Slowdown effect? As capital goods orders dry up, Pune's MSMEs falter

The third part of the series looks at how MSMEs that cater to capital goods makers are reeling from stress

Chandrakant Kumbhar, a resident of Dehu, a small town near Pune’s industrial cluster, has lost his job twice in the last three years: first, in the aftermath of demonetisation, and then, three months ago. Kumbhar, who is skilled in steel fabrication, is finding it difficult to land another job in the small universe of factories in Bhosari, where he usually finds work, owing to the economic slowdown.

The town of Bhosari, which lies at the heart of the industrial cluster developed by the Maharashtra Industrial Development Corporation, houses many capital goods manufacturing companies. Small firms — those which offer work to the likes of Kumbhar — are suppliers to the vendors of large companies.

While capital goods manufacturers are somewhat able to mitigate the severity of the slowdown in investment demand, the local economy of medium, small and micro enterprises (MSMEs), which are largely dependent on the former, is faltering.

The rate at which capital intensive industries buy capital goods, or the investment demand in the economy, is represented by gross fixed capital formation. This grew by just 1 per cent in the September quarter. And capital goods output, as shown by the index of industrial production (IIP), contracted 20 per cent for two consecutive months: August and September.

At the top of the pyramid, Larsen & Toubro (L&T), India’s largest engineering conglomerate and leader in capital goods production, saw domestic orders decline in the July-September 2019 period. However, the company managed to show a rise in its overall order inflow, courtesy international orders. 

From Bhosari, a 20-minute drive gets you to the Pune facility of engineering firm Thermax. The company reported a 28 per cent growth in orders in the quarter ending September. The order growth was helped by domestic orders, however the management also described the present market as “very, very tough,” in an official investor call. While large capital goods companies have maintained growth, industry order intake has taken a hit.
 

Prashant Girbane, director general at Pune-based industry lobby group Mahratta Chamber of Commerce, Industries and Agriculture, says the impact is like the whip on a horse: the far end is bound to hurt more.

“The larger companies have cut down on shifts, which has impacted their tier-I suppliers, and, in turn, impacted the tier-II suppliers even more adversely. All are dependent on the same value chain,” Girbane said.

The grim state of the market has forced companies which provide products and services to larger companies to run below capacity.

Anup Nair, managing director at Martin Engineering Company, says that though the company can operate two shifts, it is running only one, as the demand has either not grown, or is stagnant.

“We are doing the same volumes as 2018,” he told Business Standard. The company’s hiring activity is limited to replacing its workforce.

Nair has a mitigation plan that looks to increase focus on the cement sector as he sees greater growth prospects there.

Smaller ancillary units, however, are not agile enough to grow or mitigate. “It’s been less than a year since I started this factory, and business has been erratic. One day my shop floor has work for 10 hours and the next day, just four,” said the owner of a sheet metal cutting workshop at Bhosari. “I am keeping my workforce small, so that I do not need to retrench later,” he added.

At the bottom of the pyramid are factory workers like Kumbhar. His last job was as a production manager at a factory shop floor. Workers like him also provide business to small tea and snack shops in the industrial area. Even these informal enterprises have started feeling the pinch.

“I am now manning this shop myself. Business is slow due to mandi (slowdown),” said the owner of a tea shop.

Labour contractors and factory workers at Bhosari add the demand for contract workers has also taken a big hit. “Though I got my increment for this year, there are now fewer contract workers at our factory. The company prefers to manage with the available workforce,” said one factory worker.

The slump and its impact are not limited to smaller engineering units, but also extends to their suppliers. “Demand from the canteen business has gone down. Thankfully, the larger part of my business is from the hotels industry, which is thriving,” said a spice supplier, whom this correspondent met at a tea-stall in Bhosari.