As working capital withers, the economic activity in the MSMEs in the state is slowly grinding to a halt. All is not well with the Micro, Small and Medium Enterprises (MSME) sector in Telangana. For the past seven months, close to 60% of manufacturing orders have dried up, say those from the sector.

While some in the sector feel that GST and demonetisation broke the back of MSMEs in the state and country, a few are of the view that the trend could be reversed if policymakers gave as much importance to MSMEs as they give to the IT industry in Telangana.

“The orders we used to get from the central government have all dried up, especially the orders for electronic parts from ECIL, railways and defence,” says N Srinivas, president of the Kapra Small Scale Industries Owners Association, which represents 1,500 MSME units located in and around the residential and industrial areas at Kushaiguda, Cherlapally, Nacahram, Moula Ali, AS Rao Nagar. “Only private works are coming in,” he adds, “We have been seeing the trend for the past seven months. We are observing a drop in 50 to 60% of orders. Whoever we ask, they say there are no new orders.” There are an estimated 7,000 plus firms in these localities catering to the defence, aerospace and railways sectors, fabricating and manufacturing components used in machines.

In Telangana as a whole, there are around 11 lakh MSMEs in the manufacturing space, employing over 25 lakh persons, according to the state government. Most of these units are littered around residential areas, mostly in the outskirts of Hyderabad city. Several financially stressed MSMEs have been declared Non Performing Assets (NPA) by banks for defaulting on their loans. Though the state government claims that only 10% of MSMEs in the state are sick and need state assistance, those from the sector peg the number of sick MSMEs in the state much higher and say it has not been quantified yet.

While the state government has taken some steps to help the MSMEs, including the setting up of a “health clinic” for sick units through the Telangana Industrial Health Clinic Ltd (TIHCL) in 2017, the industry says it’s not enough. Specifically, they say not much will change unless the root cause of trouble is not addressed – the Goods and Services Tax, dubbed “Gabbar Singh Tax” by many for allegedly being exploitative.

The vexing ‘Gabbar Singh Tax’

Srinivas blames GST for the vanishing of working capital from the hands of entrepreneurs and the present economic slowdown seen across sectors.

“Of the 1,500 MSMEs (small percentage of 11 lakh total MSMEs) in our association, not even 40% of them are registered with the GST regime as they can’t afford to transition. These firms have an annual turnover that is below Rs 20 lakh and will have one machine and five or six employees working under them. As per the GST rules, these firms need not migrate to the GST regime – but if they want to do business with those who have enrolled with GST, they have no choice but to migrate,” Srinivas explains.

“These units don’t have accountants or even a computer to file taxes,” he adds, “No one wants to give them orders as those who buy the goods from them will have to pay the input tax on behalf of these unregistered units.”

According to Ramadevi K, the president of Association of Lady Entrepreneurs of India (ALEAP), a cluster of women entrepreneurs, it is the NPA norms of the banks and GST combined that has killed the industry and economy in the country. “Under GST, when we buy raw materials it’s the supplier who should pay the tax. If he doesn’t pay we (MSMEs) won’t get input credit. Many of the suppliers don’t have GST registration still. Now we have to police the suppliers – is it our duty to ensure the suppliers pay the tax?” she asks.

Input tax credit simply means that manufacturers don’t have to pay tax on raw materials for which tax has already been paid. For instance, if an MSME is producing machines for packaging materials, they can subtract the tax already paid on parts by the supplier they’re buying the parts from. But if the supplier has not paid tax, then the MSME will not get that reduction. As raw materials get processed and move up the ladder to become finished goods under the GST regime, every player in the tax chain pays the tax for the person from whom they buy the goods from. The GST paid on behalf of the supplier has to be reimbursed by the Centre, which was delayed for two years.

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As one entrepreneur put it, “This would mean that as we do more sales, we keep paying the tax and bleed to death.”

Ramadevi is of the view that a single tax slab will help lessen the burden, “They just need to make it a single tax slab of 4% and everyone will be willing to pay. Even the suppliers will pay – we may not even claim input tax from them as 4% tax is acceptable and we are ready to pay on behalf of suppliers who are not GST registered. Why can’t the union government take such an initiative? At present, we pay 12 to 18% tax.”

Centre reimburses GST returns, what now?

In August, Union Finance Minister Nirmala Sitharaman claimed that pending GST returns amounting to Rs 60,000 crore to the MSME sector will be cleared within 30 days; by October 97% of these dues were cleared. The Minister said at a press conference, “Government should not sit on overdue payments,” and that the money should go to people who have been waiting for it on the ground.

