How to put out a bright spark

Roquefort in southwest France finds the expression of its soul in blue-veined cheese, Georgia in rich, tannic wines and Coimbatore in wet grinders. Not very romantic, but this appliance (with its Geographical Indication or GI tag) captures the engineering spirit of Kovai, which gave birth to this invention in 1955. Today, the city has grown to be a manufacturing hub with 12,873 registered micro, small and medium enterprises (MSMEs). 

Coimbatore’s industrial history goes back to 1920s, with the opening of textile mills. These require machines, which require engineering skills. G Ezhil, chairman of The Institute of Indian Foundrymen, says that, even in the ’70s, three of Tamil Nadu’s seven engineering institutes were here. With skills covered, the locals decided to build their own foundries. “Earlier, we built brass lamps and Gods. Now, we make tools,” he chuckles. 

Foundries are central to the city’s economy but, for the past decade, they have been dealing with one spanner thrown in after another. Earlier, it was the power cuts and shortages, then came a crackdown by the state pollution control board and then a new taxation system. Ezhil says that the first is a thing of the past and the second has largely been dealt with, but the third — Goods and Services Tax — remains heavily taxing. On one hand, GST has driven up prices of inputs and their products. On the other, their client companies in automotive and engineering industries have also seen a slowdown as they bear the brunt of higher taxes. A double whammy! There has been a dip in sales by 30-50% across foundries.

The taxation policy has businesses tangled up in red tape. Senthil Kumar, founder of Bluemount Castings, says compliance requirements have pushed companies, especially the MSMEs to the brink. “I’m a mechanical engineer, but operate like a chartered accountant. I’m constantly wondering which returns to pay on which day, and in the process, get little time to help my company innovate,” he says. He claims that his business, which caters to clients such as BHEL, KSB Pumps and tractor builders, has been hit by 30% at the very least.

But he adds that excess capacity built by foundries is also to blame. “Between 2016-18, demand from India grew because China was grappling with pollution that its factories generated. Now, China has new, modern facilities. So, buyers will head back to the country, while India is likely to get under 40% of the demand,” says Kumar.

The micro-scale enterprises are most likely to face the pinch, according to S Soundara Rajan. He started with a single lathe (tool that rotates a workpiece) when he co-founded Falcon Toolings, and today, he employs 260 people who work on 60 machines. “Larger companies have entire departments to take care of filing GST and compliance. The smaller ventures in Coimbatore simply cannot afford such privileges. They are largely a one-man-show with a technocrat at the helm,” he says. 

An entrepreneur, who wishes to remain anonymous, laments how he had to go to the office on a Sunday to check if his supplier had filed their sales data on the GSTN portal. You can claim input tax credit (ITC, or discount on tax to be paid on sales) only for services from suppliers who have filed their sales data on or before the 12^th of every month. Any delay on the suppliers’ part holds up the claim-and-refund process by a month for everyone upstream. On the 12^th of every month, the GSTN portal allows you to check who among your suppliers has completed the process and, in January, 12^th fell on a Sunday. “With the current system, the work of the government officials has been shifted to the tax-payers,” says the entrepreneur.

Falcon Toolings’ Rajan believes that the GST system also robs smaller enterprises of opportunities. “A big company thinks twice about giving job orders to a young, promising company that has no GST number,” says Rajan. When you rope in a subcontractor, a smaller player usually, you pay a tax on the job work, which is work applied on another person’s work, such as welding or painting. Without a GST number, a subcontractor cannot issue you a valid receipt to claim input tax credit. 

Job work itself has become more expensive. Under the value-added tax regime, it attracted zero tax provided that you accounted for the payment done for it. As per GST norms, it was taxed at 18% till it was brought down to 12% through petitioning by Coimbatore District Small Industries Association (CODISSIA) under the leadership of its current president, R Ramamurthy. The attempt now is to bring it down to 5%. 

