Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 2 :: August 1998
Cry for Help
Jeyessomnath C. Nagarajan
The current state of the Indian economy is not very encouraging for any industrialist, let alone the small industrialist. And the Ambattur Industrial Estate in Chennai, established in 1964, and having about 1500 units spread over an area of nine square kilometers, presents a cross section of cases.
With an aggregate annual turnover of about Rs.2000 crores, most of the units here belong to the small scale sector, and are engaged in engineering, casting, forging, sheet fabrication and related activities. The auto ancillaries, which form the majority of the units in the Estate, supply auto parts to groups such as TVS, Ashok Leyland and Maruti Udyog.
The Ambattur Industrial Estate Manufacturers Association (AIEMA) represents about 800 of these units. With the industry going through a difficult phase of demand recession, the problem for these small scale units has been compounded by various other structural problems, partly due to Government policies.
W. R. Parthasarathy, Vice-President, AIEMA, expressed his frustration by saying, ``while the Government pays lip service to industrial growth, no recognition is given to the role of the industrialists...the small scale industries are mainly seen as tax payers by the Central as well as the State governments.''
Though the Prime Minister, A. B. Vajpayee in his recent proposal had talked of the need to revive the small and medium scale enterprises, ``no concrete initiative has been taken yet'', says Parthasarathy.
He continues: ``If we are talking about creation of wealth, you will just have to see how many of the small scale industries were able to graduate to `medium scale' in the last two decades in the country...and in the case of the Ambattur Estate, hardly two or so made it.''
Parthasarathy adds: ``But in India, what we have is heavy paper work, poor flow of credit to small scale industries and high interest rates on borrowings, antiquated labour policies, poor infrastructure including power supply, innumerable taxes, and these factors burden the small scale industry to turn around and perform more efficiently.''
If small industries have been feeling the demand recession more acutely than the bigger players, their plight has been complicated by the refusal of auto majors such as Mahindra Ford, Daewoo and Hyundai to buy auto parts from ancillary units based here.
Parthasarathy says: ``They do not want to take a risk in placing orders and they bring in their own collaborators for the auto parts.'' He says that in the last seven months or so, the orders placed with AIEMA manufacturers had shrunk to about 65 per cent of the previous figure, and the most hit have been the auto ancillary units.
According to the estimate of Richard Aloysius, partner, Ticotools Engagers, an auto ancillary unit in Ambattur estate, at least 100 to 180 units have closed down in the last one year due to the demand recession. Aloysius says that in order to supply sub-assemblies to the auto-majors, the small scale units must first of all tie up with a foreign partner.
He adds: ``More often than not, there is not sufficient capital to tie-up with a foreign partner, as most of these units have debt-equity ratio of 1:2. To make matters even worse, banks firstly require you to prove you could actually execute the order and then they demand collaterals anywhere between 100 and 200 per cent for loans.''
``Even tyres are imported...Bridgestone tyres are used on Maruti Esteems and Kumho tyres are used on Hyundai and some Tata four wheel drives'', according to Aloysius.
Walking around the estate, the story turns out to be not so uncommon. And it does not have to do with only auto ancillaries, or, for that matter, with just dwindling orders. The typical SSI's problems start at the very beginning.
``If you look at most of the developed countries, including the US, the UK, Germany and Italy, there is so much of emphasis laid on the role played by the small and medium entrepreneurs, and the taxation and fiscal systems in those countries provide a stimulus to the growth of these small and medium enterprises'', says Parthasarathy.
For instance, in India, every factory, irrespective of the number of workmen or its size is subject to the control of at least 26 Central and State Government enactments. One can easily imagine the amount of paper work this calls for, ``which is often beyond the abilities of small and medium manufacturing units'', says Parthasarathy. About 40 per cent of the time is spent on paper work as these 26 enactments have their own rules and regulations, according to him.
Parthasarathy adds: ``The Factories Act and the Industrial Disputes Act are so antiquated and inflexible that they do not serve the purpose they were intended to anymore.'' The Government has a terrible amount of control over the hiring and firing of workers as a consequence of these Acts, and this creates a distortion in the economy, he says.
Parthasarathy argues that the coverage of the Factories Act be redefined. A factory must be defined as one employing more than 100 persons instead of the present limit of 10 persons with power.
The Industrial Disputes Act does not allow inefficient employees from being fired. This Act must also be modified to provide for a flexible hiring and firing policy decided by the industry.
A well defined exit policy for employment is a must, and it will help, in particular, certain industries which are seasonal in nature as well as export industries where the demand for employees depended totally on order position. Besides, a well defined exit policy will result in a lot of employees from the unorganised labour force being absorbed into industry and a lot of discords and disputes with labour could be avoided.
As regards finance, the flow of credit is difficult in the first place as the banks do not want to take a risk, and even if they do, the lending rate given to a small industry is invariably about seven per cent more than the prime lending rate.
Parthasarathy says that the Reserve Bank of India should give a directive to the Indian Banking Association that the interest income from small scale industries should be kept to a minimum, and the interest rate charged should be something like a half per cent over the prime lending rate.
The logic behind this, according to him, is that small scale industries are more in need of capital than the larger industries, which due to the very size of their financial strength are capable of tiding over their financial difficulties. A similar problem in a small industry could even lead to the closure of the industry. Moreover, financial assistance given on time is more important than the quantum of financial assistance, according to him.
``The Government must not look at these industries as a source of interest income, but also as generators of revenue in terms of sales tax, excise, income tax, professional tax, municipality tax, not to mention the employment generation potential.''
On taxation, a small scale industrialist feels that the taxation system should be based on value added rather than in terms of investment in plant and machinery. The reason is, large scale capital intensive units claim depreciation benefits and pay less taxes relatively.
``Idle capacity creation for availing of depreciation benefits is a common occurrence'', Parthasarathy says.
The small scale units, most of them being labour intensive, do not have this benefit and end up with less reserves, he says.
Regarding infrastructure problems, Parthasarathy says that the main one was the non-availability of electricity on an uninterrupted basis. There are at least three power cuts everyday in addition to the unannounced load sheddings. To avoid power interruption to heavy industries and heavy vehicle factories, the small scale sector is seen as dispensable by the state electricity boards and the SSIs bear the brunt of the erratic power supply.
Generators could be a solution, but then, everyone cannot afford a generator, and especially steel and chemical plants which require enormous amount of power, cannot make do with generators.
The situation is likely to persist, and could even get worse if the Government does not wake up and initiate the necessary steps to reverse the trend. ``It is not the heavy industries that provide a maximum number of employment but the small and medium scale enterprises...the governments must understand this and follow the examples set by the developed countries in this regard'', says Parthasarathy.
He suggests that the Government set up representative bodies or `nodal agencies' in different zones of the country, comprising small scale industrialists, and earmark certain banks to route the funds for viable projects recommended by the nodal agencies.
``Any talk of sustainable economic development without addressing the genuine concerns of the small and the medium scale sector would only be rhetoric'', he adds wistfully.