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Wednesday, May 27, 2020

From capital to labour to credit, small firms on the brink, have emergency wishlist for govt

Given that this sector is responsible for an estimated 11 crore jobs and accounts for 30 per cent of the GDP, and a prolonged crisis could infect the entire economy.

Written by Aashish Aryan , Prabha Raghavan , Pranav Mukul , Aanchal Magazine | New Delhi | Updated: May 5, 2020 12:18:29 pm
From capital to labour to credit, small firms on the brink, have emergency wishlist for govt Zero production in companies higher up the supply chain has had a crippling effect on many MSME firms, which are almost fully dependent on them for their business. (Express File Photo by Gopal Kateshiya)

REVENUE, labour, capital, access to raw materials, overheads, and demand — the question mark over each is getting bigger by the day as the lockdown and its graded easing affect firms in the Micro, Small and Medium enterprises sector (MSME), in both manufacturing and services.

While each case is unique, all are united over the basics they want the government to ensure: cheaper bank loans to help them tide over the working capital problem, permission for longer daily working hours in major business districts during initial weeks, and easing of supply-chain constraints to ensure availability of inputs and outflow of finished goods and services.

Given that this sector is responsible for an estimated 11 crore jobs and accounts for 30 per cent of the GDP, and a prolonged crisis could infect the entire economy.

Zero production in companies higher up the supply chain has had a crippling effect on many MSME firms, which are almost fully dependent on them for their business. One of the hardest hit has been the auto ancillary sector, given that in April, passenger car and two-wheeler manufacturers clocked “zero” domestic sales.

Said Milind Kamble, founder of the Dalit Indian Chamber of Commerce and Industry: “The automobile sector is completely shut and most of the SME and MSME in India are in the auto ancillary business. Since there is no demand from the bigger players, it has trickled down and deprived the MSMEs of any business,” Kamble said.

Read | Salons to stores to cafes: small services stare at end of road

Moreover, as consumers across the country cut down on discretionary spending, sale of cars or electronic items, even after the lockdown is lifted, is unlikely to pick up soon.

According to Aakanksha Bhargava, CEO and President of PM Relocations, a Gurugram-based logistics company, since cash flow is the biggest issue, the government could consider providing some sort of refund or money transfer linked to payment history of income tax or GST by the company. The SME Chamber of Commerce has written to the Prime Minister seeking exemption from interest payment till June end, besides a moratorium on loans till December.

There’s a growing worry among employers about the reluctance of workers to return. Bhargava said labour laws should be tweaked to support businesses to allow measures such as overtime to be permitted for next few months.
MSME exporters across sectors face a “huge” liquidity issue that has contributed to their inability to restart operations.

This is due to orders getting cancelled or held up, which have also hampered their ability to buy raw materials for manufacturing.

Also Read | Lockdown effect: ‘Manufacturing PMI shrinks at fastest pace ever’

“Most of their orders have been cancelled. Some of them have been delayed because the buyer is asking to hold back the orders. They are saddled with fixed charges, including wages to their workers. That is the biggest challenge they are facing at this time,” said Federation of Indian Export Organisations director general Ajay Sahai.

For MSMEs suffering due to dwindling export numbers, the government is working on a plan to extend the interest equalisation scheme, under which exporters get 3-5 per cent subsidy on loans for specified items. The industry believes more measures may be required to bail the MSMEs out of this situation.

Sahai said many MSMEs paid their workers during March and April despite no work in the hope they would stay on when operations restarted. What is disappointing for the industry is that, now when they are close to opening again, the workers are going back,” he said. “When production starts, they will be searching for workers,” he said.

Barely 25 percent of FIEO’s MSME members across sectors like apparel, leather, gems and jewellery, handicraft and carpets are operational in green and orange zones at the moment.

A report released by Crisil points out how SMEs are hit when the economy moves into a low-growth trajectory. The report says that when the economy moves from normal to low growth rate, current asset days (how quickly a company is able to convert its current assets into cash) for large companies rises from 139 days to 143 days, for micro and small companies it jumps from 189 days to 220 days.

With the economy on slow lane for more than two years now, credit information firm TransUnion Cibil said loans worth Rs 232,000 crore of MSMEs are at a higher risk of becoming non-performing assets.

In Ludhiana’s industrial belt, a hub of MSMEs manufacturing cycle parts, auto parts, textiles products, factories operate within municipal limits and have to follow stringent guidelines.

“The lockdown uncertainty has led to export orders being put on hold. We are also not getting payments easily, leading to exhaustion of our bank limits. In such circumstances, payment of wages is very difficult especially since the government has ordered to pay full salaries. With resources being depleted, how will we pay salaries?” said Jatin Chadha, Director at Ludhiana-based Shiv Forgings, an MSME manufacturer and exporter of hand tools.

Ishant Goyal, director at Ludhiana-based edible oil company AP Refinery, speaks for many: “There is constraint around the movement of labour, availability of spares and support services, and some packing materials. Another key constraint, especially for export-based industries, is unavailability of courier services, as they are essential for the movement of critical documentation.”

Given the relatively smaller size of operations, MSMEs are traditionally known to manage expenses and turnovers on a short-term basis. Therefore, the lockdown hurts them harder.

Take the owner of a Surat-based distribution agency for a medium-sized FMCG brand who said he fears running out of cash given that business was now happening without credit. “The transporter we employ has been seeking advanced payments instead of the usual monthly clearance of dues. The company we procure from is seeking advance payments for releasing inventory but we have to supply goods to our customers (shopkeepers) on a credit basis. So there is an imbalance in our own working capital,” the MSME owner said.

One estimate of the relief package comes from K E Raghunathan, Chennai-based SME owner and former National President, All India Manufacturers’ Organisation. The average daily turnover of MSMEs is Rs 30,000 crore, said Raghunathan. A lockdown of 40 days implies a loss of Rs 12 lakh crore turnover. “Assuming 10 per cent profit margins, MSMEs would have got Rs 1.2 lakh crore in their hands. The government should consider giving this 10 per cent or Rs 1.2 lakh crore to MSMEs to use it for payment of salaries and loans,” he said.

If not upfront funding support, the government can consider splitting the package in different ways: interest waiver on working capital loans at least for a quarter, moratorium on repayment for three quarters, some tax relief such as a cut in GST rate to 5 per cent, safety net to workers such as part-payment of wages, PF contributions for micro and mini enterprises, and easing labour laws allowing them to let staff work overtime.

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