Micro-enterprises caught in macro problems; stricter labor and pollution standards add to the woes
In May 2020, Finance Minister Nirmala Sitharman raised the thresholds for the Micro, Small and Medium Enterprise (MSME) labels, acknowledging that previous definitions created an unintended incentive for units to remain “small”. She cited pan-India data on scaling up MSMEs, but for hundreds of units in the Okhla Industrial Area (OIA) south of Delhi, the journey since then has been decidedly downward. The pandemic and a relentless increase in labor and input costs have crippled most units here.
Thus, one could find several units in this chaotic industrial city of the national capital, which in 2020 met the criteria of a “medium business” announced by the minister, but have since been relegated to the “small business” category, because their Turnovers have slipped sharply from over Rs 100 crore then to Rs 40-50 crore or less now. And many “micro” units have since gone out of business or have a minimal, shadowy existence. Large parts of the factories here – mainly makers of garments, leather, pharmaceuticals and packaging materials – also face severe labor shortages as all the migrant workers who left the city during the pandemic have not returned.
While MSMEs in other parts of the country may also face similar issues, Okhla units also have the added constraints of being housed in the national capital, where environmental standards are now diligently enforced. In addition, the implementation of minimum wage standards has inflated labor costs.
At the start of the quarantine, Mahipal manufactures ready-to-wear children’s clothing in a small factory in Sanjay Colony in OIA Phase II. From 10 people in the pre-pandemic era, its workforce has now fallen to just three and even they are not getting adequate work due to lack of demand from wholesalers. As a result, its monthly sales are now down 70% from pre-pandemic levels. “If things continue like this, we’ll have to lower the shutters in the not-too-distant future,” he says exasperated.
Vishal Chowdhury, who sells dupattas, operates in the same area among some 250 other wholesalers. Its sales have more than halved from pre-pandemic days. “The cost of raw materials has increased by around 50%. Only part of the additional cost can be passed on to retailers,” says Chowdhury. The recent cotton shortage has also affected his business, as his regular suppliers have reduced their activities.
Not surprisingly, at OIA’s garment center, only a few trucks were waiting to load goods on Friday. Since the confinement, only 3 to 4 trucks have been circulating in the industrial zone compared to 12 to 13 previously, according to a worker. A “green tax” – Rs 1,700-1,800 for a 14ft diesel truck – has eroded truckers’ margins.
A few kilometers away, Deepak Gupta is struggling to run his printing unit at full capacity. Gupta faces no shortage of demand, but the cost of its main raw material – art paper – has risen from Rs 60/kg a year ago to Rs 115/kg now. Labor costs have also increased. “Strong pollution controls make the business all the more difficult to manage,” he says. Unsurprisingly, many printing units are leaving Okhla to settle near Noida, Gurgaon and Faridabad.
OIA comprises a group of 600 printing units with annual turnovers between Rs 5 crore and Rs 50 crore. More than 20 have closed and about 40 units have been transferred to Noida and Faridabad. Even among operational units, most are barely using 50% of capacity. Just a week ago, a company sold an expensive imported machine and has only one left, Gupta informs. “The buyer of the machine will soon start operating from outside Delhi,” he says.
“Labour is a big problem. While we pay a minimum wage worker around 16,500 rupees per month, he will work for only 9,000-9,500 rupees in Noida or Faridabad. Our margins are tightening. The printing press in Okhla will survive another five years at most,” Gupta predicts.
OIA apparel exporters were doing relatively well until the pandemic hit in 2020 thanks to regular buyers in Europe. They are now busy finding new buyers in other shipments to Europe which have become erratic after the pandemic. “In the absence of the European market, we are targeting the American market. Apart from the leather garments we used to deal with before, we have now added cotton garments to our basket,” says Lallan Kumar, who works as a manager in one of the many export companies in the region.
Okhla Chamber of Industries Chairman Arun Popli said OIA has now transformed into a center for micro-enterprises. Higher electricity costs, more expensive labor and exorbitant parking fees have led many factory owners to leave their premises and rent them to new tenants who turn them into offices, adds- he.
“All major Okhla units have fled to various parts of the NCR mainly due to higher labor costs. Okhla started losing its charm from 2016-17 when the Delhi government raised the minimum wage. Salaries here are now double the level in neighboring areas,” says Popli.
Few Okhla units have benefited from the government’s flagship guaranteed loan scheme, the coverage of which was expanded from Rs 50,000 crore to Rs 5 trillion in the last budget, or the Credit Guarantee Trust for Micro and Small Enterprises . These programs were extended by the Narendra Modi government, recognizing the need for an extended period of relief to start-ups and small businesses as they grappled with the fallout from Covid-19.