CHENNAI: The state of Tamil Nadu’s small and medium enterprises lately has been a major cause of concern. The state’s growing number of sick units indicates red flags pertaining to the implementation of RBI’s NPA norms and the Centre’s Goods and Services Tax.
“If the state of affairs is equally worrisome in the near future, you will even see 1,00,000 units shutter by the end of the year,” KV Kanakambaram, President, Industrial Estate Manufacturers Association, told The New Indian Express.
Of the 12 lakh small and medium enterprises in the state, records reveal that nearly 50,000 shut down last year.
“With the ongoing political uncertainty, the requirement to pay advance taxes within 30 days, and tightening of lending norms by banks are churning out sick industrial units by the day,” he said.
Small and medium enterprises that bank on capital from sole proprietors have suffered the most due to the tightening of lending norms in the formal financial sector, and are forced to resort to borrowing funds from the informal sector, including pawnbrokers.
The variable rates under GST for different raw materials and the lack of clarity regarding input tax credit have added to the burden of small industry owners, leaving them short of cash to pay labourers, and manage electricity bills and other costs.
A small unit that makes 16,000 kg of iron windows every year will incur raw material costs (for the iron, paint, welding rod) of about Rs 10 lakh, and may generate revenue of Rs 16 lakh. However, with 18 per cent GST, the costs goes up to Rs 11,80,000 and the industry owner is left with only about `4,20,000.
Additional costs he may incur would be for labour, electricity, rent and other operational expenses. He cannot pass on the input cost and GST to the larger industries he supplies to because of competitive pricing amid small business owners, says A Shanmugavelayudhan, a noted industrialist and former president of the Tamil Nadu Small and Tiny Industries Association.
“To meet additional costs before one receives returns, the small business owners either resort to borrowing funds at higher rates of interests from pawnbrokers or try to pledge personal assets. As a result, when there is a contingency, say the Chennai floods or demonetisation, the business does not have any financial backing and they either turn sick or shut down,” says KC Durairaj, President, Chennai Metro Small and Micro Industries Association.