All work and not much pay for India’s manufacturers
Loans to small companies drops
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