Saturday, July 13, 2024

MSMEs: Still In Dire Straits – The Big Story News

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Sunil Kumar, 51, a Mumbai-based small-scale manufacturer and exporter of metal fittings for the housing sector, is a concerned man. Despite the economy opening up to a large degree, demand for his products remains sluggish. Exports to nations in the Middle East, his mainstay for several years, are down by half this year, with no sign of picking up. At the same time, input costs—especially steel prices—have risen fourfold compared to pre-pandemic rates, while shipping costs have more than doubled. “No one has certainty about anything, be it the pandemic, the business environment or government policies,” says a distraught Kumar, who hopes the festive season will lead to an improvement in demand.

There are hundreds of thousands of entrepreneurs like Kumar, who have pinned their business hopes on the reopening of the economy as Covid vaccinations increase and case numbers fall. While large companies have been able to survive the pandemic and even improve profit margins by cutting costs—reflected in the rebounding of GDP growth to 20 per cent in the quarter that ended in June, albeit on a very low base—firms in the MSME (micro, small and medium scale enterprises) sector are still struggling to get out of the red. Many say that without a revival in the MSME sector, which is often described as the backbone of Indian manufacturing, economic growth will not be sustainable. As a result of its size, the sector has a major impact on overall investments and in consumption, both of which lagged in the April-June quarter.

India’s 63.4 million MSMEs account for 45 per cent of the country’s manufacturing output, 40 per cent of its exports and employ about 120 million people. In 2020, when the Centre implemented one of the most severe lockdowns in the world, this sector was one of the worst-hit by the sudden arrest of economic activity. A survey conducted in June last year by the All India Manufacturers’ Organisation said 35 per cent of India’s MSMEs and 37 per cent of self-employed individuals had to close down their business as a result of the pandemic. A survey in May this year by social media platform LocalCircles, of 6,000 startups across 171 districts, saw nearly 60 per cent of respondents saying they expected to scale down, sell or shut down their firms over the following six months. Around 41 per cent said they were out of capital, or had less than a month’s worth of capital remaining. Peculiarly, the Centre says it does not have any data on the number of MSMEs that suffered business failures due to its Covid-19 lockdowns.

Soaring input costs

The rise in raw materials prices has had a particularly crippling effect on MSMEs. “Sectors that [require] raw materials like steel, aluminium, copper and plastics are in trouble,” says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). Steel mills have increased their prices by up to Rs 4,500 per tonne from June this year, taking the benchmark price for hot rolled coil to nearly Rs 68,000 per tonne, a record. Aluminium prices have been rising steadily sine January; in the past few weeks, prices have risen 14 per cent to nearly Rs 2.25 lakh per tonne, the highest since 2008. What has surprised experts is that prices are rising despite demand remaining depressed. One explanation is the rising commodity costs in international markets as a result of China limiting exports of raw materials.

“MSMEs in sectors that require raw materials like steel, aluminium, copper and plastics are in trouble”

– Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises

Imports have also been squeezed by high transportation costs and clogged shipping markets. Domestic manufacturers have seized the opportunity to jack up the prices of their finished goods. While this has led to windfalls for large companies in the commodities sector—such as JSW Steel, Tata Steel and Hindalco—MSMEs have suffered. Bhardwaj says the price increases range from 10-40 per cent. The engineering sector, which depends heavily on iron and steel, is among the worst-hit as a result. Kumar says the slowdown in raw material delivery has impacted fulfilment of orders too. He says that earlier, if a manufacturer ordered raw materials in the morning, they were delivered by the afternoon. Now, vendors take up to three days to make deliveries, resulting in delays all the way down the production chain.