Foundries now face higher bills, which come more frequently than the paychecks. “One needs to file the 28% GST amount within 45 days of delivering a service, while payment cycles of corporates are typically 60 days. It holds up the working capital,” says R Saravanan, managing director, Sandfits Foundries. Added to that, his company saw a 30% drop in business in the first three quarters of FY20 vis-à-vis FY19. It produces engine and suspension parts for Daimler, Ashok Leyland and Cummins, and flywheels for Hyundai.

The clients have been bruised, too. K Ilango, managing director, RSM Autokast, speaks about the commercial-vehicle (CV) segment. His company manufactures brake drums for CVs. The CV manufacturers were anyway dealing with falling demand for various reasons. For one, the revised axle norms, through which medium or heavy CVs can now carry 25-30% more. So, why buy more when you can make the same mule bear more weight? Two, customers are delaying purchases to wait for BS-VI vehicles. And three, there is also the shortage of credit, with non-banking finance companies (NBFCs) becoming more cautious. Added to these is the 28% GST on CVs. “28% tax is for sin goods. When did CVs and two-wheelers become sin goods?” asks the former president of CODISSIA.

He sees no relief from this though. “The automotive sector contributes heavily to the government’s coffers, so they won’t reduce the tax,” he says. Illango cautions that the current rate could make evasion attractive. “Organised players, who play by the rules, will get the short end of the stick. Ideally, the GST should be brought down to a reasonable 18%,” he says.

September was the worst for RSM Autokast. Sales were muted since the company was operating at just 25% capacity. Illango says that their big clients such as Ashok Leyland and York Trailers also reported similar capacity utilisation levels. The company clocked north of Rs.1 billion in FY19, and its founders say they will be “thrilled” if they cross Rs.700 million in the current fiscal. They have been down this road before, in 2008. But he says this time the cut is deeper: “Then the government stepped in and reduced the excise duty and spurred consumption, and restored the duties in 2012 after normalcy returned. This time around, borrowing has become harder.”

Just as auto and engineering businesses are big clients for the foundries, agricultural-pump manufacturers are, too. As per CII, the city caters to 40% of the country’s pump demand, and is home to 600-odd of these manufacturers. While they have been largely unaffected by GST, their purchases from foundries have reduced after non-stop and unseasonal rains in Rajasthan, MP and Maharashtra between August and November. The showers during harvest time were hard on farmers, who consequently had little disposable income. According to industry data, pump manufacturers are seeing 40-60% reduction in sales. 

Industry leaders have been trying to negotiate some respite. To rope in orders for Coimbatore’s SMEs, CODISSIA has approached PSUs such as Southern Railways, Tunnel Coach Factory and Cochin Shipyard. It is also joining hands with the Coimbatore Defence Innovation Atal Incubation Centre (CDIAIC). The initiative, aimed at innovating 50 new defence products per year, has bagged Rs.200 million from the Finance Ministry, Rs.150 million from Atal Innovation Centre and Rs.150 million from CODISSIA. 

On the other end, the association has been trying to reduce the burden on MSMEs. Ramamurthy says, “We sought from the finance ministry that no SME be declared a non-performing asset (NPA) till March 2020. If you’re declared an NPA, the company’s CIBIL scores take a hit and it becomes difficult to sustain your business. We’ve been given relief till the end of FY20.” While the turnover limit for filing GST for businesses was raised from Rs.2 million to Rs.4 million, he says that they are pushing the ministry to raise the limit to Rs.10 million. This is still short of the Rs.15-million limit from the VAT regime.

In the meanwhile, foundries are readying themselves for imminent changes, like with electric vehicles (EVs). Ezhil says, “There are some 260 cast-iron parts in the present day car, and EVs are likely to have less than half the number of cast-metal parts. However, they will have other requirements. Today, we manufacture engine and suspension components. When the new cars come, we may shift to manufacturing parts used to build robots in manufacturing facilities,” he says. Step into Rajan’s cabin and you’ll see a 3D printer buzzing away. It is a reminder to keep curiosity about newer manufacturing methods alive.

Ilango says, “Change is welcome, but you must give people time to comprehend it and adapt. Implement reform with force, catch the delinquents and bar them. But, of those who are straight, allow them to have it easy.”