Fuel price hike hits MSMEs hard

This is the latest blow after pandemic impacted industries badly

Updated - April 16, 2022 08:17 pm IST

Published - April 16, 2022 08:15 pm IST - Bengaluru

An employee working at a manufacturing unit in Peenya, Bengaluru.

An employee working at a manufacturing unit in Peenya, Bengaluru. | Photo Credit: File photo

The recent increase in fuel prices is having a cascading effect on the already bleeding medium, small, micro enterprises (MSMEs) in Karnataka, say stakeholders.

The MSME community will be able to withstand the onslaught of soaring inflation only if the Government takes immediate action to cut the cost of raw materials, increase the working capital by encouraging banks to lend more, put a cap on the export of raw materials to increase their availability within the country at a reasonable price and cut import duties, they say.

The industry is also demanding a six-month interest holiday, bringing fuel under GST, increase in the NPA period from the current 180 days to 360 days and decrease in interest on existing loans (which is in the 8.2% to 14% range) by 50%.

Commenting on a slew of onslaughts the sector has been facing, trade body Kassia (Karnataka Small Scale Industries Association) said that this was only the latest in a series of blows. First, the economic slowdown and later the pandemic had already squeezed their operating margins.

Now, the fuel hike-induced inflationary trend has further tightened the situation for them. On the one hand, there was pressure on the price front owing to escalating input costs. MSMEs were not in a position to raise product prices as they operated in a highly competitive market, the trade body said.

MSMEs normally get a 10% to 20% profit on finished products. Under the current inflationary environment, they are forced to work without any profit or even in losses, industry insiders lament.

External dependency

D.R. Subramanyam, Member of CII Karnataka State Council and Managing Director at SLN Technologies said, “Small and micro industries have heavy external dependency as they lack their own infrastructure. An increase in fuel price has pushed up their operational costs so high in many ways in terms of additional increases in raw material cost, transportation cost, wages and other costs.”

Freight cost, which accounts for a significant portion of the operational cost of industries, has now gone up up to 15% and this has resulted in a 15% direct increase in operational costs. Employee commuting expenditure has also gone up and consequently, employers are under pressure to increase wages, all leading to further increase in operational costs.

“The blow is much bigger in certain industries. The fuel hike increased the cost of overall operations by 30% to 35%. The worse thing is that it is happening barely six months after we saw operational costs going up over 30% after prices of all raw materials shot up. For instance, the price of steel a kilo went up to ₹95 from ₹70 a few months ago,’‘ narrated R. Raju former president of Kassia and also Managing Director of Vengree Metal Punch.

Echoing similar sentiments, T R Parasuraman, immediate past resident, BCIC and President and Whole Time Director, Toyota Industries Engine India, said, MSMEs were facing multifold impacts of the recent hike in fuel price. The transportation cost of raw materials, the cost of processing these materials and also running the DG sets for keeping the production line busy has impacted the business significantly.

“The manufacturing of goods has become costlier, margins have become narrower and issues with cash flow has led to unwarranted borrowings to keep the business afloat. Unpredictability and uncertainty loom over business thereby affecting efficiency and productivity leading to business closure,” Mr. Parasuraman narrated.

Import duty

Perikal Sunder, former president, FKCCI, argues that reducing the import duty revenue target of the government may help manage the current inflationary scenario. “In fiscal 2021-22, the Union Government collected import duty revenues of ₹3,60,000 crore, close to double of its target of ₹1,78,000 crore. The Government can probably rationalise its import revenue expectation to boost the domestic economy. It could also be great if the Government introduces a 50% ceiling on exports of raw materials whose prices are high,’‘ Mr. Sunder recommended.

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