Covid lockdown stifles manufacturing; cash crunch, labour woes bite

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Published: May 11, 2020 3:55 AM

With over 60% of units still shut and most others operating at just 10-15% capacity, the “graded” easing of the lock-down curbs has barely revived manufacturing in export hubs.

Exporters tell FE that units that contributed about 70% to the country’s exports of $314 billion in FY21 are located in the so-called red zones.

With over 60% of units still shut and most others operating at just 10-15% capacity, the “graded” easing of the lock-down curbs has barely revived manufacturing in export hubs. Exporters tell FE that units that contributed about 70% to the country’s exports of $314 billion in FY21 are located in the so-called red zones. While many states have now given them approval to start manufacturing even in such hot spots (barring the ‘containment’ areas within them), thus enabling more units to open, key cities — such as Mumbai and Ahmedabad — are still completely shut. Even manufacturing in some other industrial belts — such as Pune, Hyderabad, Bhopal, Indore, Kanpur and Agra — hasn’t really started.

Sharad Kumar Saraf, president of the Federation of Indian Export Organisations (FIEO), said migrant workers were allowed to go back home just when the industry got permission to resume operations in some areas. “As such, local workers are struggling to reach factories due to curbs on the public transportation system,” he said. Lack of uniform standard operating procedures (SOPs) in times of a lockdown across districts and states, despite the Union home ministry notification, has added to exporters’ woes.

Bhuvnesh Seth, vice-chairman of the Export Promotion Council for EOUs and SEZs, said fresh orders in special economic zones since the lockdown had crashed to just about 5% of the usual flow. SEZs and other designated export-oriented units account for about 34% of the country’s exports.

Facilities making up for roughly 75% of the country’s engineering goods exports worth $79 billion (in FY20) are in the red zones. Ravi Sehgal, chairman of the engineering goods exporters’ body EEPC India, said cash flow has been a huge issue.

Banks are willing to enhance the working capital limit but only with additional conditions and documentations, which are difficult to manage in times of a lockdown.

As such, export credit as of March 27 grew just 3.5% year-on-year even on a hugely favourable base (it had contracted 45% y-o-y a year earlier), while overall priority-sector loans grew 5.8%.

Over a half of export orders have been cancelled, with key markets—the US and the EU—bearing the brunt of the pandemic, and many buyers have held up payment for supplies already made.

Some exporters warn of a 60% slide year-on-year in exports in the first half of FY21 (merchandise exports stood at almost $160 billion in the April-September period last fiscal), with a more precipitous fall in the June quarter. It’s not until July that manufacturing will get back to some semblance of normalcy, that, too, if the migrant workers are back on time (which seems unlikely at the moment) and the government steps in quickly with substantial relief, exporters say.

According to Rafeeque Ahmed, chairman of major leather exporter Farida Group, units in Chennai have resumed operations in a limited manner from Friday. But stringent social distancing norms are hurting the viability of operations in labour-intensive sectors like leather, as several functions are typically performed by workers in close proximity. Several buyers have delayed payments, eroding his company’s cash flows.

Exporters tell FE that units that contributed about 70% to the country’s exports of $314 billion in FY21 are located in the so-called red zones.

Merchandise exports, which had already contracted by 1.5% y-o-y up to February, ended the last fiscal with a 4.8% fall to $314.3 billion, thanks to an almost 35% crash in March.

Even in certain “green zones”, manufacturing couldn’t resume normally as firms supplying components to them are located in the restricted areas. In some cases, exporters want their inventory to be cleared before starting fresh production, anticipating a demand shock.

Raja M Shanmugham, president of the Tirupur Exporters’ Association, said 1,000 of the 1500 export-oriented garment units in Tirupur, the country’s largest apparel hub, have started operation but unless the government ensures a one-year loan repayment moratorium and adequate credit at subsidised rates, the industry will be crippled. Private sector workers’ dues should also be partly borne by the government, he said.

Apparel Export Promotion Council chairman A Sakthivel said a beginning has been made and garment units are operating with a relatively thin workforce, primarily to carry out sampling. However, a more precise assessment of the situation can be made only in the coming weeks.

Ajay Sahai, director general of FIEO, said domestic supply chains are battered. Cash reserves, especially of MSMEs, are depleted after the payment of March wages and credit flow remains inadequate. Companies haven’t got approval to open warehouses. Overseas demand for lifestyle products has taken a knock, as large department stores are facing the Covid heat.

Shaji Baby John, chairman and managing director at marine exporter Kings Infra Ventures, says such exports will likely drop by at least 30% year-on-year in FY21. “Many farmers had to go for panic harvesting during the initial phase of the lockdown. Although the central government stepped in immediately and declared the industry as essential services, the supply chain was disrupted by then.”

However, the only silver-lining is that demand will likely bounce back in the second half of this fiscal on an impending supply shortage and Indian exporters may cash in on that if they are ready, John said.
Last month, FIEO had warned of 15 million job losses in the export sector if the government didn’t come out with a relief package immediately.

(With inputs from Rajesh Ravi in Kochi)

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