner is an animated picture of the shopping website interface. On the middle right corner near the ' S' is an animated diagram of how the shopping interface connects a business to a household. On the bottom right corner is a hand holding a Dollar sign on a golden coin, adjacent to that is a diagram of a truck moving from one location to another to left of that is a diagram of T-shirts which represent the commodity. To the right of the 'E' is a diagram of a billing device, on top of that to the left is a stack of gold coins and to the left of that on top of the 'E' is a diagram of the analytics of a website interface.

Exports have the potential to rapidly scale the profitability of SMEs and also aid in bringing in Foreign Currency for our Large Trade Deficit running country. Exports help SMEs spread their Customer Base businesses across the globe rather than a limited domestic market and also helps Indian SMEs become globally competitive and offer better quality. Some more direct gains from exports for SMEs are :

The benefit of getting paid in foreign currency:- 

Different currency notes from all around the world is piled on , some of the noticeable ones are a one dollar bill from USA and Saudi Riyal along with a few coins also scattered on top.

Instead of getting paid in Indian Rupees (INR), exports pay you in Foreign Currency- US Dollars, EUR, GBP, Dirhams, etc. All these developed countries’ currencies consistently appreciate in value against INR – due to the differential inflation (or higher inflation in India) viz. USD/INR exchange rate in 2008 was Rs. 39 per US Dollar as compared to USD / INR = Rs. 75 today in 2021. Gradually each year, this percentage accrual in INR (even though adjusted by Buyers) overall results in better profitability as compared to pure INR sales locally.

• Payment Assurance and punctuality:- 

While large Enterprises benefit from credit purchases and are focused on maximizing their capital these long cycles of cash flow adversely affect the SMEs.  In Developed Country Buyer jurisdictions – US, EU, UK, Singapore etc., Invoice due dates are honoured a lot more consistently given the stricter regulations around Contract Act and International  Credit Insurance Ratings, whereby any payment delays impact their ability to source future supplies on credit. Such credit insurance is not available in India – though some of the initiatives such as TReDs etc. have begun but early days.

• Receivables Finance or Factoring

With the help of factoring from various international Factoring Providers in Developed Countries, you can easily support your Debtors or Receivables Credit period without collateral or security. You will have access to incremental cash flow that will help meet increased demand from Export. Again this option of non recourse financing or factoring is not available as easily for local Invoices. 

Government incentives:-

Exports is a zero rated supply i.e. no GST is applicable for most export categories. In addition to tax waivers, the Government of India to promote Exports provides numerous benefits that form about 3% -5% of FOB (Free on board) value of Exports of Goods or Services. There are also Interest Subvention schemes where Bank Interest on Working Capital or Capex Loans availed specifically for Exports are subsidised by the Government of India. 

Faster Growth: as access to much larger global market & buyers:-

If small and medium-sized enterprises are provided with the right support then they can significantly boost our economic growth of the country. The gap between large Enterprises and SMEs is quite large. The productivity differences can reach up to 60%. 

One more aspect here is the potential to enable eCommerce for Cross Border Trade from India instead of traditional offline Buyer Search or Demand Generation for SME Exports.

SMEs have started adapting to technology and this is required to bridge the productivity gap between large enterprises and small enterprises. The digitalization of Exports documentation and processes especially for SMEs is a key step to improve the competitiveness of SMEs and enable them to grow their Exports. 

A pie diagram showing the different contributions of SMEs 
No of SMEs- 36.1 million units (orange )
Employment opportunity (red)
Products - More than 6000 products ( purple)
GDP contribution- 6.11 % (light blue )
SME output - 45% (dark blue)
SME exports - 40 % (light green ) 
Bank Lending - 16% ( dark green )
SME growth rate - 10% (mustard yellow )

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Anshika Prasad