India’s industrial landscape is dotted with SMEs. They account for 40% of the country’s manufacturing output and almost half its exports. In Maharashtra, for instance, SMEs produce around 8,500 products from plastic to scientific appliances. They contributed 80%, or Rs30,000 crore, to the state’s tax revenue. In Tamil Nadu, the comparative number was Rs20,000 crore, according to Kumar.
“Because the units do not get credit and payment on time, about 1.82 lakh units have closed down in Maharashtra in the past eight years,” said Rakshpal Abrol, president, Bombay Small Scale Industries Association, which has 4,600 individual members and 40 factory associations as its members.
“Since there is no council set up yet, we have nowhere to go to file complaints,” he added.
And the law is silent on several important aspects, said Damodar Avanoor, vice-president, Kerala State Small Industries Association. “The Act explains how a respondent can go on appeal but lacks clarity on how an award can be executed.”
Almost all SME associations that Mint spoke to said while cases of non-payment are rising, many people are hesitant to go on record for fear of being boycotted by companies. But a more serious problem, they maintain, is the lack of awareness about the law itself.
A sample survey of 250 small entrepreneurs conducted by Milagrow, a Noida-based firm that assists small businesses, shows that between 62% and 80% of the respondents didn’t know that a law exists to protect payment rights.
“The facilitation council (the complaints body) exists only in name, lacking both competence and manpower. Big companies have the clout of purchasing power. On the other hand, small players depend on their large customers, who constitute 60-70% of their revenue base so they rarely want to lodge a complaint,” said Rajeev Karwal, Milagrow’s chief executive officer.
In states such as Kerala, about half the defaulters are government-owned companies; in Tamil Nadu, government firms account for 15% of defaulters. The number is a high 80% in the north-eastern states, said Ram Swaroop Joshi, chairman of Federation of Industries and Commerce of the North East Region.
Government-owned companies can get away with this, said Bhardwaj, because “the executive machinery in states, including the development commissioner, district magistrate and police, hesitate to take action against their fellow officers in public sector undertakings, even after judgements by facilitation councils”.
SMEs that are brave enough to take on state-owned firms suffer the consequences.
A.V. Johnson, owner of an SME in Kerala, was forced to shut shop when several customers delayed payments. He was able to restart operations last year when the Kerala Road Transport Corp., one of the defaulters, paid a claim of Rs22 lakh. Since then, the state-owned firm has blacklisted him.
Rama Devi Kanneganti’s battle with a state-owned firm is far from over. The managing partner of Hyderabad-based Shivani Engineering Industries, which assembles buses, filed a case against the Andhra Pradesh State Road Transport Corp. over non-payment of dues running into a few crores of rupees.