Kavitha Rajesh, an entrepreneur who is a paint manufacturer in Telangana, says, “This reimbursement doesn’t mean that we get cash in hand to use as working capital. The reimbursement only means that our input tax for the subsequent months will get adjusted. It doesn’t really help.”

Over the course of September and October, Sitharaman made many promises to the MSMEs: to make GST filings simpler, to ensure that GST returns will be made within 60 days of application. She also asked Public Sector Banks (PSBs) not to declare MSME units struggling to repay loans as Non Performing Assets (NPAs) until March 31, 2020.

Despite claims that the banks have enough liquidity to do lending, the union government has sought help from Non Banking Financial Companies (NBFCs) to provide more credit line to ailing MSMEs. This despite a crisis in the NBFC sector due to over-lending. The government even held loan melas across 400 districts in the country, with the aim of capital infusion into the economy, focusing on MSMEs and farmers.

“Tell me, how many MSME entrepreneurs know that credit can be availed from NBFCs? Who is communicating with them? All their efforts look good only on paper,” asks Kavitha, who also works closely with women MSME entrepreneurs in the state.

Kavitha points fingers at the ill thought out demonetisation for breaking the back of MSMEs, “The credit crunch faced then tied up money in bottlenecks and the effect of it is still being felt.”

With cash flow affected, MSMEs have had to rely too much on banks for credit, but that route eventually only adds to the problems of the sector.

The not-so-friendly neighbourhood banks

“If one Vijay Mallya to whom the banks have lent money fails, it impacts the whole economy. But out of 100 MSMEs if one entrepreneur fails, the bank won’t feel the pinch,” says Srinivas, who is of the view that banks have never been supportive of MSMEs in Telangana. “About 25% of the units in our association are sick MSMEs that have been declared NPAs by banks for defaulting on loans,” he adds.

Once an MSME is declared an NPA, all new means to avail credit dries up, and no new loans get sanctioned unless the previous loans are paid in full. Even worse is the automatic hike in interest rates once there is a default.

“The sick MSMEs in my association are struggling to repay the loans. They took the loan for working capital and buying new machinery. But they went into losses as their product rates were not competitive. A combination of factors affected us – rising labour costs, fluctuating metal rates, higher rent and power bills, combined with payment delays from suppliers. The annexure expenditures have become high and business is fast becoming unsustainable,” points out Srinivas, who wants the union government to resume providing the sector with input subsidies that were stopped in 2014.

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“It’s best not to depend on banks for credit,” says Ramadevi, “The banks won’t come to anyone’s rescue.”

Ramadevi points out that when banks grant loans to MSMEs, the sanctioned interest rate, for example, would be 11% but the banks change the interest rates even if there is a tiny error in the returns filings.

“The interest changes to whatever they like – they would hike it from 11% to 14% in a month. When we ask them why they have changed it, they say it’s a centralised system, the computer selects the tax, the human touch is gone. We intend to alert the Finance Minister on this. Earlier the bank manager would know the entrepreneur so well that he would reason out what bank instrument would best suit the MSME unit and also guide the entrepreneur using his own knowledge. But now it’s all computerised. In a computer if you make even a small error the whole credit facility is affected. Even if I submit bills saying these are receivables, the unit is still declared an NPA. Once you’re branded an NPA, you have to pay the whole amount to the bank and only then it can be revived,” she explains.

Banks are afraid to lend money to MSMEs, says Kavitha: “For example, to avail a loan of Rs 22 lakh they are asking us to keep a property worth Rs 5 crore as collateral. Where is the logic in that? The banks say as the property is worth Rs 5 crore, the MSME unit can avail more loans against it, that it doesn’t matter if the property documents are with the bank or with the entrepreneur.”

‘Industry must address issues’

Unni Maiya, Chairman of the State Level Banking Committee (SLBC) for Telangana, says the computerised penalty system has been in place for a long time but was never enforced. “In some banks, it’s system-driven. In some banks, it’s the bank manager who decides on the defaults. The perception that banks are not helpful to MSMEs is a bygone reality. The experience of MSMEs with banks has never been good traditionally. There are genuine MSMEs, there are no doubts about it, but what we find is that some people misuse the credit lent by banks,” Unni says.

