A worker observes an electric arc furnace in a steel factory of Store Steel in Store, Slovenia November 17, 2016. REUTERS/Srdjan Zivulovic - RTX2U61W
Just when the Micro, Small and Medium Enterprises (MSMEs) were bracing to recover from two consecutive shocks from COVID-19, soaring costs of inputs and fuel along with weak demand have delivered another blow, forcing many units to sell at a loss.
The steep hike in input costs is visible in the Wholesale Price Index (WPI) based inflation which scaled to a record high of 12.94 percent in May this year pushed by high commodity, fuel prices and low base effect. This is the fifth straight month of an uptick in WPI inflation.
This also translated into a high retail inflation which stood at 6.30 percent in May, a six month high.
MSMEs sell at loss, resort to lay offs
Speaking to Moneycontrol, Ramamurthy, member, All India Council of Association of MSMEs (AICA) which represents 170 MSME associations across the country said, "The raw material prices have increased massively over a year even though the demand is down. The open market is not accepting the effect of the price hike therefore a lot of MSMEs are now selling at losses and most others have closed their business because we simply cannot afford to continue business like this."
"With such a steep hike in the prices, the working capital requirement of the MSMEs has doubled. Not only has our variable costs gone up but also the fixed costs which is making the Indian MSMEs less attractive in the export market, " he noted.
Ramamurthy said many MSMEs were resorting to lay offs in order to cover the cost of raw material.
Between April 2020 and June 2021, the price of copper has more than doubled from Rs. 345 to Rs 745 while the price of steel plates have jumped 82 percent from Rs 45 to Rs 82.
Echoing a similar sentiment, SC Ralhan, President, Ludhiana Hand Tools Manufacturers Association which represents about 400 MSMEs from the region said, "The past one year has been extremely difficult for the MSMEs, first the COVID-19 lockdown, we lost all of our business and employees and now when finally we were preparing to start business after the second wave, the problem of raw materials is hurting us. I am aware of so many MSMEs which are laying off workers and working with very little labour because they cannot pay for both labour and materials."
According to Chandrakant Salunkhe, Founder & President, SME Chamber of India, production costs of the MSMEs have increased by 60-65 percent.
"Since the orders and contracts are pre booked, the MSMEs cannot negotiate with the customers to cover for the price hikes. The customers do however in some instances agree to increase the retail costs by 10 percent but that is very little as the cost of making the product is much higher," Salunkhe said.
Ranjeet Mehta, Deputy Secretary General, PHD Chamber of Commerce & Industry said, "The prices of steel and other raw materials are highly volatile and change frequently in months and and even in weeks. This situation surely is pressing the sector. The MSMEs have to bear the losses for such frequent change in prices as customers are not willing to accommodate. Another issue which the MSMEs supplying to PSUs (Public Sector Undertakings) fear is getting blacklisted if they delay in providing the order with a hope of better price."
Logistic costs pinch
The recent surge in fuel prices is adding to their woes.
"While the government had let the MSMEs function during the second lockdown, it was extremely chaotic and burdensome for us. With different restrictions announced by the different state governments all our orders for materials were getting delayed by several weeks. And now, right after the lockdowns lifted petrol has become so expensive. If this is how everything becomes expensive, the MSMEs will become extinct," argued Ramamurthy.
"Fuels costs not only adds to the logistic costs because several industries require it for manufacturing too. This is like a double whammy for the MSMEs over and above the impact of the pandemic," said a member of Mohali Industries Association who did not wish to be named.
Between December 2019 and June 25, 2021, petrol prices rose 25-30 percent. In Mumbai the retail price of petrol surged from Rs.80.79 per litre in December 2019 to Rs. 103.89 on June 25, 2021.
Demand for relief, immediate intervention
"The government should announce a scheme similar to the Rs. 3 lakh crore ECLGS to provide immediate relief to the sector, " said Ramamurthy.
In order to mitigate the stress caused by the pandemic on several sectors, the government had announced an Emergency Credit Line Guarantee Scheme.
ECLGS aims to provide 100 percent guaranteed coverage to the banks, non-banking financial institutions (NBFCs) and other lending institutions in order to enable them to extend emergency credit to business entities that have suffered due to the pandemic and are struggling to meet their working capital requirements.
The government may announce the ECLGS again but that would only provide immediate which would be a temporary in nature, instead a more permanent solution needs to devised,” Mehta of the PHD Chamber said.
Industry body AICA recently wrote to the prime minister urging the government to intervene after a massive spike in key raw material prices is hurting the enterprises.
In its letter, AICA had suggested hedging of steel for the MSMEs in order to provide protection against escalation for some period. AICA further suggested that the public sector enterprises must be instructed to accept cancellation of orders from MSMEs without putting a penalty or blacklisting them as an event of increase in the prices of steel is not within the control of the MSMEs.
The industry body also wants PSUs to publish steel prices on a quarterly basis and maintain that level for three months.
“We have made representations to the Prime Minister to look into the matter urgently and have urged that a steel bank must be created for the MSMEs. I have also requested the prime minister that 40 percent of the steel produced by the steel companies should be set aside only for the MSMEs,” Ralhan said.
Satish Shetty, President, Taloja Industries Association which represents 974 MSMEs in Maharashtra said, "The increase in costs of raw materials is affecting the MSMEs, who are already struggling, because of pandemic impact and squeezed working capital. This is mainly due to sky rocketing commodity prices. High commodity prices are posing a serious challenge to the businesses to operate in the difficult pandemic times, which needs to be addressed immediately through the adequate reforms in the supply chains of high commodity prices."