According to Ashokkumar C. Patel, president of the Ahmedabad Engineering Manufacturers’ Association, the prices of raw materials for foundries and engineering industries, including pig iron, coal silicon, graphite, magnesium and scrap metals, have also risen sharply, leading to a hike in the price of finished products. The price of pig iron has risen from Rs 30,750 per tonne on July 1 last year to Rs 44,450 on September 17 this year. Metal casting prices have also been hiked, by Rs 3.50 per kg, following the increase in coal prices. “[Many firms in the] foundry and engineering industries are on the verge of closure, and this will impact jobs,” says Patel.

In the short term, the impact of these rising prices will mean a reduction in profit margins at such companies. In the long term, if the import of raw materials remains impacted, firms will increasingly shift to importing finished goods rather than raw materials. Coming at a time when the Centre has been pushing for India to become a global manufacturing hub through the Aatmanirbhar Bharat Abhiyaan, this will be a step backward. It will also have a cascading effect on jobs and demand, leading to a vicious economic cycle in which raw materials shortages will lead to shuttered firms and fewer jobs, which in turn will drag demand down yet further.

Sharad Gupta, 56, a Delhi-based garment manufacturer/ exporter with a factory in Ludhiana that employs about 125 people, says the price of cotton yarn has more than doubled in the past two years, from Rs 170 per kg to more than Rs 340 per kg at present. His firm’s turnover, which was in the region of Rs 100 crore before the pandemic, is now down to Rs 10 crore. “Although markets have re-opened, customers are not placing orders, especially in the fashion and modern garments category,” he says. His products comprise knitted garments such as T-shirts and track suits and are exported to the US, Australia, Canada and the Middle East.

Yet another reason for the rising input costs is the increase in shipping costs, which have doubled globally. According to a Bloomberg report in June, transporting a 40-foot steel container of cargo by sea from China’s Shanghai into Rotterdam in the Netherlands rose to a record $10,522 (Rs 7.8 lakh), as much as 547 per cent higher than the seasonal average over the past five years. With more than 80 per cent of all trade taking place via the oceans, the increase in freight costs has raised prices for everything from toys and clothes to sugar, coffee and other food items. Gupta says shipping charges for a 20 foot container from Mumbai to Durban were about $800 (Rs 60,000) before the pandemic, but now stands at $5,800 (Rs 4.3 lakh), more than seven times the earlier price.

No magic cure

Most MSME players say the government needs to roll out a comprehensive policy to address the woes of the MSME sector. “The government’s outlook towards the garment industry, which is a big job provider, needs to change,” says Gupta. Neighbouring Bangladesh exports five times as many garments as India does, he argues, because the government there is more supportive to the industry than the Indian government is to domestic manufacturers.

A major scheme the Centre has already rolled out to help MSMEs in distress was the Emergency Credit Line Guarantee Scheme (ECLGS) under the Aatmanirbhar Bharat Abhiyaan, under which loans fully guaranteed by the government were extended to businesses. As on September 24, 2021, total loans sanctioned had crossed Rs 2.86 lakh crore, and of the total guarantees issued, about 95 per cent were for loans sanctioned to MSMEs. However, only around 15 per cent of India’s MSMEs have availed of the ECLGS, since MSMEs do not want to burden themselves with more loans when they are unsure how they will repay them. Also, most of these units are run by single entrepreneurs who find the process of applying for loans and completing the mandated paperwork cumbersome enough to be not worth the effort.

Recently, the finance ministry extended the scheme by six more months, till March 31, 2022, or till guarantees for the overall ceiling of Rs 4.5 lakh crore are issued, whichever is earlier. The scheme has also been extended to the services sector. But the problem with the scheme is that it only helps those who have taken loans from banks. Many units would not have done so, as they are not capital-intensive; what they need is financial assistance to restart operations. In some cases, public sector banks are even shying away from giving loans to MSMEs, as a Bengaluru-based entrepreneur tells india today. “Transparency is a big problem with MSMEs, which makes banks reluctant to lend to them,” says a Mumbai-based economist.

