Manufacturing Startups Yet To Show Up
Micro and small manufacturers have become a minority during the last eight years. Add Medium size entrepreneurs to the group and the fancied MSMEs emerge. Publicly displayed statistics reveal that they contribute twelve per cent of the GDP, around forty per cent of exports and are credited as employment drivers of the economy. Despite a plethora of measures that the Union Ministry of MSMEs took, the total number of enterprises in the sector remains at around six crores. This article attempts to analyse the reasons from two perspectives: 1. Entrepreneurs and 2. Policy Makers (Governments and the Financial Institutions). While most reasons may be in the public domain, the article explores the measures to correct some of the lacunae.
Typical Entrepreneur Story:
Just a week ago, I addressed a group of youngsters in Medak District on the traits of entrepreneurship for business development.
Failed entrepreneurs provide enough leads for avoiding the mistakes they committed in their saga of growth. Way back in 1999, a married youngster, Parashar having two children, with ITI qualification had Rs.2 lakhs at his disposal to start a mechanical shed with two lathe machines, a bending rod, a generator, a small furnace, and a toolkit picked up through his learning at the Central Institute of Tools and Designs, Hyderabad.
The residential house of 900sq.ft was built in an area of 200sq.ft., leaving a vacant space of 800sq.yds in the backyard. His idea was to manufacture window grills, steel frames, steel wires, nails, and screws in a small shed in his backyard. He contacted Balaji Steels, a secondary Steel manufacturing unit that was supplying ingots and steel rods. Balaji Steels agreed to support him with the raw materials on one-month credit. The shed cost him Rs 50000 and all the machinery and tools Rs. One lakh and twenty thousand. He had liquid funds of just around Rs 20000. He had a smooth start. Though his wife was also a partner, she was a sleeping partner, for, she did not know a bit of the enterprise her husband started. All she knew was that Rs. 2lakhs was being spent of the liquid resources. Parashar promised a monthly makeover to the family Rs.6,000/-.
The first decade was a good run for him. He opened only a savings bank account with a PSB almost next door to him. He engaged the services of a commerce graduate to help him write up the statement of accounts and maintain the stock registers. The rest were eight workers of whom three were migratory workers from Odisha. At the suggestion of Balaji Steels, he opened a cash credit account with the Bank to meet his working capital requirements. While his annual turnover was Rs.2crore, the Bank agreed to give cash credit limit of Rs.25lakh against his request for Rs.40lakhs if he would mortgage his house as collateral. He deposited the required papers as equitable mortgage.
12th September 2016, the day he would not forget. Goods and Services Tax Act came into force from that day. His problems started from that day. His creditors invoiced the raw materials differently. Input Tax Credit was promised and he was expecting on the goods sold after manufacturing. His buyers had no GST as most of them were residential houses and real estate. 20th June 2018 was the day of painful surprise when the commercial tax authorities came to his factory in the morning demanding that there was a default on GST payment from him. He tried to explain his ignorance and also enquired the fate of the input tax credit. They replied that he was not eligible. They left after some argument giving a week’s time to settle the past dues and reformulate his returns as per the forms on the website of the Government. At home, his son was to get into professional education and his daughter was at marriageable age. Pressure mounted at home.
Parashar’s loan account became irregular with the debtors delaying the payments due to him and his creditors increasing the price of raw material due to the GST application and general price increase. Manufacturing activity started limping. One fine morning, the Bank declared his account non-performing and gave notice under SARFAESI Act for eventual sale of the mortgaged property. His wife was furious and decided to sell off the family jewellery to clear the bank dues. Parashar had put his enterprise for sale.
This story is typical of several micro and small manufacturers in India. What went wrong since inception?
