Not Just Auto: Coimbatore’s MSMEs Are Sick
It is a sector that provides employment to around 12 crore Indians across the country - MSMEs or micro, small and medium enterprises are the backbone of industry and provide employment in large numbers.
Coimbatore in western Tamil Nadu is chock full of MSMEs and they say they are all feeling the pinch of the economic slowdown. And it is not just automobile related MSMEs that are hit hard.
From pump manufacturers to jewellery makers to engineering units, they are united in their anxiety about loss of business and the search for a road to recovery.
Coimbatore is famous for its pumpset manufacturers. A peculiarly unpredictable industry, it is dependent on the rains - excessive rains could cause crop loss and pull farmers back from buying new pumps and the same could happen during drought as well.
This Rs 9000 crore industry, of which Coimbatore contributes 50%, is facing a double slump. With rains wreaking havoc in north India, crop losses have dampened business in the past month. The economic slowdown has exacerbated the issue.
“Many of our members have announced a 5-day or 4-day week,” V Krishnakumar, President, SIEMA (Southern India Engineering Manufacturers' Association) told The Lede. “Earlier we used to work 6-day weeks.”
Krishnakumar says the first to have been hit are the migrant labourers who travel long distances from the north and north east Indian states to work in Coimbatore.
“If recession takes place, the first people to be asked to go are contract employees and migrant workers,” he said. “According to press reports, more than 40,000 to 50,000 migrant labourers have gone back in Coimbatore alone. Not only does their purchasing power go down but petti kadais (small shops), cinema theatres, tea shops, hotels who earn money from them are all impacted,” he explained.
The situation is grim all around.
Take the case of K Ilango, Director of Rangamma Steel and Malleables, a company with a turnover of Rs 120 crore. The firm makes and sells machined castings (braking components) for commercial vehicles like buses and trucks.
“We started feeling the pinch right from April,” said Ilango. “By July it started getting terrible. August and September are much worse.
Our business is down by more than 50%. We are totally dependent on the automotive sector, especially commercial vehicles. Now we are working at less than 50% capacity. From three shifts, we have reduced production to one shift. Even at this stage, we have more than a month’s stock. We have brought down production to four days a week with just one shift hoping to tide over this crisis,” he said.
Ilango has three factories with 225 permanent employees and another 200 contract employees. He says he has had to let a number of skilled contract workers go. “Now there are hardly 50-60 contract employees left,” he said.
Tales of hunger abound in the jewellery manufacuring industry in Coimbatore. “I had a goldsmith who was a very skilled man and he left in search of better opportunities some months ago,” said B Muthuvenkatraman, President, CJMA (Coimbatore Jewellery Manufacturers Association).
“One day when I went to the hospital for a check-up, a security guard saluted me, came up and asked if I was well. It was the same goldsmith. I asked him what he was doing here. He said he took up this job because there were hardly any jobs in the jewellery sector,” he said.
Muthuvenkatraman says the guilt hit him hard. “To think that we have not taken care of our goldsmiths - these are craftsmen with a divine talent. They work with a beautiful metal and create exquisite designs. They are being pushed into jobs as salesmen and security guards,” lamented Ilango.
Muthuvenkatraman says the past 50 days have been especially disastrous for the jewellery manufacturing industry.
“Slowly it has become very adverse. In the past 50 days, people have not been investing in gold. There are more than one lakh goldsmiths here.
More than 60,000 goldsmiths have gone elsewhere, working as security guards, as salesmen in large jewellery stores.
We are afraid that if such skilled people are not with us, the industry will disappear. I personally cannot design a Rs 1 crore necklace. To make it, you need to have that skill in your blood. They are blessed with that skill. In the recession period, the government has given support for the auto sector. But we need to give some sort of support for the goldsmiths,” he said.
Muthuvenkatraman speaks of his own experience at his jewellery store in Coimbatore. “I have 34 years’ experience in this business. I got into this sector in 1985 when I was 19 years old. I have seen a lot of recessions. Eleven years back we had a big recession but it came back to normal in just 10 days. I have not seen such a meltdown in my life – each day is worse than the previous one,” he says.