In a representation to the government in September, FISME had asked the Centre to closely monitor price movements of the top ten raw materials and refer cases to the Competition Commission of India, if need be. It also wants the Centre to rationalise import duties and bring down duties on key raw materials to zero. Moreover, it says the government should protect MSMEs from prosecution and penalties due to non-compliance during the pandemic, upto March 31, 2022. It had earlier also asked the Union finance minister Nirmala Sitharaman to review the current practice of ‘special mention accounts’ introduced by the Reserve Bank of India in 2014 to identify those accounts that have the potential to become an NPA or a non-performing asset, as this creates an additional burden on MSMEs.

While everyone acknowledges the importance of the MSME sector, there still seems to be no end to their woes and no clear strategy to resolve the problems. It is high time that there was a sharp focus on the segment, targeted at addressing immediate financial woes and bringing input costs down. If not, a deepening of the crisis in this backbone sector will push the economy further into distress.

CASE STUDY 1

“Can’t increase selling price, profits under pressure”

C.S. PRAKASH, 50, Founder and MD, Pushpak Products, Bengaluru (Photo by Hemant Mishra)

Prakash, whose 29-year-old firm operates in seven sectors, including aerospace, engineering and electronics, and has Rs 38 crore in annual revenues, got into new business opportunities such as making trolleys for ventilators and animal ear tags during the pandemic, both for the central government. While he has been able to triple his revenues from the new ventures—his firm made 9,200 trolleys within two to three months of getting orders, and supplied 10 million animal ear tags, with orders for another 10 million—input costs have eaten up his profits.

The cost of structural steel, a key raw material, has doubled in the past year, from Rs 45 per kg to Rs 90, while plastic prices have risen from Rs 290 to Rs 550 per kg in a year. Meanwhile, transportation costs have doubled; earlier, trucking charges from Bengaluru to New Delhi were Rs 45,000; they have now risen to Rs 70,000. However, Prakash is unable to increase his selling price. “Once we get the order based on an L1 tender, there are no chances of increasing the price,” he says. “Profits are zero, sometimes even in the negative.” As staff salaries cannot be raised as profits fall, the threat of attrition lurks. He says it is time to derisk one’s business by identifying new opportunities, so that the cash flow of firms will not be impacted even if that sector suffers any business uncertainty. Another measure is to collaborate with other MSMEs to have a better control over product prices.

CASE STUDY 2

“Unsure of where input prices will settle”

SANDEEP JAIN, 56, MD, Solo Group, Gurgaon (Photo by Yasir Iqbal)

Jain, whose 30-year-old group does business in precision machines, automotive engineering and aluminium die-casting, is going through a period of unprecedented uncertainty. While his firms survived the Covid lockdowns, which saw production drop nearly 25 per cent, the soaring input costs have taken a bigger toll. Aluminium prices have risen 35 per cent in the past six months, from Rs 140 to Rs 205 per kg. At one point, it was as high as Rs 220 a kg. “I am still not sure where prices will settle,” says Jain, whose group has an annual turnover of around Rs 30 crore, with 180 employees. The prices of ferro alloys also doubled in the months of September and October. Cost of other inputs such as sheet metal scrap, plastics and polymers have also seen a significant rise. To add to the woes, shipping costs have risen 80 to 100 per cent, from $2,500 (Rs 1.8 lakh) for a 20 ft container to $5,000 (Rs 3.7 lakh), while shipping time has increased from four-five weeks to over eight weeks.

The dilemma entrepreneurs like Jain face is that they cannot raise prices in tandem with their suppliers. Meanwhile, his customers have started working on very slim inventory levels. The worldwide semiconductor shortage has also led to auto companies slashing production. This has impacted most suppliers, squeezing their cash flows. There was also a shortage of packaging material due to pulp shortage as China started lifting pulp from India by offering higher prices, until the government stepped in. Some suppliers to Jain’s firm were also hit by power outages, with units in Punjab closed for three weeks, leading to a labour exodus.



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