The entrepreneur is a manufacturer of small means. He did not separate his personal account from the enterprise account. Once he started transactions with the bank, he had no idea of the way the account was being operated. His credit purchases and output sales had mismatches in the tax statements as he did not know simple accounting practices. The auditor he relied on, did not guide him. Bank field staff or the branch manager did not give him clear idea of the obligations he has to fulfil to run the account as per best practices. As long as the account was within the limit sanctioned, Bank did not bother. But with the slightest irregularity, Bank accused him of diversion of money whenever he paid the College admission fees of his son or for other important family expenses. Some ‘friends’ suggested that he changed his bank from a PSB to a private sector bank. However, his wife did not agree. She insisted closure of the business and fulfil the responsibilities to the family as priority, even if it meant selling off the house!
Entrepreneur is trustworthy. He, however, did not have any knowledge of finance. He did not even look for a knowledgeable partner. He realized that since he started the factory in his own premises, he was not eligible for any incentives. He did not digitize his operations and did not even bother to know the nitty-gritty of maintaining accounts, stock registers, sales registers, muster rolls and the other regulatory requirements of the industry. Even the Pollution Control Board levied penalty on him for the coal furnace and unhygienic practices. There were regulatory lapses on his part. There was no responsible counselling at the right time from any of the regulatory agencies – District Industries Centre, Commissionerate of Labour, PCB, and the Bank.
Trust begets trust and this is the basic trait for a successful entrepreneur.
The reasons for the tardy growth of manufacturing startups are obvious. There are lakhs of Parashar in the country crying for counselling at the right time. There is a need for peripatetic trainers as such entrepreneurs have to take care of the entire supply chain and finance and cannot afford the luxury of institutional training. Many a time, they do not have any leisure either to themselves or their families. The regulatory burden and cost of conducting business have been on the rise. It is difficult for someone not owning land to start a business.
The cost of land has been on the rise throughout the country and has reached such proportions that the initial capital required for this purpose alone would eat up the limited equity that the MSMEs have. It is desirable that the states have a separate land bank for the MSEs in particular and make available such pieces or parcels of land necessary for the sector they are engaged in, on a long-lease basis with alienable rights in favour of the lender for no more than ten years. The lender shall not alienate such land to any institution other than similarly placed enterprises, for the purpose of recovering the loan obligation either fully or partly. Such a decision of the lender shall also be subject to a state government-approved third-party check on the resolution decision.
NITI Aayog in 2017 brought out a report on manufacturing startups. The Report says: “An enterprise-friendly regulatory environment will allow easy entry and exit of enterprises, enable them to reach an optimal size and scale and boost job creation. There is a strong correlation between a higher level of economic activity and doing better on a range of doing business indicators.” The statement is a recognition of the essentials of environment for the startups.
Environment-friendly Technologies
Adopting Energy Efficient and Environmentally Sound Technologies (E3ST) can go a long way in energy conservation, preventing emissions and reducing pollution. Promoting eco-efficiency and protecting the environment are now priority objectives to which industries have to adhere to. However, there are several barriers to the adoption of such technologies by small industries. They include lack of the following: awareness and training; finance; coordination between different departments/ministries dealing with energy and environment issues; standards and benchmarking; and infrastructure. Effective strategies are being developed to remove these barriers and make the industrial sector more sensitised to environment-related issues. But where is the money? Entrepreneurs rightly question. Banks view such investments are not prone to quick returns. Yet, they speak of financing the de-carbonizing technologies and green technologies occupy their major focus.
Figures hide more than they reveal.
While standup India's latest report says that Rs.40000cr were sanctioned during the last seven years to 1.80 lakh entrepreneurs, it does not mention the number of manufacturers. Second, sanctions do not mean disbursements. The average amount of such sanction is just Rs.3.17lakhs. Data on the number of successful entrepreneurs among them is also not found. This is not to discount the good efforts but only to suggest that transparency in data is crucial in performance assessment.
No entrepreneur would be without stress at one point of his journey or the other. The best way is to approach a Jana Aushadi for MSEs. The government of Telangana formed one such – Telangana Industrial Health Clinic, five years ago and proved that they could relieve the stress of five hundred odd entrepreneurs more through their unique diagnostic tools, strategic interventions, handholding and mentoring and through low-cost loan products.
*The author is an economist and Turnaround Management Specialist.
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