All work and not much pay for In­dia’s man­u­fac­tur­ers

Loans to small com­pa­nies drops

Kuwait Times - - BUSINESS -

VADO­DARA: In the of­fice of the small paint fac­tory he helps run, Pramod Pa­tel is clear on the prob­lem hold­ing back In­dia’s man­u­fac­tur­ing growth: cash, or a lack of it. Clients, he says, are tak­ing months to pay, some­times 150 days com­pared to the stan­dard 30, chok­ing up busi­nesses like his Re­li­able Paints and ham­per­ing the cre­ation of much-needed jobs. “We have a lot of po­ten­tial in our busi­ness, but we have no con­fi­dence in the pay­ments,” says Pa­tel, speak­ing over the noise of a mixer whirring be­hind him. Work­ers around him pre­pare paint to be de­canted by hand into cream and grey col­ored cans.

While there is no com­pre­hen­sive data for the cash cy­cle of In­dia’s man­u­fac­tur­ing in­dus­try, man­u­fac­tur­ers in­ter­viewed by Reuters in the in­dus­trial heart­land of Gu­jarat say cash is mov­ing at a glacial pace. All those in­ter­viewed by Reuters re­ported clients de­lay­ing pay­ments, some­times for the best part of a year, ev­i­dence of an un­even re­cov­ery and of In­dia’s credit drought as banks tackle $100 bil­lion of trou­bled loans.

Cen­tral bank data shows that loans to medium-sized in­dus­trial com­pa­nies were down 10 per­cent by mid Septem­ber, com­pared to the start of the fi­nan­cial year in April. Loans to small com­pa­nies dropped more than 3 per­cent in the pe­riod. Un­der Prime Min­is­ter Naren­dra Modi, who once ran Gu­jarat as chief min­is­ter, In­dia has sought to im­prove life for man­u­fac­tur­ers. He wants to boost a sec­tor that ac­counts for un­der a fifth of the econ­omy, com­pared to a third for China, the world’s largest man­u­fac­turer.

But the re­al­ity on the ground is tough. Even In­dia’s in­dus­trial bell­wether, Larsen & Toubro, has re­ported de­te­ri­o­ra­tion. Chief Fi­nan­cial Of­fi­cer R. Shankar Ra­man says pay­ments take around 100 days af­ter they fall due, com­pared to a stan­dard 60-75 days. That is hov­er­ing around the long­est pay­ment pe­riod in over a decade, he said.

‘Made in In­dia’

In­dia badly needs man­u­fac­tur­ing to fuel its re­cov­ery and cre­ate jobs. Af­ter all, In­dia will be home to a work­ing age pop­u­la­tion of 900 mil­lion peo­ple by 2020, roughly a fifth of the world’s po­ten­tial work­ers. Modi’s gov­ern­ment has promised to make it sim­pler to op­er­ate in the coun­try, with plans for a uni­fied bank­ruptcy code, a uni­fied goods and ser­vice tax, and more flex­i­ble la­bor laws. Last week, it lifted re­stric­tions on for­eign in­vest­ment in 15 sec­tors, in­clud­ing de­fense.

But in this cor­ner of Gu­jarat - a state that was ranked top in a World Bank-sup­ported study on the ease of do­ing busi­ness in In­dia’s 29 states - man­u­fac­tur­ers say the small­est and weak­est among them could be pushed to the wall, un­less re­form is im­ple­mented and re­cov­ery ar­rives swiftly. A plethora of dif­fer­ent taxes still wrap small firms like Re­li­able Paints in red tape. Oth­ers re­port bat­tling out­dated fac­tory rules: some are fined for a lack of spit­toons, for ex­am­ple, in ar­eas where spit­ting on the floor is for­bid­den. There are signs of hope. L&T’s Ra­man says he expects the num­bers to have hit the bot­tom, pro­vided promised gov­ern­ment spend­ing kicks in and banks pass on lower rates.

“The way the re­cov­ery is struc­tured right now, it is not broad based,” said econ­o­mist Sonal Varma at No­mura. Gov­ern­ment spend­ing, how­ever, could im­prove cash flows even for smaller firms within six to 12 months, she es­ti­mates. Gu­jarat, for one, has pushed taxes on­line, cut­ting down on the pa­per­work and op­por­tu­ni­ties for cor­rup­tion, and man­u­fac­tur­ers say that had made pro­cesses smoother. But un­til re­forms come in, the bu­reau­cracy is over­hauled and real spend­ing starts, fac­tory man­agers in this baked cor­ner of Gu­jarat - where paints, pumps and engi­neer­ing parts dom­i­nate pro­duc­tion - say their clients will con­tinue to strug­gle.

“Our big prob­lem is client liq­uid­ity,” said the di­rec­tor at one Euro­pean firm sup­ply­ing the con­struc­tion in­dus­try. “And of course we have to deal with bu­reau­cracy and cor­rup­tion.” Four years af­ter shut­ting an of­fice in Mum­bai, he said he was still bat­tling to con­clude the process. And with lots of work­ers, In­dia needs more skilled ones. “We have a young work­force,” said Vivek Sar­wate, who runs plants out­side the city of Vado­dara for Sch­nei­der Elec­tric , making com­po­nents for the In­dian power sec­tor. “But if this young coun­try is not a skilled coun­try, in­stead of an as­set, this be­comes a li­a­bil­ity.” —Reuters

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