MSME discrimination due different currency and hedging cost

Aatmanirbhar – In Theory and Practice 4

by Sandith14 July, 202014 July, 2020

If we see all the four policies in action, the total spread between a foreign supplier and an MSME who embarks on indigenisation is 25%. Because of these, and the incentives it generate, govt. departments and PSUs would love a foreign supplier or a trader of a foreign supplier. MSME cannot think of attempting bigger projects. Even if they do the import duty exemption, finance cost, payment terms and currency hedging would kill their competitiveness. How will atmanirbhar be achieved with theses rule in place?

This is the concluding part of the four part series which focus on four major policy that discriminates MSME when compared to foreign vendor. The fourth policy covered here is the difference in payment currency. Let’s look at the terms:

*Example of a payment terms showing different currency for foreign supplier and Indian MSME.*

A foreign supplier would be paid in Euro. An Indian MSME will be paid in rupees. An Indian MSME that is trying to indigenise would still have to import components depending on the level of indigenisation. At 10% indigenisation 90% would imported and so on. To cover the exchange rate risk of the input components, the MSME will have to take currency hedging. It is about 3% for a six months coverage.

Let’s look at the additional cost for the MSME depending on level of indigenisation. At 10%, they would be importing 90% input materials. The additional cost be 3% of 90 units, i.e., 3.7 units. For MSME with 50% indigenisation the currency exchange cost is 1.5 units and similarly for MSME with 80% indigenisation the cost is 0.6 units.

Now if we add the currency hedging cost to the real cost for each supplier we get:

Foreign supplier	Trader	MSME 10% indigenisation	MSME with 50% indigenisation	MSME with 80% indigenisation
102.5	107.5	127.5	120.3	114.9

*Real cost after adding cost of currency hedging*

Clearly the MSME who thinks of atmanirbhar is having its competitiveness against foreign suppler further lowered by this difference in currency.

If we see all the four policies in action, the total spread between a foreign supplier and an MSME who embarks on indigenisation is 25%. Because of these, and the incentives it generate, govt. departments and PSUs would love a foreign supplier or a trader of a foreign supplier. MSME cannot think of attempting bigger projects. Even if they do the import duty exemption, payment terms, difference in payment timing and payment currency would kill their competitiveness. How will atmanirbhar be achieved with theses rule in place?

Read the first part highlighting the import duty exemption and the issues it generate for MSME.

Read the second part of this article where discrimination due to finance cost is discussed.

Read the third part of this article where discrimination due to payment timing is discussed.