Whether it is in Pune, Coimbatore or Howrah, Small and Medium enterprises are feeling the heat of the economic slowdown. Many are in danger of going under, says A. Srinivas.

There is a stillness in the air as one enters Bangalore’s Peenya Industrial Area. Many units, from foundries to powder coating, are closed. Security guards shuffle around listlessly at road intersections and undefined bus stops. Pushcart eateries lie abandoned in places. There are trucks carrying rods and pipes but not too many people milling around, even at lunch hour. One of India’s largest hubs for small and medium engineering units wears a sullen, resigned look.

“Over the last 20 months, production has fallen by 50 per cent and the workforce of about 600,000 by 30-40 per cent. But the Government is not bothered,” says Latha Girish, President, Peenya Industries Association.

Peenya has about 8,000 small units and 30 medium industries. Of these 6,000 are engineering units. “Unlike in the 2008-09 slowdown, when the Government announced a stimulus for the economy and credit support for the small-scale sector, there has been no policy response to the 20-month industrial slowdown, either from the Centre or from the State Government,” says PIA Vice-President Venkatesh D.T. “Industry somehow held on to its workforce for the first year, but could not do so later on.”

Similar stories are playing out across the country, in the Chinchwad auto cluster, near Pune, in the foundries in Howrah (West Bengal), in Coimbatore’s powerloom outfits and Surat’s diamond units, among others.

The US slowdown and Euro Zone crisis have singed Howrah’s 450 or so foundries, located in grimy, pot-holed lanes around the city, forcing them to work at a sub-optimal level. Says Ravi Sehgal, MD, Carnation Industries, a Rs 100-crore company, “Over the last two years, the US economy slowed and then the Euro Zone crisis hit. It impacted the foundry industry here, especially those dependent on exports.” Exports to these markets account for 90 per cent of Carnation’s sales.

According to HSBC’s monthly Purchasing Managers Index data, India’s manufacturing activity has contracted in August and September. New orders have fallen considerably, forcing enterprises to cut jobs.

Nawany Corp Ltd, a Mumbai-based logistics company with 200 trucks and names such as Vedanta and ACC on its client roster, is trying not to default on its vehicle loans. Three years ago, the company, which had an annual revenue of about Rs 35 crore in 2012, had bought some new commercial vehicles. But with the onset of the slowdown, EMI payments have become a tightrope walk. Any default will impact Nawany Corp’s Credit Information Bureau (India) Limited (CIBIL) score, and affect its ability to raise fresh loans.

Worst-hit

But it is the sub-Rs 1 crore enterprises, which account for the vast majority of the Micro, Small and Medium Enterprises (MSME), that have been worst hit. Most job losses are in this category of enterprises, which employ 8-15 people each. And employees who are retained get their salaries late. “Our monthly orders have fallen to Rs 2 lakh from Rs 5 lakh about a year earlier,” says Kannan Reddy, proprietor of Nandhini Enterprises in Pune, which makes control-panel casings.

According to a 2013 Government report, entitled ‘Accelerating Manufacturing in the MSME Sector’, MSMEs contribute nearly 8 per cent of the country’s GDP, 45 per cent of the manufacturing output and 40 percent of the exports.

Multiple Challenges

This industrial segment, which employs around 400 million people, has been hit by the world and domestic economic slowdown on the demand side and rising interest rates and raw material costs, caused by the falling rupee, on the supply side. “Oil, coal and steel costs have shot up, but not our final price,” explains Jayaramu, Honorary Secretary of the Peenya Industries Association.

Auto-components, engineering, construction, real estate, construction material and plastics are among the worst-hit industries. Gems and jewellery and chemicals, too, have been badly affected. “Except perhaps for garments, and niche high-tech sectors, such as defence and aerospace, most industries have taken a hit,” says J. Crasta, Co-Chairman, Assocham, Southern Region.

The garment industry is one of the few that is bucking the trend. “Orders are shifting from Bangladesh to India, after the accidents there,” says K. R. Jayaram of the Garment and Textile Workers’ Union, Bangalore.

For the vast majority, however, the outlook is dismal. “There is no activity in the infrastructure and power sectors because of the policy paralysis,” says B.P. Shashidhar, President, Karnataka Small Scale Industries Association.

In the real estate sector, demand for wood products, ceramics, stone and marble is being affected, says Yogesh Dixit, Senior Director, CRISIL, SME Ratings. “The slowdown in the passenger car and commercial vehicle market will affect the demand for industrial plastics,” he adds.

The slowdown isn’t the only cause of the SME sector’s ills. There has been a flood of imports from China and other countries, due to a lower import duty on finished goods, particularly for mobile phones and LED lamps. “Discoms are buying transformers made in China,” says Philip Lewis, past president, Federation of Karnataka Chambers of Commerce and Industry and a first-generation producer of electrical machinery for over three decades.

