Opinion

Manufacturing MSMEs are in distress

AJ Hegde | Updated on November 13, 2019 Published on November 13, 2019

Their miseries range from high cost of capital and higher tax rates to weak demand and delayed payments. The future does not look good

Of late, there’s lot of news about micro, small and medium enterprises (MSMEs) across media platforms. Ministers as well as economists and columnists have been highlighting the importance of the MSME sector. However, in spite of all the attention given to MSMEs, there hasn’t been any improvement in their condition.

MSMEs are the largest provider of employment after agriculture. Manufacturing MSMEs have witnessed manifold growth over the years, thanks mainly to large OEMs offloading the manufacture of components and sub-assemblies to them. However, over the last one year, the condition of manufacturing MSMEs has been deteriorating . It is time to bring to the notice of all concerned the ground reality and the plight of units in this sector.

Shortage of skilled manpower

MSMEs are established by technicians, technocrats and small entrepreneurs. Their experience and expertise are the main investments. MSMEs employ unskilled and semi-skilled workers. Availability of skilled manpower is limited. Freshers and unskilled people are recruited and trained by MSMEs. So, the labour productivity in MSMEs is very low.

The skill development programme launched by the government has not been able to provide enough skilled manpower to industry. MSMEs can recruit/train freshers and the government has a scheme to reimburse part of the stipend paid to the trainees. Unfortunately, the reimbursements don’t reach MSMEs due to bureaucracy and red tape.

Land prices high

State Industrial Area Development Boards develop industrial land and distribute to industries. The land cost fixed by these boards is very high. In addition, a lot of time and money have to be spent in getting the land allotted and registered. Hence, majority of MSMEs continue to operate in rented premises.

Private land is available, but without proper infrastructure and approvals. Running the units in such premises is risky.

Erratic power

The power supply to most MSMEs is erratic, with frequent power shedding and voltage fluctuations. The hi-tech machinery used need well-regulated power supply on a continuous basis. MSMEs are forced to install captive power plants (DG sets), voltage stabilisers and UPS. These are additional investments which add to the costs.

High cost of capital

Getting bank loans for MSMEs is not easy, especially during the starting stage. Government agencies have instructed banks to disburse loans to MSMEs on priority basis, but banks are reluctant to lend and insist on collateral. Hence MSMEs take loan from NBFCs, co-operative banks and borrow from friends/relatives at higher rate of interest. Due to the high cost of capital, exporting products at competitive prices is difficult.

MSMEs are classified based on the investment made on plant and machinery. The present limit fixed for investment on plant and machinery is too low. Banks and government departments take advantage of this definition and deny certain benefits and concessions MSMEs are supposed to get. It is time that the government revised the investment limit upwards. This will help MSMEs install hi-tech, productive machinery and be competitive in the international market.

Tax rates higher

The recent corporate tax reduction is applicable only to companies. Ninety per cent of MSMEs are either partnership firms or proprietorships and are, therefore, not eligible for the reduced corporate tax rate. They have to pay a higher rate of tax (about 35 per cent). Majority of MSMEs cannot convert themselves to companies because of high cost of compliance and less flexibility.

The government should find a way to pass the reduced tax rate benefits to MSMEs as well.

Delayed payments

Payments for supplies from MSMEs are never received in time. The government directive to all corporates to make payment to MSMEs with in 45 days is not followed. There is always a delay in getting the payments. MSMEs do not bring this to the notice of government agencies due to fear of losing the business.

The slowdown in the economy has affected the MSMEs sector badly. A large number of manufacturing MSMEs are suppliers of parts to the automotive sector. These MSMEs have not been getting enough orders for the last one year due to disruptions in the automotive sector. Many MSME units are either closed or working partially, and many of those working in these units have lost their jobs.

The capacity created by MSMEs is underutilised, and capacity expansion and modernisation have come to a halt. The recent loan melas organised by banks may not have had many takers from the MSME sector as the units are struggling even to repay the existing loans.

Exports

The US-China trade war should increase export of goods from countries like India. But Indian MSMEs are not able to match Chinese prices. This is mainly because of lower labour productivity, higher cost of capital, land and power, less productive plant/machinery, and higher taxes and duties. .

The procedures involved in importing of raw materials without customs duty is elaborate and cumbersome. It is not worth spending time and money in getting advance licences for getting duty free raw material in small quantities. Hence MSMEs import the raw materials by paying customs duty. This increases their input costs.

Many foreign customers expect products to be supplied on DDP (delivered duty paid) or DDU (delivered duty unpaid) basis. They like to get the items from warehouses close to them and draw items as and when needed. Logistics, customs clearing and warehousing are bottlenecks for export of goods from MSMEs. An agency should take care of these activities and help MSMEs in this regard.

Most of the MSMEs are engaged in manufacture of components as per customer requirements. They are also engaged in import substitution and providing cost-effective solutions to their customers. But no R&D activity for development of new products has been happening in the MSME sector.

The future for manufacturing MSMEs does not look good. They do not have enough resources to develop their own products or enter into joint ventures with foreign partners and grow big.

The writer is CEO of Bhavani Industries, Bengaluru

Published on November 13, 2019
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