The banker believes that the trust placed on MSMEs by banks got eroded at some point due to the misuse of subsidies by a few. “Some form partnerships to form a unit, they will start with enthusiasm and amass wealth for personal gains diverting it from the business and enjoy tax benefits. Some hire Chartered Accountants (CAs) to hide the higher income to avoid tax. But when there is a market issue and there is a loss, the entrepreneurs would not bring back their assets to repay the loans. They then say the bank is not cooperating. This is one aspect,” points out Unni, who blames the MSME associations for not voicing the concerns of the sector accurately. “They come for RBI meetings but talk about individual issues rather than sector issues,” he adds.

The SLBC chairman is of the view that MSMEs depending on banks alone for a credit line is a bad approach. “There is no capital infusion into MSMEs from the markets, this needs to change. The credit line is mostly through banks and government. There are genuine issues in the MSME sector that need to be fixed but there are issues the industry must address within itself,” he says.

The banks say they are willing to lend credibility and restructure NPAs, provided the MSMEs are viable.

Ramadevi does not find the reasoning of the bankers adequate, however, she does not blame the banks for their hard stand on NPAs among MSMEs either. She points fingers at the Basel norms, a global norm that sets a common standard for banks to follow across the country, introduced in 2003 by the Reserve Bank of India (RBI). The norms are designed to reduce the financial stress faced by banks and their exposure to risks. All commercial banks in the country transitioned to the updated Basel 3 norms (that came out in 2010) this March.

The Basel norms have set strict rules for banks to follow to recover loaned amounts from stressed firmed. “I don’t think our country should get into the Basel norms that decide on rules such as a unit that hasn’t paid interest in three months should get declared an NPA. It’s universal for everybody. But in a developing country like ours with so many factors affecting industrial growth, I don’t think it applies to us. Nothing works as per the system in our country,” Ramadevi reasons.

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She asks, “Do all suppliers actually pay up within 30 days? There are always some delays. If there are power cuts, production gets delayed and that has cascading effects. If we talk about systems from manufacturing to marketing, everything should be linked and operate smoothly, which is not the case in this country. Then how will these stringent norms work? I want to repay the bank but if I don’t get my payments on time how will I pay the bank? They are not addressing the receivable aspect.”

State support – and the lack of it

Apart from a demand to make GST rates uniform and relaxation in rules for stressed MSMEs, the sector hopes that the state government would step in to bring down operational costs. The sector is seeking support in the form of reduced power tariffs, property tax and easier building plan approvals for expansion. They also want the state to expedite its efforts to form MSME clusters.

MSME units located in residential areas do not get subsidies, nor do they get reduction in power tariffs unlike MSMEs located in industrial zones. In residential localities, they face higher rents, property taxes and, as they operate out of rented premises, banks don’t give loans either.

Both the associations are of the view that the state government can do more. “They give big IT companies large tracts of land and support. We also want that kind of support from the government. We only need a few 100 meters of space to set up a unit, but don’t get anything. But when corporates ask for land they get all the subsidies and at a fast pace. If they support us like how they support corporates, we can ensure there is economic growth in the country,” Srinivas says.

Jayesh Ranjan, Principal Secretary for Industries in Telangana, says the state government is trying its best to mitigate the issues faced by the sector. “The only solution is that they have to shift to proper industrial parks. We are aware of micro-units that don’t get any benefits as they are not in a recognised industrial park. The state acknowledges this, we showed them a couple of locations but that was not suitable as their workers live in the city and cannot travel to the city outskirts every day. We are trying to find a better location and relocate them, this is a work in progress,” the official says.

The sector is asking the state to ensure there are common manufacturing, packaging and storage facilities at the clusters, which the units can share. This would improve MSME sustainability, says Ramadevi.

“For example, if there are a few garment manufacturing units they would all need embroidery and packaging machines. At a cluster they can have a common machine that can be used by everyone. Food processing units could be made into clusters and be given a common cold storage, ripening plant and even packaging facilities that could be supported by the state government so that each entrepreneur need not invest Rs 3 crore for a single packaging machine. It will make the project viable, and the entrepreneur spends less in the form of bank interests, makes more profit, and sustainability will also increase. These initiatives need to be taken up by the government. We are not asking for incentives, but this kinds of support is the need of the hour,” she adds.

However, Jayesh Ranjan says the upcoming industrial park for MSMEs in the state is already “saturated for now.” The plans for new industrial parks are still on paper; even if they come up they will be located far away from where the present ones are located.

For the state’s MSMEs, help has to come both from the union and the state, and it has to come before more firms find doing business unsustainable. #KhabarLive


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