The MSME Segment - Some Pertinent Current Facts From Reports

I opened the morning news site, The Indian Express, my daily first site – to a rather shocking, though unsurprising bit of news. This news, based on a survey of 34,700 organisations is deeply disquieting, and was regarding rampant job losses in some sectors of our economy. Before I continue – the article in question covers primarily the Job Scenario; but also raises points on earnings & profitability – which in my opinion needs a focused and detailed look. And this article was just the latest in a series of articles I have run across that raise the question of the impact of Demonetisation & GST on the MSME and unorganized sectors of our economy.

We will look at those aspects in other articles – including a book review on the concerned topic of a latest book – The Big Reverse: How Demonetisation Knocked India Out. { This review will be uploaded sometime next month}. My point – there is plenty of other evidence from a variety of sources, people etc all of which point to increasing stress & problems in this segment {MSME + Unorganised} of the Economy. We also know this segment constitutes well over 40% of the Economy; by some reports, it can range upto 57%. This latest survey is just one more in the ever growing list of evidence. Yet, curiously enough, this doesn’t show in GDP numbers or some other indicators. Let us park this here for now; for this objection leads us into an entirely different stream of enquiry, to be taken up later on my blog.

FIRST, EXCERPTS FROM THE Indian ExpressARTICLE

[Click link  to read original article]

“Traders and micro, small and medium enterprises (MSMEs) across the country have reported steady job loss and declining profits since 2014 and demonetisation, the roll-out of GST are among the reasons for the slowdown, according to a new survey by the All India Manufacturers’ Organisation (AIMO). The AIMO survey, which analysed 34,700 samples from traders and MSMEs across the country revealed that these sectors suffered major setbacks in terms of its performance on various business aspects since 2014. The AIMO represents over 3 lakh micro, small-scale, and medium and large scale industries engaged in manufacturing and export activities.”

Let me summarise the main statistics raised in bullet points below:

ü Job Losses:

o   Job loss was reported at the rate of 43% in the trader segment

o   Micro-segments reported job losses of 32%

o   Small segments reported 35%

o   Medium-scale industries reported 24% job losses

o   The survey on jobs, keeping the industry status in 2014-15 as the base, shows that the trade sector which had 100 employees has now reduced to 57 by 2018-19.

ü operational profits of traders across the country have dropped drastically by about 70% since 2014.

o   Micro industries show a 43% drop in operational profits,

o   Small-scale industries report a dip of 35% and

o   Medium scale industries faced a drop of 24%

ü While traders reported that profitability, sales and sourcing funds are the major challenges, micro industries said that profitability, sourcing funds and raw material costs were theirs. Government documentation, profitability, sourcing funds, availing incentives such as subsidies were among the major challenges faced by small and medium scale industries.

LOOKING AHEAD AND DEEPER

There is other clear evidence of a slowdown generally, and specifically in the MSME segment; in Addition to this AIMO Report, the RBI annual report 2017-2018 clearly admits on Page 30 that there is an increase in imports and a replacement of domestic production. ‘The current account deficit is widening as imports increasingly replace domestic production in several item – Page 30, Point II.1.3,RBI Annual Report’. In the same report, section II.1.4 states : “Aggregate demand, which is featured in the immediately following sub-section, decelerated due to a slowdown in consumption, both private and government, and a decline in net export as the surge in imports outpaced exports.”  An Economic Times report from April 2018 highlights some aspects, {look below}  to take another example.

‘We have witnessed a period of demand moderation across sectors. This scenario affected the MSME sector more than others, due to various systemic issues. The sector, especially small and mid-scale export units, were already facing challenges prior to demonetization and GST. Over the last few years, the sector was impacted by the global economic slowdown, owing to its exposure to the export markets of the US and Europe.  Vulnerable businesses which lack pricing power took the demand downturn harder because of high transaction costs and procedural delays (during GST implementations period). This led to high fixed costs that they were unable to control. D&B data shows that sales volume in the MSME sector declined by 0.2% during FY17, as compared to a positive growth of 7% for large companies.”

CONCLUDING THOUGHTS – FOR NOW

There are many other aspects that many other reports aside from the ones above raise – rise in overall outstanding receivables in terms of number of days that it takes a company to collect payments, Increased cost of borrowing, declining household savings, PFCE slowdown 17-18. Some of the reports also raise the scepter of brighter days ahead, but that is something we will look at a little bit later. The point now is to understand the current status of this sector, which contributes so much – 40-60% of the Economy. While the normal Social Media circuit focuses on GDP, this is something that actually needs to be understood by the layperson equally well.

The objective in this article is to collate some facts relating to the trend in the MSME segment of our economy, bring them together for layperson contemplation as well as to tinker thoughts and action in those few quasi experts and experts who read this write-up. Accordingly, I have given data from AIMO, RBI Report, D&B report – in coming days will look at other sources and reports, including a complete analysis of the book on Demonetisation referred above. This data raises some pertinent questions, as it clearly flies in the face of quite a few reports and numbers oft-quoted in the pink sheets. We would do well to remember that we don’t measure the MSME segment-  especially the ones that done file audited reports, fuly, as the IE article clearly indicates, as also supported by Neelkanthh Misra of Credit Suisse in this article from 2016 linked here. Worth a deep thought by all of us, in my considered opinion…

BIBLIOGRAPHY

RBI Annual Report 2017-2018

It's Time to Include the Informal Economy in Measuring GDP

Empirical evidence shows MSMEs yet to recover from the twin economic measures

Dip in jobs, profits for MSMEs; noteban, GST to blame: Survey

How GDP distorts our view on what is important