Fear and loathing in India’s small factories

On either side of the small approach lane that led towards the factory, machines squeaked and metal clanked from within a handful of micro industries. An unusually high number of them, however, were silent—just like Murugan. As the rest of India awaits an important Union budget, Murugan was busy shutting down a factory that he had run for 22 years.

On his final visit to the factory floor, he helped lift one of the last big machines that was lying around—a heavy-duty lathe that costs ₹10 lakh, but was getting sold off for ₹4 lakh in a distress sale. “Better than selling it at scrap value," said Murugan. He then pulled down the shutters and walked to his car, which he is considering selling next, he said.

Coimbatore is one of the few geographies in the country that can vie for the “manufacturing heartland" tag. It is the second-largest economy, after Chennai, in a state which is one of India’s most industrialized—Tamil Nadu.

While many of the big factories are housed in and around Chennai, the erstwhile textile town (roughly 500km to the west) had always been the hub of the smaller player—the valve maker and the wet-grinder manufacturer.

Many of the smaller factories also supplied essential components and parts that kept Chennai’s auto cluster buzzing. Coimbatore is the sort of place where one takes pride in running a factory, or working in one. And it has been like that as long as the locals can remember. In many ways, it was an ideal location for the “Make in India" dream to take root.

But the economic downturn of the past few months has left an acute impact on cities like Coimbatore, which revolve around small and medium-sized manufacturing units.

Even if there is a mild economic recovery in the coming months, the scars will take a long time to heal. Stories of job losses are rife. The impact on small factory owners who are trying to grapple with their first near bankruptcy may be a bit harder to quantify.

When Murugan’s factory, which manufactured valves for the auto industry, finally shut its doors, four people lost their job. And that was after the workforce had already been heavily trimmed in an effort to stay afloat.

City of small industries

Coimbatore is an interesting case study as to how broad-based the economic slowdown is. The city’s local economy is diverse enough—it supplies a bulk of the spare parts used by automobile manufacturers hosted in cities like Chennai; has one of the highest densities of textile units in the world; meets over 90% of the country’s wet grinder demand. Many companies which may necessarily not have a global or national name are crucial to the city’s survival, such as pump-set maker GV Industries, which has been around for decades.

The crippling consumption slowdown has left a broad footprint: customers are forgoing not just the purchase of new cars, but also clothes, wet grinders, and pump sets. For people like Murugan, the fallout has been devastating. A nascent prosperity had taken root over the last two decades, largely as a result of the town’s manufacturing capability. Many of the small and mid-sized factory owners had begun to get used to nice homes, cars, dining at expensive restaurants, and going on vacations.

“For six months, I had no business. I was simply paying salaries and rent. That itself was around ₹60,000," he said. “The orders were coming down every year. But in the last year, the business was very bad. It was a total loss all of a sudden. One year ago, we had a business of at least ₹2-4 lakh (a month). Now, I can’t even pay salary."

The announcements in the budget speech later this week will be keenly awaited by people like Murugan. They will be looking for at least some signs to feel hopeful, because there has been just a string of bad news off late. Auto sales, for example, fell again in December. India’s overall industrial output rose for the first time in four months in November, but the index of eight core infrastructure industries fell 1.5% from a year ago—the fourth straight month of contraction.

The key thing will be to build capabilities, said M. Vijayabaskar, a professor at the Madras Institute of Development Studies. “It’s not just about Coimbatore, but overall, in manufacturing, India does not have a specific vision which identifies a clear calibrated growth trajectory."

“Right now, what’s happening—and this is true for industry bodies as well as government planning—by and large, it is all about getting concession and infrastructure. But the government is yet to establish any kind of useful linkage between, say, the auto and the IT industry. That’s a policy failure. We need to identify sectoral linkages and clear road maps for building capabilities," he added.

The GST effect

Localities such as Avarampalayam and Ganapathy that house a large number of foundries, and motor and pump shops, are now lined with shuttered units.

At least 10,000 units in the broader region have shut down, and some 25,000 workers have lost their jobs in just a year, according to C. Sivakumar, president of Coimbatore Tirupur District Micro and Cottage Entrepreneurs Association (COTMA). Micro and small-scale industries have traditionally fuelled Coimbatore’s reputation as a mechanical powerhouse, as they needed relatively small investments and yet provided employment to a sizeable number.

Effectively, a small room with six tables and six vises could provide jobs for six people at a minimum wage of ₹600 per month—all of which would require less than ₹1 lakh as investment. The work typically involves cutting or cleaning mechanical components using machines.

