Unprecedented rise in the cost of raw materials, wage increases, double-digit inflation and rising interest rates are taking a heavy toll on the small and medium enterprises (SMEs) in Karnataka. What’s more, cheaper goods from China and withdrawal of products reserved for the SME sector are only compounding the crisis. The sector is the second-largest employment provider after the farm sector in the state.
Over six months, the prices of raw materials such as mild steel, petroleum products, paper, ink, copper, aluminium and lead have zoomed, forcing SMEs to minimise inventory, lower production and operate on shoe-string budgets to ensure minimal margins. For instance, copper price has jumped by 51 per cent to Rs 425 per kg; aluminium by 85 per cent to Rs 165 per kg; lead by three times to Rs 135 per kg.
Raw materials constitute 60 per cent of the production cost in the SME sector, with wages, overheads and taxes, accounting for another 30 per cent, leaving very little margins. Margins have declined to almost zero currently. The margin was around 10 per cent 6 months back. If the current crisis continues, the units may plunge into losses.
Arvind N Burji, president, Karnataka Small Scale Industries Association (Kassia), says: “If the central government fails to check the rising prices of raw materials like steel and aluminium and does not impose curbs on the steel cartel, the SME sector will not survive the onslaught.”
“Gone are the days when a unit could go sick and survive for a couple of years. Today, bankers will declare our units as NPAs (non-performing assets) and initiate measures to recover the loan in three-six months.” Burji told Business Standard.
Kassia has roped in respective associations in Andhra Pradesh, Kerala and Tamil Nadu to address the issues. “The respective associations met recently and discussed the issues. We have written to the prime minister, commerce minister and the ministry concerned about the problems and have sought their immediate intervention,” Burji said.
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Prakash N Raikar, general secretary, Kassia, said “We have to meet the contractual obligations and delivery schedules at the rates fixed in the beginning of the fiscal. With production cost shooting up , we are constrained to increase our charges proportionately. Our customers, are unwilling to renegotiate as they have the option of buying imported goods from China at a lower cost.”
Though the quality of Indian SME products are commended worldwide, the state units have not been able to increase their export share. Many units, particularly those manufacturing electrical items such as cable connectors, switch gears and bus bars are in the imminent danger of shutting, as cost of raw-materials like non-ferrous metals — copper, aluminium and lead have become prohibitive.
Kassia says if the situation continues over the next two quarters, about 30 per cent of the SMEs across the state will not only turn sick and go into red, but also face closure.