TLI Interview
MSME sector, considered backbone of the economy, was under distress even before pandemic dealt body blow to the economy. The massive disruption in supply chain has triggered a reset in business and economy. Federation of Indian Micro and Small & Medium Enterprises (FISME) President Animesh Saxena spoke to Top Lead India’s Nirbhay Kumar about the challenges faced by the sector. Edited excerpts:
MSME sector is among the worst sufferers. The pandemic has dealt a massive blow to it. What feedback you have received from the industry? How stressed they are?
Historically, the MSME sector has been stressed. They had their usual challenges of payments not coming on time. Availability of funds at reasonable interest rate has also been an issue. These factors were already prevailing. When Coronavirus pandemic came and subsequently the lockdown was announced, it was a huge blow on survival of the sector especially micro and small enterprises.
After the lockdown, supply chain completely stopped and orders dried up. Since MSMEs had very limited holding capacity in terms of funds availability, their survival became very difficult. Most of the weak units shut down during lockdown.
Medium and large enterprises had vision and plan so they sent their people on leave or allowed them to work from home. They hoped that after 3-4 months they will start their operations full steam. But in small and micro there was no such thing. They simply shut down thinking that they will see later as to how things pan out.
Our estimation right now from micro and small enterprises point of view is that around 20-25% units are still shut. Now they are trying to revive their business. Most of them were part of large and established supply chain. They were not Business to Consumers (B2C). Bulk of them employed small number of people. Their workers went home and did not come back so they are now trying to revive that in two ways. They are assessing the order situation and they are recalling their workers and also recruiting new workers where old ones are not available. In the meantime, they had to pay rents even as premises were shut. So, they have huge liability also to clear off. Most of the raw material suppliers have made their credit terms stricter. Earlier, since everything was running smoothly, they had a cycle of payment terms. For instance, raw materials were being supplied on credit. Ever since the pandemic started, raw material suppliers have tightened their terms. For them it is becoming very difficult to pay in cash and produce the merchandise and wait for the payment.
As part of the Aatmanirbhar Bharat package, collateral free loans are being given. But they have helped only existing borrowers and large number of MSMEs have been out of this institutional finance purview. Either they were depending on NBFCs or private lenders. So, they have been left. We have raised this issue on all the forums where we got the opportunity to interact with the government. We have said that some scheme should be brought out quickly so that these units could be funded and financially supported. In our interactions with the government, there has been agreement over such a scheme but somehow we have not seen any concrete scheme or step which has been formulated to help them. What we are now hearing is that banks are tying up with the NBFCs and are providing the capital for distribution. It has to be seen how effective this scheme is going to be.
A section of MSMEs which uses steel as input has complained about rising prices. Are there other items which have seen hike in prices?
Yes, plastic is another item where we have seen prices have suddenly shot up. A lot of industry, downstream, is dependent on plastic raw material. Every industry which is using packaging material they are getting feelers from their suppliers that prices have significantly gone up. It is because of some monopolistic scenario where few people are controlling the plastic raw material. There are a lot many small enterprises which are making plastic products. They are not getting the raw material. Besides, prices have gone up three to four times. Availability is also strictly on cash. This matter has been raised with the government.
Recently, we saw an advertisement by plastic manufacturers’ association where they came up with the logic that prices have not gone up that high. They are saying that prices have internationally gone up. So, we don’t know the real motive but on the ground raw material prices have gone up.
In case of steel, the government had made a scheme where all big steel manufacturers had to supply to MSMEs at the internationally available prices. Same model needs to be replicated for all the major raw materials. There has to be some policy norm. Because if you have to reduce the dependence on import of raw material, then this should be the practice. Otherwise, industry will be crying for allowing hassle free and anti-dumping free import of raw material.
Plus, when India wants to become $5 trillion economy, exports is the only way out to reach that level. For that you have to be part of the global value chain.
Now, there is long value chain in producing goods. So, if India has to compete with major manufacturing nations, there has to be free movement of goods. If you have to be effective supplier and be part of the global value, raw materials have to be sourced at the best available prices anywhere in the world. In fact, this is not advisable policy to stop the import of raw material. This will also force the domestic manufacturers to improve their functioning and compete in the international market. Meanwhile, till the time that is not happening at least government should ensure that all domestic manufacturers follow this practice of matching the price, at least for MSMEs. The other problem with the MSMEs is that they are not capable of making direct import because of low economy of scale and then importing of loose cargo is very expensive.
Have prices of raw materials gone up due to government discouraging imports from China?
Supply from China is getting restricted right now. In some items, government has imposed anti-dumping duty. Where there is no anti-dumping duty there is some sort of non-tariff barrier. This results in slow clearance of shipments from China. Unfortunately, with the disturbance in supply chain in the last six months, shipping freight rate has gone up and there is scarcity of the containers also. Containers are not available. Since government is discouraging imports, not enough containers are available. These are non-tariff barriers which are hurting the smooth import of the raw materials.
There has been a lot of discussion around MSMEs closing down and being under tremendous stress. But at the same time, net worth of billionaires has soared. How do you see this?
This is quite an irony and very dangerous sign. If business gets concentrated in few hands, this will be a huge challenge especially for a country like India with huge population and that too in the younger age group. They need jobs. Most of the billionaires are in the business where they need lesser and lesser manpower. Either they are high technology-based companies or they are using a lot of automation so not enough jobs are being created. The government has to take this very seriously. This is a serious situation. Because India has the largest youngest population and if this population is not utilised in productive way this will be disastrous for the society. It may cause social unrest. So, the government has to promote MSMEs which are low tech but high job creators. The working population has to be meaningfully employed. The government cannot absorb so many people. Government jobs are scarce. The big billionaires are not recruiting enough. So, where is the scope? It is only MSMEs which can provide large number of jobs. The government should focus on skill development as well as promoting these enterprises where job opportunities are more. Maybe, government can dole out some wage subsidy for creating jobs.
Now that unlock has happened, how is the demand scenario?
It is fluctuating. Demand in India traditionally spikes during festive and marriage seasons. There was demand till the festive season but now again we are seeing a slowdown.
Countries such as Germany, UK and Ireland have again announced localized lockdowns to contain virus spread. Has it hurt order flow for MSME exporters?
Already we have started feeling the hurt. Many units exporting to Europe have seen demand coming down by about 50% in recent weeks. The lockdown and restrictions are primarily to stop people from going out especially during Christmas and New Year holidays. Because it has largely been seen and experienced by most countries that infections spike during large gatherings in festival times. We have seen demand slowdown in our own business (apparel and garments) also. The buyers in parts of Europe have reduced their quantity November onward. From 14th of this month, everything seems stopping as they are not allowing shipments to go. They have instructed us not to send shipments till January 10. Export market is impacted by this.
Also read | Concentration of wealth in few hands a dangerous sign for a country like India, says top MSME body Chief