With staff strength of 11 in his story and 40 in his factory, Muthuvenkatraman is at a loss about how to tide over. “Last week the sales in my store amounted to 4.5 grams! In other weeks, it is just 20 grams or 10 grams. There is no work for any of the labourers in the factory. We are just trying to find them some odd jobs to keep doing so that they don’t leave,” he lamented.
As for foundries in Coimbatore, production has come down by 40%. “The cascading effect is everywhere,” said G Ezhil, Chairman, Vice Chairman, IIF (Institute of Indian Foundrymen), Coimbatore Chapter. “It has intensified in the past six months. Over-capacity and over-production has also contributed to the crisis.
We have 500 members in our association. Out of this 500, closures of business are around 2-3%. The hit in production is 40% across the table.
As of now we are cutting down on costs and remaining silent. Our members are not investing in anything. All foundries are working only for five days a week. We are managing the show by ensuring no overtime,” he said.
MSMEs, by all accounts, are largely dependent on bank loans for working capital. With the banking sector reeling under NPAs (non-performing assets) and NBFCs (non-banking financial companies) too nosediving, MSMEs were hardest hit, as they did not have access to capital to continue business.
As the economy slowed perceptibly, orders began drying up too, leaving little cash in hand for small entrepreneurs.
But the bankers did not stop knocking on the doors of MSMEs. Forced to pay their EMIs and with income reducing drastically, they were at their wits’ end.
If an MSME took more than 90 days to pay up the monthly EMI, it would automatically be termed as an NPA. This fear was keeping entrepreneurs awake at night.
All this was communicated to Finance Minister Nirmala Sitharaman by CODISSIA, a trade body based in Coimbatore.
On September 19, the Minister announced that banks must not declare any stressed MSME loan as an NPA until the end of the current financial year.
“The relief given by the Finance Minister until March 2020 is welcome,” said R Ramamurthy, President, CODISSIA (Coimbatore District Small Industries Association). “Our member industries have got relief psychologically and they can go work and pay back loans after some time. If there are loans hanging over your head, you will not be able to work at all.
After 90 days banks would simply mark you as an NPA account and that is put forth in the schedule and then you cannot even get Re 1 loan anywhere. The industry may be running and may be a good one also.
But just because of working capital shortage and a sudden slump in the market, if you are not able to pay, we would be penalised. The Reserve Bank has to change the rules. They are going by ancient rules. We want them to change it to 180 days permanently,” he said.
Ramamurthy stresses that the nature of MSMEs is that of survival where they do not have surplus funds to tide over downturns. “We are not large corporates which have access to equity markets. We are small units dependent on bank loans to work. Banks already give less working capital and for the rest we are forced to go to private lenders.
When there is a slowdown, larger companies can withstand it because they have reserves and surplus. But what about us? We are giving employment to 12 crore people across India. Reserve Bank has to focus on us and change things for us.
We are writing to RBI every month but they only talk about the rules. They need to put up a separate committee for MSMEs and change the rules. We have requested the Finance Minister to speak to the RBI about this. No one is going to give micro and small enterprises equity support – we are dependent on bank loans.
There are very few NPAs in MSMEs. The banks are giving working capital of only 20% of property value to us. We are demanding 40% working capital. If there is a slight slowdown of 30-40%, MSMEs should be able to withstand it. But the current situation is such that we simply cannot survive,” he said.
GST has turned out to be a demon for MSMEs. While they do admit that movement of goods across state borders has become much faster, they feel the rates of taxation are forbidding.
Ilango of Rangamma Steel and Malleables says his company has taken a debilitating hit thanks to GST.
“One of the biggest hits was GST. Automotives have been bundled by the government into one sector but it actually comprises four different sectors - 2-wheelers, 3-wheelers, cars, tractors and commercial vehicles (buses, trucks, minivan).
The government gave concessions to tractors since most buyers are farmers. Most people say automobiles are luxury goods. But commercial vehicles are not luxury goods by any stretch of the imagination – these are buses bought by governments. Two-wheelers cater to the lower segment and they too cannot be classified as luxury goods.
