Two years after getting hit by demonetisation, MSMEs continue to limp

A survey conducted across 25,000 units, comprising nearly 50 per cent of micro and small industries and 25 per cent each of medium and large firms, has found a sustained blow to the bottom line

Until two years ago, small-time middlemen in the leather cluster of Tamil Nadu used to collect raw leather and sell it to units mostly for cash payments. Today, they have almost disappeared. 

Blame it on demonetisation that took place on November 8, 2016. Two years on, micro, small and medium enterprises (MSMEs) and traders across industries are still reeling from aftershocks. From job loss to dissolution of business, the impact of the drastic economic measure is continuing to be felt. 

Says Rafeeque Ahmed, chairman, Council for Leather Exports, “The middlemen in Tamil Nadu’s leather cluster used to operate largely in cash. After the note ban this segment has completely vanished since they were not a part of the organised sector.” 

Prime Minister Narendra Modi recently announced as many as 12 measures for the MSME sector in a bid to give them a boost. 

The measures include the sanctioning of loans of Rs 10 million for MSMEs registered for the goods and services tax (GST) in just 59 minutes via a new portal. These MSMEs will also get 2 per cent subvention or rebate on incremental new loans of up to Rs 10 million. In addition, their exports will get an increase in interest subvention from 3 per cent to 5 per cent.

Perhaps the measures could have come sooner. According to J James, president, Tamil Nadu Association of Cottage and Micro Enterprises, Coimbatore, MSMEs in the region are on the brink of closure. For these cash-dependent micro industries, the note ban, closely followed by the implementation of the GST, have translated into a double whammy. Delayed payment cycles have led to delayed GST payments, which in turn have attracted  penalties.

Larger units in the value chain take as many as 150 days to release payments, with the result that these micro industries end up paying the tax with penalties to the tune of Rs 50000 to Rs 100,000. 

“All 30,000 micro units in Coimbatore are doing business by paying this penalty. The industry is in big trouble here,” says James, adding that at least 3,000-4,000 micro units in Coimbatore have shut shop, leaving around 25,000 people jobless.

A survey by the All India Manufacturers’ Organisation (AIMO) conducted across 25,000 units, comprising nearly 50 per cent of micro and small industries and 25 per cent each of medium and large firms, has found a sustained blow to the bottom line. The survey, which will be released on the second anniversary of the note ban on November 8, also found that job losses in the MSME sector has been about 32 per cent, with over 86,000 of the total of 270,000 employees losing their employment in the aftermath of demonetisation.

Says K E Raghunathan, national president of AIMO, for the MSMEs the reality is: “You are either already sick or are in the process of becoming sick.”

Witness the MSMEs in Gujarat. Surat’s textiles and diamond industries and the tiles and sanitaryware units in Morbi and surrounding areas are all in severe distress. Since demonetisation, the turnover of industry clusters have either plummeted or remained stagnant. For example, the ceramic and vitrified tiles industry turnover has fallen from Rs 300 billion to Rs 260 billion in the past two years, whereas that of the rough-to-polished diamond industry in Surat has remained static at roughly Rs 1.5 trillion.

The irony is that most of the traders and small units in these sectors continue to transact in cash. “The government’s intention to promote digital payments through demonetisation and later though GST has been a pipe dream. The move has seen erosion of businesses in the last two years, but has done nothing to reduce cash transactions,” says Champalal Bothra of the Federation of Surat Textile Traders’ Association.  

In the pre-demonetisation era, and despite cyclical ups and downs, Surat’s synthetic textile industry boasted a production of 40 million metres per day, one of the largest in the country. This fell to 25 million metres per day after the note ban and is yet to recover.

“From 40 million metres per day production, we are now stuck at 25 million meters a day. Plus, after demonetisation and GST, about 100,000 workers lost their jobs in power looms, around 80,000 in embroidery, 200,000-250,000 in process houses, and another 30,000 in textile trading sectors. Several traders are also in the process of winding up,” Bothra says.

It’s not just the grim statistics. Corruption — which the note ban was supposed to root out — continues to plague the garment industry, says Raja M Shanmugam, president, Tamil Nadu’s Tirupur Exporters Association, which represents units that export knitwear. 

“Corruption is still at peak levels, even though the government’s aim was to stop it with demonetisation. Hence though the disruptive economic policy was supported by the people at large, much of it it got negated because the loopholes were exploited by manipulators. On the upside, many units have enrolled in the organised sector for tax filing processes,” says Shanmugam. 

How they fare 

• 32% or 86,000 of a total of 270,000 lost jobs across 25,000 MSME units

• 70% of MSMEs in Tirupur knitwear exporting industry hit by note ban

• Coimbatore’s cottage, micro industries see 25,000 losing jobs in the aftermath

• Surat textile industry saw production fall by 60% to 25 million metres per day

• Morbi’s ceramic, vitrified tiles’ turnover down from Rs 300 billion to Rs 260 billion

• Surat’s rough-to-polished diamond industry’s turnover stagnant at Rs 1.5 trn

• Clusters continue to rely on cash payments even as payment cycles elongate