D. Gandhikumar, President of the Federation of Indian Micro and Small and Medium Enterprises (FISME), an MSME lobby, says the sector has been hit by inadequate funds and high interest costs. With their Non-Performing Assets ballooning, financial institutions have become reluctant to meet the funding needs of the MSME segment, he adds.

Constricted cash-flow

A dip in demand sets off a negative of spiral of events. “Large units, including PSUs, delay payments to their small-scale suppliers, which leads to a working capital crunch because taxes and wages need to be paid monthly,” says Shashidhar. Banks have been unable to step in and help for a variety of reasons. This pushes units into the informal lending sector, says Lewis. Many units are forced to slash production, workers and prices to survive.

Industry representatives argue that the law, which allows them to proceed against buyers if payments are not made within 45 days, is unrealistic. “If SMEs do that, large units will dump them and either import or source from other States. For auto components, large units in Bangalore can go to Pune or even Hosur, across the (Tamil Nadu) border,” says Girish.

Delayed payments are a common refrain across the country. “This is not the only problem. People are worried that cycles have got distorted. New orders have slowed considerably or have stopped,” says Vinod Patkotwar, CEO of Crown Rubber Products, a medium-sized company in Pune.

Price cuts

For many, the only way to keep afloat is by generating volumes through price cuts, and undercutting has become the norm, squeezing cash flows further. There is little unity. “SMEs are a fragmented constituency. Leadership of an association depends on political affiliation. All this brings down bargaining power,” says P.M Mathew, Director of the Institute of Studies in Economic Development, Kochi, which focuses on SME concerns.

The Government isn’t helping. “Procedural issues are killing the small exporter,” says Prashanth Bhat of Bangalore-based SME Network, a tax and finance consultant for SMEs. “It can take up to a year to claim an export benefit from the Directorate General of Foreign Trade.”

Mitigation Measures

“The 1993 Tata Motors strike taught me that not to rely only on one vendor,” says Patkotwar. Today, apart from auto sector companies, Crown Rubber Products supplies companies a number of manufacturers, including luggage and ceramics companies.

While the global situation is beyond their control, both industry and the Central and State Governments can take some proactive steps to mitigate the effects of the slowdown.

“The current environment is an opportunity for auto-reliant SMEs to diversify. For this, the Government must unveil special financing schemes,” says Patkotwar. “Today, even a thousand SMEs are not sufficient to meet the requirements of companies like L&T and Siemens. However, SMEs must invest in technology to match up to the requirements of these companies. This is where the Government can play a role,” he says.

Approaching a credit rating agency is a good option for MSMEs seeking finance, says R.K. Das, a Country Head at Small Industries Development Bank of India. “Rating agencies assess a firm’s financial viability and capability to honour business obligations. A good rating can help MSMEs gain faster and cheaper credit.”

FISME wants a commercial bank set up to focus exclusively on the financial requirements of MSMEs. It also wants Government help to crack the export market. “Though the contribution of MSMEs to the country’s exports is more than 40 per cent, less than half a per cent of MSMEs are into direct exports,” says FISME’s Gandhikumar.

A. Padmanabha, Honorary General Secretary, Kassia, says small industries’ associations should work in tandem with State Small Industries Development Corporations to source raw material such as steel in bulk, thereby lowering input costs.

The Bangalore Machine Tools Manufacturers’ Network, a small body of 12 entrepreneurs, is a modest effort in this direction. “We pool efforts in training our employees and procuring materials,” says one of its members, N.M. Dube of Duocom Instruments Pvt Ltd, an instrumentation firm in Peenya.

M.H. Bala Subrahmanya, Economics Professor at the Indian Institute of Science, takes a positive view of the current situation. “In a slowdown, it is possible that engineers will break out of large units and develop niche products,” he says.

Policy Support

But a positive approach amidst adversity and a willingness to undertake investment must be accompanied by the right policy environment. “As in China, Governments and banks should send out a signal that they stand by SMEs,” says Mathew.

The Central Government should once again show the urgency it displayed in late 2008 and 2009. Banks could provide additional working capital finance and restructure small-industry loans instead of doing so only for large companies.

Public sector units also need to pay their suppliers on time.

A large number of first-generation entrepreneurs in industrial estates such as Peenya left comfortable PSU jobs in the 1970s and 1980s to be on their own. It is this entrepreneurial zeal that the economy needs to rekindle. It can happen only if the Government tilts the policy scales a bit in MSMEs’ favour.

srinivas.a@thehindu.co.in

(With Satyanarayan Iyer in Pune, Rahul Wadke in Mumbai, Abhishek Law in Howrah, R. Yegya Narayanan in Coimbatore and Anil Urs in Bangalore)

(This article was published on October 27, 2013)
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