Vehicle components are priced at 28%, apart from the vehicles themselves. The government is tempted by the organised auto sector since they feel they can get a lump sum of tax from it. But they need to segment the sector itself.
Auto components are either B2B (Business to Business) or B2C (Business to Consumer). In the B2B segment, they can input tax credit. B2C is largely unorganised and a lot of tax evasion takes place.
I think the government is making a big mistake in not segmenting the auto sector. For auto components, they should bring it down to 18%, it is reasonable,” he says.
Ilango is even more upset with the way the GST has been implemented.
“Compliance is very difficult. It is actually over-compliance which makes companies weak. If my supplier doesn’t pay my GST I am punished with interest and penalty.
What do I do if a supplier somewhere in Delhi does not pay GST? Should I close my business and go fight with him? It is up to the government to take action, not me.
When we take orders from government departments, payment does not come for six months. Do you want me to go fight with some babus in Kerala Transport Corporation or somewhere else? We have been articulating this for a few years but not much has changed,” he vented.
For the gold jewellery makers, GST of 3% has resulted in lost job opportunities, according to Muthuvenkatraman of CJMA. “A total of Rs 1600 crore from this industry has gone as tax.
This works out to five tons of gold which should have gone to goldsmiths and has instead gone as tax. Out of every kilo of gold, only 800 grams comes to us.
We have lost the opportunity of working on five tons of gold which could have put more money in the hands of goldsmiths,” he said.
CODISSIA’s Ramamurthy says GST needs to be reduced to 12% on average across all sectors rather than the 18% at present. “Earlier engineering job orders were not taxed. Now after our entreaties, after 18% GST for two years, they have brought it down to 12%. Micro units which have one to two lathes and are working cannot sustain with GST. We want it to be brought down to 5% like textiles.
The funny thing is that an atta mixer had a GST of 5% while a wet grinder used to make idli-dosa flour had 18% GST. When industry pointed it out to government, asking if chapathis were seen as staple diet while idli-dosas were not, the government immediately brought it down to 12% a year and a half ago.
Now it has been brought down to 5% - wheat and idlis are now equal. But it took two years for this to happen,” said Ramamurthy.
“The overall downtrend started when demonetisation was introduced. Micro enterprises started struggling once demonetisation was introduced. It went further down after GST,” said Krishnakumar, President, SIEMA.
What Next For MSMEs?
The unanimous demand is for reduction of GST and an intervention in the demand side of the economy so that buyers would have more purchasing power.
“To be able to increase buying power, the government needs to put more money in the hands of people,” said Krishnakumar, President, SIEMA. “There are a lot of measures being carried out on the corporate side and that is good. But is it going to help an individual buy more? That is the question.
There should be a reduction in income tax, so that disposable income is there in the hands of individuals. More employment needs to be generated, otherwise fiscal measures will not help,” he added.
Ezhil, who is with the foundries sector, says the government needs to develop a multi-pronged strategy.
“All growth engines of the basic economy need to be fired. Everything needs to be given stimulus, needs to be addressed in a multi-pronged manner. The government needs to address demand.
They have to do something to bring back demand. Tax cut in GST needs to be done. It is the consumer who has to pay the GST at the end of the day. A manufacturer is simply passing it on.
Corporate tax cuts will not serve the purpose. That should be the last option. Corporate tax should be cut only after profit. That may boost investment but it will not help market demand,” said Ezhil.
CODISSIA’s Ramamurthy agrees with the demand for a cut in GST across the board while arguing for longer term measures to help the MSME sector weather future storms.
“Corporate tax cut is a long term move. I feel GST needs to be reduced until March at least, so that consumption can pick up. Indian economy is strong enough to withstand this recession. We don’t need to worry about global recession.
We can survive on the Indian economy alone, as long as MSMEs are handheld just a little by the government. We don’t ask for subsidies or incentives. We are asking government to create demand for us by opening up PSU contracts to MSMEs.
At least during a slowdown, when our production is down by 30-40%, it can be made up by giving us contracts from PSUs,” he said.
Ilango, the maker of braking components for commercial vehicles though is not optimistic. “We are already at the bottom, I just hope there is nothing worse in store. Let’s wait and see,” he signed off.