Make in India ? More layoffs likely as manufacturing sales take a hit in India

Despite the government’s efforts to attract investment under its Make-in-India campaign, sales of manufactured goods fell 3.7% during 2015-16–the first decline in seven years–sparking fears of layoffs and debt default in the months to come.

Spurred by a global slowdown and lack of demand, sales of manufactured goods were falling even before demonetisation, affecting sectors ranging from textiles to leather to steel.

As a result, in the six months to September 2016, engineering major Larsen & Toubro laid off some 14,000 employees. Companies such as Microsoft, IBM and Nokia were also reported to have cut back on their workforce in 2016–albeit on a smaller scale–blaming sluggish demand for downsizing.

In November 2014, just weeks after Prime Minister Narendra Modi launched his Make-in-India campaign, Nokia shut its factory in Chennai, rendering 6,600 full-time workers jobless.

“The most common way of cutting cost in India is to reduce the workforce,” economist Ila Patnaik, who has served as the principal economic advisor to the government of India, told IndiaSpend. “If the global economy and the domestic market do not improve, we can expect more layoffs in this sector.”

Companies forced to close down due to financial distress will also lay off workers. Closure of 186 industrial units led to net job losses of 12,176 in the manufacturing sector over the last four years, the labour ministry estimated in this December 2015 reply filed in the Lok Sabha.

Syed blamed the post-demonetisation cash crunch for falling sales as well as a shortage of workers due to mass exodus from cities. “Labourers have to be paid in cash as they don’t have bank accounts. Since we were unable to pay them in cash, the workers have returned to their villages,” he said.

In the first 34 days of demonetisation, micro- and small-scale industries have suffered job losses of 35% and a 50% dip in revenue, an All India Manufacturer’s Organisation study showed as the Indian Express reported on January 7, 2017.

Global upheavals have also caused problems for manufacturers, GK Jain, a large-scale manufacturer and exporter of readymade garments, said. “For the last three years, there has been uncertainty in the global market. The foreign currency market has been volatile, and there is an influx of surplus products,” he added. “The volatility has led to a reduction in sales and has adversely impacted the profit margins.”

With sluggish growth and high unemployment hitting American and European economies, importers there want to pay lower prices to overseas manufacturers, squeezing exporters’ profit



margins, Jain said.

There has been a rise in borrowings by vulnerable companies in the steel sector, the RBI report said. However, steel secretary Aruna Sharma said “There was heavy investment in public and private steel sector in the past, and the investment takes place in cycles.” She added, “So, once the returns on that investment start coming, there will be big investments again.”

The RBI also noted that Indian manufacturers have collectively run up debt of Rs 6.9 lakh crore. The decline in sales and its impact on profit margins has impacted manufacturing industries’ ability to service their debt. In its study of the financial statements of 1,707 manufacturing companies over the last four years, the RBI revealed that the number of vulnerable companies whose debt-equity ratio is higher than 200% has increased from 215 in 2012-13 to 284 in 2015-16–an increase of 32%. A high debt-equity ratio means a company is aggressively using borrowed money to finance its growth, leading to higher risk for default.

The RBI’s analysis also showed that the debt at risk of default among private manufacturing companies grew nearly four-fold, from Rs 58,800 crore ($8.9 billion) to Rs. 2.1 lakh crore ($32 billion) in the four years to March 2016.

What can be done: Invest in infrastructure, remonetise and increase overall public spending

Economists agree that the government must take steps to undo the damage caused by demonetisation by investing more in infrastructure, remonetising the economy and increasing the allocation for public-spending programmes.

“The government needs to either increase its consumption spending or ensure an increase in wage incomes. Government must invest more in public schemes, which can lead to creation of jobs in direct and indirect sector,” Ghosh said. “Instead, its cavalier attitude towards the national employment guarantee scheme and social spending has led to reduced consumption possibilities for workers.”

The government needs to remonetise the financial system quickly as the informal economy, which includes parts of the manufacturing sector, is dependent on it, Ghosh added.

It could take two to three quarters for the effects of the demonetisation-induced short-term shock to wear off and for normalcy to return, Patnaik predicted.

For longer-term support to manufacturing and job creation, new investment and enterprise are a must, economist Ajit Ranade said. “If we need to add two million jobs every month, then we need to create 20,000 to 50,000 new enterprises every month,” he said. “We need a big push in infrastructure.”