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27
February 2017
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| Manufactured Goods (The Total Investment & Insurance Solutions) |
Despite
the governments efforts to attract investment under its Make in India campaign,
sales of manufactured goods fell 3.7 per cent during 2015-16 -- the first
decline in seven years --s parking fears of layoffs and debt default in the
months to come.
Spurred
by a global slowdown and lack of demand, sales of manufactured goods were
falling even before demonetisation, affecting sectors ranging from textiles to
leather to steel.
As
a result, in the six months to September 2016, engineering major Larsen &
Toubro laid off some 14,000 employees. Companies such as Microsoft, IBM and
Nokia were also reported to have cut back on their workforce in 2016-albeit on
a smaller scale-blaming sluggish demand for downsizing. The Total Investment & Insurance Solutions
In
November 2014, just weeks after Prime Minister Narendra Modi launched his
Make-in-India campaign, Nokia shut its factory in Chennai, rendering 6,600
full-time workers jobless.
Economists
say the government must step in to support the manufacturing sector, which
constitutes 15-16 per cent of the gross domestic product (GDP) and supports 12
per cent of the workforce. The Total
Investment & Insurance Solutions
Why
sales are down: Investment falls, costs and import duties rise, demand
contracts
A
range of factors including falling investment, increased input costs and higher
import duties have caused demand for manufactured goods to fall, a trend that
was visible before demonetisation and has strengthened since. The Total Investment & Insurance Solutions
While
the services sector grew by 4.9 per cent in 2015-16, faster than the 3.7 per
cent recorded in the previous financial year, manufacturing contracted for the
first time in seven years, from a growth rate of 12.9 per cent in 2009-10 to
-3.7 per cent in 2015-16, Reserve Bank of India (RBI) data shows. The Total Investment & Insurance Solutions
Small-scale
private companies, with yearly annual sales of less than Rs 100 crore, have
been more seriously affected as their sales have contracted continuously for
the last seven years. Having registered an 8.8 per cent decline in 2009-10,
their sales fell by 19.2 per cent year-on-year in 2015-16. The Total Investment & Insurance Solutions
"Our
sector is making huge losses as the price of electricity and raw material has
gone up," Shan Ali Syed, owner of a small-scale textile plant in the town
of Bhiwandi, 32 km northeast of Mumbai, told IndiaSpend. "Hence, cost of
final product also increases, and we are unable to compete with cheaper imported
Chinese products."
"Higher
export duty and decline in demand has led to reduction in sales even before
demonetisation," Manoj Kishanchand Ahuja, a Mumbai-based small-scale gold
jewellery manufacturer, said. "We were forced to reduce production. So,
hiring of workers on contractual basis has also gone down." He added that
most of his business takes place in cash, and post-demonetisation, the
situation has worsened.
Investment
has fallen because of a decline in demand, leading to lower sales and profits.
"New orders recorded a decline sequentially (quarter-on-quarter) as well
as on a year-on-year basis and dipped into negative territory," the RBI
said in its latest report.
A
cutdown in industrial output for the fourth straight month in December, along
with a depressed investment outlook, could lead to more layoffs, industry
captains have warned.
On
top of that, net loans to the manufacturing sector, which account for 65 per
cent of corporate loans, have declined by 77 per cent in the last six years,
IndiaSpend reported in January 2017. Large-scale manufacturing units have been
the worst hit, recording a fall of 69 per cent.
The
fallout: Jobs and companies at risk
If
sales do not improve, companies will act to cut costs, manufacturers and
traders said.
"The
most common way of cutting cost in India is to reduce the workforce,"
economist Ila Patnaik, who has served as the principal economic advisor to the
government of India, told IndiaSpend. "If the global economy and the
domestic market do not improve, we can expect more layoffs in this
sector." The Total Investment & Insurance
Solutions
Companies
forced to close down due to financial distress will also lay off workers.
Closure of 186 industrial units led to net job losses of 12,176 in the
manufacturing sector over the last four years, the labour ministry estimated in
a December 2015 reply in the Lok Sabha.
Syed
blamed the post-demonetisation cash crunch for falling sales as well as a
shortage of workers due to mass exodus from cities. "Labourers have to be
paid in cash as they don't have bank accounts. Since we were unable to pay them
in cash, the workers have returned to their villages," he said. The Total Investment & Insurance Solutions
In
the first 34 days of demonetisation, micro- and small-scale industries have
suffered job losses of 35 per cent and a 50 per cent dip in revenue, an All
India Manufacturer's Organisation study showed as the Indian Express reported
on January 7, 2017.
Global
upheavals have also caused problems for manufacturers, G.K. Jain, a large-scale
manufacturer and exporter of readymade garments, said.
With
sluggish growth and high unemployment hitting American and European economies,
importers there want to pay lower prices to overseas manufacturers, squeezing
exporters' profit margins, Jain said. The Total
Investment & Insurance Solutions
There
has been a rise in borrowings by vulnerable companies in the steel sector, the
RBI report said. However, steel secretary Aruna Sharma said: "There was
heavy investment in public and private steel sector in the past, and the
investment takes place in cycles." She added, "So, once the returns
on that investment start coming, there will be big investments again."
The
RBI also noted that Indian manufacturers have collectively run up debt of Rs
6.9 lakh crore. The decline in sales and its impact on profit margins has
impacted manufacturing industries' ability to service their debt. In its study
of the financial statements of 1,707 manufacturing companies over the last four
years, the RBI revealed that the number of vulnerable companies whose
debt-equity ratio is higher than 200 per cent has increased from 215 in 2012-13
to 284 in 2015-16-an increase of 32 per cent. A high debt-equity ratio means a
company is aggressively using borrowed money to finance its growth, leading to
higher risk for default.
The
RBI's analysis also showed that the debt at risk of default among private
manufacturing companies grew nearly four-fold, from Rs 58,800 crore to Rs. 2.1
lakh crore ($32 billion) in the four years to March 2016. The Total Investment & Insurance Solutions
What
can be done: Invest in infrastructure, remonetise and increase overall public
spending
Economists
agree that the government must take steps to undo the damage caused by
demonetisation by investing more in infrastructure, remonetising the economy
and increasing the allocation for public-spending programmes. The Total Investment & Insurance Solutions
It
could take two to three quarters for the effects of the demonetisation-induced
short-term shock to wear off and for normalcy to return, Patnaik predicted.
For
longer-term support to manufacturing and job creation, new investment and
enterprise are a must, economist Ajit Ranade said. "If we need to add two
million jobs every month, then we need to create 20,000 to 50,000 new
enterprises every month," he said. "We need a big push in infrastructure."The Total Investment & Insurance Solutions
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