“The microenterprises here used to get a monthly business of about ₹120 crore. Now, it has dropped to just about ₹50 crore. There is almost a 60% drop in orders," said Sivakumar. When this reporter visited, he and his colleagues were drafting a letter to Prime Minister Narendra Modi detailing their hardships. Apart from the decline in orders, the letter, as well as other shop owners, pointed to the hurdles that have come up in the last couple of years as a result of the new goods and services tax (GST) regime.

The issues with GST go beyond the tax rate, and is more about the system’s inadequacy in understanding the ground realities of a small enterprise, explained J. Maheswaran, owner of pump-set manufacturer GV Industries .

The small and medium businesses in Coimbatore are almost completely running on credit, said Maheswaran. A local vendor usually supplies some spare parts on credit to a company, with the assurance of payment when the final product gets sold. In a slowdown, as products pile with sales drying, the vendor naturally suffers payment delays. But in the meanwhile, he has to pay his GST by the 20th of each month.

“If I have made a turnover of about ₹5 lakh, I have to pay about ₹90,000 per month as GST. I get the payment from the customer after a minimum of 90 days, that too, sometimes, partially. This has been the procedure in the market for years. But now, after you have made the bill, you have to pay the GST within 20 days... even before the full amount comes to you," explained Maheswaran.

“If you fail to pay the GST, you will get fined. If you continue to fail for three months, the GST will be blocked. Your bank account also will get blocked. So, now, we are borrowing money from wherever we can to pay the GST until we get the payment," he added.

Profusion of pink slips

At least a dozen factories this reporter visited with said they have fired at least 5-10 workers in the last six months. Nachi Engineering, which produces computer numerical control machines used for precision and control in auto and other industries, has fired 30 workers, mostly migrants from north India who have packed their bags and left. The locals who got retrenched have pinned their bets on the services economy—becoming Swiggy delivery executives and Uber driver partners. “I personally know some 125 people who have switched to these jobs because of the slowdown," said J. Puviarasu, head of Nachi Engineering.

It is an equally distressing story in the textile sector, the town’s other major job provider, where at least one leading firm has shut down two units and others have cut down on shifts to reduce manpower, said K. Selvaraju, secretary general of the Southern India Mills’ Association. Coimbatore has roughly 1,000 textile units, employing about 300,000 workers, according to data provided by the textile commissioner’s office.

A big job provider and head of a top textile company in the Coimbatore-Tirupur textile belt, who requested anonymity, said that 70% of his exports have fallen, hitting his turnover by 20% and costing him ₹100 crore last year.

“(In my company), all overtime is cut. Earlier three person’s job is now run by two people. One extra has been removed, or they are attached to another internal department. We stopped hiring. The last year has been a learning for us in lean management techniques," he said.

The textile industry had already been dealing with difficulties, particularly due to intense global competition. And now, a domestic slowdown has only pushed things even more to the brink. Debt levels of many small units, for example, have reached unmanageable levels.

Everybody is probably in debt to everybody else now, said Tamil Arasu of VMC Engineering, a small factory that deals with textile machinery and other tools. He usually keeps some additional stock expecting orders to peak during festivals, such as the Tamil New Year Pongal in early January. All that stock, worth ₹20 lakh, remains piled in a corner of his factory—a scene now common in most Coimbatore factories.

“During Pongal season, usually everything will fly off the shelves: pump sets, clothes, wet grinders, and so on. But not this time," said Arasu. To some extent, he added, it is not a surprise, since he himself has cut down on expenses. Even a traditional trip back to his village in Dindigul on Pongal was cancelled, in order to cut down expenses, he said.

“I have cut all non-essential expenses within the family. Only house rent is mandatory, everywhere else we are tightening," he added.

VMC Engineering is down from 15 workers to just three. The prospect of unemployment has made workers insecure. Karthik, one of Arasu’s workers, for instance says he is feeling a lot of pressure as he is effectively doing a two-person job in two shifts. “I tried searching for jobs in other places, but there are no jobs. So, my friends advised me to stay put in this company," he said.

Balamurugan, a worker who lost his job when Murugan’s precision tools factory downed shutters, said: “We thought there will be (more) jobs after Deepavali, but nothing happened. Then, we thought there will be jobs after Pongal. It’s a week after Pongal now and I don’t know if anything will come or not. I am thinking of going back to my village to rear cattle. I think that’s better."